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Ep. 1 — The MSME Growth Engine: Navigating Opportunities, Challenges, and the Role of CA in the Era of AI and Viksit Bharat 2047
CA Journal
· June 2026
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The MSME Growth Engine: Navigating Opportunities, Challenges, and the Role of CA in the Era of AI and Viksit Bharat 2040India’s MSME sector plays a crucial role as an impetus behind the economic development of the nation on its journey towards becoming Viksit Bharat@2047. With the seamless integration of Artifi cial Intelligence and contribution of Chartered Accountants in strategic advisory, MSMEs are rapidly transitioning into globally competing “micromultinationals”, contributing over 31% of GDP and employing millions. It highlights the expanding role of CAs, shifting from compliance professionals to strategic growth advisors, facilitating data-centric decision-making, ESG conformity, and AI governance. Although there exist several opportunities such as improved credit availability, government incentives, and overseas expansion which are substantial, obstacles such as technological divide, funding gaps, and digital vulnerabilities still remain. The article highlights the role of MSMEs as engines of growth while also discussing the synergism of AI, policy support, and professional profi ciency that will metamorphize MSMEs into a paramount force in India’s vision of a $30–35 trillion economy.The Strategic Paradigm of India’s MSME Sector in 2026Consider a manufacturer of hosiery based out of Ludhiana, Punjab, a skilled fabric knitt er from Coimbatore, and a small-batch tea estate in Upper Assam. During the times of the old economy, these businesses were home-grown players striving to survive against exorbitant costs and intermediaries. In the era of Viksit Bharat 2047, the concept of “small” businesses no longer exists. Th ey are now referred to as Micro-Multinationals. Any business with a revenue of ₹100 crore in a Tier2 city now boasts of international reach and data insights, driven by Artifi cial Intelligence (AI) and steered by strategic CA advisory, that was previously only reserved for high-value powerhouse corporations Th e path traversed by the Indian economy in the year 2026 is principally defi ned by the strength of the Micro, Small, and Medium Enterprises (MSME) sector. As India advances towards the 100th year of its independence under the ideology of Viksit Bharat@2047, the MSME sector has transformed itself from a reinforcing auxiliary to the butt ress of industrial propulsion. In the present fi scal year 2025-26, the sector is instrumental in contributing approximately 31.1% of the national GDP and 35.4% of the combined manufacturing yield. With over 7.47 crore enterprises in its network, enabling employment for nearly 38.82 crore individuals, it continues to be the second-largest employer following agriculture. India’s real GDP is projected to grow at 7.4% in FY26, with a manufacturing GVA surge of 9.13% in recent quarters. This growth is mirrored in the rising prosperity of the average citizen, with per capita net national income expected to rise from ₹1.89 lakh in FY24 to ₹2.20 lakh by FY26.Viksit Bharat 2047: Ideological Pillars and the MSME MandateTh e ideology of Viksit Bharat 2047 is a national mission to transform India into a developed, self-reliant nation. It is built on four fundamental pillars: Yuva (Youth), Garib (Poor), Mahilayen (Women), and Annadata (Farmers).Youth: MSMEs serve as the laboratory for entrepreneurship, absorbing the demographic dividend into high-tech manufacturing.Poor: The sector offers social mobility through localized employment at low capital cost, targeting zero povertyWomen: The 2025-26 budget targets 70% participation of women in economic activities. Credit guarantee covers for women-led units have been enhanced to 90% to bridge gender disparities.Farmers: MSMEs in food processing (supported by a ₹10,900 crore PLI outlay) facilitate value addition, aiming to make India the “food basket of the world”As India advances through the year 2026, the layout for Viksit Bharat 2047 no longer remains an unimaginable vision; it is a live financial mission. At the core of this metamorphosis lies the Micro, Small, and Medium Enterprises (MSME) sector. Historically referred to as the “backbone” of the economy, the MSME sector has progressed into its fast-moving engine in 2026. With India aiming to become a $30 trillion to $35 trillion economy by its centenary of independence, MSMEs are entrusted with a pivotal breakthrough. Today, the sector contributes approximately 31% to India’s GDP and nearly 48.5% of its exports. These values are expected to surge to 50% of GDP and 60% of exports. This jump is being advanced by the dual forces of Artificial Intelligence and the strategic supervision of Chartered Accountants, who have shifted from conventional auditors to the engineers of progress.Understanding the Economic MagnitudeTo understand the scale of “Viksit Bharat,” one must look at the sheer financial volume MSMEs represent in 2026 and their projected path to 2047Current GDP Contribution (2026): With India’s GDP hovering around ₹320 lakh crore ($4 trillion), MSMEs contribute roughly ₹100 lakh crore.The Funding Gap: Despite the push for formalization, the credit gap remains significant at approximately ₹30 lakh croreGovernment Allocation: The Union Budget 2026-27 has earmarked over ₹22,000 crore for the Ministry of MSME, with a dedicated ₹10,000 crore SME Growth Fund designed to create “Global Champions.”The 2047 Vision: By 2047, the MSME sector is expected to manage an economic value exceeding ₹1,200 lakh crore, necessitating a level of efficiency only achievable through deep technological integration.The Roadmap to Viksit Bharat 2047To ensure MSMEs drive the $35 trillion dream, a four-pillar strategy is being implemented; the projections/ estimations are shown below:PillarObjectiveFinancial Target (Estimated)FormalizationProjected to move a greater number of microunits to the Udyam portal.Estimated to unlock higher opportunities in formal credit.Technology HubsProjected to establish AICommon Facility Centers across the country.Estimated reduction of tech-adoption cost by 60%.India’s real GDP is projected to grow at 7.4% in FY26, with a manufacturing GVA surge of 9.13% in recent quarters. This growth is mirrored in the rising prosperity of the average citizen, with per capita net national income expected to rise from ₹1.89 lakh in FY24 to ₹2.20 lakh by FY26.The Regional Powerhouses in INR TermsThe roadmap to a $30 trillion economy is paved by regional clusters. By 2047, the MSME contribution is projected to hit ₹1,200 lakh crore. Let’s look at the impact on the ground by taking few examples:Punjab’s Manufacturing Might: For a cycle-part manufacturer in Ludhiana, the cost of downtime is often ₹2 lakh per day. AI-driven predictive maintenance is now saving these units over ₹50 lakh annually in repair costs.Coimbatore’s Textile Tech: Modern looms in Tamil Nadu are utilizing AI to reduce fabric wastage by 12%, adding nearly ₹1.5 crore to the annual bottom line of medium-scale exporters.Assam’s Tea Renaissance: Small Tea Growers (STGs) contribute nearly 50% of India’s tea. AI-powered soil analysis and climate forecasting are increasing yields by 20%, ensuring that the ₹20,000 crore tea industry remains competitive against global rivals.The Role of CA in the Era of AI and Viksit Bharat 2047The role of the Chartered Accountant has undergone its most significant shift since the introduction of GST. In the Viksit Bharat roadmap, the CA is the “General Surgeon” of an MSME’s financial health and it’s “Pilot” in the digital skies.From Compliance to Strategic Advisory :- In 1990, a CA filed taxes. In 2026, a CA performs Data-Driven Business Modeling. Using AI tools, CAs provide MSMEs with “What-If ” analysis: “If we increase production of Part X by 20% using a robotic arm, what is the impact on our debt-service coverage ratio over 5 years?”The ESG Sentinel:- As India integrates into global supply chains, MSMEs face strict ESG (Environmental, Social, and Governance) mandates from international buyers. CAs are now the authorized professionals who certify an MSME’s carbon footprint and labour practices, ensuring they aren’t barred from the ₹80 lakh crore global green market.AI Governance and Ethical Audit :- With MSMEs adopting AI, there is a risk of algorithmic bias or data leaks. The “CA Mandate” now includes auditing the AI models themselves, ensuring that the financial data fed into these systems is secure and that the outputs are compliant with the Digital Personal Data Protection (DPDP) Act. The part played by Chartered Accountants in this age has constantly evolved. They are no longer just confined to the role of ‘Tax Filers’ but have become Navigators of GrowthThe Valuation Expert: Chartered Accountants now make use of AI to furnish real-time valuations, assisting business owners in negotiating from a place of power.Conclusion: The Lion AwakensThe passage towards 2047 isn’t confined to just a value on a GDP chart; it is about the enabling of the small business owner. When a cultivator of tea in Assam makes use of AI to maximize his harvest, or an owner of textiles employs a CA’s approach to go public on the NSE Emerge platform, India surfaces as a winner. The MSME Growth Engine is now charged by intellect and integrity. The shift from “Small” to “Significant” is far-reaching. By 2047, the world won’t just purchase goods labelled “Made in India” but those “Designed and Perfected by the Indian MSMEs”. The year 2047 will witness a nation where the contrast between a “small” and “large” business is bleared by technology. A minor unit in a Tier-3 city, powered by AI and steered by a technologically adept CA, will have the same methodical competencies as a multinational today. The MSME Growth Engine is no longer just about survival; it is about dominance. As the “CA Mandate” evolves and AI matures, the journey to Viksit Bharat is not just an economic target; it is a transformation of the Indian spirit of “Jugaad” into a global standard of “Innovation and Excellence.” The road to Viksit Bharat 2047 is not merely about surviving; it is about scaling through “manufacturing depth” and technological sophistication. AI provides the leverage to escape the low-productivity trap, while regulatory mechanisms like Section 43B(h) and TReDS 2.0 provide the necessary financial discipline and liquidity. As CAs, our role is to act as the bridge mentoring 7.5 crore MSMEs to navigate the complexities of digital transformation and global compliance. By fusing AI-driven innovation with the spirit of Atmanirbharta, the MSME sector will remain the heartbeat of India’s transformation into a global economic powerhouse.
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Ep. 2 — GeM and MSMEs: Catalysing India’s Growth Engine through Digital Public Procurement
CA Journal
· June 2026
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GeM and MSMEs: Catalysing India's Growth Engine through Digital Public ProcurementThis article looks at how the Government e-Marketplace (GeM) supports MSMEs through inclusive public procurement, digital transformation and financial access, highlighting initiatives such as #VocalForLocal, Womaniya, Startup Runway, GeM Sahay and TReDS integration that reinforce Make in India and the broader Aatmanirbhar Viksit Bharat 2047 vision.Micro, Small and Medium Enterprises (MSMEs) remain central to India's economic and social progress. Together they contribute close to 30% of GDP, account for over 45% of exports, and provide livelihoods to more than 110 million people, making them the backbone of the country's manufacturing, services and trade ecosystem. Beyond economic output, MSMEs foster entrepreneurship, support regional growth, uplift women and disadvantaged communities, and create sustainable livelihoods nationwide. As India works toward a more globally competitive and self-reliant economy, this sector is increasingly seen as a driver of innovation, resilience and inclusive growth.Public ProcurementPublic procurement typically accounts for roughly 15–20% of a nation's GDP, which makes an efficient procurement system vital to India's economy. A well-designed system that runs round the clock helps ensure government spending is allocated and used strategically. Standardising procurement across a country as large and diverse as India — spanning Central and State ministries, public sector enterprises, autonomous bodies, Panchayati Raj institutions and cooperative societies — was a significant challenge, given the fragmented, manual-intensive processes that existed earlier. GeM was created to bring a step change to this landscape and usher in e-governance through digitalisation.Genesis of the Government e-MarketplaceGeM's foundations build on the JAM Trinity (Jan Dhan–Aadhaar–Mobile), which enabled financial inclusion through bank accounts, biometric identity, and mobile-based service delivery. This was reinforced by the "Digital India" programme, which strengthened online infrastructure and connectivity, paving the way for seamless e-delivery of government services.By 2016, the government decided to overhaul the procurement processes previously run through the Directorate General of Supplies and Disposal, aiming for greater transparency, efficiency and accountability. Following recommendations from a Group of Secretaries to the Prime Minister, the Government e-Marketplace (GeM) was set up as a one-stop Special Purpose Vehicle for procuring common goods and services without intermediaries. GeM was launched on 9 August 2016 by the then Union Minister for Commerce and Industry, Smt. Nirmala Sitharaman, and developed initially as a pilot with technical support from the National e-Governance Division under MeitY. GeM operates as a 100% government-owned Section 8 company under the Department of Commerce.About Government e-Marketplace (GeM)GeM is an end-to-end digital procurement platform for government buyers, made mandatory under Rule 149 of GFR 2017, with several states amending their own procurement rules to align. Built on efficiency, transparency and inclusiveness, the platform actively promotes participation from under-served seller groups — micro and small enterprises, women and tribal entrepreneurs, persons with disabilities, startups, self-help groups, artisans, weavers and craftsmen under the One-Product, One-District initiative.Since 2016, GeM has onboarded 1.46 lakh government buyers and over 24.96 lakh sellers and service-providers, listing roughly 10,500 product categories and 330 service categories. As of 18 May 2026, 3.87 crore orders worth ₹18.94 lakh crore in Gross Merchandise Value (GMV) have been fulfilled, with MSMEs contributing close to 45% of that total. Products and services are split almost evenly, at roughly 51.74% and 48.26% of total GMV respectively.Fiscal YearProduct GMV (Cr)Service GMV (Cr)GMV Grand Total (Cr)FY 16-17420-420FY 17-185,83085,838FY 18-1916,61179817,409FY 19-2019,8113,06722,878FY 20-2130,0308,51138,541FY 21-2281,95124,6471,06,598FY 22-231,35,21866,0992,01,317FY 23-241,95,9542,07,6194,03,573FY 24-252,13,0943,28,5105,41,603FY 25-262,55,0532,47,5525,02,606FY 26-2726,54727,63854,185Grand Total (Cr)₹9,80,519₹9,14,448₹18,94,967Percentage Mix51.74%48.26% Table 1: GeM GMV Trend by Fiscal Year (Product and Services)Source: Compiled by AuthorPolicy and Marketplace Interventions for MSMEsTwo major policy frameworks support MSMEs on GeM: the Public Procurement Policy for Micro and Small Enterprises (PPP-MSE, 2018) and the Public Procurement (Preference to Make in India) Order, 2017 (PPP-MII). The former, anchored under the MSMED Act and run by the Ministry of MSME, mandates a minimum 25% procurement target from MSEs, with sub-targets of 4% for SC/ST-owned MSEs and 3% for women-owned MSEs, alongside L1+15% purchase preference and EMD/tender fee exemptions. The latter, administered by DPIIT, has no fixed quota but gives purchase preference to Class-I local suppliers based on local content, supporting domestic manufacturing and self-reliance goals.AspectPPP-MSE, 2018PPP-MIIFull NamePublic Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012 (amended 2018)Public Procurement (Preference to Make in India) OrderYear2018 amendment (original 2012)2017Nodal Ministry/Dept.Ministry of Micro, Small and Medium EnterprisesDPIIT, Ministry of Commerce and IndustryObjectiveInclusive procurementMake in India / self-relianceLegal BasisSection 11, MSMED Act, 2006Rule 153(iii), GFR 2017Primary ObjectivePromote MSE participation in government procurementPromote domestic manufacturing and local value additionTarget BeneficiariesMicro and Small EnterprisesLocal suppliers/manufacturersCore Policy InstrumentMandatory procurement targetPurchase preference based on local contentProcurement TargetMinimum 25% from MSEsNo fixed quotaSocial Inclusion Provisions4% sub-target SC/ST; 3% women-ownedNone specificPreference MechanismL1+15% purchase preferencePreference to Class-I local suppliersSupplier ClassificationUDYAM/MSME-registeredClass-I, Class-II, Non-localLocal Content RequirementNot primary criterionCentral featureEMD/Tender Fee ExemptionAvailable for eligible MSEsNot a core featureFocus AreaInclusion, entrepreneurship, MSME developmentManufacturing, localisation, self-relianceLinkage with National InitiativesInclusive growth, MSME promotionMake in India, Aatmanirbhar BharatApplicabilityCentral Ministries/Departments/CPSEsCentral Ministries/Departments/CPSEs and procuring entitiesImpact OrientationSocial and economic inclusionIndustrial and manufacturing competitivenessNature of PreferenceEnterprise-category basedProduct/local-content basedKey Policy GoalAssured market access for MSEsStrengthening domestic supply chains and indigenous capabilityComparison: PPP-MSE 2018 vs PPP-MIISource: Compiled by AuthorMSMEs have consistently exceeded the mandatory 25% procurement target across the years since FY16-17.Fiscal YearTotal Order Value (Cr)Gen MSE Order (Cr)% of Gen MSE Order ValueFY 16-174226916.30%FY 17-185,8732,26838.61%FY 18-1917,4209,20052.81%FY 19-2022,87813,81960.39%FY 20-2138,54122,60058.64%FY 21-221,06,59859,03355.38%FY 22-232,01,31797,33248.35%FY 23-244,03,5731,90,48947.20%FY 24-255,41,6031,95,97936.18%FY 25-265,02,6062,37,10047.17%FY 26-2754,18532,17659.38%Total₹18,40,831₹8,27,88544.97%PPP-MSE Target 25.00%Variance (+/-) 19.97%Table 2: Year-wise Gen MSE Participation in Total Order ValueSource: Compiled by AuthorWhile the women-owned MSE sub-target is being met, the SC/ST MSE sub-target remains a work in progress, and GeM continues to work with stakeholders in that ecosystem to onboard, support and build resilience among SC/ST MSEs.Fiscal YearTotal Order Value (Cr)MSE Order Value (Cr)Women MSE Order Value (Cr)SC/ST MSE Order Value (Cr)FY 16-174226980FY 17-185,8732,26831119FY 18-1917,4209,2001,229101FY 19-2022,87813,8161,722226FY 20-2138,54122,6002,421423FY 21-221,06,59859,0335,2301,198FY 22-232,01,31797,33210,7652,689FY 23-244,03,5731,90,48916,6784,287FY 24-255,41,6031,95,97922,0945,146FY 25-265,02,6062,37,10028,1676,588FY 26-2754,18532,1763,334747Total (Cr)₹18,40,831₹8,60,061₹91,960₹21,426PPP-MSE Target 25.00%3.00%4.00%% to Total Order Value 45.39%4.85%1.13%Variance (+/-) 20.39%1.85%-2.87%Table 3: PPP-MSE Procurement Performance Dashboard (FY16-17 to FY26-27)Source: Compiled by AuthorKey Marketplace Interventions#VocalForLocal Outlet Stores – 8 digital storefronts spotlighting products from women and tribal entrepreneurs, artisans, weavers, ODOP craftsmen, FPOs, SHGs and DPIIT-recognised startups, helping strengthen local supply chains and visibility for domestic manufacturing.Womaniya – a dedicated storefront with filters and catalogue icons that help buyers identify and procure from women-owned MSEs, supporting women's economic empowerment.Startup Runway – a channel for DPIIT-recognised startups to list innovative products across 14 recognised categories spanning healthcare, sustainability, mobility, IT and smart governance.GeM–UDYAM API Integration – a seamless two-step auto-registration process linking UDYAM registration with GeM seller onboarding via email/SMS prompts.GeM Sahay – a collateral-free, purchase-order-based working capital financing mechanism offering up to ₹25 lakh based on transaction history.TReDS Integration – invoice discounting through TReDS platform partners, improving liquidity and reducing payment delays, with further policy support from the Union Budget 2026–27.CSC Partnership – an MoU with Common Service Centres enabling 5 lakh+ village-level entrepreneurs to support seller onboarding and value-added services like catalogue photography and order management.Role for Accounting and Finance ProfessionalsChartered Accountants, Cost Accountants and finance professionals play a meaningful role in helping MSMEs formalise their businesses and adopt digital processes that connect them to wider supply chains. Their work today extends well beyond statutory compliance and tax advisory into financial planning, cost optimisation, working capital management, digital accounting adoption and business restructuring.On GeM specifically, professionals can help MSMEs onboard, manage GST compliance and bid documentation, and adopt digital accounting and reporting systems. They can also guide MSMEs on leveraging GeM Sahay and TReDS financing for working capital, and on aligning with ESG and sustainability expectations from institutional buyers and investors.The future trajectory of the MSME sector will depend on sustained support in terms of policy, enhanced digital infrastructure, improved ease of doing business, and closer collaboration between industry, government, financial institutions, and trade/MSME associations.Looking AheadDigital Public Infrastructure platforms like GeM demonstrate how technology-driven governance can widen economic opportunity while improving transparency, efficiency and accountability in public systems. By bringing together market access, financing and value-addition support in one digital ecosystem, GeM is reshaping the role of public procurement in India's development story. As the country moves toward its Aatmanirbhar Viksit Bharat 2047 vision, MSMEs — supported by initiatives such as #VocalForLocal, Womaniya, Startup Runway, GeM Sahay and TReDS — are positioned to drive manufacturing growth, employment generation and self-reliance.1. Government e-Marketplace. (2018, July). GeM handbook (p. 7). Government of India.2. Startup Genome. (2018, April). All Reports – Startup Genome.Authors may be reached at eboard@icai.in
Commercial Laws
Ep. 3 — The Importance of the Foreign Exchange Management Act [FEMA], 1999 in India
CA Journal
· June 2026
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The Importance of the Foreign Exchange Management Act (FEMA), 1999 in IndiaIn today's era of rapid globalization, digital payments, and high-volume cross-border transactions, FEMA plays a very important role in facilitating international trade, managing foreign exchange reserves and maintaining the stability of the Indian currency. From the perspective of Chartered Accountants (CAs) in Practice in India, developing expertise in this field and providing consultancy services to clients engaged in multinational businesses is a welcoming and rewarding opportunity. In recent times, comparatively fewer CAs are practicing in this field as compared to Direct and Indirect Taxes. Recognizing the growing importance of this domain, ICAI has been continuously encouraging its members by organizing Certificate Courses on FEMA and regularly updating them on recent changes and their impact on the Indian economy. Through this article, the author shares views and learnings on the significance and impact of FEMA on Indian Markets in a fast-growing economy.What is FEMA, 1999?FEMA, 1999, is an Indian law enacted to regulate the flow of foreign currency, manage foreign exchange, and ensure monetary stability in the Indian economy. It covers all transactions, i.e., capital account transactions and current account transactions, including the scope of Foreign Direct Investments (FDI) and External Commercial Borrowings (ECB).This act empowers the Central Government to frame rules and the Reserve Bank of India (RBI) to issue regulations for managing foreign exchange, to facilitate external trade and maintain a stable forex market. In other words, the Central Government sets the policy framework, while the RBI regulates authorized dealers and oversees foreign exchange transactions.Top 10 Positive Impacts of FEMA, 1999, on the Indian Economy(a) Focus on Economic Stability & Forex ManagementFEMA focuses on maintaining economic stability by regulating capital flows and ensuring that cross-border transactions do not negatively impact the balance of payments. It is the cornerstone of India's foreign exchange regulations, which are designed to promote the orderly development and maintenance of the forex market along with the surety of economic stability.(b) Welcoming Foreign InvestmentFEMA is designed to facilitate external trade, systematically promote a foreign exchange market and actively encourage foreign direct investment (FDI) to boost India's economic growth. By providing clear and transparent guidelines for foreign capital flows (FDI and FPI), FEMA attracts foreign investors, boosting India's GDP and capital reserves. FEMA also allows dealing with most of the transactions unless the same are restricted.(c) Positive Response to Businesses and Start-UpsReducing constraints on foreign exchange, it makes it easy to do business while importing, exporting, and operating in global markets. Guidelines of FEMA Valuation restrict startups from giving away equity below fair value, which protects the stakeholders and assists in future fundraising. Further, adhering to FEMA guidelines helps startups and businesses to maintain a positive reputation and legal compliance, which is essential for attracting foreign investors.(d) Liberalization in Trade PracticesFEMA generally allows the transactions unless expressly prohibited in the act, which reverses the FE principle of prohibiting everything not permitted. Also, unlike FE, which treated foreign exchange violations as criminal acts, FEMA classifies them as civil offenses in most of the cases. Accordingly, FEMA plays a vital role in liberalizing the trade practices.(e) Shifting from Regulation to ManagementThe huge shift from the Foreign Exchange Regulation Act (FE), 1973, to the FEMA represents a foundational transformation in India's approach to foreign exchange that is moving from a regime of strict control and conservation to management and facilitation.Under the eyes of FERA, foreign exchange was a scarce resource to be controlled. FEMA started treating it as an economic asset to be managed for the development of the country. In addition, the primary objective was shifted from "conservation" of foreign exchange to "facilitating external trade and payments".(f) More than Law, it works like an Eco-SystemFEMA is more than just a law; it forms the foundation of India's foreign exchange ecosystem by safeguarding national interests while balancing the need to attract foreign investment with regulatory responsibility. It ensures the clarity to investors, compliance with global standards, and supports India's goal of becoming a globally competitive economy in this dynamic world. Most importantly, it continues to evolve, adapting to the changing needs of the Indian economy and global financial trends.(g) Boost Foreign InvestmentBy liberalizing foreign exchange transactions and activities and creating a more conducive regulatory environment in an economy, FEMA encourages foreign trade and investment, which directly or indirectly contributes to economic growth.(h) Enhancing Investor ConfidenceFEMA provides a transparent, crisp and predictable regulatory framework which helps enhance investor confidence and attract greater foreign investment into India.(i) Sector-Specific RegulationsFEMA governs industries on a sector-specific basis. The regulations under FEMA prescribe Foreign Direct Investment (FDI) caps and approval routes (automatic or government), based on industry type, to regulate foreign capital inflows and maintain stability in the market and the Indian economy.Since most of the people are shifting to digital modes nowadays, FEMA specializes the regulations that often focus on E-commerce industries in relation to cybersecurity to protect digital data (digital assets).(j) Shifting from Criminal to Civil PenaltiesFEMA, 1999, marked a fundamental change in Indian law, moving from a criminal-based, restrictive regime to a civil-based, facilitative framework. This transition reflects a shift in policy from conserving foreign exchange as a scarce resource to managing it as an economic asset to promote trade and investment.The huge shift from the Foreign Exchange Regulation Act (FERA), 1973, to the FEMA represents a foundational transformation in India's approach to foreign exchange — moving from a regime of strict control and conservation to management and facilitation.Compliances and Documentations under FEMA, 1999The main compliances required under FEMA, 1999, include mandatory reporting of foreign investments and transactions to the RBI through AD Category-I banks. These requirements involve the following:Filing the Annual Return on Foreign Liabilities and Assets (FLA)Reporting FDI via Form FC-GPR/FC-TRS within specified timelinesFill Entity Master FormMonthly ECB-2 filingsAdhering to LRS limits for outward remittancesComply with downstream investment rules if the subsidiary makes further investments in other Indian entitiesFiling of Annual Performance Report (APR), especially when involved in Overseas Direct Investment (ODI)Reporting of investments made in a Foreign Joint Venture (JV) or Wholly Owned Subsidiary (WOS) is requiredReporting of foreign exchange withdrawals by individuals is required, with daily reporting via CIMS for AD banksExport proceeds must be realized and returned to India within specific timeframesMaintaining proper records of all foreign exchange transactions (FIRC–Foreign Inward Remittance Certificate) and ensuring KYC (Know Your Customer) compliance is necessaryFiling Form 15CA/15CB with the authorized banks, etc.Register for an Import Export Code (IEC) in case of the Import and Export IndustryBasic Points to be Considered under FEMA, 1999Retaining Resident AccountsThe most common violation is failing to convert a Resident Savings Account to a Non-Resident Ordinary (NRO) account immediately upon becoming an NRI (generally defined under FEMA as a person staying outside India for more than 182 days during a financial year). Holding a resident savings account after attaining NRI status constitutes a violation of FEMA provisions. Therefore, an NRI should convert resident savings accounts into an NRO account. It is not easy, and not even possible for an NRI to close resident savings accounts while residing abroad.Using NRE Account after ReturningContinuing to operate a Non-Resident External (NRE) account for income earned in India after returning to India permanently is also a violation.Crypto/Prohibited InvestmentsUsing LRS funds to buy crypto-assets or using credit cards for prohibited items is not allowed and may be treated as Liberalised Remittance Scheme (LRS) Breach.Splitting RemittancesExceeding the $250,000 annual limit provided to the resident individuals by using multiple banks to send money abroad without realizing the cumulative total is a violation.Non-filing or wrong-filing is also a violation under FEMA.Important Monetary Limits under FEMA, 1999Liberalized Remittance Scheme (LRS): Resident individuals can remit up to USD 250,000 per financial year (April–March) for authorized purposes.Repatriation for NRIs/PIOs: Non-Resident Indians/Persons of Indian Origin (NRIs/PIOs) can repatriate up to USD 1 million per financial year from their NRO account (income/sale proceeds).Educational Expenses: Remittance for studies abroad is allowed up to the estimate provided by the institution or USD 100,000 per academic year, whichever is higher.Medical Treatment: Expenses for medical treatment abroad are permitted up to the estimate from a doctor/hospital, or within the LRS limit.Gifts and Donations: Remittance as gifts/donations by a resident is covered under the USD 250,000 LRS limit.FEMA and RBI Compliances: Core Reporting RequirementsRequirementApplicable FormsTimelineRegulating AuthorityFDI ReportingFC-GPR, FC-TRS30–60 daysRBIOverseas InvestmentForm FCOn or before making ODI remittanceRBIAPR for ODIForm APRAnnualRBIImport PaymentsA2 Form, KYCBefore sending paymentAD BankExport of Goods/ServicesSOFTEX Form, GR FormPeriodic (project specific or invoice based)RBI/ SEZ AuthorityCore reporting requirements under FEMA / RBISome Recent Actions of the Government Related to FEMA, 1999Some recent actions and measures by the Government of India and the RBI under the FEMA, 1999, during the year 2025–2026 have focused on liberalizing foreign investment, extending export realization timelines, strengthening compliance requirements for border-sharing nations, and updating compounding rules to enable faster and more digitized processing. The actions include:1. Changes made under Export and Import RegulationIn November 2025, the RBI extended the time limit for exporters to realize and repatriate proceeds to India from 9 months to 15 months. The RBI also updated regulations for India, Nepal, and Bhutan, allowing travellers to carry Indian currency notes up to ₹25,000 (excluding denominations above ₹100).2. Foreign Direct Investment (FDI) & Non-Debt Instruments (2025)In June 2025, the Government of India permitted Indian companies in FDI-prohibited sectors (e.g., lottery, gambling, real estate, etc.) to issue bonus shares to existing non-resident shareholders, provided the shareholding pattern does not change. The regulations continued to mandate prior government approval for any FDI from countries sharing land borders with India, which was strictly enforced in 2025.3. Liberalised Remittance Scheme (LRS) & Tax (2025–2026)Under Budget 2025, the threshold for Tax Collected at Source (TCS) was increased to ₹10 lakh per financial year, which relates to remittances under LRS. Remittances up to ₹10 lakh generally do not attract TCS, while rates of 0.5% to 20% apply above this limit. Also, remittances for education funded by loans from financial institutions do not attract TCS, encouraging students studying abroad.4. Compounding and Compliance Procedures (2025)Now, all regulatory approvals, including FEMA-related compounding applications, must be submitted exclusively through the RBI's PVAAH portal. The April 2025 amendments introduced a cap of ₹2,00,000 for compounding minor, technical, or reporting contraventions under FEMA to promote voluntary compliance and ease of doing business.5. Enforcement Actions (2025–2026)The Enforcement Directorate (ED) has intensified investigations into "front companies" which are used to channel foreign funds for non-permitted activities (mainly covering foreign NGOs). Engagement of ED is increasing day by day. Some recent actions taken by the ED team are –Case 1. "ED has provisionally attached assets worth Rs. 100.44 Crore under PMLA, 2002 in connection with large-scale illegal coal mining and pilferage in leasehold areas of Eastern Coalfields Limited. Earlier, on 08.01.2026, ED conducted searches at 10 premises in Kolkata and Delhi. Evidence seized during searches has been instrumental in linking proceeds of crime to the attached properties. Total attachment in the case now stands at Rs. 322.71 Crore."Case 2. "ED, Panaji has carried out search operations on 28.09.2025 & 29.09.2025 under FEMA, 1999, at 15 premises across Goa, Delhi-NCR, Mumbai and Rajkot, related to M/s. Golden Globe Hotels Pvt. Ltd., M/s. Worldwide Resorts and Entertainment Pvt. Ltd and Big Daddy Casino, Goa. During the search operations, various incriminating documents, digital evidences, cash amounting to Rs. 2.25 Crore (approx.) in Indian currency, USD 14,000 and other different foreign currency equivalent to around Rs. 8.50 Lakh were recovered and seized. Further, different cryptocurrencies including USDT of more than Rs. 90 Lakh were found and freezed."Case 3. "ED, Special Task Force, Headquarters has seized 13 bank accounts of M/s Reliance Infrastructure Ltd. under Section 37A of the Foreign Exchange Management Act (FEMA), 1999 for contraventions under section 4 of FEMA in the matter of siphoning of public funds from highway construction projects awarded by NHAI."6. Enhanced Reporting MonitoringRBI has upgraded the Single Master Form (SMF) system to allow auto-reconciliation and immediate email alerts for delayed filing of FC-GPR/FC-TRS forms. Also, duplication of work has been reduced on the iFirm portal.Role and Initiative taken by the Institute of Chartered Accountants of India (ICAI) on FEMA, 1999Since ICAI is a huge professional body, it plays a very important role in the administration, compliance, and education related to FEMA, with the help of its expert team.ICAI provides guidance to Chartered Accountants, encourages them to stay up to date on regulations for inbound/outbound investments, conducts specialized certificate courses on FEMA, and supports compliance with RBI regulations.It supports members in ensuring proper documentation and compliance with RBI guidelines (Notifications, Circulars) for foreign exchange transactions and is also involved in advisory roles.Through its committees, such as the Committee on Commercial Laws, Economic Advisory and NPO Cooperative (CCLEANC), ICAI, time to time publishes handbooks, such as the "CAs' Handbook on Inbound & Outbound Investments under FEMA," conducts webinars and seminars, conduct certificate courses to assist members in navigating regulations.FEMA: An Open Opportunity for Chartered Accountants (CAs) in their CareerWith continuously increasing cross-border transactions, foreign investments, and compliance and reporting requirements, FEMA offers significant and wide-growing career opportunities for CAs in India.Certification requirements for remittances, foreign investments, and capital transactions are required by Authorized Dealer (AD) Banks, which covers a wide scope for the profession.Client representations are required before the RBI for compounding of offences, approvals, and liaising with AD banks.Positions are available in leading firms and companies for managing the regulatory functions, particularly in roles involving Tax Advisory and Litigation for corporate clients.Challenges under FEMA, 1999a. The dynamic nature of FEMA regulations and frequent release of circulars from the RBI make compliance difficult for smaller firms and individuals, which can hamper their opportunities. Keeping pace with day-to-day regulatory updates can often be difficult.b. Due to the requirement for approvals in certain transactions, significant delays can occur, which require extensive documentation and time.c. Even unintentional non-compliance because of negligence or a clerical nature, such as technical, procedural lapses in reporting, can lead to severe penalties and, in some cases, the requirement to unwind transactions.d. There could be a chance of misuse in relation to the bank accounts of foreign nationals. Non-Resident Indians (NRIs) often struggle with correctly using NRE/NRO/FCNR accounts, with illegal use of resident savings accounts being a common violation. Also, NRIs face limitations on purchasing agricultural property, plantations, and farmhouses, etc. in India.e. Penalties are very heavy under FEMA, 1999.ConclusionOverall, the flexible, transparent, and business-friendly approach of FEMA has played a vital role in inviting foreign investments, continuously promoting ease of doing business, making India a developed country and ensuring smooth repatriation of earnings for NRIs and foreign investors.Despite its many advantages, FEMA demands strict compliance with reporting obligations, documentation, and sector-specific restrictions. Non-compliance can lead to penalties, regulatory actions, and restrictions on future transactions, making it essential for businesses and individuals to stay updated with RBI notifications and FEMA amendments.Under FEMA, what you cannot do directly, you cannot do indirectly either.Important Government Websites in relation to FEMA, 1999https://rbi.org.in/Scripts/Fema.aspxhttps://enforcementdirectorate.gov.in/femahttps://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?Id=1171https://firms.rbi.org.in/firms/faces/pages/login.xhtmlAuthor may be reached at shweta.choraria@yahoo.com and eboard@icai.inThe Chartered Accountant · June 2026 · www.icai.org
India's Sustainable Financing LeapIndia is rapidly maturing as a global sustainable finance leader, ranking fourth among emerging markets with USD 55.9 billion in cumulative GSS+ debt issuance by end-2024. SEBI's June 2025 ESG Debt Securities Framework brings regulatory clarity to three distinct instruments: Social Bonds, Sustainability Bonds, and Sustainability-Linked Bonds — each serving a defined purpose, from funding social projects to linking coupon rates with ESG performance. Anchored in ICMA's global principles, the framework drives transparency and investor confidence, positioning India to channel capital toward inclusive growth and climate transition.The world of finance is undergoing a seismic shift. Traditional priorities of profit and immediate returns are giving way to a broader vision that integrates environmental, social, and governance (ESG) principles, emphasizing sustainability, fairness, and enduring stability. Within this evolving landscape, instruments like social bonds, sustainability bonds, and sustainability-linked bonds (SLBs) have become essential for channelling capital toward impactful, purpose-driven initiatives.On June 5, 2025, the Securities and Exchange Board of India (SEBI) launched its groundbreaking Framework for Environment, Social and Governance (ESG) Debt Securities (other than green debt securities) — "The Framework" — setting a new standard for the issuance and oversight of social, sustainability, and sustainability-linked bonds, distinct from Green Bonds, which already have their own SEBI framework.Mapping the Current LandscapeThe Climate Bonds Initiative, in partnership with MUFG Bank under the India Initiative on Climate Risk and Sustainable Finance (IICRSF), released the India Sustainable Debt State of the Market 2024 report. India has solidified its position as the fourth-largest emerging market for aligned GSS+ debt worldwide, trailing only China, South Korea, and Chile. By December 2024, cumulative GSS+ issuance soared to USD 55.9 billion — a 186% increase from USD 21.4 billion in 2021.Theme2024Cumulative since 2006DealsUSD bn% totalDealsUSD bn% totalGreen226.45116346.683Social75.544116.612Sustainability20.6542.24SLB00010.51Grand Total3112.510017955.9100India GSS+ ScorecardSource: India Sustainable Debt State of the Market 2024 (Climate Bonds Initiative / IICRSF / MUFG)"Green bonds continue to dominate, representing 83% of total aligned issuance, yet the market is diversifying rapidly across themes, instruments, and issuer profiles."In 2024, seven aligned social bonds added USD 5.5 billion, boosting cumulative social bond volume to USD 6.6 billion. NBFCs further contributed by arranging USD 1.8 billion in social loans. India's sustainable finance ecosystem is also being reshaped by the RBI's Green Deposit Framework, IFSCA's sustainable finance guidelines, and SEBI's enhanced disclosure requirements.Social BondsA Social Bond channels capital into projects that tackle pressing social issues or foster positive societal outcomes. Unlike traditional bonds, proceeds are tied to specific, impact-driven projects focused on underserved or vulnerable populations.Eligible Categories under the FrameworkAffordable basic infrastructure (clean drinking water, sewers, sanitation, transport, energy)Access to essential services (health, education, vocational training, healthcare)Affordable housingEmployment generation & just transition programmes (incl. SME financing and microfinance)Food security and sustainable food systemsSocio-economic advancement and empowermentAny other category specified by the Board from time to timeFour Core Components — ICMA Social Bond PrinciplesUse of ProceedsFund projects with clear social benefitTarget specific social issuesTransparent financing vs. refinancingContext-specific target populationProject Evaluation & SelectionCommunicate social objectiveDefine project eligibilityOutline benefit to target groupsDisclose perceived risksManagement of ProceedsTrack via sub-account or portfolioPeriodic allocation adjustmentsDisclose temporary placementsExternal audit verificationReportingAnnual reports until fully allocatedDetail projects, amounts, impactsDisclose qualitative & quantitative indicatorsCase StudyStandard Chartered Social BondIn March 2025, Standard Chartered issued its first-ever Social Bond — a EUR 1 billion, 8-year Non-Call 7 issuance — supporting sustainable development across emerging markets, with proceeds aimed at SME financing (including women-owned businesses) and access to healthcare, education, infrastructure, and food security. About 99% of the bank's social asset base sits in Asia, Africa, and the Middle East, including India, Malaysia, and Bangladesh.Sustainability BondsSustainability Bonds finance or refinance a combination of eligible green and social projects, blending environmental and social goals. They can help address the social costs of decarbonization — particularly relevant in India, where the transition away from coal and thermal power may disrupt livelihoods.Case StudyIndia Exim BankIndia Exim Bank listed its inaugural 10-year USD 1 billion Sustainability Bond in 2023 on the London Stock Exchange's Sustainable Bond Market, also listed on India INX at GIFT City. In February 2025, it issued two further Sustainable Bonds totalling USD 150 million.Sustainability-Linked Bonds (SLBs)SLBs tie debt terms to measurable sustainability goals rather than restricting use of proceeds. Issuers retain full discretion over how capital is deployed, while financial features such as coupon rates adjust based on achievement of predefined Sustainability KPIs against Sustainability Performance Targets (SPTs)."Sustainability-linked bonds" means a debt security which has its financial and/or structural characteristics linked to predefined sustainability objectives of the Issuer, measured through predefined Sustainability KPIs and assessed against predefined SPTs. — SEBI FrameworkFive Core Components — ICMA SLB PrinciplesSelection of KPIs — materiality, strategic alignment, measurability, external verifiability, and benchmarking.Calibration of SPTs — ambitious, beyond business-as-usual, benchmarked against peers or science-based references, set on a predefined timeline.Bond Characteristics — typically a coupon adjustment tied to SPT trigger events, proportionate and clearly documented.Reporting — annual, transparent updates on KPI performance and strategic context.Verification — mandatory independent external verification, publicly disclosed.Case StudyLarsen & Toubro SLBOn June 23, 2025, L&T issued ₹750 million in three-year sustainability-linked bonds under SEBI's ESG debt framework at a 6.35% coupon — 10–15 basis points below a comparable vanilla NCD, saving roughly ₹1.1 crore annually. The bond is tied to two KPIs against a fiscal-2022 baseline: a 30% cut in Scope 1 and 2 GHG intensity, and 15% women leaders among the top 500 managers by FY 2027. Meeting both targets drops the coupon to 6.10%; missing either raises it to 6.60%.ConclusionA profound shift is sweeping the global finance landscape, prioritizing purpose alongside profit. India's sustainable finance ecosystem is entering a decisive phase of maturity, marked by clearer rules, stronger accountability, and growing market sophistication. SEBI's ESG Debt Securities Framework provides the much-needed regulatory clarity to scale these instruments into mainstream capital markets, positioning India as a potential global benchmark in sustainable debt — provided issuers, especially first-time and mid-sized entities, can navigate the associated costs and compliance requirements.ReferencesSEBI ESG Debt Securities Framework CircularIndia Sustainable Debt State of the Market 2024ICMA Social Bond Principles (June 2023)ICMA Sustainability-Linked Bond Principles (June 2024)Standard Chartered — First Social Bond Press ReleaseIndia Exim Bank Sustainability Bond Listing — LivemintRupee SLBs — ET Edge InsightsArticle by CA. Jessika Kaur Duggal, Member of the Institute · Published in The Chartered Accountant, June 2026 (ICAI)Author contact: jessikakduggal@gmail.com | eboard@icai.in
Indirect Taxation
Ep. 5 — Dipping Reliance on Customs’ Revenue: A Boost to India’s Quest for Negotiating Trade Deals
CA Journal
· June 2026
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Dipping Reliance on Customs' RevenueTariff jitters have been regularly making headlines in business media all over the world, and India has been no different. Yet India has significantly reduced its reliance on customs duties as a source of tax revenue — from over one-third of the Union government's gross tax revenue in the late 1980s to just over 6% as per the 2026-27 Budget Estimates. This shift reflects a strategic move toward trade liberalization, improved domestic tax systems like GST, and a growing focus on industrial competitiveness rather than revenue protection, positioning India to offer tariff concessions in trade negotiations without jeopardizing fiscal stability.36.38%Peak customs share of gross tax revenue (1987-88)6.15%Projected customs share (2026-27 BE)₹44.04L crGross tax revenue (2026-27 BE)7Major FTAs concluded since 2021IntroductionCustoms duties and tariffs have long been at the heart of global economic discourse. Traditionally viewed as both a revenue tool and a protective measure, their role has evolved significantly in emerging economies like India. As geopolitical tensions and economic nationalism rise — typified by the United States' hardened trade posture — countries are re-evaluating their trade architectures. India's calibrated reduction in import tariffs, alongside an increasing array of Free Trade Agreements (FTAs), allows it to negotiate trade deals with less fiscal risk, strengthening its global economic positioning.The Dual Role of Customs DutiesCustoms duties serve two essential roles in a country's economy:Revenue Generation — especially in developing countries, customs duties were historically easy to collect and provided a steady stream of funds before robust domestic taxation mechanisms like GST or comprehensive income tax structures matured.Protective Barrier — beyond revenue, tariffs shield domestic industries from foreign competition, incentivizing local production, preserving employment, and nurturing infant industries.India has traditionally balanced these roles with care, but the balance has been shifting in recent years — from revenue generation toward regulatory and strategic use.The Long Arc: Four Decades of Declining Customs Revenue ShareIn 1980-81, customs revenue accounted for 25.87% of the Union's gross tax revenue, driven by high import duties and a relatively closed economy. Customs duties are projected to account for around 6% of gross tax revenue in the 2026-27 BE — a sharp decline from the historic high of 36.38% in 1987-88. Gross tax revenue has jumped from ₹14 lakh crore in 2015-16 to over ₹44 lakh crore in 2026-27, while customs duty has barely moved, remaining in the ₹2–2.5 lakh crore range over the last decade.Figure 1: Gross Tax Revenue vs. Customs Revenue (₹ lakh crore)0 10 20 30 45 1980-81 2004-05 2016-17 2026-27Gross Tax Revenue Customs RevenueIllustrative trend chart based on author's compilation; see data tables below for exact figures.Figure 2: Customs' Revenue Contribution to India's Tax Revenue Since 1980-81 (%)0% 10% 20% 30% 40% 1980-81 1987-88 (36.38%) 2018-19 (5.66%) 2026-27 (6.15%)Source: Author's CompilationCustoms Revenue Data: 1980-81 to 2013-14Financial YearGross Tax RevenueCustomsShare of Total Tax Revenue1980-810.130.0325.87%1981-820.160.0427.19%1982-830.180.0528.93%1983-840.210.0626.94%1984-850.230.0730.00%1985-860.290.1033.23%1986-870.330.1134.94%1987-880.380.1436.38% (peak)1988-890.440.1635.54%1989-900.520.1834.93%1990-910.580.2135.86%1991-920.670.2233.04%1992-930.750.2431.86%1993-940.760.2229.30%1994-950.920.2729.03%1995-961.110.3632.15%1996-971.290.4333.28%1997-981.390.4028.87%1998-991.440.4128.28%1999-20001.720.4828.19%2000-011.890.4825.21%2001-021.870.4021.53%2002-032.160.4520.74%2003-042.540.4919.12%2004-053.050.5818.89%2005-063.660.6517.77%2006-074.740.8618.23%2007-085.931.0417.55%2008-096.051.0016.50%2009-106.250.8313.34%2010-117.931.3617.12%2011-128.891.4916.79%2012-1310.361.6515.96%2013-1411.391.7215.11%Gross Tax Revenue, Customs Revenue, and Share (₹ lakh crore)Source: Author's CompilationCustoms Revenue Data: 2014-15 to 2026-27 (BE)Financial YearGross Tax RevenueCustomsShare of Total Tax Revenue2014-1512.451.8815.10%2015-1614.562.1014.45%2016-1717.162.2513.13%2017-18*19.191.296.72%2018-1920.801.185.66%2019-2020.101.095.44%2020-2120.271.356.65%2021-2227.092.007.37%2022-2330.542.136.99%2023-2434.662.336.73%2024-2537.962.336.14%2025-26 (RE)40.782.586.33%2026-27 (BE)44.042.716.15%Gross Tax Revenue, Customs Revenue, and Share (₹ lakh crore)*GST implemented mid-2017-18, restructuring the indirect tax base. Source: Author's Compilation from Union Budget.This stark decline is not merely a statistical anomaly but a deliberate consequence of policy shifts toward trade liberalization, WTO commitments, and an evolving tax regime that places greater emphasis on domestic revenue tools like GST and direct taxation. India has been systematically lowering its import tariffs, slowly since 2001-02 and more swiftly from 2015-16, in alignment with its broader trade liberalization strategy and WTO-bound tariff commitments."India has already entered into duty-free access for several imports under FTAs with ASEAN, Japan, and South Korea which allow zero or reduced customs duties on many imports."Selected Trade Agreements Concluded or Under Negotiation in Recent YearsS.NoCountry / InstitutionAgreement NameDate1MauritiusIndia Mauritius Comprehensive Economic Cooperation and Partnership Agreement22 Feb 20212United Arab EmiratesIndia UAE Comprehensive Economic Partnership Agreement18 Feb 20223AustraliaAustralia-India Comprehensive Economic Cooperation Agreement2 Apr 20224EFTAIndia EFTA Trade and Economic Partnership Agreement10 Mar 20245United KingdomIndia-UK Comprehensive Economic and Trade Agreement24 Jul 20256OmanIndia-Oman Comprehensive Economic Partnership Agreement18 Dec 20257European UnionIndia-EU Free Trade Agreement27 Jan 2026Source: Author's CompilationThese agreements have opened up duty-free or low-duty access to and from partner countries, naturally leading to reduced customs revenue but increased trade flows. The rationale is clear: short-term revenue foregone through tariff reductions is expected to be offset by long-term gains in trade expansion, efficiency, and economic growth.Major Customs Duty Reductions — Union Budget 2026-27CommodityFrom (%)To (%)Capital goods for manufacturing Lithium-Ion Cells for BESSApplicableNilCapital goods required for processing of critical minerals in IndiaApplicableNilSodium antimonate for use in manufacture of solar glass7.5NilGoods required for Nuclear Power Projects (exemption extended till 2035)ApplicableNilComponents and parts for manufacture of civilian and training aircraftsApplicableNilRaw materials for manufacture of aircraft parts for MRO by Defence sector unitsApplicableNilSpecified parts used in manufacture of microwave ovensApplicableNil17 anti-cancer drugs and medicines for rare diseasesApplicableNilDutiable personal-use goods (Heading 9804) imported for personal use2010Inputs for processing seafood products for export (duty-free import limit increased)1% of FOB value of exports3% of FOB value of exportsBCD exemption extended: Capital goods for Li-Ion cells for mobile phone batteriesApplicableNilSource: Author's CompilationStrategic Leverage in Trade NegotiationsThe decline in customs revenue dependence empowers India in at least three key ways during trade negotiations:1. Reduced Revenue RiskIn the 1990s, customs revenue made up nearly 30–35% of total tax receipts. Today, with that figure under 6%, the fiscal hit from liberalizing trade is minimal, giving India flexibility to offer concessions without undermining budgetary stability.2. Focus on Industrial Impact over Fiscal LossWithout the looming worry of revenue foregone, government can concentrate entirely on evaluating the impact of reduced tariffs on domestic producers — enabling smarter, sector-specific protections and phasing mechanisms.3. Better Risk Management for ExportersFacing challenges like the EU's Carbon Border Adjustment Mechanism (CBAM) and retaliatory tariffs, FTAs offering reciprocal duty-free access help India mitigate export revenue risks and maintain global competitiveness.The Shift from Revenue to RegulationAs customs duties lose fiscal importance, their future lies in regulatory oversight:Quality Control — ensuring imported goods meet safety and environmental standards.Strategic Protection — temporary duties to counter unfair trade practices or protect strategic sectors.Sustainability Goals — using tariffs to discourage environmentally harmful imports and promote green alternatives.This transformation reflects a maturing economy no longer reliant on border taxes to balance its books.Industrial Preparedness for a Low-Tariff EconomyCritics of tariff reduction often cite the vulnerability of local industries to international competition. However, India has used the last decade to prepare its industries through:PLI Schemes (Production Linked Incentives) incentivizing domestic manufacturing across mobile phones, pharmaceuticals, electronics, and textiles.Infrastructure investment — logistics parks, ports, and dedicated freight corridors improving cost competitiveness.Digital governance and compliance systems reducing transaction costs for exporters and importers alike.What Lies AheadAs India deepens its engagement with the world — particularly with the EU, US, UK, and Africa — its approach to customs duties will continue to evolve. More FTAs are expected, especially with countries in Africa and Latin America, while continued reduction in tariffs on strategic inputs will support Make in India and green transition initiatives.ConclusionIndia's sustained decline in dependence on customs revenue represents a paradigm shift in fiscal and trade policy. From being a key source of funds, customs duties have become an increasingly marginal tool, used more for strategic signalling than revenue collection. This shift grants India greater leverage and flexibility in trade negotiations, reduces the domestic economic cost of liberalization, and reflects a maturing fiscal framework supported by more sustainable and equitable tax bases. As India positions itself to strengthen its place in the global economic landscape, the proactivity shown by the country's financial leadership in realigning the customs framework over the last two decades will prove to be a cornerstone of its strategic future.Referencesindiabudget.gov.incommerce.gov.in — International Trade AgreementsArticle by CA. Lakshay Agarwal, Member of the Institute · Published in The Chartered Accountant, June 2026 (ICAI)Author contact: eboard@icai.in
GST
Ep. 6 — Invisible Players, Visible Risk: Non-Filers and Unregistered Persons in the GST Regime
CA Journal
· June 2026
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Definition of Assessment in GSTDefined under Section 2(11) of the CGST Act, 2017 — assessment means the determination of tax liability under the Act, and includes:Self-Assessment (Sec. 59)Re-AssessmentProvisional Assessment (Sec. 60)Summary Assessment (Sec. 64)Best Judgment Assessment (Sec. 62 and Sec. 63)Basically, an assessment is a quasi-judicial proceeding adopted in fixing the correct liability to pay tax.Note: There is no explicit provision permitting a Proper Officer to re-assess the tax liability of a taxable person — re-assessment is not provided in any specific section. A Proper Officer must take care not to carry out a roving exercise to redetermine liability except in case of rectification or any other method as provided in the law.Concept of Best Judgement Assessment (BJA)The definition of BJA is not provided under the GST Law. However, in general practice and as per other acts such as Income Tax Law, BJA means the assessment of a taxpayer carried out by the Assessing Officer (AO) as per the best of their judgement and based on all relevant information gathered, available material, and records."Best Judgement Assessment" must not be "worst" judgement assessment — judgement must be fair, not arbitrary. It should reflect realistic turnover, consider seasonal variations, and allow proportionate input tax credit.Types of Assessments in GSTAssessment (Sec. 59 to 64, Rule 98 to 100)AssessmentBy Tax PayerSelf-Assessment [Sec. 59]Provisional Assessment [Sec. 60, Rule 98]By Tax AuthoritiesScrutiny of Returns [Sec. 61, Rule 99]Best Judgement Assessment↳ Non-Filers of Returns [Sec. 62, Rule 100(1)]↳ Unregistered Persons [Sec. 63, Rule 100(2)]Summary Assessment, special cases [Sec. 64, Rule 100(3)(4)(5)]What Really Happens If You Do Not File Your GST Return? [Section 62]Notwithstanding anything to the contrary in Section 73 or Section 74 (or Section 74A), where a registered person fails to furnish the return under Section 39 or Section 45 — even after service of a notice under Section 46 — the proper officer may proceed to assess the tax liability to the best of their judgement, taking into account all relevant material available or gathered, and issue an assessment order within five years from the date specified under Section 44 for furnishing the annual return for the relevant financial year.Where the registered person furnishes a valid return within 60 days (earlier 30 days) of service of the assessment order, the order is deemed withdrawn — but liability for interest under Section 50(1) and late fee under Section 47 continues. If the valid return is not filed within 60 days, the taxpayer may furnish it within a further 60 days on payment of an additional late fee of ₹100 per day of delay beyond the initial 60 days; the assessment order is then deemed withdrawn, though interest and late fee liability still continues.Stepwise Procedure for Assessment of Non-Filers [Sec. 62 & Rule 100(1)]Rule 68 — Notice to non-filers: A notice in FORM GSTR-3A is issued electronically to a registered person who fails to furnish a return under Section 39, 44, 45, or 52.If the taxpayer fails to furnish the return within 15 days of issue of FORM GSTR-3A, the proper officer may assess the tax liability per Rule 100(1) of the CGST Rules, 2017, based on material available on record and the circumstances of each case.Assessment orders under Section 62(1) are issued in FORM GST ASMT-13, with a summary uploaded in FORM GST DRC-07.If a valid return is filed within 60 days of service of the ASMT-13 order, the assessment is deemed withdrawn — but interest (Sec 50(1)) and late fee (Sec 47) still apply.If not filed within 60 days, the taxpayer may file within a further 60 days (120 days total from service) by paying an additional late fee of ₹100/day beyond the initial 60 days; the assessment is still deemed withdrawn, but interest and late fee liability continues.If no return is filed within this period, the order becomes final and cannot be withdrawn even if returns are filed later — though the aggrieved person may appeal under Section 107.Once FORM GST DRC-07 is issued, recovery proceedings for tax assessed in FORM GST ASMT-13 follow.Forms Used for Proceedings under Section 62Sr. No.Form No.Purpose1GSTR-3A (System Generated)Notice to taxable person2GST ASMT-13Assessment order3GST DRC-07Summary of order uploaded electronicallyProcess Flow — Non-Filers of Returns3 days before due date: system message "File return before due date"→Due date of return (e.g. 20th of next month for GSTR-3B)→Immediately after due date: "Return not filed" message to Authorized Person / Proprietor / Partner / Director / Karta5 days after due date: Notice in FORM GSTR-3A issued electronically — file within 15 days→If filed within 15 days: notice stands withdrawnIf not filed within 15 days: Best Judgement Assessment using GSTR-1, 2A, E-Way bill, relevant materials, inspection→ASMT-13 issued with DRC-07 (summary of order)If valid return filed within 60 days: ASMT-13 deemed withdrawn→If not filed within 60 days: Proper officer may initiate recovery u/s 78 (pay demand within 3 months) and recovery u/s 79Standard Operating Procedure for Non-Filers of ReturnsCBIC, vide Circular No. 129/48/2019 dated 24.12.2019, issued a Standard Operating Procedure for the assessment of non-filers. A format of the notice to be issued under Section 46 instructs the defaulter to file pending returns within 15 days; failure to comply attracts Section 62 (best judgment assessment for non-filers) without further communication. The circular also prescribes guidelines to ensure uniformity in implementation across field formations.Amnesty Scheme for Non-Filers (Deemed Withdrawal of Best Judgement Assessment Order)A special amnesty scheme vide Notification No. 06/2023-CT dated 31-03-2023 allowed taxpayers who received best judgment assessment orders under Section 62(1) on or before 28.02.2023 to have these orders automatically withdrawn, if they filed all pending returns and paid the required tax, interest, and late fees between 1 April and 30 June 2023. Notification No. 24/2023-CT dated 17-07-2023 extended the deemed withdrawal date to 31-08-2023. This benefit applied regardless of ongoing or decided appeals, and was a one-time relief valid only for orders issued up to 28.02.2023.Case Law — Joy Mathew vs. Union of India (2020): The Kerala High Court held that filing returns within 30 days under Section 62(2) nullifies assessment orders and cancels recovery notices.Is Non-Registration a Loophole or a Liability? [Section 63]Notwithstanding anything to the contrary in Section 73 or Section 74 (or Section 74A), where a taxable person fails to obtain registration even though liable to do so, or whose registration has been cancelled under Section 29(2) but who was liable to pay tax, the proper officer may assess the tax liability to the best of their judgment for the relevant tax periods, and issue an assessment order within five years from the date specified under Section 44 for furnishing the annual return. No such order may be passed without giving the person an opportunity of being heard.Assessment Proceedings under Section 63The procedure starts when a tax officer learns — through inspection, survey, enforcement, intelligence unit information, or other means — that a taxable person has failed to obtain registration or pay taxes despite being liable to do so.The Adjudicating/Assessing Authority (A/A) issues a Show Cause Notice to the taxable person, scheduling a personal hearing if required.If no reply is received, the A/A issues a reminder — a maximum of three reminders can be issued.The taxable person may reply and request a personal hearing (PH), or apply for an extension of the PH date — adjournment can be allowed a maximum of three times.If PH is not required, the A/A issues an Assessment Order (ASMT-15) or a Drop Proceeding order based on the reply.If PH is required, the A/A conducts the hearing and passes the order accordingly.If the taxable person does not reply even after three reminders, the A/A passes an ex-parte order to the best of their judgement based on available information and records.Rule 100(2)The proper officer issues a notice under Section 63 in FORM GST ASMT-14, containing the grounds on which the assessment is proposed on a best judgment basis. A summary of the notice is uploaded in FORM GST DRC-01. After allowing 15 days for the person to furnish a reply, the officer may pass an order in FORM GST ASMT-15, with a summary uploaded in FORM GST DRC-07.Forms Used for Proceedings under Section 63S. No.Form No.Purpose1GST ASMT-14Notice to taxable person2GST DRC-01Summary of notice uploaded electronically3GST ASMT-15Assessment order4GST DRC-07Summary of order uploaded electronicallyExample — How Authorities Track the Unregistered and Non-FilersIn July 2025, Karnataka GST authorities issued notices to approximately 7,000 unregistered vendors based on UPI transaction data indicating potential tax liability under Section 63 of the CGST Act.Data Sources Used to Track Non-Filers and Unregistered PersonsSourcesGST Portal (gst.gov.in) — GSTR-1, 2A/2B, TDS/TCS returnsE-Way Bill System (ewaybillgst.gov.in)Banks & RBISEBI ReportsPayment Gateways — BillDesk, PayPal, Razorpay, Instamojo, StripeWallet Sites — Amazon Pay, Paytm, PhonePe, Google PayIncome Tax Department — Form 3CD, ITR, SFT ReportCustoms Department & CBICMCA & ROCGoods & Service Network (GSTN)MSME dataAudit & Investigations — field surveys, suspension/cancellation of GST registration, special drivesImplication of Section 62 on the Recipient (Buyer) — Rule 37ANew Rule 37A was inserted vide Notification No. 26/2022-CT dated 26.12.2022 to specify the mechanism for reversal of input tax credit already availed by the recipient in Form GSTR-3B. Where the supplier has furnished invoice or debit note details in Form GSTR-1 or IFF but has not furnished Form GSTR-3B by 30th November (earlier 30th September) of the subsequent financial year, the ITC availed by the recipient must be reversed along with interest.If the recipient reverses the ITC on or before 30th November of the succeeding financial year, no interest is payable on the reversal; if reversed after 30th November, interest under Section 50 applies. The recipient may re-avail the ITC in Form GSTR-3B once the supplier furnishes their Form GSTR-3B.Interest and Late FeesInterest and late fees apply even for non-filers and unregistered persons, independently of Sections 73 and 74.Interest (Section 50(1)): If tax is not paid within the prescribed time, interest of up to 18% is payable. If tax is declared late in a return under Section 39, interest applies only on the amount paid via the electronic cash ledger, unless proceedings under Sections 73, 74, or 74A have already commenced for that period.Late Fee (Section 47(1)): ₹100 per day, up to ₹5,000, for delay in filing returns under Sections 37, 39, 45, or 52.ConclusionGST compliance is not just about avoiding penalties; it is about unlocking peace of mind, credibility, and steady growth. Filing on time and staying registered turns obligations into opportunities. Think of compliance as your business's passport, not a burden — it does not restrict you, it is the currency of trust and the smartest investment, opening doors to trust, stability, and lasting success. Prevention is always cheaper than correction; discipline today secures freedom for tomorrow.ReferencesGST Act(s) and Rules Bare Law (issued by ICAI)Background Material on GST (issued by ICAI)cbic.gov.inidtc.icai.orgtutorial.gst.gov.in — FAQs GSTR-3AArticle by CA. Rinkesh Ashokkumar Mamrawala, Member of the Institute · Published in The Chartered Accountant, June 2026 (ICAI)Author contact: carinkeshmamrawala@gmail.com | eboard@icai.in
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Ep. 7 — From Delays to Discipline: Unlocking MSME Liquidity through Reforms
CA Journal
· June 2026
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From Delays to Discipline: Unlocking MSME Liquidity through ReformsThis article explores key reforms aimed at addressing liquidity challenges faced by India's MSME sector. It highlights three pivotal developments: the introduction of an AI-enabled Online Dispute Resolution (ODR) mechanism, Section 43B(h) of the Income Tax Act linking tax deductions to timely MSME payments, and the revised MSME classification effective from April 2025. Together, these reforms are designed to formalize the sector, enforce payment discipline, and improve access to finance.Introduction: The Evolution and Formalization of the MSME SectorLiquidity is the lifeline of any business, but for MSMEs, it is often the defining factor between survival and excellence. Adequate cash flow ensures timely procurement of raw materials, payment of wages, and fulfilment of orders. However, the structural disadvantage of MSMEs in negotiating credit terms often results in delayed payments, forcing them into cycles of working capital stress.2003 — Formation of MSME Ministry2006 — MSMED Act: Regulating Credit Period/Dispute, Formation of MSEFCs2015 — Online Registration via Udyog Aadhaar; GeM/TReDS launched2017 — MSME Samadhaan portal launched2018 — TReDS made mandatory for PSUs/large companies2019 — MCA mandates reporting of MSME dues2020 — New MSME Definition + Udyam Registration2024 — Section 43B(h) of Income Tax Act introduced2025 — Revised MSME Definition; AI-based ODR launchedLiquidity, the Cultural ChallengeSeveral liquidity-focused initiatives have improved MSME receivables, yet challenges remain, particularly with PSUs and large corporates, where a cultural shift in payment behaviour toward MSMEs is still needed. In a study done in 2022, over ₹10.7 lakh crore, equivalent to nearly 6% of India's gross value added (GVA), were locked in delayed payments owed to MSMEs. A staggering 80% of invoices raised by MSMEs experience delays, with public sector undertakings and government entities among the most delayed payers.This delay in receivables severely disrupts working capital cycles for MSMEs, compelling them to rely on costly short-term borrowing or to limit operations due to cash flow constraints. The study highlights an inherent power imbalance in buyer-supplier relationships, where small enterprises are forced to accept prolonged credit periods to retain business.Several liquidity-focused initiatives have improved MSME receivables, yet challenges remain, particularly with PSUs and large corporates, where a cultural shift in payment behaviour toward MSMEs is still needed.1. Online Dispute Resolution: A Digital Solution for Payment DelaysA major stride in the formalization journey of the MSME sector is the introduction of an Online Dispute Resolution (ODR) platform, launched in mid-2025. Conceived under the MSME Development Act and further strengthening the MSME-SAMADHAAN initiative, this system transitions MSMEs from paper-based complaints to a fully end-to-end digital grievance redressal mechanism.From 15 October 2025, all new delayed payment cases must be filed exclusively on the new MSME ODR Portal (odr.msme.gov.in) — the Samadhaan portal stopped accepting new filings and redirects users to the ODR platform.The ProcessThe ODR portal provides an end-to-end dispute resolution process in two stages:Pre-MSEFC — a voluntary, out-of-court process comprising a Digital Guided Pathway and Unmanned Negotiation.MSEFC — the legal procedure under the MSMED Act, 2006, comprising Conciliation/Mediation and Arbitration.1. Access MSME ODR Portal8. Platform Scrutiny (Completeness & Jurisdiction)2. User Registration (MSME/Buyer/Supplier)9. Notice Issued to Respondent (Electronic Service)3. Login to Dashboard10. Respondent Registration & Reply4. Initiate New Dispute (File ODR Case)11. Appointment of Neutral (Mediator/Arbitrator)5. Enter Case Details (Parties, Amount, Issue)12. Online Mediation (Video/Chat/Document Mode)6. Upload Supporting Documents13A. Settlement Achieved → 16. Case Closed7. Payment of Prescribed ODR Fees13B. Mediation Failed → 14. Arbitration → 15. Award → 16. Case ClosedAdvantages for MSMEsAI-facilitated Resolution: Parties can opt for automated, AI-driven negotiation before formal MSEFC proceedings.Empowered Facilitation Councils: Tech and financial support provided to MSEFCs, with private ODR providers empanelled.Speedy Resolution: Designed to deliver outcomes in weeks, not months.Cost Efficiencies: Digital filing and reduced procedures keep expenses low.Accessibility and Convenience: Reduces geographical barriers for MSMEs across regions.Transparency and Accountability: Digital logs, AI-generated milestones, centralized case tracking.Financial Backing to MSEFCs: States receive grants for legal and IT capability building.Mandatory Payment Compliance: Buyers face default liability if dues aren't cleared in 45 days.Strategic Alignment: Developed under the World Bank-supported RAMP initiative.2. Tax-based Enforcement: Section 43B(h) of the Income Tax ActA transformative development for payment discipline is the introduction of Section 43B(h), effective from AY 2024–25. This amendment mandates that expenditure on purchases from Micro and Small Enterprises (MSEs) will be allowed as a deduction only if payment is made within the timelines prescribed under the MSMED Act — within 15 days, or 45 days if contractually agreed.This tax provision links compliance with the MSMED Act to tax deductibility, making it a powerful enforcement tool. Large buyers and corporates now have a financial disincentive to delay payments. For Chartered Accountants and auditors, this introduces new layers of disclosure and verification while preparing tax computations or certifying financials.3. Revised Classification Norms: Broadening the MSME BaseThe revised definition of MSMEs, effective from 1st April 2025, marks another key reform aimed at increasing the number of enterprises that can avail of government schemes, credit benefits, and legal protections under the MSMED Act.MicroInvestment ≤ ₹2.5 croreTurnover ≤ ₹10 croreSmallInvestment ≤ ₹25 croreTurnover ≤ ₹100 croreMediumInvestment ≤ ₹125 croreTurnover ≤ ₹500 crorePrior to the 2020 amendment, a small enterprise was defined by a gross investment limit of ₹5 crore. Today, the limit stands at ₹25 crore on a Written Down Value (WDV) basis, along with a turnover ceiling of ₹100 crore — effectively a 5 to 10 times expansion in threshold eligibility for MSEs.Legal Backbone: Judicial Support to the MSMED ActThe MSMED Act, 2006 provides a statutory cap on the credit period, restricting it to a maximum of 45 days, regardless of any mutual agreement to the contrary — a provision that has consistently received judicial backing.Eden Exports v. Union of India (2010): Madras High Court upheld the constitutionality of limiting the credit period.Silipi Industries v. Kerala State Electricity Board: Clarified counterclaims and limitation periods under the MSMED Act.NBCC India Ltd. v. Relcon Infraprojects Pvt. Ltd. (2025): Supreme Court affirmed that even unregistered MSEs are entitled to legitimate dues.Broader Awareness and Institutional EnablersIncreased awareness and regulatory emphasis have led auditors to scrutinize company disclosures related to MSME dues more closely, particularly Form MSME-1 filings and compliance with Section 43B(h).The 2019 MCA notification mandated half-yearly reporting of MSE dues. Companies failing to file Form MSME-1 under Section 405 of the Companies Act face a fine of ₹20,000 plus ₹1,000 per day of default, up to ₹300,000.The 2018 Ministry of MSME notification mandates large companies and CPSEs with turnover exceeding ₹250 crore (reduced from ₹500 crore in November 2024) to onboard with at least one of the three licensed TReDS platforms before 1st April 2025.In FY2024 alone, over ₹1.38 lakh crore worth of invoices were financed across 41.6 lakh transactions on RXIL, Invoicemart, and M1xchange — an 80% increase from ₹75,000 crore in FY2023. Cumulatively, the platforms have processed bills exceeding ₹5.33 lakh crore.ConclusionFor India to achieve its vision of "Viksit Bharat" by 2047, MSMEs will play a pivotal role. Their growth hinges on three key enablers: Robust Infrastructure with seamless last-mile delivery, access to Skilled Manpower, and Assured Liquidity. Daily hearings by MSEFCs, empowering them to execute awards, and automatic supplier classification without buyer discretion are steps that can further strengthen the liquidity ecosystem.Looking ahead, it is imperative that the government, MSMEs, and Chartered Accountants work in close coordination to build on this momentum, accelerating the formalization of the MSME sector.Author may be reached at eboard@icai.in
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Ep. 8 — Fraud-Proofing Indian MSMEs: A Digital Toolkit for Chartered Accountants
CA Journal
· June 2026
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Fraud-Proofing Indian MSMEs:A Digital Toolkit for Chartered AccountantsFrom instant payments to single-click fi lings, the digital economy of India is in a fast-paced transformation. Especially for the MSME sector, fi nancial processes are faster than ever. However, it often comes with blind spots, given that the industry is thriving on lean operations and vendor relationships largely based on trust. This article explores how Chartered Accountants can design guardrails without slowing down the business by quietly building resilience. With only a small fraction of MSMEs using ERPs or structured controls, CAs can make use of this opportunity to streamline the system and design fraud prevention checks. Using real-life cases, simple digital tools, behavioural nudges, and regulatory measures, this article outlines practical interventions to empower MSMEs to scale securely.In business or the tech world, speed is often mistaken for progress. We celebrate every leap in convenience, often by how quickly we get things done — instant payment systems, layered APIs that onboard vendors in minutes, approvals in hours, payments in seconds, filings at the click of a button.Yet anyone who has driven a fast car knows that speed is not produced by the engine alone. It is also the visibility, the lanes, the brakes. We don't go faster because of the accelerator, but because of how we have designed restraint into the system. Discipline is prosaic — mirrors, rules, and manuals, none of which are glamorous — yet it forms the backbone of safe and sustainable progress.Finance has significantly upgraded its engines over the last decade. Yet somewhere inside the boardrooms, the prevailing mantra became "remove friction," and convenience was often confused with safety. Nowhere is this more visible than in the MSME sector, which already runs on speed and proximity: shorter approval chains, familiar suppliers, and one person doing five jobs.The backbone of local employment and trade now operates atop high-speed financial infrastructure. But the same system also widens exposure. Reported cyberfraud losses reached the figure above, across 36.37 lakh financial fraud incidents, moving at the same speed as digital payments. In a recent case, an accountant at an export unit allegedly used the company's GST portal to generate fake invoices totalling ₹10 crore, reportedly skimming ₹1.8 crore in benefits — an irregularity uncovered only during a routine audit.The task, therefore, is not to slow MSMEs down, but to design brakes that make speed safer and more sustainable. The baseline is stark: only ~11% of MSMEs use ERP or structured accounting software, with many still operating without internal controls. This is exactly where Chartered Accountants close the gap — as control architects who introduce small, affordable safeguards at the points where value changes hands.Why MSMEs Are ExposedMSMEs enjoy real operational advantages: decisions move a few meters, not a few floors; exceptions are resolved by the person who actually knows the work; cash cycles are short with fast approvals. But this same operating model can unintentionally align three critical risks in one place:Authority — the power to decideAccess — the ability to actAcceptance — no one to questionFor instance, one staff member creates the vendor, approves the purchase order, and releases the payment. Since everyone trusts them and there is no second check, a duplicate or fake vendor gets repeatedly paid without notice. Operational "rails" — e-invoicing, real-time payments, API-based onboarding — have accelerated, while the guardrails of who approves, what gets approved, and with what proof have not kept pace.A recurrent set of red flags helps practitioners triage the risk:Master record creation without supporting documentationDuplicate entries with minor variationsTransactions posted during weekends or outside business hoursRounding off without backingEntry adjustments near period-end without audit trailsStructural LimitsSmall teams with overlapping rolesFounder override becomes routineNo segregation of dutiesProcess GapsScattered docs (paper / chat / email / desktop)Sequence not provable (PO → GRN → Invoice → Payment)Month-end back-datingLate reconciliationsTechnology Myths"Controls = big ERP" mindsetPartial digitisation with no frictionShared logins and weak KYCLimited Regulatory PushBelow audit thresholdsCompliance ≠ controlNo periodic access reviewCA's Expanded RoleMSMEs usually don't have the luxury of hiring a COO, CIO, Internal Auditor, or Compliance Head. Chartered Accountants are uniquely positioned to see the business end-to-end every quarter — the transactions, the gaps, the controls, the behaviour. Most MSMEs don't ask for "fraud controls" until there is a problem; CAs, being closest to the books and the owner, can spot the gaps, install safeguards, and respond to red flags as they emerge.As trusted advisors, professionals can translate the language of fraud into terms owners actually act on — not "procurement fraud" but "your accountant can create a fake vendor, bill for nothing, and approve it, alone." Framing risk in terms of business impact, rather than legal terminology, makes it tangible."Chartered Accountants are uniquely positioned to calibrate friction at those few points where there is a cash exit, an obligation creation, or to make evidence easy to read, aligning the work to professional standards."Installing Friction: Simple Digital ToolsWithout complex processes or large budgets, professionals can help MSMEs install friction where value changes hands — starting with how information is captured and validated. A simple setup using MS Excel or Google Sheets can feed dashboards that highlight where risk accumulates; basic low-code platforms bring structure to day-to-day transactions, such as routing vendor onboarding through a maker-checker workflow.Ghost vendors — verify GSTIN/PAN before onboarding using free tools, or maintain a shared spreadsheet with verified/unverified statusPayroll leaks — map attendance or biometric logs to salary payouts in a sheet template that flags mismatchesReimbursements — timestamp claims with no-code forms to prevent backdated entriesBank reconciliations — use simple Excel plug-ins to automate checks for duplicate or rounded entriesAwareness matters as much as tooling. Periodic training using anonymised real scenarios helps staff distinguish routine transactions from suspicious ones. Basic Excel rules or dashboards can flag multiple payments to the same UPI ID, sudden weekend entries, or unusual patterns. A simple whistleblower channel — a dedicated line or a monthly-reviewed drop box — encourages early reporting without fear.When signals emerge, a professional can run a scoped review before escalating to a full Forensic Accounting Investigation Standards (FAIS) engagement: Secure bank statements, GST/tax filings, WhatsApp/email trails Check who created, approved, and paid the transaction Match PO to payment across vendors or monthsCase Study — Digital Overhaul for a ₹12 Crore MSMEA precision-machining client with fewer than 50 employees and ₹12 crore turnover suspected money was "leaking somewhere" — though the root cause was limited process visibility rather than active fraud. Rather than a full forensic review, the engagement began with strengthening internal controls using low-cost digital tools, no heavy ERP required. Risk mapping Targeted control setup Automated monitoringA staff fraud-risk assessment via Google Forms generated a heat map identifying two weak areas: payments and inventory. For purchases above ₹10,000, Tally Prime's voucher approval system was activated, and Dropbox folders with access logs were created to store scanned, signed purchase orders linked to vouchers. An Excel VBA anomaly tracker (built with the help of generative AI) was configured to flag duplicate vendor entries, unusual round-offs, and non-business-hour transactions, with a monthly auto-mailed summary.Result at quarter-end review: duplicate vendors reduced to zero, an estimated ₹3.5 lakh saved from fraud leakage, and improved credit ratings from demonstrably stronger internal controls.DateVendor NameInvoice No.AmountFlag 1Flag 21/8/2025XYZ Ltd.INV00110,500——3/8/2025ABC Pvt. Ltd.INV00220,000——10/8/2025PQR Corp.INV00312,345——17/08/2025LMN & Co.INV0045,000——12/8/2025XYZ Ltd.INV0549,099——3/8/2025HBC Ltd.INV0091,800——Sample VBA Anomaly Tracker — BeforeSub AnomalyScan()
Dim ws As Worksheet
Set ws = ThisWorkbook.Sheets("Transactions")
Dim lastRow As Long
lastRow = ws.Cells(ws.Rows.Count, "A").End(xlUp).Row
Dim i As Long
For i = 2 To lastRow
' Check for round-figure payments
If ws.Cells(i, 4).Value Mod 1000 = 0 Then
ws.Cells(i, 5).Value = "Rounded Value"
End If
' Check for weekend date
If Weekday(ws.Cells(i, 1).Value, vbMonday) > 5 Then
ws.Cells(i, 6).Value = "Weekend Entry"
End If
Next i
End SubDateVendor NameInvoice No.AmountFlag 1Flag 21/8/2025XYZ Ltd.INV00110,500——3/8/2025ABC Pvt. Ltd.INV00220,000Rounded ValueWeekend Entry10/8/2025PQR Corp.INV00312,345——17/08/2025LMN & Co.INV0045,000Rounded ValueWeekend Entry12/8/2025XYZ Ltd.INV0549,099——3/8/2025HBC Ltd.INV0091,800—Weekend EntrySample VBA Anomaly Tracker — AfterEmerging Fraud Types in MSME DigitisationProfessionals must also watch for newer, under-recognised fraud patterns confronting digitally enabled MSMEs:Fraud TypeImpactHow a CA Can HelpFake loan appsOwners' need for quick working capital falls prey to fraudulent digital lendersValidate fintech partners; educate on RBI-registered NBFCs; vet loan documents before submissionFake websites / suppliersLookalike sites trick businesses into paying advances for bulk ordersUse MCA/GST verification APIs; build a vendor onboarding checklistQR code switchMSMEs accepting payments via QR codes get scammed when codes are physically replacedAutomated reconciliation setupsImpersonation over the phoneOwners/staff conned by fraudsters posing as tax officialsSOPs for phone verification and approvalsPhishing via e-commerce platformsFake "order confirmation" or "returns" links harvest login credentialsRole-based logins, 2FA, security-hygiene trainingE-invoice portal misuseManipulated or out-of-system invoices used to claim fraudulent ITCCross-check GSTR filings with books; reconcile e-invoice numbers monthlyBNPL manipulationStaff misuse company Buy-Now-Pay-Later or credit wallet accounts personallyReview monthly BNPL statements; implement transaction capsPolicy and Platforms That Support PreventionFraud prevention cannot rest on internal controls alone. India's regulatory system has embedded protective mechanisms into digital and financial infrastructure:RBI's Digital Payment Security Measures — mandatory 2FA for online transactions; UPI security upgrades that flag suspicious activityMSME SAMADHAAN — a delayed payment monitoring system enabling MSMEs to report and recover delayed paymentsGovernment e-Marketplace (GeM) — a transparent channel to sell to government departments, reducing procurement fraud and payment defaultsCyber Suraksha Scheme — subsidised cybersecurity tools and secure payment platformsProfessionals can help navigate Samadhaan filings, GeM onboarding, and ICAI's SMP Committee Cloud Tools Repository — which offers secure documentation, e-signature, and video-meeting tools that support collaboration and streamlined digital workflows.Building Breaks, Not BarriersWe began with speed — in payments, decisions, trust, and the way risk travels through all of them. The MSME engine doesn't need to hit the brakes; it just needs to install them. A Chartered Accountant's role is not to ask for new software, but to embed friction that protects:Maker-checker steps on approvalsWeekly or monthly reconciliation alertsA simple prompt before UPI vendor payoutsMonthly pattern checks in payrollThese micro brakes prevent macro losses. Professionals provide the missing friction in the compressed ecosystems of MSMEs, where the same person often approves, disburses, and reconciles. Fraud prevention, in this context, is a design language — knowing when and where to pause so you don't crash later.ReferencesHaugh, N., Sethi, P., & Leroux, J. (2023, February). No Reward Without Risk: Addressing the Economic Impacts of Misinformation and Other Digital Harms on MSMEs.LiveMint. (2023, October 12). Export firm accountant booked for ₹10 crore GST fraud. livemint.comThe Economic Times. (2023, September). Fake Input Tax Credit racket using dummy MSME units. economictimes.indiatimes.comSinha, P. (2022). The Digital Evolution of MSMEs in India: Risks and Safeguards. Journal of Financial Compliance, 9(3), 45–56.RBI. (2023). Report on Digital Lending and Fintech Governance. rbi.org.inGovernment of India. (2024, July). Udyam Registration Statistics. Ministry of MSME. udyamregistration.gov.inMulakala, A., Cute, B., & Ogee, A. (2024, October 22). From vulnerability to resilience: Safeguarding MSMEs from cyberattacks. The Asia Foundation.Staysafeonline. (n.d.). Data Security – MSME vulnerabilities. staysafeonline.inAuthors may be reached at eboard@icai.in · The Chartered Accountant, June 2026, pp. 43–48 · www.icai.org
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Ep. 10 — MSMEs as Catalysts of Industrial Growth, Employment, and Innovation in India
CA Journal
· June 2026
00:00
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MSMEs as Catalysts of Industrial Growth, Employment, and Innovation in IndiaMSMEs are the true catalysts of the economy today. They are driving to industrial growth, employment generation, innovation, and regional development in our diverse nation. This article entails contribution and innovation brought in by the top 4 manufacturing industries - Textiles, Food Processing, Pharmaceuticals, and Auto Components. Collectively, these 4 industries contribute over 48 million jobs in the country. Each sector refl ects a growing culture of innovation: from sustainable textile production and millet-based food products to advanced pharmaceutical formulations and EV-ready auto components. These enterprises are increasingly leveraging automation, IoT, and digital systems to sharpen their competitive edge. Government initiatives that are fueling the growth of MSMEs in these industries include SAMARTH, PM MITRA, PMFME, PLI, and FAME II. If the administration continues to provide support to the MSMEs through policy & fi nancial support, technological, infrastructure and skill development, then it will lead India to be the global leader in almost all industries.IntroductionThe Micro, Small and Medium Enterprises (MSME) sector plays a vital role in India's economic development by contributing to industrial growth, employment generation, innovation, and regional development. MSMEs have been recognized as the backbone of the Indian economy, strengthening the manufacturing sector, encouraging entrepreneurship, and promoting regional development — though the adequacy and effectiveness of institutional support mechanisms continue to remain areas of discussion.Contribution, Growth Trends, and Government Schemes in MSME Sectoral DevelopmentMSMEs represent a diverse ecosystem of businesses, generally classified into three categories based on business activity: Manufacturing, Service, and Trading. This classification provides a structured framework for analysing growth trends, investment requirements, employment generation, sector-specific challenges, and specialised government schemes available to facilitate growth.Manufacturing UnitsManufacturing MSMEs play a crucial role in industrialization and economic expansion. This sector is also a major source of employment, particularly for semi-skilled and skilled workers. The following sections examine the impact, innovation, and industry-specific government incentives across four key manufacturing industries.1. Textile Manufacturing UnitsIndia's textile industry employs over 45 million people and contributes 2.3% to GDP, 13% to industrial production, and 12% to total exports. MSMEs dominate this sector, accounting for nearly 80% of textile capacity — especially in handlooms, powerlooms, and garment manufacturing."India is currently a global leader in the textile market and is expected to retain this position, due to the combination of a strong MSME foundation and India's rich heritage in traditional handicrafts, abundant raw material base including cotton and silk, and well-established global supply chains."Innovations in the Textile IndustryTextile MSMEs are increasingly adopting GOTS (Global Organic Textile Standard) certification, recycled polyester fibre manufacturing from waste PET bottles, eco-friendly dyeing technologies, and sustainable fabric production such as certified organic cotton or bamboo clothing. Many units are adopting digital printing, automated cutting/stitching machines, IoT-enabled looms, water recycling systems, zero-liquid- discharge technologies, and energy-efficient machines — alongside smart fabrics like no-iron shirts, customized small-batch production, and recycling old clothes into bags and accessories, generating rural employment.Central Government InitiativesA. SAMARTH Scheme (Scheme for Capacity Building in Textile Sector)Nature of Assistance: Financial assistance for skill development and capacity building through training, certification, and placement-linked skilling across handloom, handicrafts, jute, and sericulture.Who Can Apply: Textile manufacturing units, industry associations, NGOs, training institutes, start-ups with training infrastructure and placement tie-ups.How to Apply: Through the Ministry of Textiles and empanelled implementing agencies.B. PM MITRA (Pradhan Mantri Mega Integrated Textile Region and Apparel) SchemeNature of Assistance: Financial support for developing large textile parks, infrastructure, and common facilities through state implementing agencies and SPVs.Who Can Apply: State Governments, textile manufacturers, private investors, and industrial units in PM MITRA parks across Tamil Nadu, Telangana, Gujarat, Karnataka, Madhya Pradesh, Uttar Pradesh, and Maharashtra.How to Apply: Through the Ministry of Textiles or respective State-level agencies.C. Technology Upgradation Fund Scheme (ATUFS)Nature of Assistance: Capital subsidy for purchase of new machinery and technology in textile manufacturing.Who Can Apply: Existing textile MSMEs — spinning, weaving, garment, and processing units.How to Apply: Via the i-TUFS (ATUFS) Online Portal and notified lending banks.ParticularsWebsite LinkMinistry of Textiles (MoT)texmin.gov.inSAMARTH Official Portalsamarth-textiles.gov.inDirectorate of Handloomshandlooms.nic.inDevelopment Commissioner (Handicrafts)handicrafts.nic.inCentral Silk Boardcsb.gov.inCentral Wool Development Boardwoolboard.nic.inTable 1: Empanelled Implementing Agencies (SAMARTH)State / AuthorityWebsite LinkMinistry of Textiles (Central)texmin.gov.inTamil Nadu — SIPCOT (Virudhunagar)sipcotweb.tn.gov.inTelangana — TSIIC (Warangal)tsiic.telangana.gov.inGujarat — GIDC (Navsari)gidc.gujarat.gov.inKarnataka — KIADB (Kalaburagi)kiadb.inMadhya Pradesh — MPIDC (Dhar)invest.mp.gov.inUttar Pradesh — Invest UP (Lucknow)invest.up.gov.inMaharashtra — MIDC (Amravati)midcindia.orgTable 2: State-Level Agencies Managing PM MITRA ParksATUFS Major Lending Banks: State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India, Bank of India, Indian Bank, IDBI Bank, Central Bank of India, Indian Overseas Bank, UCO Bank, Punjab & Sind Bank, and SIDBI. (Portal: itufstxcindia.gov.in)2. Food Processing Manufacturing UnitsThe entire food processing industry of India employs about 1.7 million people directly, and MSMEs contribute over 70% of total processing units nationwide. The sector supports agriculture's transition to value-addition and improves farmer incomes through modern supply chain systems.Innovations in Food ProcessingFood processing MSMEs are adopting certified organic sourcing, eco-friendly packaging, and modern milling technologies, along with cold-chain logistics, automated sorting and grading systems, dehydration and preservation technologies, millet-based and functional food production, and hygienic processing units. Notable innovations gaining market attention include dehydrated home-cooked meals for Indian students abroad, healthier millet cookies, and the return of low-glycaemic-index traditional foods like khapli atta and red rice. GI tags from DPIIT are also helping regional products like Kalari cheese from Udhampur, J&K gain recognition and build export-ready supply chains.Central Government InitiativesA. Operation Greens SchemeNature of Assistance: 35%–70% subsidy for food processing and storage infrastructure for Tomato, Onion & Potato (TOP) and other perishables, plus 50% subsidy on transportation and storage.Who Can Apply: FPOs, MSMEs, food processing units, cooperatives, logistics operators, and agri-entrepreneurs.How to Apply: Online via the SAMPADA Portal (sampada.gov.in) by submitting a Detailed Project Report (DPR).B. PM Formalization of Micro Food Processing Enterprises (PMFME) SchemeNature of Assistance: Credit-linked subsidy of 35% of project cost (up to ₹10 lakh per unit), plus branding, marketing, and training support.Who Can Apply: Individual micro food processing entrepreneurs, SHGs, FPOs, and cooperatives.How to Apply: Online via the PMFME portal (pmfme.mofpi.gov.in) or State Nodal Agencies.C. Credit Linked Capital Subsidy for Technology Upgradation (CLCS-TUS)Nature of Assistance: 15% capital subsidy on institutional finance for machinery and technology purchases.Who Can Apply: Existing MSME manufacturing units, including food processing industries.How to Apply: Through banks and financial institutions — SIDBI, NABARD, SBI, Bank of Baroda, PNB, Bank of India, Canara Bank, Indian Bank, Corporation Bank, Andhra Bank, and TN Industrial Investment Corporation.3. Pharmaceuticals Manufacturing UnitsThe Indian pharmaceutical industry was valued at US$50 billion in FY 2023-24 and is projected to reach US$130 billion by 2030, positioning India as the "pharmacy of the world." As the 3rd largest producer globally, India supplies 20% of generic medicines worldwide, and MSMEs contribute 35–40% of industry output, particularly in APIs, generics, and intermediates. India hosts over 500 USFDA-approved facilities and 2,000+ WHO-GMP certified units.Innovations in PharmaceuticalsPharmaceutical MSMEs are adopting WHO-GMP-compliant manufacturing, advanced formulation technologies, biotechnology-based processes, and contract manufacturing systems to produce complex generics, oncology drugs, and special formulations. They are diversifying into vitamin gummy bears, multivitamin patches, and rare disease drugs, often with incubator support focused on genetic disease, autoimmune diseases, cancer, drug research and development, and stem cell research.Central Government InitiativesA. Production Linked Incentive (PLI) Scheme for PharmaceuticalsNature of Assistance: Financial incentives based on incremental sales of eligible pharmaceutical products over a fixed period.Who Can Apply: Pharmaceutical manufacturing companies, including eligible MSMEs in drug and bulk drug production.How to Apply: Online via the Department of Pharmaceuticals portal (pharma-dept.gov.in).B. Credit Linked Capital Subsidy Scheme (CLCS-TUS)Nature of Assistance: 15% capital subsidy on investment in eligible plant and machinery.Who Can Apply: Existing pharmaceutical MSMEs seeking modernization or technology improvement.How to Apply: Through banks and financial institutions under the CLCS-TUS scheme.4. Auto Components Manufacturing UnitsIndia's auto component industry contributes 2.3% to GDP and directly employs over 1.5 million people. In 2024, turnover reached ₹6.14 lakh crore (US$74.1 billion), with domestic OEM supplies comprising 54% and exports accounting for 18%. MSMEs support India's automotive manufacturing ecosystem through forging, casting, machining, and aftermarket auto components."India's auto component industry contributes 2.3% to GDP and directly employs over 1.5 million people. In 2024, turnover of the industry reached ₹6.14 lakh crore (US$74.1 billion) with domestic OEM supplies comprising 54% and exports accounting for 18%."Innovations in Auto ComponentsAuto component MSMEs are adopting CNC machining, robotic-assisted manufacturing, 3D printing, and IoT-enabled production systems to manufacture precision components. Many units are developing EV components and export-quality lightweight materials, alongside quality control and supply chain management software, improving production speed, reducing material wastage, and supporting entry into EV supply chains.Central Government InitiativesA. ASPIRE SchemeNature of Assistance: Financial support for setting up Livelihood Business Incubators (LBIs) and Technology Business Incubators (TBIs), plus training and innovation grants.Who Can Apply: Government institutions, NGOs, technical institutes, incubation centers, and MSMEs.How to Apply: Through the Ministry of MSME (aspire.msme.gov.in) by submitting incubation project proposals.B. FAME II SchemeNature of Assistance: Financial incentives for electric vehicles, EV components, and charging infrastructure development.Who Can Apply: EV manufacturers, component manufacturers, transport agencies, and MSMEs in the EV supply chain.How to Apply: Through the Ministry of Heavy Industries (fame2.heavyindustries.gov.in) as per FAME II guidelines.ConclusionMSMEs continue to play a vital role in India's economic growth through employment generation, industrial development, innovation, exports, and entrepreneurship. With increasing adoption of technology, sustainable practices, and government support initiatives, the sector holds strong potential for future growth. Continued policy support, easier access to market and finance, and infrastructure development will further strengthen MSMEs and enhance India's global competitiveness.ReferencesMinistry of Micro, Small and Medium Enterprises (MSME): msme.gov.inMSME Connect: msme.gov.in/sites/default/files/MSME-Connect.htmUdyam Registration: udyamregistration.gov.inMinistry of Textiles: texmin.gov.inMinistry of Food Processing Industries (MoFPI): pmfme.mofpi.gov.inSAMPADA Portal: sampada.gov.inDepartment of Pharmaceuticals: pharma-dept.gov.inKhadi and Village Industries Commission (KVIC): kviconline.gov.inArticle by CA. Neha Agarwal, Member of the Institute · Published in The Chartered Accountant, June 2026 (ICAI)Author contact: nehaagarwal.1717@gmail.com | eboard@icai.in
Corporate Finance
Ep. 11 — Mergers and Acquisitions: Transforming the Global Business Landscape 2026-2030
CA Journal
· June 2026
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Mergers and Acquisitions: Transforming the Global Business Landscape 2026–2030M&A has evolved from a growth tool to a strategic necessity in today’s globalized market. The 2026– 2030 period will see transformative shifts driven by technology, regulatory reforms, and sustainability. This article examines M&A’s history, current trends, and future outlook, with emphasis on India’s rising prominence, the role of Chartered Accountants, and sectoral opportunities and challenges ahead.Historical Context of M&ASince 1996, India has recorded over 28,500 M&A deals with a cumulative value exceeding $1.06 trillion. In 2025 alone, deal value rose sharply to around $60.2 billion, with transaction volumes reaching 960+ deals, reflecting a strong rebound in high-value activity despite a relatively stable deal count.28,500+M&A deals in India since 1996$1.06TCumulative deal value since 1996$60.2B2025 deal value960+2025 transaction volumeTechnological TransformationTechnological innovation, particularly AI, blockchain, and digital tools, is a major driver of M&A. AI is transforming the process by streamlining operations, enhancing due diligence, automating tasks, and accelerating data analysis. In the IT sector, AI-driven M&A is rising, with generative AI projected to be used in 80% of M&A processes within three years, up from 16% today.Landmark M&A Deals (2020–2025)DealValueSectorStrategic RationaleMarket ImpactTesla – Maxwell Technologies (2019)$218MAutomotive & Energy StorageStrengthened Tesla's vertical integration in battery innovation.Enhanced potential for higher energy density and lower cost EV batteries.Amazon – MGM Studios (2021)$8.45BMedia & EntertainmentContent-driven acquisition to build scale in the attention economy.Bolstered Amazon Prime Video's library, including iconic IPs like James Bond, for subscriber retention in OTT wars.Microsoft – Activision Blizzard (2022)$68.7BTechnology & GamingA historic gaming deal giving Microsoft scale in gaming and future-ready access to the metaverse ecosystem.Triggered global competition concerns (US, UK, EU regulators). Cemented Microsoft's position vis-à-vis Sony and Tencent.AMD – Xilinx (2022)$35BSemiconductorsPortfolio diversification beyond CPUs/GPUs into adaptive computing and FPGAs.Elevated AMD as a full-stack semiconductor player competing with Intel and NVIDIA across HPC and AI workloads.Pfizer – Arena Pharmaceuticals (2022)$6.7BPharmaceuticalsPipeline strengthening in immuno-inflammatory drugs, complementing Pfizer's R&D-led growth.Accelerated Pfizer's diversification beyond vaccines into chronic-care therapeutics.Oracle – Cerner Corporation (2022)$28.3BHealthcare ITEntry into healthcare data systems, leveraging Oracle's cloud expertise to digitize health records.Convergence of tech + healthcare signaled digital health's rise as a core growth frontier.Reliance – Disney Merger (2024, Completed)$8.5BMedia & EntertainmentConsolidation of Star India, Viacom18, JioCinema & Hotstar into JioHotstar, combining TV, digital & sports under one platform.Commands 120 TV channels, 280M subscribers, >85% OTT share, 50% TV viewership; IPL rights drive mass user engagement.Tata Motors – Iveco (2025)$4.4–4.5BCommercial Vehicles BusinessExpands Tata Motors globally with access to Europe and Latin America via Iveco Group; accelerates entry into EV and hydrogen technologies; drives scale efficiencies.Enhances global positioning and investor sentiment; increases competitive pressure in the CV market; short-term leverage concerns but positive long-term outlook.Sectoral Analysis of Landmark DealsSectorKey DriversNotable DealsTechnologyCloud computing, AI, cyber security, and semiconductor advancementsMicrosoft–Activision, AMD–Xilinx, Oracle–CernerHealthcare and PharmaceuticalsDevelopment of vaccines, immunology, and healthcare ITPfizer–Arena Pharmaceuticals, Oracle–CernerMedia and EntertainmentCompetition among streaming platforms, global content demandAmazon–MGM Studios, Reliance–DisneyRenewable EnergyClean energy mandates, carbon neutrality goalsTesla–Maxwell TechnologiesImplications of Recent DealsMarket Transformation: These transactions reshaped competitive landscapes, creating opportunities for growth while intensifying competition.Regulatory Challenges: Deals faced scrutiny, particularly in technology and media, over antitrust concerns and data privacy issues.Strategic Realignments: Companies increasingly focused on vertical integration and technological synergies to drive innovation and efficiency.Thus, the landmark M&A deals between 2020–2025 underscored consolidation as a key strategy for overcoming challenges and seizing opportunities, driving innovation, transformation, and shaping the future of global business.The 2025 Performance and Projections for 20262025 OverviewIndia's M&A market witnessed a strong rebound in 2025, with total deal value reaching approximately $60 billion, reflecting robust growth driven by high-value transactions. While overall deal volumes remained relatively stable, the surge in billion-dollar deals significantly boosted aggregate value. The year was marked by increased domestic consolidation and renewed inbound interest, particularly in infrastructure, BFSI, and technology sectors.Projections for 2026Looking ahead, India's M&A market is expected to maintain positive momentum, with transaction values projected in the range of $65–75 billion, supported by improving capital availability and strategic consolidation trends. Key drivers include:AI & Digital Expansion: Continued investments in AI, cloud, and digital platforms driving strategic acquisitions.Infrastructure & Energy Push: Ongoing focus on renewables, logistics, and core infrastructure assets.Private Equity Momentum: Sustained recovery with increased dry powder deployment and platform-building strategies.Regulatory Stability: Policy continuity and ease of doing business supporting both domestic and cross-border transactions.Notable Deals Driving MomentumA. Mankind Pharma's Acquisition of Bharat Serums & VaccinesBelow is a comparative snapshot of Mankind–BSV (2024) vs. Pfizer–Arena Pharma (2022), wherein we can see how Indian pharma M&A trends are converging with global benchmarks.AspectMankind Pharma – BSV (2024)Pfizer – Arena Pharma (2022)Deal ValueINR 13,768 Cr (USD 1.65 Bn)USD 6.7 BnStake Acquired100%100%Funding StructureMix of internal accruals + debt (NCDs & CPs); equity raise plannedAll-cash transactionPrimary FocusWomen's Health, Fertility, Critical Care, ImmunoglobulinsImmuno-inflammatory diseasesStrategic SignificanceMakes Mankind a leader in women's health & fertility in India with access to high entry barrier, niche therapiesStrengthens Pfizer's pipeline in autoimmune & inflammatory diseases and expands innovative medicine portfolioR&D & InnovationIn-house complex biologics, recombinant platforms, niche critical care productsCutting-edge R&D in immuno-inflammatory drugsGeographic ScopeIndia leadership + expansion in global fertility/IVF marketsGlobal R&D and market integration, especially US & EUFinancial ImpactEBITDA-margin accretive, Net Debt/EBITDA target <2x by FY26Long-term growth through new drug pipelineWorkforce Integration2,500+ BSV employees added to MankindArena fully absorbed into Pfizer's global R&D and commercial structureComparison: Mankind–BSV (2024) vs. Pfizer–Arena Pharma (2022)Key insights:Indian M&A catching up to global pharma scale: While smaller in value than Pfizer's mega-deal, Mankind's acquisition is huge by Indian standards, reflecting increasing consolidation in specialty pharma.Focus areas diverge but are complementary: Pfizer bet on the future drug pipeline in autoimmune diseases and immunology, while Mankind consolidates existing leadership in women's health, fertility & critical care, while gaining biologics R&D.Market Impact: Pfizer's deal was pipeline-driven, betting on future blockbuster drugs; Mankind's deal is portfolio-driven, strengthening current market dominance plus future innovation.B. ACC–Ambuja Cement's Acquisition of Penna CementTransaction OverviewAcquirer: Ambuja Cements Ltd. (subsidiary of Adani Cement)Target: Penna Cement Industries Ltd. (PCIL)Stake Acquired: 100%Enterprise Value: ₹10,422 CroreCompletion Date: 16 August 2024Deal Type: Strategic acquisition to expand production capacity and geographical presenceStrategic RationaleCapacity Expansion: Adds 14 MTPA capacity; supports Ambuja's goal to achieve 140 MTPA capacity by FY2028, representing 16% CAGR growth (current 77.4 MTPA).Market Presence: Strengthens footprint in Southern & Eastern India where Ambuja had weaker presence; provides sea-route access to Sri Lanka via Penna's bulk cement terminals (BCTs).Resource Advantage: Access to ample limestone reserves ensuring long-term raw material security; surplus clinker from Jodhpur unit can support additional 3 MTPA grinding capacity; enhances economies of scale in production, logistics, and procurement.Adani Group's Cement StrategyMarket Share Goal: Capture 20% of India's cement market (currently the second largest after UltraTech Cement).Recent Investments: ₹1,600 crore invested in a new grinding unit in Bihar.M&A Pipeline: Nearly $3 billion earmarked for acquisitions. Potential targets include Gujarat's Saurashtra Cement, Jaiprakash Associates' cement business, and Vadraj Cement.ParameterAdani CementUltraTech CementCurrent Capacity (FY24)91.4 MTPA (Ambuja 77.4 + Penna 14 MTPA, incl. under-construction)138.0 MTPATarget Capacity (FY28)140 MTPA160 MTPA+ (aggressive expansions announced)Market Share (India)15% (aiming 20% by FY28)23% (market leader)Geographical PresenceStrong in North, West, Central; now expanded to South & East via PennaPan-India coverage, especially strong in South & EastStrategic AssetsPenna's Bulk Cement Terminals enabling coastal logistics & exports to Sri Lanka; ample limestone reserves; 18 integrated plants + 18 grinding units23 integrated plants + 29 grinding units; strong RMC and white cement portfolio; pan India distributionRecent Investments₹10,422 Cr for Penna Cement acquisition; ₹1,600 Cr grinding unit in Bihar; $3 Bn earmarked for further M&AContinuous capex for brownfield expansions; strong focus on renewable & energy efficiencyParent Group StrategyVision: 20% market share by FY28, capacity-led aggressive growth, debt-light strategyVision: Retain first position in leadership; expand into green cement & global marketsCompetitive EdgeFastest-growing player with M&A-led expansion; coastal export potential via Penna's BCTs; backed by Adani infra ecosystemScale advantage & brand leadership; extensive retail & RMC presence; established global credibilityComparison: Adani Cement (Ambuja + ACC + Penna) vs. UltraTech Cement (Aditya Birla Group)Key Hurdles and Legal Challenges in M&A: Role of CAsMergers and Acquisitions are intricate transactions with significant regulatory, financial, and operational challenges. Chartered Accountants play a pivotal role by ensuring compliance, structuring finances efficiently, mitigating risks, and coordinating with legal advisors.1. Regulatory Compliance ChallengesDomestic Transactions:Corporate Laws: CAs must ensure compliance with local laws such as the Companies Act, 2013, which governs shareholder approvals, disclosures, and post-merger filings.Sectoral Regulations: Industries such as banking, defense, and telecommunications are subject to additional regulatory scrutiny, requiring prior approvals.Competition Law: Approval from authorities like the Competition Commission of India (CCI) is essential to prevent anti-competitive practices.Cross-Border Transactions:Foreign Exchange Laws: Adhering to laws such as the Foreign Exchange Management Act in India is critical for cross-border transactions.Antitrust Approvals: M&A deals often require multi-jurisdictional antitrust reviews, such as those by the European Commission or the US Federal Trade Commission.Tax Treaties: Structuring deals to leverage Double Taxation Avoidance Agreements (DTAAs) while minimizing tax exposure is a key challenge.2. Taxation HurdlesDomestic Transactions:Capital Gains Tax: Analyzing and optimizing tax liabilities on the transfer of assets and shares are essential.Stamp Duty: Stamp duties on asset transfers vary across states and can significantly impact transaction costs.Cross-Border Transactions:Withholding Taxes: Ensuring compliance with withholding tax regulations on cross-border payments like royalties or dividends.Transfer Pricing: Accurate valuation of cross-border transactions to comply with transfer pricing regulations and avoid disputes.Tax Jurisdiction Conflicts: Identifying the jurisdiction for taxing income and gains is often contentious in international deals.3. Due Diligence ComplexitiesDomestic Transactions:Financial Review: Ensuring accuracy of financial statements, contingent liabilities, and compliance with domestic accounting standards.Disclosure Norms: Adhering to regulatory disclosure requirements to avoid penalties or delays.Cross-Border Transactions:Diverse Standards: Reconciling varying accounting and legal standards across jurisdictions.Language Barriers: Translating and interpreting financial and legal documents from foreign languages accurately.4. Legal and Structural HurdlesCultural and Governance Differences: Aligning corporate governance and cultural practices in cross-border deals.Sanctions and Trade Barriers: Avoiding deals with entities in sanctioned jurisdictions or industries.Intellectual Property (IP) Risks: Ensuring seamless transfer and protection of intellectual property rights (IPR).5. Securities and Disclosure RegulationsTakeover Code Compliance: Public company acquisitions require adherence to laws like SEBI (SAST) Regulations in India.Insider Trading Laws: Preventing misuse of confidential information during the transaction process.Disclosure Obligations: Accurate and timely reporting to regulators and stakeholders.6. Labor and Employment LawsEmployee Benefits Harmonization: Aligning employee contracts, pensions, and benefits across merging entities.Workforce Relocation: Addressing visa and immigration challenges in cross-border workforce integration.Jurisdiction-Specific Protections: Compliance with worker protection laws, including mandatory consultations in some jurisdictions.7. Data Protection and Privacy LawsGDPR Compliance: Ensuring compliance with the EU's General Data Protection Regulation (GDPR) in cross-border transactions.Data Localization Laws: Adhering to jurisdiction-specific data residency requirements.8. Emerging ChallengesESG Compliance: Integrating Environmental, Social, and Governance factors into M&A processes is becoming increasingly important.Technological Integration: Merging IT systems and ensuring cyber security in the newly formed entity.Litigation Risks: Managing disputes arising from breach of warranties or misrepresentation.Major post-integration risks include operational alignment (harmonizing operational systems and processes), repatriation of profits (addressing restrictions on profit repatriation to parent jurisdictions), and environmental compliance (addressing liabilities for past environmental violations of the target company).Emerging Trends Shaping M&A (2026–2030)Sustainability and Clean Energy: M&A activity in clean energy is expected to accelerate, driven by government initiatives to achieve 500 GW of clean energy capacity by 2030. Companies are increasingly focusing on ESG criteria as a cornerstone of their growth strategies.Digital Transformation: The integration of AI, blockchain, and IoT is reshaping industries, creating opportunities for technology-driven mergers.Healthcare and Pharmaceuticals: Post-pandemic, the healthcare sector has witnessed consolidation, with companies focusing on innovation and expanding their product portfolios.Infrastructure and Real Estate: The construction boom and urbanization trends in emerging markets have sparked significant M&A interest, with companies leveraging deals to access prime locations, streamline supply chains, and capitalize on smart city projects.The Role of Chartered Accountants (CAs) in M&A: Opportunities and ServicesStrategic Planning and AdvisoryIdentify potential targets aligned with industry trends and goals.Advise on deal structures (asset/share purchases, JVs).Conduct market research to assess competitiveness and growth prospects.Valuation and Financial ModelingPerform valuations (DCF, Comparable Companies, Precedent Transactions).Build financial models to forecast performance and synergies.Tax Structuring and OptimizationStructure deals to minimize tax liabilities and ensure compliance.Use tax treaties to avoid double taxation and optimize cash flows.Due Diligence ServicesCarry out financial, legal, and operational due diligence.Verify financial statements and uncover risks or compliance gaps.Regulatory Compliance and Risk ManagementEnsure compliance with corporate, tax, and securities laws.Manage approvals from regulators (e.g., competition authorities).Transaction Support ServicesAssist in negotiating deal terms, warranties, and indemnities.Draft financial sections of shareholder and regulatory filings.Post-Merger Integration (PMI)Align accounting systems, reporting, and processes.Track achievement of synergies and financial targets.Audit and Assurance ServicesProvide assurance on financial disclosures and reporting standards.Conduct special audits for acquisition-related statements.Advisory on ESGIntegrate ESG factors into M&A to create long-term value.Guide sustainability reporting and ESG compliance.Technological Integration and Cyber SecuritySupport IT and digital system integration.Ensure robust cyber security during and post-deal.Thus, the roles of CAs are pivotal in M&A, offering expertise across strategy, finance, compliance, and integration. Their role ensures smooth execution, risk management, and value creation, making them indispensable in today's complex deal environment.Observational Insight (2025)Technology, infrastructure, and financial services dominated deal value concentration.Mega-deals ($10B+) largely driven by scale, AI capability, and infrastructure control.Increasing cross-border strategic acquisitions, especially from emerging markets like India.Sector-wise Share of M&A Deals (Volume, 2025–26 est.)SectorApprox. ShareIT / Technology24%Industrials / Manufacturing15%Utilities / Power / Renewable13%Healthcare / Pharma10%Financial Services / Insurance9%Consumer Goods / FMCG8%Telecom / Infrastructure7%Others (incl. gaming, retail, energy)14%Future Outlook (2030 Projections)Global M&A is set to grow strongly, led by clean energy, technology, and healthcare. India is expected to emerge as a global hub for strategic investments with exponential M&A growth.Key Trends:Rise in cross-border collaborations.Stronger focus on sustainability and ESG.Expansion of private equity and venture capital in early-stage firms.ConclusionM&A will remain central to corporate growth and innovation, with India's dynamic market, supported by regulatory reforms and proactive policies, playing a pivotal role in global economic progress through 2026–2030.ReferencesBain & Company. "Looking Back: M&A Report 2025." Retrieved from: bain.comReuters. "Law Firms Rode Uneven M&A Wave as Big Deals Surged in 2024." Retrieved from: reuters.comFinancial Times. "Dealmakers Bet That Donald Trump Will Fuel Rebound in Megadeals." Retrieved from: ft.comMarketWatch. "Merger Activity is Down 40% from its Peak. Citigroup CEO Jane Fraser Sees a 'Big Unlock' Ahead." Retrieved from: marketwatch.comFinancial Times, India Briefingcfo.economictimes.indiatimes.comAuthor may be reached at canehasedhara@gmail.com and eboard@icai.inThe Chartered Accountant · June 2026 · www.icai.org
Theme
Ep. 12 — Digital Transformation in Public Financial Management: A Report on Governance, Integrity, and Technology
CA Journal
· June 2026
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Digital Transformation in Public Financial Management: A Report on Governance, Integrity, and TechnologyDigital transformation in Public Financial Management (PFM) has evolved from a technological upgrade to a structural necessity for modern governance. This paper examines the transition toward digital PFM, highlighting its role in addressing a global integrity crisis characterised by annual losses of US $4.5 trillion due to inefficient use of public funds. As of 2025, digital maturity was defined by meaningful participation and integrated platforms, as evidenced by the World Bank's GovTech Maturity Index (GTMI), which reached a global average of 0.589.The transition faces complex challenges, categorised into legal, social, and ethical perspectives. Legally, 'blackbox' algorithms threaten judicial review, necessitating a 'duty of candour' from the state. Socially, a digital divide affecting 2.6 billion people risks exacerbating exclusion, while ethically, the rise of 'dark patterns' undermines public trust. Global case studies, such as Estonia's KSI (Keyless Signature Infrastructure) Blockchain and India's Unified Payments Interface (UPI), demonstrate successful implementations, while failures in Moldova and Toronto underscore the risks of weak oversight and privatized public policy.The article proposes a '3PT' framework — Policy, Process, People, and Technology — to guide future reforms. Key recommendations include re-engineering processes before automation, adopting phased rollouts, and transitioning from reactive monitoring to AI-driven predictive stewardship. Finally, the report emphasises the evolving role of accounting professionals as Digital Integrity Officers, essential for maintaining the 'auditability' of complex digital ledgers and securing the state's fiscal engine room.Public Financial Management (PFM)Public Financial Management (PFM) serves as the engine room of the modern state. It represents the essential operational framework for the collection, allocation, and accountability of public resources, thereby sustaining the social contract between the state and its citizenry (Osuntoyinbo, T. M., 2026).When PFM systems fail, the very foundation of governance erodes. This article seeks to address certain basic issues with regard to the urgent need of transforming PFM using information technology. Digital transformation of PFM is the need of the hour. This article looks at the digitisation and digital transformation aspects in PFM, rather than PFM itself.Imperative for DigitisationThe global community currently faces an integrity crisis of staggering proportions. International Monetary Fund (IMF) models estimate global losses of approximately US $4.5 trillion annually — nearly 5% of the world GDP — due to inefficient use of public funds within public financial systems. About US $1.7 trillion of this loss occurs specifically at the budgetary central government level (IMF, 2023). Traditional paper-based systems are structurally incapable of mitigating these risks as they fail to provide immutable, verifiable audit trails required for professional and democratic oversight. This vulnerability allows for unauthorized adjustments and hidden transactions that manual auditing cannot detect in real-time (Osuntoyinbo, T. M., 2026). Consequently, the transition to digital PFM is no longer an optional upgrade; it is a structural requirement to ensure fiscal stability and public trust."International Monetary Fund (IMF) models estimate global losses of approximately US $4.5 trillion annually — nearly 5% of the world GDP — due to inefficient use of public funds within public financial systems."The Landscape of Government Digital Maturity in 2025As of 2025, digital maturity has evolved beyond simple internet access to focus on meaningful participation — the ability of a state to deliver essential services through integrated, sophisticated platforms. "Governments must work with fintechs, telcos, content providers, and community leaders to scale up infrastructure, access, and support" (Pateriya, S., 2025). The World Bank's GovTech Maturity Index (GTMI) 2025 provides the benchmark for this transition, evaluating 198 economies across four primary pillars: core government systems, public service delivery, digital citizen engagement, and GovTech enablers (World Bank, 2025).The 2025 GTMI data reveals a global average increase to 0.589, up from 0.552 in 2022. However, this progress is marked by a widening gap between Group A (high maturity) leaders and Group D (low maturity) economies (World Bank, 2025). While advanced states are integrating frontier sub-indicators — specifically AI Ethics, Green Tech policies, and Digital Identity — developing nations often struggle with legacy system inertia.Key Issues in Digital TransformationDigital transformation, though a technical task, is invariably hindered by administrative and capacity gaps. The chart below highlights the core technical and non-technical challenges faced during the digitalisation process across regions. Technology isn't meant to be an unbiased instrument; it actively engages with organizational law and social fairness. Executing digital PFM without dealing with these hurdles can lead to risks related to digitizing ineffectuality or aggravating exclusion. It is helpful to resolve these issues not just from a technical standpoint but also from a governance approach.IndicatorStrategic FocusGlobal Status 2025AI Ethics & GovernanceEthical utilization of automated decision-making and bias mitigation.70% of government bodies are currently piloting or planning AI use.Green Tech PoliciesIntegration of environmental sustainability into digital architecture.New sub-indicator; high correlation with Group A maturity.Digital Identity (ID)Seamless authentication using National Digital IDs for public services.Fundamental to the "whole-of-government" approach in leading states.Cloud-Based PFMSecure, interoperable cloud enclaves replacing fragmented legacy servers.Essential for real-time macro-fiscal monitoring and data integrity.Table 1: Digital Maturity Indicators — 2025Source: Synthesized from World Bank GTMI 2025 and IMF Digital Solutions Guidelines (Rivero del Paso et al., 2023).Figure 1: Main Issues or Challenges Faced by PFM IT Systems in 30 CountriesLack of interoperability 27Cybersecurity concerns 20Needs evolved, systems not enough 19Quality of data 11Inconsistent data with other systems 9Rigid reporting 8Remote users lack access 8Slow / cumbersome reporting 7Using internal data is complicated 3Source: Digital Solutions Guidelines for Public Financial Management, IMF Technical Notes and Manuals 2023/007Legal/Administrative PerspectiveAs automation becomes rapidly integrated into government decision-making, 'blackbox' algorithms pose an immediate difficulty to legal obligations. Lord Sales (2025) highlights an intrinsic strain: judicial review depends on comprehending why a conclusion was reached — especially if it was drawn for proper purposes. When AI produces patterns that are indecipherable to humans, it poses a threat to impairment of judgment, where executives unthinkingly make use of algorithmic prompts, significantly hindering their judicial discretion.In order to alleviate this, following Lord Sales' emphasis upon the 'duty of candour' could prove to be helpful. This duty is applicable to the preliminary level of technology execution, necessitating administrative authorities to elucidate the system's logic and possibility of prejudice before legal proceedings. Additionally, if a system is innately impenetrable, the weight of clarification must pivot to the State to establish the system's rightfulness (Sales, 2025).Social PerspectiveThe technological gap continues to be a notable hurdle to engagement. Nearly 2.6 billion individuals continue to be offline (ITU, 2023). Beyond connection, a lack of required skills and a gap in the availability of economical devices bring about new types of alienation. Susceptible individuals often make use of obsolete devices that are no longer compatible with internet banking or subsidy applications. Narrowing this gap demands moving past conventional infrastructure to the collaboration of FinTech and Telecom, employing Mobile Network Operators (MNOs) and Mobile Virtual Network Operators (MVNOs) to capitalize on abundant public data, e.g. telecom data for credit rating of the financially underserved.Ethical PerspectiveWithin the Indian setting, the rise of dark patterns — manoeuvred UI/UX designs — erode trust. A study of 53 widely-used Indian applications disclosed that 52 amongst them made use of at least one delusive tactic such as interface interference or drip pricing (Law Web, 2025). Such methods result in users getting involved in unexpected financial obligations, endangering the probity of electronic payments.Case Studies: Triumphs and Challenges in Digital TransformationThere have been numerous triumphs and challenges from across the world with regard to digital transformation. A few cases are highlighted here to showcase the approaches required in this regard.Global CasesTriumphsEstonia: Considered the benchmark for data integrity, utilizing KSI Blockchain alongside its X-Road infrastructure. KSI uses 2048-bit public key encryption to create a tamper-proof, distributed validation structure, ensuring no government record can be retroactively manipulated (Access Now, 2019).Singapore: Through its GovTech initiative, Singapore employs a whole-of-government (WOG) approach to AI, using real-time anomaly detection to identify procurement irregularities and compliance breaches, maintaining world-leading integrity scores (Tech.Gov.sg, 2025).ChallengesMoldova: The 2014 billion-dollar bank fraud, where more than 12% of GDP was siphoned through shell companies and fraudulent lending, exposed the catastrophic risks of weak regulatory capacity and lack of digital oversight (Arnold, 2025).Toronto's Smart City Project (Sidewalk Labs): This digital transformation plan was shelved due to concerns over privacy, lack of trust, and the questionable political legitimacy of a private tech company being deeply involved in public policy and data collection (Eom & Lee, 2022).India CasesTriumphsUPI: The Unified Payments Interface is a global leader, processing over 15 billion transactions monthly as of late 2024 (Cornelli et al., 2024), revolutionizing social payment transparency.GIS Mapping for Property Tax in Kanpur: Authorities used GIS mapping to update fiscal cadastres and identify previously unrecorded properties, more than tripling annual revenue from house taxes (Access Partnership, 2018).Aadhaar-Linked Payments: India's biometric ID system authenticates Direct Benefit Transfers (DBT), reducing ghost beneficiaries and saving over US $1 billion in LPG subsidies alone (Access Partnerships, 2018).ChallengesSystemic Exclusion via Aadhaar Biometric Authentication: Poor connectivity and fingerprint registration failures for labourers and the elderly have denied essential PDS food rations, causing severe adversities including starvation (Access Now, 2018).Proliferation of Dark Patterns: Indian digital platforms face consumer protection failures, with 79% of patterns tricking users into surrendering personal data — prompting the government to classify 13 patterns as unfair trade practices (Law Web, 2025).Aadhaar Cybersecurity and Data Privacy Breaches: A centralised database has suffered repeated security failures; UIDAI lacks transparency and treats breach information as a "state secret" (Access Now, 2018)."India utilizes its biometric ID system to authenticate Direct Benefit Transfers (DBT), which has reduced ghost beneficiaries and saved the government over US $1 billion in LPG subsidies alone."Synthesis of Case Learnings & The Way Forward: The 3PT FrameworkDrawing on the analysis of global digital transformation efforts in PFM, the following learnings are structured to enhance quality and mitigate implementation failures, organized around the Policy, Process, People, and Technology (3PT) framework.Policy — The Foundation of IntegrityLegal & Regulatory Realignment: Comprehensive legislation for e-signatures, data privacy, and blockchain records, mandating digital systems as the single source of truth.Sustained Political Will: Major reforms typically take 7–14 years and require political commitment beyond single election cycles.Holistic Reform Programmes: Project framing as Public Expenditure Management reform appeals more to top policymakers than narrow technical modernisation.Process — Designing for EfficiencyProcess Re-engineering (BPR) First: Manual inefficiencies must be re-engineered for comprehensive control before technology deployment.Phased, Test-and-Learn Rollout: Pilots troubleshoot first, manage stakeholder expectations, and demonstrate early integrity dividends.Structured Controls: Systems should capture all transaction stages ex-ante, ensuring no expenditure escapes the digital audit trail.People — Building a Digital CultureEvidence-based Decisions: A shift from discretionary to data-driven decision-making among managers and staff.Talent Acquisition & Retention: Market-based salary scales and specific career paths to prevent loss of IT talent to the private sector.Stakeholder Engagement: Active communication with civil society and the private sector to overcome resistance and build trust.Technology & AI — The Frontier of AutomationAI as a Predictive Tool: Transition from reactive monitoring to predictive analytics that forecast fiscal stress and default patterns.Real-time Anomaly Detection: Machine learning flags duplicate payments, suspicious supplier behaviour, and inflated invoices instantaneously.Modernizing Legacy Systems: Movement toward cloud-native, microservices-based, API-driven architectures.Ethics & Algorithmic Scrutiny: Safeguards against algorithmic bias and judicial review methods adapted for automated decisions.While governments need to leapfrog to bypass paper-based stages, such an approach is effective only if foundational legal and identity frameworks are present. Without these, legacy system inertia causes new digital tools to simply digitise inefficiency, failing to transform the underlying governance.The Role of the Accounting Professionals in PFM Digital TransformationIn the era of AI, the Human-in-the-Loop (HITL) approach is the final safeguard against judgmental atrophy. The accountant's role must evolve from bookkeeper to Digital Integrity Officer and Forensic AI Auditor.Accountants are critical in validating AI-generated audit flags and ensuring that automated decisions comply with business and statutory requirements. Furthermore, the transition to accrual-based accounting — adopted by only 30% of governments as of 2021 — is made feasible by digital transformation through automated reconciliations and real-time data ingestion (IFAC, 2021). Professional accountants are the key drivers of this transition, ensuring the "auditability" of complex blockchain ledgers and maintaining fiscal accuracy."In the era of AI, the Human-in-the-Loop (HITL) is the final safeguard against judgmental atrophy. The accountant's role must evolve from bookkeeper to Digital Integrity Officer and Forensic AI Auditor."ConclusionThe digitisation of PFM is a structural necessity for the modern state. GTMI 2025 data confirms that while progress is being made, the journey is fraught with legal, social, and ethical complexities. Success requires a balanced approach: pairing advanced technologies like KSI Blockchain and AI Auditing with robust compliance mechanisms. By empowering accounting professionals as the vanguard of digital integrity, governments can move from reactive monitoring to a future of predictive, data-driven stewardship, finally securing the state's engine room.Author may be reached at eboard@icai.inReferencesAccess Now (2019) National Digital Identity Programmes: What's Next? accessnow.orgAccess Partnership (2018) Digital Innovation in Public Financial Management (PFM): Opportunities and implications for low-income countries. accesspartnership.comArnold, V. (2025) "Moldova: Consortium of Banks Emergency Liquidity Program, 2014," Journal of Financial Crises, Vol. 7, Iss. 1. elischolar.library.yale.eduCornelli, G., Frost, J., Gambacorta, L., Sinha, S. and Townsend, R. M. (2024) The organisation of digital payments in India — lessons from the Unified Payments Interface (UPI). BIS Papers No 152, pp 61–73. bis.orgEom, S-J. and Lee, J. (2022) 'Digital government transformation in turbulent times: Responses, challenges, and future direction', Government Information Quarterly, 39(2). pmc.ncbi.nlm.nih.govIFAC (2021) The Main Challenges of Public Sector Accounting Reforms and World Bank's Public Sector Accounting and Reporting (PULSAR) Program. ifac.orgInternational Monetary Fund (2023) Costing corruption and efficiency losses from weak PFM systems. PFM Blog. blog-pfm.imf.orgITU (2023) Press Release. itu.intLaw Web (2025) Dark Patterns in India: How Digital Platforms Are Deceiving Consumers and What Can Be Done? lawweb.inOsuntoyinbo, T. M. (2026) 'Building Trust in Public Finance: Digital Transformation and Financial System Integrity in Government', IRE Journals, 9(8), pp 625–643. doi.orgPateriya, S. (2025) 'Digital divide in 2025: Where we stand & what's widening the gap', NuovoPay. blog.nuovopay.comRivero del Paso, L., Pattanayak, S., Uña, G. and Tourpe, H. (2023) Digital Solutions Guidelines for Public Financial Management. IMF Technical Notes and Manuals 2023/007. imf.orgSales, Lord P. (2025) AI and Public Law: Automated Decision-Making in Government. Keynote Lecture, Government Legal Department's Annual Conference, 5 November. supremecourt.ukTech.Gov.Sg (2025) AI and data driven government. tech.gov.sgWorld Bank (2025) GovTech Maturity Index (GTMI). worldbank.org
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Ep. 13 — From Accounts to Accountability: ICAI’s Role in Public Financial Management
CA Journal
· June 2026
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From Accounts to Accountability: ICAI's Role in Public Financial ManagementA well-functioning Public Financial Management (PFM) system is what makes government genuinely effective and trustworthy. It governs how public money is raised, allocated, spent and accounted for — and ultimately determines whether fiscal discipline, transparency and public trust can be sustained.As governments shift toward real-time reporting and begin adopting tools such as Artificial Intelligence, the demand for accurate and well-organised financial data keeps growing. That reliability hinges on sound financial reporting. Lasting PFM reform, therefore, isn't just about new technology — it depends on strengthening the underlying systems and processes that protect the integrity of financial data.PFM in India: Progress and GapsIndia's PFM landscape shows real progress alongside ongoing challenges. A solid institutional and legal foundation — reinforced by audit oversight from the Comptroller and Auditor General (C&AG), fiscal discipline under the Fiscal Responsibility and Budget Management Act, and digital platforms like PFMS and Direct Benefit Transfer (DBT) — has helped improve transparency and cut down on leakages.Even so, weak financial reporting and limited capacity at the local level remain persistent obstacles. Recent reform efforts have leaned into transparency, fiscal discipline and outcome-based governance, but lasting impact will require deeper work on financial reporting, accountability and institutional capacity. The 16th Finance Commission is now working to improve how public resources are allocated and used across every tier of government.ICAI's Role in Strengthening PFMAs a partner in nation-building, the Institute of Chartered Accountants of India (ICAI) — through its Public & Government Financial Management Committee (PGFMC) — supports government bodies at every level by improving financial reporting and management practices, building official capacity through training and e-learning, aiding accounting reform implementation, and offering technical guidance.Setting Accounting Standards for GovernmentIndia's government structure operates at three levels — Central, State, and Local Self-Government — and standardisation efforts differ across each.Central and State GovernmentsMost accounting still follows a cash or modified-cash basis, though reforms are underway, most notably the Ministry of Railways' move toward accrual accounting.Under Article 150 of the Constitution, government accounts are kept in forms prescribed by the President on the advice of the C&AG, India's Supreme Audit Institution.The Government Accounting Standards Advisory Board (GASAB), set up by the C&AG's office, develops cash-based Indian Government Accounting Standards (IGAS) and accrual-based Indian Government Financial Reporting Standards (IGFRS).ICAI sits on GASAB and regularly contributes technical input on draft standards and related documents.Local Self-GovernmentRural Local Bodies/Panchayats: follow a cash-based system under the Model Accounting System (MAS), implemented through the e-GramSwaraj platform.Urban Local Bodies: required to use accrual-based accounting under the National Municipal Accounts Manual (NMAM), developed by the Ministry of Housing and Urban Affairs based on an earlier C&AG Task Force report.To bring consistency across local bodies, ICAI has issued 31 Accounting Standards for Local Bodies (ASLBs), modelled on international benchmarks such as the International Public Sector Accounting Standards (IPSAS). These are recommendatory until individual states choose to make them mandatory — Uttarakhand became the first state to revise its Municipal Accounts Manual in line with the ASLBs.ICAI is also part of a newly formed Steering Committee revising NMAM 2.0 under the C&AG's office.Building Government CapacityICAI invests heavily in capacity building through structured training programmes, workshops, vernacular-language webinars, and e-learning content. So far, roughly 3,500 government officials have been trained, including staff from the C&AG's office, the Indian Cost Accounts Service, Tamil Nadu's treasury and accounts department, and urban/rural local bodies across states such as Gujarat, Tamil Nadu, Maharashtra, Uttarakhand, Nagaland, Tripura, Bihar and Punjab.ICAI also runs a recurring webinar series on "Public Financial Management: Key for Growth & Governance," held every alternate Thursday to keep members and stakeholders up to date on PFM developments.3,500 Government officials trained6,000 Registrations for the Panchayat/Municipal accountant course356 Candidates who passed that course3,485 Participants trained via the Certificate Course on Public FinanceCertificate Courses for Local-Body AccountantsWorking with the C&AG's office, ICAI launched a certificate course in 2023 aimed at placing trained accountants in Panchayats and Municipal Bodies, even in remote areas. Several state Urban Development and Panchayati Raj departments now require this course for local-body accounts staff, a meaningful step toward stronger discipline and accountability at the grassroots level.Stakeholder Engagement and PartnershipsICAI maintains an active dialogue with the Ministry of Housing and Urban Affairs, the Ministry of Panchayati Raj, the Ministry of Rural Development, the C&AG's office, and various state government departments, offering technical and advisory support on financial reporting. It also engages with bodies like the National Institute of Public Finance and Policy, the International Public Sector Accounting Standards Board, and the South Asian Federation of Accountants.ICAI Collaborations & Strategic AlliancesCapacity Building Joint Research Technical SupportO/o C&AG of IndiaNational Institute of Urban Affairs (NIUA)Centre of Excellence for Financial Audit (CoEFA, Hyderabad)Mahatma Gandhi State Institute of Public Administration (MGSIPA)Andhra Pradesh Police DepartmentMultilateral Global PartnershipsThe World BankAsian Development Bank (ADB)Primary goal: improving audit quality for Externally Aided Projects (EAPs) in IndiaRecognising Reform: ICAI AwardsTo encourage progress, ICAI presents Awards for Promotion of Accounting Reforms in Local Bodies, recognising local bodies that improve transparency, accountability and the overall quality of their financial reporting.Publications and ResearchICAI regularly publishes material on public finance and government accounting, including a joint study with NITI Aayog on transitioning Urban Local Bodies to accrual accounting, which lays out implementation roadmaps, policy insights and reform strategies.Chartered Accountants can play an important role in Government across accounting, auditing, financial management and policy formulation — ultimately supporting better service delivery and more effective use of public funds.Professional Opportunities for MembersICAI also runs a Certificate Course on Public Finance and Government Accounting, covering government economic policy, budgeting, fiscal tools, public funds, grants, and the accounting systems used across Central, State and Local Bodies. Open to both CA members and government officials, the course is recognised in tenders issued by local bodies and government departments in Maharashtra, Madhya Pradesh and Jammu & Kashmir, and the C&AG's office counts it toward empanelment criteria for CA firms.ConclusionTransparency, accountability and fiscal discipline remain the foundation of effective governance, and strong PFM systems are central to India's progress toward becoming a developed economy. Through capacity building, standards development, institutional partnerships and policy support, ICAI has helped move the conversation from basic accounting toward genuine accountability in public finance — strengthening government officials' financial management capabilities along the way.As India advances its Viksit Bharat vision, ICAI's continued focus on reform aims to support a transparent, resilient and future-ready public financial system.Authors may be reached at cpf_ga@icai.in and eboard@icai.inSource: The Chartered Accountant journal, May 2026 · www.icai.orgContent adapted and reformatted from the original ICAI journal article (May 2026 issue).
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Ep. 14 — The 16th Finance Commission and the Future of Local SelfGovernments in India
CA Journal
· June 2026
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The 16th Finance Commission and the Future of Local Self-Governments in IndiaIntroductionLocal self-governments, both the Panchayats and the Municipalities, have a long history of existence in India. While the Panchayats have been around since ancient times, the Municipalities too have been governing the urban areas since the 17th century. Recognizing their importance in governing the grassroots level and their primacy in providing basic services, the Constitution of India placed the subject of 'local government' in the State List of the Seventh Schedule. As these institutions did not form part of the formalised government, the transfer of funds and functions had been ad hoc in nature until 1993.With the passage of the 73rd and 74th Constitutional Amendments, 1993, both the Panchayats and the Municipalities got recognition in the book of statute as institutions of self-government, respectively. Consequently, Part IX - The Panchayats and Part IX A - The Municipalities, were inserted in the Constitution containing sixteen and eighteen articles respectively. The State Legislature was made responsible for devolving the functions and finances to these local governments.In general, the related public expenditure incurred by the local governments exceeds the revenue generated by them. Hence, certain arrangements have been made for regular transfers of funds to them. Articles 243 I & Y necessitate every State to constitute, at regular intervals of five years, a finance commission (SFC), and assign it the task of reviewing the financial position of local governments and making recommendations on the sharing and assignment of various taxes, duties, tolls, fees etc. and grants-in-aid to be given to the local governments from the Consolidated Fund of a State. The provision causes stress on state finances.Hence, an amendment was also made in Article 280, through an insertion of sub-clauses (bb) and (c), and mandated the Union Finance Commission (UFC) to suggest "measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities" respectively. Towards this end, devolution of resources from the Union to States and States to Panchayats and Municipalities was considered a necessary requirement. The fact that Article 280 was amended to add clause (3) (bb) & (c) explains that just as the State government has the responsibility under Article 243 (I & Y) to devolve resources to the Panchayats and the Municipalities, the Union government also has a corresponding role and responsibility. It enabled and provided a legal basis for the pass-through of central funds to the local governments, with which the Union has no direct relationship.Union Finance Commission and Local Governments in the PastSince 1993, seven Union Finance Commissions (UFCs) have provided grants-in-aid to local governments. The table below shows grants to local governments by the successive UFCs, in absolute terms and their percentage share in the Union tax divisible pool.UFCPanchayats (Rs. Crore)Municipalities (Rs. Crore)% of Union Divisible Pool10th UFC4,3811,0001.411th UFC8,0002,0000.812th UFC20,0005,0001.213th UFC64,40823,1111.914th UFC2,00,29287,1493.815th UFC2,36,8051,21,0553.216th UFC4,35,2363,56,257—Source: Report of the 15th and 16th Union Finance CommissionsThe 10th UFC, chaired by Shri K. C. Pant, recommended a grant of a) Rs. 100 per capita for the rural population amounting to Rs. 4,381 crore for Panchayats, and b) Rs. 1,000 crore for Municipalities. This share constituted 1.38 percent of the Union divisible tax pool. Subsequently, the 11th UFC, led by Prof. A. M. Khusro and the 12th UFC headed by Prof. C. Rangarajan, made certain allocations as shown above. Each one of them increased the grants by about three times that of the previous allocation.The 13th UFC, led by Dr. Vijay Kelkar, marked a departure from the earlier practice of ad hoc lump-sum grants and introduced a share of the local governments in the Union tax divisible pool i.e., 1.42 percent for Panchayats and 0.51 percent for Municipalities, resulting in a total grant of Rs. 87,519 crore for the period 2010-15. However, the 14th Commission, led by Dr. Y. V. Reddy, reverted to the earlier approach by recommending an ad hoc grant of Rs. 2,00,292 crore for Panchayats and Rs. 87,149 crore for Municipalities.At the beginning, the share of Panchayats in the total local government grants was substantially high, which consistently declined over the years, only to assign increasing importance to Municipalities. The share of Municipalities has risen consistently, from 19 percent in the 10th UFC to a significant 45 percent in the 16th UFC, highlighting the increasing importance to urban governance in the context of urbanisation.Recent Background for the 16th UFCThe 15th UFC, chaired by Shri N. K. Singh, proposed Rs. 2.37 lakh crore for Panchayats and Rs. 1.21 lakh crore for Municipalities during 2021-26. Amid the backdrop of COVID-19, the Commission also recommended special grants of Rs. 70 thousand crore exclusively for primary health care systems. Further, the grants recommended for Municipalities were categorized as: basic grants of Rs. 82.9 thousand crore for smaller cities (<1 million population), and 100 percent performance-linked grants of Rs. 38.2 crore for million-plus cities via a Challenge Fund. It also provided Rs. 8000 crore as performance-based grants for the incubation of new cities, and Rs. 450 crore for shared municipal services. The 15th UFC's total grants, including special grants, accounted for 3.2 percent of the Union's divisible tax pool.The grants for Panchayats and the basic grants for cities other than million-plus cities were to be utilized as follows: 40 percent as untied grants to address local felt needs as per the 11th and 12th schedules (excluding salaries and other establishment costs), 30 percent earmarked for drinking water and water management, and the remaining 30 percent for sanitation, including the maintenance of open defecation free (ODF), solid waste, and faecal sludge management. Performance grants for Municipalities, on the other hand, incentivized service level benchmarks (SLBs) for urban drinking water supply, sanitation, and solid waste management and air quality improvements in larger cities.As part of the eligibility criteria for availing grants, the Commission required states to set up the State Finance Commission (SFC) and follow its recommendations by March 2024, in order to qualify for grants for 2024-25 and 2025-26. Additionally, to strengthen accountability, states were mandated to ensure that Panchayats publish provisional and audited accounts online. However, Municipalities were expected to go beyond this and fix minimum property tax floor rates and improve collection efficiency.Transfers to Local Government by the 16th UFCThe 16th UFC, under the leadership of Prof. Arvind Panagariya, has scaled up allocations to Rs. 4.35 lakh crore for Panchayats and Rs. 3.56 lakh crore for Municipalities for a period of five years commencing April 1, 2026."The grants for Municipalities include targeted support to growth centres through components such as the Urbanisation Premium of Rs. 10 thousand crore and the Special Infrastructure Component of Rs. 56.1 thousand crore."The Urbanisation Premium supports planned rural-urban transitions by helping states in building administrative structures and delivering basic services in expanding urban areas, while the Special Infrastructure Component is aimed at boosting wastewater management systems in 22 cities with populations between 1-4 million.Both rural and urban grants (excluding the share of urban premium and special infrastructure component) are subdivided into basic and performance grants in an 80:20 ratio. Of the basic grant, 50 percent is tied to sanitation and solid waste management, and/or water management; funds can also be utilized toward operation and maintenance expenditure of these items. The remaining 50 percent of the basic grant and the entire performance grant are untied in nature, with a proviso that these cannot be used for salaries or establishment expenses, with a cap of 20 percent on road-related spending.The entry-level conditions for availing basic grants promote better governance through continued reforms such as mandatory audits, regular elections, and the formation of SFC and tabling of its Action Taken Report (ATR) within six months of the submission of the SFC report, thereby improving transparency, accountability, and the overall functioning of the local governments.The performance grant, both for Panchayats and Municipalities, is further split equally between the rural/urban performance component and state performance component. Under the first component, the Commission aims to strengthen fiscal capacity by considering local governments' own source revenue (OSR) performance. Under the second component, it requires states to transfer at least 20 percent of the UFC's basic grant equivalent to local governments from their own sources.Additionally, to access the urbanization premium, states need to merge peri-urban villages into adjoining larger municipalities with a population of at least one lakh and formulate a rural-to-urban transition policy. For the Special Infrastructure Component, municipalities are required to undertake a detailed study in the first year of the award and enter into an MoU with MoHUA and the state government.Focus of UFCs on Good Accounting PracticesSuccessive UFCs have made important recommendations to improve the accounting practices of the local governments. The 11th UFC required the Comptroller and Auditor General (CAG) to supervise the record-keeping and auditing of the local government accounts, with audit reports to be inspected by the designated state legislative committee. The 12th UFC emphasized the need for disaggregated financial data (as per CAG formats) and a modern accounting system and databases.The 13th UFC supported the continuation of CAG guidance over Local Fund Audit Departments (LFADs) and proposed measures to strengthen them. The 14th UFC underscored the need to distinguish between various revenue sources in local government accounts, ensure timely auditing and compilation of accounts, and made the submission of audited accounts — up to two years prior — a condition for eligibility for performance grants for both gram panchayats and Municipalities.The 15th UFC further reinforced these requirements by mandating the online availability of both provisional and audited accounts as a prerequisite for receiving local government grants. This practice has been carried forward in the 16th UFC recommendations. While these reforms have significantly improved transparency, accountability, and the availability of financial information, the 16th UFC notes that there is a lot that remains yet to be completed to assure the obtainability of exact accounts and their audits in a timely manner.ImplicationsA trend towards progressive fiscal transfers to local governments by the successive UFCs since the 73rd and 74th CAAs shows the strengthening of these institutions through a predictable channel of funds. Anchored in the Constitutional amendments, these grants have supplemented the resources of the third-tier of the government, enabling better service delivery and stronger democracy.Allocation of Funds as Tied and Untied GrantsSuccessive UFCs have recommended tied grants to basic services like sanitation, solid waste management, health, drinking water, education, etc., to improve service delivery outcomes. At the same time, untied funds have been provided for the locally felt needs of these governments. Lastly, the 16th UFC has rebalanced the composition of basic grants by moving from the 15th UFC's 60:40 tied-untied ratio to a 50:50 distribution. While this shift increases the share of untied funds, tied grants continue to support essential services. The higher share of untied grants enables local governments to use such funds according to their own priorities and community needs, whether that involves repairing a road, supporting cultural activities, or investing in small-scale infrastructure projects. This flexibility strengthens fiscal decentralisation and enhances their ability to respond effectively to local demands.Revenue Mobilisation EffortsThe 15th UFC recommended performance grants exclusively for the urban sector, requiring Municipalities to set property floor rates in the first year, and ensure that property tax collections grew in line with GSDP in subsequent years for the remaining years of the award period. However, this condition led to fewer states qualifying for grants, with numbers falling from 22 in 2023-24 to 16 in 2024-25, as per MoHUA's submission to the 16th UFC.In contrast, the 16th UFC has suggested performance-linked grants based on the growth in OSR for both Panchayats and Municipalities. Panchayats are expected to increase their OSR annually by a minimum of 2.5 percent in 2027-28, or achieve 2.5 percent annual compound growth over OSR of 2025-26, whichever is lower, subject to Rs. 1200 per household per annum. For Municipalities, the requirement is a 5 percent annual growth, with an emphasis on increasing OSR from all sources, comprising rent earnings, income from holdings, service fees and the like.Accountability and AuditsThe UFCs over the years have emphasized timely preparation and auditing of accounts with oversight by the CAG. Eligibility for performance grants was linked to the submission of audited accounts, compelling compliance. Both the 15th and 16th UFCs have mandated the online publication of provisional and audited accounts, making financial data accessible to the public. These reform measures may result in significantly enhanced transparency and availability of financial data for informed policy-making.Increasing Share of Municipalities"The share of Municipalities has increased steadily from 19 percent in the 10th UFC to 45 percent in the 16th UFC, reflecting India's urban transition and the growing demands on urban infrastructure and governance."The 15th UFC highlighted that India's economic growth depends on well-managed urbanization. It recognised cities as key drivers of growth, investment, and poverty reduction, and stressed the need for better financing and governance of Municipalities. Building on this, the 16th Finance Commission emphasized planned urbanisation through timely identification of emerging urban areas, clear transition policies, and stronger administrative capacity, along with adequate financing and sound planning to improve productivity and liveability.Timely Constitution of SFCThe UFC is required to make transfers to the local governments based on the recommendations of the SFC reports. Since the 73rd and 74th CAAs, the states were expected to constitute their seventh SFC by 2024; however, only six states — Assam, Haryana, Himachal Pradesh, Kerala, Tamil Nadu, and Rajasthan — have done so. This has made it difficult for the UFCs to base their recommendations on the SFC reports.The 15th UFC made the constitution of SFCs and the laying of an explanatory memorandum before the State Legislature a mandatory condition for availing local government grants. The 16th UFC has continued this conditionality and further mandated that the ATR must be tabled in the State Legislature within six months of submission of the SFC report.Impact of Census OperationsThe 16th Census began in April 2026 with the first phase, covering house-listing and housing census, while the main population enumeration is scheduled for February 2027. All the administrative units have been frozen for the period January 1, 2026 to March 31, 2027, including Panchayats and Municipalities, until the census is completed. It is to be noted, however, that the resultant delimitation of constituencies and administrative divisions may affect the disbursal of grants to the local governments. The 16th UFC has not addressed this matter, making it necessary to put arrangements in place to ensure the smooth transfer of funds to these institutions.Conclusion"The 16th Finance Commission, like its predecessors, has supported the local governments through increased allocation with a stronger accountability framework for transparent and responsive governance."However, States have to come forward to comply with the 16th UFC's conditions:Strengthen the institution of SFCConduct regular elections at local levelsPublish annual accounts regularlyEmpower and incentivize the local governments to collect their OSRs efficientlyProvide matching contribution of 20%They also need to meet the preconditions for special grants, such as the urbanization premium and special infrastructure component. With respect to accounts and audit, it is expected that the CAG will provide Technical Guidance and Supervision to the LFADs. Due to these conditions, the state governments will enhance their skills and address the issue of manpower shortage.Notably, Panchayats have advanced in accounts reporting through the eGram Swaraj portal, covering over 2.6 lakh Panchayats. They follow the cash-based Model Accounting System (MAS), which simplifies accounting for all tiers of panchayats, tracks scheme-wise fund flows, and aligns with Union and state government accounts. Building on this momentum, efforts are underway to standardize municipal accounting practices, with the CAG-initiated revision of National Municipal Accounts Manuals (NMAM) 2.0, in consultation with reputed agencies, including the Institute of Chartered Accountants of India (ICAI).Successive UFCs have also recommended raising the ceiling on professional tax from Rs. 2,500 per annum, as prescribed in the Constitution. This ceiling was last revised in 1988 through the sixtieth Constitutional Amendment. Given that nearly four decades have elapsed since the last revision and considering inflation as well as expansion of the tax base, it is imperative to undertake appropriate legislative amendments to enhance the permissible limit to supplement the resources of the local governments.Additionally, an amendment to Article 285 of the Constitution is necessary to enable state and local governments to levy property tax on Union government properties, or at the very least, to recover the cost of local services provided to such properties.All UFCs, except the 14th edition, have recommended grants to local institutions in the tribal areas falling under the Fifth and Sixth Schedules. These grants were designed largely on the lines of Panchayats, with varied approaches. The 16th UFC has also reaffirmed the importance of supporting representative institutions in exempted areas and has recommended state government to make allocations to these areas at par with local governments in other areas. Since the Constitution (125th Amendment) Bill, 2019, is pending in the Parliament, a robust framework for the intergovernmental fiscal transfers to these areas will take time.Author may be reached at vnalok@gmail.com and eboard@icai.inSource: The Chartered Accountant, May 2026, www.icai.org
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Ep. 15 — Can the Urban Challenge Fund enable a Level Playing Field for Unlocking the Indian Municipal Bond Market?
CA Journal
· June 2026
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Can the Urban Challenge Fund Enable a Level Playing Field for Unlocking the Indian Municipal Bond Market?India's urban population is projected to exceed 52 crore by 2036, demanding massive infrastructure investment estimated at ₹1 lakh crore over two decades. In response, the Union Budget 2025 introduced the Urban Challenge Fund, approved in February 2026. Under the Fund, up to 25% of project expenses for financially viable projects will be met through Central Grants, provided at least 50% of funding comes from commercial sources such as municipal bonds, bank loans, or Public Private Partnerships (PPPs). This article examines whether the Urban Challenge Fund, alongside MoHUA fiscal incentives, Budget 2026, and SEBI's regulatory push, can democratise access to the municipal bond market for all cities, states, and Union Territories.IntroductionIndia's urban population is projected to exceed 52 crore by 2036, intensifying pressure on infrastructure and demanding ₹1 lakh crore in investment over the next two decades. Despite cities contributing over 63% to GDP, their own revenue contribution remains just 1%. Owing to growing service demand and limited financial resources, Urban Local Bodies (ULBs) have increasingly turned to borrowings — a trend that has surpassed the ₹13,364 crore recorded in FY2024 BE and is expected to keep rising. However, as a share of Gross State Domestic Product (GSDP), these borrowings still account for less than 0.05% of GDP, underscoring continued dependence on state transfers.Municipal bonds, especially green and pooled bonds, have emerged as strategic tools, spurred by the SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (last amended August 18, 2023) and MoHUA's fiscal incentives. Yet challenges such as low credit ratings, limited transparency, and poor market depth continue to hinder growth. In response, the Union Budget 2025 introduced the Urban Challenge Fund (UCF), requiring 50% market borrowing to drive reform. Persistent barriers include over-reliance on grants, inadequate financial transparency, compliance burdens, lack of secondary markets, and weak municipal creditworthiness.This article evaluates whether the UCF — launched in Budget 2025 and approved in February 2026 with a ₹10,000 crore allocation for FY 2026–27 — can open the bond market to all states, cities, and UTs as a level playing field, rather than privileging a few financially robust states and cities.About Municipal BondsMunicipal bonds are debt instruments issued by Indian cities to mobilise financial resources for urban infrastructure development — covering water supply, sanitation, solid waste management, transportation, and road networks. They offer a triple advantage: long-term capital for municipalities, support for public goods and services under the Twelfth Schedule of the 74th Constitutional Amendment Act (18 functions), and relatively stable returns for investors, often paired with MoHUA incentives.Between 1995 and 2005, ten municipal corporations collectively raised approximately ₹1,325 crore through tax-free municipal bonds, mainly for roads, water supply, and sewerage. The period 2006–2016 saw a sharp decline in issuances after the withdrawal of tax-free exemption, compounded by substantial central grant infusions that reduced the immediate need for market-based funding. As of 14 March 2026, bonds worth ₹4,240.34 crore have been issued by 29 cities.Types of Municipal BondsMunicipal bonds in India fall mainly into General Obligation (GO) bonds — backed by a municipality's taxing authority and used for non-revenue-generating infrastructure like schools and parks — and Revenue bonds, repaid from income generated by specific projects such as water supply or toll roads, making them riskier but potentially more rewarding. Thematic bonds (green, blue, yellow, brown) further align municipal financing with ESG objectives.Bond TypeThematic CategoryDescriptionTypical Use CasesGreen BondsEnvironment-friendly investmentsProjects with clear climate/environmental benefitsRenewable energy, waste management, energy-efficient buildingsBlue BondsOcean and water conservationWater-sector projects promoting marine ecosystem sustainabilityWastewater treatment, desalination, coastal protectionYellow Bonds (less common)Urban transport & energy efficiencyPublic transport, EV infrastructure, smart gridsMetro rail, clean busesBrown BondsHigh-emission, traditional infrastructureFossil fuel projects, roads, airports (non-green aligned)Highway expansion, fossil power plantsTable 1: Thematic Classification — Green, Blue, Yellow, and Brown BondsEvolution of India's Municipal Bond Market: MoHUA & SEBI ReformsIndia's municipal bond market has evolved over two decades through reform-linked grants, fiscal incentives, and regulatory intervention. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM, 2005) initiated this transformation by linking grants to credit rating reforms. The Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Smart Cities Mission (2015) advanced market-readiness through mandatory credit ratings and disclosures.A major boost came with AMRUT 2.0, offering fiscal incentives of ₹13 crore for every ₹100 crore raised (capped at ₹26 crore per ULB) for a first bond issuance. Subsequent issues attract additional incentives for green bonds (₹10 crore per ₹100 crore raised, capped at ₹20 crore) and yellow bonds (an additional ₹5 crore per ₹100 crore raised) for water, sanitation, and renewable energy projects.Further reforms include MoHUA's CityFinance.in guidelines requiring standardised Audited Financial Statements under a 100-mark performance framework (2020); the Nifty India Municipal Bond Index launched by NSE Indices; SEBI's mandatory Expected Loss (EL) ratings alongside traditional credit ratings; reduction of minimum bond face value from ₹1 lakh to ₹10,000 to widen retail participation; and permission for Foreign Portfolio Investor (FPI) participation.The Union Budget for FY 2026–27 added a further incentive of ₹100 crore for substantial municipal bond issuances of ₹1,000 crore or more, motivating large cities and ULBs to tap capital markets at scale — in addition to the existing AMRUT 2.0 support framework.#CityBond Size (₹ Cr)ROI (%)Date of IssueFinal Redemption1Pune MC2007.5920-Jun-201720-Jun-20272GHMC2008.9016-Feb-201816-Feb-20283Indore MC139.909.2529-Jun-201829-Jun-20284GHMC1959.3814-Aug-201814-Aug-20285Bhopal MC1759.5526-Sep-201826-Sep-20286GVMC (Vizag)8010.0021-Dec-201821-Dec-20287Ahmedabad MC2008.7015-Jan-201915-Jan-20248Surat MC2008.6827-Feb-201901-Mar-20249GHMC10010.2320-Aug-201921-Aug-202910Lucknow MC2008.5013-Nov-202018-Nov-203011Ghaziabad NN1508.1031-Mar-202106-Apr-203112Vadodara MC1007.1524-Mar-202228-Mar-202713Indore MC2448.2520-Feb-202320-Feb-203214Pimpri-Chinchwad MC2008.1528-Jul-202328-Jul-202815Ahmedabad MC2007.9006-Feb-202406-Feb-202916Vadodara MC1007.9005-Mar-202404-Mar-202917Rajkot MC1007.9021-Oct-202418-Oct-202918Agra NN508.1515-Apr-202515-Apr-203219Prayagraj NN508.0702-May-202502-May-203220Varanasi NN508.0109-May-202507-May-203221Greater Chennai Corp2007.9722-May-202521-May-203522Pimpri-Chinchwad MC2007.8504-Jun-202504-Jun-203023Gandhinagar MC257.6523-Jun-202523-Jun-203024Bhavnagar MC258.0028-Oct-202528-Oct-203025Surat MC2008.0014-Oct-202513-Oct-203026Nashik MC2007.8025-Nov-202525-Nov-203027Tirupur Corp1008.5008-Jan-202621-May-203528Coimbatore MC150.858.2923-Jan-202627-Jan-203029Greater Chennai Corp205.597.9509-Jan-202601-Sep-203630Tiruchirappalli City MC1008.5006-Feb-202606-Feb-2036Total4,340.34 Table 2: Status of Municipal Bond Issuance After SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2023Source: sebi.gov.in/statistics/municipalbonds.htmlChallenges to Municipal Bond Market Development in IndiaLow Revenue Generation: Indian ULBs generate approximately 1% of GDP in revenue, far below counterparts in Mexico, Thailand (2–4%), and Brazil, Russia, South Africa (7–9%), driving heavy dependence on central and state transfers. No state municipal corporation maintains a consistent positive operating surplus.Limited Borrowing and Bond Issuance: Borrowings constitute just 10% of total ULB revenues, with bonds accounting for a mere 0.5–1%. No municipal bonds were issued between FY14 and FY16.Concentration of Issuances: Over 75% of bond value and 70% of volume are concentrated among the top 10 municipal corporations, with Ahmedabad leading at ₹758 crore. Only 18% of ULBs have accessed the bond market.Geographic Disparity: Fewer than 20 states and UTs have issued municipal bonds. Gujarat dominates with more than ₹1,000 crore raised.Stringent Eligibility Norms: SEBI requires positive net worth, adherence to the National Municipal Accounting Manual (NMAM), state accounting standards, timely audits, and no default history — conditions many ULBs struggle to meet.Weak Financial Health: Only 36 of 467 AMRUT-rated ULBs secured A- or higher. Own tax revenue as a share of total revenue fell from 43% (FY2017) to 30% (FY2024 BE), while transfers rose from 24% to 38% over the same period.Financial Indiscipline: Per the 16th Finance Commission Report, many cities lack audit-ready financial statements for the preceding three years. Accrual accounting adoption varies sharply by state — near-universal in Andhra Pradesh, Tamil Nadu, and Telangana, but as low as 6–7% in Goa, Punjab, and Nagaland.Illiquidity & Secondary Market Gaps: The absence of a vibrant secondary market discourages investor participation, increasing illiquidity and risk perception.State/UTOwn RevenueRevenue ExpenditureOperating Surplus19-2020-2121-2219-2020-2121-2219-2020-2121-22Andhra Pradesh1,4921,7371,9831,7271,7491,951-235-1232Arunachal Pradesh2.852.133.155.728.6516-3-7-13Assam8510296257240219-173-138-122Bihar2042292639031,0141,110-698-785-847Chhattisgarh5205526451,9521,9001,410-1,432-1,348-765Delhi8,1127,1807,98514,85714,28215,079-6,746-7,102-7,094Goa414752364043579Gujarat5,9025,7926,9468,4499,35110,119-2,546-3,559-3,173Haryana1,0639581,2442,3652,2562,280-1,303-1,298-1,036Himachal Pradesh545253187168146-133-116-93Jammu and Kashmir151929168158159-153-138-130Jharkhand244220249549575544-305-355-296Karnataka4,4494,4862,4358,5047,1849,546-4,055-2,698-7,111Kerala5225545751,1711,4891,575-649-934-1,000Madhya Pradesh2,0191,9812,2834,5814,3854,832-2,562-2,404-2,549Maharashtra26,78223,17543,64536,03339,34946,022-9,251-16,175-2,377Manipur3.366.34.287.738.5812-4-2-8Mizoram181719414643-23-29-25Odisha2342773558909341,007-657-657-651Punjab1,2461,2631,4301,7552,0222,136-509-759-705Rajasthan3273614521,6341,5931,494-1,307-1,233-1,041Sikkim9.197.467.25121113-3-4-6Tamil Nadu3,5993,5113,8257,4918,1487,846-3,892-4,637-4,021Telangana3,1693,0543,6562,8903,0903,542280-36114Tripura8283123153137308-71-54-184Uttar Pradesh1,3371,3641,6324,5115,0965,742-3,175-3,732-4,110Uttarakhand105107101343414458-238-307-357West Bengal4,0594,6364,1054,9235,2075,548-863-571-1,443Table 3: Operating Surplus of Municipal Corporations — State-wise (₹ in Crores)Source: RBI report on Municipal Finances: Municipal Corporations (2024)Leveraging Technology and Policy Reforms to Strengthen Municipal FinanceCities must increasingly leverage technology to enhance internal revenues and reduce expenditure by addressing unassessed, under-assessed, and unpaid properties and households.States like Madhya Pradesh, Uttar Pradesh, and Gujarat have already issued guidelines to facilitate municipal bond issuances — a step other states should emulate, broadening issuance across all 28 states and 8 Union Territories.Recent SEBI reforms — removal of the minimum BBB- rating requirement and introduction of Expected Loss (EL) ratings — have made the regulatory environment more supportive by improving transparency and default risk assessment.Tax incentives for investments in municipal bonds, if introduced, would significantly boost investor interest and trust, supporting growth across India's 5,100+ cities.The Urban Challenge Fund (UCF): Catalysing Market-Based Urban Infrastructure FinancingThe Urban Challenge Fund (UCF), introduced in the Union Budget 2025–26 and approved in February 2026, is a key policy initiative driving sustainable urban development with a proposed corpus of ₹1 lakh crore. It will operate from FY 2025–26 to FY 2030–31, with an extendable implementation period up to FY 2033–34, focused on three strategic areas: Cities as Growth Hubs, Creative Redevelopment, and Water & Sanitation.Projects are judged on their potential to generate revenue, attract private investment, create employment, and enhance safety, inclusivity, service equity, and cleanliness. A co-financing model has the Central Government contributing up to 25% of project costs, with the remaining 50% financed through bonds, PPPs, or borrowings — incentivising ULBs to improve creditworthiness and financial management. The UCF's initial ₹10,000 crore allocation marks a shift from grant-based to blended finance models.The Fund covers all cities with a population of 10 lakh or more (2025 estimates), all State and Union Territory capitals not already covered, and major industrial cities with a population of 1 lakh or more.To facilitate market access for ULBs in the Northeastern and Hilly States, and smaller ULBs with populations under 100,000 elsewhere, a Credit Repayment Guarantee Scheme of ₹5,000 crore has been sanctioned. This offers a Central guarantee of up to ₹7 crore or 70% of the loan amount (whichever is lower) for first-time loans, rising to 50% on subsequent successful repayments — effectively supporting projects worth a minimum of ₹20 crore for the first instance and ₹28 crore for subsequent projects in smaller cities.ConclusionMunicipal bonds hold immense transformative potential for financing India's urban infrastructure through sustainable, market-based instruments. The ₹1 lakh crore Urban Challenge Fund, approved in February 2026, signals a paradigm shift toward leveraging capital markets for urban development. The 16th Finance Commission's emphasis on enhancing municipal own-source revenues (OSR) — linking performance grants to revenue improvements and targeting around 5% annual growth — is expected to strengthen city investment ratings, while mandatory publication of audited financial statements will boost transparency and investor confidence.Since nearly 50% of UCF funding is envisaged through market borrowings, including municipal bonds, improved OSR will strengthen debt-servicing capacity and creditworthiness. Together, these measures should create a more level playing field across states, enabling a broader set of cities — beyond a few frontrunners — to access the municipal bond market.Realising this potential will require institutionalising credit enhancement tools, standardising financial reporting under NMAM, and building robust project pipelines through technical assistance and transaction advisory support. Together, the UCF, large bonds under Budget 2025–26, and 16th Finance Commission reforms may catalyse a broader wave of municipal bond issuances across all regions — making the strengthening of India's municipal bond market not just a fiscal necessity, but a cornerstone of equitable, resilient, and financially self-reliant urban transformation.ReferencesAthar, S., White, R., & Goyal, H. (2022). Municipal finance in emerging economies: A comparative analysis. Journal of Public Finance.Bibhudatta, A., Amlan, D., & Rathee, D. (2025). Municipal green bonds: Financing urban sustainability in India. Urban Development Finance Journal.Bihari, S. C., & Mehta, R. (2020). Tax exemptions and fiscal sustainability: A policy analysis. Journal of Public Finance and Policy Research.CareEdge Ratings. (2025). Indian municipal bond market: High potential, slow progress.Goyal, H., & Agarwal, R. (2020). Municipal bonds: Financing urban development in India. Urban Finance Journal.IDFC Foundation. (2023). India Infrastructure Report 2023: Urban governance and infrastructure financing. IDFC Institute.Institute of Chartered Accountants of India (ICAI). (2018). Municipal bonds: Financing urban infrastructure in India.Kapoor, G., & Pati, P. (2017). Evolution of the global municipal bond market: Lessons for emerging economies. Financial Systems Review.Narayan, R., & Goyal, M. (2022). Revisiting tax incentives in developing economies: Lessons from India. South Asian Economic Journal.NITI Aayog. (2018). Strategy for New India @75. Government of India.Reserve Bank of India (RBI). (2022, 2024). Indian municipal finance report: A comparative study. RBI Publications.Securities and Exchange Board of India (SEBI). (2015). Issue and listing of municipal debt securities regulations [Last amended August 18, 2023].Source article: The Chartered Accountant, May 2026, pp. 28–34 (ICAI). Author may be reached at eboard@icai.in.The Chartered Accountant · May 2026
Theme
Ep. 16 — IPSASB SRS 1 ClimateRelated Disclosures Standard: A Breakthrough in Public Sector Financial Reporting
CA Journal
· June 2026
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IPSASB SRS 1 Climate-Related Disclosures Standard: A Breakthrough in Public Sector Financial ReportingThe issuance of Sustainability Reporting Standard (SRS) 1, Climate-related Disclosures, by the International Public Sector Accounting Standards Board (IPSASB) marks a significant development in public sector financial reporting. The Standard introduces a structured framework for disclosing climate-related risks and opportunities within General Purpose Financial Reports (GPFRs). It is applicable from 1 January 2028, with early adoption permitted, and provides temporary relief from Scope 3 disclosures during the first three annual reporting periods following initial adoption.IntroductionClimate change has emerged as a critical macroeconomic and fiscal challenge for governments worldwide. Damage to public infrastructure from extreme weather, rising disaster-response spending, declining public health, falling workforce productivity, and decarbonisation pressures are significantly affecting public finances — even as the transition to a low-carbon economy presents opportunities for sustainable growth and resilience.Stakeholders need reliable information on how governments identify, manage, and respond to climate-related risks and opportunities, including impacts on asset impairment, provisioning, contingent liabilities, operating costs, and revenue uncertainty. IPSASB issued SRS 1 in January 2026 to establish a structured approach for incorporating such information into GPFRs, strengthening transparency, accountability, and fiscal decision-making.Climate-Related Disclosures in Public Financial ReportingSRS 1 provides a comprehensive framework for reporting climate-related risks, opportunities, governance structures, and performance metrics within GPFRs. By embedding such disclosures into mainstream financial reporting, the Standard moves public sector reporting beyond narrative sustainability statements toward structured, fiscally relevant information — serving not just investors but citizens, legislators, and other stakeholders concerned with stewardship of public resources.Significance in Public Financial ManagementClimate change affects fiscal sustainability in several interconnected ways:Increased public expenditure: Rising frequency and intensity of climate events drive higher spending on disaster relief, rehabilitation, and crop insurance. Climate change could push up to 132 million people into extreme poverty by 2030.Capital investment needs: Developing countries may require roughly US$4.5–5.4 trillion annually by 2030 for climate-resilient infrastructure.Revenue volatility: Disruptions in agriculture, fisheries, and tourism cause wide swings in government revenue; global GDP could fall 11–14% by 2050 due to climate change.Long-term fiscal risk: Persistent climate shocks could push public debt to unsustainable levels, with cumulative global losses estimated at $23 trillion between 2030 and 2050."SRS 1 provides a comprehensive framework for reporting climate-related risks, opportunities, governance structures, and performance metrics within GPFRs."While frameworks such as PEFA Climate, the IMF's Climate Public Investment Management Assessment (C-PIMA), and the World Bank's Disaster Risk Reduction–Public Financial Management (DRR-PFM) tool assess climate responsiveness from specific angles, SRS 1 integrates climate disclosures directly into general purpose financial reporting — enhancing relevance for budgeting, risk assessment, and policy evaluation, and establishing a common benchmark for reporting.Overview of SRS 1SRS 1 is organised around four core pillars: Governance, Strategy, Risk Management, and Metrics and Targets. Together, these provide a coherent framework for understanding how public sector entities identify, assess, and respond to climate-related risks and opportunities. Illustrative practices already observed in Indian public sector undertakings demonstrate alignment with the intent of this framework.PillarRequirementIllustrative ExampleGovernanceDisclose oversight mechanisms and management responsibilities for climate risks/opportunities.IOCL's BRSR 2024-25 describes a Corporate Climate Action Committee setting internal targets and monitoring net-zero progress.StrategyExplain how climate risks/opportunities influence objectives, planning, and service delivery.BHEL's Sustainability Report 2021-22 describes research into lower-impact products across their lifecycle.Risk ManagementDisclose processes for identifying, assessing, and managing climate-related risks.IOCL manages climate transition opportunities via renewable energy investment and supply-chain efficiency.Metrics & TargetsDisclose quantitative indicators such as GHG emissions and performance against targets.BHEL tracks Scope 1 & 2 emissions via UNFCCC protocols; Scope 3 not yet captured.Alignment with Global FrameworksSRS 1 is closely aligned with IFRS S2 (issued by the ISSB) and is conceptually consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). All three share a common structure centred on governance, strategy, risk management, and metrics — but SRS 1 is tailored specifically to the public sector context, extending beyond investor decision-making to accountability for public resources and service delivery.Key Differences Between SRS 1 and IFRS S2AspectSRS 1 (Public Sector)User focusBroader base: citizens, legislators, service recipients, and suppliers — not just investors and lenders.MaterialityBroader perspective based on accountability and stewardship, not just financial materiality.Whole-of-government perspectiveExpected to expand beyond entity-level to cover climate outcomes of policies and programmes.Long-term impactConsiders intergenerational impacts and long-term fiscal sustainability.Cross-government coordinationRequires integrated reporting across departments.Policy and investment linkagesCombined disclosure of fiscal implications from both policy and investment.Implementation Timeline and ChallengesSRS 1 applies to reporting periods beginning on or after 1 January 2028, with early adoption permitted and temporary Scope 3 relief for the first three reporting periods. Key implementation challenges include:Data quality: Fragmented digital platforms make organisation-wide climate data, especially Scope 3, hard to compile.Institutional coordination: Climate information is dispersed across departments, especially challenging for sub-national governments.Capacity constraints: Government accounting personnel often lack climate risk assessment expertise.System integration: Existing financial systems aren't built to capture climate data.Measurement complexity: Significant estimation and judgment are required, complicating audit scrutiny.Audit and assurance: Reliance on estimates and third-party data complicates verification of completeness and accuracy.These challenges can be addressed through phased implementation, capacity building, and better coordination between finance and climate professionals.Implications for Indian Public Sector EntitiesIndia has committed to net-zero emissions by 2070 and has introduced National and State Action Plans on Climate Change, emission intensity targets, and a centralised carbon trading platform. Climate budgeting and SDG budgeting initiatives are also gaining traction."IPSASB has made SRS 1 public sector financial reporting framework-agnostic — allowing countries like India to adopt it even without adopting the main IPSAS suite."Government entities eligible to adopt SRS 1 include the Union Government, state governments, urban local governments, public sector undertakings, and other government institutions. The Comptroller and Auditor General of India and the Controller General of Accounts can play key roles in driving adoption.Potential BenefitsImproved budget credibility through better identification and costing of climate risks.Enhanced fiscal risk management via structured disclosure of uncertainties and contingent liabilities.Strengthened public investment decisions through integrated climate considerations in project planning.Greater transparency and accountability in climate-related expenditure.Improved access to green and climate finance through enhanced investor confidence.Climate-Related Disclosures: Illustrative ExampleConsider a coastal state government vulnerable to rising sea levels and cyclones. Under SRS 1, it would disclose:Risks: Potential damage to ports and roads from cyclones; projected disaster relief expenditure; rising insurance and rehabilitation costs from coastal flooding.Strategy: Planned investment in sea walls, early warning systems, and disaster preparedness across short, medium, and long term.Metrics: Value of climate-retrofitted assets; percentage of infrastructure in high-risk coastal zones.Targets: Retrofitting X% of port infrastructure with flood-resilient design by 2030; reducing annual climate-related losses by ₹X crore over ten years.Role of Chartered AccountantsAdvisory: Designing climate reporting frameworks aligned with existing financial systems.Reporting: Ensuring consistency between climate disclosures and financial statements (provisions, contingent liabilities, asset valuations).Assurance: Providing independent assurance on climate disclosures.Risk assessment: Applying risk management thinking to identify and quantify climate-related risks.Capacity building: Training government officials to build institutional reporting capability.Way ForwardSRS 1 represents the first phase of climate-related public sector reporting. Future developments are expected to include expansion to policy-level reporting, integration with budgeting and fiscal planning, development of standardised sector-specific metrics, and greater global convergence with sustainability reporting frameworks.ConclusionThe introduction of SRS 1 marks a transformative step in public sector financial reporting. By embedding climate-related disclosures within GPFRs, the Standard enhances the relevance of financial reporting for fiscal risk management and policy decision-making. For India, it presents an opportunity to strengthen public financial governance, with Chartered Accountants playing a crucial role in enabling this transition and ensuring the credibility of climate-related disclosures.Authors may be reached at eboard@icai.inReferences & Footnotes1. World Bank – Climate Change & Poverty: worldbank.org/en/topic/health/brief/health-and-climate-change2. World Bank, COP26 Climate Brief – Adaptation & Resilience3. Swiss Re Institute, The Economics of Climate Change (2021)4. Deloitte, The Turning Point: Climate Change and Economic Growth (2022)5. PEFA Climate – Supplementary Framework for Assessing Climate Responsive PFM6. C-PIMA – Climate Public Investment Management Assessment, IMF7. Disaster Resilient and Responsive PFM Assessment Tool, World Bank8. IOCL BRSR 2024-25 — iocl.com9. BHEL Sustainability Report 2021-22 — bhel.com10. UNFCCC — unfccc.intSource: IPSASB, FSB-TCFD, IFRS Sustainability ResourcesSource: The Chartered Accountant, ICAI — May 2026 (pp. 35–39)
taxation
Ep. 17 — Whether a Non-Resident is Liable to Deduct TDS under Section 194-IA of the Income-tax Act, 1961
CA Journal
· June 2026
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Whether a Non-Resident is Liable to Deduct TDS under Section 194-IA of the Income-tax Act, 1961This article examines the applicability of Tax Deduction at Source (TDS) under Section 194-IA of the Income-tax Act, 1961, in the context of immovable property transactions involving resident and non-resident parties. It clarifies the distinction between the obligations of resident and non-resident buyers, highlights judicial pronouncements regarding chargeability and extra-territorial application, and addresses practical enforcement challenges. With increasing globalization and cross-border mobility, the taxability and withholding obligations for such transactions hinge on principles of territorial nexus, source of income, and residential status. The article further explores CBDT circulars, procedural compliance hurdles, and practical safeguards, aiming to guide practitioners and taxpayers in navigating TDS obligations in cross-border property deals under evolving Indian tax law.IntroductionThe Indian real estate sector has witnessed increasing participation from non-resident investors alongside resident investors, leading to significant cross-border property transactions. Such transactions inevitably raise important questions under Indian tax laws, particularly in relation to the mechanism of Tax Deduction at Source (TDS). Among these, one area of concern is the applicability of Section 194-IA of the Income-tax Act, 1961, which mandates TDS on payments made by the buyer to a resident transferor for the transfer of immovable property exceeding specified thresholds. While the provision appears straightforward, its interpretation becomes complex when non-residents are involved as buyers in Indian property transactions.This issue has acquired greater significance in recent years due to increased global mobility, overseas Indians looking to invest in India, and foreign nationals seeking opportunities in the booming Indian property market. Non-resident investors are often unfamiliar with the complex procedural and compliance requirements of Indian tax law, and the potential for unintended non-compliance can create significant anxiety. Moreover, cross-border property transactions touch upon multiple legal regimes simultaneously, including Indian income-tax law, foreign exchange laws, registration rules, and even international tax treaties, adding to the uncertainty. The implications of TDS obligations under Section 194-IA, therefore, are not merely academic but have real-world consequences for non-resident buyers, the property market, and tax administration alike.TDS – A Statutory Collection MechanismTDS is a machinery provision designed to collect tax at the time when income either accrues, arises, or is paid. Under Indian tax law, the obligation to deduct tax at source is imposed upon the payer, i.e., the person responsible for making a payment, when it falls within the scope of relevant provisions of the Income-tax Act, 1961.Section 1(2) of the Act stipulates that the Act extends to the whole of India. The application of the Act, including compliance mechanisms such as tax deduction at source, is territorially bounded. It cannot be enforced beyond Indian jurisdiction unless there is a specific legal nexus. Section 6 of the Act determines the residential status of individuals and entities, and Section 5 outlines the scope of total income for different classes of taxpayers. A non-resident is taxed only on income that accrues or arises, or is deemed to accrue or arise, in India. However, the act of making a payment from outside India by a non-resident for a transaction that occurs within Indian territory does not by itself constitute a sufficient legal or territorial nexus to fasten a TDS obligation, unless the non-resident has a presence in India through a permanent establishment or a business connection.The Supreme Court in the case of CIT v. Eli Lilly & Co. (India) Pvt. Ltd. (2009) 312 ITR 225 (SC) has clarified the fundamental principle that the Indian Income-tax Act, 1961, does not have extra-territorial operation unless there is a sufficient territorial nexus between India and the person or transaction sought to be taxed. Relevant extracts are reproduced below:“On the question of extra-territorial operation of the 1961 Act the general concept as to scope of income tax is that, given a sufficient territorial connection or nexus between the person sought to be charged and the country seeking to tax him, income-tax may extend to that person in respect of his foreign income. The connection can be based on the residence of the person or business connection within the territory of the taxing state; and the situation within the state of money or property from which taxable income is derived (see The Law and Practice of Income Tax by Kanga and Palkhivala, seventh edition, at p. 10)”The Supreme Court’s decision in this matter affects the way TDS obligations are determined under Indian tax law. It reinforces that TDS obligations can only be imposed where there exists a sufficient territorial nexus between the payer or the transaction and India. Consequently, the Indian Income-tax Act has selectively imposed TDS obligations on non-residents only in clearly defined situations, where either the source of income lies in India or the payer has a presence in India.The Act clearly identifies non-residents as liable for TDS compliance only in specific circumstances, for example:Section 195 (payments to non-residents)Section 194E (payments to non-resident sportsmen or entertainers)Sections 194LB, 194LC, and 194LDIn the aforementioned provisions, the statute explicitly brings non-residents within the purview of TDS for outbound payments. However, there is no express provision in the Act imposing a TDS obligation on a non-resident payer who is located outside India and who makes a payment to a resident in India, unless such non-resident has a physical or economic presence in India.CBDT has not allocated jurisdiction to any Commissioner of Income-tax to administer or enforce TDS provisions against non-residents making payments to Indian residentsFurther, CBDT has not allocated jurisdiction to any Commissioner of Income-tax to administer or enforce TDS provisions against non-residents making payments to Indian residents, as evidenced by Notification No. 55/2014/F.No.187/39/2014 and Notification No. 57/2014/F.No.187/29/20141. This lack of administrative action clearly indicates that the legislature never intended to impose such an obligation.Furthermore, under Section 203A of the Act, a person is generally required to obtain a TAN in order to deposit TDS, file statements, or issue TDS certificates as required under the Income-tax Rules. For non-resident buyers who have no business connection, assets, or permanent establishment in India, these compliance steps are not straightforward. Even where specific provisions (such as Section 194-IA) allow TDS payment without a TAN, a non-resident would still be required to obtain a PAN, register on the Income-tax portal, and complete the associated compliance formalities.It is equally important to recognize that the fundamental purpose of TDS is not simply tax collection but also ensuring timely reporting and traceability of transactions for tax administration purposes. However, this compliance mechanism presupposes the payer’s ability to navigate the Indian tax infrastructure, including understanding filing deadlines, obtaining a TAN, and remitting tax payments through Indian banking systems. For non-resident individuals or entities lacking business in India, fulfilling these compliance obligations could be an arduous task, often necessitating the engagement of professional advisors, thereby adding to transaction costs and complexity. Such practical challenges underscore why the territorial nexus principle plays a decisive role in determining whether TDS obligations under Indian law can be realistically imposed on persons entirely situated outside the country.Another dimension relevant to the discussion is the interplay between Section 194-IA and the provisions for interest, penalty, and prosecution under the Act. For instance, under Section 201(1A), a person who fails to deduct or deposit TDS is liable to pay interest, while Section 271C imposes penalties for such defaults. However, imposing these consequences on non-resident buyers with no presence in India creates significant enforcement challenges. The absence of jurisdictional reach and administrative infrastructure to pursue recovery from non-residents further supports the view that Section 194-IA was not intended to cover non-resident purchasers lacking territorial nexus with India.Section 194-IAAs stated in the Explanatory Memorandum to the Finance Bill, 2013, the purpose of Section 194-IA is to widen the tax base and curb evasion in real estate transactions, where sellers often underreport the actual consideration to reduce their tax liabilities. By introducing Section 194-IA, the Government aimed to create a tracing mechanism for real estate transactions and ensure that property transfers exceeding certain thresholds were reported to the tax authorities.Section 194-IA provides that:(1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum or the stamp duty value of such property, whichever is higher, as income-tax thereon. (2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property and the stamp duty value of such property, are both, less than fifty lakh rupees.This Section uses the word “any person, being a transferee” to define who is responsible for deducting tax at source. At first glance, this might appear to encompass both residents and non-residents. However, a closer reading of the Income-tax Act reveals that the term “person” under Section 2(31) merely defines the types of legal entities, such as individuals, HUFs, firms, companies, and others. It does not determine whether such persons are resident or non-resident or whether they have a sufficient territorial nexus with India.A view may be taken that the residential status of the buyer is irrelevant for Section 194-IA, and that the provision applies so long as the seller is a resident. Some also suggest that where the buyer is a non-resident, Section 195 should apply. However, this interpretation is not consistent with the statutory language. Section 195 is triggered only when a payment is made to a non-resident. The provision begins with the words “any person responsible for paying to a non-resident… any sum chargeable under the Act,” which makes it clear that it governs outbound payments made to non-residents. In the present case, the factual position is the opposite: the payment is made by a non-resident to a resident seller. Accordingly, section 195 has no application.Once Section 195 is excluded on this basis, the only provision that could potentially impose a TDS obligation is Section 194-IA. The issue, therefore, is not whether Section 195 overrides Section 194-IA, but whether Section 194-IA either expressly or by necessary implication extends to non-resident transferees who have no presence or territorial nexus in India. This is a jurisdictional enquiry, not merely a definitional one, and requires examining whether the machinery of TDS can practically and legally operate against a payer situated entirely outside India.The determination of whether a person is resident or non-resident falls under Section 6 of the Act, while the scope of their taxable income is governed by Section 5. Therefore, although the words “any person” in Section 194-IA appear broad, they cannot be interpreted in isolation to impose tax deduction obligations on non-residents lacking presence or business connections in India. Legislative clarity and territorial nexus remain fundamental principles in determining the extent of tax compliance obligations under the Act.Since Section 194-IA was introduced primarily to trace high-value property transactions and to bring transparency into the real estate sector, its core objective is informational in nature. However, even in the absence of TDS compliance under Section 194-IA, such transactions remain traceable through the alternative reporting mechanism prescribed under Section 285BA of the Act, read with Rule 114E of the Income-tax Rules, which mandates sub-registrars to report transactions of ₹30 lakh or more. This ensures that the tax department obtains visibility into significant property deals, reducing the necessity to impose TDS compliance obligations on non-resident buyers who lack any presence or business connection in India.Role of DTAASince the purchase of property in India by a non-resident buyer does not result in any income in the hands of the buyer and given that TDS obligations are imposed purely under domestic tax law, there is no need to refer to Double Taxation Avoidance Agreements (DTAAs) for determining whether Section 194-IA applies to such transactions. The DTAA provisions allocate taxing rights over capital gains to India but do not impose any obligation on non-resident buyers to deduct tax at source. Therefore, the analysis of Section 194-IA’s applicability to non-resident buyers remains solely within the realm of domestic Indian law.ConclusionIn view of above, a non-resident buyer of immovable property located in India is not liable to deduct tax at source under Section 194-IA, unless such buyer has a Permanent Establishment or a Business Connection in India. Inbound transactions by non-residents situated wholly outside Indian territory are not intended to be subject to TDS under the Act.Further, Rule 114B of the Income-tax Rules states that PAN must be quoted by both the seller and the buyer in case of sale or purchase of immovable property where the value exceeds ₹10 lakhs. This may create an obligation on the non-resident buyer to obtain a PAN in India, purely for the purpose of reporting the transaction, even though there is no TDS liability under Section 194-IA.Author may be reached at ch.sivapriya@outlook.com and eboard@icai.in1. These notifications are issued under section 120 of the Income-tax Act, 1961 defining jurisdictions of Commissioners of Income Tax. Source: The Chartered Accountant, May 2026 • www.icai.org
taxation
Ep. 18 — From Soil to Soilless: Redefi ning Agricultural Taxation in Modern India
CA Journal
· June 2026
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From Soil to Soilless: Redefining Agricultural Taxation in Modern IndiaThis article examines the evolving landscape of agricultural taxation in India amid modern farming techniques like hydroponics and aeroponics. The central government lacks authority to tax agricultural income, a power reserved for states under the Constitution's State List, Entry 46. The states of Assam and West Bengal currently tax plantation crops, though other states are deterred by high administrative costs and political sensitivities. The rise of soilless farming challenges tax exemptions, as seen in the 2025 Madras High Court, which classified mushroom cultivation as business income. To navigate these changes, Agri-entrepreneurs should maintain land connections, document processes, and secure licenses to ensure compliance and preserve tax exemptions.IntroductionIndia's agricultural sector is shifting from traditional land-based cultivation to technology-driven methods like hydroponics, aeroponics, and controlled-environment farming. These advancements challenge the definition of "agricultural income" under the Income Tax Act, 1961, designed for traditional farming. This article analyzes the constitutional framework, judicial interpretations, and administrative challenges, focusing on recent rulings like the 2025 Madras High Court decision on mushroom cultivation, to assess how tax law adapts to agricultural innovation and its implications for policy and enforcement.Historical Context of Taxation in Indian AgricultureIn its 2002 report, the Task Force on Direct Taxes recommended taxing agricultural income, but no action was taken as the central government lacks authority; this power lies with states under Entry 46, State List, Seventh Schedule of the Constitution of India. Historically, states like Bihar, Odisha, Tamil Nadu, and Kerala taxed agricultural income, but currently, only Assam and West Bengal tax plantation crops (tea, coffee, rubber). Under the Income Tax Act, these crops have a portion treated as business income (40% tea, 25% coffee, 35% rubber), with the rest state taxable. West Bengal waived tea garden taxes for 2023–2025.High administrative costs and political sensitivities deter uniform taxation of agricultural income. Tax collection requires detailed land records and compliance, which is challenging in India's informal agricultural sector. Agriculture contributes 16% to GDP (FY24) and employs 46.1% of the population, linking it to food security and rural livelihoods. Taxing farmers risks evoking colonial-era taxation memories, making it politically sensitive. Thus, most states avoid taxing agricultural income, limiting it to commercially organized plantation crops.Evolution of Farming PracticesTechnological advancements have transformed Indian agriculture from a rainfall-dependent livelihood into a profitable enterprise. Methods like drip irrigation, greenhouse farming, hydroponics, aquaponics, and aeroponics, supported by drone monitoring and soil sensors, boost yields and efficiency. However, adoption is uneven, and the tax-exempt status of income from commercial setups like soilless systems or mushroom cultivation is debated. Without clear Central Board of Direct Taxes (CBDT) guidance, tax classification relies on judicial interpretation.Advanced Farming TechniquesGreenhouse FarmingGreenhouses enable controlled cultivation, protecting crops and regulating temperature, humidity, and light. They support soil-based, grow-bag, or soilless methods, ideal for high-value crops and urban farming.HydroponicsHydroponics involves growing plants in nutrient-enriched water, enabling faster growth and higher yields for lettuce, tomatoes, and herbs. It suits urban spaces and reduces soil-borne pests, gaining traction in Maharashtra, Karnataka, and Telangana.AquaponicsAquaponics integrates hydroponics with aquaculture, using fish waste to nourish plants, which filter water for fish. It conserves water and supports sustainable cultivation of greens and fish like tilapia in Kerala and Tamil Nadu.AeroponicsAeroponics involves misting plant roots with nutrients, offering resource efficiency and rapid growth for basil, lettuce, and microgreens. It suits vertical farms in urban areas like Delhi NCR and Mumbai."Technological advancements have transformed Indian agriculture from a rainfall-dependent livelihood into a profitable enterprise. Methods like drip irrigation, greenhouse farming, hydroponics, aquaponics, and aeroponics, supported by drone monitoring and soil sensors, boost yields and efficiency."Understanding the Law: Agricultural Income Tax LawIndirect TaxesUnder GST, unprocessed agricultural produce is exempt, regardless of cultivation method (soil, hydroponics, or aeroponics). Button mushrooms are classified as "Edible vegetables" (GST Chapter 07), supported by APEDA and FSSAI.However, processed goods (e.g., mushroom powder, frozen spinach) incur GST at 5% or 12%.Direct TaxesUnder the Income Tax Act, 1961, the term agricultural income is defined in clause (1A) of Section 2. This income is exempt under Section 10, subsection (1), of the Act. The exemption is granted specifically to agricultural income, so it is important to understand what constitutes agricultural income under the law.Clause (1A) of Section 2 can be broken down into three distinct components:Income from rent or revenue derived from agricultural landIncome from agricultural operationsIncome from buildings associated with agricultural activityItem (a) establishes two essential conditions: the land must be located in India, and it must be used for agricultural purposes. Rent typically refers to lease or tenancy payments received from agricultural land. Revenue may also include sharecropping arrangements or rent-in-kind, where the landlord receives a portion of the agricultural produce instead of monetary consideration. The Supreme Court in CIT vs. Raja Benoy Kumar Sahas Roy (1957) clarified that land must be subjected to integrated agricultural operations, both basic (tilling, sowing) and subsequent (weeding, harvesting), to qualify.Basic operations such as tilling of the land, sowing of seeds, and planting require expenditure of human skill and labour upon the land itself. Subsequent operations after the produce sprouts include weeding, digging the soil around the growth, tending, pruning, cutting, harvesting, and marketing. Only when the land is subjected to such integrated activity can it be said to be used for agricultural purposes.Item (b) covers three types of income: income directly from agricultural operations; income from processing carried out by the cultivator or rent-in-kind recipient to make the produce market-ready; and income from the sale of such produce, either as is or after applying only such ordinary processes. The processing or sale must relate to produce originating from the same land and carried out by the person who cultivated it. Industrial or commercial processing beyond what is ordinarily done would not qualify.Item (c) extends the definition to income from buildings used in relation to agricultural land. The building must be owned and occupied by the receiver of rent or revenue, or occupied by the cultivator or rent-in-kind recipient, must be located near the land, and used in connection with ordinary agricultural processes such as cleaning, sorting, or storing.In conclusion, for income to qualify as agricultural under the Income Tax Act, it must arise from activities integrally connected to the use of land for agricultural purposes, conforming to judicially established tests such as those in the Raja Benoy Kumar case. The focus is not only on the nature of the income but also on how and where it arises.Partnership Firm Warehousing Case and Interpretation of Section 2(1A)(c)ITO, Budaun vs. Assessee (ITAT Delhi, 24 March 2009)Three individuals, each owning agricultural land in their personal capacity, formed a partnership firm to operate a warehousing business. The firm constructed storage facilities on the land and rented them to government agencies for storing food grains such as wheat and rice, claiming this rental income as exempt agricultural income. The Tribunal examined three criteria:Ownership and Occupancy Requirement — The firm earned the rental income but did not own the land, which was held individually by the partners. Requirement not satisfied.Cultivator Connection — The firm did not cultivate any produce nor receive rent in kind; the stored grain belonged to government departments. Connection lacking.Link Between Land and Produce — The warehouse stored food grains unconnected to the land on which it was built. Criterion failed.Based on the failure to meet all three conditions, the Tribunal ruled that the income was not agricultural income and was taxable as business income.Summary Interpretation of Section 2 Clause (1A)Interpretation requires several cumulative conditions to be satisfied:The land must be located in India.The land must be used for agricultural purposes.There must be basic and subsequent operations on the land.The produce must result from human skill and labour applied to land and must be intended for consumption or trade and commerce.The use of controlled environments such as polyhouses or greenhouses does not disqualify the activity from being agricultural, so long as operations connected with land continue to exist.Activities conducted in factory-like settings, such as climate-controlled units for mushroom cultivation without any basic operations on land, are treated as manufacturing and do not qualify as agriculture under the Act.Button-Mushroom CultivationMarket and ClassificationButton mushrooms, which account for nearly 85% of India's edible mushroom market, significantly contribute to agricultural income, particularly in states such as Bihar, India's largest producer, Odisha, and Maharashtra. State horticulture departments support farmers, including small landholders, through training, financial aid, and technical assistance. Unlike traditional field crops, button mushrooms are grown in compost beds within enclosed structures.Income treatment varies; small-scale units may qualify as agricultural income, while large, controlled commercial setups face uncertainty over tax exemptions due to their factory-like nature. Without clear policy guidelines, tax eligibility often depends on judicial interpretation."Income treatment varies; small-scale units may qualify as agricultural income, while large, controlled commercial setups face uncertainty over tax exemptions due to their factory-like nature."Biological and Cultivation BasicsButton mushrooms (Agaricus bisporus) are neither vegetables nor fruits in biological terms. They belong to the fungal kingdom, entirely separate from both the plant and animal kingdoms. Fungi are heterotrophic organisms — they secrete enzymes to break down organic matter and absorb the resulting nutrients. Button mushrooms are saprophytic fungi that feed on decaying organic material, whereas plants are autotrophic, using chlorophyll to capture sunlight for photosynthesis.Legal Perspective on TaxationMadras High Court Ruling (2025)Principal Commissioner of Income Tax vs. M/s British Agro Products (India) Pvt. Ltd. — 9 May 2025The Madras High Court ruled that income from button-mushroom cultivation in climate-controlled facilities does not qualify as agricultural income under Section 10(1) of the Income Tax Act, 1961. The assessee claimed exemption citing Inventaa Industries (2018), but the Revenue argued that mushrooms are fungi, not plants; cultivation used compost trays, not land; and industrial features (e.g., depreciation on machinery) suggested manufacturing.Applying the test from CIT vs. Raja Benoy Kumar Sahas Roy (1957), the Court held that the absence of land-based operations disqualified the income, treating it as business income. The biological classification was irrelevant; the lack of land nexus was decisive. The Court rejected Inventaa Industries for insufficiently examining the statutory land requirement, contrasting it with Best Roses Biotech Pvt. Ltd. (ITAT Ahmedabad), where floriculture with 75% soil was deemed agricultural.Tax Implications of Modern Farming TechniquesUnder Indian tax law, agricultural income traditionally hinges on land-based operations like tilling and sowing. Modern soilless methods such as hydroponics and aeroponics challenge this framework, as they eliminate the use of soil entirely. Income from such methods is typically ineligible for exemption under Section 10(1), unless a clear connection to land exists.This legal debate first surfaced in nursery operations. Courts were divided — some upheld the tax exemption for plants grown in pots, while others denied it due to lack of land use, referencing the Supreme Court's Raja Benoy Kumar Sahas Roy ruling.To resolve these inconsistencies, Finance Minister P. Chidambaram clarified in the 2008–09 Budget that income from saplings or seedlings grown in a nursery, whether in pots or soil, should be tax-exempt. This led to Explanation 3 to Section 2(1A) of the Income Tax Act, which deems such nursery income to be agricultural, without mentioning soil or land.This legal fiction must be applied fully, as affirmed in CIT vs. S. Teja Singh (1959). Thus, nursery income from soilless methods like hydroponics may still qualify for exemption, even though the provision predates such technologies. However, the exemption only applies to the nursery phase from seed germination to sapling. Once plants mature (e.g., hydroponic lettuce), the income becomes taxable business income.StageTax TreatmentHydroponically sprouted seedlingsExemptMature crops grown hydroponicallyTaxableTherefore, Explanation 3 is a narrow carve-out for nursery operations, not a blanket exemption for all soilless agriculture. Entrepreneurs must carefully structure their operations and maintain documentation to remain within this protective legal scope.While the new Income-tax Act, 2025, maintains the same substantive definition of agricultural income, it introduces a more coherent drafting approach, consolidating the former explanations within the principal clause for a cleaner and more integrated formulation.Moving AheadAs Indian agriculture modernizes, tax law remains anchored in land-based definitions of agricultural income. Techniques like hydroponics and controlled-environment farming increasingly fall outside the exemption under Section 10(1), with courts treating such income as business income, especially in factory-style setups like button-mushroom cultivation.To manage this evolving legal landscape, Agri-entrepreneurs should:Maintain a Land Link: Design operations to involve soil-based or land-connected cultivation where possible.Document Activities: Use digital tools (e.g., FarmERP) to track all agricultural processes from land preparation to harvesting.Obtain Licenses: Secure nursery or horticulture licenses from state bodies or the NHB to legitimize seedling and soilless operations.Structure Nurseries Strategically: Operate nurseries as standalone seedling units to qualify under Explanation 3 to Section 2(1A). For soilless setups, obtain proper licensing and seek clarity through CBDT applications or advance rulings.Pursue Certifications: Obtain organic or pesticide-free certifications (e.g., APEDA, NPOP) to reinforce the agricultural nature of your business.These steps help mitigate tax risk and clarify the classification of income under an increasingly complex framework. Notably, countries like Australia classify hydroponics as business income unless clearly tied to land, highlighting the importance of legal and operational foresight in India's context.Key TakeawaysUltimately, the Income Tax Department is likely to rely on the "British Agro Products" judgment to challenge exemptions for factory-like setups. As such, Agri-tech entrepreneurs must design their businesses with tax clarity in mind. The key takeaway is that the exemption under Section 10(1) hinges not on the type of crop or technology used, but on whether the activity involves genuine, integrated operations on or from land.◆ ◆ ◆Author may be reached at harishpaliwal@outlook.com and eboard@icai.inTask Force on Direct Taxes (2002): https://www.indiabudget.gov.in/budget_archive/es2002-03/chapt2003/chap29.pdfRefer Article 246 in Constitution of IndiaWest Bengal Budget Speech 2022: https://finance.wb.gov.in/writereaddata/Budget_Speech/2022_English.pdfMOSPI Press Release: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2079024NHB Mushroom Cultivation: https://nhb.gov.in/pdf/Cultivation.pdfAPEDA Agri Exchange — India Production: https://agriexchange.apeda.gov.in/Production/Indiacat/Index
GST
Ep. 19 — Omission of Rule 96(10) of CGST Rules 2017 without a “Saving Clause”: Ease of doing business or the Legislative Oversight
CA Journal
· June 2026
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Omission of Rule 96(10) of CGST Rules 2017 without a "Saving Clause": Ease of Doing Business or the Legislative OversightThe article examines the omission of Rule 96(10) of the CGST Rules, 2017, which earlier restricted IGST refunds for certain categories of exporters availing specified exemption benefits. Several taxpayers had challenged the validity of Rule 96(10) before various High Courts, contending that the rule was ultra vires the GST law. Subsequently, the Government omitted Rule 96(10) vide Notification No. 20/2024-Central Tax dated 8 October 2024. However, questions arose regarding the fate of pending litigations where exporters had availed IGST refunds allegedly in contravention of Rule 96(10). The article analyses judicial rulings that emphasized the absence of a "saving clause" in the omission notification and discusses how courts interpreted such omission to determine its impact on ongoing proceedings and pending disputes.The Goods and Services Tax (GST) regime, a landmark tax reform in India, has been in a constant state of evolution since its inception on July 1, 2017. The government, with time, has constantly brought changes through GST council meetings to ensure simplicity and, at the same time, maintain the revenue targets and curb any revenue leakages. While most legislative changes are aimed at simplification and easing compliance, a recent omission of a key rule has created a significant legal and financial ripple, positively affecting exporters across the country.The 54th GST council meeting held on 9th September 2024 recommended that rule 96(10) of CGST Rule 2017 be omitted prospectively. The minutes of the meeting did not specify anything related to existing demand/notices pertaining to rule 96(10) of the CGST Rules, 2017. Pursuant to the recommendation of the GST council meeting, notification No. 20/2024 – Central Tax dated 8th October 2024 was issued to omit Rule 96(10) entirely. The unconditional removal of Rule 96(10) of the Central Goods and Services Tax (CGST) Rules, 2017, without the inclusion of a saving clause, has become the central point of contention in several high-profile legal battles. This article will meticulously examine the critical role and features of a saving clause, the fundamental legal principle it embodies, and provide a detailed analysis of how two landmark rulings by the Calcutta and Gujarat High Courts have leveraged this very principle to grant substantial relief to exporters with pending disputes.Before we delve into the principles of the Saving Clause and analysis of observations made by the Hon'ble High Courts, a quick summary of Rule 96(10) is as follows:Rule 96 of the CGST Rules 2017 provides for rules governing the refund of Integrated Goods and Services Tax ("IGST") on goods or services exported outside India. Sub-rule 10 of Rule 96 provided that certain taxpayers will not be eligible to avail a refund of IGST paid on export of goods or services. These taxpayers included importers who have availed the benefit of IGST exemption at the time of import of materials (Advance license holders, EOU units, etc.). These categories of taxpayers were required to export under LUT and claim a refund of unutilised ITC under Rule 89 of the CGST Rules, 2017. However, Rule 89 of the CGST Rules restricted the refund of ITC on capital goods. This had led to a significant financial impact on exporters.Certain exporters, who have imported goods with exemption of IGST, have exported with payment of IGST and received IGST refund. Government authorities in such cases had initiated demand proceedings along with interest and penalty.Various petitions were filed with the court to determine Rule 96(10) as ultra vires to the GST law. With a number of High Court petitions across the country and repeated representations by the exporters, the government brought up a welcome move to omit Rule 96(10), albeit prospectively. The council meeting and subsequent notification were completely silent on pending proceedings with respect to Rule 96(10). The notification unconditionally omitted Rule 96(10) from the CGST Rules 2017 without any saving clause for pending proceedings.Having briefly gone through Rule 96(10) and relevant issues, we will first delve into the principle of the saving clause and then discuss observations made by two Hon'ble High Courts in this regard.Part I: The Core Legal Principle — The Imperative of a Saving ClauseA saving clause is not a mere formality; it is a crucial provision in legal drafting, particularly when a statute or rule is being repealed, amended, or omitted. Its fundamental purpose is to preserve the status quo ante, to ensure that the repeal does not retroactively affect rights, liabilities, or legal proceedings that arose under the old law. The concept is deeply rooted in the legal principle of "obliteration," which states that when a law is repealed or omitted, it is treated as if it never existed on the statute books. This is a powerful doctrine of statutory interpretation. The only way to prevent this "blotting out" effect is through an explicit saving provision."Rule 96 of the CGST Rules 2017 provides for rules governing the refund of Integrated Goods and Services Tax ("IGST") on goods or services exported outside India. Sub-rule 10 of Rule 96 provided that certain taxpayers will not be eligible to avail a refund of IGST paid on export of goods or services."The Doctrine of Obliteration and Its Judicial HistoryThe legal position on this matter has been crystallized by the Supreme Court of India in the landmark case of Kolhapur Canesugar Works Ltd. & Anr. v. Union of India & Ors. (2000). The Hon'ble Supreme Court, while interpreting a similar repeal in the context of the Central Excises Act, held that when a rule is omitted, it is as if it "had never been passed, and the statute must be considered as if the rule had never existed." The court further clarified that the only way to counter this legal effect is with an explicit saving clause. This precedent established a clear legal position: in the absence of a saving clause, all actions must stop where the repeal finds them. This principle became the foundation for the subsequent High Court rulings.The General Clauses Act, 1897, provides a general saving clause for the repeal of any Central Act or Regulation. Section 6 of this Act, in particular, states that unless a different intention appears, the repeal shall not affect any legal proceeding, right, privilege, or liability that was accrued under the repealed law. However, as the High Courts would later find, this general provision does not automatically apply to the "omission" of a rule, which is a different legal mechanism from a full-fledged "repeal" of an Act. This nuance is central to the entire issue.Part II: The Legislative Action — Omission of Rule 96(10)Rule 96(10) of the CGST Rules, 2017, was a source of widespread discontent among exporters. It was a restrictive provision that placed a significant hurdle on exporters by denying them the refund of Integrated Goods and Services Tax (IGST) paid on their exports. The condition was that an exporter could not claim this refund if they had availed benefits under specific customs duty exemption notifications on their inward supplies, such as the Advance Authorization Scheme / EOU. The intent behind the rule was to prevent a "double benefit," but in practice, it often led to a disproportional denial of refunds, even if the value of the exempted inputs was minuscule.Recognizing the hardship it caused, the government, on the recommendation of the GST Council, decided to omit Rule 96(10). The omission was carried out through Notification No. 20/2024-Central Tax dated October 8, 2024, without any accompanying saving clause. This legislative omission, while intended to be a positive step, created a legal vacuum and immediately brought the principle of "obliteration" to the forefront of litigation. Tax authorities, presuming that their pending notices and assessments were still valid, continued to pursue cases against exporters, setting the stage for the two landmark High Court rulings.Part III: Judicial Intervention — The Landmark High Court JudgmentsThe failure / intentional omission of the legislature to include a saving clause presented a critical opportunity for the judiciary to clarify the legal position and provide relief to taxpayers. Both the Hon'ble Calcutta High Court and the Hon'ble Gujarat High Court seized this opportunity, and their rulings have provided a powerful and consistent precedent.Calcutta High Court in M/s. Glen Industries Private LimitedIn the case of M/s. Glen Industries Private Limited & Anr. v. The Deputy Director, Directorate General of GST Intelligence & Ors., the petitioner was an exporter of plastic containers who had been issued a show-cause notice while Rule 96(10) was still in force. The notice was for the recovery of an alleged erroneous refund of approximately Rs. 1.96 crore. The final order confirming the tax demand, however, was passed on January 30, 2025, a date subsequent to the rule's omission on October 8, 2024.The Hon'ble Calcutta High Court, in its judgment dated March 26, 2025, meticulously analyzed the legal arguments. The petitioner's counsel, relying heavily on the Supreme Court's pronouncements in the Kolhapur Canesugar Works case, argued that the omission of the rule effectively removed the very legal foundation for the show-cause notice and all subsequent proceedings. The court agreed with this line of reasoning. It held that the omission of a subordinate legislation, like a rule, has the same effect as a repeal. The court stated that since the rule was "unconditionally omitted" and not "repealed and re-enacted" with a saving clause, the legal basis for the administrative action was gone."In a case where a particular provision is omitted and in its place another provision dealing with the same contingency is introduced without the saving clause in favour of the pending proceedings then it can be reasonably inferred that the intention of the legislature is that the pending proceedings shall not continue but fresh proceedings for the same purpose may be initiated under the new provision."This judgment was a watershed moment, providing judicial confirmation that administrative authorities cannot pass orders invoking a provision that has been removed from the statute book, even if the proceeding was initiated when the rule was in force.Gujarat High Court in Messrs Addwrap Packaging Pvt. Ltd.The Gujarat High Court, faced with a similar set of facts in the case of Messrs Addwrap Packaging Pvt. Ltd. & Anr. v. Union of India & Ors., echoed a similar view and delivered a judgment that further solidified the legal position. The petitioners in this case also had pending refund disputes where the IGST refund was denied based on the now-omitted Rule 96(10). It may be noted that in the present order, more than 100 special civil applications were clubbed to pass an order pertaining to Rule 96(10) of the CGST Rules 2017.The Gujarat High Court's ruling, dated June 13, 2025, was more comprehensive in its reasoning. While the court was initially poised to rule on the constitutional validity of Rule 96(10), the Government's omission of the rule made this question academic. The Court then pivoted its entire analysis to the legal effect of the omission. It was observed that the Government's notification stated the rules "shall come into force on the date of their publication," which is a prospective application. However, the court astutely distinguished between the prospective effect of a law and the retrospective effect of its repeal.The court relied on Sections 6, 6A, and 24 of the General Clauses Act, 1897. It held that while Section 6 provides a general saving clause for the repeal of an "enactment," the omission of a rule is not a full-fledged repeal. However, by interpreting the term "repeal" broadly and by applying the doctrine from the Kolhapur Canesugar Works case, the Court concluded that the intent of the legislature was to make the provision inoperative from the date of its omission. The Court unequivocally stated that the omission of the rule applied to all pending proceedings as of the date of its removal, where final adjudication had not yet taken place."Therefore, we are of the opinion that Notification No.20/2024 dated 8th October, 2024 would be applicable to all the pending proceedings/cases meaning thereby that Rule 96(10) would stand omitted prospectively but applicable to pending proceedings/cases where final adjudication has not taken place. Therefore, in view of the foregoing reasons, the omission of Rule 96(10) would apply to all the proceedings/cases/petitions which are pending for adjudication either before this Court or before the respondent adjudicating authority, and no further proceedings are required to be carried forward and petitioners would be entitled to maintain refund claims of IGST paid on export of goods."The Hon'ble Gujarat High Court's judgment had a powerful two-fold impact:It Quashed All Pending Proceedings: The Court explicitly quashed all challenged show-cause notices, orders-in-original, and refund denials that were based on Rule 96(10), providing a direct remedy to the petitioners. The demand in cases, in which a show cause notice has been issued but an order has not been passed, or an OIO has been passed, but the matter has been challenged with a higher authority, has been ordered to be dropped altogether.It Clarified the Right to Refund: The Court also affirmed the exporters' right to pursue their IGST refunds under the general framework of the GST law, effectively removing the obstacle created by the omitted rule. The Court emphasized that the right to refund had always existed under the parent Act, and the rule was merely a procedural restriction that had now been removed.Part IV: The Broader ImplicationsThe consistent rulings from the Calcutta and Gujarat High Courts have profound implications for GST law and administrative practice in India.Legal Certainty for Taxpayers: These judgments have established a strong legal precedent that taxpayers can now use to challenge any pending notices or demands based on a provision that has been unconditionally omitted from the GST rules. This has effectively "unlocked" long-pending IGST refunds for countless exporters, providing them with much-needed cash flow and relief from litigation.A Reminder to Lawmakers: The rulings are a clear signal to the Government and its legislative drafting bodies about the critical importance of including saving clauses when amending or repealing laws. This is essential for ensuring legal continuity and preventing unnecessary litigation. The absence of such a clause forces the judiciary to interpret the legal vacuum, often in favor of the taxpayer.The Rule of Law and Judicial Activism: These rulings also highlight the crucial role of the judiciary in acting as a check on legislative and administrative overreach. By meticulously applying established legal principles, the High Courts have upheld the fundamental rights of citizens. The rulings reinforce the principle that the law must be drafted with precision and foresight, and that in the absence of such prudence, the Courts will uphold the fundamental rights of citizens and the established doctrines of statutory interpretation.ConclusionIn conclusion, the saga of Rule 96(10) is a potent case study. It may be interesting to wait and see the Government's action. The government's future course of action may determine whether the unconditional omission of Rule 96(10) was a regulatory oversight or a genuine step to close all the litigations. While concluding our analysis, it would be important to look forward to the following points in the future.Whether the Government challenges the order passed by the Hon'ble Gujarat High Court and the Hon'ble Calcutta High Court in the Apex Court?What would be the observation of the Hon'ble Supreme Court in this matter in case the matter is tabled before the Apex Court?Will the Government come up with a circular / instruction to clarify their position for all the pending matters with respect to Rule 96(10)?ReferencesMinutes of 54th GST Council MeetingNotification No. 20/2024 – Central Tax dated 8th October 2024Hon'ble Calcutta High Court order in the case of M/S. Glen Industries Private Limited & Anr. versus The Deputy Director, Directorate General of GST Intelligence & Ors. (2025 (4) TMI 492 - Calcutta High Court dated 26 March 2025)Hon'ble Gujarat High Court order in case of Messrs Addwrap Packaging Pvt. Ltd. & Anr. versus Union of India & Ors pronounced on 13 June 2025Author may be reached at karanrajvir18@gmail.com and eboard@icai.inThe Chartered Accountant · GST · May 2026 · www.icai.org
GST
Ep. 20 — When The Legislature Erases A Law - Do ‘Omissions’ Count as a ‘Repeal’ Under the General Clauses Act?
CA Journal
· June 2026
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When The Legislature Erases A Law Do 'Omissions' Count as a 'Repeal' Under the General Clauses Act? — An Analysis Through the Lens of Proposed Omission of Section 13(8)(b) of the IGST Act, 2017 by the Finance Bill 2026The global economy is undergoing a structural shift marked by the rise of the services sector as the principal engine of growth. The Government of India's Finance Act 2026 omitted Section 13(8)(b) of the IGST Act, shifting the place of supply for intermediary services to the recipient's location — converting a taxable domestic supply into a zero-rated export. But the omission carries no saving clause, raising the question of whether eight years of pending disputes survive, a question four landmark cases have debated but not definitively settled.IntroductionThe Finance Act, 2026, has made an important legal development under the Goods and Services Tax (GST) framework. Among several amendments across various tax laws, one stands out not for its prospective commercial impact, but for the profound retrospective legal questions it has triggered: the omission of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act), which governs the place of supply (POS) for intermediary services.Under the pre-omitted provision, the POS for intermediary services was the location of the supplier, meaning Indian intermediaries serving foreign clients were treated as making a domestic supply, attracting GST. The omission removes this rule entirely, falling back on the general provision in Section 13(2). What was previously a taxable domestic supply becomes a zero-rated export of services, eligible for refund of input tax credit or integrated tax paid.A large number of taxpayers, especially exporters of services, have suffered denial of export refunds and demands for output tax after their genuinely export-classifiable services were reclassified as "intermediary" services under the old Section 13(8)(b). Rule 86(4B) of the CGST Rules requires that an erroneous refund repaid with interest be recredited via PMT3A to the Electronic Credit Ledger, available to discharge output tax on inter-State supplies. The key question is whether this omission applies retrospectively from 1 July 2017, settling all disputes, or only prospectively from 30 March 2026, leaving years of litigation to be resolved on their own merits.Liberalisation Without a Safety NetJudicial decisions across multiple High Courts and CBIC's Circular No. 159/15/2021-GST have stressed that classification as an intermediary service depends entirely on the substance of the transaction, turning on four limbs: a minimum of three parties, two or more distinct supplies, the supplier not acting as principal to the main transaction, and a facilitative (not principal-to-principal) role.This fact-dependence has made the law litigation-prone. Tax authorities have often applied the intermediary tag mechanically, forcing exporters to litigate based on actual contracts and operations. Once the tag applies, POS shifts into India, converting a zero-rated export into a taxable supply and denying refund. Many such cases remain pending without finality.The 2026 omission, introduced without any savings clause, leaves open the fate of pending proceedings, demands, and disputes accumulated over the past eight years.The Common Law FoundationCommon law principles, inherited by India during the colonial period, remain interpretative aids unless displaced by statute. The relevant doctrine here is the Common Law Doctrine of Statutory Obliteration: when a provision is repealed or omitted, it is treated as erased from the statute book as if it never existed.However, the doctrine recognises the qualification of "transactions past and closed" — matters that have already attained finality are insulated from subsequent statutory removal. The far more significant category is matters still alive in litigation: demands under challenge and unadjudicated show cause notices. For these, whether the omission extinguishes the jurisdictional foundation of proceedings becomes urgently relevant.The General Clauses Act, 1897Section 6 of the General Clauses Act, 1897 provides the statutory answer to the uncertainty that unguarded removal of legislation could cause:Where this Act, or any Central Act or Regulation made after the commencement of this Act, repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not—(a) revive anything not in force or existing at the time at which the repeal takes effect; or(b) affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed; or(d) affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or(e) affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid;and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed.Section 6 codifies the doctrine of saving: repeal of a law is not the same as declaring it never existed. If Section 6 applies, pending proceedings, demands, and show cause notices under Section 13(8)(b) would survive and remain enforceable as if the omission never took place. But the threshold question is whether an "omission" falls within the word "repeal" — a question the courts have answered inconsistently over five decades.Rule 86(4B) of the CGST Rules mandates that where an erroneous refund is repaid along with interest, the refund will be recredited via PMT3A to the Electronic Credit Ledger (ECrL), available to discharge output tax on inter-State supplies.The Four Pillars of the Debate1. Rayala Corporation (P) Ltd. v. Director of Enforcement (1969) 2 SCC 412A five-judge Constitution Bench held Section 6 inapplicable to the omission of Rule 132-A of the Defence of India Rules. It stated, without analytical discussion, that "repeal" does not encompass "omission." Its more durable reasoning was textual: Section 6 requires repeal via a Central Act or Regulation, and Rule 132-A was omitted by a mere Ministry notification.2. Kolhapur Canesugar Works Ltd. v. Union of India (2000) 2 SCC 536A fresh Constitution Bench affirmed Rayala on both grounds regarding Central Excise Rules omitted by subordinate legislation, and laid down a three-tier framework: pending proceedings survive only if the new rule expressly provides for continuance, Section 6 applies, or a pari materia provision exists in the parent statute.3. M/S Fibre Boards (P) Ltd. v. CIT Bangalore (2015) 10 SCC 333A two-judge bench (Nariman and Sikri JJ.) challenged the established position. It held that Rayala's "omission is not repeal" remark was obiter dicta, not binding, since the case turned entirely on the Central Act requirement. It introduced Section 6A — which itself uses "repeal" to describe "express omission" — arguing both Constitution Bench decisions were rendered per incuriam for missing this provision. It also invoked State of Orissa v. M.A. Tulloch & Co. (1964), holding that if even implied repeal qualifies under Section 6, express omission must qualify too.4. Hikal Limited v. Union of India (Bombay High Court, 2025)Arising from the GST regime itself, concerning omission of Rules 89(4B) and 96(10) of the CGST Rules without a savings clause. The Court rejected the Revenue's argument that rules made under a Central Act inherit Section 6 protection, holding that Section 6's list of qualifying instruments is exhaustive and a Rule is not among them. The Court followed Rayala and Kolhapur on their primary textual ground, holding pending proceedings lapsed, while endorsing the Fibre Boards critique that the omission-versus-repeal distinction was obiter.The Legal Landscape TodayReading the four cases together, the law currently operates on a bifurcation based on the nature of the repealing instrument, not simply on omission versus repeal.For subordinate legislation — rules omitted by notification — Rayala, Kolhapur, and Hikal remain unambiguous: Section 6 does not apply, and pending proceedings lapse absent a savings clause or pari materia provision, because the repealing instrument is not a Central Act or Regulation.For Central Act provisions omitted through a Finance Act or other Parliamentary legislation, Fibre Boards represents the current judicial position: "repeal" in Sections 6 and 24 includes express omissions by virtue of Section 6A. The omission of Section 13(8)(b) falls in this second category, having been effected through the Finance Act 2026 — a Central Act — meaning the primary objection in Rayala, Kolhapur, and Hikal is absent here, and on the Fibre Boards analysis, Section 6 would be attracted.Do the Issues Actually Resolve?A constitutional tension remains: Fibre Boards was decided by a two-judge bench, while the Constitution Bench decisions it effectively overrides were decided by five judges. Strictly, a smaller bench cannot override a Constitution Bench, however sound its reasoning. In practice, whether the omission of Section 13(8)(b) attracts Section 6 remains genuinely litigable.Second Side of the CoinThe omission also creates new compliance consequences. Indian businesses receiving intermediary services from suppliers outside India previously fell outside India's POS under Section 13(8)(b). With its omission, the general rule in Section 13(2) now applies, shifting POS for such inbound services to the recipient's location — squarely within India — making reverse charge mechanism (RCM) liability unambiguous.Conclusion — A Legislative Proposal That Demands a Legal AnswerThe omission is commercially a liberalising measure long awaited by the intermediary services sector, correcting a structural anomaly and improving India's attractiveness as a global hub, particularly for GCCs. But implemented as a bare omission without a saving clause, transitional provision, or express statement of legislative intent, it has opened significant legal uncertainty.Rayala and Kolhapur established the still-surviving textual ground that Section 6 requires a Central Act, not mere omission. Fibre Boards, using Section 6A and the per incuriam doctrine, demonstrated that "repeal" includes express omission. Fibre Boards itself noted this was not a novel argument — General Finance Company & Anr. v. Assistant Commissioner of Income Tax (2002) 7 SCC 1 had acknowledged the argument's force but declined to refer it to a larger bench. Hikal confirmed the orthodoxy for subordinate rules while endorsing the Fibre Boards critique.Until a Supreme Court Constitution Bench definitively resolves whether "repeal" in Section 6 includes express omission through a Central Act, every stakeholder — service providers seeking refunds and Revenue authorities pursuing past demands — must navigate an unsettled landscape. A savings clause in the Finance Act 2026 could have closed this gap entirely; in its absence, the five-decade-old debate is live, consequential, and headed to court.ReferencesIntegrated Goods and Services Tax Act, 2017The Finance Bill, 2026The General Clauses Act, 1897Rayala Corporation (P) Ltd. v. Director of Enforcement (1969) 2 SCC 412Kolhapur Canesugar Works Ltd. v. Union of India (2000) 2 SCC 536M/S Fibre Boards (P) Ltd. v. CIT Bangalore (2015) 10 SCC 333Hikal Limited v. Union of India, 2025:BHC-AS:37892-DBGeneral Finance Company & Anr. v. Assistant Commissioner of Income Tax (2002) 7 SCC 1Author may be reached at madhavkumarjha759@gmail.com and eboard@icai.inSource: The Chartered Accountant, ICAI · May 2026 · www.icai.org
GST
Ep. 21 — Judicial Affi rmation of Bona Fide Credit Entitlement: A Landmark Supreme Court Ruling
CA Journal
· June 2026
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Judicial Affirmation of Bona Fide Credit Entitlement: A Landmark Supreme Court RulingThe Supreme Court of India, in Commissioner of Trade & Tax, Delhi v. M/s Shanti Kiran India (P) Ltd. (judgment dated 9 October 2025), upheld the principle that a bona fide purchasing dealer cannot be denied Input Tax Credit (ITC) merely due to the selling dealer's failure to deposit collected tax. Affirming the Delhi High Court's earlier ruling in Quest Merchandising and the constitutional doctrine under Article 14, the Supreme Court held that responsibility for non-payment of tax rests with the defaulting seller, not the compliant purchaser.IntroductionThe judgment marks a significant reaffirmation of the principle of fairness and bona fide credit entitlement in indirect taxation. The issue — whether a purchasing dealer can be denied ITC merely because the selling dealer failed to deposit tax with the Government — resonates strongly with ongoing disputes under the Goods and Services Tax (GST) regime. This decision reinforces the foundational objective of ease of doing business, ensuring genuine buyers are not penalised for non-compliance by the selling dealer that is beyond their control.Case Background and FactsUnder the Delhi Value Added Tax Act, 2004 (DVAT Act), M/s Shanti Kiran India (P) Ltd., a registered dealer, had paid VAT to its sellers on valid invoices. The sellers' registration was valid on the date of transaction but was later cancelled, and they failed to deposit the tax with the department. As a result, the Department denied ITC to the purchaser under Section 9(2)(g) of the DVAT Act, which permits ITC only if the selling dealer has deposited the tax.The principal issue before the judiciary was whether ITC is available to purchasing dealers who:Paid taxes to registered selling dealer(s) in accordance with the invoices raised by them.Were bona fide purchasers who had paid taxes in good faith to registered selling dealer(s).Transacted with seller(s) who were registered with the Department on the date of the transaction.The Delhi High Court, following Quest Merchandising India Pvt. Ltd. v. Govt. of NCT of Delhi (2017), held that bona fide purchasers cannot be denied ITC merely because the seller defaulted. It held that:The expression "dealer or class of dealers" in Section 9(2)(g) should be read as excluding a purchasing dealer who bona fide entered into transactions with validly registered selling dealers, with no mismatch between Annexure 2A and 2B of the Delhi VAT Return.The Department could not invoke Section 9(2)(g) to deny ITC where the selling dealer was validly registered and had issued a tax invoice reflecting the TIN.If the selling dealer failed to deposit the tax collected, the proper remedy was for the Department to proceed against the defaulting seller — not to deny ITC to the purchaser.The Department could still proceed under Section 40A of the DVAT Act where collusion between buyer and seller was established.Supreme Court's FindingsA two-judge bench comprising Justice Manoj Misra and Justice Nongmeikapam Kotiswar Singh upheld the Delhi High Court's view and dismissed the Department's appeal, directing it to grant ITC after due verification of invoices. The Court noted that the sellers' registration was undisputed on the date of transaction, and neither the transactions nor the invoices had been doubted on any inquiry into their veracity.Legal Reasoning and Constitutional PerspectiveThe Delhi High Court had earlier read down Section 9(2)(g) to avoid constitutional invalidity under Article 14, since a literal interpretation would make a purchaser vicariously liable for another's default. ITC, therefore, should be denied only where collusion or fraud exists — reasoning the Supreme Court upheld in full."The issue, whether a purchasing dealer can be denied Input Tax Credit (ITC) merely because the selling dealer failed to deposit tax with the Government, resonates strongly with ongoing disputes under the Goods and Services Tax (GST) regime."Relevance under the GST RegimeThough decided under the Delhi VAT Act, the principles bear directly on Section 16(2)(c) of the CGST Act, 2017, which similarly requires that tax charged by the supplier be "actually paid to the Government." High Court decisions in Bharti Telemedia Ltd. (2021), D.Y. Beathel Enterprises (2021), and Suncraft Energy (2023) have echoed this reasoning, holding that bona fide purchasers should not be denied ITC and that the Department must instead pursue the defaulting supplier.In Suncraft Energy, the Calcutta High Court relied on a similar reading of Section 9(2)(g) by the Delhi High Court in Arise India Limited v. Commissioner of Trade and Taxes, Delhi, holding the DVAT scheme of ITC availment to be substantially the same as under GST, subject only to procedural and statutory-form changes. The Department's special leave petition challenging Arise India was dismissed by the Supreme Court on 10 January 2018.ConclusionThe Supreme Court's judgment in Shanti Kiran India (P) Ltd. delivers more than a VAT-era clarification — it lays down a constitutional principle relevant to the entire indirect tax system, including GST. A taxpayer who has acted bona fide, purchased from a registered supplier, paid GST to that supplier, and discharged tax on its own output liability should not be deprived of ITC merely because the supplier failed to remit it. The ruling affirms input tax neutrality, protects genuine taxpayers, and reinforces equitable administration of tax law, giving GST taxpayers a strong precedent to invoke in similar disputes.◆ ◆ ◆Author may be reached at cajoydeb@mail.ca.in and eboard@icai.inSource: The Chartered Accountant, ICAI — May 2026 Issue, p. 60–62
MSME
Ep. 22 — Bridging Compliance and Capital: Chartered Accountants as Catalysts for MSME Expansion
CA Journal
· June 2026
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Bridging Compliance and Capital: Chartered Accountants as Catalysts for MSME ExpansionHow India's Chartered Accountants are becoming strategic enablers — turning financial discipline, regulatory navigation and digital advisory into a growth engine for the country's 63 million micro, small and medium enterprises.The Micro, Small and Medium Enterprises (MSME) sector contributes approximately one-third to India's GDP and plays a pivotal role in driving the nation's economic development, recognized as one of the four key engines of growth alongside Agriculture, Investment and Exports. Sustained government focus on formalization has significantly enhanced credit penetration, enabling more enterprises to access formal financial systems and institutional support.Yet the sector remains structurally vulnerable: limited access to capital, inadequate technological infrastructure, and low resilience to market volatility continue to threaten its growth trajectory toward the vision of Viksit Bharat by 2047. Roughly 94% of India's MSMEs still operate informally and unregistered, even as the sector produces around 6,000 products — predominantly in manufacturing — across food, textiles, chemicals, metals, machinery and leather.30%Share of India's GVA35.4%Of manufacturing output63M+Enterprises nationwide110M+People employed40–45%Of India's exportsA Sector Defined by Diversity and ScaleGlobally, MSMEs represent close to 90% of all businesses, contribute roughly half of world GDP, and account for over 70% of formal employment. In India alone the sector spans more than 63 million enterprises. MSMEs are particularly effective at generating employment at lower capital cost than larger firms, catalyzing industrial development in rural and backward regions and helping narrow regional income gaps.FIG. 1 — KEY CHARACTERISTICS OF MSMEsDIVERSITYWide variation in size, industry, technology adoption and service offeringECONOMIC CONTRIBUTIONSubstantial share of GDP, exports and industrial outputEMPLOYMENT GENERATIONSecond-largest source of jobs after agriculture — reaching youth, women and vulnerable groupsThe Challenges Holding MSMEs BackOutdated technology, fragile supply chains and weak infrastructure compound a deeper problem: a persistent mismatch between the demand and supply of credit, driven largely by collateral constraints. Credit guarantee schemes and improved use of borrower data have begun to close that gap, while platforms such as TReDS — the Trade Receivables Discounting System — let MSMEs auction invoices for financing, lowering costs and improving access without collateral.FIG. 2 — CORE FUNCTIONAL AREAS OF MSME OPERATIONS (Source: FTAPCCI & IMCI)Marketing PracticesICT AdoptionHuman Capacity BuildingCost OptimizationMost MSMEs still lean on cold calling and relationship-based marketing; advanced tools like CRM, ERP and cloud computing remain underused due to cost and a shortage of skilled manpower. Yet over 70% of enterprises report income gains from even basic digital adoption — smartphones and UPI chief among them — signalling where the next wave of growth is likely to come from.Where Chartered Accountants Step InAs MSMEs navigate tighter regulation, complex global supply chains and intensifying competition — nearly 1,450 annual regulatory obligations per unit, costing roughly ₹13 lakh — Chartered Accountants have become indispensable strategic partners rather than back-office service providers."CAs uphold India's integration with global accounting and auditing standards, including IFRS, ISAs, and ethical standards, enabling MSMEs to present reliable and internationally comparable financial statements."Financial Stewardship & Access to Capital1- Cash-flow management and financial planningRobust bookkeeping, budget forecasting, working capital management and cash-flow modelling that directly shape an MSME's ability to scale.2- Improving access to financeCAs strengthen creditworthiness through auditable statements and valuation reports — MSMEs backed by a CA are reportedly twice as likely to secure loans from institutions like SIDBI, and CAs help unlock collateral-free credit of up to ₹5 crore under CGTMSE.3- Capital markets and structured financeWith MSMEs raising ₹7,453 crore via equity by January 2025, CAs guide listing on NSE Emerge and ensure disclosure compliance.Regulatory Compliance & Governance1- Mitigating compliance burdenAccurate GST filing, income tax compliance and statutory audits reduce exposure across more than 1,000 regulations spanning 480 high-risk provisions.2- Enhancing corporate governanceAlignment with IFRS and ISAs builds investor confidence and supports foreign investment inflows.3- Risk management and internal controlSystematic risk identification helps MSMEs withstand shocks such as supply chain disruption.Strategic Advisory & Value Creation1- Business advisory & strategic planningIdentifying cost efficiencies, market trends and reinvestment strategies that position MSMEs for long-term competitiveness.2- Digital transformation & analyticsGuiding adoption of AI, machine learning and cloud platforms — including the Udyam Portal and SBI's Udyami Mitra — while building cyber-resilient, quantum-prepared financial systems.3- Mentorship & ecosystem supportOn-ground guidance for Udyam registration, GST onboarding and scheme applications such as CGTMSE and Mudra, backed by ICAI's helpdesks and grievance redressal portal.Confronting the Hard NumbersA ₹69 trillion credit gap stands against just ₹10.9 trillion in available formal credit — a divide felt most acutely by women entrepreneurs facing limited collateral and restricted access to banking networks. CAs help close this gap by structuring viable loan proposals and credit models, while simultaneously guiding MSMEs toward greener, more sustainable operating models as global pressure for ESG compliance intensifies.Case Studies in PracticeBanking and MSME Sector Conclave 2025, Pune — highlighted how CAs bridge the information asymmetry between small businesses and lenders, clarifying documentation and collateral requirements and enabling single-window clearances across MSME clusters.Regulatory technology adoption — academic studies show that tech-savvy CAs implementing RegTech solutions can dramatically cut compliance costs while improving operational efficiency and risk visibility.Formalization in practice — through support with Udyam registration, GST compliance, capital markets listing and export documentation, CA-backed MSMEs see improved survival rates, better credit access and stronger growth.Strategic Horizons: The Road AheadFive priorities define where the CA–MSME partnership is headed next.Broaden Digital AdvisoryFacilitate Inclusive FinancingSimplify Compliance PathwaysDrive Sustainable InnovationStrengthen Professional EcosystemsThis means deepening competence in AI-enabled accounting and blockchain-based supply chain traceability; catalyzing inclusive finance for women-led and rural enterprises; advocating for compliance rationalization; supporting circular-economy and ESG-aligned business models; and scaling mentorship through ICAI initiatives like CIPD, incubation centers and startup yatras.A Multidimensional PartnershipAcross five pillars, the CA's role with India's MSMEs has moved well beyond the ledger.Financial ExpertiseEnabling access to capitalCash flow maturityCapital market participationRegulatory ProficiencyMitigating compliance riskElevating government standardsStrategic AdvisoryUnlocking new market opportunitiesCost efficienciesSustainability frameworksTech-Enabled Service DeliveryRegulatory technologyAnalyticsDigital literacyQuantum-ready systemsInstitutional OutreachScaling capacity via ICAI programsMentorship clinicsRegulator collaborationConclusionAs India confronts a challenging post-pandemic landscape marked by regulatory complexity, digital transformation, rising global competition, supply chain disruption and sustainability imperatives, MSMEs require more than transactional support — they need a strategic, tech-savvy, governance-oriented partnership. Chartered Accountants offer exactly that, through financial expertise, regulatory proficiency, strategic advisory, tech-enabled service delivery and institutional outreach.As India progresses toward its long-term ambition of a $5 trillion to $35 trillion economy by 2047, the CA–MSME partnership will remain a foundational pillar — solidifying financial discipline, improving compliance, expanding access to formal credit, and supporting the sector's digital and sustainable transformation.ReferencesBora, G. (2025). ET World MSME Day 2025: Driving innovation, impact, and intelligence. New Delhi: The Economic Times.CFO, C. (n.d.). Role of Chartered Accountant in Growth of MSMEs. Chhota CFO.Dewan, N. (2025). Regulatory overload: MSMEs face Rs 13 lakh yearly compliance costs. The Economic Times.FTAPCCI & IMCI. (n.d.). Current Practices and Challenges of MSMEs in Pursuit of Make in India Vision. FTAPCCI.Kumar, R. (2025). MSMEs in India: A Study of the Challenges, Opportunities, and Future Prospects. Journal of Emerging Technologies and Innovative Research, 12(3), 358–363.Mittal, M. (2025). Understanding Indian MSME Sector — Progress and Challenges. SIDBI.Nanda, C. S. (2025). The Chartered Accountant, 74(1), 6–9.iGOT Karmayogi. Retrieved from igotkarmayogi.gov.inAuthors may be reached at abhishekbhu008@gmail.com and eboard@icai.in
CORPORATE LAWS
Ep. 23 — Hindsight on Insider Trading
CA Journal
· June 2026
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Hindsight on Insider TradingThe regulation of insider trading has emerged as a critical challenge in India's securities law regime, with implications for corporate governance, investor protection, and market fairness. This article undertakes an in-depth doctrinal and comparative analysis of insider trading under the SEBI (Prohibition of Insider Trading) Regulations, 2015. It critically examines the statutory framework, judicial interpretations, and enforcement practices in India, while synthesizing case law from foreign jurisdictions such as the United States and the United Kingdom. By integrating legal reasoning with policy considerations, the article identifies gaps in enforcement, ambiguities in definitions of unpublished price-sensitive information, and challenges in proving intent. It further explores how Indian jurisprudence has evolved from a formalistic approach to a more substantive understanding of fiduciary duties and fair disclosure. The study concludes with recommendations for strengthening India's legal framework by enhancing clarity, reducing compliance costs, and ensuring alignment with global best practices.CS Dr PT GiridharanFormer Additional Director (Corporate Laws), ICAICA. PT PadmanabhMember of the InstituteInsider Trading: Doctrinal Underpinnings and Global ParallelsInsider trading—trading in securities while in possession of unpublished price-sensitive information (UPSI)—directly undermines market fairness and investor confidence. The prohibition extends even to informal tip-offs among friends or casual conversations. Across major jurisdictions, including India (SEBI), the U.S. (SEC), and the U.K. (FCA), the foundational doctrine remains the same: “disclose or abstain.”In India, the SEBI (Prohibition of Insider Trading) Regulations, 2015, embody this principle through stringent preventive measures and penalties. The 2015 overhaul shifted the framework from mere prevention to absolute prohibition, ensuring that no person connected with a company can exploit UPSI for personal gain or secret profits.India's approach aligns closely with U.S. securities law. In Cady, Roberts & Co. (1961), the SEC held that information entrusted for corporate purposes must not be misused for personal advantage, emphasizing the intrinsic unfairness of allowing selective access to material information. The Supreme Court of India echoed this in Rakesh Agrawal v. SEBI (2003), affirming the duty to “disclose or abstain” and reiterating that the use of material non-public information is inherently fraudulent as it gives unfair advantage over uninformed investors. In Dirks v. SEC, the U.S. Supreme Court clarified that insider trading requires a breach of fiduciary duty involving manipulation or deception, supported by intent (mens rea).The U.K. adopts a dual enforcement system: insider dealing constitutes both a criminal offence under the Criminal Justice Act 1993 and a civil offence under the Market Abuse Regulation (MAR). The severe penalties imposed under both tracks highlight the strong stance taken by developed markets against insider trading.The Pitfalls of Insider Tradinga) India – SEBI Act, 1992 & PIT Regulations, 2015Section 15G of the Securities and Exchange Board of India Act, 1992 stipulates that any person contravening the Prohibition of Insider Trading (PIT) Regulations, 2015 shall be liable to a monetary penalty of not less than ₹10 lakh, which may extend to ₹25 crore or three times the amount of profits made out of the insider trading transaction, whichever is higher.Violations may also lead to prosecution and a prohibition on accessing the securities market for a specified period. In practice, SEBI orders in such matters usually impose monetary penalties coupled with market bans, though notably, there has not been any criminal conviction for insider trading in India so far.b) United States – Securities Exchange Act, 1933Under U.S. law, a criminal violation of insider trading provisions may attract a fine of up to USD 5 million and/or imprisonment for up to 20 years. Civil remedies include disgorgement of unlawful gains and other monetary penalties.It is pertinent to note that insider trading is not per se illegal; liability depends on proving, on a preponderance of probabilities, that such trading occurred. The legal test revolves around the materiality of the non-public information and whether the evidence outweighs a plea of innocence.c) United Kingdom – Criminal Justice Act, 1993In the UK, insider trading offences can result in unlimited fines and custodial sentences of up to seven years.Innocence or Evidence – The Rajaratnam CaseInsider trading becomes illegal when a person trades securities based on material, non-public information obtained through private or privileged channels. Proving that such trades are intentional rather than the result of innocent coincidence or independent analysis is one of the most challenging tasks for regulators. A notable example is United States v. Rajaratnam (No. 11-4416, 2nd Cir. 2013). In this case, two former business school friends were implicated—one of whom served as a director on the board of a multinational corporation. They exchanged a series of phone calls discussing unpublished price-sensitive information (UPSI) concerning the company's balance sheet ahead of its Annual General Meeting. The Director disclosed this confidential information to his friend, who, in turn, purchased shares of the company based on it. The trial lasted nearly three years. Despite compelling evidence, including wiretap recordings and trading records, the defendants argued that their actions were merely the outcome of legitimate market research—an argument the court rejected.The penalties were severe:Raj Rajaratnam (Chief of a hedge fund): 11 years' imprisonment—one of the longest terms ever imposed for insider trading in the U.S.—along with substantial monetary penalties.Rajat Gupta (Director and source of UPSI): two years' federal imprisonment, USD 13.9 million civil penalty, USD 5 million fine, and a permanent ban from serving as an officer or director of a public company.This case illustrates the complexity of proving intent in insider trading prosecutions, especially where parties appear to be at arm's length. The conviction ultimately rested on clear evidence that UPSI was transferred from a board member to a hedge fund manager, resulting in profitable trades.What Level of Proof is Necessary in Insider Trading Cases?In Dilip S. Pendse vs SEBI, decided on 19 November 2009 (Appeal No. 80 of 2009), the Securities Appellate Tribunal, while referring to the judgement delivered by Lord Denning, L.J., in Bater v. Bater (1950) 2 All E.R. 458, observed:“It is true that by our law there is a higher standard of proof in criminal cases than in civil cases, but this is subject to the qualification that there is no absolute standard in either case. In criminal cases, the charge must be proved beyond a reasonable doubt, but there may be degrees of proof within that standard. So also, in civil cases. The case may be proved by a ‘preponderance of probability’, but there may be degrees of probability within that standard. The degree depends on the subject matter.”Key Changes and Challenges in the PIT AmendmentsSEBI, through its notification of March 11, 2025 (published March 12, 2025), introduced major amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015. Effective June 10, 2025, these changes broaden the scope of Unpublished Price Sensitive Information (UPSI), ease compliance for UPSI originating outside the listed entity, expand the definition of “connected person” to include more relatives, and tighten the sensitivity attached to UPSI. Regulation 2(1)(n) continues to define UPSI as non-public information relating to a company or its securities that could materially affect their price, supported by a non-exhaustive list of examples such as dividends and financial results. The definition aligns with the events under Para A and B of Part A of Schedule III, read with Regulation 30 of the LODR Regulations, which require each event to be examined for potential price sensitivity.Expanded Scope of UPSI under SEBI RegulationsKey Disclosure EventsFinancial & Credit Events: Rating changes (excl. ESG), planned fund-raising, loan resolution/restructuring or one-time settlements, winding-up/CIRP matters.Governance & Control: Agreements impacting management/control, changes in KMP (UPSI unless due to superannuation, term end, or auditor resignation).Compliance & Licensing: Grant, withdrawal, or suspension of key licenses/approvals.Misconduct & Investigations: Fraud/defaults/arrests (India/abroad), forensic audits for misstatements/misuse of funds, adverse authority orders.Contracts & Business Operations: Awards or terminations of non-routine contracts/orders.Legal Outcomes: Litigation/dispute results with significant company impact, guarantees/indemnities/sureties given outside normal business.Who All Are Covered Under a Connected Person?The revised definition of ‘connected persons’ broadens coverage beyond relatives to include the new categories mentioned, placing compliance obligations on them, with a presumption of inclusion unless they can prove otherwise.A connected person is anyone associated with a company in a way that gives them access to UPSI. The definition now also covers:firms, their partners, or employees where a connected person is a partner; andindividuals sharing a household or residence with a connected person.These additions extend compliance obligations beyond relatives, with a presumption of inclusion unless rebutted by the concerned person.“Insider trading becomes illegal when a person trades securities based on material, non-public information obtained through private or privileged channels.”Obligation of Connected PersonsConnected persons, as insiders, must comply with key rules:Under Regulation 3, they cannot share UPSI except for legitimate purposes, duties, or legal obligations;Under Regulation 4, they cannot trade while in possession of UPSI, and any permitted off-market insider trades must be reported to the company within two working days, which then informs the stock exchange within two trading days; andUnder Regulation 5, they may submit a pre-approved trading plan, a provision now extended to relatives of connected persons.Impact on Listed EntitiesListed entities mainly need to remind connected persons about the proper handling of UPSI. With the expanded definition, connected persons must exercise extra caution, as in any alleged violation of Regulation 4(1) of SEBI PIT Regulations, the burden is on them to prove they did not possess UPSI. Pre-clearance and disclosure obligations still apply only to designated persons and their immediate relatives, not all relatives. While SEBI allows listed entities to seek disclosures from connected persons, such requirements should be imposed after careful consideration. As a precaution, entities may obtain relatives' PAN details to monitor trading activities.'Relative' becomes 'Super Relative'The amended framework broadens “immediate relatives” into a wider “relative” category by removing the earlier requirements of financial dependency or involvement in trading decisions. Now, a relative includes a spouse, parents (own and spouse's), siblings (own and spouse's), children (own and spouse's), and the spouses of those siblings or children. This change ensures clearer identification of connected persons, effectively covering all close family members in insider trading regulations. The onus remains on such persons to prove that their connection did not involve influence from UPSI.Is 'Profit Motive' Essential to Prove a Charge in the Case of Insider Trading?In SEBI v. Abhijit Rajan (2022), the Supreme Court held that proving insider trading requires establishing a profit motive; a “distress sale” to save a company from bankruptcy is not insider trading. For information from outside the company, entries in the structured digital database can be made within two days, and a new proviso to Schedule B, Clause 4(1) allows the trading window to remain open for such information.The Responsibility of Professionals in Handling Insider TradingA compliance officer—typically a whole-time company secretary designated as a KMP under SEBI (LODR)—plays a central role in preventing insider trading by ensuring full regulatory compliance, protecting confidential board deliberations, guiding directors on secure audio/video participation, monitoring disclosures and shareholdings, and identifying conflicts, including excluding directors with over 2% interest from relevant proceedings. Well-versed in corporate and securities laws, the officer safeguards UPSI, maintains accurate records, and upholds strong governance standards.SEBI's recent actions against promoters of Kwality Limited, Edelweiss Financial Services and its compliance officer, and entities involved in insider trading in Zee Entertainment Enterprises Limited reinforce the importance of this role.For KMPs and connected persons, ethical conduct remains essential: trade only on public information, avoid ESOP or F&O dealings when in possession of UPSI, recognise that “relatives” may extend broadly, disclose all holdings, and abstain from trading when uncertain—since in insider-trading cases, evidence prevails and violations can lead to disgorgement, trading bans, and loss of holdings.SEBI's ongoing investigation into insider trading at a private bank is examining why the CEO and Deputy CEO traded in the bank's shares despite knowing about major accounting lapses involving derivative losses of ₹2,329 crore—information that qualified as UPSI. The case raises broader concerns about the timing of disclosures, fraud reporting, internal controls, adherence to the code of conduct by key managerial personnel, and the bank's overall governance and risk management. Regulators and stakeholders are also scrutinizing whether the auditors should have treated the derivative-related losses as fraud.The Ethical Behaviour for Key Managerial PersonnelTrade only on publicly available information; never trade while holding UPSI.You may be connected to the company, but avoid ESOP or F&O trades if you possess UPSI.“Relatives” can include extended or proximate relations.Studying insider trading is fine—just avoid becoming part of an insider network.As a KMP, safeguard UPSI and never misuse it.Always disclose your shareholdings to the company to avoid liability.The safest approach is to abstain and refrain from trading when in doubt.If you are a connected person, stay away from trading activities.In insider trading cases, evidence—not claimed innocence—prevails.Falling into the PIT results in disgorgement, trading bans, and loss of holdings.ConclusionInsider trading undermines market trust, and while India's regulations have evolved, adopting global best practices can make oversight more agile, data-driven, and deterrent. A resilient framework should integrate advanced surveillance, stronger cross-border collaboration, and a culture of ethics to keep capital markets transparent, fair, and inclusive.Synthesis Table 1: A look at the SEBI (PIT) Regulations, 2015, and as AmendedS. No.AspectKey Points1Definition of Insider TradingTrading a company's securities using confidential, non-public information for profit or to avoid loss.2ProhibitionNo trading, sharing, or facilitating trades using UPSI.3UPSINon-public information that could materially impact security prices if disclosed.4InsiderDirectors, KMPs, employees, or anyone with access to UPSI.5Connected PersonsImmediate relatives of insiders and specified professionals/advisors.6Trading WindowCompanies must close trading windows during sensitive periods; designated persons restricted.7Compliance OfficerAppointed by the company to monitor adherence and implement insider trading policy.8AmendmentsSEBI periodically updates regulations, e.g., 2019 expanded UPSI definition; 2025 amendments added further provisions.9EnforcementSEBI can investigate violations and impose fines, bans, and other disciplinary measures.Synthesis Table 2: Insider Regulations – A Global ScenarioFeatureIndiaUSAUKAustraliaStandardPossessionUseUsePossessionEnforcementSEBISEC/DOJFCAASICProofPossessionUse & intentMens reaStrict-likeWhistleblowerYesYesPartialYesTrendDigital forensics/WhatsApp leaksTippee liabilityCriminal sentencingHigh convictionsSynthesis Table 3: Comparative Enforcement StrengthIndia: Strong enforcement (4/5)USA: Moderate enforcement (2/5)UK: Moderate enforcement (2/5)Australia: Strong enforcement (4/5)The above highlights that India and Australia have the highest enforcement strength, while the USA and UK are relatively lower.Synthesis Table 4: Indian Case Laws on Insider Trading – An Evolving JurisprudenceCaseFactsOutcomeSignificanceRakesh Agrawal v. SEBI (1998)MD of ABS Industries accused of insider trading pre-merger.SAT ruled no intent; case was in his favor.Introduced "subjective intent" test, later replaced by possession-based standard.Hindustan Lever Ltd. v. SEBI (1998)HLL bought BBLIL shares before merger announcement.SEBI's allegation dismissed; news already public.Clarified "publication" timing for UPSI.SEBI v. Rajiv Gandhi (Satyam, 2009)Promoters sold shares before fraud disclosure.Heavy penalties imposed.Reinforced SEBI's authority on UPSI-related fraud.Reliance Industries Ltd. (2021)Trading in Reliance Petroleum shares using UPSI pre-merger.₹25 crore penalty by SEBI.Showed SEBI's aggressive action against corporate insiders.Synthesis Table 5: Global Case Laws on Insider Trading – A Stringent ApproachCaseFactsOutcomeImpactUnited States v. Martha StewartSold ImClone shares after tip before FDA rejection.Convicted for obstruction/false statements, not insider trading.Highlighted SEC's broad enforcement powers.Dirks v. SEC (1983)Analyst received tip; issue of tippee liability.Liability only if tipper breached fiduciary duty for personal benefit.Established personal benefit test for tippees.R v. McQuoid & Melbourne (UK, 2009)UPSI passed to father-in-law, who traded.Both imprisoned.Showed strong penalties for familial misuse of UPSI.ASIC v. Curtis (Australia, 2010)Traded using insider info from a girlfriend.2.5 years imprisonment.Reinforced strict enforcement in Australia.Authors may be reached at drptgiridharan@gmail.com and eboard@icai.inSource: The Chartered Accountant, May 2026 — Corporate Laws section, ICAI (pp. 70–74)
taxation
Ep. 24 — Analyzing Information Technology Act, 2000 through a Taxman’s lens
CA Journal
· June 2026
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Analyzing the Information Technology Act, 2000 Through a Taxman's LensA Law Born from Growth and RiskIndia's IT industry expanded rapidly after the 1991 economic reforms opened the economy to global participation. Through the 1990s the sector's output and software exports grew sharply, and with that growth came a new category of risk: data breaches, viruses, and hacking incidents that the existing legal framework was not built to handle. Parliament responded with the IT Act, 2000, conceived with a dual mandate — legally enabling electronic commerce and documentation, while bringing cybercrime under the reach of the law.The Act's preamble sets out three goals: recognizing electronic transactions as legally equivalent to paper-based ones, enabling electronic filing with government agencies, and amending allied statutes such as the Indian Penal Code, the Indian Evidence Act, the Bankers' Books Evidence Act, and the Reserve Bank of India Act. Its reach extends well beyond cyber law into the everyday mechanics of taxation, which is the focus of this article.Giving Legal Force to Electronic RecordsSection 4 of the Act puts electronic records on equal legal footing with paper documents, provided they are accessible and usable for later reference. This single provision has outsized consequences for tax compliance: it means that wherever a tax notification or rule is silent on whether a "document" must be physical, a digital version satisfies the requirement by default. The article illustrates this with a customs exemption notification (Notification No. 102/2007-Customs) that lists supporting documents an importer must produce without specifying their format — a gap Section 4 fills, a reading the CESTAT endorsed in House Full International Ltd. v. Commissioner of Customs (Import), Mumbai (2014).When Is a Notice "Dispatched"?Digital communication between tax authorities and taxpayers — through email, government portals, or SMS — raises a technical question with major legal consequences: exactly when does a notice or order count as sent? Section 13(1) of the IT Act answers this by tying dispatch to the moment an electronic record leaves a computer resource under the originator's control.Case in Focus — Suman Jeet Agarwal v. ITO, Ward 61(1) (Delhi HC, 2022)The Delhi High Court examined the Income Tax Department's ITBA email system, which routes notices through several internal servers before they reach an assessee's inbox. The diagram below reflects the mail flow discussed in the judgment.Assessing Officer(Sender)⇒ITBA System(User Agent)⇒Sent Mail Queue⇒ITBA MTA Server(Messaging Gateway)⇒Assessee's MTA Server(Destination)⇒Mailbox & Gmail(Assessee)The court held that dispatch occurs the moment the message leaves the last server still under the Department's control — the ITBA MTA server — and enters the assessee's mail service infrastructure, which the Department does not control. This places the Department squarely as "originator" under Section 11(c) of the IT Act, and fixes the dispatch timestamp accordingly."Receipt of a notice or order by the party to whom it is addressed is essential for proper service under tax law — without it, the entire proceeding can be rendered void."When Is a Notice "Received"?Section 13(2) governs the time of receipt and turns on a key distinction: has the addressee designated a specific computer resource for receiving such communications?ScenarioTime of ReceiptAddressee designated a computer resourceWhen the record enters that designated resourceNo resource designated, but addressee retrieves itThe moment of actual retrievalNo resource designated, no retrieval shownWhen the record enters any computer resource of the addresseeRegulatory and judicial interpretation has filled in what counts as a "designated computer resource." A 2017 CBDT notification on e-Proceeding treats a taxpayer's registered e-filing account as such a resource. In Poomika Infra Developers v. State Tax Officer (Madras HC, 2025), the GST common portal itself was held to be a designated resource for both the department and the registered taxpayer, since login credentials give the taxpayer controlled access to it. Section 144B of the Income Tax Act similarly extends the definition to cover the assessee's registered portal account, linked mobile app, and registered email address.Where Does Dispatch and Receipt Legally "Happen"?Because electronic communication passes through servers scattered across geographies, Section 13(3) and 13(5) supply a fixed legal answer, overridable only by agreement between the parties:Place of dispatch = the originator's place of businessPlace of receipt = the addressee's place of businessMultiple business locations → the principal place of business governsNo place of business → usual place of residence; for companies, the registered officeSection 13(4) clarifies that this deemed "place" of receipt applies even though it may differ from the physical location of the actual server handling the record — keeping jurisdictional questions clean despite the underlying technical complexity.Keeping Records: Section 7 and Its LimitsIndian tax law imposes detailed record-retention obligations — Section 44AA and Rule 6F under the Income Tax Act, and Rules 56–57 of the CGST Rules, among others. Section 7 of the IT Act lets electronic records satisfy any retention requirement, provided three conditions hold: the record stays accessible for later reference, it is preserved in its original (or an accurately representative) format, and details identifying its origin, destination, and timing remain available.Important nuanceSection 7(2) applies the principle generalia specialibus non derogant — a specific law overrides a general one. So wherever tax legislation lays down its own, more specific retention rules, those rules control, and Section 7's general retention standard steps aside.The Electronic Gazette and the Exact Moment a Notification Takes EffectSince 2015, India has published Gazette notifications exclusively online, a shift the government tied directly to Section 8 of the IT Act, which allows publication in either the print or Electronic Gazette to satisfy any legal "publication" requirement.But the precise time of publication — not just the date — can decide a case. In Ruchi Soya Industries v. Union of India (Andhra Pradesh HC, 2019), the court held that a notification only takes legal effect once it has been digitally signed by the competent officer and then uploaded to the official Gazette website; the judgment noted the exact digital-signature timestamp as decisive. The Gujarat High Court reached a similar conclusion in Adani Wilmar Ltd. v. Union of India (2022).Looking AheadThe article closes by noting a widening gap: the IT Act, 2000 was built for an earlier digital economy, while cloud computing, digital currencies, AI-driven decision-making, distributed ledgers, and smart contracts now raise governance questions the original Act never anticipated — particularly around tax evasion risk and data privacy. Recent and proposed measures aimed at closing that gap include:TDS on payments made during transfer of virtual digital assetsRecognition of cloud-based storage within the definition of "books of accounts" under the proposed IT Bill, 2025The Promotion and Regulation of Online Gaming Bill, 2025The Digital Personal Data Protection Act, 2023The (draft) National Data Governance Framework Policy, 2022The proposal to eventually replace the IT Act, 2000 with a Digital India ActThe author's broader argument is that as digital infrastructure and tax administration grow more intertwined, sustained harmonization between technology law and tax law — not one-off fixes — is what will keep the system workable.Selected Case Law & Sources CitedHouse Full International Ltd. v. Commissioner of Customs (Import), Mumbai — CESTAT, 10 Nov 2014Suman Jeet Agarwal v. ITO, Ward 61(1) & Ors — Delhi High Court, W.P.(C)-10/2022, 27 Sep 2022Poomika Infra Developers v. State Tax Officer — Madras High Court, W.P. No. 33562 of 2024, 9 Apr 2025Ruchi Soya Industries v. Union of India — Andhra Pradesh High Court, W.P. No. 4533 & 4534 of 2019, 28 Sep 2019Adani Wilmar Ltd. v. Union of India — Gujarat High Court, R/SCA/8057/2019, 11 Nov 2022CBDT Notification No. 4/2017, dated 3 April 2017Originally published in The Chartered Accountant journal, ICAI, May 2026 issue — by CA. Abhinab Paul. This page is an independent summary prepared for reference purposes.
Technology
Ep. 25 — Securing the Trust Quotient: A Cybersecurity & Data Protection Framework for Modern CA Practices
CA Journal
· June 2026
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Securing the Trust Quotient: A Cybersecurity & Data Protection Framework for Modern CA PracticesCybersecurity has emerged as a critical practice-management and governance imperative for Chartered Accountants, especially in small and mid-sized firms managing sensitive financial and personal data amid weaker controls. Digitisation, cloud adoption, and remote work have dissolved traditional perimeters, exposing firms to phishing, ransomware, credential theft, and breaches via insiders or vendors. The article connects these risks to ICAI’s confidentiality and due-care duties under the Code of Ethics, the IT Act’s “reasonable security practices,” and the Digital Personal Data Protection Act, 2023 (DPDP Act), with Rules notified in November 2025. It emphasises governance and risk management over mere compliance, while positioning cyber-insurance as a supplementary safeguard rather than a primary control.Introduction: From IT Issue to Practice-RiskOver the last decade, most CA firms have quietly but fundamentally changed how they work. Client interactions that once involved physical files, manual ledgers, and in-person meetings are now dominated by cloud-based accounting systems, online filing portals, shared drives, and video calls. Income-tax returns, GST filings, audit documentation, board packs, and management reports all move through digital channels, often accessed from multiple locations and devices.This article argues that cyber risk must be treated as an integral part of practice management and professional governance. It maps why CA firms are attractive targets, explains how attacks typically unfold in real life, connects cybersecurity to professional and legal obligations, and proposes a practical, layered framework that a small or mid-sized firm can adopt without needing a full-time Chief Information Security Officer (CISO).Why CA Firms Are Prime Targetsi. The Data Profile of a CA FirmCA firms sit at a unique junction in the economic system. They deal not only with numbers but with structured, verified information about individuals, businesses, and transactions. Typical firm repositories include tax returns, financial statements, trial balances, bank statements, KYC records, loan documents, projections, valuation reports, and working papers. In many cases, firms also handle copies of PAN, Aadhaar, cancelled cheques, and, increasingly, one-time access to client portals.From a criminal’s perspective, this is exceptionally valuable raw material. With a single client file, an attacker may be able to construct a complete personal or business profile for identity theft, targeted social-engineering scams, or fraudulent borrowing. At the corporate level, access to draft financials, M&A plans, and internal board papers can support insider trading, corporate espionage, or extortion attempts. Unlike random customer lists breached from e-commerce sites, data held by CAs is curated and trusted, which increases its “market price” in underground forums.ii. Misconceptions in Small and Mid-Sized PracticesDespite this exposure, many small and mid-sized firms believe that “we are too small to be on anyone’s radar” or that “hackers will only target banks and large corporates.” However, attackers often prefer entities with weaker defences, especially where the data value per target is high. International and Indian experience shows that SMEs and professional firms are frequently targeted because they tend to have:Limited budgets for security tools and skilled IT staff.Fragmented infrastructure with a mix of old and new devices and software.Informal practices such as shared passwords, uncontrolled USB usage, and unencrypted laptops.iii. Remote and Hybrid Work: The Vanishing PerimeterRemote and hybrid work, accelerated during the pandemic and now normalized, has dissolved the traditional “office perimeter” guarded by a firewall. Partners and staff routinely access client data from home networks, personal laptops and tablets, and mobile phones on the move. Wi-Fi routers at home may still run default passwords; family devices may share the network; sensitive emails may be checked over open hotel Wi-Fi.This shift means that security can no longer rely on the idea of a single safe network. Every endpoint and every identity used to access client data becomes part of the attack surface. Without basic measures such as VPNs, hardened devices, and multi-factor authentication (MFA), remote access significantly increases the chance that a compromised device, stolen password, or unsafe network opens a backdoor into the firm’s environment.Anatomy of Today’s Cyber Threats to CA Firmsi. Phishing, Spoofing and Business Email CompromisePhishing remains the single most common starting point for cyber incidents in professional firms. Attackers craft emails that appear to come from trusted entities—such as the Income Tax Department, GSTN, MCA, RBI-regulated lenders, or even large clients—and send them in bulk, often timed around deadlines when staff are under pressure. Common patterns include:Notices claiming discrepancies in an income-tax return with a link to “view order,” which actually leads to a credential-harvesting page.Messages from “bank relationship managers” seeking confirmation of client account details or sending “revised RTGS forms” with malware attachments.Emails apparently from a client CFO or partner asking for an urgent payment to a new vendor account or for sharing sensitive MIS reports through a shared link.Once a user clicks a malicious link or enters credentials, attackers may gain full access to that mailbox. They then quietly monitor and forward emails, reset passwords on linked cloud services, and send convincingly timed messages to other staff and clients to initiate frauds—this is typically termed Business Email Compromise (BEC).ii. Malware and RansomwareMalware is a broad term that includes viruses, trojans, and, increasingly, ransomware. In ransomware incidents, the attacker encrypts the firm’s data and demands a ransom (often in cryptocurrency) to provide the decryption key. Modern ransomware operations often combine this with data exfiltration: they first copy out sensitive data and then encrypt systems, threatening to publish the stolen information if the ransom is not paid.For a CA firm in peak filing or audit season, ransomware can be catastrophic. Access to trial balances, audit files, GST workings, and emails may be lost overnight. Even if backups exist, recovery may take days, during which staff are unable to work effectively, clients become anxious, and statutory deadlines may be missed. Moreover, if client data has been stolen, the firm must consider disclosure, contractual obligations, and reputation management in addition to restoration.iii. Social Engineering and “Jamtara-Style” AttacksNot all attacks rely on sophisticated code. Many simply exploit human psychology—authority, urgency, trust, or fear. Indian media and law-enforcement reports show how “Jamtara-style” call-centre frauds and organized cybercrime rings use phone calls, SMS, WhatsApp, and social media to deceive educated professionals. Examples relevant to CA firms include:Callers posing as bank officials or payment-gateway staff seeking OTPs “to reverse a failed transaction” relating to professional fees.Imposters claiming to be from client IT departments asking for VPN or email passwords “to fix an issue.”Attackers impersonating a partner on WhatsApp—using a downloaded profile photo—to ask a team member to urgently buy high-value gift vouchers or transfer funds.Because these attacks bypass technical controls, awareness and verification discipline (for example, calling back on known numbers) are essential defences.iv. Silent Data Exfiltration and Credential TheftWhile ransomware and BEC are visible, many damaging breaches begin with silent data theft. Infostealer malware and keyloggers installed through malicious attachments or cracked software can capture passwords, browser-stored credentials, and even screenshots. Each time a staff member logs into a tax portal, internet banking, or a cloud accounting system, their credentials may be sent to a remote command-and-control server.Over weeks or months, attackers may accumulate working papers, client lists, and authentication data without triggering obvious alarms. The first sign might be a client’s bank account being misused, tax refunds diverted, or confidential financials appearing in a competitor’s hands.v. Insider and Third-Party RisksInsider risks cover a spectrum—from deliberate theft of client lists by departing staff to well-meaning employees forwarding sensitive data to personal email for “working from home.” In firms with weak access controls, a junior staff member might have wide-ranging read access to multiple clients’ folders, increasing impact if their account is misused.Third-party risks arise when firms use outsourced book-keeping teams, freelance staff, or external IT vendors who have access to systems and data. Compromise of a remote-desktop solution, an unmanaged device used by an outsourced accountant, or lax security at an IT vendor can create a breach path into an otherwise well-controlled firm.Professional, Legal and Ethical Dimensionsi. Confidentiality, Due Care and the ICAI Code of EthicsThe ICAI Code of Ethics requires members to maintain the confidentiality of information acquired as a result of professional and business relationships and not to disclose such information without proper authority unless there is a legal or professional duty to do so. This obligation implies not only avoiding intentional disclosure but also exercising reasonable care to prevent unauthorized access.If a firm stores tax returns and financials on unencrypted laptops with shared passwords or uses free file-sharing platforms without access control, it may be difficult to argue that “reasonable care” was exercised when a breach occurs.In some fact patterns, a serious, preventable cyber incident could raise questions around professional competence and due diligence, particularly where clients suffer direct loss.ii. IT Law, Contracts and Client ExpectationsIndian law also expects “reasonable security practices.” The Information Technology Act, together with its rules on sensitive personal data and subsequent data-protection developments, impose obligations on entities that process financial and personal information to implement appropriate security controls.Separately, clients—especially banks, NBFCs, listed companies, and multinationals—are increasingly embedding data-protection and breach-notification clauses in engagement letters and vendor contracts. These may require CA firms to:Protect data using specified security standards.Restrict sub-processing or offshore storage.Notify clients within a defined time-frame if a breach affecting their data occurs.Failure to comply can lead to termination of engagement, claims for damages, and reputational escalation within the client group.iii. Cyber Insurance – Help, not a PanaceaCyber-insurance products for SMEs and professional firms have grown in India, offering coverage for forensics, legal expenses, incident response, extortion support, and sometimes business interruption. However, insurers generally impose minimum security baselines and may deny or limit claims if the insured has ignored basic controls, misrepresented its posture, or failed to patch known critical vulnerabilities.For CA firms, insurance should be viewed as a risk-transfer tool after foundational controls are in place. It may be particularly relevant where clients or foreign group entities expect evidence of financial resilience in case of cyber incidents.A Practical Cybersecurity Framework for CA FirmsFor readers, the most valuable discussion is “What exactly should a firm do?” The following framework is designed for small and mid-sized firms that may not have a dedicated Chief Information Security Officer (CISO) but can invest in disciplined practices and appropriate external support.i. Governance and PolicyCybersecurity must start with governance, not gadgets. Partners should:Explicitly assign responsibility for information security—either to a partner or a small committee—while retaining overall accountability.Maintain a simple risk register listing key digital assets (email, cloud drives, tax and audit tools, practice-management systems), main threats, and existing controls.Adopt a concise written Information Security Policy that covers acceptable use of devices, password rules, handling of client credentials, remote-work conditions, and incident reporting.The policy need not be lengthy, but it should be communicated, revisited annually, and supported by training and enforcement.ii. Identity and Access ManagementIdentity is the new perimeter. Some practical steps:Implement MFA for firm email accounts, cloud storage, practice-management tools, and VPN or remote-desktop access. Most mainstream platforms now support MFA at no extra cost.Avoid shared logins for staff; where a shared mailbox is needed (e.g., info@), use named accounts with delegated access.Apply the principle of least privilege: staff should have access only to clients and folders required for their engagements, and access should be promptly revoked when roles change or employment ends.Periodic (for example, quarterly) reviews of user accounts, especially for leavers and external vendors, reduce “orphaned” access that attackers can exploit.iii. Endpoint and Network SecurityBecause staff often work from multiple locations, firm devices must be hardened:Standardise on licensed operating systems and applications, with automatic patching turned on for OS, browsers, and office suites. Critical accounting and tax tools should be monitored for updates as vendors release security fixes.Install reputable endpoint-protection software (antivirus/EDR) and configure regular scans, web-filtering, and blocking of known malicious domains.Enable full-disk encryption on laptops and portable devices; enforce screen-lock and inactivity timeouts. Lost or stolen devices without encryption are a major breach vector.On networks:Use business-grade routers where possible; change default passwords and update firmware.Segment guest Wi-Fi from internal networks at the office.Require VPN connections when accessing firm resources from outside. Even simple, commercial VPN solutions can significantly improve security over open Wi-Fi.iv. Data Classification, Encryption and HandlingNot all data requires the same level of protection. A simple classification scheme—such as public, internal, confidential, and highly confidential—helps align controls with risk. For example:Public: published articles, marketing material.Internal: HR policies, general internal communication.Confidential: normal client working papers, tax computations.Highly confidential: draft financials of listed entities, M&A deals, investigation reports, board papers.For confidential and highly confidential data:Use secure sharing platforms with access control and, where possible, watermarking and download restrictions. Avoid sending large volumes of sensitive data as unencrypted email attachments.Ensure encryption in transit (HTTPS/TLS) is in place for portals and sharing tools; for very sensitive items, use password-protected archives shared through separate channels.Put clear rules around copying firm data to personal devices or external USB drives and consider technical controls to restrict or log such actions.v. Backup, Business Continuity and Incident ResponseBackups are the last line of defence against ransomware and accidental deletion. For CA firms, they should be non-negotiable. Recommended practices include:Follow the 3-2-1 rule: keep three copies of data, on two different media, with one copy offsite or in immutable cloud storage.Automate backups for critical file shares, cloud drives, and practice-management databases, and test restoration regularly to ensure that backups are not only present but usable.Define which systems are most critical (for example, audit files, tax working papers, emails) and set realistic Recovery Time Objectives (how fast they must be restored) and Recovery Point Objectives (how much data loss in hours or days is tolerable).An Incident Response Plan, even a simple two-page document, should outline:Who to inform first when suspicious activity is noticed.Immediate steps to contain impact (disconnecting devices, resetting passwords, preserving logs).External contacts—IT vendor, cyber forensic support, legal advisor, and, where relevant, client contact points and law-enforcement portals such as the National Cyber Crime Reporting Portal.Practising this plan through a tabletop exercise once a year can significantly improve response effectiveness.The Human Firewall: People, Culture and TrainingMany high-profile cyber incidents ultimately trace back to human action—clicking a malicious link, using a weak password, forwarding data insecurely, or ignoring early warning signs. For CA firms, investing in people and culture often yields the highest return on effort. Effective measures include:Periodic awareness sessions held every few months, focusing on real-world cases such as recent tax-related phishing scams or “Jamtara-style” frauds, instead of generic theoretical content.Simulated phishing exercises, where staff receive mock phishing emails and immediate feedback, to build pattern recognition.Clear “dos and don’ts” documented in a simple user guide: how to verify unexpected payment requests, what to do if you suspect malware, and which channels to use for sharing different types of data.Firms should encourage a no-blame reporting culture. Staff should feel safe admitting that they clicked a suspicious link or shared data incorrectly, so the firm can respond quickly and limit damage. Punitive reactions or ridicule discourage reporting and allow incidents to escalate.Vendors, Cloud, and the Wider Ecosystemi. Managing IT Vendors and SaaS ToolsGiven that many firms rely on cloud-based accounting, practice-management, document-sharing, and backup tools, vendor risk must be actively managed. Practical steps include:Reviewing contracts to ensure they address data security, sub-processors, data-location (where information is stored), and incident-notification timelines.Asking SaaS providers for evidence of security posture, such as ISO 27001 certification or SOC 2 reports, where appropriate for the firm’s risk level and client expectations.Limiting and periodically reviewing access granted to external IT support staff; terminating access when projects end, or vendors change.ii. Learning from Professional and Peer NetworksProfessional forums and peer networks are increasingly addressing themes such as cybercrime, digital practice, and technology risks through articles, webinars, and study-circle discussions. Engaging with this ecosystem enables firms to:Benchmark their preparedness against peers.Learn from anonymised case studies of incidents and near-misses.Access curated resources, sample policies, and checklists developed by practitioners with IT-risk expertise.As attacks continue to evolve, staying connected to such professional communities helps firms avoid learning “the hard way” through their own breaches.From Compliance Burden to Competitive AdvantageMany firms still view cybersecurity as a regulatory or client-driven burden—something to be handled minimally to “tick the box.” However, there is an emerging opportunity to reposition strong information security as a differentiator.Clients, particularly sophisticated corporates and international groups, increasingly ask how their data will be protected and may favour advisors who can articulate a clear posture. Firms with demonstrable controls—documented policies, MFA, tested backups, staff training, and incident-response readiness—are better placed to win and retain high-sensitivity mandates such as forensic assignments, insolvency, internal investigations, and transaction support.For readers building mid-sized practices, including a brief, plain-language description of the firm’s security approach in proposals and on websites can reinforce a message of trust and professionalism, provided it accurately reflects practice. Cyber-resilience then becomes not just a shield against loss, but a positive attribute of the firm’s brand.The Digital Personal Data Protection Act, 2023 (DPDP Act)The Digital Personal Data Protection Act, 2023 (DPDP Act), enacted on August 11, 2023, establishes India’s first comprehensive framework for safeguarding digital personal data while balancing individual privacy rights with legitimate data processing needs of businesses and government entities. It defines key roles such as Data Principals (individuals whose data is processed), Data Fiduciaries (entities controlling data), and Significant Data Fiduciaries (those handling large volumes or sensitive data), mandating consent-based processing—free, specific, informed, and unconditional—or legitimate uses, alongside obligations like data security, breach notifications, and grievance redressal.The Act establishes the Data Protection Board of India to enforce compliance, monitor breaches, and impose penalties up to ₹250 crore, with exemptions for personal/domestic use and public data, and restrictions on cross-border transfers to notified countries. Special protections apply to children’s data, prohibiting tracking or targeted advertising without verifiable parental consent.The Digital Personal Data Protection (DPDP) Rules, 2025The Digital Personal Data Protection (DPDP) Rules, 2025 explain how the DPDP Act, 2023 has to be followed in day-to-day practice. They were issued in November 2025 and laid down simple rules on how to take consent, what basic security measures to use (like access control, encryption, logs, and backups), and how quickly data breaches must be reported to both affected individuals and the Data Protection Board. For CA and audit firms, these Rules mean clearer expectations that firms should have written procedures, control over their IT vendors, and evidence that they are using reasonable security practices for client data.Cybersecurity Asset Management for CA FirmsCybersecurity asset management is, at its core, about knowing exactly what technology your CA firm uses and how it is protected. This means keeping a live, structured list of all laptops, desktops, servers, Wi-Fi routers, mobile phones, cloud applications, e-filing portals, and the locations where client tax, audit, and finance data are stored. Each of these assets is a potential entry point for an attacker, so having this visibility allows the firm to see which systems are critical, which ones are outdated, and where basic safeguards—like patches, antivirus, encryption, or access controls—are missing.In practical terms, firms can tag important assets (for example, folders containing working papers of listed entities or shared drives with PAN/Aadhaar details) as “high-risk,” and then ensure they are monitored more closely, updated promptly, and accessed only by authorised users. The same inventory helps identify “forgotten” machines, shadow IT tools, or unmanaged home devices that often become weak spots in ransomware or data-breach incidents, especially in remote and hybrid work models.For small and mid-sized practices that do not have a full-time Chief Information Security Officer (CISO), building basic discipline around asset management—clearly assigning ownership for key systems, scheduling simple quarterly reviews, and using modest automation to detect new or unpatched devices—offers a very practical way to demonstrate “reasonable security practices” under IT and data-protection laws. At the same time, it materially improves the firm’s ability to prevent, detect, and respond to cyber incidents, thereby protecting client data and supporting long-term trust in the practice.Conclusion: Building a Cyber-Resilient ProfessionThe profession’s social licence ultimately rests on trust—trust that CAs will handle financial and personal information with integrity, competence, and care. In a digital and remote-first world, that trust now extends to the robustness of firms’ cybersecurity practices.For CA firms across India, cyber threats are inevitable—the real question is whether they are prepared when they strike. By elevating cyber risk to a core practice-management priority, embedding it firmly in governance, and fortifying technical and human defences, firms can master the digital landscape with unshakeable confidence.For CA firms, cybersecurity goes far beyond IT spend—it is the essential base on which professional excellence and long-term resilience of the practice truly rest.♦ ♦ ♦ReferencesMinistry of Electronics and Information Technology (MeitY). The Digital Personal Data Protection Act, 2023.meity.gov.inPress Information Bureau (PIB). DPDP Rules, 2025 Notified (14 November 2025).pib.gov.inPRS Legislative Research. The Digital Personal Data Protection Bill, 2023 (Updated January 2026).prsindia.orgInstitute of Chartered Accountants of India (ICAI). Code of Ethics 2019.nagpuricai.orgMinistry of Electronics and Information Technology. Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011.dataguidance.comTanium. What is Cybersecurity Asset Management (CSAM)? (April 2025).tanium.comLansweeper. How Cybersecurity Asset Management Enhances Your Security (August 2025).lansweeper.comICAI. Cybersecurity & Data Privacy in GCCs (GCC Summit Presentation, June 2025).gcc.icai.orgAuthor may be reached at: peeyushsharmaca@gmail.com and eboard@icai.inThe Chartered Accountant · May 2026 · www.icai.org
Technology
Ep. 26 — Tax Automation: A Strategic Guide to Getting It Right
CA Journal
· June 2026
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Tax Automation: A Strategic Guide to Getting It RightAs multinational businesses face mounting complexity from cross-border operations and digital compliance mandates such as e-invoicing and e-audits, manual tax management is no longer sustainable. This guide walks through why automation has become essential, how to define its scope, what to look for when evaluating vendors, where AI fits into the picture, and the pitfalls that can derail a project.Why Manual Tax Processes No Longer WorkGlobal companies juggle a wide range of obligations — cross-border transactions, foreign registrations, drop shipments — across jurisdictions that each have their own rules. Staying compliant means tracking constantly shifting tax laws and rates while also keeping up with digital reporting mandates that tax authorities are rolling out worldwide. Trying to manage all of this by hand has become unrealistic, which is why connecting ERP systems to a dependable automated tax engine has shifted from a nice-to-have to a core requirement.A properly built automation layer reduces manual effort, applies rate and rule updates automatically, keeps a detailed audit trail, and lowers the chance of costly errors or penalties. That said, choosing and rolling out the wrong system can be an expensive, time-consuming mistake — so the selection process deserves real rigor.What "Tax Automation" Actually CoversAt its core, tax automation is simply the use of technology to make tax work faster, more accurate, and more consistent. It rests on four connected pillars, all tied back to an organization's broader tax strategy:Automated Tax CalculationAutomated Reporting & ReconciliationStandardized Tax ProcessesStronger Overall ComplianceTax Strategy & PlanningAutomation doesn't have to be all-or-nothing. Some organizations automate only specific pieces — calculation or reporting, for example — while leaving other functions manual. Others go further and automate nearly everything. How far a company goes depends entirely on its own tax strategy and risk appetite, which is why defining clear objectives up front is the necessary first step.The Business Case for AutomationKeeping pace with digital mandates: Governments increasingly require e-invoicing, e-reporting, e-verification, and e-audit capabilities, which are nearly impossible to satisfy manually.Staying current automatically: Vendors update tax rates and rules in real time, removing the burden of manual tracking.Standardizing across geographies: A consistent process across teams, systems, and countries reduces training overhead and improves accuracy.Faster, cleaner reporting: High-volume data can be reconciled and reported quickly, supporting timely filings and audit readiness.Supporting outsourced and shared-service models: Automation lets centralized teams without deep local tax expertise still operate compliantly.Scaling with growth: Built-in global rule sets make it easier to enter new markets without rebuilding tax processes from scratch.Freeing up the tax team: Less time on repetitive tasks means more capacity for planning, advisory work, and process improvement."Automation isn't just about buying a tool — it's about understanding the objective and scope of tax automation, then choosing the solution that actually fits the organization."Defining the Scope Before You ShopOnce the "why" is clear, the next question is "how much." Several factors typically shape that decision:Regulatory obligations: Mandatory digital requirements in certain countries often force the issue.Jurisdictional coverage: Many companies start with complex tax jurisdictions like the US, Canada, India, and Brazil before expanding globally.Source systems in scope: ERP and non-ERP platforms (SAP, Oracle, Ariba, Coupa, CRM tools, etc.) that generate taxable transactions need to be clearly mapped.Depth of functionality: Calculation, reporting, analytics, and intelligence features vary significantly between vendors.Organizational structure: Centralized teams and shared service centers generally benefit most from heavier automation.Cost versus capability: Since tax is a cost center, budget constraints often have to be balanced against best-in-class functionality.Evaluating and Selecting a VendorWith objectives and scope defined, the next step is shortlisting and stress-testing candidate tools. A few evaluation criteria matter most:CriterionWhat to CheckSystem integrationSeamless connection to core source systems like SAP or Oracle is non-negotiable — weak integration should disqualify a vendor outright.Total cost of ownershipUpfront implementation cost plus ongoing licensing, support, and maintenance fees.Vendor track recordClient references, reviews, and documented success stories.Out-of-the-box fitTools requiring heavy customization for baseline scenarios are usually a poor match.Data readinessWhether the tool can handle data cleansing and work well with existing source data.Implementation effortRealistic timeline, complexity, and internal resourcing required.Support quality24/7, locally available support, validated through references.Coverage & complianceSupport for all relevant tax types (VAT, GST, sales & use tax) across federal, state, and local levels, with real-time rate updates.Reporting depthReal-time, intelligent reporting — and ideally tax-return preparation support.SecurityStrong data protection given how sensitive tax data is.UsabilityAn interface simple enough for both tax specialists and non-tax users.AI-Based vs. Rule-Based Tax EnginesTax technology vendors are increasingly layering AI on top of — or in place of — traditional rule-based engines. Two AI capabilities stand out:Smart search: Users can ask questions in plain language and get fast, accurate answers instead of digging through manuals.Smart categorization: AI automatically maps source-system data to the engine's tax categories, removing a traditionally manual mapping step.AI can learn from historical data, cut down on manual configuration, and spot patterns, fraud, or anomalies that rule-based systems would miss. But it comes with real trade-offs: results depend heavily on data quality, decisions can be opaque or biased, and audit trails are harder to produce and defend. Rule-based engines, by contrast, are mature, predictable, and easy to audit — but less adaptive.The most practical path forward for most organizations is a hybrid model: rule-based logic as the operational backbone, with AI applied selectively to areas like analytics where its strengths are most valuable.Where Tax Automation Projects Go WrongCommon Failure PointsPoor data quality: Automation output is only as good as the source data feeding it — "garbage in, garbage out" is the defining risk of these projects.Lack of cross-functional alignment: Tax, IT, Sales, Procurement, and Finance all need to be on the same page early; getting there is often harder than expected.Wrong tool selection: A mismatch with organizational size, complexity, or system landscape drives up cost and timeline.Weak training and change management: Leads to underutilization and resistance from end users.Over- or under-automation without governance: Both extremes raise compliance and audit risk.Neglected ongoing support: Without continued maintenance, calculation accuracy can degrade over time.ConclusionTax automation has moved from optional upgrade to operational necessity for multinational organizations of every size. Done well, it speeds up tax processes, reduces errors, and frees the tax function to focus on strategy rather than routine work — while keeping the organization aligned with shifting global regulations. But success depends on more than picking a popular tool: it requires a clear-eyed view of objectives, scope, data quality, and organizational readiness. Treated as an ongoing journey rather than a one-time purchase, tax automation can deliver lasting compliance, time, and cost benefits.Author contact: eboard@icai.inReferencesGoyal, A. (2025). The Impact of Artificial Intelligence on Taxation: The Role of AI and Key Use Cases. International Journal of Science and Research (IJSR), 14(5), 1213–1220.Deloitte. Tax Transformation Trends 2025. Available at deloitte.com.Deloitte. Tax Transformation Trends 2023. Available at deloitte.com.Originally published in The Chartered Accountant, May 2026, Institute of Chartered Accountants of India (icai.org).
Artificial Intelligence
Ep. 27 — Financing India’s Next Growth Cycle: AI Credit Scoring and the CA’s Role
CA Journal
· June 2026
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Financing India's Next Growth Cycle: AI Credit Scoring and the CA's RoleArtificial Intelligence is reshaping credit scoring in India by moving beyond traditional CIBIL-based assessments toward data-driven, algorithmic decision-making. While these systems improve speed, coverage, and risk sensitivity in lending decisions, they also introduce new challenges related to governance, internal controls, audit assurance, and regulatory compliance. For CAs, the adoption of AI-driven credit scoring has direct implications for audit planning, evaluation of internal controls, regulatory compliance, and the exercise of Professional Skepticism. CAs equipped with AI governance expertise will play a critical role in enabling responsible and inclusive credit practices.As India moves toward its goal of becoming a developed country by 2047, access to formal credit remains a critical enabler of entrepreneurship — essential for job creation, productivity, and sustainable growth. India's development roadmap under Viksit Bharat @2047, supported by Digital India, the Jan Dhan–Aadhaar–Mobile (JAM) trinity, and MSME formalisation programmes, emphasises widening access to institutional finance.Despite this progress, structural gaps persist: over 400 million individuals remain outside the formal credit system due to limited conventional credit histories. Sample survey data shows that 78% of first-generation entrepreneurs access formal credit for the first time, and nearly 75% of MSMEs still depend on informal lenders. Artificial Intelligence is changing this equation — by interpreting digital transactions, alternative data, and behavioural patterns, AI can integrate excluded borrowers into the formal credit ecosystem.Historical Evolution of Credit Scoring SystemsCredit scoring traces its roots to the 1950s, when US lenders began using statistical analysis of repayment behaviour to assign numerical scores and standardize risk assessment. The FICO score, introduced in 1989 by Fair Isaac Corporation, dominates credit assessment worldwide, particularly in the United States.India's formal credit scoring system developed much later. CIBIL (Credit Information Bureau India Limited), established in 2000 and regulated under the Credit Information Companies Regulations Act, 2005, pioneered organized credit assessment in India. The CIBIL score operates on a 300–900 range, with scores above 750 considered excellent. India's credit infrastructure includes four major credit bureaus:TransUnion CIBILExperianEquifax IndiaCRIF High Mark Credit Information ServicesLimitations of the Traditional Credit Scoring SystemTraditional credit scoring relies on historical financial data from banks. Credit bureaus collect repayment and loan records, apply statistical models to assess default risk, generate a numerical score, and lenders use it for approvals and pricing. Over the decades this evolved into sophisticated proprietary algorithms, but the core premise — reliance on past borrowing and repayment records — remains unchanged. Key flaws include:1. Historical Bias and Structural DiscriminationTraditional models favour borrowers with stable, salaried employment and established banking relationships, disadvantaging farmers, start-up entrepreneurs, daily wage earners, and others with non-linear but often reliable income. Because bureaus rely on past formal borrowings, the poor are trapped in a cycle where absence of credit history prevents access to credit, and lack of access prevents creation of history.2. Narrow and Static Assessment FrameworkCurrent systems primarily analyse 10–20 parameters around loan repayment, outstanding debt, and credit utilization — excluding meaningful indicators such as rental payments, utility bills, insurance premiums, digital wallet transactions, and tax payment consistency. This limits innovation in credit products and prevents lenders from identifying genuinely creditworthy individuals.3. Inability to Capture Informal Economic ActivityThe current system is built for formal economies, yet over 80% of India's workforce is in the unorganised sector, contributing around 45% of GDP. Informal entities like chit funds, self-help groups, and local money lenders hold detailed but non-digitised repayment records that reflect borrowers' financial discipline but remain invisible to the formal system — pushing creditworthy small business owners toward higher-interest informal credit.4. Counterintuitive and Arbitrary OutcomesExisting models can penalise prudent behaviour: cash-based money management or early repayment may reduce scores, while multiple loan inquiries for better terms can further harm ratings — discouraging sound financial management.5. Opacity and Lack of ExplainabilityBorrowers see only a numerical score with little insight into the factors behind it, such as repayment timing, credit utilisation, or loan closure. This prevents individuals from improving their credit behaviour or correcting errors, and may conceal bias against those without a formal borrowing history.Traditional vs. AI-Based Credit Scoring: A Comparative ParadigmDimensionTraditional Credit Scoring (e.g., CIBIL)AI-Based Credit ScoringData ScopeNarrow data (10–20 parameters); formal loan & repayment history onlyVast data (thousands of points): digital payments, utilities, behaviourMethodologyStatic, rule-based statistical models on past recordsDynamic machine learning that continuously learns and refines from new dataInclusivityLimited access; excludes "credit-invisible" borrowers without formal historyBroad inclusion; integrates underserved groups (e.g. gig workers) via alternative dataTransparencyOpaque "black box"; numerical score with limited explanationExplainable AI (XAI) providing insight into decision logic (e.g. SHAP)AssessmentRetrospective snapshot; looks backward at historical performanceReal-time and predictive; monitors current signals to forecast future riskKey AI Technologies in Credit Risk AssessmentAI is breaking away from rigid, history-bound models to create systems that are dynamic, data-rich, and inclusive by design, drawing on continuous learning across real-time digital-economy signals.1. Machine Learning-Based Risk ModellingSupervised ML models — Logistic Regression, Decision Trees, Gradient Boosting — evaluate thousands of borrower variables (income, repayment history, transaction frequency) to estimate default probability, refining accuracy as new data arrives. This allows lenders to approve credit for first-time borrowers and small entrepreneurs lacking a formal bureau record. Kotak Mahindra Bank, for instance, deployed a Perfios credit-assessment and fraud-analytics pipeline that materially reduced manual effort in statement analysis and fraud checks.2. Natural Language Processing (NLP) and Conversational AINLP extracts insights from unstructured text such as customer feedback and financial reports. AI-powered OCR reads forms (even handwritten), detects tampering, and extracts borrower data automatically, reducing manual effort and speeding underwriting. Emerging use cases include sentiment analysis of applicant responses, while conversational AI agents improve financial literacy and provide pre- and post-loan support.3. AutoML and No-Code AI PlatformsAutoML automates data preparation, feature selection, model building, and validation — letting credit and finance teams use AI without deep technical skills. Indian banks such as Axis Bank use cloud AutoML tools like Google Vertex AI to test credit-risk models faster, making strong controls and CA oversight more important than ever.4. Explainable AI (XAI) and Model Governance ToolsRBI's FREE-AI framework emphasises that AI-based credit decisions should be understandable by design, supported by documentation rather than operating as opaque black boxes. Tools like SHAP (SHapley Additive Explanations) and LIME (Local Interpretable Model-Agnostic Explanations) help human reviewers, including auditors, understand the reasons behind automated decisions — SHAP shows how each factor affects the overall score, while LIME explains individual decisions.5. Behavioural and Anomaly Detection SystemsUnsupervised ML identifies deviations from historical norms — sudden withdrawals, inconsistent deposits, missed payments — enabling dynamic risk-score adjustments and early intervention. Citibank's "Customer 360" system, for example, combines bureau data with lifestyle and transaction analytics, feeding behavioural signals into a Decision Management System that dynamically reassigns risk bands and pricing tiers."AI-driven credit models now shape credit decisions, portfolio risk, and Expected Credit Loss (ECL) outcomes at scale. This shifts the Auditor's role from reviewing individual loan files to applying Professional Skepticism over data governance, model governance, explainability, and management reliance on automated outputs."RBI's FREE-AI: Framework for Responsible and Ethical Enablement of AIRBI's FREE-AI is India's first principle-based governance framework for AI adoption in financial services, guiding responsible and trustworthy use of AI from credit underwriting to fraud detection. It is built on seven guiding "Sutras":1. Trust is the FoundationBuilding public confidence in AI systems.2. People FirstEnsuring human oversight and accountability.3. Innovation Over RestraintEncouraging responsible experimentation.4. Fairness and EquityAvoiding bias and discrimination.5. AccountabilityAssigning clear responsibility for AI decisions.6. Understandable by DesignMaking AI transparent and explainable.7. Safety, Resilience & SustainabilityEnsuring long-term reliability and adaptability.Auditing the Algorithm: Internal Controls, Governance, and Professional SkepticismAs AI-driven credit models increasingly shape decisions, portfolio risk, and ECL outcomes, the auditor's role shifts from reviewing individual loan files toward Professional Skepticism over data governance, model governance, explainability, and management reliance on automated outputs.1. Audit Considerations for Data Usage and ConsentAI-based credit scoring uses vast amounts of sensitive personal and behavioural data, including financial transactions, tax records, and digital footprints — making compliance with the Digital Personal Data Protection (DPDP) Act, 2023 integral to audit. Auditors should evaluate controls ensuring purpose limitation, consent validity, and lawful use of data.Auditor Checks for AI-Enabled Credit Processes1Lawful PurposeVerify each data category has a documented, lawful credit-risk purpose consistent with policy and disclosures.2Informed ConsentExamine consent records for informed, specific permission to use data for AI assessment.3Prevent ReuseEvaluate controls ensuring data isn't reused for cross-selling or other analysis without consent.4Retention & DeletionReview automated deletion/anonymisation once purpose is fulfilled or consent withdrawn.5Breach ResponseReview breach detection and response for timely identification, escalation, and notification.2. Model Drift and OverfittingAI credit models are built on historical data and can deteriorate as conditions change — for example, models trained in low-rate environments may underestimate risk as rates rise or borrower cash flows weaken, particularly in MSME or unsecured retail portfolios. Outdated models risk delaying recognition of credit deterioration and understating provisions. Auditors should review independent model validation, compare predictions with actual default experience, test stressed scenarios, confirm intervention thresholds, and benchmark against challenger models.3. Explainability and TransparencyWhere models operate as black boxes, management may struggle to justify approvals, rejections, or risk classifications, creating litigation and compliance risk, and limiting the audit evidence available to support provisioning judgments. Auditors should confirm explainability tools and standardised reason codes are embedded in the process, review system-generated explanations for selected decisions, test consistency against policy thresholds, and perform "decision replay" using archived model versions to verify traceability and audit trail.4. AI-Driven ECL Measurement and Financial Statement ImpactUnder RBI's mandated Expected Credit Loss (ECL) approach, AI models influence default risk assessment, early warning signals, and forward-looking assumptions. Weak governance can delay migration of stressed accounts, understating provisions. Auditors should link model results to ECL assumptions, run sensitivity analysis on default rates, recovery assumptions, and macro variables, compare outcomes against historical stress periods, and assess management overlays for known model limitations.5. Governance, Accountability, and Vendor DependenceHeavy reliance on third-party vendors for AI credit models can create a "responsibility gap" if decision logic and data practices remain vendor-controlled. Auditors should assess board-approved AI policies and outsourcing contracts, verify contractual rights to vendor documentation, validation summaries, change notifications, and incident disclosures, and confirm critical vendor models are recorded in the model inventory and risk register.Case Study: Strategic Integration of AI in Credit Risk Management — JP Morgan Chase1. Transforming Traditional Credit Assessment ChallengesJP Morgan Chase replaced slow manual processes and static scoring with dynamic machine learning models, analysing financial histories alongside alternative sources like online behaviour and transaction patterns to build comprehensive borrower profiles — reducing defaults, accelerating approvals, and extending credit access to underserved segments.2. Key AI-Driven Operational EnhancementsAI uncovers patterns traditional methods overlook, supports predictive risk modelling using diverse variables, enables real-time application processing, and continuously refines accuracy amid market shifts. The firm's COiN (Contract Intelligence) tool reviews around 12,000 credit agreements in seconds, saving an estimated 360,000+ annual hours while flagging default clauses and risks.3. Primary Risks Introduced by AI SystemsModels trained on historical data may unintentionally replicate past patterns, leading to biased outcomes such as repeatedly flagging certain transaction types without adequate context. Complex decision logic can be difficult to interpret, limiting management's ability to explain outcomes to regulators or customers, and heavy automation can amplify errors during volatile markets. Greater reliance on sensitive data also raises privacy risk.4. Effective Risk Mitigation and Governance StrategiesRegular model validation and retraining help reduce bias and keep models relevant. Explainability tools and documented decision logic support transparency and regulatory review. Critical decisions retain human oversight, especially during abnormal market movements, and robust data-governance controls, access restrictions, and monitoring safeguard data integrity.ConclusionThe adoption of AI in India's credit ecosystem is not a question of if, but how responsibly it can be scaled. Long-term progress will depend less on sophisticated algorithms alone and more on data infrastructure, robustness of internal controls, model validation, and ethical oversight.In this evolving landscape, Chartered Accountants emerge as critical custodians of trust. The CA's role extends beyond traditional financial audits into auditing algorithms, validating model governance, challenging automated judgments through Professional Skepticism, and ensuring that AI-driven credit decisions translate into reliable financial reporting and prudent ECL recognition.AI should be seen as an enhancement to risk judgment, not a replacement for it. Those who build expertise in AI governance, audit of automated systems, and ethical assurance will not only safeguard the integrity of India's financial system but also define the future relevance of the profession itself.ReferencesTransUnion CIBIL's Latest CMI Report, 26 March 2025 — newsroom.transunioncibil.comThe Economic Times, 25 July 2025 — economictimes.indiatimes.comAnnual Report, Periodic Labour Force Survey 2017-18 — mospi.gov.inPress Information Bureau, Government of India, 2025 — pib.gov.inJPMorgan Chase & Co. Annual Report — reports.jpmorganchase.comDigitalDefynd, 2026 — 13 Ways JP Morgan Is Using AI: In-Depth Case Study — digitaldefynd.comRBI, 2025 — FREE-AI Report — rbidocs.rbi.org.inNITI Aayog, 2021 — Responsible AI — niti.gov.inDPDP Act, 2023 — meity.gov.inIIBF, 2024 — Algorithmic Brilliance: Unveiling the Power of AI in Credit — iibf.org.inAuthor may be reached at prathamshah807@gmail.com and eboard@icai.inSource: The Chartered Accountant, May 2026, pp. 95–101 · www.icai.org
Firms
Ep. 28 — Why CA Firms and Sole Proprietors are Increasingly Moving Towards Collaboration
CA Journal
· June 2026
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Why CA Firms and Sole Proprietors are Increasingly Moving Towards CollaborationAs aptly stated by the late Mr. Ratan Tata, “If you want to walk fast, walk alone. But if you want to walk far, walk together.”This philosophy holds particular relevance for the Chartered Accountancy profession in today's rapidly evolving economic and technological environment. In an era dominated by social media influence, instant outcomes, and technology-driven impatience, professional quality and ethical standards often face erosion. Against this backdrop, Chartered Accountants must introspect on a fundamental question: Is our professional growth driven solely by individual economic gains, or by collective ethical responsibility and long-term institutional strength?Moving from a sole proprietorship to a collaborative firm is like a solo musician joining a symphony orchestra. While the solo musician has total control over their instrument, they can never produce the volume, complexity, or "impact" of a full orchestra. By agreeing to a shared "conductor" (leader) and "sheet music" (MoUs and documentation), the individual's talent is amplified rather than lost, allowing them to perform on much larger stages.Beyond Sole Proprietorship: A Broader Professional PerspectiveChartered Accountants today are no longer confined to local geographies or limited clientele. With strong ethical foundations, deep technical knowledge, and access to advanced technologies such as AI and digital platforms, CAs now possess the capability to operate at national and global levels.However, sole proprietors, particularly in smaller cities, often face inherent limitations: restricted resources, limited manpower, difficulty in handling complex matters before government authorities, tribunals, and courts, and challenges in scaling operations. While independence has its merits, professional isolation can restrict growth, confidence, and impact.Collaboration through partnerships, networks, alliances, LLPs, or structured MoUs enables pooling of diverse skill sets, risk-sharing, and stronger institutional credibility, qualities increasingly demanded by regulators, corporates, and government bodies.The First Step Towards CollaborationCollaboration need not begin with an immediate merger or formal partnership. A practical and low-risk approach is the formation of a task force of like-minded Chartered Accountants working on specific assignments under a well-drafted Memorandum of Understanding (MOU). Such arrangements help build trust, establish transparent fee-sharing mechanisms, leverage technology, and test long-term compatibility before moving towards deeper institutional integration.Strategic Roadmap for CollaborationThe shift from a "small shopkeeper" mentality to a global practitioner requires a phased approach.Phase 1: Project-Based Synergy — Form a task force of like-minded CAs to work on specific projects, testing trust and fee-sharing through MOUs before committing to full mergers.Phase 2: Skill-Based Integration — Combine subject matter experts with those possessing leadership, marketing, and fee recovery skills.Phase 3: Multi-Disciplinary Expansion — Form Networking, Mergers, or LLPs to build the capacity required to handle MNCs and large government institutions.Practical Challenges Faced by Sole Proprietors in Smaller CitiesIn practice, sole proprietors and small firms often face:Pressure from clients to compromise on complianceDelayed or disputed fee recoveriesLimited bargaining power even with mid-sized businessesLack of respect for professional independenceUnifying ethical and quality-conscious professionals allows them to command dignity, ensure compliance discipline, and eliminate under-pricing pressures, particularly in semi-urban and rural markets."Collaboration through partnerships, networks, alliances, LLPs, or structured MoUs enables pooling of diverse skill sets, risk-sharing, and stronger institutional credibility, qualities increasingly demanded by regulators, corporates, and government bodies."Professionalism over Mere BrotherhoodBuilding larger firms should be rooted in professionalism rather than fraternity alone. True collaboration requires commitment, accountability, and active participation. While ICAI has consistently promoted capacity building through seminars and continuing professional education, collaboration flourishes only when professionals engage beyond formal attendance.Handling Large Corporates, MNCs, and Government AssignmentsIt is increasingly impractical for a sole proprietor to independently service large corporations, multinational entities, or government institutions. Such engagements demand:Multidisciplinary ExpertiseStrong Internal ControlsRobust Reporting MechanismsScalability and ContinuityCollaborative and multi-disciplinary firms are better positioned to meet these expectations, thereby contributing to national GDP, reducing corporate fraud, and improving governance standards.Changing the Mindset: From Individual Survival to Collective ImpactWhen we expand our thinking beyond individual gain and view our actions through the lens of national and global governance, what is truly right and sustainable, we may initially face resistance. As independent professionals, our intent can be misunderstood, and standing by principles may appear costly in the short term. However, history shows that integrity-led choices compound over time.Collaboration ultimately reinforces the dignity and value of the Chartered Accountant designation earned through years of rigorous effort.Overcoming Liaisoning and Communication Barriers through the Power of Complementary Skill SetsMany professionals face limitations in liaising, communicating, and executing Government contracts and audits when operating individually or as small firms. Structured collaboration among Chartered Accountants through MOUs, networking arrangements, or mergers enables collective capability building, allowing firms to overcome scale, access, and operational constraints.When domain experts are integrated with professionals possessing leadership maturity, those skilled in people management, process design, marketing, and fee recovery, the combined entity becomes capable of executing large and complex assignments for both the government and corporate sectors. Such collaboration transforms individual competence into institutional strength.A collaborative model also fosters an accountability-driven culture, where roles are clearly defined, responsibilities are shared, and outcomes are owned collectively. This minimizes dependency on individuals, strengthens governance, and builds credibility with Government authorities and large organizations.The combination of technical experts with professionals skilled in leadership, people management, marketing, and fee recovery creates a balanced and resilient firm structure. Such synergy enables handling complex assignments across corporate and government sectors without compromising quality or ethics.Role of Government and National LeadershipThe vision of building globally competitive Indian CA firms articulated even at the highest levels of national leadership requires policy-level support. Fear of loss of individuality, confidentiality, and ethical dilution must be addressed through robust legal frameworks, governance structures, and institutional safeguards.Documentation, Leadership, and Ethical SafeguardsIntegrity before expansion — A large firm without moral unity risks collapse due to the actions of even one individual.Collective accountability — Reputation is fragile; professionals are deeply conscious of ethical failure and public trust.Purpose over manipulation — Organizations founded on tax evasion or legal misuse cannot contribute to national growth.Reputation as a shared asset — Safeguarding credibility must be embedded in the organizational framework.Holistic development — Along with work–life balance, spiritual and ethical grounding is essential to build responsibility, sensitivity, and long-term trust within members.While documentation is essential, the true challenge lies in preserving integrity, unity, and accountability. Hence, leadership with vision, ethical strength, and holistic understanding is indispensable.Spiritual and ethical sensitization alongside technical training must form an integral part of institutional development to safeguard reputational capital.Strengthening Communication Within the ProfessionProfessional rivalry in small cities, similar qualifications causing reluctance to share, fear of client data leakage, and ethical limits on case discussions. It needs to create secure peer forums and mentorship networks; promote recognition for transparent, ethical work; and adopt encrypted digital platforms and clear confidentiality protocols.CAs advise and report, but cannot enforce tax payments, client misunderstandings, and pressure from authorities during economic downturns. However, transparent communication and mutual respect are essential to break professional silos. Government support at departmental and ministerial levels is crucial to uphold the dignity and independence of the profession.Centralized Remuneration and Sustainable GrowthAs Dr. A.P.J. Abdul Kalam rightly observed, "Chartered Accountants are partners in nation-building."Chartered Accountants are trained to apply professional scepticism and analytical rigor, which makes it difficult to conceal material information when engagements are conducted properly. The profession has the capability to identify inconsistencies and address risks, including potential fraud. However, the effectiveness of this role is closely linked to appropriate fee structures and institutional support.Experience shows that arrangements such as centralized payment of audit fees, as seen in bank branch statutory audits, help ensure independence, consistency, and timely remuneration. In practice, especially in smaller towns, payment certainty often determines prioritization of work. While authorities cannot regulate every business interaction, they can strengthen the professional framework by ensuring clear engagement terms, adequate remuneration, and operational support. This would eliminate undue pressure, reduce early-career struggles, and discourage unethical compromises.Learning from Established Collaborative Models Where Collaboration Works BeautifullySeveral large public sector audits are conducted jointly by multiple Chartered Accountant firms. A review of such audit reports indicates that a significant number of Government Public Sector Undertakings (PSUs) are audited by Indian accounting firms. These entities are substantial in scale and complexity, requiring the combined capacity, expertise, and infrastructure of more than one firm. Joint audits facilitate effective distribution of work, sectoral specialization, risk sharing, and collective responsibility, thereby strengthening the overall audit process."Joint audits facilitate effective distribution of work, sectoral specialization, risk sharing, and collective responsibility, thereby strengthening the overall audit process."This approach demonstrates that when firms collaborate or combine their professional strengths, PSUs can provide substantial and sustained professional engagements. Such collaborative models enhance institutional capacity, promote knowledge sharing, and enable Indian firms to successfully manage large-scale and technically complex assignments. They also reflect the growing capability of the profession to deliver high-quality assurance services for significant public sector entities. Overall, these arrangements underscore how strategic cooperation among firms can support efficient execution, maintain audit quality, and build confidence in the governance and financial reporting framework of major public sector organizations.The large Indian audit firms, either individually or jointly, are engaged in the statutory audit of major corporate entities. Such entities typically have extensive domestic and international operations, and their annual reports highlight the role of prominent accounting firms in statutory audits and financial reporting processes. These instances provide a factual perspective on the involvement of large audit firms in overseeing the financial reporting and compliance functions of significant Indian corporates. They reflect the established practice of engaging experienced firms for complex and large-scale assignments, thereby reinforcing the importance of professional expertise, capacity, and structured audit mechanisms in maintaining transparency and accountability within major business organizations.It is also observed that several accounting firms that have established over the past 10–15 years may have limited public visibility or online recognition. Despite this, many such firms are engaged in substantial and technically demanding assignments. They operate at deeper functional levels and address matters through a skill-based and domain-driven approach within government bodies, public sector undertakings, and large corporate organizations.Alongside these engagements, these firms also cater to small and medium-sized enterprises, institutions, and salaried individuals. Their services are delivered through structured methodologies, sound technical expertise, and strict adherence to professional and regulatory standards. Fee arrangements are typically commensurate with the scope and quality of work, without compromising on ethical or professional requirements.This underscores the diversity and depth of the profession, where both established and relatively less visible firms contribute effectively across multiple sectors of the economy.Several homegrown firms have also demonstrated that ethical, skill-based collaboration can build strong national institutions without excessive branding.ConclusionThe evolution of the Chartered Accountancy profession demands a transition from fragmented individual practices to strong, collaborative institutions. By combining resources, expertise, and ethical values, Indian CA firms can confidently compete with global players and make a meaningful contribution to national development. The growing presence of large, well-structured Indian accounting firms shows that meaningful competition with global networks is increasingly possible even without historically dominant brand names. This evolution quietly underscores an important insight for small Chartered Accountant firms, sole proprietors, and individual professionals: in a changing professional landscape, collaboration is no longer optional; it is strategic. By coming together with shared intent, complementary strengths, and long-term vision, Indian CAs can build platforms that are resilient, relevant, and capable of creating impact at every level of the economy. The future of the profession belongs to those who choose to grow collectively rather than individually.ReferencesCompanies Act, 2013 (Section 139 and 141) — mca.gov.in — This section governs the appointment of auditors and specifically allows for Joint Audits, a concept reflected in the multi-firm audits of NTPC and IOC mentioned in the sources.ICAI Networking Guidelines — icai.org — The Guidelines for Networking of Indian CA Firms, 2021, provide the regulatory framework for Networking, Mergers, and Demergers, enabling firms to combine resources while maintaining professional ethics.The Limited Liability Partnership (Amendment) Act (LLP) Act, 2021 — mca.gov.in — Cited as a primary vehicle for collaboration, allowing for a corporate structure with the flexibility of a partnership.ICAI Code of Ethics 2019, 2020 and Revised Edition 2025 — icai.org — Governs professional conduct, confidentiality, and "secrecy of information" mentioned as a barrier to communication.Chartered Accountants (Amendment) Regulations, 2021 on Multi-Disciplinary Firms (MDFs) — icai.org — Supported by recent regulatory shifts allowing CAs to partner with other professionals (like CS or CMA) under specific ICAI guidelines.◆ ◆ ◆Author may be reached at caharsharora@gmail.com and eboard@icai.inThe Chartered Accountant · May 2026
Profession
Ep. 29 — The Audit Story: Charting the Future of Chartered Accountancy in India
CA Journal
· June 2026
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The Audit Story: Charting the Future of Chartered Accountancy in IndiaAs Chartered Accountants, we are custodians of trust. For decades, our profession has been synonymous with statutory audits, balance sheet reviews, and manual ledger reconciliations. We are compliance watchdogs, valued for our ability to ensure adherence to regulations and provide assurance to stakeholders.However, as times have changed, so has the role of the profession. The audit profession, today, is at the intersection of technology, regulation, and client expectations. The traditional image of an auditor, hunched over dusty ledgers, relying on manual sampling, has been replaced by a dynamic, tech-enabled professional who must deliver far more than compliance. Clients are savvier, regulators are more assertive, and businesses demand strategic insights rather than check-the-box reviews.In this environment, survival is not enough. Therefore, a firm must craft and communicate its "audit story."An audit story is not just a record of engagements completed or reports issued. It is the narrative of a firm's professional journey; how it integrates technology, expertise, and foresight to deliver transformative value. It is the story of how a Chartered Accountant moves from being a cost center to a growth partner.In the Indian context, where the profession is under increasing scrutiny from bodies like NFRA, QRB, and ICAI's Disciplinary Committee, our audit story is being written in bold new ways.From Compliance to Growth PartnerIn today's competitive landscape, a firm's reputation is not built solely on its name or longevity. Instead, clients look for speed, transparency, innovation, and strategic insights. A compelling audit story positions us not as compliance officers, but as value creators.The essence of this story lies in three pillars:1. Showcasing a Unique Approach — Demonstrating how we solve problems differently.Example: A manufacturing client faced frequent inventory discrepancies. Instead of traditional checks, we used an audit analytics software to analyze all transactions, identify recurring errors, and suggest process improvements.Result: Inventory discrepancies dropped by 60%, and audit focus shifted to high-risk areas rather than random sampling.2. Enhancing Efficiency and Accuracy — Using modern tools to deliver high-quality audits faster.Example: A mid-sized IT client had 50,000+ quarterly transactions. Using AI-powered risk assessment, we automatically flagged unusual entries and reduced manual verification.Result: Audit cycle time decreased by 30%, accuracy improved, and partners could focus on strategic insights for the client.3. Driving Client Trust and Growth — Creating long-term partnerships that generate repeat business and referrals.Example: A family-run SME initially engaged us only for audits. By implementing interactive dashboards, clients could track performance year-round, and we offered quarterly advisory discussions.Result: The audit became a recurring engagement, advisory fees rose by 40%, and the client relationship evolved into a trusted partnership.For Chartered Accountants in India, this story must also emphasize quality and integrity. With stricter regulatory oversight, audit failures are not merely reputational risks but existential threats. Quality, therefore, is not optional; rather, it is the foundation of growth.Shaping the Future of Audits: Key Tools for CA FirmsThe future of auditing will be shaped not only by our professional judgment but also by how effectively we integrate financial and technological tools. Below are the key strategies and solutions that forward-looking Indian CA Firms are adopting to stay ahead:1. Audit Analytics Software — Moving Beyond SamplingIn the past, sampling was our lifeline. But sampling is inherently limiting. It gives us a slice, not the whole picture. An audit analytics software allows us to test entire populations of data, revealing insights that manual methods could never uncover.Key Benefits:Precision and Accuracy: By analyzing 100% of transactions subject to relevance and audit objectives, anomalies are more easily detected.Fraud Detection: Automated algorithms flag suspicious patterns proactively.Continuous Auditing: Integration with client ERPs (Tally, SAP, Oracle) allows near real-time review, reducing the lag between occurrence and detection of errors.This approach enables the auditor to demonstrate to the client that the entire population of transactions has been subjected to analytical review, rather than relying on limited samples. This significantly enhances the credibility of the audit process and reinforces stakeholder confidence.2. Cloud-Based Practice Management Systems — Collaboration Without BoundariesThe office server of the past is now an anachronism. Cloud-based systems offer secure, scalable platforms for practice management.Advantages:Accessibility: Partners and staff can work seamlessly across geographies.Real-Time Dashboards: Track project progress, billing, and staff allocation instantly.Cost-Effectiveness: Subscription models reduce upfront IT investment, making enterprise-grade tools available even to small firms.Examples in the Indian Context: Zoho Practice, QuickBooks Online, and CA-specific cloud suites tailored for our compliance-heavy environment.3. Workflow Automation — Efficiency at ScaleRepetition kills efficiency. Whether it is sending reminders, generating standard reports, or onboarding clients, automation reduces manual drudgery.Applications:Automated reminders for GST filings or audit confirmations.AI-driven task allocation based on skill and workload.Standardized templates for letters, contracts, and compliance checklists.Impact: Industry surveys suggest automation increases utilization rates by 18–20%, freeing up partners and staff for higher-value advisory work.4. Data Visualization Dashboards — Speaking the Client's LanguageNumbers alone rarely tell a story to non-finance professionals. Tools like Power BI and Tableau transform spreadsheets into interactive dashboards.Advantages:Client Understanding: Clear visuals help clients grasp trends and risks.Strategic Discussions: Meetings shift from compliance reviews to strategy conversations.Differentiation: Firms offering visualization stand apart from those delivering static reports.For SMEs especially, this shift converts audits from a statutory burden into a strategic advantage."An algorithm may flag a transaction as unusual, but only a Chartered Accountant can interpret whether it signals fraud, a control weakness, or simply a one-time business event. Context, professional scepticism, and human judgment are irreplaceable."5. AI-Powered Risk Assessment — Smarter PlanningArtificial Intelligence is no longer futuristic; it's embedded in auditing tools. AI modules analyze historical data and predict risk zones, enabling targeted audit planning.Applications:Predictive analytics highlight transactions warranting scrutiny.Dynamic scoping directs attention to high-risk areas.Automated compliance checks reduce documentation errors.There are tools which are already proving their worth globally, and Indian firms are beginning to follow suit.6. Benchmarking & KPI Tracking — Managing the Firm Like a BusinessAs professionals, we sometimes neglect the fact that our own firm is also a business. Benchmarking tools and KPI dashboards ensure we measure, track, and optimize performance.Key Metrics Include:Realization rates (billed vs. worked hours).Staff productivity and turnaround times.Profitability by service line or client segment.With data-driven insights, partners can make informed decisions on pricing, staffing, and expansion strategies.7. Strategic Pricing Models — From Hours to ValueHourly billing is being replaced by value-based pricing. Clients today want predictability and transparency in fees, while firms want fair compensation for value delivered.Advantages:Aligns client-firm interests.Builds trust by eliminating surprise billing.Improves profitability by preventing under-pricing.Data analytics also allows firms to model scenarios and anticipate scope creep, thereby ensuring sustainable engagements.Building a Future-Ready CA FirmAudit AnalyticsEnhances audit accuracy and efficiency.CloudProvides scalable and secure data storage.AutomationStreamlines repetitive tasks for efficiency.DashboardsOffers real-time insights for decision-making.AIEnables advanced data analysis and predictions.BenchmarkingCompares performance against industry standards.PricingOptimizes pricing strategies for profitability.Case Studies in the Indian ContextStory of a Boutique Firm That Found Its VoiceA boutique CA Firm based in Ahmedabad with ten professionals, felt invisible. Their audit reports were thorough, but clients skimmed them, treating audits as a compliance chore.One day, a client's CEO admitted: "We know audits are necessary, but they don't help us run our business." That comment changed everything.The firm began experimenting with Power BI dashboards. Instead of static audit reports, they delivered interactive visuals, highlighting revenue patterns, anomalies, and benchmark comparisons. For the first time, clients could see their business performance clearly in charts and trends.The response was electric. Clients started requesting quarterly reviews just to discuss the dashboards. What had been a once-a-year audit became an ongoing advisory relationship. Within a year, advisory revenue rose by 40%, all from the existing client base.The story of this firm shifted from that of a compliance provider to a strategic advisor, proving that presentation can be as powerful as analysis.The Small-Town Firm That Scaled Through CollaborationIn Nagpur, a CA Firm with two partners, often lost out on larger clients because they lacked bandwidth and sector expertise. Rather than struggle alone, they embraced ICAI's alliance model, collaborating with another mid-sized firm in Mumbai.Together, they shared resources, co-sourced talent, and presented themselves as a united front for larger audits. Cloud-based tools made collaboration seamless.Within three years, this firm expanded their client portfolio beyond SMEs to include listed entities. They retained their small-town base while projecting national-level credibility. Their story demonstrated that alliances, supported by technology, can level the playing field.Strategic Considerations for AdoptionSimply buying software won't change your audit story. Integration requires:Leadership Buy-In: Technology adoption succeeds only when partners and senior management actively use and champion it. If leadership demonstrates commitment, staff are more likely to embrace change. For example, a partner using a cloud dashboard in client meetings signals that this tool is not optional; it is part of the firm's core workflow.Training: Continuous upskilling ensures the team can maximize the potential of new tools. This can include formal vendor-led sessions, peer-to-peer learning, and refresher workshops. Staff who understand the "why" and "how" of a tool are more efficient and confident, reducing errors and improving adoption.Change Management: Resistance is natural. Communicate the benefits clearly, show quick wins, and recognize early adopters publicly. For instance, acknowledging a staff member who successfully implemented automated reconciliation processes encourages others to follow suit.Compliance: Any tool must align with regulatory standards, such as the ICAI guidance, NFRA expectations, and data documentation requirements. This includes audit trails, retention policies, and secure storage of client data. Ensuring compliance from day one prevents regulatory risk while building client confidence.Challenges & Risk MitigationEvery transformation carries risks. Key challenges include:High Initial Costs: Enterprise-level software, AI tools, and cloud platforms can require significant investment. Firms can mitigate this by phased adoption, starting with high-impact modules first, or by using subscription-based models that reduce upfront capital expenditure. This approach spreads costs and allows measurable ROI before full implementation.Resistance to Change: Some team members may prefer familiar legacy processes. Firms can mitigate this by establishing mentorship programs, gamified learning sessions, and public recognition of staff who successfully implement new tools. Celebrating small wins builds momentum and reduces fear or skepticism.Data Security Risks: Moving sensitive financial data to cloud platforms introduces cybersecurity challenges. Firms should conduct vendor due diligence, ensure end-to-end encryption, implement access controls, and provide ongoing cybersecurity training for staff. Regular third-party audits help ensure client data remains safe and compliant with regulations.Risks of Over-Relying on Automated ToolsTechnology is reshaping audits, but it is not a silver bullet. AI, analytics, and automation can process vast amounts of data and highlight anomalies with speed and precision. Yet, they remain tools, not decision makers. An algorithm may flag a transaction as unusual, but only a Chartered Accountant can interpret whether it signals fraud, a control weakness, or simply a one-time business event. Context, professional scepticism, and human judgment are irreplaceable.The real strength of the audit profession lies in combining technology with expertise. Machines deliver efficiency; humans deliver insight. The future of audits, therefore, is not about replacing people with systems, but about amplifying professional judgment through technology. It is machines plus human expertise that will define the credibility and impact of our work.The Road Ahead — Emerging Trends for CA FirmsThe next decade promises transformative shifts in how audits are conducted and advisory services are delivered. Chartered Accountants who understand these trends will be better positioned to stay relevant and add value.Blockchain Audits: Blockchain provides immutable transaction records, reducing the need for manual verification and audit evidence collection. For firms, this means faster, more reliable audit, with a clear trail for regulators and clients.Next-Gen AI: Beyond risk assessment, AI will draft audit documentation, model fraud scenarios, and suggest areas of focus. This frees auditors to spend more time on professional judgment and client advisory, rather than repetitive tasks.Client Portals: Clients increasingly expect secure, real-time access to documents, dashboards, and audit progress. Well-designed portals strengthen transparency, collaboration, and trust, turning audits into interactive, continuous engagements rather than periodic exercises.ESG Assurance: Regulatory and investor focus on Environmental, Social, and Governance metrics is growing. CA Firms that can provide ESG audits, sustainability reporting, and assurance services will have a competitive advantage, especially with businesses seeking ESG-aligned investors.Collaborative Models: ICAI's alliance framework allows small and mid-sized firms to pool resources and expertise, enabling participation in larger, complex audits. Collaboration, supported by cloud tools and standardized processes, allows firms to compete with larger players without losing their identity.The Indian government's push for digital adoption and capacity-building programs further accelerates these trends, making now the ideal time for firms to modernize.Implementation Roadmap1. Obtain Lead Partner ConsentGain approval from leadership to proceed.2. Focus on EssentialsIdentify and prioritize key tools like cloud and analytics.3. Test with One ClientConduct a pilot with a single client to test processes.4. Encourage AdoptionTrain staff and promote tool adoption.5. Expand to More ClientsGradually scale up implementation to more clients.6. Continuous ImprovementPeriodically monitor, refine, and improve processes.ConclusionAs Chartered Accountants, we must remember: our profession is not defined by the past, but by the story we choose to write today.We can continue as compliance officers, bound by checklists and deadlines, or we can seize the moment to become growth partners, trusted advisors, and innovators.By embracing audit analytics, workflow automation, cloud management, AI-driven insights, and value-based pricing, we can transform not only our firms, but also the businesses we serve. The journey is not without hurdles — investment, training, and cybersecurity risks are real. But they are surmountable. With deliberate strategy and courage to adapt, our audit stories will not just be about survival but about leadership in a rapidly evolving market.Therefore, the journey toward digital transformation must be ambitious, but it cannot be reckless. Regulatory scrutiny, data confidentiality, and client trust demand that firms adopt technology responsibly. Speed should never come at the cost of integrity, and automation should never overshadow professional judgment. By embracing innovation with caution and balance, Chartered Accountants can ensure that technology enhances, rather than undermines, the profession's credibility.Author may be reached at caharshalisalvi@gmail.com and eboard@icai.in
Theme
Ep. 30 — Application Systems in Business: Risks, Controls, and the Auditor’s Evolving Role
CA Journal
· June 2026
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Application Systems in Business: Risks, Controls, and the Auditor's Evolving RoleHow Chartered Accountants can navigate risks in new and modified transaction processing systemsDigital transformation has redefined modern business, with application systems such as ERP, CRM, RPA, and AI platforms moving from support functions to the backbone of operations, transactions, and reporting. While these systems enhance efficiency and scalability, they also introduce risks in cybersecurity, compliance, financial reporting, and change management. Chartered Accountants play a critical role in addressing these risks by analysing vulnerabilities, designing robust controls, and validating their effectiveness. Drawing on frameworks like IIA's GTAGs, COBIT, COSO ERM, and ICAI initiatives, this article outlines practical methodologies and highlights emerging trends such as continuous auditing, AI monitoring, and blockchain assurance, positioning CAs as strategic advisors in technology-driven environments.IntroductionOver the past decade, organizations across the globe have accelerated their adoption of technology-driven models. Whether in manufacturing, financial services, retail, healthcare, or logistics, the reliance on application systems has grown exponentially. What was once a matter of operational convenience has now become a business imperative.Today, critical activities, ranging from payroll processing and inventory management to customer engagement and financial reporting, are automated through integrated application systems. These platforms are not only performing transaction processing but also providing advanced decision support through data analytics, predictive modelling, and real-time dashboards.The COVID-19 pandemic further catalyzed this transition. Remote working, online transactions, and digital collaboration tools became essential, and organizations had to adopt or upgrade application systems quickly to ensure continuity. While the benefits were clear, these rapid implementations also introduced unanticipated risks.For Chartered Accountants, this represents both an opportunity and a responsibility. As professionals trusted with ensuring transparency, compliance, and accountability, CAs must not only understand financial controls but also assess and assure the underlying application systems. The ICAI's Digital Accounting and Assurance Board (DAAB) has emphasized that technology-enabled assurance is now central to the CA's role.The Rise of Application Systems in Modern BusinessThe shift from manual processes to technology-enabled operations is not new. However, the scale, complexity, and pace of change in application systems have reached unprecedented levels.1. Enterprise Integration through ERP and CRMSystems such as SAP, Oracle NetSuite, and Salesforce unify core functions such as finance, procurement, HR, and customer management into integrated platforms. This reduces duplication, accelerates decision-making, and provides holistic visibility.Example. A manufacturing enterprise integrates its supply chain into its ERP, ensuring real-time inventory updates. While this reduces stock-outs, a minor misconfiguration could halt production across multiple plants.2. Emergence of Robotic Process Automation (RPA)Bots automate repetitive, rule-based tasks such as invoice matching or compliance reporting.While efficient, improper configuration can result in large-scale processing errors.3. Artificial Intelligence and Machine LearningPredictive analytics and anomaly detection applications are increasingly embedded in finance, fraud detection, and forecasting.However, algorithms may carry inherent bias or lack transparency, posing audit challenges.4. Cloud Computing and Software-as-a-Service (SaaS)Cloud applications lower costs and improve scalability.Yet, they raise unique issues around data security, vendor dependency, and regulatory compliance across jurisdictions.5. Mobile Applications and APIs as Enablers of Digital TransformationDigital transformation is reimagining business models, processes, and customer engagement through technology, with mobile applications as a key interface for customers and employees.APIs are secure channels that allow apps to communicate with core systems like ERP, CRM, payment gateways, and cloud platforms in real time, enabling seamless transactions and data updates.Mobile applications bring services directly to customers and employees, but their effectiveness relies on APIs — a banking app, for example, uses APIs to fetch balances, process transactions, and update customer records instantly.This integration requires auditors to assess API security, reliability, and integrity, as weaknesses could compromise both mobile and enterprise systems.How data exchange works in API-to-API communication. API-to-API communication enables automated, structured, and secure data exchange between independent applications. Systems authenticate using tokens, API keys, or OAuth, exchange data in formats like JSON or XML, and may use middleware for compatibility. While APIs improve efficiency, weak authentication, undocumented endpoints, or lack of monitoring pose risks, making control evaluation critical to maintaining data confidentiality, integrity, and availability.6. Blockchain ApplicationsDistributed ledgers are transforming trade finance, supply chain traceability, and audit trails.Adoption is promising but immature, creating uncertainty around controls and governance.Case in point. In the banking sector, transaction processing applications handle millions of daily records — any misconfiguration could lead to erroneous interest calculations, impacting both financial results and customer trust. In e-commerce, a malfunctioning payment gateway could disrupt thousands of transactions per second, causing not only revenue loss but also reputational fallout.Risks in New or Modified Transaction Processing SystemsThe IIA's GTAG 3: Managing and Auditing IT Vulnerabilities emphasizes that changes in IT environments invariably introduce vulnerabilities. The following risk categories are particularly relevant to application systems:01Operational RisksSystem downtime in critical industries (stock exchanges, hospitals)Data integrity errors during migrations or upgradesInadequate documentation of processes02Cybersecurity RisksExternal attacks: ransomware, denial-of-service, phishingInsider threats, including privilege abuseThird-party integrations expand the attack surface03Compliance & Regulatory RisksGlobal regulations (GDPR, India's DPDP Act)Automated systems must ensure audit trailsInability to demonstrate compliance04Financial Reporting RisksAutomated journal entries, revenue recognition, reconciliationsErrors can bypass manual review05Change Management RisksFrequent patches, upgrades, and modificationsWeak governance may allow unauthorized changes·Net effectAll five categories interact at the centre of cybersecurity risk and feed enterprise-level exposure.Risk Analysis Frameworks for ProfessionalsCAs and internal auditors must anchor their risk assessments in structured methodologies.IIA GTAG SeriesGTAG 1 (Information Technology Controls) provides the foundation for assessing general and application controls; GTAG 3 (Managing and Auditing IT Vulnerabilities) is specific to application changes and new systems; GTAG 11 (Developing the IT Audit Plan) integrates IT risks into enterprise-wide assurance.COBITProvides governance and management objectives, ensuring alignment between IT processes and business goals, and helps auditors assess the maturity of IT processes.COSO ERMEncourages risk-based thinking and integration of IT risks into enterprise-level decision making, aligning risk appetite with business objectives.NIST Cybersecurity FrameworkUseful for addressing the cybersecurity dimensions of application risks across five functions: Identify, Protect, Detect, Respond, Recover.Practical Methodology for CAsRisk identification — gather inputs from IT teams, process owners, and regulatory requirements.Risk assessment — evaluate likelihood and impact (financial, reputational, operational).Risk prioritization — focus on high-risk areas such as transaction accuracy, system security, and data confidentiality.Control mapping — link each risk to existing or proposed controls.Ongoing monitoring — establish continuous feedback loops.Designing and Implementing Application ControlsEffective risk management hinges on designing controls that are theoretically sound and embedded seamlessly into day-to-day operations. Application controls act as the first line of defense against data inaccuracies, fraud, and operational inefficiencies. Broadly, they fall into five categories.1. Preventive Controls stop errors before they occurProactive measures ensuring that only valid, authorized, and accurate transactions enter the system — input validation, role-based access controls (RBAC), and encryption / password policies.Example. In a banking application, input validation prevents account opening forms from being submitted without mandatory KYC details, while RBAC ensures account creation and loan approvals are handled by separate personnel.2. Detective Controls identify after the factOperate after a transaction has been processed, aiming to identify anomalies, errors, or unauthorized activities — exception reports, audit trails and log monitoring, and reconciliation reports.Example. In an e-commerce platform, exception reports highlight orders shipped without payment confirmation; audit logs trace who overrode the control and when.3. Corrective Controls restore stabilityMechanisms that restore systems to a stable state after an error or incident — backup and disaster recovery plans, incident response procedures, and rollback mechanisms.Example. During an ERP migration, rollback mechanisms allowed a manufacturing company to revert to the old database when errors were discovered in batch inventory uploads.4. IT General Controls (ITGCs) the foundational layerSupport the reliability of all application controls — change management, logical access controls, and the system development life cycle (SDLC).Example. Inadequate change management once caused an Indian FMCG company's ERP system to miscalculate inventory valuation after an update; post-incident, stricter ITGCs required multi-stage approvals before changes went live.5. Application-Specific Controls input · processing · outputInput controls govern the accuracy and completeness of data entry; processing controls cover system calculations and batch totals; output controls govern distribution of reports to authorized users only.Collaboration between CAs and IT TeamsDesigning and implementing controls is not solely a technology exercise. CAs bring knowledge of business risks, statutory compliance, and financial integrity; IT teams provide expertise in system logic, architecture, and technical feasibility. To be effective, controls must be documented in process maps and control matrices, implemented through ERP configuration, scripts, or workflow rules, tested periodically for operating effectiveness, and monitored continuously with exception alerts and management dashboards.Testing and Validating ControlsDesigning controls is only the first step. The true measure of reliability lies in testing whether controls are not only implemented but operating effectively over time — a requirement underscored by audit standards such as ISA 315 and ICAI's Standards on Auditing.Method 01Walkthroughs and ObservationAuditors trace a sample transaction from initiation to completion, observing how inputs, authorizations, processing, and outputs are managed. This provides contextual understanding of process design and identifies control gaps early.Example. In an ERP environment, auditors may track a purchase order from creation through vendor approval, goods receipt, and payment disbursement, confirming segregation of duties.Method 02Re-performanceThe auditor independently re-executes a control procedure to verify it operates as intended, providing stronger assurance than relying on management representations alone.Example. An auditor recalculates system-generated depreciation for a class of assets to validate that ERP logic matches accounting policy and statutory requirements.Method 03Data AnalyticsTools such as IDEA, ACL, Power BI, and Python scripts analyze entire transaction populations rather than samples, increasing coverage and improving anomaly detection.Example. In payroll audits, data analytics quickly flag duplicate bank account numbers, ghost employees, or abnormal overtime payments.Method 04Continuous AuditingAutomated scripts embedded within ERP or external monitoring systems run predefined rules and alert auditors in near real time, reducing the lag between risk occurrence and detection.Example. A retail organization scanned supplier master data daily and flagged duplicate bank accounts linked to multiple vendors, uncovering potential fraud before payments were made.Method 05Control Effectiveness ReviewsBeyond individual controls, auditors assess whether the overall control environment addresses key risks holistically, whether redundancies exist, and whether management actively monitors remediation.Example. An ITGC review might assess whether user access reviews are consistently performed across all critical applications, not just sampled for one module.Method 06Integration of Manual and Automated TestingWhere manual and automated controls coexist, auditors must assess the interaction between the two — automated configuration and logic accuracy on one side, manual oversight of exception reports on the other.Example. In a treasury system, automated limits may prevent over-exposure in foreign exchange contracts, but management review of exception reports ensures breaches are properly investigated.Best Practices for ProfessionalsRisk-based approach — prioritize testing of controls that mitigate high-impact risks.Use of CAATs — leverage scripts, queries, and software to test at scale.Documentation — maintain clear working papers of procedures performed, exceptions noted, and evidence collected.Follow-up — complement testing with recommendations and validation of corrective actions.Integration with internal audit — coordinate to avoid duplication and improve coverage.Emerging Trends & Future DirectionsAI and Machine Learning in AuditingAutomated anomaly detection reduces manual sampling.Predictive analytics highlight emerging risks before they materialize.Blockchain for TransparencyImmutable ledgers reduce reconciliation needs.Smart contracts enforce controls automatically.Continuous Monitoring as a NormMoving from periodic testing to real-time dashboards.Integration with enterprise risk management systems.Skill Transformation for CAsProficiency in IT risk management, cybersecurity, and data analytics is no longer optional.ICAI's DAAB initiatives provide structured pathways for capability building.ConclusionThe increased involvement of application systems in business is not merely a technological shift but a transformation in how organizations operate, compete, and manage risks. While these systems promise efficiency, accuracy, and scalability, they simultaneously magnify the consequences of failure.For Chartered Accountants, this represents both a challenge and an opportunity. By adopting frameworks from IIA, ISACA, NIST, and ICAI, CAs can step beyond compliance to become strategic partners in ensuring resilient, risk-aware businesses. Designing and testing controls in evolving application landscapes is no longer a specialized IT function — it is a core assurance responsibility.In essence, the profession must embrace a dual role: enabling innovation while safeguarding integrity. As custodians of trust in financial and business systems, Chartered Accountants stand at the intersection of technology and assurance, shaping the future of reliable business in the digital age.ReferencesThe Institute of Internal Auditors (IIA). GTAG 1: Information Technology Controls.The Institute of Internal Auditors (IIA). GTAG 3: Managing and Auditing IT Vulnerabilities.The Institute of Internal Auditors (IIA). GTAG 11: Developing the IT Audit Plan.ISACA. COBIT Framework for Governance and Management of Enterprise IT.Committee of Sponsoring Organizations of the Treadway Commission (COSO). Enterprise Risk Management — Integrating with Strategy and Performance.National Institute of Standards and Technology (NIST). Cybersecurity Framework.ICAI Digital Accounting and Assurance Board (DAAB). Publications and Guidance Notes.Industry whitepapers on ERP, RPA, and AI applications (Deloitte, PwC, EY, KPMG).CA. Richa Thapa, Member of the Institute, may be reached at richathapa18@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · APRIL 2026 · WWW.ICAI.ORG
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Ep. 31 — Accounting Theories in the Digital Era: Progress and Paradigm Shifts
CA Journal
· June 2026
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Accounting Theories in the Digital Era: Progress and Paradigm ShiftsDigital accounting has revolutionised the accounting profession by integrating emerging technologies such as artificial intelligence, cloud computing and blockchain technology. This transformation has enhanced the accuracy, speed, communication and transparency of financial reporting. The article analyses how emerging technologies support and modify major accounting theories — stakeholders, legitimacy, signalling, and user satisfaction theories — by improving communication, transparency, reporting quality and decision-making, while also raising concerns about privacy, security and bias.IntroductionTraditionally, accounting and auditing functions were more reliant on manual methods and human expertise. However, with the advent of technology and Artificial Intelligence (AI), these tasks have witnessed a paradigm shift. Accountants and other professionals have shifted their attention towards enhancing accounting and auditing practices through digital technologies, resulting in greater effectiveness, timely audit of financial statements, improvement in department performance, reduction in audit task burden, improvement in productivity, better risk evaluation and fraud identification, and improved audit report quality. However, adoption of digital technologies also brings various complexities and challenges.Al Wael et al.'s (2023) study explained resource limitations, organisational resistance, insufficient understanding of digital technologies, and ethical and regulatory concerns as barriers to adoption. Security issues in cloud environments, compatibility with existing standards, trust issues and data privacy were other challenges highlighted in prior research. These risks can reduce stakeholder confidence, disrupt organisations, and violate regulatory directives.In light of economic, regulatory and technological developments, accounting theories have also witnessed a paradigm shift. Emerging tools like AI, blockchain, and big data are helping develop new accounting theories that better address today's complex environment, marking the beginning of a new era of digital accounting.The Digital Accounting and Assurance Board (DAAB) is an important part of the Institute of Chartered Accountants of India's (ICAI) mission to integrate emerging technologies into accounting and auditing practices. DAAB provides technical guidance and conducts webinars to help professionals navigate digital assurance and auditing complexities, aiming to improve audit efficiency through better use of digital audit evidence.ObjectivesTo understand the evolution and concept of digital accounting.To explore the development of accounting principles and practices in the digital era.To explain the role of technology in the development of modern accounting theories.To propose new accounting theories suitable for the digital era.To examine challenges faced by accountants in adopting emerging technologies.Evolution and Concept of Digital AccountingTo remain competitive in today's digitalised world, accountants must adopt digital accounting. Several scholars have defined the concept in complementary ways:Deshmukh (2006): digital accounting is a computer system or software designed and programmed to be customized for recording transactions and generating financial statements for further analysis.Lehner et al. (2019) regarded it as a common language among accounting professionals, while Ahmed et al. (2019) describe it as the use of digital technologies and information systems for recording, analysing and reporting financial transactions within organisations.i. Conceptual Model of Digitalisation in Accounting (DIA)Zhang et al. (2022) proposed a conceptual model of DIA built around four components:a) Firm CharacteristicsFirms face pressures such as cost control, demand for higher transparency, work efficiency and competitive advantage, compelling them to adopt digital technologies.b) Executive CharacteristicsLeaders' and managers' aspiration levels and strategic intent play a significant role in digital transformation. Belief in the value of digitalisation increases the likelihood of successful transformation.c) Organisational CapabilitiesOrdinary Capabilities: help firms control costs and maintain technical business efficiency.Dynamic Capabilities: involve adapting quickly to change, building new routines, and innovating based on accumulated knowledge and learning.d) Digitalisation in Business ProcessesArchitectural Knowledge: understanding how technology systems fit together as a whole.Component Knowledge: the ability to use and manage individual technologies, such as specific software tools.ii. The Digital Competency Maturity Model (DCMM) Version 2.0ICAI has released a detailed model to encourage adoption of emerging technologies such as AI and blockchain among accounting firms and professionals. It assesses digital competency across automation of internal processes (attendance, documentation, communication, data security), availability of qualified accountants, level of automation in audit/tax/accounting/management consulting services, and integration of emerging technologies. A structured questionnaire helps firms identify strengths and gaps to plan their digital adaptation.Evolution of Accounting TheoriesEraPeriodKey DevelopmentsEarly 20th Century1900s–1920sAccounting mainly practical, focused on record keeping with minimal theoretical basis.Traditional Paradigm1920s–1950sAccounting emerged as a formal academic discipline; stewardship and historical cost principles established; Paton & Littleton introduced matching principle and revenue concept.Behavioural Paradigm1950s–1970sFocus on objectivity and verifiability; principles-based accounting emphasising consistency and compliance; human decision-making emphasised by Anthony (1965) and Kaplan (1977).Normative Paradigm1970s–1980sRoss (1977) framed accounting as a normative discipline aimed at economic efficiency; introduction of agency theory examining principal-agent relationships.Empirical Paradigm1980s–1990sRise of empirical, evidence-based research; formal standard-setting bodies (FASB, IASB) developed; Freeman (1984) advanced stakeholder-centric theory.Role of Emerging Technologies in the Development of Accounting Theories (1990s–Present)Accounting today is viewed as a social and political construct centred on social justice, transparency and sustainability. Barth (2006) emphasised Fair Value Accounting (FVA), shifting focus from historical cost to market value. This phase saw the increased role of accounting information systems and technology.An Accounting Information System (AIS) helps organisations gather, store, manage, process and report financial data. Romney and Steinbart (2020) describe an AIS as comprising people, procedures, data, software, IT infrastructure and internal controls. Technology like AIS automates routine tasks, improves accuracy, and enables advanced data analysis — encouraging a shift from historical cost toward fair value accounting and non-financial reporting such as ESG and stakeholder-centric disclosures. While automation improves efficiency, developing economies still face adoption challenges due to infrastructure and skill gaps.Proposed Accounting Theories in the Digital EraDigital Signalling TheoryBuilding on Spence's (1973) traditional signalling theory, which explains how firms use financial data to reduce information asymmetry with stakeholders, digital tools like cloud computing and big data make these signals faster and more effective. While an abundance of signals can create confusion or mislead, digital technology also improves transparency and verification, making this theory relevant in the modern era.Digital Stakeholders Engagement TheoryExtending Freeman's (1984) stakeholder theory, digital platforms now let stakeholders express demands rapidly, increasing corporate openness, transparency, sustainability and governance. AI and big data help companies better understand and respond to diverse stakeholder needs.Digital User Satisfaction TheoryBuilding on DeLone and McLean's (2003) Information System Success Model, which focuses on usability, functionality and relevance, technologies like AI, blockchain and cloud computing enhance user satisfaction through automation, cost reduction and real-time reporting.Digital Legitimacy TheorySuchman's (1995) legitimacy theory explains how organisations follow societal rules and norms through reporting and social responsibility. Online platforms now make this interaction faster and more transparent, enabling real-time accountability and elevating the importance of reputation and ethical behaviour.Momentum Theory of Digitalisation in Accounting (DIA)Zhang et al. (2022) compare digital transformation to water flowing from high hills (firm and executive characteristics) through sluice gates (organisational capabilities) into the ocean (digitalisation in accounting). Organisations' willingness to allocate resources and their organisational capabilities determine how successfully they adapt, with digitalisation in accounting representing the consolidated output of this flow.Challenges Faced by Accountants in Adopting Emerging TechnologiesTraditional accounting ethics — objectivity, confidentiality, professional competence and due care — require expansion as digitisation transforms core professional responsibilities.1. Accountants' AutonomyExcessive reliance on digital tools can reduce critical thinking and decision-making, leading to biased or misleading outcomes and raising accountability concerns.2. PrivacyAI and IoT technologies raise concerns around unauthorised access, confidentiality breaches and complex consent agreements, while also enabling employers to monitor staff activity.3. DehumanisationEulerich et al. (2023) describe dehumanisation as occurring when professionals are sidelined or replaced by automation, risking loss of judgement, empathy, isolation and job dissatisfaction.4. Technological ComplexitiesDwivedi et al. (2021) highlight the "black box problem" — the inability of auditors to explain or document an AI tool's decision-making process. Yang et al. (2024) add biases and computability issues as further barriers.5. Need for Continuous LearningRegular training and skill upgradation are essential; reluctance to learn new technology risks accountants being displaced by data scientists.6. Cyber Security ThreatsDigital accounting systems are inherently vulnerable. Common risks include:Breach of data: unauthorised access leading to theft and reputational harm.Ransomware: malicious software encrypting data and demanding ransom.Phishing: manipulating employees to disclose confidential information or install malware.Spoofing: attackers creating falsely authorised identities to access data.ConclusionIn view of rapid technological advancements, accounting theories have undergone significant transformation to integrate with the digital world. Digital technologies like AI, blockchain and cloud computing have reshaped signalling, legitimacy, stakeholder and user satisfaction theories — enhancing transparency, accountability and efficiency through reduced cost, real-time reporting and immediate communication.Despite these advantages, digital technologies raise concerns about privacy, autonomy, technological complexity, cybersecurity and bias. A May 2024 survey-based report by the AI Committee at ICAI found that AI adoption in India remains in its early stages with considerable growth potential, with diverse adoption levels and budget constraints limiting use in auditing. This points to the need for advanced theories that integrate ethics and governance tailored to digital complexities.The Committee for Members in Practice (CMP) under ICAI has tie-ups with software and technology providers to offer discounted access to audit and accounting tools for practising Chartered Accountants. ICAI has also launched AI certificate courses (AICA Level 1 and 2), with Level 2 covering advanced prompting techniques and practical AI applications in finance, auditing, compliance and analytics through a 5-day hybrid format carrying 30 CPE hours.More workshops, seminars, webinars and awareness programmes should therefore be organised by ICAI to promote acceptance and adoption of emerging technologies and theories in accounting and audit practices.ReferencesAhmed, S., Smith, J., & Chen, L. (2019). The role of digital technologies in transforming accounting practices. Journal of Accounting Research, 57(2), 345–378.Al Wael, H., Abdallah, W., Ghura, H., & Buallay, A. (2023). Factors influencing artificial intelligence adoption in the accounting profession: the case of public sector in Kuwait. Competitiveness Review: An International Business Journal, 34(1), 3–27.Barth, M. E. (2006). Fair value accounting: Evidence from investment securities and the market valuation of banks. The Accounting Review, 81(1), 1–25.DeLone, W. H., & McLean, E. R. (2003). The DeLone and McLean model of information systems success: A ten-year update. Journal of Management Information Systems, 19(4), 9–30.Deshmukh, A. (2006). Digital Accounting: The Effects of the Internet and ERP on Accounting. USA: IGI Global.Dwivedi, Y. K., et al. (2021). Artificial Intelligence (AI): Multidisciplinary perspectives on emerging challenges, opportunities, and agenda for research, practice and policy. International Journal of Information Management, 57, 101994.Eulerich, M., Wagener, M., Waddoups, N., & Wood, D.A. (2023). The dark side of robotic process automation. Accounting Horizons, 38(1), 1–10.Lehner, O., Leitner-Hanetseder, S., & Eisl, C. (2019). The whatness of digital accounting: status quo and ways to move forward. ACRN Journal of Finance and Risk Perspectives, 8(2), I–V.Yang, J., Blount, Y., & Amrollahi, A. (2024). Artificial intelligence adoption in a professional service industry: A multiple case study. Technological Forecasting and Social Change, 201, 123251.Zhang, M., Ye, T., & Jia, L. (2022). Implications of the "momentum" theory of digitalization in accounting: Evidence from Ash Cloud. China Journal of Accounting Research, 15(4), 100274.Authors may be reached at garimahgc13@gmail.com and eboard@icai.inThe Chartered Accountant · April 2026 · www.icai.org
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Ep. 32 — Cybersecurity Audit Framework: Essential Toolkit for Modern Auditors
CA Journal
· June 2026
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Cybersecurity Audit Framework: Essential Toolkit for Modern AuditorsRBI Cyber Framework SEBI CSCRF ISO 27001 NIST 800-53 SOC 2Indian businesses face escalating cyber threats, and regulators demand robust cybersecurity audits. This article serves as a practical toolkit for auditors, especially Chartered Accountants, to navigate complex frameworks — the RBI's cyber resilience requirements, SEBI's Cybersecurity and Cyber Resilience Framework (CSCRF), and global standards such as ISO 27001, NIST 800-53, and SOC 2. It structures audits around twelve core domains, each with example controls auditors can use to deliver actionable insights and strengthen cyber defences.Introduction: Cybersecurity as a Governance ImperativeCyber-attacks on Indian organisations have highlighted the need for strong cyber governance. In 2018, a co-operative bank in Pune lost ₹94 crore (≈US$13 million) after malware was used to compromise its payment system. Another incident saw 4.5 million airline passengers' data exposed after the carrier's IT vendor was hacked. These breaches prompted regulators to strengthen oversight. The RBI expanded its cyber framework to include detailed annexures specifying baseline controls, SOC requirements, and incident reporting templates. SEBI introduced the CSCRF to ensure cyber resilience across all financial-market entities. Chartered Accountants and internal auditors must therefore broaden their role from traditional financial oversight to advising on cyber risk, compliance, and resilience.RBI's Cybersecurity Framework: Annexures and Key ControlsThe RBI's cyber security circular (2016) outlines baseline controls for banks and payment operators, expanded through annexures that apply across regulated entities. Compliance requires a board-approved cybersecurity policy and a risk management programme covering prevention, detection, and response.Annex 1: Baseline Cybersecurity and Resilience RequirementsAnnex 1 lists minimum controls that banks must implement. Key areas include:Governance and risk management: Inventory of IT assets, classification of critical information, and periodic risk assessments.Protection and prevention: Secure configuration of hardware and software, network segmentation, encryption of sensitive data, strong authentication, and multi-factor access controls.Monitoring and detection: Centralised logging, continuous security monitoring, and threat intelligence to identify anomalies.Incident response and recovery: Procedures for incident reporting within two to six hours, root-cause analysis, corrective actions, and lessons learned.Vendor management: Due diligence of third parties and the right to audit service providers handling customer data.These controls apply to banks, but similar principles extend to non-bank payment operators via the RBI's 2023 Master Direction on cyber resilience, which emphasises risk assessments, encryption, and digital-payment security.Annex 2: Setting up a Cyber Security Operations Centre (C-SOC)Annex 2 requires banks to establish a Cyber Security Operations Centre (C-SOC) with capabilities for real-time monitoring, behaviour analytics, and incident response. The C-SOC must integrate logs from networks, servers, and applications, analyse them for anomalies, and coordinate responses across the organisation. Banks may operate the SOC in-house or outsource to qualified third parties, but they remain responsible for governance and oversight. Regular drills and evaluations ensure readiness and continuous improvement.Annex 3: Cyber Incident Reporting TemplateAnnex 3 standardises how banks report cyber incidents to the RBI. The template requires details such as the nature of the attack, systems affected, detection time, actions taken, root cause analysis, and measures to prevent recurrence. Banks must report incidents within six hours of discovery, aligning with CERT-In's reporting timelines, and follow up with updates as investigations progress.Third-Party Risk ManagementIn addition to the above, Annex 3 also includes guidelines on third-party risk management. Banks must identify critical vendors, conduct annual security assessments, and include confidentiality, data-protection, and right-to-audit clauses in contracts. Outsourcing cannot absolve banks of responsibility; they must monitor vendor compliance, ensure data localisation, and maintain controls over outsourced SOCs and cloud services.SEBI's Cybersecurity and Cyber Resilience Framework (CSCRF)SEBI released the CSCRF in August 2024 to establish uniform cyber governance across capital markets. It applies to market infrastructure institutions (stock exchanges, clearing corporations), qualified regulated entities (mutual funds, asset managers), and mid-size firms, as well as credit rating agencies, venture funds, and other regulated entities.Core Elements of CSCRFCybersecurity governance: Entities must adopt a board-approved cybersecurity policy, define roles and responsibilities, and implement a cyber risk management framework.Risk assessment and critical system identification: Organisations must classify IT assets, identify critical systems (trading platforms, payment gateways), and conduct periodic risk assessments.Cyber Capability Index (CCI): SEBI uses a numerical score to benchmark cybersecurity readiness. Market infrastructure institutions undergo third-party assessments twice a year, while qualified entities perform annual self-assessments.Security Operations Centre: All entities must establish 24×7 SOCs or use shared market SOCs created by exchanges. SOC efficacy must be reported periodically.Vulnerability Assessment and Penetration Testing (VAPT): Regular VAPT must cover all critical systems and be performed after major updates.Incident response and management: Entities must maintain a documented incident response plan and cyber crisis management plan. Incidents must be reported promptly through SEBI's portal.Data protection and access control: Mandatory encryption (full-disk and file-level) and strict access controls with multi-factor authentication.Backup and disaster recovery: Entities must maintain disaster recovery plans, perform regular backups, and test restoration.Red teaming and continuous improvement: SEBI mandates periodic red-team exercises and ongoing updates to policies and staff training.Compliance reporting and auditing: Entities must submit structured reports to SEBI and undergo regular cybersecurity audits, with adoption deadlines set for January 1, 2025, or April 1, 2025, depending on previous obligations.Why CSCRF MattersThe CSCRF emphasises both cybersecurity and resilience, requiring entities to anticipate, withstand, contain, recover from, and evolve after cyber incidents. By aligning controls to these goals, SEBI aims to ensure market stability and investor confidence. Auditors should evaluate organisations' adherence to the framework, ensuring that policies, SOC operations, data localisation, and vendor management meet SEBI's standards.Global Standards and Best PracticesIndian regulations should be benchmarked against global standards to ensure robust security:ISO/IEC 27001: Provides a structured information security management system, emphasising risk assessment, control implementation, and continual improvement.NIST SP 800-53 and NIST Cybersecurity Framework: Offer detailed control catalogues and a framework of functions (Identify, Protect, Detect, Respond, and Recover) that parallel the SEBI CSCRF goals.SOC 2 (Trust Services Criteria): Evaluates security, availability, processing integrity, confidentiality, and privacy; useful for service providers and technology firms.By mapping Indian requirements to these global frameworks, auditors can identify gaps, adopt international best practices, and prepare organisations operating across borders.Core Cybersecurity Audit Domains & ResponsibilitiesTo deliver a comprehensive cybersecurity audit, auditors should structure their review around the following domains. Each domain includes example controls to guide assessment.1 Governance & PolicyResponsibilitiesVerify the presence of a board-approved cybersecurity policy; evaluate management's oversight and assignment of security roles. Ensure policies align with RBI Annex 1 and SEBI CSCRF.Example controlsFormal information security charter; senior management training; periodic policy reviews; evidence of board minutes approving security strategy.2 Risk Assessment & ManagementResponsibilitiesCheck whether the organisation maintains an inventory of assets, assesses risks regularly, and records mitigation actions. Ensure risk appetite aligns with business objectives.Example controlsEnterprise risk register with cyber entries; documented methodology for evaluating threats and vulnerabilities; integration of cyber risks into overall risk management; evidence of scenario-based testing.3 Asset ManagementResponsibilitiesConfirm up-to-date inventories of hardware, software, data, and third-party services; validate asset classification and protection commensurate with sensitivity.Example controlsAutomated asset discovery; tagging of data and systems; configuration management database; secure asset decommissioning.4 Identity & Access Management (IAM)ResponsibilitiesAssess user provisioning, authentication, and authorization. Check the enforcement of least privilege, multi-factor authentication, and monitoring of privileged accounts.Example controlsRole-based access control matrix; periodic user access reviews; multi-factor authentication for administrators; privileged access management (PAM) solutions; timely revocation of credentials when employees depart.5 Network & System SecurityResponsibilitiesEvaluate network segmentation, firewalls, intrusion detection systems, and endpoint protection. Ensure secure configuration of servers and devices.Example controlsHardened system baselines; segregation of development and production networks; continuous vulnerability scanning; patch management schedules; anti-malware agents with real-time detection.6 Application SecurityResponsibilitiesReview the secure development life cycle (SDLC) and third-party software management. Check for regular vulnerability scans and penetration tests, particularly after major releases.Example controlsSecure coding guidelines; automated static/dynamic code analysis; penetration testing results; controls for open-source component management; change management records.7 Data Protection & PrivacyResponsibilitiesVerify data classification, encryption at rest and in transit, and adherence to data minimisation and retention policies. Assess compliance with India's Digital Personal Data Protection Act and other regulations.Example controlsEncrypted databases and communication channels; data loss prevention tools; backups stored offline; secure disposal processes; privacy impact assessments for new systems.8 Monitoring & LoggingResponsibilitiesEnsure critical systems generate logs that are consolidated and analysed. Logs should be synchronised with accurate time sources and retained in compliance with RBI and SEBI guidelines.Example controlsCentralised security information and event management (SIEM); use of behaviour analytics to flag anomalies; regular log reviews; alignment with Annex 2 SOC requirements; documented retention schedules.9 Incident Response & RecoveryResponsibilitiesReview documented incident response and cyber crisis management plans. Check whether drills are conducted, and evaluate business continuity and disaster recovery capabilities.Example controlsIncident classification matrices; defined communication protocols; evidence of tabletop exercises; off-site backups; alternate processing sites; defined recovery time and recovery point objectives.10 Third-Party & Supply-Chain SecurityResponsibilitiesExamine vendor risk management processes, including due diligence, contract clauses, and monitoring of service providers. Evaluate compliance with SEBI's requirements for supply-chain security (e.g., software bill of materials).Example controlsSupplier risk assessments; third-party security questionnaires; contractual terms covering confidentiality, breach notification, and audit rights; monitoring of outsourced SOC performance.11 Compliance & LegalResponsibilitiesEnsure all applicable laws and regulations (RBI, SEBI, CERT-In, DPDP Act) are identified and that policies and controls align with them. Verify timely submissions of required reports and evidence of regulatory audits.Example controlsCompliance matrix mapping controls to legal requirements; evidence of incident reports to regulators; records of external audit findings and remediation.12 Business Continuity & Disaster Recovery (BC/DR)ResponsibilitiesAssess preparedness to maintain operations during disruptions. Ensure business impact analysis has identified critical functions and that redundancy exists.Example controlsDocumented BC/DR plans; regular disaster recovery drills; geographically separate backup sites; redundancy in power and network infrastructure; communication plans for prolonged outages.Sample Audit Report FormatA well-structured report enhances the usefulness of audit findings:SectionContentExecutive SummarySummarise scope, objectives, key findings, and overall risk assessment for board review.Scope and ObjectivesDefine systems reviewed and compliance frameworks referenced (RBI, SEBI CSCRF, ISO 27001, NIST 800-53).MethodologyDescribe evidence gathered (policy review, interviews, configuration checks, VAPT results). Mention use of automation, analytics, or red-team reports where applicable.Detailed Findings and RecommendationsGroup findings by domain; state condition, cause, and impact; assign severity; propose remediation actions.ConclusionSummarise overall cyber posture and highlight priority recommendations. Provide management with a roadmap for improvement.AppendicesMay include vulnerability scan reports, inventories, or compliance matrices.Sector-Specific PerspectivesWhile core controls remain consistent, different sectors warrant emphasis on certain domains:Banking & FinanceCompliance with RBI's annexures and Master Direction. Scrutinise transaction monitoring, multi-factor authentication, encryption of customer data, and vendor oversight. Strong SOC monitoring and incident reporting are critical.Capital MarketsAdherence to SEBI's CSCRF is paramount. Emphasis on SOC operations, CCI scoring, VAPT after major system releases, and data localisation.Technology & Start-upsRapidly scaling firms often lack mature processes and rely heavily on cloud services. Assess cloud security posture, API security, and developer practices.Government & Public SectorHandles sensitive citizen data and critical infrastructure. Evaluate identity management, network segmentation, incident response readiness, and CERT-In's six-hour reporting rule.Audit-Tech Enablers and Future ConsiderationsAI and analytics: Machine learning can sift through vast log data to detect anomalies. Continuous monitoring solutions such as Cloud Security Posture Management (CSPM) help maintain compliance with CSCRF's SOC requirements.Automation: Scripts can collect evidence (user lists, configuration baselines, patch status) and verify remediations. Integration with Governance, Risk, and Compliance (GRC) platforms streamlines tracking.Penetration testing and red teaming: Regular ethical hacking exercises reveal real-world vulnerabilities. Auditors should review these results and confirm remediation.Looking ahead, threats like ransomware, supply-chain attacks, and privacy breaches will persist. Auditors must encourage resilient controls such as offline backups, vendor oversight, and data encryption. Emerging technologies (AI, quantum computing) will bring both opportunities and risks; staying informed of evolving standards and regulations is critical."By understanding and applying the RBI's annexures, SEBI's CSCRF, and global frameworks, auditors can structure comprehensive reviews across key domains."ConclusionCybersecurity auditing is now integral to corporate governance. For Chartered Accountants and internal auditors, mastering this domain is essential to protect organisations and uphold investor confidence. By understanding and applying the RBI's annexures, SEBI's CSCRF, and global frameworks, auditors can structure comprehensive reviews across key domains. Incorporating example controls and leveraging modern tools ensures audits are thorough, practical, and aligned with regulatory expectations. Continuous learning and adaptation will enable auditors to help organisations anticipate, withstand, contain, and recover from cyber threats, ensuring resilience in an increasingly digital world.Source: The Chartered Accountant, April 2026, Vol. 1277–1282 · Author may be reached at eboard@icai.in
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Ep. 33 — Cloud Strategies for Different Business Sizes: A Decision-Making Matrix for CFOs or/and CIOs
CA Journal
· June 2026
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Cloud Strategies for Different Business Sizes: A Decision-Making Matrix for CFOs and CIOsThis article explores the strategic considerations for cloud adoption in large corporations with regulated protocols versus small-to-medium enterprises (SMEs) with agile protocols. It contrasts the differing needs of these organizations, where large corporations prioritize compliance, security, and integration with legacy systems, while SMEs focus on scalability, cost-effi ciency, and rapid innovation. The article also highlights the collaborative role of the Chief Financial Offi cer (CFO) and Chief Information Offi cer (CIO) in the decision-making process, each bringing a distinct perspective i.e., technology and fi nancial feasibility, respectively. Additionally, the article presents a cloud adoption decision matrix that guides organizations in selecting the right cloud strategy based on factors such as regulatory compliance, cost, scalability, and speed of innovation. This matrix helps align both technical and fi nancial goals to ensure a successful cloud adoption strategy that meets the unique needs of both large enterprises and SMEs.IntroductionAdopting a cloud strategy is not just about technology; it's about future-proofing the business. It provides the foundation for operational efficiency, business agility, innovation, and growth. When choosing a cloud solution for large corporations versus small-to-medium enterprises (SMEs), the decision-making process is shaped by business size, regulatory requirements, flexibility needs, scalability, security, and cost constraints. Both kinds of organization benefit from cloud adoption, but their approaches will differ due to distinct business models, governance protocols, and technological demands.01 Key Differences in NeedsLarge Corporations · Regulated ProtocolsHeavily regulated due to industry standards (healthcare, finance, government) — compliance and security come first.Cloud adoption must be secure, with strong data governance and privacy mechanisms.Large-scale systems that need high availability, strong performance, and integration with complex legacy systems.Common regulations: GDPR, HIPAA, PCI-DSS, SOC 2.SMEs · Agile ProtocolsMore flexible, with fewer legacy systems — able to embrace rapid development and deployment.Prioritize cost-efficiency, scalability, and fast innovation over rigid compliance.Need to respond quickly to changing market demand.Favor lightweight cloud solutions built for speed and simplicity.02 Cloud Adoption Use CasesFor Large Corporations with Regulated ProtocolsFinancial Services — Banking, InsuranceA large financial institution adopts a private or hybrid cloud to meet PCI-DSS and SOX requirements while maintaining strong data security. Encryption, access controls, and audit logging protect customer data, and the environment scales to handle peak transaction volumes.Decision drivers: regulatory compliance, security, infrastructure control, hybrid cloud capability.Healthcare ProvidersA healthcare provider chooses a HIPAA-compliant government cloud offering for hosting electronic health records, relying on encryption, secure communication, and disaster recovery aligned with health data regulation.Decision drivers: HIPAA compliance, secure data transmission, redundancy, disaster recovery, regional data storage.Global RetailersA multinational retailer moves its ERP system to a multi-cloud environment to improve performance across regions while complying with local data protection laws such as GDPR, centralizing inventory and business intelligence.Decision drivers: regulatory requirements, multi-region availability, legacy integration, high availability.For SMEs with Agile ProtocolsSoftware Development StartupsA fast-growing SaaS startup builds a server-less architecture that scales automatically with demand, giving it a flexible environment to iterate quickly while keeping operational overhead low.Decision drivers: flexibility, deployment speed, cost-efficiency, scalability, developer-friendly tooling.E-Commerce CompaniesA mid-sized e-commerce platform runs on a flexible, managed cloud solution that absorbs demand spikes during holidays and promotions, paired with a CI/CD pipeline for frequent feature rollouts.Decision drivers: agility, cost, ease of management, scalability, fast go-to-market.Media and Entertainment FirmsAn SME media producer combines creative-cloud tools with cloud storage for seamless collaboration across globally distributed teams, keeping production costs down.Decision drivers: collaboration tools, cost, quick scaling, rapid development cycles, data accessibility.The cloud environment supports sensitive customer data with encryption, secure access controls, and audit logging — and scales to handle transaction volume while quickly scaling down resources during off-peak periods.03 Decision Analysis: When to Choose What?Regulatory ComplianceBusinesses operating in finance or healthcare need providers with specialized compliance features; private or hybrid clouds usually give more control over data and security. SMEs face fewer regulatory pressures and can rely on public cloud providers' built-in compliance certifications without much overhead.SecurityLarge corporations often need to retain control over encryption keys, enforce strict access controls, and continuously monitor security protocols. SMEs typically lean on cloud-native security features and let the provider carry much of the security management burden.Flexibility and AgilityLarge organizations value flexibility but remain anchored to legacy systems that demand stability — hybrid and multi-cloud strategies usually strike that balance. SMEs prioritize speed, often choosing PaaS or SaaS models to minimize overhead and innovate quickly.ScalabilityLarge corporations need both horizontal scaling across regions and vertical scaling within complex systems, which hybrid clouds support well. SMEs prioritize cost-effective, automatic scaling through server-less options.CostFor large corporations, cost is usually secondary to compliance, performance, and security — though optimization through reserved instances still matters. For SMEs, cost control is central, and pay-as-you-go pricing avoids large upfront investment.04 Risk Assessment: SaaS, IaaS & PaaSCloud adoption means choosing between service models — each with its own risk profile that CFOs and CIOs must weigh together.SaaSData security & complianceProviders control infrastructure, limiting direct oversight — regulated industries must validate GDPR, HIPAA, or SOC 2 alignment.Vendor lock-inCIOs must assess contract and exit terms to avoid dependency on a single provider.Cost managementCFOs must watch subscription pricing and shadow-IT spend outside governance.IaaSOperational riskFull infrastructure control requires skilled teams for patching, scaling, and tuning.Cost vs. performanceCFOs must weigh pay-as-you-go against reserved instances to avoid overruns.Regulatory burdenSensitive data may require multi-cloud or hybrid setups to satisfy regional law.PaaSLimited customizationFaster development comes with dependency on a proprietary platform.Data residencyCIOs must verify data sovereignty, especially for cross-border operations.Exit strategyRapid deployment benefits must be weighed against long-term scalability and lock-in.05 Controls, Policies & ComplianceGovernance & Control FrameworksFrameworks like COBIT and NIST define accountability, policy, and risk thresholds.The shared responsibility model: providers secure infrastructure, organizations remain responsible for data security and access management.CFOs focus on FinOps to optimize cloud spend; CIOs focus on Zero Trust access policies.Compliance by IndustryHealthcare → HIPAA complianceFinance → PCI-DSS for payment securityGlobal enterprises → GDPR for data protectionLarge enterprises often need on-premise and public cloud integration together to satisfy data residency laws across multiple regions.Security & Access ManagementIdentity and access management restricts access on least-privilege principles.Encryption protects data at rest and in transit.Incident response plans align disaster recovery with ISO 27001 standards.06 Who Decides: The CIO, CFO, or Both?Cloud adoption is a strategic decision that touches operations, finance, security, and long-term scalability — which is why, in most large organizations, it involves both the CIO and CFO working together.CIO — Technology PerspectiveTechnology fit: alignment with existing infrastructure and future IT needs.Security & compliance: encryption, access controls, monitoring.Scalability & flexibility: handling growth and supporting CI/CD.Innovation: enabling rapid deployment and DevOps agility.Integration with legacy systems via hybrid or multi-cloud approaches.CFO — Financial PerspectiveCost efficiency & ROI: total cost of ownership versus on-premise infrastructure.Budget impact: how costs distribute over time.Financial risk management: hidden fees, overage charges, outage exposure.Scalability as a financial lever: paying only for what's used.Vendor contract terms: pricing models and flexibility.Collaborative Decision-MakingTogether, the CIO and CFO align on strategic goals, balance new technology against budget reality, define shared success metrics such as ROI and operational efficiency, and jointly mitigate risks — from data security and compliance to vendor lock-in and migration disruption.07 Compact Strategy Guide01Initial AlignmentCIOUnderstands current IT infrastructure and future technical needs.CFOAssesses the financial outlook — cost structures, ROI, budget impact.TogetherEstablish a shared vision: agility, cost efficiency, security.02Vendor SelectionCIOReviews technology stack, compliance features, integration capability.CFOEvaluates pricing models and total cost of ownership.TogetherCompare financial and technical fit across vendors.03Cost-Benefit AnalysisCIOPresents technical benefits — performance, security, flexibility.CFORuns financial analysis — savings, ROI, efficiency.TogetherCalculate TCO and agree on budget allocation.04Risk Assessment and MitigationCIOIdentifies technical risks — migration, vulnerabilities, integration.CFOEvaluates financial risks — hidden costs, lock-in, overages.TogetherBuild mitigation plans and clear vendor contracts.05Execution and MonitoringCIOOversees migration, ensuring technical requirements are met.CFOTracks budget and ROI against projections.TogetherMonitor performance and financial impact, adjusting as needed.08 Decision Matrix for Cloud AdoptionCriteriaLarge Corporations · RegulatedSMEs · AgileRegulatory CompliancePrivate cloud / hybrid cloud / compliance-certified providersPublic cloud with built-in complianceSecurityStrict control over security — private cloud, encryption keysCloud-native security tools and complianceFlexibilityHybrid / multi-cloud for legacy system integrationFull cloud-native environments for agilityCostHigher budget, focus on cost optimization (reserved instances)Cost-efficient — pay-as-you-go, server-lessScalabilityHorizontal & vertical scaling — hybrid, multi-cloudServer-less, auto-scaling solutionsSpeed of InnovationSlower, due to regulatory and legacy constraintsFast development cycles, CI/CD pipelinesBusiness SizeLarge enterprise with complex systemsSmall to medium-sized, dynamic growthConclusionFor large corporations, cloud adoption must address regulatory, security, and integration concerns — often requiring private or hybrid cloud solutions that ensure compliance with strict industry protocols while supporting large-scale operations. For SMEs, cloud strategy should emphasize agility, speed, and cost-efficiency, with public cloud offerings, server-less architectures, or PaaS solutions enabling rapid deployment.Ultimately, the decision hinges on balancing regulatory needs and security for large corporations against agility and cost efficiency for SMEs. The key is aligning cloud strategy with organizational size, industry demands, and operational goals.The CIO and CFO play complementary roles: the CIO brings the technical expertise to evaluate platforms, ensure security, and align technology with business goals, while the CFO ensures the strategy is cost-effective and delivers value. Done right, this partnership lets an organization pursue both innovation and cost-efficiency while minimizing risk.Author may be reached at mail2dipra@gmail.com and eboard@icai.inReferencesAbdula, M., Averdunk, I., Barcia, R., Brown, K., & Emuchay, N. (2018). The cloud adoption playbook: Proven strategies for transforming your organization with the cloud. John Wiley & Sons. ISBN 9781119491811.Amazon Web Services. (2022). Cloud adoption framework: Business perspective. docs.aws.amazon.comForrester Research. (2024). The state of cloud in the U.S., 2024. forrester.comHarvard Business Review. (2016). The CIO's guide to cloud computing. hbr.orgHohpe, G. (2020). Cloud strategy: A decision-based approach to successful cloud migration.IDC. (n.d.). Cloud adoption trends. my.idc.comMcKinsey & Company. (2018). Cloud adoption to accelerate IT modernization. mckinsey.comNational Institute of Standards and Technology. (2011). The NIST definition of cloud computing (NIST SP 800-145). U.S. Department of Commerce.Weinman, J. (2012). Cloudonomics: The business value of cloud computing. John Wiley & Sons. ISBN 9781118286968.Originally published in The Chartered Accountant, April 2026 · www.icai.org
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Ep. 34 — The Power of Automation – Smart Applications, Smarter Firms
CA Journal
· June 2026
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The Power of Automation — Smart Applications, Smarter FirmsChartered Accountancy (CA) fi rms in India have long delivered reliable and trusted services through disciplined processes and time-tested methods. Rooted in professional ethics, strong client relationships, and regulatory expertise, these traditional practices have built the foundation of the profession’s credibility and success. However, in today’s rapidly evolving regulatory and business environment, where speed, accuracy, transparency, and client responsiveness are increasingly important, CA practices must gradually embrace digital transformation. Traditional manual workfl ows often create ineffi ciencies in communication, document management, and compliance tracking. Digital solutions such as client portal web applications and smart task and call management systems can signifi cantly improve operational effi ciency. A client portal enables secure document exchange, real-time compliance tracking, and structured communication with clients, while task and call management tools streamline internal workfl ows and strengthen accountability among team members. This article highlights how web portals, software automation, and smart workfl ow systems can boost productivity, ensure compliance accuracy, and help chartered accountants build more effi cient, scalable, and future-ready professional practices.Client Portal Web App: Strengthening Client Collaboration and Practice EfficiencyIn the dynamic world of professional accounting, Chartered Accountants (CAs) are expected to juggle client coordination, regulatory compliance, data accuracy, and constantly evolving tax laws, all under tight deadlines. Managing scatt ered communication, large volumes of data, stringent compliance timelines, and maintaining service transparency has become increasingly complex. In this demanding environment, manual systems are no longer sufficient. CA practices are facing mounting pressure to modernize their operations and meet rising client expectations. Traditional workflows heavily reliant on emails, physical fi les, and fragmented tools are proving inadequate in today’s fastpaced, digital-first landscape. Th e solution for this is a Client Portal Web Application, which is a secure,cloud-based platform designed to centralize communication, simplify document exchange, automate repetitive tasks, and minimize human errors. It not only optimizes internal effi ciency but also delivers a more seamless and professional client experience. Most importantly, such portals can be custom-developed to align with a chartered accountancy fi rm’s unique workfl ow, service off erings, management style, and scale, making them a powerful asset for transforming how CAs operate, collaborate, and deliver value to their clients.01Understanding the Client Portal Web AppA Client Portal Web App is a cloud-based solution enabling secure, structured interaction between practicing chartered accountants and their clients — replacing scattered messages, endless email threads, and physical paperwork with one centralized platform.Clients upload and access documents, check compliance statuses, and communicate with the CA team.Team members manage workflows, monitor deadlines, and cut down on routine administrative work.Partners & senior professionals oversee firm-wide activity, document flow, and service delivery.Most importantly, these portals can be custom-developed to align with a firm's unique workflow, service offerings, management style, and scale.02Secure Login, Role-Based Access & Audit TrailsIn a financial environment, safeguarding data and managing access are critical. A custom-developed portal can be tailored to include:Two-Factor Authentication (2FA) — ensuring only authorized users gain access.Role-based access control — precisely configured levels for clients, partners, and internal team members.Comprehensive activity logs & audit trails — every login, upload, and status change tracked in detail.A Client Portal Web App is a cloud-based solution that enables secure, structured interaction between practicing chartered accountants and their clients.03Smart Document StructuringEfficient document organization is essential to any CA practice. Through custom portal development, a smart, hierarchical document structure can be designed — organized first by service type (GST, Income Tax, TDS) and then by financial year — for quick, logical access to relevant files, tailored to the firm's operational model and client base.04Key Benefits & Core FunctionalitiesReal-Time Project Status UpdatesColor-coded statuses — Pending, In Review, Completed — let clients independently track filings, cutting down repetitive follow-up queries during high-pressure compliance periods.Seamless Document Collection & Cloud StorageCentralized, secure uploads for KYC documents, bank statements, invoices, and GST data in year-wise, service-wise folders — eliminating email trails and local storage dependency.Compliance Overview & Automated Due Date RemindersA dashboard of upcoming and overdue filings, with automated alerts via email, SMS, or in-app notification for ITR, GSTR-1/3B, TDS, and ROC filings.Service Overview, Billing & Payment Follow-UpClear bifurcation of services availed, downloadable invoices, automated payment reminders — and the option to restrict key documents until payment clears.On-Demand Document AccessUpload once, access perpetually — clients retrieve ITR acknowledgments, Form 26AS, and GST returns anytime, from any device.Integrated Chat PanelReal-time messaging, smart chatbots for FAQs, and permanent, non-editable chat logs for audit and dispute resolution.Push Notifications & Upload AlertsCritical updates on rule changes, compliance deadlines, and submission status — keeping the firm positioned as a proactive, tech-enabled advisor.Admin Dashboards for MonitoringTrack document and filing status across all clients, filter by submitted vs. pending, and generate reports for internal performance planning.Personnel Assignment & Controlled AccessClient-to-team mapping, unique client codes, and granular access rights — so operations staff see only the clients they're responsible for.05Smart Task & Call Management Web AppWhere the client portal manages the client-facing side, a Smart Task & Call Management Web App addresses internal workflow — structured task assignment and tracking, plus efficient handling of client calls converted into actionable service requests.Role-Based Dashboards with controlled accessReal-Time Task allocation & status updatesTimestamped Logs for full audit trailWhen a call comes in, a designated handler logs it directly into the platform and assigns it to the right team in real time — for example, a GST amendment request appears instantly in the GST team's dashboard, no verbal follow-up required.Reassignment & rescheduling — tasks can shift between team members as workloads change.Customizable filters & analytics — view tasks by To-Do, Ongoing, Successfully Closed, or Unsuccessful, and surface bottlenecks.06Business ImpactThe impact is multifold: scattered messages and verbal updates disappear, replaced by streamlined time management and task tracking. Clear responsibilities improve team coordination and client service. The system ensures audit readiness through complete activity logs, and secures access with Two-Factor Authentication.07Final Reflection: The Case for Custom-Developed SolutionsWhile many firms reach for off-the-shelf software, custom applications tailored to specific needs can become long-term digital assets — introducing meaningful automation, reducing manual intervention, and ensuring consistent, timely execution.Beyond operational gains, such solutions strengthen data security through access controls and encryption, while fostering a transparent, responsive client experience that supports long-term retention.The future belongs to those ready to innovate, adapt, and lead their practices into the digital era.Author may be reached at cakarishmasoni@gmail.com and eboard@icai.inThe Chartered Accountant Journal April 2026 · Vol. 1289–1293
Fraud Behavioural Aspects
Ep. 35 — The Fraud Triangle Reimagined: Why People Cross Ethical Lines
CA Journal
· June 2026
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Fraud & Behavioural Aspects — The Chartered Accountant — April 2026The Fraud Triangle, Reimagined Why people cross ethical linesThe Fraud Triangle comprising pressure, opportunity, and rationalization has infl uenced our understanding of workplace fraud. In the contemporary digital and mixed work contexts, each facet of the triangle is undergoing a transformation. This article reconceptualizes the framework from a behavioural perspective. The accounting scams in public domains exemplify how Chartered Accountants and forensic experts may identify early indicators of fraud and develop more robust preventative techniques based on human insights.IntroductionWhy do people indulge in unethical practices? Th e Fraud Triangle comprising of pressure, opportunity, and rationalization has helped us answer that. It remains one of the most useful tools for understanding why people commit fraud at work. Th is article revisits the Fraud Triangle through a behavioural lens, exploring new pressures like the Fear of Missing Out (FOMO) and burnout, modern opportunities, and shift in moral lines. Using the scam of a banking institution as a case study and supported by legal and professional standards, it provides actionable insights for Chartered Accountants and fraud examiners to strengthen fraud prevention in a digital world.The Fraud Triangle“Thus, conscience does make cowards of us all.” Hamlet, Act 3, Scene 1When Shakespeare wrote those words, he captured something timeless — the quiet, invisible battle between what we feel and what we know is right. That same battle plays out today in offices and boardrooms, not on a stage, but in the quiet moments when someone decides to cross a line.White-collar crime is not just about numbers; it's about people under pressure who convince themselves that no one will notice, and still think of themselves as "good people."First developed by criminologist Donald Cressey, the triangle holds that three things must be present for fraud to happen: pressure, opportunity, and rationalization. For decades it has helped us understand why people commit fraud — but in today's world, the shape of each corner has shifted.
PRESSURE
OPPORTUNITY
RATIONALIZATION
The Fraud Triangle — Donald Cressey, reconceptualized for digital & hybrid workPressure doesn't just come from unpaid bills; it comes from toxic performance culture, social comparison, and silent mental health struggles. Opportunities have multiplied with remote work, digital systems, and weakened oversight. And rationalization? It's easier than ever: "Everyone's doing it." "It's just a shortcut." "I'll fix it later."If we want to catch fraud earlier — or better yet, prevent it — we need to look at the human side of fraud with fresh eyes.Pillar IModern Pressures Beyond Financial StressWhen we think about why people commit fraud, it's easy to picture someone desperate — drowning in debt, paying off medical bills, or battling addiction. Sometimes that's true. But more often today, the pressure that drives unethical decisions looks very different, and far more subtle.The Fear of Missing Out (FOMO): A New Kind of PressureScroll through social media for five minutes and you'll see it: former classmates posting promotions, friends celebrating luxury holidays, influencers showing off designer purchases. In a world saturated with curated images of success, even high-performing professionals can start to feel left behind.For some, that voice becomes hard to ignore — and when the opportunity arises to fudge an expense report, inflate a sales figure, or divert funds, it's rationalized as a way to "catch up" or "level the playing field."The Digital Economy: Rewriting ExpectationsThe rise of the digital economy has transformed how we work, spend, and measure success — and quietly reshaped what employees believe they "should" achieve, and how fast. Stories of instant success are everywhere:The crypto-currency investor who retires at 35.The influencer who earns more in a month than many do in a year.Even traditional professionals — CAs, lawyers, bankers — are exposed to this narrative daily. The flood of hyper-success stories creates a subtle but powerful pressure: "If everyone else is moving fast and winning big, why am I still grinding away slowly?"In such an environment, some begin to cut corners — inflating numbers, misrepresenting growth, or dipping into funds. Not because they are inherently dishonest, but because the digital economy has subtly shifted the goalposts for what "normal" success looks like.Burnout: When Exhaustion Clouds JudgmentPost-pandemic, burnout is a silent epidemic. Remote work blurred the line between office and home. An employee might think: "I've given this company everything. A little extra for myself won't hurt." In that moment of weakness, an ethical boundary can quietly dissolve.Job Insecurity and the Precarious WorkforceToday's workforce is far less stable than in decades past. Many professionals work on contracts or in gig roles; even permanent employees face constant restructuring. This chronic insecurity breeds fear, and with fear comes a survival mindset: "If I don't take this chance now, I may not have another."Toxic Corporate Cultures: Pressure Cookers for FraudIn some companies, sales targets are unattainable, underperformance is punished publicly, and bonuses depend entirely on short-term results. Fraud becomes almost a coping mechanism: "If I don't hit this target, I'm out. Everyone fudges the numbers — it's just how things work here."Why it mattersIf we only watch for obvious financial stress, we'll miss many of today's most powerful fraud drivers. FOMO, burnout, job insecurity, and toxic culture shape modern fraud risk in ways traditional controls can't easily detect.As CAs, we need a sharper lens for these pressures — because behind every fraud case is a human story that often begins with someone who felt trapped, exhausted, or left behind.Pillar IIOpportunities in a Digital, Hybrid WorldIf today's workplace is filled with new pressures, it is equally full of new opportunities — subtle, everyday chances to take what isn't rightfully ours. They don't look like locked safes or unguarded tills. They are passwords, expense apps, cloud folders, and remote logins that appear in the quiet moments when no one is watching.The Remote Work Effect: Out of Sight, Out of MindIn bustling offices, small ethical nudges — a glance from a colleague, a manager dropping by — helped keep misconduct in check. Now millions work from home, alone, often for months on end. Day-to-day supervision is weaker; performance is measured on outcomes, not behaviour. The voice that once said "someone will notice" starts to fade, and small liberties can quickly snowball.Digital Systems: New Tools, New TemptationsA procurement officer realizes they can slip a fake vendor into an overloaded approval queue. These aren't hardened criminals; they are ordinary people tempted by complexity and the illusion of invisibility that digital processes create.The Shadow World of Digital PaymentsIndia's UPI system and mobile wallets have transformed commerce — but speed and convenience come at a cost. A finance manager sends money through multiple wallets to obscure its origin. A fraudster sets up dummy UPI IDs to siphon small amounts from dozens of accounts. An employee rationalizes a quick unauthorized transfer: "I'll return it before anyone notices."Blurred Boundaries, Blurred EthicsIn hybrid work life, professional and personal boundaries often dissolve. An employee downloads client data to a personal cloud folder "just to work faster." Another uses a corporate card for a personal expense, planning to fix it later. None of these acts may start with criminal intent, but each chips away at ethical clarity.Such evolving risks make it imperative for organizations to revisit internal controls, as reinforced by Section 177(9) of the Companies Act, 2013, which mandates an effective vigil mechanism, and the ICAI Code of Ethics, which emphasizes professional integrity in a changing business environment.Why it mattersOpportunities for fraud today no longer look like unlocked safes or missing signatures. Today's fraud lives in small gaps — digital apps, cloud systems, and rationalizations that feel safe in the moment.As CAs, we must learn to see these gaps, not just in systems, but in the human moments where fraud begins.Pillar IIIRationalization in the Age of Moral FlexibilityNo one wakes up one morning and decides to become a fraudster. What happens is quieter, more human — small, private moments when someone looks at a choice and begins to tell themselves a story about why it's okay to make the wrong one.This is rationalization, the third side of the Fraud Triangle, and in a fast-moving world of shifting values, it is often the most dangerous force of all."Everyone's Doing It" — The Power of GroupthinkWhen employees see peers cutting corners and no one calls it out, they start to believe this is "how things work": "If no one else seems to care, why should I be the only one following the rules?""I'm Not Paid What I'm Worth" — Balancing the ScalesAn employee who feels underpaid or overlooked begins to think of fraud as a form of compensation: "They don't value my work — so why not take what I deserve?" This is not about greed. It's about resentment — and when resentment meets opportunity, the risk of fraud spikes."Why Should I Be Loyal When They Aren't?"When employees see their organization breaking promises or mistreating staff, their own moral compass can shift: "If they cheat, why should I stay honest?" When trust is broken, loyalty dissolves and self-interest takes over."Just This Once" — The Most Dangerous StoryThe most seductive rationalization of all is the one-time exception: "I'll pay it back next month. It's only a small amount. Just to get through a rough patch." But "just this once" often turns into twice, then a pattern. Most white-collar criminals start with small acts they believe they can control — and crossing the line again becomes easier each time.White-collar crime is not just about numbers; it's about people under pressure who convince themselves that no one will notice — and still think of themselves as "good people."Why it mattersFraud is not born out of opportunity alone. It grows in the stories people tell themselves — stories that justify, excuse, and slowly erode the boundaries of right and wrong.Our role is to support cultures where "this is wrong" is louder than "no one will notice."The role of Chartered AccountantsWhere We Can BeginFraud doesn't announce itself with alarms and sirens. It arrives quietly — through everyday decisions made under pressure, in systems that no longer fit the way we work, and in cultures where speaking up feels harder than staying silent. Fraud risk is a behavioural challenge requiring human insight beyond the numbers. Focus areaPractical actionsRelevant standards & laws01Expanding the definition of red flagsWatch for behavioural changes — sudden withdrawal or defensiveness from previously open employees.Observe shifts in tone during meetings.Incorporate non-financial indicators into internal audit checklists.SA 240 (Revised) — The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements02Adapting fraud risk assessments for hybrid workContinuously monitor access rights and digital controls.Enforce segregation of duties across remote teams.Adjust transaction monitoring to real-time digital flows (UPI, mobile payments, etc.).COSO Framework; ICAI Code of Ethics (2020)03Addressing rationalization through culturePromote leaders who model ethical choices.Facilitate open dialogue about burnout and ethical dilemmas.Section 177(9), Companies Act, 2013; SEBI (LODR)04Reconnecting ethics with everyday decisionsManagement and HR foster psychological safety while maintaining accountability.Integrate simple ethical checkpoints into everyday processes, making ethical decisions easier and automatic.ISO 37001; ICAI Guidance Note on Reporting under Section 143(12), Companies ActTable 1 — Practical actions mapped to relevant standards and lawsAs CAs, our job is not just to react to fraud once it happens, but to help create organizations where it struggles to take root. It means understanding the human stories behind the numbers, and building systems and cultures that protect both the organization and the people within it.ConclusionFraud is evolving, so must we. If we want to stay ahead of modern white-collar crime, we must reimagine our tools — not just our technology, but our understanding of people.Fraud risk isn't just a checklist. It is a living, human system, shaped by pressure, opportunity, and the stories we tell ourselves to justify crossing the line. In the end, the strongest controls are human, built on values, not just rules."The fault, dear Brutus, is not in our stars, but in ourselves."William Shakespeare, Julius Caesar (Act 1, Scene 2)Referencesacfe.com/fraud-resources/fraud-101-what-is-fraudCompanies Act, 2013 — Sections 177(9), 134(5), 143(12)SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015ICAI Code of Ethics, 2020SA 240 (Revised) — The Auditor's Responsibilities Relating to Fraud in an Audit of Financial StatementsICAI Guidance Note on Reporting under Section 143(12) of the Companies Act, 2013COSO Internal Control — Integrated FrameworkISO 37001 Anti-bribery Management SystemsAuthor CA. Lekshmi N, Member of the Institutelekshminsankar@gmail.com · eboard@icai.in
Commercial Law
Ep. 36 — Ease of Doing Business: Doing Away with Sections 138-148 of the Negotiable Instruments Act, 1881
CA Journal
· June 2026
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Ease of Doing Business: Doing Away with Sections 138–148 of the Negotiable Instruments Act, 1881The Payment and Settlement System across the world during the 19th and 20th centuries was mainly by way of Cheques, Bills of Exchange, and Promissory Notes. Therefore, in India, the Negotiable Instruments Act, 1881, was enacted to regulate them; however, frequent cheque ‘Dishonour’ persisted, and in the absence of any convenient alternative for transferring large sums for goods or services, cheques remained the preferred mode of payment. In view of the prohibition under the Income Tax Act, 1961, from paying in cash above a specifi ed amount, the payment through cheques has also been a legal necessity in our country. However, the unscrupulous people or traders, with mala fi de intentions, either used to dishonour the cheques issued by them by not keeping suffi cient amount in their bank accounts or by stopping payment of the cheques or by altogether closing the accounts. There was no specifi c remedy under the Negotiable Instruments Act, 1881, for the victims except to fi le a complaint with the Police alleging cheating or to fi le a civil suit for recovery of the amount, which was time-consuming and expensive.In view thereof, to bring certainty to the mercantile transactions and to instil confidence in the system of cheque payments, the Parliament of India had amended the Negotiable Instruments Act, 1881, by way of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988) and inserted Chapter No. XVII and Sections 138–142, under which the act of dishonour of cheques had been made an offence punishable with imprisonment for a period of one year or with a fine which could extend to twice the amount of the cheque. The said amendment came into force from 1.4.1989. Since transactions through cheques were a common phenomenon, there was also a high incidence of dishonour of cheques. In view of the fact that the dishonour of a cheque has been criminalised, a large number of criminal complaints came to be filed before the Courts, which completely overwhelmed the criminal justice system. The complaints remained pending for years due to the elaborate procedure involved in criminal trials. This has affected and choked the criminal justice system, and hence the disposal of other criminal cases. To expedite disposal of these complaints, the Act was once again amended in the year 2002 to bring in certain radical changes like making the offence triable summarily, fixing a time limit for completion of the trial, taking evidence by way of affidavits, etc. The offence has also been made compoundable while enhancing the punishment from one year imprisonment to two years imprisonment.The Supreme Court's Observations in GimpexIn the case of Gimpex Private Limited vs. Manoj Goel [MANU/SC/0829/2021] (Criminal Appeal No.1068/2021), the Hon'ble Supreme Court observed as under:"The object of bringing Section 138 into the statute was to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. It was to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of bouncing of cheques due to insufficient arrangements made by the drawer, with adequate safeguards to prevent harassment of honest drawers.It is quite evident that the legislative intent was to provide a strong criminal remedy in order to deter the high incidence of dishonour of cheques. What must be remembered is that the dishonour of a cheque can be best described as a regulatory offence that has been created to serve the public interest in ensuring the reliability of these instruments.The provision to punish the offender has encouraged the institution of a large number of cases that are relatable to the offence contemplated by Section 138 of the Act. So much so, that at present a disproportionately large number of cases involving the dishonour of cheques is choking our criminal justice system, especially at the level of Magistrates' Courts. As per the 213th Report of the Law Commission of India, more than 38 lakh cheque bouncing cases were pending before various courts in the country as of October 2008. This is putting an unprecedented strain on our judicial system."In a reply to the Parliament, the Government of India informed that there were 43.05 lakh cheque bouncing cases pending before various courts as on 18.12.2024.38 lakh+ Cheque bouncing cases pending as of Oct 2008 (Law Commission, 213th Report)43.05 lakh Cheque bouncing cases pending as on 18.12.20243.45 crore Total criminal cases pending across courts (National Judicial Grid)The Supreme Court's Suo Moto InterventionAcknowledging the deep-rooted problem, the Hon'ble Supreme Court took up the matter on its own in Suo Moto WP (Crl) No. 2/2020. In this case, the Supreme Court considered the delay in the disposal of cases under the Negotiable Instruments Act, which is creating a severe logjam in courts at all levels, especially the Trial Courts and the High Courts. The Hon'ble Supreme Court vide order dated 10.03.2021, inter alia, directed to constitute a 10-member Committee with the objective of submitting a report specifying the steps that must be taken in order to facilitate an early disposal of cases under the Negotiable Instruments Act. The Committee submitted its Report to the Court, wherein it, inter alia, suggested the creation of Special Negotiable Instruments Courts. The Amicus Curiae in the matter suggested a pilot study, in 5 judicial districts in the 5 states with the highest pendency (namely, Maharashtra, Rajasthan, Gujarat, Delhi, and Uttar Pradesh) so that the viability of the scheme can be examined based on the results of the pilot study.Thereafter, vide its order dated 19.05.2022, the Hon'ble Supreme Court has directed that the pilot study shall be conducted in the manner indicated in the said order for a duration of 1 year from 01.09.2022 to 31.08.2023 in 25 Special Courts with one Special Court in each of the 5 judicial districts which have been identified as having the highest pendency of NI Act cases by each of the five High Courts mentioned above. The pilot study was suggested to test the scheme of employing retired judicial officers and retired Court staff to operationalise these Special Courts in the five states with the highest pendency of cases, namely, Maharashtra, Rajasthan, Gujarat, Delhi, and Uttar Pradesh. The Supreme Court had also issued guidelines as to the setup of the said special courts, appointment of Presiding Officers, and Staff. Since the said period of one year for which the Special Courts were constituted expired on 31-08-2023, the hearings in the said special courts were stalled. Further, the Delhi High Court, through its notification dated 01-09-2023, directed to transfer back all the matters to their parent Court in the absence of any direction/clarification from the Supreme Court. The decision of the Supreme Court on the constitution or continuation of special Negotiable Instruments Courts is awaited. This is the scenario of the disposal of complaints filed for the dishonour of cheques before the Criminal Courts.The Rise of Digital PaymentsOn the other hand, with the advent of technology, new payment systems have come up, and their usage has spread rapidly. Now, persons can operate their accounts electronically, and a counterpart payment system through Electronic Clearing Service (ECS) has been introduced. Now, funds can be transferred through ECS, and as such, issuing or accepting cheques can be avoided. Similarly, Internet Banking facilitates a person to transfer huge amounts of money to the supplier of goods or services almost instantaneously. A person can transfer money through NEFT/RTGS, which is cost-effective and time-effective. Money can also be transferred through UPIs like Google Pay and PhonePe which is more efficient and faster, and even a common man or a layman in our country has become well conversant in using these UPI systems for the transfer of money.15,547 crore UPI transactions completed, Jan–Nov 2024₹23.49 lakh crore Total value of those UPI transactionsEarlier, there was no other alternative to a person who supplied goods or services other than to accept the cheques, as it cannot be expected of a person to carry a huge amount of physical cash. Further, payments above a specified limit were not being allowed as a business expenditure under the Income Tax Act, 1961, which further necessitated payment through cheques.In the case of P. Mohan Raj Vs. Shah Brothers Ispat Pvt. Ltd., Hon'ble Supreme Court described the proceedings of Section 138 as "Civil Sheep in a Criminal Wolf's clothing" while observing that the nature of the offence under Section 138 of the NI Act is quasi-criminal since it arises out of a civil wrong. Therefore, as the Supreme Court stated, dishonour of a cheque is originally a civil wrong, whereas by statute it has been made an offence.As per the National Judicial Grid, presently there are 3.45 crore criminal cases pending at various stages in various courts, including the Supreme Court. Presently, since alternate payment systems have come up, there is no need to accept payment through cheques, and if anyone accepts cheques will be doing so at their own risk and peril. There is no need to continue to encourage payment through cheques. Further, the Income Tax Act, 1961, has also been suitably amended to include payments made through electronic systems. The provisions of Section 138–147 have been made applicable to payments through ECS under Section 25 of the Payment and Settlements Systems Act, 2007, and are liable for punishment for dishonour of the mandate given for ECS payments. Other payment systems like Internet Banking, UPI etc., provide for instant payments, and RBI has issued guidelines regulating these payments. These payment systems are now well entrenched in our economy and have become an indispensable part of the payment systems. The credibility in these systems has now been well established, and there is no need to rely upon archaic payment systems like Cheques.Victims of heinous crimes, especially women, are unable to get quick justice owing to the huge pendency of cases in criminal courts. Therefore, the criminal courts are required to devote their resources and time to rendering justice in serious cases rather than complaints like dishonour of cheques.The Decriminalisation DebateThe Ministry of Finance, on 8th June 2020, issued a statement of reasons for 'Decriminalization of Minor Offences for Improving Business Sentiment and Unclogging Court Processes', including the offences under Section 138 of the Negotiable Instruments Act, 1881. The statement underlines the fact that the risk of imprisonment for actions or omissions that aren't necessarily fraudulent or the outcome of mala fide intent is a big hurdle in attracting foreign investments. It further stated that the uncertainty in legal processes and the time taken for resolution in the courts hurts the ease of doing business. Criminal penalties, including imprisonment for minor offences, act as deterrents, and this is perceived by the Government as one of the major reasons impacting business sentiment and hindering investments, both from domestic and foreign investors. The notification aims to help revive the economic growth and improve the justice system. The central government had invited the comments of State Governments/UT Administrations, Civil Society/Non-Government Organizations, Academicians, Public and Private Sector Organizations, Multilateral Institutions, and members of the public to submit their suggestions to the Department of Finance Services, Ministry of Finance, by 23rd June 2020.Some stakeholders had opposed the government's move or proposal to decriminalize the offence of dishonour of cheques. They have suggested that monetary limits can be fixed for cheque bounce cases to attract criminal prosecutions. The Government is yet to take any decision thereon.The Global Decline of ChequesFurther, the volume of the transactions through cheques has been declining over recent years thanks to the growing popularity of electronic payment methods like online banking, mobile banking, digital wallets etc. Once a widely prevalent method of payment, cheques have experienced a decline in usage in many countries due to the emergence of digital payment methods and other instruments such as Debit and Credit Cards. Several countries have either completely phased out or significantly reduced the usage of cheques. The monetary authority of Singapore announced that all corporate cheques will be done away with by the end of 2025. This was announced following the reduction in cheque transaction volumes by almost 70% from 61 million in 2016 to less than 19 million in 2022. Similarly, transactions in cheques in Australia once accounted for 85% of the number of non-cash payments and witnessed a 90% decrease in cheque usage over the past decade, and hence Australia has decided to phase out cheques by 2030.The developed countries like the UK, USA, France, Australia, Singapore, etc. have not criminalised the act of dishonour of cheques and still treat it as a civil wrong, with damages payable therefor. In fact, through UPI payment systems, our country is far advanced in payment systems than the above-referred developed countries.The Way ForwardHence, it is time to decriminalise dishonour of cheques so that pendency of criminal cases in various courts across the country is drastically reduced, and hence the provisions related to dishonour of cheques in the Negotiable Instruments Act, 1881 should be repealed by the Parliament. This urgent reform is required to be made to reform the judiciary and to reduce the unnecessary burden of carrying the weight of cheque dishonour cases.Presently, there is no threshold as to the amount to initiate criminal action for dishonour of cheques. At least, to start with, the Government should bring forth an amendment to fix a threshold of Rs. One crore and above to apply the provisions of Section 138 of the Negotiable Instruments Act, 1881. This move can drastically reduce the number of complaints being filed before the criminal courts for dishonour of cheques.Author may be reached atkshk.hareesh@gmail.com | eboard@icai.inSource: The Chartered Accountant, ICAI Journal — April 2026 (pp. 46–48)
Audit
Ep. 37 — Audit Documentation: A Cornerstone of Audit Quality
CA Journal
· June 2026
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Audit Documentation: A Cornerstone of Audit QualityAudit documentation, commonly referred to as working papers, is integral to maintaining the quality and reliability of the auditing process. As emphasized by Standard on Auditing (SA) 230 “Audit Documentation”, it not only ensures compliance with professional standards but also demonstrates the thoroughness and rationale behind audit conclusions. Effective documentation supports audit quality, facilitates future audits, and aids supervision and regulatory reviews. However, challenges such as balancing detail, adapting to technological changes, and maintaining consistency across teams persist. This article explores the signifi cance of audit documentation, outlines best practices, and discusses emerging trends such as digital integration, highlighting its critical role in fostering transparency and trust in fi nancial reporting. It is not merely a requirement for compliance with standards but a critical component of the audit process that ensures quality, consistency, and transparency. The documentation refl ects the work performed by the auditor, the decisions made during the audit, and the evidence collected to support the conclusions reached. As outlined in SA 230, the meticulous preparation and maintenance of audit documentation is vital for achieving professional excellence and regulatory compliance.Understanding Audit Documentation Audit documentation is the written record that provides evidence of the auditor's work — the planning, the evidence gathered, and the conclusions reached. Records may be physical, electronic, or a blend of both.✓Evidence of audit quality. Substantiates that the audit was performed in accordance with applicable Standards on Auditing.✓Support for audit conclusions. Provides the rationale behind the auditor's opinions, ensuring they are well-founded.✓Facilitates future audits. Serves as a resource for planning and conducting recurring engagements.✓Basis for supervision and review. Supports peer review, quality control checks, and regulatory inspection.Key components of a complete audit file: the audit plan (nature, timing, and extent of procedures), audit programs (steps addressing specific risks), evidence collected (confirmation letters, inspection records, analytical procedures), significant professional judgments, and a summary of findings and conclusions.BWhat SA 230 Requires SA 230 prescribes four governing qualities every working paper file must satisfy.01 — STANDARDSufficient & appropriateDetailed enough for an experienced auditor with no prior knowledge of the engagement to understand the work, judgments, and conclusions.02 — STANDARDTimely & organizedPrepared promptly to preserve accuracy, and structured so records can be retrieved and reviewed with ease.03 — STANDARDComplete & transparentLeaves a clear trail of the audit process that demonstrates adherence to the Standards on Auditing.04 — STANDARDSecure & retainedStored to prevent unauthorized access and kept for a minimum of seven years from the date of the auditor's report.CWhere Documentation Breaks Down 01Balancing detail and brevityOver-documentation can bury critical findings; under-documentation risks non-compliance with the Standards on Auditing.02Adapting to technological changeDigital tools require documentation practices that capture system logs, screenshots, and electronic communications as evidence.03An evolving regulatory landscapeFrequent updates to Standards on Auditing from ICAI and other bodies require continuous adaptation of documentation practice.04Resource constraintsSmaller firms and individual practitioners often lack the time and cost capacity for fully comprehensive documentation.05Consistency across audit teamsLarger engagements struggle to keep documentation consistent without standardized templates or clear guidelines.DPractical Guidance for Effective Documentation ✓Use standardized templates. ICAI's Audit Working Paper Templates streamline the process and keep documentation aligned with the Standards on Auditing.✓Emphasize materiality. Document significant risks, key judgments, and findings — skip detail that adds no value to the audit.✓Leverage technology. Cloud-based documentation platforms enable real-time updates, team collaboration, and faster retrieval.✓Invest in regular training. Continuous professional education keeps auditors current with evolving standards and ICAI guidance.✓Build robust review mechanisms. Peer reviews and quality control checks confirm accuracy, completeness, and consistency.ICAI provides a wealth of resources, including Audit Working Paper Templates, to assist auditors in maintaining consistent and effective documentation.EThe Role of Documentation in Quality Assurance The Quality Review Board (QRB) treats documentation as the primary evidence of compliance with the Standards on Auditing during quality reviews. Three shortcomings recur most often:✗Incomplete or insufficiently detailed documentation of audit procedures and findings.✗Failure to document significant judgments and the rationale behind conclusions.✗Missing documentation of supervision and review processes.ICAI addresses these gaps through the Implementation Guide to SA 230, Audit Documentation (Revised 2022 Edition), which offers practical guidance for meeting documentation requirements.FSampling & Fraud Detection in Practice Documentation & audit samplingThe rationale behind sample selection, the procedures used, and the results obtained must be recorded clearly so the work is transparent and reviewable.ExampleTesting a client's accounts receivable: record the sample-selection method, the sample size, and the results of testing — including whether the sample was judged representative and how any exceptions affected the audit opinion.Documentation & fraud detectionDocumentation evidences that the audit was performed with appropriate professional scepticism, and that red flags were properly recorded and investigated.ExampleDiscrepancies surface in purchase order approvals and payment authorization during a procurement audit. The auditor records the inconsistency, the evidence gathered, and the steps taken to assess whether fraud occurred.GEmerging Trends & the Role of AI 01Increased use of digital evidenceTransaction logs and email correspondence are becoming standard evidentiary items as client systems digitize.02Integration of data analyticsFiles now record not just the analysis performed, but the rationale for the data sets chosen and the conclusions drawn from them.03Focus on cybersecurityDocumentation of cybersecurity risks and controls is gaining prominence, particularly for technology-driven clients.Where AI is starting to help✓Increased accuracy and speed in processing audit-relevant data.✓Reduced manual effort, freeing time for analysis and review.✓Sharper detection of potential audit risks through advanced data analysis.HConclusion Audit documentation is not merely a procedural requirement — it is a strategic tool that underpins the quality and credibility of the audit process. By embracing best practices, leveraging technology, and staying current on regulatory change, auditors strengthen the effectiveness of their documentation.As the profession evolves, robust documentation remains a cornerstone of audit quality — ensuring transparency, accountability, and trust across the financial reporting ecosystem.REFERENCE — Standard on Auditing SA-230; Implementation Guide to SA 230 (Revised 2022 Edition), Audit Documentation; Audit Working Paper Templates, ICAI.✓ FILE COMPLETEAuthorCA. Jyoti AggarwalMember of the Institutejyotiaggarwal102@gmail.com
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Firms
Ep. 38 — Building Future-Ready CA Firms: LLP vs Partnership Under ICAI’s Strategic Practice Frameworks
CA Journal
· June 2026
00:00
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Building Future-Ready CA Firms:LLP vs Partnership Under ICAI's Strategic Practice FrameworksChartered Accountant (CA) fi rms in India are navigating a major infl ection point. Traditional partnership structures are increasingly strained under the weight of expanding regulatory demands, geographical presence needs, and client expectations for multidisciplinary expertise. The emergence of Limited Liability Partnerships (LLPs), particularly those enabled through ICAI’s 2022–2024 regulatory frameworks, offers an alternative that balances professional independence, scalability, and legal resilience. This article provides a holistic, structured, and ICAI-compliant comparison of LLPs and traditional partnerships with special emphasis on legal frameworks, audit controls, partner roles, merger protocols, governance models, succession planning, and technological integration. Through strategic use of the MDP Guidelines (2022), Networking Guidelines (2021), Aggregation Model (2024), and Merger/Demerger Frameworks (2024), the analysis lays out a clear decision matrix. Whether you’re a sole proprietor, mid-sized regional fi rm, or a returning professional from industry, LLPs now provide ICAI-approved, ethically governed structures aligned with modern fi rm aspirations. With benefi ts ranging from liability shielding and client trust to institutional brand building and global compatibility, the LLP model is no longer an option; it’s the roadmap to a future-ready CA practice.Introduction India’s professional landscape is undergoing transformation. Th e shift is not merely legal or operational but strategic and inevitable. As the global economy integrates, clients increasingly demand fi rms that can off er bundled services: audit, advisory, risk, tax, digital, legal, and ESG. Traditional partnerships, with their individualistic decision-making and informal governance, struggle to respond to these demands. With the introduction of the Limited Liability Partnership (LLP) Act, 2008, and further bolstered by ICAI’s proactive reforms including: Multidisciplinary Partnership (MDP) Guidelines, 2022 Networking Framework, 2021 LLP Aggregation Model, 2024The shift. Traditional partnership structures are increasingly strained under expanding regulatory demands, geographical presence needs, and client expectations for multidisciplinary expertise. Limited Liability Partnerships, enabled through ICAI's 2022–2024 frameworks, offer an alternative balancing professional independence, scalability and legal resilience.The frameworks. This article draws on the MDP Guidelines (2022), Networking Guidelines (2021), LLP Aggregation Model (2024), and Merger/Demerger Frameworks (2024) to lay out a clear decision matrix for sole proprietors, mid-sized firms, and returning professionals from industry.India's professional landscape is undergoing transformation. The shift is not merely legal or operational but strategic and inevitable. As the global economy integrates, clients increasingly demand firms that can offer bundled services: audit, advisory, risk, tax, digital, legal, and ESG. Traditional partnerships, with their individualistic decision-making and informal governance, struggle to respond to these demands.With the introduction of the Limited Liability Partnership Act, 2008, and further bolstered by ICAI's proactive reforms — the MDP Guidelines (2022), Networking Framework (2021), LLP Aggregation Model (2024), and Merger and Demerger Protocols (2024) — Chartered Accountants now have a legal, scalable, and strategic blueprint to build firms that are future-proof.What the LLP structure offersLimited liabilityPerpetual successionCustomizable governanceLegal identityProfessional brand continuityMultidisciplinary partnerships under regulationWho it suitsSole proprietors seeking scalability and successionMid-sized firms looking to standardize governanceNew CAs wanting structured career pathwaysIndustry-returning professionals needing re-entry via MDPs ICAI's MDP Framework — 2022The Multidisciplinary Partnership (MDP) framework introduced in 2022 revolutionized how CAs can collaborate with professionals from other domains.Permissible partners under Regulation 53BCompany Secretaries (CS)Cost and Management Accountants (CMA)AdvocatesEngineersArchitectsActuariesCore conditionsMajority CA control — CAs must remain in majority in both headcount and profit share.Audit independence — only CAs can sign attest functions; non-CAs are barred from accessing audit revenues.Naming rights — one MDP firm name per CA is permitted.Structural flexibility — MDPs may function as LLPs or traditional partnerships.Revenue segregation — non-CAs may share in non-audit services only.This framework serves three strategic purposes: enabling multidisciplinary service delivery under one brand, supporting returning professionals with expertise in law, valuation, or governance, and providing the structural base for ESG, forensic, IT audit, and legal advisory integration.§2Legal & Structural ComparisonIn traditional partnerships, governance is generally informal and power is distributed equally on a headcount basis unless modified by the deed — carrying a high risk of dissolution on a partner's retirement or death. LLPs replace that fragility with a filed, codified agreement.Traditional Partnership vs LLP — Legal & Structural ComparisonCriteriaPartnership FirmLLP (MDP or CA-only)Legal StatusNot a separate legal entitySeparate legal entity Sec. 3, LLP ActLiabilityUnlimited (joint & several)Limited to contribution Sec. 27–28SuccessionMay dissolve on partner exitPerpetual succession Sec. 24GovernanceDeed-based (varies by state)LLP Agreement — customizable, filed with MCAVotingDefault: one partner = one voteCapital-based or custom modelProfit SharingAs per deedAs per agreement; fixed + variable modelsAdmission / ExitRequires amendment deedMCA filing Form 4 + agreement updateLegal RecognitionWeak in tenders, PSU, MNC contractsRecognized under MCA; preferred for large contractsTransparencyLow (not public)High (public via MCA portal)§3Governance, Deadlock Management & Partner RightsIn contrast to the informality of a deed, LLPs provide robust governance features: retirement and expulsion clauses can be pre-coded into the LLP Agreement, expulsion for misconduct or inactivity can be enforced without dissolving the firm, and decision-making can be allocated by capital, role, seniority, or strategic contribution.Deadlock management mechanismsCasting vote by a designated Chairperson or Managing Partner.Arbitration clauses referring disputes to third parties or boards.Russian Roulette / Shotgun clauses — exit mechanisms where one partner offers to buy out the other at a set price; if declined, they must sell at that same price.Escalation to a Central Board or Ombudsman (for Aggregated LLPs) — unresolved disputes referred to a neutral central body for binding resolution.Traditional partnerships usually lack such pre-defined arrangements, leaving disputes open-ended or forcing dissolution.In an LLP structure, the legal and operational distinction between Designated Partners, Limited Partners, and functional team members enables the firm to strategically assign responsibilities — compliance, domain leadership, business development — without conferring equal ownership, liability, or voting rights.§4Role-Based ComparisonThis clear segmentation in LLPs allows a firm to assign functional roles without diluting control — structurally impossible in a traditional partnership, where all partners typically share equal liability and authority unless explicitly altered through complex deed clauses.Designated vs Limited Partners vs Traditional PartnersParameterDesignated Partner (LLP)Limited Partner (LLP)Partner (Traditional Firm)Legal ResponsibilityStatutorily responsible for filings, complianceNot liable beyond capitalJointly and severally liableManagement ParticipationYes, as defined in agreementYes — active participation required; silent partners not allowed by ICAIDefault = yesSigning Authority (Audit)Yes (if CA)Yes (if CA)Yes (if CA)DIN / DPIN RequiredYesNoNoEntry / Exit ProtocolForm 4 + LLP AgreementAs per LLP AgreementBy deed amendmentVoting PowerCustomizableCustomizableHeadcount (default), or as agreedLiability ExposureUnlimited for non-complianceLimited to contributionUnlimited personal liabilityRetirement / ResignationLLP Agreement + Form 4As per LLP AgreementMay require dissolution unless protected by deed§5ICAI-Compliant Profit ModelsProfit-sharing models are central to maintaining both equity and motivation in a professional firm. By structuring hybrid models — fixed plus incentive for domain heads — LLPs attract high-performance professionals while retaining audit compliance integrity.Key Compliance PrincipleOnly CAs can share audit revenues. Non-CAs in MDPs may participate only in non-audit work.— ICAI Code of Ethics, 2020 and SA 220Profit-Sharing Models & ICAI's ViewModelPartnership FirmLLPICAI's ViewEqual SharingYesYesPermittedCapital-based SharingYesYesEncouragedPerformance-Linked IncentivesYesYesAllowed (non-audit functions)Audit / Non-Audit Revenue SplitYesYesMandatory under ICAI Code & SA 220Fixed + Variable PayDifficult to structureYesPermitted if clearly defined§6Regulatory Filings, Transparency & Public CredibilityTraditional partnership firms are regulated under State-Level Registrars — leading to a lack of standardized forms, no online visibility, and no central monitoring. LLPs, by contrast, are regulated by the Ministry of Corporate Affairs, with filings accessible at mca.gov.in.Filing & Transparency ComparisonAspectPartnership FirmLLPPublic View of DocumentsNot availableYes, via MCA portalRequired FilingsMinimalAnnual Return Form 11, Financials Form 8, Partner Changes Form 4Technology IntegrationManual or physical filingsFully online via MCA-21Registrar Approval TimelineVaries; largely informalLegally mandated timelinesReputation for TendersWeak institutional identityStrong legal identity (preferred by PSUs, MNCs)LLPs inherently carry greater legal credibility and transparency, making them ideal for firms aiming for national or global expansion.§7Merger & Demerger Framework for CA FirmsWith growing firm sizes and multi-location practices, mergers and demergers are no longer exceptional — they are part of institutional strategy. The ICAI Merger and Demerger Guidelines (2024) offer a statutory path for formal consolidation.Merger guidelinesFile Form MDA-1 to ICAI: merging entities, post-merger governance, confirmation of CA majorityComplete the merger process within 6 monthsMCA filings: Form 3 (amend LLP Agreement), Form 14 (final confirmation to ROC)Audit assignments must remain with CA partners; client communication and conflict policies must be declared; merged firm applies for an updated FRNDemerger guidelinesFile Form MDA-2 with ICAIPredefine brand and name usage rightsPredefine client retention splitsPredefine staff migration protocolsPractical example. Two mid-sized LLPs may merge to secure PSU tenders and then demerge once mandates are secured — retaining market presence under a common brand using the Aggregation framework.§8ICAI Networking Guidelines — 2021ICAI allows firms to collaborate without merging, through networking.Three Approved Networking ModelsModelFeaturesICAI RestrictionsReferralPure client hand-off; no delivery coordinationMust not pool feesFormal NetworkJoint delivery, shared SOPsNo audit fee poolingAOP NetworkCommon name + revenue pooling (non-audit only)Requires ICAI registration & complianceWhy use networking?For pre-merger trial runsTo collaborate across citiesTo distribute niche domain expertise — ESG, forensics, GSTAudit integrity clause. Each network member is independent for audit purposes, with separate responsibility and rotation rules.§9LLP Aggregation Model — 2024The LLP Aggregation Model introduced by ICAI in 2024 is a hybrid between a merger and a network: a central brand is adopted across multiple LLPs in different cities or regions, sharing policies, branding, HR, and quality control — while legal identities remain separate.Why aggregation worksAvoids the complexities of a full mergerMaintains autonomy in deliveryEnables national brandingAttracts large mandates via a shared profileShared in aggregationTech stackBrandingPoliciesNon-audit revenue (if agreed)Not shared in aggregationAudit feesStatutory workPartner-level equityResult: each LLP retains operational control but aligns strategically — ideal for firms with strong city or regional roots.§10Entry Pathways into LLPs by Professional StageICAI now supports multiple entry pathways into LLP structures, depending on the professional's experience, size, and vision.A — Sole ProprietorsExperiencePathwayRole0–5 yearsJoin as salaried / junior partnerLearner, Team Contributor5–10 yearsMerge into an LLPDomain Contributor10–30 yearsLead verticals or geographySenior / Mentor Partner30+ yearsAdvisory / Board roleGovernance & SuccessionB — Industry CAs Returning to PracticeExperienceEntry RouteFocus Area5–10 yearsFunctional lead in MDP LLPDirect Tax, Finance10–20 yearsDomain / Vertical HeadGovernance, Regulatory20+ yearsBoard-level mentorStrategy & SuccessionC — Newly Qualified CAsRouteStructureBenefitEmploymentLLP or traditional firmMentorship + Domain ExposureStart Own FirmLLP structureBranding + Liability ProtectionJunior PartnerLLP or CA-only firmEquity + Long-term Growth Path§11Global Best Practices & Indian AlignmentGlobally, professional services firms — especially the Big Firms — are structured as LLPs for three main reasons: limited liability for managing partners, institutional continuity, and compliance with global transparency norms.ICAI's reforms from 2022 to 2024 mirror these global best practices by allowing multi-disciplinary models, enabling cross-border alliances, and requiring audit integrity and partner governance. Indian CA firms adopting the LLP structure find it easier to bid for international tenders, attract foreign investment via the automatic FDI route, and enter strategic tie-ups with overseas legal or audit entities.Example. A GST-focused LLP in India partnered with a Dubai-based tax consultancy under an MDP LLP model by adding non-attest partners. The LLP framework enabled brand sharing while revenue remained compliant with Indian audit rules.§12Case Snapshot: XYZ & Co.Transition to Aggregated LLPFirm background. XYZ & Co. was a 3-partner traditional firm based in Delhi, handling mid-sized audit and taxation mandates. By 2022, partners realized limitations in scale, retention, and risk coverage.Transformation journeyConverted to XYZ LLP via Form 17 and executed a comprehensive LLP Agreement.Onboarded partners from Mumbai and Hyderabad as Designated Partners to expand presence.Declared an LLP structure to ICAI with SOPs, branding, and HR policy.Adopted a unified tech stack — Zoho Practice, Keka, Google Workspace.Secured a PSU audit mandate based on multi-city presence and institutional branding.Rolled out succession plans, onboarding younger CAs as junior partners with vesting models.Result: within 18 months, XYZ LLP grew to 9 partners across 3 cities, maintained ICAI compliance, and operated with stronger client confidence, increased revenue, and governance visibility.§13Strategic Roadmap: Merging 2 Partnership Firms, 3 LLPs and 20 Sole Proprietors into One LLPThis roadmap is presented as a conceptual process flow depicting sequential regulatory progression.Strategic AlignmentAchieving alignment among participating firms on vision, long-term objectives, governance philosophy, and regulatory preparedness — assessing mutual compatibility, partner intent, quality benchmarks, and readiness for structured collaboration under ICAI guidelines.Networking StartFirms formally enter a networking arrangement, enabling coordinated service delivery, knowledge sharing, and brand alignment while continuing to operate as independent legal entities — a low-risk foundation for trust-building.Transition of Entities to LLPIdentified entities transition into LLP structures, including 20 sole proprietorships and 2 partnership firms, via FiLLiP and Form 17, execution of LLP Agreements, and obtaining DIN, PAN, and GST registrations. A unified technology stack supports scalable, professionally managed operations.Functional OnboardingStructured functional onboarding across the networked LLPs: senior professionals inducted as equity or mentor partners, domain specialists designated as vertical heads (GST, Audit, Risk), and junior partners aligned under a fixed-plus-incentive model with defined lock-in. Partner valuation uses revenue performance, client base strength, staff under management, and market goodwill.ICAI LLP AggregationParticipating LLPs are formally aggregated per ICAI's framework. The aggregation declaration is filed with ICAI, and a unified professional identity — logo, official email domains, SOPs, HR policies — is adopted. Audit and non-audit revenue streams are clearly segregated per the ICAI Code of Ethics.Final Merger of All LLPsAggregation culminates in the merger of all participating LLPs into one unified structure. A Scheme of Amalgamation is drafted; statutory filings include Form 6 (proposal), Form 14 (confirmation), and Form 3 (amended agreement). An independent valuer supports equitable equity structuring.ICAI Merger NotificationMerger notification is filed with ICAI through Form MDA-1, and a new Firm Registration Number is obtained. A formal board-level governance framework is instituted, including a rotating Managing Partner model for leadership continuity.Outcome: a fully ICAI-compliant, aggregated and merged LLP with a pan-India presence and a partner base exceeding fifteen professionals — operating under a robust governance framework, positioned to deliver multidisciplinary professional services at scale.§14From COP to ComplianceWhat each CA practice category can and cannot do — full-time, part-time, and employment with COP.Scope of Practice for COP HoldersCategoryCertificate of PracticeEmployment AllowedAttest FunctionsEligible for CA Firm PartnershipFull-Time PracticeYesNo (except under Reg. 190A)YesYesPart-Time PracticeYesYes (limited, with permission)NoNoEmployment with COPYesYesNoNoPermissible Roles for Full-Time Practicing CAsScenarioPermitted for Full-Time COP?NotesSole proprietor in one CA firm and partner in anotherYesMust inform ICAI, manage both ethicallyPartner in multiple CA firmsYesAllowed if in full-time practiceEmployment + partner in CA firmNot allowedContravenes full-time practice§15Technology Stack for Modern CA LLPsA scalable, secure, cloud-based technology ecosystem is essential for modern LLP-based firms.Recommended Cloud Tools by FunctionCategoryRecommended ToolsFunctionCommunicationGoogle Workspace / Microsoft 365Email, Calendar, Drive, DocsInternal MessagingArtha EMS / Slack / TeamsCollaboration, network practice channels, task collaborationPractice ManagementZoho Practice / CAOA / Octago / Pappilo / Artha EMSWorkflow, task management, deadlinesAudit ToolsTally ERP + Audit360 / CCH iFirmDocumentation, controls, checklistsDocument ManagementDropbox Business / SharePointSecure file sharing, version controleSigningDocuSign / Zoho Sign / Adobe SignSign LLP agreements, engagement lettersBilling & CRMZoho Books / QuickBooks / RazorpayInvoicing, collections, payment remindersHR & PayrollKeka / Zoho People / GreytHRPayroll, leave, onboardingValuation & AnalyticsExcel Online + Power BI / Zoho AnalyticsPartner equity, dashboards, insightsTech governance tipsUse 2FA for access to all critical platformsCentralize audit templates via the practice management systemAutomate client reminders via CRMRun biannual IT audits and backupsTrain all team members in tech protocolsConclusionThe modern CA firm must be professionally governed, legally compliant, client-first and multidisciplinary, technologically integrated, and ethically transparent under the ICAI Code. The LLP model offers this transformative path — combining flexibility with structure, risk mitigation with growth, and regulatory compliance with national and global competitiveness.Succession planning for sole proprietorsBrand elevation for city-based firmsReturn opportunities for industry veteransTeam-based governance for sustainabilityStructure shapes strategy. Among available structures, the LLP framework offers a scalable and compliant platform for future-ready CA firms. ICAI has provided the enabling guidelines — the future-ready firms must now act.Reproduced from The Chartered Accountant, April 2026, pp. 52–59 Author: aswpradeep@gmail.com · eboard@icai.in
GST
Ep. 39 — Interest Under GST
CA Journal
· June 2026
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Interest Under GSTDid you know that the Central Excise Act, 1944, and the Customs Act, 1962, initially did not have any provision for the levy of interest? Levy of interest was first introduced in the Service tax in the year 1994, followed by an amendment in the Central Excise Act and Customs Act through the Finance Act, 1995. Even after 30+ years of its introduction in indirect tax laws, the interest-related provisions are still the subject matter of litigation in the majority of indirect tax laws. GST is also not an exception. The interest-related provisions have been in the Central Goods and Services Tax Act, 2017, since its inception, and even after 8 years, there exist some grey areas. This piece of articulation is focused on three issues related to the levy of interest under GST that are the centre point of litigation in present times.Issue I: Proviso to Section 50(1) & Anomalies ThereinInterest on delayed payment of tax is levied through section 50 of the Central Goods and Service Tax Act, 2017, read with rule 88B of the CGST Rules, 2017. The first issue pertains to the proviso to section 50(1). The relevant portion of section 50 is produced as follows:"Section 50. Interest on delayed payment of tax, -(1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council:Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 or section 74A in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger."A bare reading of this proviso brings out the fact that interest shall be levied on the cash component of the total tax liability. However, this benefit shall be allowed only on the tax payable in respect of "supplies made during a tax period and declared in the return for the said period furnished after the due date". In other words, this proviso seems to extend the adjustment of ITC in respect of the supplies made during the tax period and declared in the returns for the said tax period. However, if the supplies made during the tax period are declared belatedly, in a subsequent return, the benefit of this proviso is not available. This may be understood with the help of the following example:Illustration ABC Ltd. issued 100 invoices during the month of August 2025. Out of these invoices, 90 invoices were shown in the GSTR-3B for the month of August 2025, filed on 20.10.2025. 10 invoices issued in the month of August 2025 were shown in the GSTR-3B for the month of September 2025, filed on 20.10.2025. As per the language of the proviso to section 50, the benefit of adjustment of ITC while computing the interest shall be allowed only in case of 90 invoices pertaining to the month of August 2025 and declared in the GSTR-3B for the same month. However, interest shall be computed on "gross tax liability" without extending the benefit of the proviso to section 50 in respect of 10 invoices pertaining to the month of August 2025 & declared in GSTR-3B for the month of September 2025.It is worthwhile to mention here that the above-referred proviso was added purposely in section 50 to curtail the malpractices. If this proviso were not so worded, there would have been a taxpayer who would have avoided the inclusion of a few tax invoices in GSTR-3B, as there was no balance in the Electronic Credit Ledger, and he was not willing to make payment in cash. However, the language of this proviso, even though thoughtfully drafted, does not address the following issues:Suppose, in the above-referred example, there is sufficient balance in the Electronic Credit Ledger during the month of August 2025 to meet the entire tax liability from ITC; however, the 10 invoices were mistakenly left to be included in the GSTR-3B. As per the language contained in the proviso to section 50, the benefit of adjustment of ITC is not allowed, and interest is payable on the gross tax liability ignoring the fact that there was a sufficient balance in the Electronic Credit Ledger to cover the entire tax amount pertaining to those 10 invoices on the due date of GSTR-3B for the month of August 2025.Suppose there was an invoice on which the date was mistakenly shown as 10.08.2024 instead of 10.08.2025. This is a pure clerical mistake that may be verified from the other data available on the records. However, the Revenue Department still demands the interest on the entire tax amount by mentioning that this case is not covered by the proviso to section 50. Interesting, right?There are a lot more similar issues that are popping up nationwide, where the interest is demanded without extending the benefit of balance in the Electronic Credit Ledger by following the principle of literal interpretation in this case. A suitable clarification is needed on this issue.Issue II: Recovery of Interest Due But Not PaidA. Legal ProvisionsSection 79 of the Central Goods and Services Tax Act, 2017 provides for the recovery of pending dues under the GST law by various means, including the debit from Electronic Cash Ledger, freezing of bank accounts, recovery from attachment of movable and immovable property belonging to the defaulter, etc. However, this provision cannot be invoked unless the proper procedure prescribed under law is followed. This procedure includes issuance of a show cause notice under section 73, 74, or 74A, allowing the opportunity to file the reply, granting of a personal hearing, which is followed by an order. Once a demand is confirmed by passing an order, thereafter, recovery proceedings under section 79 of the Central Goods and Services Tax Act, 2017, can be initiated. However, there are certain exceptions to this. One such exception is contained in section 75(12) of the Central Goods and Services Tax Act, 2017. This section reads as follows:"(12) Notwithstanding anything contained in section 73 or section 74 or section 74A, where any amount of self-assessed tax in accordance with a return furnished under section 39 remains unpaid, either wholly or partly, or any amount of interest payable on such tax remains unpaid, the same shall be recovered under the provisions of section 79.Explanation: For the purposes of this sub-section, the expression "self-assessed tax" shall include the tax payable in respect of details of outward supplies furnished under section 37, but not included in the return furnished under section 39."An analysis of the above sub-section clarifies that where any amount of self-assessed tax remains unpaid or any amount of interest payable on such tax remains unpaid, no show cause notice is required to be served, and recovery can be directly made by invoking provisions of section 79. Further, sub-rule 5 of rule 142 of the Central Goods and Services Tax Rules, 2017 provides that a summary order is required to be issued in case of an order issued under section 75. This sub-rule reads as follows:"(5) A summary of the order issued under section 52 or section 62 or section 63 or section 64 or section 73 or section 74 or section 74A or section 75 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130 shall be uploaded electronically in FORM GST DRC-07, specifying therein the amount of tax, interest and penalty, as the case may be, payable by the person concerned."Combined reading of section 75(12) and rule 142(5) brings out the fact that in case interest on self-assessed tax remains unpaid, the show cause notice in FORM GST DRC-01 is not required to be issued under section 73, 74, or 74A, and directly an order may be issued in FORM GST DRC-07.If we check the language of sections 73, 74, and 74A under which show cause notice can be issued, it clarifies that the show cause notice can be issued by the proper officer only if "any tax is not paid or short paid or erroneously refunded or input tax credit has been wrongly availed or utilised." Where the demand is only of interest with tax already paid in GSTR-3B, the pre-requisites laid down in these three sections are not met, and accordingly, a show cause notice cannot be issued in either of these sections. This also substantiates the language of section 75(12) of the Central Goods and Services Tax Act, 2017, which prescribes for direct recovery without issuance of a show cause notice. The validity of these provisions has been upheld by the Hon'ble Gujarat High Court in the case of Rajkamal Builder Infrastructure (P.) Ltd. v. Union of India [R/Special Civil Application No. 21534 of 2019] as decided on March 31, 2021. In this case, the Hon'ble High Court has held that the show cause notice in FORM GST DRC-01 cannot be issued in case of self-assessed tax and interest referred to in section 75(12) of the Central Goods and Services Tax Act, 2017.Revenue Department's TakeIt is pertinent to mention here that the Revenue Department normally issues a show cause notice for the recovery of interest even if no demand for tax is pending. Section 75(12) is never invoked by it. Perhaps it is done to impose a penalty which is not possible if the amount of interest due is directly recovered under section 79.Case in point A taxpayer had already paid the tax amount while filing the GSTR-3B pertaining to the financial year 2018-19. Only the interest of a nominal amount of around ₹3,000/- was due. As per provisions of section 75(12), the said amount of interest could have been recovered directly under section 79, and the matter would have closed. However, a show cause notice was issued under section 73, despite the fact that no show cause notice can be issued under section 73, as there is no demand for tax in the case. The show cause notice proposed the demand of interest of ₹3,000/- along with a penalty of ₹10,000/- under section 73. The matter was adjudicated by issuing an order under section 73, in which the demand of interest and penalty was confirmed.Meanwhile, an amnesty scheme was introduced by the Government by adding section 128A to the CGST Act, 2017. This scheme extends the waiver of interest or penalty, or both, if the tax amount is paid. As the order was under section 73, an application for waiver of interest and penalty was moved in FORM SPL-02. Interestingly, the application was proposed to be rejected by issuing a notice on the grounds that the case does not pertain to section 73; it is covered by section 75(12), which is not included in the amnesty scheme. This was backed by Circular No. 238/32/2024-GST dated 15th October, 2024. Paragraph 4 of the Circular is reproduced below.QuestionClarification (Paragraph 4 of Circular No. 238/32/2024-GST)Whether the benefit provided under Section 128A will be applicable in cases, where the tax due has already been paid and the notice or demand orders under Section 73 only pertains to interest and/or penalty involved?Where the tax due has already been paid and the notice or demand orders under Section 73 only pertains to interest and/or penalty involved, the same shall be considered for availing the benefit of section 128A. However, the benefit of waiver of interest and penalty shall not be applicable in the cases where the interest has been demanded on account of delayed filing of returns, or delayed reporting of any supply in the return, as such interest is related to demand of interest on self-assessed liability and does not pertain to any demand of tax dues and is directly recoverable under sub-section (12) of section 75. (emphasis supplied)Here, the Board Circular clearly specifies that where the demand of tax pertains to section 75(12), the direct recovery is to be made under section 79 — i.e., no show cause notice is needed. But what if the order under section 73 is already issued and a penalty is also imposed in the order, which is not lawful, as when a show cause notice is not issuable under section 73, the question of imposing a penalty under this section does not arise? The Circular should have clarified such cases and should have provided for waiver of penalty upon payment of interest. However, this is not done.Coming back to the case: the demand for interest and penalty was confirmed under section 73, which is an undisputed fact. With a confirmed demand under section 73, the taxpayer opted for the amnesty scheme; however, the proper officer switched approach, stating that the case is not covered under section 73, but rather it is covered by section 75(12), so the benefit of the amnesty scheme is not available. However, the order was issued under section 73, which is clearly reflected on FORM DRC-01 as well as FORM DRC-07, and there is no mention of section 75(12) in these documents. The situation now stands as follows:The taxpayer, having paid interest of ₹3,000/-, wants to claim relief from penalty under the amnesty scheme. Penalty is not imposable at all as provisions of section 73 are not applicable in this case.The Revenue Department is bent upon recovering the penalty as well because there is one confirmed demand under section 73, and the benefit of the amnesty scheme is not admissible because of the clarification given in the Board Circular.As the amount involved in the issue is very small, it does not appear feasible for the taxpayer to opt for an appeal.Issue III: Interest on Tax Payable Under the Reverse Charge MechanismTime Limit for Issuing an Invoice Under the Reverse Charge MechanismSection 31(3)(f) of the Central Goods and Service Tax Act, 2017 provides that where the supplies taxable under the reverse charge mechanism are received from an unregistered person, the tax invoice on such goods and services is required to be issued by such recipient who is liable to pay tax on the same. The time limit for issuance of such an invoice is prescribed in Rule 47A of the Central Goods and Service Tax Rules, 2017. This rule reads as follows:"Rule 47A. Time limit for issuing tax invoice in cases where recipient is required to issue invoice.Notwithstanding anything contained in rule 47, where an invoice referred to in rule 46 is required to be issued under clause (f) of sub-section (3) of section 31 by a registered person, who is liable to pay tax under sub-section (3) or sub-section (4) of section 9, he shall issue the said invoice within a period of thirty days from the date of receipt of the said supply of goods or services, or both, as the case may be."Thus, this rule prescribes that where an invoice is required to be issued by the recipient under section 31(3)(f), it is mandatory for him to issue the said invoice within a period of thirty days from the date of receipt of the said supply of goods or services or both.Time of Supply of Services Taxable Under the Reverse Charge MechanismThe time of supply of services under the reverse charge mechanism is determined as per section 13(3) of the Central Goods and Services Tax Act, 2017. This section reads as follows:"(3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely:-(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier, in cases where invoice is required to be issued by the supplier; or(c) the date of issue of invoice by the recipient, in cases where invoice is to be issued by the recipient:Provided that where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of supply:Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier."An analysis of the above-referred provision clarifies that in case of services liable to tax under the reverse charge mechanism, the liability to pay tax is determined based on the fact whether the supplier is registered or not. If the supplier is registered, the time of supply is determined as the earlier of the date of making payment (date of making entry or date of debit in bank account, whichever is earlier); or 61st day from the date of issue of invoice by the supplier.However, where the supplier is not registered, the liability to issue an invoice rests upon the recipient under section 31(3)(f). In such a case, the time of supply of services is determined as the earlier of two dates — date of making payment (date of making entry or date of debit in bank account, whichever is earlier); or date of issue of invoice by the recipient.Where the Invoice Under Section 31(3)(f) Is Not Issued Within the Time Stipulated in Rule 47A, Whether Interest Will Be Payable?Illustration X Ltd. received security services in relation to an event organised by it on 07.07.2025. These services are taxable under reverse charge, and the supplier is not registered. As per section 31(3)(f) read with rule 47A, the invoice is required to be issued by X Ltd. on or before 06.08.2025. However, the invoice is issued by X Ltd. on 15.09.2025, and payment is made to the supplier on 04.10.2025. X Ltd. is of the view that, as per section 13(3), the time of supply of these services will be 15.09.2025 (being earlier of date of issue of invoice, i.e., 15.09.2025, or date of making payment, i.e., 04.10.2025). Thus, the due date of tax payment will be 20.10.2025. However, the Revenue Department is of the view that the due date of issuance of the invoice under Rule 47A is 06.08.2025, and X Ltd. has knowingly delayed the issuance of the invoice to delay the payment of tax. As per the Department, the time of supply falls in the month of August, tax was due to be paid on 20.09.2025. Since the tax has been paid on 20.10.2025, interest is required to be paid on it.If we go by the bare language of section 13(3), the situation seems to tilt in favour of the assessee. The language of clause (c) of sub-section 3 of section 13 is clear and unambiguous. It used the word "date of issue of invoice" which is different than "due date of issue of invoice". The lawmakers have clearly distinguished these two terms while framing the provisions related to the time of supply. This may be ensured from the language of sections 12(2) and 13(2), which clearly differentiates between the two terms. As the language of section 13(3) clearly uses the words "date of issue of invoice", one cannot read it as "due date of issue of invoice". In this regard, it is worthwhile to mention the Apex Court judgment given in the case of Trutuf Safety Glass Industries v. Commissioner of Sales Tax, U.P. [C.A. Nos. 3467 of 2007] as decided on August 6, 2007. In this case, the Hon'ble Supreme Court held that "it is well settled principle in law that the court cannot read anything into a statutory provision which is plain and unambiguous. A statute is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent." In view of this judgment, one can say that no interest is payable by X Ltd. in the above-referred illustration.Now, let us look at another side of the coin. Rule 47A, which prescribes the time limit for issuing the invoice under section 31(3)(f), was added to the CGST Rules 2017 with effect from 01.11.2024 by virtue of the Finance (No. 2) Act 2024. Prior to this date, there was no time limit for issuing an invoice under section 31(3)(f). Also, prior to this amendment, the determination of time of supply under section 13(3) was also not dependent on the issuance of an invoice by the recipient, as clause (c) was not there in section 13(3). Thus, the time of supply of services under reverse charge was dependent only on two dates — the date of making payment and the 61st day from the date of issue of the invoice by the supplier. Date of issue of the invoice by the recipient had no role to play in determining the time of supply.Due to these missing provisions, there was also ambiguity as to what the deadline was to claim input tax credit on such invoices in terms of section 16(4). To clarify these issues, Circular No. 211/5/2024-GST dated 26th June, 2024 was issued by CBIC. Para 2.6 of this Circular reads as follows:"2.6 A combined reading of the above provisions leads to a conclusion that as ITC can be availed by the recipient only on the basis of invoice or debit note or other duty paying document, and as in case of RCM supplies received by the recipient from unregistered supplier, invoice has to be issued by the recipient himself, the relevant financial year, to which invoice pertains, for the purpose of time limit for availment of ITC under section 16(4) in such cases shall be the financial year of issuance of such invoice only. In cases, where the recipient issues the said invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax." (emphasis supplied)So, this Circular clarifies that where the tax invoice is issued after the time of supply, interest is required to be paid on the delayed payment of tax. However, whether the clarification issued by this Circular is still binding? Let us examine through the following pointers:The Circular was issued when there was no explicit provision prescribing the due date of issuing invoices under section 31(3)(f). Further, at that time, the language of section 13(3) also did not consider the date of issue of the invoice by the recipient. Whether this Circular can still be said to be applicable when the statute has specifically amended section 13(3) and has also added rule 47A is questionable.The language of section 13(3) after amendment is clear and unambiguous, and this Circular is contradictory to the provision contained in this section. The Hon'ble Supreme Court in the case of Commissioner of Central Excise, Bolpur v. Ratan Melting & Wire Industries [Civil Appeal Nos. 4022 of 1999, 3197 & 4789 of 2000, 1469 of 2002, and 3589 to 3592 of 2005] as decided on October 14, 2008, has held that a Circular contradictory to statutory provisions has no existence in law.Thus, whether interest is payable on tax paid under reverse charge in cases where there is a delay in the issue of the invoice by the recipient is subject to litigation. The Revenue Department is relying on the above-referred Circular and is demanding interest in case there is a delay in the issue of the invoice under Rule 47A. In the author's view, as the language of section 13(3) is clear, interest is not payable in such cases. However, the penalty may be imposed for non-compliance with Rule 47A of the Central Goods and Services Tax Rules, 2017.Before PartingThe provisions related to the levy of interest under GST still have several gaps and inconsistencies. The GST Council should come up with necessary amendments to end the litigation in interest-related provisions. Clarity in legal provisions is not just about law; it's about trust. Clear rules mean fewer disputes, smoother compliance, and more confidence for taxpayers. When the system is predictable, businesses can focus on growth instead of litigation.Author may be reached at:preeti.parihar@gmail.com | eboard@icai.inOriginally published in The Chartered Accountant journal, April 2026 — pages 1312–1316.
GST
Ep. 40 — GST 2.0 and the Union Budget 2026-27: A Paradigm Shift
CA Journal
· July 2026
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GST 2.0 and the Union Budget 2026‑27:A Paradigm ShiftIntroduced in 2017, GST replaced many indirect taxes and brought the country’s markets together, but its multi-slab structure made things complicated for both consumers and businesses. Through the simplifi cation of rates into mainly two slabs, the reduction of compliance burdens, and the improvement of transparency, as Prime Minister Narendra Modi announced, “The Government will bring Next Generation GST reforms, which will bring down tax burden on the common man. It will be a Diwali gift for you.” (Press Information Bureau, 2025), the 2025 GST 2.0 reforms represent a signifi cant shift toward clarity and effi ciency, and this reform brings India closer to international best practices, especially Canada’s more straightforward dual model, while maintaining the dual GST framework to maintain federal balance. Beyond revenue, the effects are evident: middle-class families benefi t from lower, more understandable bills, small retailers easily handle compliance online and farmers encounter fewer obstacles in inter-State commerce. The reform exhibits increased formalisation, better compliance and inclusive growth. GST 2.0 is further strengthened by the Union Budget 2026-27 in the form of tax administration rationalisation, digital compliance architecture and cut-down on litigation, making GST a central pillar of next-generation fi scal governance in India. The system is reaffi rmed as a pillar of New India’s economic future with GST 2.0, which changes its complicated structure into a framework that is people-centric, business-friendly, and growth-oriented.IntroductionFrom a city of toll booths to an expresswayIntroduced in 2017, GST replaced a tangle of Central and State indirect taxes and knit the country’s markets together — but its multi‑slab structure kept things complicated for consumers and businesses alike. Picture GST before 2025 as navigating a city of winding roads, toll booths, and detours, each adding time and expense. GST 2.0, by contrast, behaves like an expressway: a more direct route, with clearer signage along the way.By simplifying rates into mainly two slabs, easing compliance burdens, and improving transparency, the 2025 reforms mark a genuine shift toward clarity and efficiency — bringing India closer to international best practice, particularly Canada’s more straightforward model, while still preserving the dual GST framework that keeps Centre and States in fiscal balance. Middle‑class families see lower, more legible bills; small retailers manage compliance online; farmers move goods across State lines with fewer obstacles.The Union Budget 2026‑27 builds directly on this foundation, reinforcing GST 2.0 through tax administration rationalisation, a stronger digital compliance architecture, and a deliberate cut‑down on litigation — positioning GST as a central pillar of next‑generation fiscal governance in India.PG1319Nine Years, One LedgerGST timeline: 2017–2026From the historic midnight rollout to the Budget that folds GST 2.0 into law. 2017Launch of GSTRolled out on 1 July, unifying 17 Central and State taxes and 13 cesses under a single structure. 2018E‑way bill introducedMade mandatory for tracking goods movement across States, improving transparency. 2019Return simplificationFiling steps simplified; Aadhaar linked to registration for fraud prevention. 2020COVID impact & e‑invoicingRevenue dipped, but e‑invoicing began for large firms (₹500 crore+ turnover). 2021–22IGST refund automationExporters benefited from fast refunds via ICEGATE — turnaround cut to under a week. 2023Compliance tightened, MSMEs easedITC rules tightened overall, while compliance was made simpler for small businesses. 2025GST 2.0 — 8 years of GST56th GST Council Meeting adopts Next‑Gen amendments: fewer slabs, deeper tech integration. 2026Union Budget 2026‑27CGST, SGST and IGST sections amended; GST 2.0 written into administrative practice.Source: adapted from Insights IAS, 2025 & Gajendra Singh Godara, 2025The Price Puzzle, SolvedFrom four slabs to a cleaner structureGST 2.0 collapses the old multi‑rate ladder into two principal slabs, plus a distinct levy for luxury and sin goods — easing both billing and reconciliation.Before — GST 1.05%12%18%28%5%12%18%28%After — GST 2.05%18%40%5%essentials18%standard40%luxury & sinPG1318Transitional Provisions · Billing RuleWhich rate applies when the slab changes mid‑transaction?The applicable rate turns on the timing of three events — supply, invoice, and payment — relative to the 22 September rate change.CasePre‑22/09/2025 eventsPost‑22/09/2025 eventsRate applicableCase 1SupplyInvoice and PaymentNew rateCase 2Supply and InvoicePaymentOld rateCase 3Supply and PaymentInvoiceOld rateCase 4InvoiceSupply and PaymentNew rateCase 5Invoice and PaymentSupplyOld rateCase 6Acceptance of PaymentSupply and InvoiceNew rateIn short: when invoice and payment both fall after the revision, the new rate governs. When both precede it, the old rate holds. Where events straddle the change, the rate follows whichever of the three — supply, invoice, or payment — occurs last.Section 18, CGST ActInput Tax Credit: transitional treatmentTransitional ITC exists to protect the tax chain — credit is held or reclaimed strictly according to how the underlying supply is taxed after the change.CaseNature of changeITC treatment1Goods are not exempt to taxationKeep availing ITC normally2Goods become exemptedITC should be reversed under Section 18(4)3Goods have been zero‑ratedITC is not withdrawn; taxpayer can claim refund4Goods transferred between zero‑rated and exemptedNo ITC and no refund is allowedBusinesses are advised to regularly reconcile inventory against claimed credits — especially where new sector exemptions are announced — and to maintain complete documentation for rate transitions, eligible ITC, and reconciliation.PG1319Union Budget 2026‑27Five statutory amendments that carry GST 2.0 forwardSections 15 & 34, CGST ActPost‑sale discounts, without the paperwork. A pre‑existing agreement is no longer required. As long as a credit note is issued under Section 34 and the recipient reverses the related ITC, the discount can be excluded from taxable value.Section 54(6), CGST ActProvisional refunds for inverted duty structure. Taxpayers claiming refunds now become eligible for provisional refunds, improving cash flow while the final refund is processed.Section 54(14), CGST ActNo minimum threshold on export refunds. The minimum sanctioning threshold is removed for exports made with payment of GST, so refunds process regardless of amount.Section 13, IGST ActSimpler place‑of‑supply for intermediaries. The special rule for intermediary services is withdrawn; the general rule (location of the recipient) now applies, which may reduce disputes and improve export clarity.Section 101A(1A) — effective 1 April 2026No gap in the appellate process. Until the National Appellate Authority (NAA) is constituted, the Government can authorise an existing authority or tribunal to hear appeals under Section 101B.PG1322Figure 7 · Rs. in Lakh CroresFY‑wise GST collection since inception7.19FY17‑1811.77FY18‑1912.22FY19‑2011.36FY20‑2114.76FY21‑2218.10FY22‑2320.18FY23‑2414.07FY24‑25Source: Annapoorna, 2024PG1321On the GroundThree ledgers, three livesThe FarmerChhattisgarh, rice growerBeforeNumerous tax layers and checkpoints on the road to Maharashtra ate into earnings; delays hurt crop prices.AfterFewer slabs, faster inter‑State movement. Consumers get fresher produce; he earns more from the same crop.The Small TraderLocal retail storeBeforePerplexing slabs meant hiring an accountant just to file returns — a real cost for a small business.AfterDigital filing in minutes, with only two major slabs. More time for the store, less time on tax codes.The HouseholdMiddle‑class family budgetBeforeGrocery bills padded with several rates — 12% here, 18% there — made true costs hard to track.AfterNecessities like paneer, bicycles and toothpaste sit at 5%. Lower expenses, and a bill they can actually read.PG1320GST: From Global to LocalTwo models, one dual choiceGST was first introduced in France in 1954; over 160 nations now use some form of it. Broadly, two models dominate: single‑GST systems, as in Singapore and Australia, and dual systems — splitting collection between federal and state governments — as in Canada and India.India’s dual system applies CGST and SGST to transactions within a State, and IGST to inter‑State transactions, with the Centre distributing the State’s share onward. Canada’s GST, by contrast, is a straightforward consumption tax collected by the vendor and remitted to government — a $10 book becomes $10.60 once a flat rate is applied. GST 2.0 moves India’s more intricate dual model closer to that clarity, without giving up the federal revenue‑sharing that the dual structure exists to protect.PG1323ConclusionA ledger rewritten for trustIndia’s journey from a detailed, multi‑slab GST system in 2017 to the streamlined GST 2.0 of 2025 marks a clear shift toward efficiency, fairness and transparency. The 2025 reforms have meaningfully eased the frictions of the previous system, balancing inclusivity with simplicity while the dual GST framework continues to preserve India’s federal character through streamlined slabs and stronger compliance procedures.Taken together with the Union Budget 2026‑27, GST 2.0 is not merely an indirect tax reform but a pillar of India’s next‑generation fiscal system — a convergence that points from revenue extraction toward revenue facilitation, built on simplicity, technology, and the taxpayer’s trust.Considering it in conjunction with the Union Budget 2026‑27, GST 2.0 does not just appear as an indirect tax reform but a pillar of the next‑generation fiscal system in India.ReferencesAnnapoorna. (2024). Total GST Collection in India. cleartax.in/s/gst-collections-of-2024Arun Kumar Deshmukh, Ashutosh Mohan & Ishi Mohan. (2022). Goods and Services Tax (GST) Implementation in India: A SAP–LAP–Twitter Analytic Perspective. link.springer.comGajendra Singh Godara. (2025). GST Council (Goods and Services Tax Council), Constitutional Provisions, Functions, Way Forward. padhai.aiGST@8. (2025). Deloitte India. deloitte.comInsights IAS. (2022). Editorial Analysis: GST — Five years stronger. insightsonindia.comInsights IAS. (2025). 8 Years of GST. insightsonindia.comKeen, M. (2013). The Anatomy of the VAT. IMF Working Paper. imf.orgOECD. (2020). Consumption Tax Trends. oecd.orgPress Information Bureau. (2025a). Eight Years of GST. pib.gov.inPress Information Bureau. (2025b). PM Modi’s I‑Day Address: A Vision for Reform, Self‑Reliance, and Empowering Every Indian. pib.gov.inPress Information Bureau. (2025c, November 3). GST Revenue Soars in October 2025. pib.gov.inShreya Kashyap, TaxGuru. (2025). GST Council 56th Meeting: Tax Rate & Reforms. taxguru.inThe Economic Times / EY India. (2023). 6 years of GST — hits and the way forward. economictimes.indiatimes.comManisha Singhmanishhasingh3@gmail.comEditorial Boardeboard@icai.inOriginally publishedThe Chartered Accountant, April 2026 · icai.org
Social Audit
Ep. 42 — Annual Disclosure & Annual Impact Report for Social Enterprises on the Social Stock Exchange (SSE)
Ep. 43 — Proposed Ind AS 118: A Reform in Financial Reporting
CA Journal
· July 2026
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Proposed Ind AS 118: A Reform in Financial ReportingThis article examines proposed Ind AS 118, which is expected to replace Ind AS 1 from 1 April 2027 (ICAI, 2025). The standard introduces a structured approach to the statement of profit and loss by classifying income and expenses into five categories with mandatory subtotals. It introduces and prescribes disclosure and reconciliation requirements for management-defined performance measures (MPM), strengthens aggregation and disaggregation principles, and brings consequential amendments to Ind AS 7, Ind AS 33 and Ind AS 34. Implementation requires retrospective application, including restatement of comparatives subject to transitional relief. The article outlines these provisions and highlights the procedural and presentation changes that companies need to undertake before the effective date.IntroductionIn April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements, which will replace IAS 1 from 1 January 2027 (IASB, 2024). The new standard aims to address inconsistency in financial reporting and enhance comparability across entities (IASB, 2024). Historically, companies across jurisdictions had significant flexibility in presenting financial statements, often using customised formats and reporting figures such as adjusted EBITDA or operating profit without standard definitions or reconciliations (Sabauri & Kvatashidze, 2025). A study conducted by the IASB on a sample of 100 companies revealed that more than 60 of them reported an operating profit figure, employing at least nine different calculation approaches (IASB, 2024). This diversity meant that even fundamental metrics like operating profit were presented differently, limiting users' ability to interpret and compare results.Consistent with India's IFRS convergence approach, the Exposure Draft of Ind AS 118 is substantially aligned with IFRS 18. Ind AS 118 introduces a new approach to financial statement presentation. The statement of profit and loss is reorganised into five categories with mandatory subtotals such as operating profit presented in a consistent manner, as discussed later in the article. The standard also requires companies to present operating expenses explicitly on the face of the statement, and management-defined performance measures (MPM) must be disclosed with supporting explanations and reconciliations. Additional provisions introduce principles for aggregation and disaggregation, discourage vague labelling such as "other" and update requirements for the cash flow statement, earnings per share, and interim reporting.IFRS 18 represents the most significant change to companies' presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago. It will give investors better information about companies' financial performance and consistent anchor points for their analysis. — Andreas Barckow, Chair, International Accounting Standards Board (IASB, 2024)Although these reforms are designed to improve clarity and consistency, their adoption will require companies to adjust systems, processes, and internal judgements in preparation for implementation (Chan & EY, 2024; EY, 2025; Ndarake et al., 2024).Major Changes Under Ind AS 118Ind AS 118 introduces several interrelated changes affecting both the presentation and disclosure of financial information. The figure below summarises the key presentation and disclosure-related changes introduced by Ind AS 118, which are discussed in detail in the subsequent sub-sections.Figure 1 — Impact of Ind AS 118 on Presentation and DisclosurePresentationFive mandatory categories in the statement of profit or lossOperating profit and profit before financing and tax made compulsoryDisclosureMandatory disclosure of management-defined performance measures (MPMs)Explanation, calculation method and reconciliation required for each MPMStatement of Profit and LossThe standard requires companies to classify all income and expenses into five categories of operating, investing, financing, income taxes and discontinued operations. Two new subtotals are mandated on the face of the statement of profit and loss which are operating profit or loss and profit or loss before financing and income taxes (IASB, 2024).The operating category functions as a residual category after applying the classification principles for investing and financing activities. It includes income and expenses from an entity's main business activities and all items not included in other categories. For most entities, revenue, materials consumed, employee benefits, depreciation and amortisation, selling, general and administrative expenses, and other similar items are part of operating activities. Where a company's main business activity is financing or investing, for example, banks, NBFCs or investment companies, items such as interest income and interest expense that would normally be classified as financing or investing are presented in the operating category. This treatment depends on the nature of the entity's main business activities and requires judgement (KPMG, 2024).The investing category includes income and expenses from assets that generate returns largely independent of an entity's other operations. Classification depends on the entity's main business activity and follows specific guidance for financial institutions. This category typically includes interest income, dividend income, rental income from investment property, and results from equity-accounted associates and joint ventures, unless the entity's main business activity is investing or financing (EY, 2025).The financing category includes income and expenses related to raising finance, for example interest on borrowings and lease liabilities and similar effects of provisions. After presenting financing income and expenses, the statement presents the subtotal "profit or loss before income tax", followed by tax expense and results from discontinued operations (Czajor, 2024; IASB, 2024).Ind AS 118 introduces a choice for how operating expenses may be analysed on the face of the statement of profit and loss by nature (e.g. material consumed, employee costs, depreciation) or by function (e.g. cost of sales, selling, marketing, administrative). When expenses are presented by function, additional disclosures in the notes are required to identify major components, including depreciation, amortisation, employee benefits, impairment and write-downs of inventories. The current Ind AS 1 permits only a by-nature presentation but the exposure draft of Ind AS 118 allows both methods (ICAI, 2025; IASB, 2024).The table below presents an illustrative format of the statement of profit and loss for entities whose main business activities do not involve financing or investing. This format does not apply to banks, non-banking financial companies, insurers or other entities whose core activities involve investing, insurance services or providing finance, as those entities follow specific classification guidance.Line ItemAmountCategoryRevenueXOperatingOther operating revenuesXOperatingTotal revenueXOperatingOperating expenses (based on nature, function, or mix of both)Cost of material consumed(X)OperatingPurchases of products for resale(X)OperatingChanges in inventories of finished goods, work-in-progress and product for sale(X)OperatingEmployee benefit expenses(X)OperatingDepreciation and amortisation expense(X)OperatingOther expenses OperatingTotal operating expenses(X)OperatingOperating profit or lossX—Share of profit or loss from equity accounted entitiesXInvestingIncome from other investmentsXInvestingInterest income from cash and cash equivalentsXInvestingProfit or loss before financing and income taxesX—Interest expense on borrowings and lease liabilities(X)FinancingInterest expense on pension liabilities and provisions(X)FinancingProfit or loss before income taxesX—Income tax expense(X)Income TaxesProfit or loss after tax from continuing operationsX—Profit or loss from discontinued operationsXDiscontinued OpsProfit or Loss for the periodX—Table 1 — Illustrative Format of the Statement of Profit and LossSource: Author's analysis based on literature reviewInd AS 118 introduces a choice for how operating expenses may be analysed on the face of the statement of profit and loss by nature (e.g. material consumed, employee costs, depreciation) or by function (e.g. cost of sales, selling, marketing, administrative).Management-Defined Performance Measures (MPMs)Ind AS 118 introduces a comprehensive framework for the disclosure of MPMs in response to the growing use of performance indicators that extend beyond those mandated by accounting standards. An MPM is defined as a subtotal of income and expenses, not otherwise prescribed by Ind AS, that management uses in public communications, such as investor presentations or press releases, to convey its perspective on a particular aspect of the entity's financial performance. Subtotals explicitly required by the standards, such as gross profit, operating profit, or profit before tax, are excluded from this definition (ICAI, 2025; IASB, 2024; KPMG, 2024).Figure 2 — Identification of Management-Defined Performance Measures under Ind AS 118What Qualifies as an MPMSubtotal of income and expensesNot explicitly required by Ind ASUsed by management in public communications to explain performanceWhat Is Not an MPMRatios and financial indicatorsMeasures not based on income and expensesNon-financial performance metricsTo ensure consistency and comparability, all MPMs must be disclosed together in a single note. For each measure, entities are required to describe the measure, explain the aspect of performance it highlights and the reason for its use, and provide a reconciliation to the most directly comparable Ind AS total or subtotal (EY, 2025; ICAI, 2025; IASB, 2024). For example, an entity may present "adjusted operating profit" in its investor communications by excluding items such as restructuring costs or impairment losses that management considers not reflective of ongoing operations. Ind AS 118 requires the entity to reconcile this adjusted measure to the operating profit reported in the statement of profit and loss, with clear explanations of each adjustment and the reasons for excluding those items. Such MPMs fall within the scope of the statutory audit.Ind AS 118 distinguishes between financial and non-financial performance measures. Non-financial metrics like customer satisfaction scores, store area or subscriber numbers are outside the scope of MPMs because they are not derived from income and expense information. Within financial performance measures, three categories are relevant, as shown below.Non-Financial MeasuresIFRS-Specified SubtotalsMPMsOther Non-Subtotal MeasuresNumber of subscribersProfit or lossAdjusted profit or lossFree cash flowCustomer satisfaction scoreOperating profitAdjusted operating profitReturn on equityStore surfaceOperating profit before depreciation and amortisationAdjusted EBITDANet debt / Same-store salesFigure 3 — Types of Performance Measures and MPMsSource: IFRS Foundation (2020)An MPM is defined as a subtotal of income and expenses, not otherwise prescribed by Ind AS, that management uses in public communications, such as investor presentations or press releases, to convey its perspective on a particular aspect of the entity's financial performance.The requirements for management-defined performance measures under Ind AS 118 were introduced because such measures were defined and presented differently in practice. In the absence of clear guidance, entities used varied approaches to adjust performance measures in their external communications. The examples below illustrate common reporting practices observed in practice.IPO Prospectus An IPO prospectus showed rapid revenue growth even though the company was making substantial losses. It introduced a management-defined "contribution margin" that excluded recurring operating costs. Although presented as a measure of efficiency, this adjustment reduced clarity about key obligations and ongoing losses, making it harder to assess the company's true financial position.Listed Company Restatement A listed company had to restate its early quarterly results due to concerns over aggressive revenue recognition and the use of a customised adjusted income measure. The restatement was followed by a sharp fall in share value, highlighting investor sensitivity to the credibility of reported figures.Overemphasis on Adjusted EBITDA More recently, analysts have criticised investor presentations that place heavy emphasis on adjusted EBITDA while giving less importance to operating profit. Such emphasis can divert attention from weaknesses in profitability and cash generation, even though the reported results remain unchanged.Enhanced Aggregation and Disaggregation PrinciplesInd AS 118 introduces the criteria for aggregation and disaggregation of financial information, building on but going beyond the guidance previously provided in Ind AS 1. Whereas earlier requirements relied largely on materiality and preparer judgement, the new standard explicitly distinguishes the roles of the primary financial statements and the accompanying notes. The primary statements — the statement of profit and loss, balance sheet, statement of changes in equity, and cash flow statement — are expected to provide a concise, structured summary of recognised elements, while the notes are intended to offer additional disaggregation and explanatory context to enable users to develop a fuller understanding of the reported information.The revised framework requires that items with similar characteristics be aggregated, and items with dissimilar characteristics, when material, must be disaggregated either on the face of the statements or in the notes. The standard discourages vague labels such as "other." Where the use of such a label is unavoidable, a more specific description (for example, "other operating expenses" or "other finance expenses") must be applied to convey the nature of the items. Preparers must ensure that these descriptions are not misleading and that they are used consistently across periods.In practice, these requirements require a review of existing presentation practices. For example, material one-off gains, including those arising from the disposal of a subsidiary, should not be grouped under "other income" without adequate explanation. Similarly, significant impairment losses must be shown as a separate line item rather than included within "other expenses" (EY, 2025; ICAI, 2025; IASB, 2024; KPMG, 2024).Other Key ChangesInd AS 118 introduces consequential amendments to related standards, particularly Ind AS 7, Ind AS 33, and Ind AS 34.Ind AS 7 — Statement of Cash FlowsFor Ind AS 7, a key change is the requirement for all entities using the indirect method to begin the statement of cash flows with operating profit. Previously, entities used different profit measures, leading to inconsistent reporting. The amendments also remove options for classifying interest and dividend cash flows. Dividends paid must always be presented as financing cash flows. Entities without a specified main business activity will classify interest paid as financing and interest and dividends received as investing. For entities whose main business is lending or investing, a single category approach will apply. Each type of cash flow, namely interest paid, interest received and dividends received, will be reported in one category, aligned with the classification of related income and expenses in the profit and loss statement. Even when those items appear in more than one category in profit or loss, the total for each type must be shown in a single category in the statement of cash flows. Many of these requirements already exist in Ind AS 7, which had earlier removed alternative classifications; the amendments therefore largely bring IAS 7 into line with Indian practice, while adding clarity through the defined starting point and the emphasis on the single-category approach (ICAI, 2025; IASB, 2024).Ind AS 33 — Earnings Per ShareFor earnings per share, amendments to Ind AS 33 allow entities, in addition to reporting basic and diluted EPS, to disclose supplementary EPS figures in the notes. These additional EPS measures may be based on subtotals such as operating profit or on MPMs that are already disclosed in the financial statements. Such figures must be presented only in the notes and without greater prominence than basic and diluted EPS shown on the face of the statement of profit and loss (ICAI, 2025; IASB, 2024).Ind AS 34 — Interim Financial ReportingChanges to interim reporting under Ind AS 34 ensure that interim financial statements incorporate the new subtotals and MPM disclosures in the same way as in annual financial statements. These amendments require preparers to restate comparative cash flow information and revise reporting formats from financial years beginning on or after 1 April 2027, in line with the effective date of Ind AS 118 (ICAI, 2025).Ind AS 118 introduces the criteria for aggregation and disaggregation of financial information, building on but going beyond the guidance previously provided in Ind AS 1.Preparing for Ind AS 118 ImplementationThe implementation of Ind AS 118 will require extensive planning as it significantly reshapes the structure of financial reporting. For the newly defined categories in the statement of profit and loss, entities will need to modify their systems to ensure that transactions are captured, classified, and reported consistently across the group. Processes must be established to produce accurate reconciliations of MPMs that can withstand audit scrutiny. Adequate training of finance teams, boards, and auditors will be essential to ensure a clear understanding of the revised requirements. Companies will also need to identify which of their publicly communicated metrics fall within the scope of MPMs, define how these measures will be calculated, and document the related internal policies (EY, 2025; KPMG, 2024; Neves, 2024).Because the standard requires retrospective application of presentation changes, entities may be required to reclassify comparative figures into the revised statement structure, subject to materiality and practicability considerations. This process may involve data reviews and manual adjustments, making early preparation critical. Reclassification of certain income and expense items from operating to investing or financing categories will modify familiar subtotals, even though total net profit remains unchanged. These structural effects will need to be clearly communicated to investors and analysts. In addition, reporting must align with Indian regulatory frameworks, including Schedule III of the Companies Act, SEBI requirements, and sector-specific guidelines, all of which are expected to be updated before the standard's effective date.The new requirements also introduce areas of judgement, such as determining an entity's principal business activities and deciding which public communications create MPMs. These judgements may affect key performance indicators and may require a review of loan covenants and other contractual terms. Successful implementation will therefore demand coordinated efforts across finance, IT, governance, and investor relations functions.ConclusionThe shift to Ind AS 118 represents a major reform in the way Indian companies present their financial statements. It introduces a more structured and disciplined approach that is intended to make reported information clearer and easier to compare.Moving to this new framework will involve significant effort from preparers and auditors, but its long-term impact will be seen in how effectively companies and users of financial statements adapt to the revised presentation and use it to gain deeper insights into business performance.ReferencesChan, V., & EY. (2024). IFRS 18 in brief. ey.comCzajor, P. (2024). IFRS 18: Advancing the Relevance and Utility of Financial Statements for Stakeholders. European Research Studies Journal, Vol. XXVII (Issue S2). ersj.euEY. (2025). A closer look at IFRS 18. ey.comIASB. (2024). History of IFRS 18. ifrs.orgIASB. (2024). IFRS 18 Presentation and Disclosure in Financial Statements Effects Analysis. IFRS Foundation. ifrs.orgIASB. (2024). IFRS 18 will improve communication in financial statements. ifrs.orgICAI. (2025). Exposure Draft Indian Accounting Standard (Ind AS) 118 Presentation and Disclosure in Financial Statements. icai.orgIFRS Foundation. (2020). General Presentation and Disclosures. ifrs.orgKPMG. (2024). Presentation and disclosure IFRS 18. kpmg.comNdarake, E., Ukpong, E., & Uwah, U. E. (2024). Impact of IFRS 18 Implementation in Financial Reporting. Journal of Accounting and Financial Management. iiardjournals.orgNeves, H. D. C. (2024). IFRS 18 Implementation in Brazilian Enterprises: Challenges and Opportunities. International Journal of Business Administration, 15(2), 102. doi.orgSabauri, L., & Kvatashidze, N. (2025). Management Reporting Preparation Issues. doi.orgAuthor may be reached at eboard@icai.inThe Chartered Accountant · www.icai.org · April 2026
Global Trade
Ep. 44 — Turning Costs into Strategy: How Indian Exporters Can Respond to Rising U.S. Tariffs
CA Journal
· July 2026
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Turning Costs into Strategy: How Indian Exporters Can Respond to Rising U.S. TariffsThe recent escalation of tariffs in the United States has unsettled global trade patterns, particularly for exportoriented economies like India. While tariff hikes were directed mainly at Chinese products, their ripple effects were felt across value chains and competing suppliers. This article discusses the nature of tariffs, their impact on Indian exporters, and how Management Accounting techniques, specifi cally Cost Segregation, Contribution Margin (CM), and Break-Even Point (BEP) analysis, can help fi rms evaluate whether to sustain their presence in the U.S. or pivot to alternative markets. Drawing on India’s preferential trade agreements, the article identifi es regions such as the Middle East, Australia, and ASEAN as viable destinations where tariff relief, shorter logistics, and indirect cost savings could preserve competitiveness.IntroductionIn recent years, tariff s have re-emerged as a potent policy instrument in the global economy. Th e United States, long regarded as a champion of free trade, has increasingly used tariff s to protect strategic sectors. For Indian exporters, who oft en operate on thin margins, such measures can tilt the balance between profi t and loss. What makes the present context distinctive is that tariff s are no longer merely economic tools but also political signals. While recent tariff actions have been directed primarily at Chinese imports, Indian exporters to the U.S. face a more uncertain and arguably less predictable trade environment. It is therefore timely to revisit how Management Accounting can serve not just as a reporting function, but as a compass for strategic navigation.01 Tariffs and Their ImplicationsTariffs function as import duties that raise the landed cost of goods entering a country, reducing their price competitiveness. For Indian firms the consequence is twofold: products competing directly with Chinese exports may find an opening, provided they can land at competitive prices — while categories where Indian exports themselves face duties see margins erode unless the burden is offset elsewhere in the value chain.02 From Accounting to StrategyIntuition alone is insufficient in these conditions. Companies require a structured, numerical framework — and Management Accounting supplies exactly that, through three disciplines that together answer one strategic question: continue in the U.S. market, or reallocate to alternatives with lower tariffs and leaner indirect costs?Discipline ICost SegregationSeparates variable costs — raw materials, freight, tariffs, commissions — from fixed costs such as administration, certification, and promotion, so the negotiable is distinguished from the non‑negotiable.Discipline IIContribution MarginIsolates what remains after variable costs are deducted from the selling price — reframing the question from "how much are we selling?" to "how much are we keeping?"Discipline IIIBreak‑Even PointDivides fixed costs by per‑unit contribution margin to quantify exactly how many units or shipments are needed before a market turns profitable.03 Cost Segregation: Clarifying the Anatomy of CostsAn item that earlier attracted a 5% duty may now face 20% or even 50%, changing its economics overnight. Without a clear split between fixed and variable costs, companies risk misreading the true impact of such changes. Segregating costs lets exporters ask sharper questions:Which portion of the cost increase is truly variable, directly linked to tariff hikes?How much of the overhead remains unaffected, regardless of destination market?Which indirect costs — like financing inventory stuck in long shipping routes — are magnified when tariffs lengthen customs clearance times?An auto‑components manufacturer exporting to the U.S., for instance, may find that raw‑material duties inflate per‑unit costs while fixed expenses — plant maintenance, R&D salaries, insurance — stay unchanged. That distinction lets management decide whether producing additional units for a high‑tariff market is worthwhile, or whether production should shift toward tariff‑free destinations such as ASEAN or the UAE.04 Contribution Margin: Beyond Revenue, Towards ValueA common trap in turbulent times is chasing revenue at any cost — continuing to export even as tariffs quietly erode margins. Contribution margin analysis is the antidote, isolating the value each unit contributes toward fixed costs and profit once inflated variable costs are stripped away.Consignment ComparisonPer UnitU.S. Consignment — Before Tariffs₹40,000 CMU.S. Consignment — After Tariffs₹25,000 CMAustralian Order — After Tariffs₹35,000 CMHigher absolute U.S. sales volume masks the truth: Australia delivers more value per unit of capacity.For exporters, this shift in focus — from revenue to contribution — redirects strategy. Instead of spending marketing budget and managerial energy defending high‑volume, low‑margin markets, firms can prioritise destinations where contribution margins stay healthy.05 Break‑Even Analysis: Quantifying the Threshold of ViabilityEven when contribution margins shrink, companies may argue that a U.S. presence is essential for reputation or long‑term contracts. Break‑even analysis supplies the reality check.Apparel Exporter — Fixed Costs ₹5 CroreBEP ModelContribution Margin — Before Tariffs₹450 / unitContribution Margin — After Tariffs₹300 / unitBreak‑Even Volume — Before11,100 unitsBreak‑Even Volume — After16,600+ unitsRealistic U.S. Demand12,000 unitsDemand falls ~4,600 units short of break‑even — the strategy is unsustainable as priced.BEP is not merely an accounting formula; it is a litmus test of viability. It shifts boardroom conversation from vague optimism ("we must hold on to the U.S. market") to quantified scenarios ("we need 5,000 more units than the market can absorb") — allowing firms to make hard but necessary calls on scaling down, renegotiating, or pivoting.Tariff changes are more than alterations in trade policy; they are disruptions that ripple through cost structures, profit margins, and ultimately the strategic choices of firms. On the volatility of the external trade environment06 From Analysis to Strategy: Creating FocusIndividually, cost segregation, contribution margin, and break‑even analysis each highlight a different dimension of tariff impact. Together they form a decision‑making triad: segregation defines where the pain lies, contribution margin shows which market still creates value, and break‑even reveals which strategies are viable at scale. An exporter may discover that while tariffs hurt U.S. margins, ASEAN markets offer both higher contribution and a realistic break‑even — allowing the firm to double down on ASEAN while keeping only a symbolic U.S. presence.07 Alternative Markets for Indian ExportersIndia's expanding network of trade agreements gives exporters real options for reducing tariff exposure and diversifying demand.Middle East & GCCUAE & OmanUnder the India–UAE CEPA, over 90% of exports enter duty‑free; bilateral trade crossed USD 85 billion in FY2024. Oman's 2024 CEPA adds a logistics gateway to East Africa via the ports of Sohar and Duqm.OceaniaAustraliaThe Australia–India ECTA has eliminated duties on 85%+ of tariff lines — rising toward 90% — benefiting textiles, leather, gems, auto‑components, and processed foods.Southeast AsiaASEAN EconomiesThe ASEAN–India FTA reduces or eliminates duties across roughly three‑quarters of tariff lines. Vietnam, Indonesia, Thailand, and Malaysia offer proximity and growing demand.Re‑Export HubSingaporeMost goods enter duty‑free under the India–Singapore CECA, with predictable customs and minimal clearance delay — a direct market and a springboard into Asia‑Pacific.EuropeEFTA & the EUThe 2024 India–EFTA TEPA secures near‑complete duty‑free access to Switzerland, Norway, Iceland, and Liechtenstein. The broader EU remains viable for firms that can absorb compliance costs.FrontierAfricaPreferential access such as the India–Mauritius CECPA, shorter shipping distances, and lower competitive intensity can support healthier margins despite smaller individual volumes.08 Direct & Indirect Cost ConsiderationsTariff savings alone do not determine market attractiveness. Transit time, port clearance, documentation, and payment terms decisively alter profitability — indirect costs behave like "hidden revenue" once reduced.Oman / UAE 3–5 daysUnited States 30–40 daysA saving of even 2–3% in financing and logistics costs can offset moderate price discounts, lowering the break‑even point and improving resilience. Destination choice, in other words, must be evaluated on total cost economics, not tariff rates alone.09 Managerial ImplicationsTopline margins alone do not determine the best export destination. Finance managers must broaden their lens to incorporate indirect costs, tariff preferences, and market‑growth trajectories.Perhaps the most significant shift is not in numbers but in roles. Under stable trade regimes, accountants function as custodians of compliance. In a tariff‑laden world, their analyses shape strategy itself. On the evolving role of the finance function10 ConclusionTariffs in the U.S. remind us that international trade is as much about strategy as it is about price. Cost segregation, contribution margin, and break‑even analysis are indispensable to navigating uncertainty — technical tools that, in practice, transform ambiguity into actionable focus.The numbers suggest that while the U.S. remains significant, alternative destinations covered by CEPAs and FTAs can deliver equal or greater long‑term value once indirect costs are considered. Market selection becomes a strategic accounting decision guided by contribution margin, break‑even feasibility, and total cost economics — not a function of legacy export volumes alone.The role of the CEO, therefore, extends beyond markets. Strategic accounting serves as advisor: guiding firms on where to compete, how to price, and when to pivot.Author may be reached at nikhilmzaveri@gmail.com and eboard@icai.inReferencesASEAN Secretariat (2021). ASEAN–India Free Trade Agreement Overview. Jakarta.Department of Foreign Affairs and Trade (DFAT), Australia (2022). Australia–India Economic Cooperation and Trade Agreement. Canberra.Directorate General of Foreign Trade (DGFT), Government of India (2020). India–Chile Preferential Trade Agreement. New Delhi.JETRO (2020). Japan–India Comprehensive Economic Partnership Agreement. Tokyo.Korea International Trade Association (KITA) (2020). Korea–India CEPA. Seoul.Maersk (2023). Transit Times: India to Global Ports. Copenhagen.Ministry of Commerce and Industry, Government of India (2022). India–UAE CEPA. New Delhi.Ministry of External Affairs (MEA), Government of India (2021). India–Mauritius CECPA. New Delhi.Ministry of External Affairs (MEA), Government of India (2024). India–Oman CEPA. New Delhi.Ministry of Trade and Industry (MTI), Singapore (2020). India–Singapore CECA. Singapore.Office of the United States Trade Representative (USTR) (2024). Section 301 Tariff Actions. Washington DC.World Trade Organization (WTO) (2023). World Trade Report: Tariffs and Trade Measures. Geneva.The Chartered Accountant · Global Trade · April 2026 · www.icai.org
BANKING
Ep. 45 — Risk Management in Banking: Evolving Landscape and Opportunities
CA Journal
· July 2026
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Risk Management in Banking: Evolving Landscape and OpportunitiesBanking risk management has transformed from traditional siloed approaches to sophisticated, technology-driven integration. Digital lending now uses AI and alternative data for instant decisions, while operational risks have expanded to include cyber threats and third-party dependencies. Market volatility has intensifi ed, and model risk management has become critical as banks deploy hundreds of AI models. Climate risk introduces unprecedented long-term scenarios. This evolution presents signifi cant opportunities for Chartered Accountants, who possess strong analytical foundations but must develop new technical skills in data science and machine learning to contribute effectively to modern integrated risk frameworks.IntroductionTh ebanking industry stands at a transformative juncture where traditional risk management approaches are being fundamentally reimagined. What once constituted risk management i.e. analyzing balance sheets, taking collateral, and maintaining compliance checklists, has evolved into a sophisticated, technology-driven discipline that requires new skills, frameworks, and perspectives. For Chartered Accountants, this evolution presents both challenges and unprecedented opportunities. Our analytical training, attention to detail, and understanding of fi nancial fundamentals provide a strong foundation for navigating this new landscape. However, success in modern risk management requires us to expand our toolkit beyond traditional approaches. Th is article examines the key transformations reshaping risk management in banking, analyzes the emerging challenges and opportunities, and provides insights for CAs looking to contribute meaningfully to this evolving field.The Foundation Shift: From Silos to IntegrationTraditional Risk Management FrameworkThe traditional approach to risk management was characterized by clear boundaries and distinct responsibilities. Credit risk resided with lending departments, operational risk focused on compliance and process failures, and market risk concerned itself primarily with trading activities. This siloed approach worked reasonably well in a simpler banking environment where risks were more predictable and contained.Risk assessment relied heavily on historical data, relationship banking, and manual processes. Credit decisions were based on financial statement analysis, collateral evaluation, and personal relationships built over years. Operational risk primarily concerned itself with rogue traders, processing errors, and physical security breaches.The Modern RealityToday's banking environment has rendered these traditional silos obsolete. A single digital lending decision now simultaneously touches credit algorithms, cybersecurity protocols, and operational processes. The interconnected nature of modern banking means that risks cascade across traditional boundaries in ways that were previously unimaginable.The Basel framework evolution illustrates this transformation perfectly. From the basic capital requirements of Basel I, we have progressed to the comprehensive risk management ecosystem of Basel III, with Basel IV introducing even more sophisticated approaches to risk measurement and management.Modern risk governance has fundamentally changed. Board risk committees now spend more time discussing cyber incidents than traditional loan defaults. Risk appetite statements include tolerance levels for artificial intelligence model drift alongside conventional credit metrics. The three lines of defense model has evolved from a compliance-focused approach to a strategic risk partnership framework.Credit Risk in the Digital AgeThe Paradigm ShiftThe transformation of credit risk assessment represents one of the most dramatic changes in banking risk management. Traditional relationship-based lending, where decisions relied on officer judgment and borrower understanding, has given way to data-driven decision-making processes.Digital lenders now make loan decisions within minutes using hundreds of data points that were previously unavailable. Mobile usage patterns, payment behavior, social media activity, and location data create an entirely different information universe for credit assessment. This shift has enabled financial inclusion and increased efficiency, but has also introduced new categories of risk.New Challenges and ComplexitiesThe validation challenges associated with modern credit risk models are immense. How does one audit algorithms that consider 500+ variables? How do you explain loan rejections based on smartphone usage patterns? These questions highlight the complexity of modern credit risk management.Artificial intelligence models that predict behavior using alternative data sources present fascinating insights — battery charging frequency and loan application timing apparently correlate with repayment probability. However, these correlations raise important questions about transparency, fairness, and long-term stability.Provisioning methodologies have become equally complex. Traditional approaches relied on historical loss rates and aging analysis. Modern digital lending deals with insufficient historical data, different borrower segments, and unconventional default patterns that challenge established provisioning frameworks.RBI’s Shift to Expected Credit Loss FrameworkRecognizing these evolving complexities, the Reserve Bank of India proposed significant changes to credit risk norms in its meeting on October 7, 2025. The RBI mooted replacing the incurred-loss-based provisioning framework with an Expected Credit Loss (ECL) based provisioning approach to further strengthen credit risk management practices and promote greater comparability across financial institutions.The draft ‘Reserve Bank of India (Scheduled Commercial Banks & All India Financial Institutions – Asset Classification, Provisioning and Income Recognition) Directions, 2025’ aims to align regulatory norms with internationally accepted regulatory and accounting standards. Key elements of this proposed framework include:Staging criteria for asset classification under the ECL approach, while retaining existing norms for non-performing asset (NPA) classificationIncome recognition aligned to the Effective Interest Rate (EIR) methodModel risk management — broad principles for implementing ECL modelsAdditionally, the draft ‘Reserve Bank of India (Scheduled Commercial Banks – Capital Charge for Credit Risk – Standardised Approach) Directions, 2025’ seeks to implement key elements of global reforms by the Basel Committee on Banking Supervision, tailored to the Indian context. Major revisions include nuanced and granular risk weight treatment for exposures to corporates, MSMEs and real estate, and inclusion of ‘transactors’ under the regulatory retail category — credit cards with timely repayments during the previous 12 months.These proposed guidelines are expected to enhance credit risk management practices and promote better comparability of reported financials across institutions, while increasing the robustness, granularity, and risk sensitivity of capital charge calculations.The Speed ChallengePerhaps the most concerning aspect of modern credit risk management is the acceleration of decision-making processes. Fintech companies originate loans faster than risk management practices can adapt. Feedback loops that previously provided learning opportunities over months have compressed to weeks, creating potential blind spots in risk assessment.Operational Risk: Beyond Traditional BoundariesThe Expanding ScopeOperational risk has evolved from a relatively predictable category focused on people, processes, systems, and external events to become potentially the most catastrophic risk category in modern banking. This transformation reflects the increasing complexity and interconnectedness of banking operations.Single API failures can bring down payment systems across multiple banks. Misconfigured cloud settings can expose millions of customer records. A single incorrect email click can trigger ransomware that shuts down operations for days. These scenarios were unimaginable in traditional operational risk frameworks.Risk · Capital · ExposureOperational risk now spans cyber threats, vendor dependencies, and cloud infrastructure — not just people and process failure.Digital Transformation ImpactEvery aspect of digital transformation has introduced new operational risks. Each fintech partnership creates third-party risk exposure. Every automation introduces potential failure points. Each AI deployment brings algorithmic risks that were absent from traditional risk frameworks.The interconnected nature of modern banking has created concentration risks that are difficult to quantify and manage. Vendor failures affect multiple banks simultaneously. Cloud provider issues can impact significant portions of the industry. The pursuit of operational efficiency has inadvertently increased systemic risk exposure.Cybersecurity and Third-Party Risk ManagementDigitalization has dramatically increased the attack surface for banks. The dependency on cloud providers, technology vendors, and partners means that weak links in any part of the ecosystem can lead to systemic risk. A cybersecurity breach at a third-party vendor can compromise multiple financial institutions simultaneously, making vendor risk management one of the most critical aspects of modern operational risk.Third-party risk management has emerged as a distinct discipline within operational risk. Banks now maintain vendor registers with hundreds of suppliers, each requiring risk profiling, interdependency analysis, and failure scenario planning. Due diligence for new vendors sometimes exceeds the scrutiny applied to major loan approvals.Business continuity planning has evolved from addressing localized disruptions to managing simultaneous failures across multiple critical systems and vendors. Scenario planning exercises that once seemed like science fiction are now based on real-world events and regulatory expectations.Market Risk and Liquidity ManagementFundamental Changes in Market DynamicsWhile the fundamentals of market risk — interest rate sensitivity, currency fluctuations, and price volatility — remain unchanged, the speed and magnitude of market movements have transformed dramatically. Markets can swing 50 basis points in a single day based on social media posts or algorithm-driven trading.Traditional asset-liability management models, built for stable environments, struggle with modern market volatility. The assumptions underlying these models — stable deposit bases, predictable interest rate cycles, and gradual market adjustments — no longer reflect reality.The Liquidity RevolutionDigital banking has fundamentally altered deposit behavior and liquidity management. Customers can move money between banks in seconds rather than days. Social media can trigger bank runs faster than regulators can respond. These changes have forced banks to reconsider their entire approach to liquidity management.The COVID-19 pandemic demonstrated that funding markets can disappear overnight, and supposedly “risk-free” government securities can become sources of significant losses. Traditional assumptions about stable deposits no longer apply when customers can chase yields with simple phone taps.Treasury functions have responded by maintaining liquidity buffers that would have seemed excessive five years ago. While the cost is significant, being caught short during stress periods can be fatal for financial institutions.Model Risk Management: The Invisible ChallengeThe Proliferation of ModelsModel risk has quietly become one of the most critical areas in risk management, yet it remains the least understood by senior management. Banks have evolved from using models for basic credit scoring to deploying them for virtually every business decision — loan approvals, pricing, provisioning, regulatory capital calculation, fraud detection, customer segmentation, and even branch location decisions.The complexity is staggering. Mid-sized banks now operate with over 200 models in production, each with data dependencies, performance metrics, validation requirements, and potential failure modes. The challenge of maintaining comprehensive understanding across all these models is significant.Model Risk and Explainability ChallengesUsing machine learning and AI improves prediction power, but with complex models comes increased risk of errors, bias, and non-transparent decisions. Regulatory scrutiny has intensified as regulators demand explanations for automated decisions that affect customers’ financial lives. Model mis-specification or insufficient oversight can lead to substantial losses.Traditional statistical models were interpretable — decisions could be explained and validated. Modern AI models often function as black boxes, performing effectively but making explanation to regulators or audit committees nearly impossible. This explainability challenge has become a critical concern for risk managers and boards alike.Model validation has evolved from checking mathematical accuracy to ensuring fairness, detecting bias, monitoring performance drift, and validating training data quality. The question is no longer just “is the model right?” but “is it right for the right reasons?”Concept Drift and Model DegradationOne of the most challenging aspects of model risk management is concept drift — when the underlying relationships that models were designed to capture change over time. Models trained on pre-COVID data performed poorly during the pandemic as economic relationships shifted and customer behaviors changed overnight.This highlights the importance of continuous monitoring and the need for robust governance frameworks that can detect when models are no longer fit for purpose, even when they appear to be performing as designed.Data Quality, Privacy, and GovernanceAdvanced analytics and AI-driven risk management depend fundamentally on high-quality data. However, this dependency introduces multiple risk dimensions that banks must actively manage.Data quality issues can compromise the entire risk management framework. Incomplete data, inconsistent formats across systems, outdated information, and errors in data entry can all lead to flawed risk assessments and poor decisions. The old adage “garbage in, garbage out” has never been more relevant.Privacy concerns have escalated with stringent data protection regimes like GDPR and local laws imposing severe penalties for breaches. Banks must balance the need for comprehensive data for risk assessment with customers’ rights to privacy and data protection. This balancing act becomes particularly complex when using alternative data sources for credit decisions.Third-party and vendor data sources introduce additional risks. When banks rely on external data providers, they must ensure data accuracy, currency, and compliance with regulatory requirements. The dependency on these external sources creates vulnerabilities that must be carefully managed through robust data governance frameworks.Effective data governance requires clear policies on data collection, storage, usage, and disposal. It demands investment in data quality management systems, regular audits, and training for personnel handling sensitive information. The cost of poor data governance — in regulatory penalties, reputational damage, and flawed decision-making — far exceeds the investment required for robust frameworks.Integrated Risk Management: The New ImperativeThe Breakdown of Traditional SilosModern risks do not respect organizational boundaries. Cyber-attacks simultaneously affect operational continuity, credit portfolios, market positions, and liquidity management. These interconnected risks cannot be managed effectively in isolation.Risk appetite frameworks have evolved from separate limits for each risk type to integrated frameworks that consider how risks amplify each other. Banks must now answer questions like: What is your appetite for operational risk during credit stress? How do you manage market risk while responding to cyber incidents?Stress Testing and Scenario AnalysisStress testing has become the closest approximation to integrated risk assessment. Instead of testing each risk category separately, banks now run scenarios that stress multiple risk types simultaneously. These exercises force institutions to consider what happens when interest rates rise while cyber incidents increase and credit losses spike — reflecting the reality that multiple stress factors often occur together.Organizational and Cultural ImplicationsThe move toward integrated risk management has significant organizational implications. Risk functions increasingly resemble technology companies rather than traditional banking departments, with data scientists working alongside credit officers and cybersecurity experts integrated into every risk discussion.Risk culture becomes critical when risks interact unpredictably. Organizations need people who think about second and third-order effects rather than just immediate responsibilities within their functional areas. This cultural shift requires bringing risk management into strategic decisions rather than treating it merely as a compliance or after-the-fact function.Incentive alignment is crucial — performance metrics and compensation structures must reward risk-aware behavior and penalize excessive risk-taking. When business units are incentivized solely on growth or revenue, risk considerations often take a backseat until problems emerge.Future Directions and Emerging ChallengesClimate Risk and ESG ConsiderationsClimate risk is forcing the industry to model scenarios without historical precedent. Traditional risk models assume the future resembles the past, but climate change breaks this fundamental assumption. Banks must now stress test for sea level rise affecting real estate portfolios over 30-year horizons and extreme weather events that could disrupt operations and credit performance.Broader environmental, social, and governance (ESG) risks are gaining prominence in risk management frameworks. These non-financial risks are harder to quantify and often manifest slowly, but may lead to large losses or erosion of stakeholder trust. Reputational risk from poor ESG practices can materialize suddenly and devastatingly in today’s socially connected world.Regulatory Evolution and Compliance BurdenAs regulatory rules evolve, banks need capability to respond quickly. Regulatory fragmentation, with different jurisdictions imposing different rules, creates complexity and compliance burden. The potential penalties for non-compliance have increased substantially, making regulatory risk management a critical priority.RegTech (Regulatory Technology) is evolving beyond compliance automation to predictive risk identification. Instead of detecting problems after they occur, banks are building systems that identify emerging risks before they materialize through real-time transaction monitoring, behavioral anomaly detection, and network analysis of systemic risks.Dynamic Risk ManagementRisk governance is becoming more dynamic, with static annual risk appetite statements being replaced by adaptive frameworks that adjust to changing conditions. Risk limits now flex based on market volatility, stress conditions, and emerging threat landscapes.This dynamism requires sophisticated monitoring systems, rapid decision-making processes, and governance structures that can respond quickly without compromising oversight effectiveness.Cost Versus Return Trade-offsUpgrading systems, training people, implementing robust controls, and building comprehensive risk management frameworks all require substantial investment. Banks must balance risk mitigation against profitability and competitive pressures.The challenge lies in quantifying the return on risk management investments. While the cost of controls is immediate and measurable, the benefit — avoiding losses that might never materialize — is difficult to demonstrate. This asymmetry can lead to underinvestment in risk management until a crisis forces reactive spending.Opportunities for Chartered AccountantsThe Professional AdvantageCAs possess several advantages in the evolving risk management landscape. Our analytical training, attention to detail, and understanding of financial fundamentals provide a strong foundation for risk management roles. The ability to analyze complex financial information, understand regulatory requirements, and communicate effectively with stakeholders remains highly valuable.The professional skepticism and ethical grounding that define CA training are particularly relevant in an environment where AI-driven decisions must be questioned and validated. Our experience with auditing and assurance translates well to model validation and risk assessment frameworks.Skill Development RequirementsSuccess in modern risk management requires expanding beyond traditional CA skillsets. Tomorrow’s risk professionals need technical skills including:Data Science Fundamentals — statistical analysis, data visualization, and basic programming (Python, R, SQL)Machine Learning Concepts — how algorithms work, their limitations, and validation approachesCybersecurity Awareness — basic understanding of cyber risks, controls, and incident responseSystems Thinking — understanding interconnections and anticipating cascading effectsBehavioral Psychology — insight into how people make decisions under uncertaintyScenario Planning — developing and analyzing complex stress scenariosThese technical skills must be complemented by judgment that comes from experience with real risk events and exposure to diverse risk situations.Addressing Skill GapsBanks face significant skill gaps in data science, cybersecurity, and scenario planning. CAs who invest in developing these capabilities position themselves to fill critical needs in the industry. Professional development programs, certifications in data analytics, and exposure to technology projects can help bridge these gaps.The democratization of risk awareness means that risk management is no longer confined to risk departments. Business line managers are becoming sophisticated risk thinkers, creating opportunities for CAs to contribute across various functions while maintaining their risk management focus.Career PathwaysThe expanding scope of risk management creates diverse career pathways:Model Risk Management Third-Party Risk Climate & ESG Risk RegTech Integrated Risk Management Risk AnalyticsModel Risk Management involves validating AI/ML models, ensuring explainability, and monitoring performance. Third-Party Risk covers managing vendor relationships, conducting due diligence, and monitoring dependencies. Climate and ESG Risk means developing frameworks for assessing long-term environmental and social risks. RegTech is about building or implementing technology solutions for regulatory compliance. Integrated Risk Management coordinates across risk types and develops stress testing scenarios, while Risk Analytics leverages data science for risk identification and measurement.Value Creation OpportunitiesCAs can create significant value by bridging the gap between traditional financial analysis and modern risk management techniques. The ability to translate complex risk concepts into business language that boards and senior management can understand remains in high demand.Specific areas where CAs can add value include:Provisioning and Capital Adequacy — helping implement ECL frameworks and enhanced capital charge calculations under the new RBI guidelinesRisk Reporting — designing dashboards and reports that provide actionable insights rather than just data dumpsGovernance Frameworks — developing policies and procedures that balance control with business agilityRisk Culture — promoting risk awareness and responsible decision-making across organizationsBusiness Partnering — working with business units to embed risk considerations in strategic planningConclusionThe evolution of risk management in banking represents both a challenge and an opportunity for the profession. While the complexity has increased dramatically, the fundamental need for analytical rigor, professional judgment, and ethical decision-making remains unchanged.For CAs, this evolution requires continuous learning and adaptation. The technical skills, regulatory knowledge, and business acumen that define our profession provide an excellent foundation, but success requires embracing new technologies, frameworks, and ways of thinking about risk.The future belongs to risk professionals who can combine analytical rigor with intuitive understanding of what could go wrong. As the banking industry continues to evolve, CAs who invest in developing these capabilities will find themselves well-positioned to contribute meaningfully to this critical function.The transformation of risk management is not complete: we are still in the early stages of this evolution. The frameworks, technologies, and approaches being developed today will help banks navigate uncertainties we cannot yet imagine. For CAs willing to embrace this challenge, the opportunities are immense.The key emerging challenges — model risk and explainability, data quality and governance, cybersecurity and third-party threats, regulatory compliance burden, cultural and organizational issues, cost-return trade-offs, and the growing prominence of non-financial risks — each represent areas where skilled professionals can make substantial contributions.Risk management in banking has evolved from a compliance function to a strategic capability. Those who understand this transformation and develop the skills to contribute effectively will find themselves at the forefront of one of the most important and dynamic areas in modern banking. The journey requires commitment to continuous learning, willingness to step outside traditional comfort zones, and courage to embrace the uncertainty that defines modern risk management itself.SGCA. Saurabh GuptaMember of the Institute · Reach the author at saurabh14776@gmail.com and eboard@icai.inIn this articleThe Foundation ShiftCredit Risk in the Digital AgeOperational RiskMarket Risk & LiquidityModel Risk ManagementIntegrated Risk ManagementFuture DirectionsOpportunities for CAsKey Data PointsBasel I → III → IV: capital rules evolving toward integrated risk ecosystems200+ models in production at mid-sized banksMarkets can swing 50 bps in a single dayRBI’s ECL provisioning proposal — Oct 7, 2025Six Skills for Tomorrow’s Risk CAData Science FundamentalsMachine Learning ConceptsCybersecurity AwarenessSystems ThinkingBehavioral PsychologyScenario PlanningThe Chartered Accountant · April 2026 · Page 90–95 · www.icai.org
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Ep. 50 — The Role of Chartered Accountants in Strengthening India’s Insolvency Ecosystem
CA Journal
· July 2026
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The Role of Chartered Accountants in Strengthening India’s Insolvency EcosystemA Decade of IBC: Transforming India’s Credit EcosystemThe enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) marked a turning point in India’s economic and financial governance framework. Widely regarded as one of the most significant structural reforms of recent times, the Code sought to replace a fragmented and inefficient insolvency regime with a unified, modern, and market-oriented framework for resolving financial distress. Before the advent of the IBC, insolvency proceedings were often characterised by protracted litigation, multiplicity of forums, and substantial destruction of enterprise value. Businesses languished for years in various recovery and restructuring mechanisms, resulting in deterioration of assets, loss of employment, diminished investor confidence, and low recoveries for creditors. Frequently, by the time proceedings concluded, the underlying enterprise had ceased to exist as a viable going concern.Against this backdrop, the IBC introduced a comprehensive and time-bound mechanism aimed at facilitating resolution of distressed businesses while preserving economic value. By placing creditors at the centre of the decision-making process and prioritising resolution over liquidation, the Code brought about a fundamental shift in the treatment of financial distress in India. More importantly, it established a framework that promotes accountability, commercial discipline, and efficient allocation of capital, thereby strengthening the foundations of the country’s credit ecosystem.Over the past decade, the IBC has evolved beyond a statutory framework into a key institution of economic governance. Its influence extends far beyond insolvency proceedings, shaping borrower behaviour, lending practices, investment decisions, and corporate governance standards. The Code has contributed significantly to enhancing confidence in India’s financial architecture by providing a credible mechanism for addressing business failure and financial stress. Simultaneously, judicial pronouncements and regulatory refinements have helped develop a mature and evolving insolvency ecosystem capable of responding to changing economic realities and stakeholder expectations.The achievements of the Code are reflected in its outcomes. As on March 2026, resolution plans had been approved in 1,419 cases, resulting in realisations exceeding ₹4 lakh crore for creditors. Significantly, these recoveries amounted to approximately 95 per cent of the fair value and 167 per cent of the liquidation value of the resolved entities, demonstrating the effectiveness of resolution as a value-preserving mechanism. Since inception till March 2026, 8,987 cases were admitted under the Code, of which 7,102 had reached closure. Of these concluded cases, 4,099 companies, representing nearly 58 per cent of closures, were rescued through resolution, settlement, withdrawal, appeal, or review processes, while 3,003 proceeded to liquidation. Notably, around 42% of the cases that ended with resolution plans had previously been with the Board for Industrial and Financial Reconstruction or were defunct, underscoring the Code’s role in facilitating the revival of financially distressed enterprises.One of the most transformative effects of the IBC has been its impact on credit culture. The Code has altered the dynamics between borrowers and creditors by creating a credible consequence for persistent default. Faced with the possibility of losing management control upon admission into insolvency proceedings, many debtors have chosen to resolve financial stress at an early stage. This behavioural change is evident from the fact that more than 30,000 matters involving nearly ₹14 lakh crore were settled prior to admission under IBC. These settlements illustrate the significant deterrent value of the Code and underscore its role as an instrument for promoting consensual resolution outside formal insolvency proceedings.The broader impact of this behavioural shift is visible in the banking sector. The improvement in asset quality witnessed over the past decade cannot be viewed in isolation from the insolvency reforms introduced through the IBC. The gross non-performing asset ratio of the banking system, which stood at nearly 11.8 per cent in 2017, declined to approximately 2.1 per cent by September 2025. While several factors contributed to this improvement, the discipline induced by the insolvency framework and the increased willingness of borrowers to engage with creditors played an important role in strengthening the overall credit environment.More than 50% of the Insolvency Professionals registered with IBBI are Chartered Accountants, reflecting their significant presence in the profession. Insolvency Professionals constitute the backbone of the insolvency ecosystem.India’s insolvency framework has also earned increasing recognition at the international level. Reflecting improvements in recovery mechanisms and resolution efficiency, S&P Global Ratings upgraded India’s insolvency regime from Group C to Group B. This recognition is indicative of the progress made in creating a more effective and predictable resolution framework. Recovery rates have improved considerably when compared with the pre-IBC era. While creditors historically recovered only around 15–20 per cent of their claims through traditional mechanisms, average recoveries under the IBC have increased to nearly 30 per cent. Equally important, the time required for resolution has reduced substantially from an average of six to eight years under earlier frameworks to approximately two years under the Code.The effectiveness of the IBC is further reflected in the Reserve Bank of India’s Report on Trends and Progress of Banking in India 2024–25. The report identifies the Code as the most successful recovery channel for stressed assets among the various mechanisms available to banks. Of the total recoveries of 1.04 lakh crore made by Scheduled Commercial Banks during the year, approximately 0.54 lakh crore, accounting for more than half of the total recoveries, was realised through the IBC process. The report also notes an increase in recovery rates under the Code from 28.3 per cent in the previous year to 36.6 per cent in 2024–25, reaffirming its growing effectiveness in addressing stressed assets and improving balance sheet health within the banking sector.The impact of the IBC extends beyond recovery statistics and financial outcomes. Studies examining its behavioural effects point towards a significant improvement in repayment discipline among borrowers. Research conducted by the Indian Institute of Management, Bangalore observed a steady increase in the proportion of loan accounts transitioning from overdue status to normal classification following the introduction of the Code. This behavioural shift was also reflected in a sharp reduction in the average number of days an account remained overdue, which declined from 248–344 days to just 30–87 days.Evidence of the Code’s success is also visible in the post-resolution performance of rescued businesses. A study undertaken by the Indian Institute of Management, Ahmedabad in 2025 examined the long-term outcomes of companies resolved under the IBC and reported substantial improvements across key business indicators. During the five years following resolution, average sales increased by nearly 89 per cent, while asset turnover ratios improved by approximately 131 per cent, reflecting enhanced operational efficiency and business recovery. The average capital expenditure rose by approximately 106 per cent in five years after, reflecting renewed investment and economic viability. The study further noted a remarkable increase in the aggregate market valuation of resolved listed entities, which rose from nearly ₹2.8 lakh crore to about ₹9 lakh crore over five years, signalling strengthened investor confidence and improved long-term growth prospects following successful resolution.Role of Chartered Accountants under IBCThe success of the IBC, however, cannot be attributed solely to legislative design. It is equally a product of the professionals who operationalise the framework and translate statutory objectives into practical outcomes. Among these professionals, Chartered Accountants occupy a uniquely significant position. Indeed, the insolvency ecosystem is deeply dependent upon accounting expertise, financial analysis, valuation, auditing, forensic examination, restructuring advisory and regulatory compliance—areas that lie at the very core of the Chartered Accountancy profession.(i) Chartered Accountants qualified to register as IPsThe contribution of Chartered Accountants to the insolvency framework begins at the very foundation of the process. Recognising the specialised financial expertise required to administer insolvency proceedings, the IBC permits Chartered Accountants possessing the prescribed experience and qualifications to register as Insolvency Professionals. More than 50 per cent of the Insolvency Professionals registered with IBBI are Chartered Accountants, reflecting their significant presence in the profession. Insolvency Professionals constitute the backbone of the insolvency ecosystem. The effectiveness of the Code is, to a considerable extent, dependent upon their competence, independence and professional judgement. Once appointed as an Interim Resolution Professional or Resolution Professional, the Insolvency Professional assumes control of the affairs of the corporate debtor, manages its operations as a going concern, preserves and protects its assets, constitutes the Committee of Creditors and facilitates the entire resolution process. Each of these responsibilities requires an exceptional understanding of financial statements, business operations, stakeholder interests and commercial realities which are competencies that Chartered Accountants are uniquely equipped to provide.(ii) Maintaining Books of AccountsThe role of Chartered Accountants becomes particularly critical during the initial stages of insolvency proceedings. One of the first challenges confronting an Insolvency Professional is obtaining a clear and reliable picture of the financial affairs of the corporate debtor. In this endeavour, statutory auditors and accounting professionals often provide the essential starting point. The Code empowers the Insolvency Professional to access books of account, financial records and audit documents maintained by auditors and accountants of the corporate debtor. These records form the basis upon which the financial position of the distressed enterprise is reconstructed and assessed. Without accurate accounting information, the insolvency process itself would struggle to achieve transparency and credibility.The importance of accounting expertise extends further into the management of the corporate debtor during the Corporate Insolvency Resolution Process. In many cases, the financial records of distressed companies are incomplete, outdated or inadequately maintained. Chartered Accountants are engaged to assist Insolvency Professionals in reconstructing books of account, ensuring compliance with statutory obligations and maintaining accounting records throughout the resolution process. Their involvement enables continuity in financial reporting and facilitates informed decision-making by stakeholders.Chartered Accountants are engaged to assist Insolvency Professionals in reconstructing books of account, ensuring compliance with statutory obligations and maintaining accounting records throughout the resolution process. Their involvement enables continuity in financial reporting and facilitates informed decision-making by stakeholders.(iii) Verification of ClaimsOne of the most consequential responsibilities during insolvency proceedings is the verification and collation of claims. The composition of the Committee of Creditors, the determination of voting shares and the ultimate distribution of proceeds are all dependent upon the accurate admission of claims. This exercise often involves reconciliation of complex financial records, examination of supporting documentation and assessment of claims. Chartered Accountants, by virtue of their training in accounting, auditing and financial reconciliation, play a pivotal role in ensuring that claims are verified accurately and fairly.(iv) Audits during CIRPBeyond claim verification, Chartered Accountants contribute significantly to financial transparency and governance during the insolvency process. Recent amendments to the insolvency framework permit the Committee of Creditors to direct audits of the Corporate Debtor, where considered necessary. Given their expertise in auditing and assurance services, Chartered Accountants are naturally positioned to undertake such assignments. Their findings often provide critical insights that assist creditors in making informed decisions during the process.(v) Identification of Avoidance TransactionsPerhaps one of the most specialised contributions of Chartered Accountants within the insolvency ecosystem relates to the identification of avoidance transactions. The Code contains elaborate provisions empowering Resolution Professionals to examine whether the corporate debtor has entered into preferential, undervalued, extortionate or fraudulent transactions during the relevant look-back period. The identification of such transactions requires far more than a superficial review of records. It demands examination of financial statements, tracing of fund flows, analysis of related-party transactions and assessment of commercial rationale. Chartered Accountants, particularly those possessing forensic and investigative expertise, play a central role in this exercise. Their work not only facilitates recovery of value for creditors but also reinforces accountability and deters misconduct by errant managements.(vi) Evaluation of Resolution PlansThe contribution of Chartered Accountants becomes even more visible when the process enters the stage of evaluating resolution plans. The objective of the IBC is not merely to recover dues but to preserve viable businesses and maximise enterprise value. Resolution plans frequently involve complex restructuring proposals encompassing debt restructuring, mergers, demergers, asset transfers, operational turnaround strategies and fresh investments. The preparation and evaluation of such plans require rigorous financial modelling and commercial assessment. Chartered Accountants provide critical support in analysing business viability, projecting future cash flows, assessing financial feasibility and evaluating implementation strategies. Their expertise enables stakeholders to distinguish between commercially sustainable proposals and those that may be unlikely to succeed in practice.(vii) Valuation of AssetsValuation constitutes another area where Chartered Accountants make substantial contributions. Accurate valuation is indispensable for informed decision-making by creditors. The determination of fair value and liquidation value provides the benchmark against which resolution plans are assessed. Under the regulatory framework, members of the Institute of Chartered Accountants of India possessing the prescribed qualifications and experience are eligible to register as valuers for the asset class “Securities or Financial Assets”.(viii) Contribution to Liquidation ProceedingsThe significance of Chartered Accountants is equally evident in liquidation proceedings. While the Code prioritises resolution, liquidation remains necessary where revival is not commercially feasible. Liquidation involves identification and preservation of assets, verification of stakeholder claims, realisation of value and distribution of proceeds in accordance with the statutory waterfall mechanism. Each of these activities requires meticulous accounting and financial management. Chartered Accountants assist liquidators in maintaining accounts, ensuring compliance and safeguarding stakeholder interests throughout the liquidation process.The journey of the IBC over the last decade has demonstrated that insolvency resolution is ultimately about preserving value, restoring confidence and enabling economic renewal.Concluding RemarksThe broader success of the IBC has highlighted an important truth: insolvency resolution is not solely a legal process; it is fundamentally an exercise in financial and commercial decision-making. Law establishes the framework, but the effectiveness of the framework depends on professionals capable of interpreting financial realities, preserving value and building stakeholder confidence. Chartered Accountants bring precisely these capabilities to the insolvency ecosystem. Their professional training emphasises objectivity, analytical rigour, ethical conduct and public interest i.e., qualities that are indispensable in situations involving competing stakeholder interests and significant economic consequences.As India advances towards the vision of Viksit Bharat 2047, the importance of an efficient insolvency regime will continue to grow. Economic expansion, increasing credit penetration, globalisation of business operations and the emergence of complex financial structures will inevitably create new challenges in the management of financial distress. Addressing these challenges will require professionals who possess not only technical expertise but also strategic insight and commercial judgement. Chartered Accountants are exceptionally well positioned to meet this requirement.The journey of the IBC over the last decade has demonstrated that insolvency resolution is ultimately about preserving value, restoring confidence and enabling economic renewal. Chartered Accountants have been active participants in this journey from its inception. Whether as Insolvency Professionals, auditors, valuers, forensic experts, advisors or restructuring specialists, they have contributed significantly to the development of a robust and credible insolvency ecosystem. Their role extends beyond compliance and process management; they serve as custodians of transparency, accountability and value maximisation. As the insolvency framework continues to evolve, Chartered Accountants will remain central to its success, helping transform financial distress into opportunities for revival and ensuring that the objectives of the Code are translated into meaningful economic outcomes.Author may be reached at eboard@icai.inwww.icai.org July 2026
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Ep. 51 — Enhancing Professional Competence in Emerging and Developing Economies: A Blueprint for South Asia
CA Journal
· July 2026
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Enhancing Professional Competence in Emerging and Developing Economies: A Blueprint for South AsiaThe ICAI journey mirrors India’s remarkable ascent as a global economic powerhouse. This milestone offers an opportune moment to reflect on the broader mandate facing the profession across emerging and developing economies (EDEs). IntroductionThe South Asian Federation of Accountants (SAFA) extends its warmest congratulations to the Institute of Chartered Accountants of India (ICAI) on the 78th Chartered Accountants day and on the historic milestone of the 75th edition of ‘The Chartered Accountant’ journal. The journal is the flagship publication that has served as an intellectual anchor, a voice of the leaders capturing the evolution of accountancy from a discipline of compliance to a cornerstone of global economic strategy from over seven decades.The ICAI journey mirrors India’s remarkable ascent as a global economic powerhouse. This milestone offers an opportune moment to reflect on the broader mandate facing the profession across emerging and developing economies (EDEs). The global economic narrative is increasingly written in the vibrant, high-growth corridors of EDEs, particularly within South Asia. Yet, for these regions to sustain their upward trajectories, the financial ecosystems supporting them must be built on a bedrock of absolute trust, transparency, and sophisticated financial architecture.The profession which builds on the foundation of Trust is that of Chartered Accountant, hence their role and responsibility evolve with time. In an era defined by rapid technological disruption, macroeconomic volatility, and evolving global regulatory landscapes, the prospects of the accounting profession have never been more dynamic or demanding. For EDEs, enhancing professional competence is not merely an institutional goal; it is a macroeconomic imperative.The Shifting Paradigm of Competence and the Prospect of the ProfessionThe prospect of the accounting profession is undergoing a profound structural evolution. We are moving rapidly away from the historic perception of the accountant as a rear-view chronicler of historical financial data. The modern Chartered Accountant is emerging as a forward-looking strategic architect, a data navigator, and a custodian of multi-dimensional corporate value. In EDEs, where markets are rapidly formalizing and expanding, the demand for sophisticated financial governance means that the profession’s strategic relevance will only intensify.We are witnessing a structural migration in global accounting standards. The rigorous application of complex frameworks such as IFRS 9 (Financial Instruments) and IAS 32 demands a deep conceptual understanding of financial engineering, credit risk modeling, and forward-looking measurement methodologies, moving decisively away from historical cost conventions. Professional Accountancy Organizations (PAOs) in EDEs must cultivate an educational ecosystem where practitioners do not just memorize standard text, but master the underlying economic realities these standards seek to represent.Directional Brief on Emerging Areas: Multidisciplinary SustainabilityAs the profession looks to the horizon, the traditional boundaries of accounting are expanding into highly specialized, non-traditional domains. The most critical emerging area is sustainability assurance and management, which demands a radical departure from siloed accounting practices.The modern accountant cannot operate in isolation. Tomorrow’s competency model relies heavily on the ability to lead and work within multidisciplinary teams. When evaluating environmental impacts, carbon footprints, or climate resilience, Chartered Accountants must collaborate seamlessly with environmental scientists, engineers, data analysts, and legal experts.Thinking Sustainability Beyond the Climate LensTo truly enhance competence in EDEs, we must expand our understanding of sustainability beyond environmental and climatic issues. While carbon reduction is vital, true sustainability in developing nations encompasses the entire spectrum of Social, Governance, and Resource Optimization metrics.The professional accountant’s competency matrix must now integrate frameworks like IFRS S1 and IFRS S2, but apply them to a broader canvas:Social & Gender Dimensions: Measuring and reporting on fair labor practices, gender equity in leadership, workplace safety, and the socio-economic impact of corporate operations on local communities.Resource Optimization: Developing sophisticated management accounting frameworks that measure how efficiently, economically, and effectively a company utilizes scarce natural and economic resources. By championing circular economy metrics and eliminating waste, accountants directly drive both profitability and national resource conservation.Macroeconomic Policy, Structural Impact, and Broad-Canvas Going ConcernProfessional competence can no longer be viewed strictly through the micro-lens of individual corporate balance sheets; it must be grounded in macro-economic policy realities. In developing economies, the performance of major enterprises directly influences national employment rates, income distribution, and socio-economic stability.Accountants must understand how fiscal and monetary policies cascade down to corporate health. This understanding is particularly vital when evaluating the going concern principle. In EDEs, a going concern failure has severe ramifications that ripple far beyond equity holders.Public Financial Management, Governance, and Navigating StagflationThe role of the profession in the public sector is just as critical as its role in corporate boardrooms. True regional stability requires an accounting fraternity that is deeply embedded in Public Financial Management (PFM) and fiscal governance. This mandate becomes acute during periods of macroeconomic distress such as stagflation (characterized by high inflation and low growth) and sharp currency devaluations.During such economic storms, governments face shrinking revenues and escalating costs. The profession must offer the technical expertise required to optimize fiscal management, ensure value for public money, and maintain robust governance to prevent leakages.Navigating the Technological Frontier and the Ethical ImperativeAs we expand our macroeconomic and public roles, the operational realities of our profession continue to be rewritten by Artificial Intelligence (AI) and blockchain technology. In many EDEs, technology offers an unprecedented opportunity to “leapfrog” legacy systems, streamlining audit processes and enhancing data analytics.As AI assumes routine analytical tasks, the professional’s value shifts entirely to human judgment, skepticism, and ethical oversight. We must guard against “black box” reliance, ensuring that automated financial insights comply with fundamental ethical principles of objectivity, integrity, and professional care.Bridging the “Mindset Gap”: Cultivating Leadership and OwnershipTechnical upskilling, while vital, addresses only half of the challenge. The true catalyst for enhancing professional competence lies in transforming the professional mindset i.e., moving practitioners away from a reactive, compliance-driven posture toward an active, leadership-driven mindset.This cultural evolution centers on three distinct shifts:The Courage Mindset: Accountants in emerging economies frequently operate in highly pressurized environments. True competence requires the moral courage to stand firm in the face of compromised governance, upholding the public interest above short-term institutional or political pressures.The Ownership Mindset: Practitioners must view themselves not as external observers, but as active stakeholders in the economic health of their nations, taking proactive ownership of corporate governance outcomes.A Culture of Mentorship: To institutionalize these mental models, the profession must embrace a vibrant, intergenerational culture of mentorship. Structured institutional programs are vital to pass down the unwritten tenets of leadership, resilience, and professional attitude to the next generation of young members.Building upon this foundational support, ICAI stands as the vital strategic bridge connecting global standard-setting bodies like the International Federation of Accountants (IFAC) with regional bodies like SAFA.ICAI’s Role in Connecting the Global and Regional Accounting EcosystemsThe execution of this vast competency agenda requires visionary institutional leadership. As the world’s largest professional accounting body, the Institute of Chartered Accountants of India (ICAI) bears a unique and profound responsibility. This accountability is explicitly demonstrated through its unstinting structural commitment to our region, notably by providing the permanent Secretarial office support to SAFA, which serves as the operational hub for our regional initiatives.Building upon this foundational support, ICAI stands as the vital strategic bridge connecting global standard-setting bodies like the International Federation of Accountants (IFAC) with regional bodies like SAFA.By leveraging its immense institutional capacity, ICAI plays a pivotal role in driving global best practices down into the South Asian region, while simultaneously ensuring that the unique, localized challenges of EDEs are articulated and respected on the global stage.Crucially, ICAI can champion deeper collaboration and networking amongst practitioners, CFOs, and public finance officials across borders. By creating shared platforms for dialogue, joint research, and cross-border training, ICAI can foster a unified, resilient financial ecosystem across South Asia. This collaborative network allows CFOs and practitioners to share real-world strategies for managing stagflation, implementing sustainability frameworks, and navigating digital transformations in real time, elevating the standard of the entire regional fraternity.Conclusion: The Trusted Sentinel of Global AscentAs India and its neighbouring emerging economies march confidently toward advanced economic status, the accountancy profession cannot afford to be a passive bystander, we must elevate our profession with the current needs; economic growth without transparent financial infrastructure and macroeconomic governance is inherently fragile. Hence, this is the responsibility of every professional to take the baton and contribute in making of the better world.Further, I would like to congratulate the glorious 75-edition legacy of ‘The Chartered Accountant’ journal that offers both a moment of pride and a call to action: we must recommit to nurturing a global fraternity of accountants who are not only technically peerless but also courageous guardians of the public interest. By strengthening professional standards, promoting transparency, and embracing ethical leadership, the accounting community can transform its expertise into a bulwark for sustainable, resilient growth, thereby ensuring that prosperity is durable and widely shared.Author may be reached at eboard@icai.inwww.icai.org | July 2026 The Chartered Accountant
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Ep. 52 — Reimagining Global Finance Through Bharat’s only International Financial Services Centre @GIFT City
CA Journal
· July 2026
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Reimagining Global Finance Through Bharat’s only International Financial Services Centre @GIFT CityBharat’s incredible journey as the world’s largest and most diverse democracy over the last 78 years has been matched only by the pace of its economic growth over the last decade, powered by 1.4 billion Bharatiyas. Today, Bharat is scaling its ambition across exports, technology, infrastructure and manufacturing. Hon’ble Prime Minister’s call for Viksit Bharat @ 2047 has catalysed a series of strategic actions, including, legal, regulatory and procedural reforms, investment reforms in advanced manufacturing, infrastructure and services sector, Technology initiatives such as supporting Design in India, R&D funding through Anusandhan National Research Foundation (ANRF), Financial Inclusion programs such as ULI, UPI, etc., & Social inclusion programs such as Housing, Electricity, Telecom, Road connectivity for all, and more.For decades, the services sector has powered the Indian economy. Within this, a substantial share of the international financial services activity connected with India, such as financing for Indian companies, the leasing of an aircraft flown by an Indian air carrier, or a fund channelling global capital into Indian growth stories, was conducted from financial centres far from Indian shores. This was not for want of Indian talent; indeed, the world’s leading financial centres have long been substantially staffed by Indian professionals. The opportunity, the value addition and the ecosystem of high-quality professional services that accompany such activity were simply developing offshore. The question that animated the creation of an International Financial Services Centre on Indian soil was therefore a natural one: could such activities not be carried out from India itself, to India’s advantage and to the world’s?The GIFT International Financial Services Centre (GIFT IFSC) at Gandhinagar has been envisioned by the Hon’ble Prime Minister as a world-class hub where finance and technology converge to serve not only the nation’s aspirations but the needs of the global economy. This vision was translated into law. The Statement of Objects and Reasons accompanying the International Financial Services Centres Authority Act, 2019, set out the founding purpose:“An International Financial Services Centre enables bringing back the financial services and transactions that are currently carried out in offshore financial centres by Indian corporate entities and overseas branches and subsidiaries of financial institutions to India by offering world class business and regulatory environment. It would enable Indian corporates easier access to global financial markets.”The formation of a unified regulatory authority for IFSCs in India is the institutional expression of that statutory intent.GIFT IFSC represents a deliberate effort to re-imagine where global finance touching India is conducted, who conducts it, and on whose terms. As we mark the seventy-fifth edition of this distinguished Journal, a milestone that mirrors the maturing of the accounting profession alongside the maturing of Indian finance, it is a fitting moment to reflect on that vision and the institutional architecture being built to realise it.If substance is the foundation of the centre’s credibility, trust is its currency, and trust is built, importantly, by the accounting and auditing profession. The credibility of GIFT IFSC depends on honest financial reporting, sound audits, good governance, and entities that have real substance.From Aspiration to ArchitectureA financial centre is only as credible as the certainty it offers; capital, being the most mobile factor of production, settles where the rules for conducting business are clear and predictable. Until 2020, the banking, capital markets and insurance activity within the IFSC was regulated by the respective domestic authorities, each applying frameworks originally conceived for the domestic market. Parliament concluded that an international centre required a single, dedicated regulator. Accordingly, the International Financial Services Centres Authority was established in April 2020, vested with the powers of the four domestic financial sector regulators under fifteen Central statutes, confined to the IFSC.The merits of this unified architecture are best attested not by us, but by those who use it. A bank, a fund manager, an insurer and a fintech firm operating side by side under the purview of one regulator, navigate one coherent framework and apply through one digital window. For a global institution accustomed to negotiating with multiple agencies across jurisdictions, market participants consistently tell us that this coherence is among the centre’s most valued features. Credit for this institutional design belongs to the foresight of the Government and Parliament; our task at the Authority is to administer it well.The Financial Centre that has found Its ScaleA vision must ultimately be measured by its outcomes, and the early results are encouraging. As of March 2026, more than 1,200 registrations and authorisations, including in-principle approvals, stand granted in GIFT IFSC across banking, capital markets, fund management, insurance, leasing, fintech and other services. Assets booked through the IFSC Banking Units have grown from around USD 15 billion in 2020 to over USD 111 billion today. In FY2025-26, Trade Finance disbursements reached USD 50.67 bn. Funds domiciled in GIFT-IFSC have raised cumulative commitments approaching USD 40 billion, and over 370 aviation assets have been leased — an industry that simply did not exist on Indian soil a few years ago. Treasury centres of large multinational groups have raised USD 5 bn till date from banks and financial institutions and are optimising their global cash pools, funding global operations and carrying risk-management functions which they would once have spread across several offshore jurisdictions, and the recently operationalised Foreign Currency Settlement System now settles inter-bank foreign-currency payments within the centre in seconds, where correspondent banking once took a day or more.Audit, assurance and certification functions across the IFSC are entrusted to the profession, and our framework for book-keeping, accounting, taxation and financial-crime compliance services opens a direct avenue for Indian professionals to serve a global clientele from the IFSC itself.Behind each of these developments lies activity that would, in an earlier era, have been conducted from offshore financial centres. The significance goes beyond the numbers; it lies in the direction of travel: value that once flowed outward is being onshored, and with it the jobs, the expertise and the ecosystem of advisers, auditors and professionals that such activity sustains. Equally, the IFSC’s ambitions are not confined to serving India alone. A meaningful share of the credit extended from GIFT IFSC now flows to borrowers across many other jurisdictions, and our aspiration is to leverage India’s deep talent advantage to make the centre a strong exporter of international financial services to the region and the world. Newly notified frameworks for pension products, sustainable and transition finance, trade financing platforms serving our exporters and MSMEs continue to widen the centre’s canvas, while cooperation arrangements with peer regulators across major jurisdictions, and the operationalisation of foreign universities within the IFSC, reflect our conviction that a financial centre of lasting consequence must also be a centre of talent, technology and ideas.Fiscal Certainty and the Long HorizonInternational financial institutions commit capital over decades, and they require commensurate fiscal visibility. The Union Budget 2026 extended the tax holiday available to IFSC units from ten consecutive years out of fifteen to twenty consecutive years out of twenty-five, with income during the non-tax holiday period taxed at a competitive rate of fifteen per cent. For institutions making long-horizon investments this measure of certainty is a material consideration in capital-allocation decisions. I would only emphasise to the professional fraternity that these provisions are anchored in genuine substance: the framework expects and the Authority enforces real operations, real people and real decision-making within the IFSC. The centre’s long-term credibility rests on activity that is substantive, and professionals have a central role in upholding these standards.Trust, Substance and the Chartered AccountantIf substance is the foundation of the centre’s credibility, trust is its currency, and trust is built, importantly, by the accounting and auditing profession. The credibility of GIFT IFSC depends on honest financial reporting, sound audits, good governance, and entities that have real substance. These are exactly the areas where Indian Chartered Accountants have earned a global reputation.The role of the Chartered Accountant is an important one, one that helps in raising the trust of the ecosystem as envisioned in the Institute Motto: “य एष सुप्तेषु जागर्ति”. A centre that aspires to global standing needs professionals who hold the line on standards even when it is inconvenient to do so. It is in that quiet, daily discipline, far from headlines, that India’s reputational capital is built, and I am confident Chartered Accountants will continue to be its most dependable custodians. Audit, assurance and certification functions across the IFSC are entrusted to the profession, and our framework for book-keeping, accounting, taxation and financial-crime compliance services opens a direct avenue for Indian professionals to serve a global clientele from the IFSC itself. But I see this as something bigger than a professional opportunity alone. As the centre grows, the demands on the profession will deepen, in the assurance function, in transfer pricing, in documentation, in governance, and in the anti-money-laundering and know-your-customer vigilance. The Institute’s active engagement with GIFT IFSC, including through certification programmes and regular professional conferences, is a welcome and important move.To reimagine global finance through India’s IFSC vision is to assert a simple proposition: that the world’s engagement with India’s economy can and should increasingly be conducted from India itself. The world’s leading financial centres have long drawn deeply on Indian talent; GIFT IFSC now offers that talent the opportunity to do the same work from home, serving India and the world from Indian soil.The Road AheadThe Authority’s vision is stated plainly: to position GIFT IFSC as a leading, well-regulated global financial centre with stable, efficient and sustainable financial markets and a strong technology ecosystem in service of the vision of Viksit Bharat by 2047. A confident and globally engaged economy needs a financial centre capable of pricing risk, mobilising capital and intermediating between Indian ambition and global markets from within Indian jurisdiction. IFSCA intends to support key National Economic Missions such as Trade target of USD 2 trillion by 2030, the National Ship Building Mission, Renewable Energy targets, etc by attracting global financial institutions such as banks, fund managers, insurance entities, enabling availability of global equity, venture capital, debt and other financial services to Indian Corporates, SMEs and startups.To reimagine global finance through India’s IFSC vision is to assert a simple proposition: that the world’s engagement with India’s economy can and should increasingly be conducted from India itself. The world’s leading financial centres have long drawn deeply on Indian talent; GIFT IFSC now offers that talent the opportunity to do the same work from home, serving India and the world from Indian soil. In the spirit of the Authority’s motto, आ नो भद्राः क्रतवो यन्तु विश्वतः, let noble thoughts come to us from all directions, IFSCA, through GIFT IFSC seeks to draw the best of global finance to Indian shores.The Institute of Chartered Accountants of India and its members have been partners in every chapter of the nation’s economic journey. I warmly invite the members of ICAI to help drive financial services exports using GIFT IFSC as a platform. As GIFT IFSC takes its place among the world’s leading financial centres, I have every confidence that this partnership will remain at the very centre of the endeavour. My warm felicitations to the Institute on the landmark seventy-fifth edition of “The Chartered Accountant”.Author may be reached at eboard@icai.inwww.icai.org | July 2026 The Chartered Accountant
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Ep. 53 — Beyond Numbers: Leadership in an Era of AI, Sustainability and Change
CA Journal
· July 2026
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Beyond Numbers: Leadership in an Era of AI, Sustainability and ChangeJhun YS, President, Confederation of Asian and Pacific Accountants (CAPA)While jurisdictions may differ in their levels of digital maturity and regulatory readiness, there is growing consensus that technological advancement increases rather than diminishes the importance of professional judgment, ethics and accountability.Across many sectors, finance professionals are playing a more active role in assessing risk, evaluating alternative scenarios and supporting strategic decision-making. This evolution reflects a broader shift in the profession, from a primary focus on reporting performance to helping organisations navigate uncertainty and build resilience.The profession of accountancy has contributed a lot to economic development by strengthening transparency, accountability and bringing confidence in financial systems. Accountants continue to play a vital role in supporting sound governance, informed decision-making and public trust across jurisdictions and markets.The evolving landscape of technological advancement, sustainability considerations and changing stakeholder expectations are reshaping organizations globally. Professional bodies and international institutions, including the International Federation of Accountants (IFAC), have increasingly emphasized the need for the profession to adapt while continuing to uphold its responsibilities.One of the most significant developments, and the most visible example, is the growing adoption of artificial intelligence and digital technologies. Across industries, organisations are adopting AI-enabled tools to process data, identify patterns and support decision-making. Understandably, discussions about the future of the profession often focus on what technology may replace. A more important question, however, is what technology cannot replace.A recently published research by the Institute of Chartered Accountants of Scotland (ICAS), “Shaping the Profession: Generative AI and professional judgement in accounting”, offers useful insights. While recognising the significant potential of AI to improve efficiency and support technical work, the study found that human judgment, ethical reasoning and professional accountability remain essential elements of professional practice. These findings suggest that as technology becomes more sophisticated, the qualities that distinguish trusted professionals become more valuable.Within the CAPA network of professional accountancy organisations across the Asia-Pacific region, similar conversations on the implications of AI for professional practice, are also taking place. While jurisdictions may differ in their levels of digital maturity and regulatory readiness, there is growing consensus that technological advancement increases rather than diminishes the importance of professional judgment, ethics and accountability.Historically, much of an accountant’s role is centered on recording, analyzing and validating information. Today, many of those processes are supported by technology. Yet, while machines can generate output, they cannot assume responsibility for the consequences of decisions. Accountability remains inherently human. At the same time, the environment in which organisations operate is becoming increasingly complex, shaped by economic volatility, geopolitical uncertainty, supply chain disruptions and rapidly changing stakeholder expectations.Across many sectors, finance professionals are playing a more active role in assessing risk, evaluating alternative scenarios and supporting strategic decision-making. This evolution reflects a broader shift in the profession, from a primary focus on reporting performance to helping organisations navigate uncertainty and build resilience.This distinction has important implications. As information processing becomes increasingly automated, judgment, scepticism, integrity and governance are becoming central to the profession’s relevance.The same principle can be seen in the growing demand for sustainability reporting and assurance. According to “The State of Play in Sustainability Assurance”, a 2025 joint-study by IFAC and AICPA & CIMA, sustainability reporting, among large global companies, has become increasingly widespread, with many organisations also seeking assurance over sustainability-related disclosures. The study reflects the growing demand for reliable, decision-useful information beyond traditional financial metrics.This development presents an important opportunity for the accounting profession. The profession’s established expertise in reporting, assurance, governance and risk management positions it well to support organisations as they respond to evolving regulatory expectations and stakeholder priorities. Increasingly, accountants are contributing not only to financial stewardship, but also to organisational resilience and sustainable business practices.Major professional services firms have also acknowledged the rising significance of trust, governance, and responsible use of technology. The recent report, which polled 700 board directors and executives in 56 countries, emphasized the need for accountability, transparency, and robust governance structures as organisations embed AI in their decision-making.Far from making professional accountants obsolete, growing automation underscores the enduring importance of the profession’s core principles. Automation can boost efficiency and analytical power, but markets and institutions still depend on trust, integrity, and accountability to operate effectively.Many contemporary organisational challenges cross conventional professional divides. Sustainability reporting demands collaboration with environmental and social experts. Digital transformation calls for input from technology and data specialists. Effective governance and risk management increasingly require continuous engagement among finance leaders, regulators, boards, and policymakers.This trend is evident across the Asia-Pacific region. Professional accountancy organisations are working closely with governments, educational institutions, regulators and industry to strengthen professional capacity and help organisations respond to emerging challenges. In this environment, collaboration is no longer simply beneficial; it has become a professional imperative.The profession must therefore continue to invest in future-ready competencies. IFAC and other professional bodies have emphasised the importance of equipping accountants with broader capabilities that extend beyond technical proficiency, including digital literacy, adaptability and critical thinking. Equally important is ensuring that the profession remains relevant and attractive to future generations, who increasingly seek purpose-driven careers, opportunities for continuous learning, and the ability to contribute to broader societal outcomes.With the international economy consistently progressing, the role of accountants continues to stretch beyond fiscal reporting. Through CAPA’s active collaboration with professional accountancy bodies, a unifying theme surfaces: the profession is greatly recognized not merely for its technical proficiency, but also for its capability to offer clarity, assurance, and perspective in an increasingly multifaceted world.The consistent economic development of India and its growing international impact create substantial professional opportunities that, in turn, result in sustainable progress, strengthened institutions and secure markets.As ICAI commemorates this significant landmark, it is important to acknowledge the responsibility that the profession of accountancy bears in shaping robust institutions and economies. Though reporting frameworks and technologies will keep evolving, the necessity for practical discernment, integrity, and committed leadership stays persistent.ReferencesGovernance of AI: A critical imperative for today’s boardshttps://www.deloitte.com/global/en/issues/trust/progress-on-ai-in-the-boardroom-but-room-to-accelerate.htmlAuthor may be reached at eboard@icai.inwww.icai.org July 2026
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Ep. 54 — The CA Profession: Trusted Partner in Economic Progress
CA Journal
· July 2026
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The CA Profession: Trusted Partner in Economic ProgressIt will be exact fifty golden years since I became a CA and started my practice as a sole proprietor. Or even as a student, burning the midnight oil over thick volumes of accounts, audit, and Income Tax, and slowly and steadily increasing my practice, and finally as President of the Institute of Chartered Accountants of India, I have witnessed one constant truth: wherever India has grown, the Chartered Accountant has been present, quietly but decisively shaping that growth.We are, by nature, a profession that does not seek publicity or limelight. We work in the background, in the boardrooms, in the audit chambers, in the corridors of regulatory bodies, and yet the fingerprints of our work are visible on every significant milestone of India’s economic journey. From the liberalisation which started since 90’s to the introduction of GST, from the Foreign Exchange Management Act to the Insolvency and Bankruptcy Code, from the emergence of India’s startup ecosystem to its ambition of becoming the world’s third-largest economy, the Chartered Accountant has been a Trusted Partner at every step.The Profession Born with Independent IndiaIt is no coincidence that ICAI was established in 1949, just two years after Independence. The founding fathers of this nation understood that political freedom must be accompanied by economic sovereignty, and it demands great financial integrity. ICAI was thus not merely a professional body; it was an institution meant to take care of financial discipline and accountability to its stakeholders, investors, shareholders and, of course, the government. That was the reason why in 2005, our then President great Dr. A.P.J. Abdul Kalam, gave us the coveted salutation i.e., Partners in Nation Building. The Chartered Accountant was envisioned as the guardian of financial truth in a newly independent country, learning to stand on its own feet.Seventy-seven years later, with over 500,000 members and nearly a million students, ICAI stands as one of the largest and most respected accounting bodies in the world. But numbers alone do not capture our contribution. What captures it is the trust that businesses, governments, investors, and citizens place in the work that bears a CA’s signature. And that is what our beloved Prime Minister said in a large gathering in 2017, that the value of the signature of a CA is much more than that of a Prime Minister.Architects of Financial IntegrityAt the heart of the CA’s role is one irreplaceable quality: Integrity. In a world where financial fraud, tax evasion, and corporate misgovernance can erode investor confidence overnight, the Chartered Accountant serves as the first line of defence. Through independent audits, forensic investigations, due diligence assignments, and internal control systems, we ensure that financial statements reflect reality i.e., not aspiration, not manipulation, but the truth.This is not merely a technical function. It is a discharge of responsibility. When a CA signs an audit report, millions of stakeholders such as shareholders, lenders, employees, regulators, and pensioners rely on that signature. The entire edifice of market confidence rests, in no small measure, on the credibility of financial reporting. That is the reason that a CA is looked upon with utmost respect compared to many other professionals.Partners in Policy and GovernanceThe contribution of CAs extends well beyond the audit room. The members of our profession have played pivotal roles in designing India’s taxation architecture, drafting corporate legislation, and advising on financial sector regulation.The contribution of CAs extends well beyond the audit room. The members of our profession have played pivotal roles in designing India’s taxation architecture, drafting corporate legislation, and advising on financial sector regulation. ICAI has been an active participant in the formulation of the Goods and Services Tax framework, the Indian Accounting Standards convergence with IFRS, and the Companies Act reforms. Even the newly revamped Income Tax Act, 2025, could come up so timely because of the great, regular, sincere cooperation of CAs only. Our technical committees have submitted thousands of representations that have shaped policy in ways that benefit not just businesses but also the common citizens.At the grassroots level, CAs serve as trusted advisors to millions of small and medium enterprises that are the true engines of India’s economy. The neighbourhood CA firm that helps a textile trader in Surat file accurate returns, that advises a first-generation entrepreneur in Coimbatore on structuring her startup, that guides a cooperative society in rural Maharashtra toward financial discipline, that helps set up projects with attractive subsidy in the state of Himachal Pradesh or Sikkim and now in Jammu and Kashmir; this is where economic progress truly lives, and where our profession truly serves.India’s rapidly growing economy depends heavily on transparent financial systems and reliable reporting. Businesses, banks, investors, regulators, and government authorities rely on Chartered Accountants for accurate financial information, tax compliance, audits, advisory services, and risk management. Through these services, the profession contributes towards stronger governance, improved ease of doing business, and sustainable economic development.Over the years, the role of Chartered Accountants has expanded significantly. Apart from traditional auditing and taxation, CAs are now actively involved in startup advisory, business restructuring, valuation, mergers and acquisitions, forensic audits, insolvency processes, ESG reporting, international taxation, and strategic financial planning. Their contribution is especially important for MSMEs and startups, which rely heavily on professional financial guidance for growth and stability.The profession has also played an important role in implementing major economic reforms such as GST, faceless tax assessments, digital compliance systems, and online regulatory frameworks, and now, of course, in the area of Artificial Intelligence, Chartered Accountants have always acted as a bridge between businesses and the government by helping taxpayers understand and adapt to changing laws and digital systems.The profession has also played an important role in implementing major economic reforms such as GST, faceless tax assessments, digital compliance systems, and online regulatory frameworks, and now, of course, in the area of Artificial Intelligence, Chartered Accountants have always acted as a bridge between businesses and the government by helping taxpayers understand and adapt to changing laws and digital systems.The profession has contributed immensely towards the growth of startups and MSMEs, better tax compliance and government revenue, corporate governance and transparency, financial restructuring and strategic planning, implementation of GST, faceless assessments, and digital taxation systems, and new faceless proceedings in GST Tribunals and courts, which have helped the government save substantial time, energy, and, of course, tons of paper.Today, the CA profession is rapidly evolving in the era of Artificial Intelligence and digital transformation. Traditional accounting practices are being replaced by automation, cloud accounting, AI-based audits, and data analytics tools. Earlier, professionals spent significant time on data entry and routine compliance work. Today, AI-enabled systems can perform repetitive tasks within minutes. As a result, the role of Chartered Accountants is shifting from “data processing” to “decision-making and business advisory.” All these developments have paved the way for many more CAs who are also able to save their precious time, which in turn contributes to advising clients in various niche areas, which in turn helps the Government also in forming policies and pushing up economic growth to reach a 5 trillion economy by 2030.However, one million dollar question: while technology can automate processes, can it replace professional judgment, ethics, analytical thinking, and human decision-making? No. In no way it can match the acumen, sincerity, and integrity of a CA. Therefore, the future belongs to Chartered Accountants who combine financial expertise with technological skills.As India moves toward becoming a global economic powerhouse, Chartered Accountants will continue to play a vital role in ensuring transparency, sustainable growth, and financial discipline in the economy.The Rise of Global Capability Centres (GCCs): A New Frontier for India’s Professional EcosystemIndia is becoming a place for Global Capability Centres. This is a moment for India’s economy and the professional scene. There are already over 1,700 Global Capability Centres in India. They are doing very important work in areas like finance, technology, and risk management. India is now the centre for Global Capability Centres around the world.For Chartered Accountants, this is an opportunity. Global Capability Centres are not about doing routine tasks; they are actually centres of excellence that help companies make big decisions. The Institute of Chartered Accountants of India is in a position to provide Global Capability Centres with accountants who are very skilled and know about global reporting standards and rules.As a Past President of the Institute of Chartered Accountants of India, I think the accounting profession needs to get ready for this situation. We need to make sure our CAs have the skills and training to work in Global Capability Centres. This way, Indian CAs can stay ahead. Be trusted to handle money matters for companies around the world. Global Capability Centres are the future. We need to be a part of it. The Institute of Chartered Accountants of India and Global Capability Centres can work together to make this happen.Embrace the Future for Professional and the Country’s GrowthI am aware that the profession today stands at an inflection point. Artificial Intelligence, data analytics, blockchain, and automated compliance tools are transforming the landscape of accounting and auditing at a pace none of us fully anticipated. There are legitimate questions about which traditional functions of a CA may be automated, and which will endure.My answer, drawn from a lifetime in this profession, is this: technology can process data, but it cannot exercise judgment. It can flag anomalies, but it cannot understand context. It can generate reports, but it cannot build relationships of trust. The irreplaceable value of a Chartered Accountant has always been and will always be the combination of technical competence, ethical grounding and human judgment. These three together cannot be coded into an algorithm.What we must do, and what ICAI continues to do, is to ensure that every CA entering this profession is equipped not only with the accounting and auditing standards and simplified Income Tax Law today, but with the digital fluency and adaptive thinking required for tomorrow.A Promise to the NationAs India marches confidently toward its Viksit Bharat vision, a developed, self-reliant nation by 2047, the CA profession renews its promise to the nation. We will continue to uphold financial integrity as our sacred duty. We will continue to support the formalisation of the economy, the deepening of capital markets, and the strengthening of institutions. We will continue to be what we have always been, not merely number-crunchers, but a real Partner in Nation Building.We, the Chartered Accountants, are not here merely to record economic progress. We help create it, and that is the reason that our Hon’ble Prime Minister wants India to have Big CA Firms so that we gradually replace the label of Foreign Firms with Indian Chartered Accountants.Let us all respond not only to the call of our Hon’ble Prime Minister but also to the efforts of ICAI and its Council, which are working hard not only for knowledge and skill upgradation but also for aggregation and networking of firms, mergers, and collaboration of professionals.Ultimately, if a profession like ours – the Profession of CA, grows and strengthens, then only the Nation will grow and strengthen.Author may be reached at eboard@icai.inwww.icai.org | July 2026 The Chartered Accountant
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Ep. 55 — The Chartered Accountancy Profession in the Age of Artificial Intelligence, Sustainability, and Globalization
CA Journal
· July 2026
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The Chartered Accountancy Profession in the Age of Artificial Intelligence, Sustainability, and GlobalizationThe Chartered Accountancy profession is experiencing one of the most significant transformations in its history. The convergence of Artificial Intelligence (AI), sustainability imperatives and globalization is fundamentally reshaping the nature of accounting, auditing, taxation and advisory services. Traditional professional functions that once relied heavily on manual processes and historical analysis are increasingly being augmented by intelligent technologies, data analytics and automated systems. Simultaneously, the rise of Environmental, Social and Governance (ESG) considerations and sustainability reporting has expanded the scope of corporate accountability beyond financial performance, creating new assurance and advisory opportunities for Chartered Accountants. Globalization has further intensified the complexity of professional practice through cross-border transactions, international financial reporting standards, global tax frameworks and increasing stakeholder expectations.For India, these developments present both challenges and unprecedented opportunities. As the country advances towards becoming a major global economic power, Chartered Accountants are already playing a pivotal role in strengthening financial transparency, supporting sustainable development and facilitating international business integration. We examine the impact of AI, sustainability and globalisation on the Chartered Accountancy profession, analyse emerging professional opportunities and highlight the competencies required for future-ready Chartered Accountants. It is being discussed that the profession’s continued relevance and leadership will depend upon its ability to combine technological proficiency, sustainability expertise, global business understanding, ethical judgment and a commitment to lifelong learning.IntroductionThe Chartered Accountancy profession has traditionally occupied a position of trust and responsibility within the economy. Chartered Accountants have long served as custodians of financial integrity, ensuring transparency, accountability and confidence in financial reporting and business decision-making. Through their roles as auditors, tax professionals, advisors and financial leaders, they have contributed significantly to economic development, corporate governance, and investor confidence.However, the profession today stands at a pivotal juncture. Three transformative forces i.e., (i) Artificial Intelligence (AI), (ii) Sustainability and (iii) Globalisation are simultaneously reshaping the business landscape and redefining professional expectations. Unlike previous waves of change, these developments are not occurring independently. Rather, they interact and reinforce one another, creating a fundamentally new environment in which Chartered Accountants must operate.Artificial Intelligence has evolved from a technological concept to a practical business tool. AI-driven applications are now capable of automating routine accounting tasks, analysing vast quantities of data, detecting anomalies, supporting audit procedures and generating predictive insights. While these developments enhance efficiency and accuracy, they also challenge traditional notions of professional value and require accountants to develop new technological competencies.At the same time, sustainability has emerged as a central concern for governments, regulators, investors, and society. Climate change, resource scarcity, social responsibility and governance failures have increased demands for corporate accountability beyond traditional financial metrics. Sustainability reporting and ESG disclosures are rapidly becoming mainstream requirements, creating significant opportunities for Chartered Accountants in assurance, reporting, risk management and strategic advisory services.Globalisation has further transformed the professional landscape. Businesses increasingly operate across jurisdictions, capital flows transcend national boundaries and investors demand comparable financial information across global markets. The convergence of accounting standards, the growth of multinational enterprises and the expansion of international taxation frameworks have expanded both the scope and complexity of professional practice.The future Chartered Accountant will not merely prepare financial statements or verify compliance. Instead, the profession is evolving toward becoming a strategic partner capable of providing assurance over financial and non-financial information, leveraging technology to enhance decision-making and supporting organisations in navigating an increasingly interconnected world.For the Indian Chartered Accountancy profession, these developments present an opportunity to redefine its role in a rapidly changing economy. The future Chartered Accountant will not merely prepare financial statements or verify compliance. Instead, the profession is evolving toward becoming a strategic partner capable of providing assurance over financial and non-financial information, leveraging technology to enhance decision-making and supporting organisations in navigating an increasingly interconnected world.The Indian Chartered Accountancy Profession: Contemporary ContextIndia possesses one of the world’s largest and most respected accountancy profession. The Institute of Chartered Accountants of India (ICAI), established under an Act of Parliament in 1949, has played a pivotal role in regulating and developing the profession while contributing significantly to the country’s economic growth and financial governance.The scope of professional services provided by Chartered Accountants has expanded considerably over the years. Beyond traditional areas such as accounting, auditing and taxation, Chartered Accountants today are actively involved in corporate finance, insolvency resolution process, forensic accounting, risk management, valuation, management consulting and strategic advisory services.India’s rapid economic growth has further increased the demand for highly skilled finance professionals. The expansion of capital markets, infrastructure development, manufacturing growth, startup ecosystems, digital commerce and foreign investment has created new opportunities for Chartered Accountants across sectors. Simultaneously, regulators, investors, and stakeholders expect higher standards of transparency, accountability and governance.Recognising these developments, ICAI has undertaken several initiatives to equip members and students with future-oriented skills. Increased emphasis on technology, data analytics, sustainability reporting, forensic auditing and international standards reflects the profession’s commitment to remaining relevant in a changing environment.Nevertheless, the pace of change requires continuous adaptation. Professional success is no longer determined solely by technical expertise in accounting and taxation. Increasingly, it depends upon a professional’s ability to integrate technology, understand sustainability challenges, interpret complex data and operate effectively within global business ecosystems.Artificial Intelligence (AI) and the Future of AccountingAI represents perhaps the most disruptive technological development affecting the accounting profession. By enabling machines to perform tasks that traditionally required human intelligence, AI is transforming how accounting and assurance services are delivered.Historically, accounting involved substantial manual effort in recording transactions, reconciling accounts, analysing financial data, and conducting audit procedures. Today, many of these activities can be automated using AI-powered tools and intelligent systems. As a result, Chartered Accountants are increasingly shifting from transactional processing to higher-value analytical and advisory functions.AI in Audit and AssuranceOne of the most significant applications of AI lies in audit and assurance services. Traditional audit methodologies often relied upon sampling techniques due to practical limitations in examining large datasets. AI-driven analytics now enable auditors to analyse entire populations of transactions, identify unusual patterns, and detect anomalies with greater precision.Continuous auditing systems powered by AI facilitate real-time monitoring of business activities, enabling earlier identification of risks and potential control failures. These capabilities enhance audit quality while providing more timely assurance to stakeholders.Importantly, AI does not eliminate the need for professional judgment. While technology can identify anomalies and patterns, human expertise remains essential in interpreting findings, assessing risks, evaluating materiality, and forming audit conclusions.AI in Taxation and ComplianceTax compliance has become increasingly complex due to evolving regulations, digital tax administration systems and extensive reporting requirements. AI offers significant advantages in managing these challenges.AI-enabled systems can automate compliance processes, monitor regulatory changes, identify tax risks and assist in tax planning. Predictive analytics can evaluate the potential impact of legislative developments, enabling organisations to respond proactively to regulatory changes.For practitioners, these capabilities reduce administrative burdens and allow greater focus on strategic tax advisory services.AI in Advisory and Decision-MakingPerhaps, the most transformative impact of AI lies in its ability to support strategic decision-making. Advanced analytics, machine learning models and predictive tools enable professionals to generate insights from vast amounts of financial and operational data.Chartered Accountants increasingly use AI to support business valuation, financial forecasting, risk assessment, performance analysis and investment evaluation. As routine processes become automated, professional value shifts toward interpretation, strategy, and business judgment.Ethical Considerations and Professional ResponsibilityThe growing adoption of AI also raises important ethical and governance considerations. Issues relating to data privacy, cyber security, algorithmic bias, transparency and accountability require careful attention.Chartered Accountants have a critical role in ensuring that AI systems are implemented responsibly and ethically. Professional principles such as integrity, objectivity, confidentiality and due care remain as important as ever. Indeed, the growing complexity of technology may increase society’s reliance on trusted professionals capable of providing ethical oversight.Sustainability, ESG and Corporate AccountabilityThe concept of corporate accountability has undergone a profound transformation over the past decade. Stakeholders increasingly recognise that financial performance alone does not provide a complete picture of organisational success. Environmental impact, social responsibility, governance quality and long-term sustainability have become critical considerations in investment and business decisions.As a result, ESG reporting and sustainability disclosures have moved from the margins of corporate reporting to the mainstream.The Rise of ESG ReportingInvestors, regulators, consumers, employees and lenders increasingly seek information about an organisation’s sustainability performance. Questions relating to carbon emissions, climate risks, workforce diversity, human rights, governance practices and resource management have become critical to corporate reporting.In India, the introduction of the Business Responsibility and Sustainability Reporting (BRSR) framework has significantly strengthened ESG disclosure requirements for listed entities. This represents a major shift from voluntary sustainability narratives toward structured and measurable reporting.Assurance Opportunities for Chartered AccountantsAs sustainability reporting becomes more sophisticated, stakeholders increasingly demand confidence in the reliability of ESG information. This has created a growing market for sustainability assurance services.The competencies traditionally associated with auditing verification, internal controls, evidence gathering, risk assessment and professional skepticism are highly relevant to ESG assurance engagements. Consequently, Chartered Accountants are uniquely positioned to provide credibility and trust in sustainability disclosures.Professional opportunities now extend beyond reporting into climate risk assessment, sustainability strategy, carbon accounting, green finance and integrated reporting.Emerging CompetenciesThe sustainability domain requires knowledge that extends beyond traditional accounting disciplines. Professionals increasingly need to understand climate science, greenhouse gas accounting, sustainability frameworks, stakeholder engagement and environmental regulations.The emergence of international sustainability standards is further expanding professional responsibilities. As global reporting frameworks evolve, Chartered Accountants will play an important role in helping organisations navigate compliance requirements while creating long-term value.Globalization and International Professional OpportunitiesGlobalization has fundamentally altered the structure of modern business. Capital, information, talent, and commerce increasingly flow across national borders, creating opportunities as well as complexity.For Chartered Accountants, globalisation has transformed accounting from a primarily domestic profession into an internationally connected discipline.International Financial ReportingThe convergence of Indian Accounting Standards (Ind AS) with International Financial Reporting Standards (IFRS) represents a significant milestone in India’s integration with global capital markets.Common reporting frameworks enhance transparency, improve comparability and facilitate cross-border investment. As businesses expand internationally, demand for professionals with expertise in both domestic and international reporting standards continues to grow.International Taxation and Transfer PricingThe globalization of business has increased the importance of international taxation, transfer pricing and cross-border regulatory compliance.Multinational enterprises face increasingly complex tax environments influenced by international agreements, anti-avoidance measures, digital taxation initiatives and evolving regulatory frameworks. Chartered Accountants with expertise in these areas are in high demand.Professional MobilityIndian Chartered Accountants increasingly contribute to global organizations through multinational corporations, consulting firms, shared service centres and Global Capability Centres (GCCs). International recognition arrangements and professional collaborations have further expanded career opportunities.Success in global environments requires more than technical competence. Communication skills, cultural awareness, adaptability and global business understanding have become equally important.The Synthesis – Navigating AI, Sustainability and Globalization SimultaneouslyThe true complexity confronting a modern Indian CA is not any one of these three trends in isolation, but it is their simultaneous operation. These forces no longer operate in isolation. They feed into and amplify one another, creating an interlocking system that is fundamentally redefining how businesses are structured, how they operate and what is expected of them by investors, regulators, employees and society at large. For professionals who are particularly in finance, accounting and governance need to understand how to navigate all three forces simultaneously and it is now defining the competency of this era.Where the Forces Meet: A Mutually Reinforcing SystemThe true complexity and opportunity lie in how these three forces intersect and reinforce each other. Globalization depends on technology. Without digital infrastructure enabling real-time communication and cross-border reporting, the modern multinational enterprise could not function at the speed markets demand. Technology makes large-scale ESG reporting achievable. Collecting sustainability data across multiple geographies, processing it into standardized formats and reporting under complex regulatory frameworks would be prohibitively slow without AI-driven analytics and automated data management. Globalization, by creating an international investment community with shared expectations, has driven the push to standardize ESG reporting globally that gives rise to frameworks like ISSB and GRI that now transcend national boundaries. The result is a self-reinforcing system where competence in one force without awareness of the others is insufficient. Effective navigation demands an integrated, systems-level understanding of how all three interact simultaneously.Impact on Business and the Evolving Role of ProfessionalsBusiness decisions are no longer based solely on financial data. Companies now evaluate performance through an integrated lens that includes digital capability, sustainability positioning and global compliance standing. Reporting obligations have multiplied accordingly, with organizations preparing financial statements, sustainability reports and regulatory disclosures that must all be internally consistent and externally credible. Chartered Accountants are uniquely positioned in this landscape. Grounded in financial reporting, governance and professional ethics, they are natural candidates to expand into international taxation, ERP implementation, AI-driven audit and ESG assurance. Their role has evolved from compliance-focused record-keeping to strategic, multidimensional contribution: spanning financial integrity, digital oversight and non-financial assurance.Challenges, Opportunities, and the Path ForwardNavigating all three forces simultaneously is not without friction. Regulatory fragmentation persists as different countries apply different accounting, tax and sustainability standards, creating compliance complexity for globally operating organisations. Data quality and consistency remain major concerns as ESG, and financial data often originate from unstructured or incompatible systems across multiple geographies.For professionals, the pace of change demands a commitment to continuous learning that is both intensive and permanent. Lifelong development has shifted from aspiration to occupational necessity. Yet the opportunities are substantial. Organizations that successfully integrate global awareness, digital capability and sustainability accountability are positioned to build investor trust, access favorable capital and attract purpose-driven talent. Professionals who embrace this convergence, cultivating breadth across disciplines and depth within them, will not simply remain relevant. They will shape the future of global business. The convergence is not a disruption to be managed. It is an invitation to lead.The profession’s competitive advantage will increasingly depend upon its ability to provide assurance, insight and strategic guidance across these interconnected domains.The profession’s competitive advantage will increasingly depend upon its ability to provide assurance, insight and strategic guidance across these interconnected domains.Recommendations for ICAI and Chartered AccountantsTo ensure continued relevance and leadership, the profession must adopt a proactive approach to transformation.ICAI should continue expanding educational initiatives in AI, data analytics, sustainability reporting, assurance, and international standards. Specialised certifications and advanced training programs can help members acquire emerging competencies.Practitioners should embrace lifelong learning and actively invest in technology-enabled service delivery models. Developing expertise in AI-assisted auditing, ESG assurance, climate finance, data analytics, and international taxation will enhance professional competitiveness.ICAI should integrate technology, sustainability, analytics, and global business concepts into accounting education. Stronger collaboration between industry and professional bodies can facilitate more effective skill development.Finally, organisations should recognise Chartered Accountants not merely as compliance professionals but as strategic partners capable of creating value through technology adoption, sustainability leadership, and global business integration.ConclusionThe Chartered Accountancy profession is entering a new phase. Artificial Intelligence, sustainability, and globalisation are changing how accountants work and what people expect from them.These changes aren’t threats; they’re chances to make the profession more valuable. AI improves analysis and changes how services are delivered. Sustainability increases responsibility and opens up new assurance work. Globalisation raises demand for professionals who can navigate cross-border, complex business situations.Tomorrow’s Chartered Accountant won’t be judged only on technical skills. They’ll need to be comfortable with technology, knowledgeable about sustainability, aware of global business, strong in ethics, and able to think strategically. Those who adopt these skills will stay relevant and help shape the future of business, governance, and sustainable growth.The profession has a history of adapting. The task now is to take the lead.Author may be reached at eboard@icai.inwww.icai.org July 2026
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Ep. 56 — Chartered Accountants in a Transforming World: Ethics, Innovation and Excellence
CA Journal
· July 2026
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Chartered Accountants in a Transforming World: Ethics, Innovation and ExcellenceThe world is witnessing an era of unprecedented transformation. Rapid technological advancement, digital disruption, evolving stakeholder expectations, sustainability concerns, and changing regulatory landscapes are reshaping the way businesses operate. In such a dynamic environment, the role of Chartered Accountants (CAs) has expanded far beyond traditional accounting and auditing functions. Today, Chartered Accountants have to play the role of strategic advisors, custodians of public trust, architects of governance, and catalysts of sustainable growth.The ICAI Code of Ethics require every member to demonstrate (a) Integrity (b) Objectivity (c) Professional Competence and Due Care (d) Confidentiality and (e) Professional Behaviour. Basis this, the Excellence, Independence and Integrity are the cherished ideals for every professional.The demands of the twenty-first century require Chartered Accountants to embrace innovation while remaining firmly anchored in ethical values. The future belongs to professionals who can combine technological competence with human judgment, analytical skills with wisdom, and innovation with unwavering integrity. Important for each one of us is to learn, unlearn and re-learn.The Continuing Professional Education (CPE) is not just to complete the mandatory number of CPE hours. More than attending the CPE Seminars, the members should have a passion to obtain ‘gyan’.The Transforming Business LandscapeA few decades ago, globalization was the new ‘mantra’. Now each country wants to protect its interests first. So domestic jurisdictional interests overshadow the global ties. The year 2025 witnessed the US leveraging the tariffs to decide the foreign policies. The old traditional allies were no longer the trading friends.The recent SpaceX IPO has demonstrated how the financial markets are placing enormous value on innovation. Future potentials are more important than the current profits. In spite of reporting huge losses, the company achieved valuation approaching $1.8 trillion. The investors are placing more value on expected future earnings rather than focusing solely on current earnings.This IPO has great learnings for all of us. Is the business focusing adequately on Research and Development (R & D)? The Chartered Accountants will have to ask difficult questions. The markets may reward innovations long before its full economic benefits are visible. This will be so if the innovation can demonstrate the potential to transform an industry.The writing is also clear on the wall for all of us to read. There are people who are dreaming of building data centres in the space and there are investors who are backing them. Coupled with the continuous innovations in AI, this threatens the Indian USP1 of providing the English speaking cheap intellectual labour. The technology companies are learning this the hard way.It is not to suggest that the brick and mortar companies have no future. But one needs to be mindful of the pace of change in the global economy. It is accelerating at a very fast speed. Artificial Intelligence, Machine Learning, Blockchain, Cloud Computing, Data Analytics, and Automation are transforming business processes and decision-making frameworks. Therefore, the response time has to be faster than before and this will be an on-going activity.Thus, the role of a Chartered Accountant has to be to help the management to see the future and enable it to build a strategy to meet the challenges of the unknown.Organizations are generating vast volumes of data and seeking real-time insights rather than retrospective reporting.The stakeholders are demanding greater transparency, accountability, sustainability, and responsible corporate behaviour; and rightly so. This has led to greater regulatory scrutiny.The Chartered Accountant is uniquely positioned to bridge the gap between financial information, business strategy, and stakeholder confidence. The profession’s expertise in assurance, risk management, taxation, finance, and governance enables it to provide valuable guidance amidst complexity and change.It has often been complained that the cost of compliance has gone up. But one should not forget that the cost of non-compliance is even higher. In March 2022, the Reserve Bank of India (RBI) stopped a payment bank from onboarding new customers after supervisory concerns were identified. The continuous non-compliance led the RBI to direct the said payment bank from accepting the fresh deposits. Eventually the license has been revoked and the winding up proceedings have started. Business cannot be sustained without adhering to the regulatory compliances in letter and spirit.The Chartered Accountants have a greater responsibility to impress upon the top management to ensure that there are no regulatory violations and to build a robust eco-system of efficient compliances which are timely and also cost effective. This could be challenging but it also opens the door of innovative opportunities.The Chartered Accountant is uniquely positioned to bridge the gap between financial information, business strategy, and stakeholder confidence. The profession’s expertise in assurance, risk management, taxation, finance, and governance enables it to provide valuable guidance amidst complexity and change.The challenge is not merely to adapt transformation but to lead it.Ethics: The Foundation of TrustEthics has always been the cornerstone of the Chartered Accountancy profession. Technical competence may create opportunities, but integrity creates trust. In a world increasingly driven by algorithms and automation, ethical judgment remains an inherently human responsibility.The credibility of financial reporting, the effectiveness of audits, and the confidence of investors depend upon the ethical conduct of professionals. Society places significant trust in Chartered Accountants because they are expected to act independently, objectively, and in the public interest.This year, an unusual situation emerged when the part-time Chairman of the largest private sector bank in India resigned citing that certain practices within the bank were not consistent with his ethical values. The resignation triggered a sharp fall in the bank’s share price resulting in a significant decline in its market capitalization. It is reported that the investors lost around 1 lakh crores in value in a few days. Foreign Institutional Investors reduced their aggregate holding.It is a reminder to all of us that compliance, ethics and governance are not mere legal requirements. They are fundamental drivers of stakeholder trust and enterprise value. The sophisticated systems and regulations cannot substitute ethical behaviour. Whenever ethical standards are compromised, the consequences extend beyond individual organizations and affect public confidence in markets and institutions.The digital age presents new ethical challenges. The use of Artificial Intelligence raises questions about accountability and transparency. Data privacy concerns require careful stewardship of information. Increasing commercial pressures may create conflicts between business objectives and professional responsibilities.AI can process vast amount of data, identify patterns and make recommendations at a fast speed, unimagined before. But does it have moral compass? The answer lies with the person who is using it and for what purpose. The challenge of AI is not whether machines can think, but whether the human beings can use the technology to serve the humanity.Resilience is not a technical construct. It is a human capacity. Culture, Clarity and Courage will shape the contours of resilience.The Chartered Accountant has to drive the culture of ethics and compliance while remaining innovative and being excellent in the chosen professional area. Commercial success without ethics is temporary. Ethics without professional excellence will be preaching without practicing and will not find takers. Therefore, Excellence, Independence and Integrity are not mere ideals but essential to be implemented in day to day life.The Chartered Accountant has to drive the culture of ethics and compliance while remaining innovative and being excellent in the chosen professional area. Commercial success without ethics is temporary. Ethics without professional excellence will be preaching without practicing and will not find takers. Therefore, Excellence, Independence and Integrity are not mere ideals but essential to be implemented in day to day life.The Code of Ethics adopted by the ICAI is not only principle based, but it also adopts the best global practices while retaining the age old concepts of independence. It includes the legal requirements laid down in the statute. Apart from the technical skill and competence of the members constituting it, a profession derives its sustenance for a healthy growth from the quality of the code of conduct observed by its members in placing service before self and living up to tenets which further public interest. Such a Code of Ethics has to extend beyond the bounds set by statutes and cover obligations voluntarily undertaken to be able to command the respect and confidence of the public in general. The Code of Ethics has to be for the protection of the public and not merely self-serving.Audit is a unique profession. The contract of Audit is between the Auditee and the Auditor. But the true recipient of the outcome of the audit service is the third party who relies on the audited financial statements. This third party is the true customer. It is this customer whose confidence in our services should always be in our minds and whom we should remember when we think of ‘customer delight’.Professional integrity and independence are essential characteristics of all the learned professions but is more so in the case of Chartered Accountants. Independence implies that the judgment of a person is not subordinate to the wishes or directions of another person who might have engaged him, or to his own self-interest. Independence of the auditor has not only to exist in fact, but also appear to so exist to all reasonable persons.Let us remind ourselves the age old saying:धर्मो रक्षति रक्षितःMeaning: “Those who protect righteousness are themselves protected by righteousness.”The theme “Chartered Accountants in a Transforming World: Ethics, Innovation and Excellence” captures the essence of the profession’s evolving journey. It highlights the three pillars that will define the relevance and success of Chartered Accountants in the years ahead.Author may be reached at eboard@icai.in1 Unique Selling Proposition www.icai.org | July 2026
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Ep. 57 — ICAI: A Catalyst for the Global Accountancy Profession
CA Journal
· July 2026
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ICAI: A Catalyst for the Global Accountancy ProfessionI believe that proficiency may define the performance of an individual, but it is integrity that confers the right to lead. The values shaped by the very institution of Ethics, Integrity and Independence defines the principals for the Chartered Accountant. The very Institute that a professional upholds, from which we learn and through which we enact change, and by whose recognition we earn the title of Chartered Accountant, stands as a preeminent guardian of our profession. Founded on 1st July 1949 under the Chartered Accountants Act, 1949, the Institute of Chartered Accountants of India serves as the apex regulatory authority for the accounting profession in India and ranks among the most respected professional accounting bodies worldwide. Over seven decades, it has earned international recognition for its rigorous academic standards, ethical framework, technical depth, and firm commitment to the public interest. As India continues to grow as a global economic force, ICAI is aligning its steps with the government and broadening its international reach to create opportunity for its members across the world.IntroductionThe Institute is guided by its timeless motto, “Ya Aeshu Suptaeshu Jagruti” which means “One who remains awake while others sleep”. ICAI has stood as a guardian of trust, transparency, and accountability within India’s financial landscape. My own professional journey, which began in 1984 upon becoming a Chartered Accountant, has unfolded in parallel with the steady and impressive growth of this institution. Further, the privilege of serving as ICAI’s President in 2011 gave me a firsthand understanding of how the Institute consistently transcends its regulatory mandate to become a standard-bearer of professional excellence, ethical leadership, and forward-looking thought. Working hand in hand with government bodies, regulators, and international professional organisations, ICAI has been central to driving meaningful reforms, reinforcing governance structures, and aligning Indian standards with global benchmarks. As technological change, regulatory evolution, and cross-border economic activity continue to reshape the profession, ICAI has remained ahead of the curve sculpting its members as strategic advisors, governance architects, and trusted partners in the nation’s progress. In many ways, the story of ICAI mirrors India’s own economic and professional journey.Working hand in hand with government bodies, regulators, and international professional organisations, ICAI has been central to driving meaningful reforms, reinforcing governance structures, and aligning Indian standards with global benchmarks.ICAI’s Strategic Vision for a Future-Ready ProfessionIn response to sweeping changes in business, technology, governance, and international commerce, ICAI has adopted a long-term strategic framework to ensure that the profession remains relevant, resilient, and globally competitive. This framework is conveyed through two key strategic documents, “ICAI Vision 2030” and “ICAI Vision 2047”, which together chart a course for India’s accounting profession to assume a position of global leadership.Vision 2030 of ICAI: Shaping Global StandardsThe four strategic pillars of the Vision 2030 document is mentioned below:Becoming the World’s Leading Accounting Body ICAI aspires to define global standards, drive thought leadership, and actively shape accounting and assurance practices across both developed and developing economies.Upholding Integrity and Professional Independence The Institute is committed to reinforcing professional integrity, transparency, objectivity, and ethical conduct, ensuring that public confidence remains the cornerstone of the profession.Developing World-Class Competencies ICAI is determined to equip its students and members with future-ready skills, global exposure, and multidisciplinary capabilities through a comprehensive overhaul of its curriculum and ongoing professional development programmes.Delivering Excellence in Professional Services The profession will continue to broaden its expertise across accounting, assurance, taxation, finance, sustainability, governance, and advisory services, creating enhanced value for all stakeholders.Vision 2047: Ambition at ScaleExpanding the Profession ICAI aims to grow the CA community to 30 lakh members by 2047, in line with the demands of an expanding economy. To accelerate this, the examination structure has been revamped to offer three sittings per year for both the Foundation and Intermediate levels.AI Integration ICAI is actively bridging the technology gap by training professionals in Artificial Intelligence, Robotic Process Automation (RPA), and data analytics to strengthen financial reporting and auditing practices. A dedicated AI committee ensures that technology functions as an enabler rather than a disruptor.Empowering MSMEs ICAI is launching nationwide MSME Clinics at regional branches to provide advisory support on financial management, corporate governance, regulatory compliance, and credit-related matters, helping small businesses address challenges, build sustainability, and achieve long-term growth.Multi-Disciplinary Partnerships (MDPs) A framework is being established to enable large, integrated professional firms to compete effectively with global counterparts in accounting, law, and valuation.Global Expansion ICAI is widening its international presence and creating trade and professional opportunities for Indian Chartered Accountants in key markets such as the UK, EU, and Australia.Leading the Global Conversation on the Profession’s FutureICAI’s ambition to be a global leader is no longer confined to vision documents; it is increasingly evident in its expanding influence on international platforms and its ability to convene the world’s leading accounting minds. The Institute has organised and hosted landmark events that have actively shaped the trajectory of the profession, fostering a genuine exchange of ideas across borders.World Congress of Accountants (WCOA)ICAI made history by hosting the 21st World Congress of Accountants (WCOA) in November 2022 at the Jio World Convention Centre, Mumbai — the first time this prestigious event, widely regarded as the “Olympics of the Accountancy Profession,” was held in South Asia. Attracting thousands of delegates both in person and virtually from across the globe, the Congress focused on the profession’s role in safeguarding public interest and enabling sustainable economic development.World Forum of Accountants (WOFA)Building on the success of WCOA 2022, ICAI institutionalised its global engagement through the World Forum of Accountants (WOFA), its flagship international platform that regularly brings together accountants, regulators, policymakers, industry leaders, and academics from around the world. Following the successful editions of WOFA 2025 in New Delhi and WOFA 2.0 in Greater Noida in 2026, the Institute will host WOFA 2026 in Visakhapatnam, with a focus on technology, trust, and transformation. WOFA provides a distinctive space for Chartered Accountants to forge international networks, engage with global regulators and standard-setters, explore cross-border opportunities, and actively shape the future direction of the profession.Building a Global Network of Chartered AccountantsBeyond thought leadership platforms, ICAI’s commitment to internationalisation is equally reflected in its efforts to create practical, real-world opportunities for members through a robust network of Overseas Chapters, strategic alliances, and cross-border professional initiatives. Through 54 International Chapters and 31 Representative Offices, ICAI connects its members with global professional communities and opens doors to international career and business opportunities. Apart from this, ICAI has also been playing an active and influential role in the global accountancy profession through its participation in a wide range of prestigious international organisations.Professional Networking PlatformsOverseas Chapters regularly organise CPE seminars, industry roundtables, workshops, and international conferences that enable members to connect, collaborate, and grow professionally. Programmes such as ICAI’s Global Connect series further facilitate engagement between overseas members and professionals across jurisdictions, fostering cross-border knowledge sharing. ICAI’s international offices serve as gateways to local professional bodies, industry stakeholders, and business communities, opening pathways for career advancement and international business development.Regulatory Recognition and Professional MobilityActing as professional ambassadors for ICAI, overseas chapters engage with local regulators, government authorities, diplomatic missions, and Indian embassies to support member mobility, navigate regulatory challenges, and enhance professional recognition. The ICAI (Global Networking) Guidelines, 2025 provide a structured framework enabling firms and professionals to expand their global footprint and service capabilities.International Collaborations and Strategic PartnershipsTo strengthen the global standing of the Indian Chartered Accountancy profession and facilitate international professional mobility, the Institute has established an extensive network of international collaborations through both Mutual Recognition Agreements (MRAs) and Memoranda of Understanding (MoUs). ICAI currently maintains MRAs with eight prominent accounting bodies worldwide namely CPA Australia, CPA Canada, The Institute of Chartered Accountants in England and Wales (ICAEW), Chartered Accountants Australia and New Zealand (CAANZ), Institute of Chartered Accountants of Nepal (ICAN), Malaysian Institute of Certified Public Accountants (MICPA), South African Institute of Chartered Accountants (SAICA) and CPE Ireland (now merged with CA Ireland). These agreements enable ICAI members to obtain professional recognition and pursue membership opportunities with partner institutions, subject to prescribed eligibility requirements.Complementing these arrangements, ICAI has also entered into numerous MoUs with professional accounting bodies, academic institutions, and regulatory organisations across Asia, the Middle East, Europe, Africa, and the Pacific region. These partnerships foster knowledge sharing, capacity building, technical cooperation, research, and continuing professional development.The Institute has also been a founding member and an active member of several international organizations and accounting bodies. These memberships enable ICAI to contribute to the development of global accounting standards, foster international collaboration, exchange knowledge and best practices, represent the interests of the Indian accountancy profession on global platforms.As organisations around the world confront issues in risk management, sustainability reporting, digital transformation and regulatory compliance, Indian Chartered Accountants are ideally placed to deliver strategic solutions at scale. Through targeted capacity-building and ongoing professional development, ICAI is shaping a cadre of globally competent professionals who can drive innovation and enhance India’s stature in the international accountancy community.ICAI’s Global Role in AccountancyMembershipChartered Accountants WorldwideInternational Valuation Standards CouncilPan African Federation of AccountantsASEAN Federation of AccountantsXBRL InternationalIFRS FoundationInternational Forum of Accounting Standard SettersInternational VAT Association*International Fiscal Association*Founding MemberCAPAIFACSAFAAOSSGEdinburgh GroupEmerging Economies Group*Other AffiliationsGlobal Capability Centres (GCCs)As part of its internationalisation drive, ICAI has promoted Global Capability Centres (GCCs) as a pivotal opportunity for Chartered Accountants to move beyond traditional accounting tasks and assume strategic leadership roles within globally integrated organisations. With India now recognised as a preferred GCC destination, the Institute is equipping its members to succeed in a tech-driven landscape shaped by Artificial Intelligence, cloud platforms, cybersecurity, automation, and advanced analytics. The programme encourages cross-border knowledge exchange and brings together expertise in accounting, finance, governance and emerging fields. As organisations around the world confront issues in risk management, sustainability reporting, digital transformation and regulatory compliance, Indian Chartered Accountants are ideally placed to deliver strategic solutions at scale. Through targeted capacity-building and ongoing professional development, ICAI is shaping a cadre of globally competent professionals who can drive innovation and enhance India’s stature in the international accountancy community.Modernising the Profession: Reforms for a Competitive WorldStrengthening the roots of the Profession: Transforming the EducationICAI has undertaken significant reforms to modernise Chartered Accountancy education and align it with the evolving demands of the global business environment. The CA qualification continues to enjoy international recognition from the bodies like ECCTIS, with the programme receiving accreditation and recognition from leading global professional bodies. Beyond its core curriculum, ICAI has strengthened its commitment to lifelong learning through an extensive portfolio of certificate and post-qualification courses in emerging areas such as Artificial Intelligence, sustainability reporting, forensic accounting, risk management, and digital assurance. Recently, the Certificate Course on Financial and Accounting Information Systems (FAIS) equips members with the technological competencies required to navigate the ongoing digital transformation of businesses and financial reporting systems. ICAI is preparing present and future professionals to thrive in the digital economy and contribute effectively to an increasingly interconnected and technology-enabled financial ecosystem.Aggregation of CA Firms: A Strategic Imperative for Building India’s Own Big FourIn an increasingly globalised and technology-driven business environment, the aggregation of Chartered Accountant firms has become a strategic necessity for strengthening the profession’s competitiveness and relevance. By consolidating resources, talent, expertise, and technological capabilities, Indian CA firms can achieve the scale required to provide comprehensive, multidisciplinary services comparable to leading international networks. Such aggregation not only enhances operational efficiency and quality standards but also enables firms to invest in innovation, specialised knowledge domains, and global expansion. The significance of this transformation was underscored by Prime Minister Narendra Modi, who envisioned the emergence of large Indian accounting firms capable of standing alongside the world’s leading audit networks, calling for the creation of four Indian firms within the global “Big Eight.” This vision continues to inspire efforts toward building robust, home-grown professional institutions that can compete internationally, support India’s economic aspirations, and elevate the global stature of the Indian Chartered Accountancy profession.Revised Code of Ethics (13th Edition): Strengthening Ethical Excellence in a Changing Business LandscapeThe Revised Code of Ethics (13th Edition) represents a forward-looking effort to align the Chartered Accountancy profession with changing global norms, technological progress, and new business realities. Crafted to bolster professional competitiveness while preserving the highest ethical standards, the updated framework relaxes rules on advertising and web presence, allowing members and firms to showcase the information more effectively on modern digital platforms. The Code also brings greater harmony with the IESBA (2024) standards, reinforcing provisions on auditor independence, non-assurance services, and the reporting of legal and regulatory breaches, thereby promoting transparency and public confidence. Acknowledging the rising importance of sustainability and ESG disclosures, it introduces tailored ethical and independence requirements for sustainability assurance engagements. In addition, the widened remit for Management Consultancy Services now encompasses cutting-edge fields such as Artificial Intelligence, forensic accounting, and social impact assessment, underscoring the profession’s shifting role in a knowledge-driven economy.ConclusionAs commerce and finance knit even closer across borders, the Chartered Accountant’s remit goes well beyond compliance and reporting; it includes defending public trust, promoting transparency, and aiding sustainable economic growth. Dr. Rajendra Prasad, in his words, aptly said “the fast-increasing tempo of the industrial and economic development of the country makes it imperative that every Chartered Accountant should realise that he belongs to a profession which provides the first line of defence to the unwary public against money grabbers and opportunists. Your responsibility in this matter becomes all the greater because of the autonomy which your profession enjoys.” Those words resonate today as strongly as they did seven decades ago: autonomy confers privilege, but it also demands greater integrity and accountability in service of society.As ICAI advances a globally respected, future-ready profession through international partnerships, curricular reform, technological adoption, and ethical leadership, it is simultaneously opening fresh avenues of opportunity for members. Yet genuine transformation depends on practitioners themselves. The Institute provides vision, support, and an enabling ecosystem; practitioners must translate that into action. We must welcome innovation while remaining firmly rooted in the enduring values of ethics, excellence, and public service.Author may be reached at eboard@icai.inwww.icai.org July 2026
SPECIAL-WRITE-UP
Ep. 58 — The Future-Ready Audit Profession
CA Journal
· July 2026
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The Future-Ready Audit ProfessionThe Profession in 1949Few professions can trace their modern origins to a single legislative moment, but the Indian Chartered Accountancy profession is one such exception. When Parliament enacted the Chartered Accountants Act on 1 May 1949, and it became effective on 1st July 1949. It was well before India became a republic; it did far more than create a new regulatory body. It planted the seeds of a profession that would, over the next seven and a half decades, grow into one of the most consequential pillars of India's economic architecture.Where we have reached is, by any measure, a modest beginning. The first cohort of members was small, just above 1600; the infrastructure was nascent; and the scope of professional work was narrow, largely confined to bookkeeping, preparation of accounts, and basic statutory audit. But the foundations laid in those early years, a commitment to professional ethics, a structure of rigorous examination, and an independent regulatory mandate, proved to be extraordinarily durable. Our salute to our founding fathers, the pillars of profession who nurtured and developed the profession with great vision and passion.The First Three DecadesThe 1950s, 1960s, and 1970s were, in retrospect, years of quiet consolidation. The Indian economy model, with its emphasis on public sector enterprise, industrial licensing, and tight capital controls, created a steady but unspectacular demand for audit services. Most of the work was statutory in nature: auditing public sector undertakings, conducting company audits as required under successive Companies Acts, and maintaining financial records for a manufacturing-led economy.The profession grew steadily laying the foundation for the significant expansion that followed in later years. Firms were small, predominantly proprietorships or modest partnerships, and largely regional in character. There was no concept of the large multi-city firm, and no specialist service lines, no advisory practices. The Chartered Accountant of this era was, essentially, a trusted neighbourhood professional, someone businesses called when they needed their books to be in order or their tax returns filed.Yet these decades mattered more than they might appear. The ICAI was building its examination infrastructure, developing its early pronouncements on auditing practice, and crucially, establishing in the minds of Indian business and government alike that the CA qualification meant something real. It was a period of institution-building, and the institution that emerged from it was robust enough to absorb the rapid changes that were coming. Late 1970s saw the setting up of the Accounting Standards Board. But the progress in respect of the standards took time to materialise.Subsequent Years: The Profession Finds Its StrideThe 1980s and early 1990s marked the beginning of a meaningful shift. India's gradual opening, tentative at first, then accelerating dramatically after the 1991 economic reforms, transformed the operating environment for Chartered Accountants almost overnight. Foreign investment began to flow in. Indian companies started looking outward. Capital markets woke up. And suddenly, the demand for credible, sophisticated financial assurance was no longer just a regulatory formality, it was a commercial necessity. Also, this was the period when Section 44AB of Income Tax Act was introduced to make tax audits mandatory for entities with a turnover prescribed under the Act. This popularised the profession in smaller cities.This was also the time when the profession, for the first time, experienced the emergence of professional committees / boards, like:Auditing Practices CommitteeBoard of EthicsExpert Advisory CommitteeTo all the challenges the profession faced, it responded well. Firms began to grow in size and geographic reach. Specialist departments, taxation, management consulting, and systems audit began to emerge within larger practices. The 'Big Eight' (later 'Big Six', then 'Big Four') international accounting firms deepened their India presence, initially through loose affiliations with domestic firms, and the exposure to international audit methodology began to influence how Indian practitioners approached their work.It was also during this period that the limitations of the old model began to show. The financial frauds of the late 1990s, with the securities scam of 1992 being among the most significant, brought renewed attention to the quality of financial reporting and the role of audit in strengthening corporate governance. These developments provided the profession with valuable opportunities for continuous enhancement of audit practices, a journey that has continued to shape its evolution over the decades.Technology has moved from a tool auditors used occasionally to the central medium through which modern business operates, and therefore the central medium through which modern audit must be conducted. Data analytics, continuous auditing, robotic process automation, and now artificial intelligence are all reshaping audit methodologyThe CA Profession: Accountants, Auditors and Tax ConsultantsFor much of its history, the Chartered Accountancy profession in India wore three hats and wore them simultaneously, without much sense of contradiction. The CA was, at once, the person who audited your financial statements, and filed your tax returns. These two in-one roles were both a strength and, ultimately, a constraint.It was a strength because it made the CA indispensable to Indian business. Small and medium enterprises relied on their CA for virtually everything financial, advice on structuring transactions, representation before tax authorities, annual audit, and often a good deal of informal management counsel besides. The relationship was personal, long-standing, and built on trust that was accumulated over years.But it was also a constraint, because wearing multiple hats meant that none of them was worn with quite the specialised depth that a more focussed professional might bring. The audit partner who also handled the client's tax matters was not, and could not easily be, the sceptical, arm's-length examiner that modern audit theory requires. Independence, in such a context, was more aspiration than reality. This balancing act between the generalist tradition of Indian CA practice and the increasingly specialised demand of modern financial assurance is one that the profession must address to meet the changing expectations of stakeholders.Multiple accounting scams came to light at both international and domestic levels. Internationally, Enron, Parmalaat, Lehman Bros etc. rocked accounting profession and shook public confidence in audited accounts. At the domestic level, cases involving organisations such as Global Trust Bank, Satyam, IL&FS, DHFL, Reliance Home Finance, and Jet Airways tested the resilience of the accounting profession. These experiences prompted important reforms and strengthened the profession's focus.Emergence of NFRAFor most of its existence, the ICAI has functioned as a self-regulatory professional institution, bringing together education, examinations, membership, standard setting, and professional oversight under one umbrella. This concentration of functions in a single self-regulatory body was inherited from Britain, and for decades it has worked well enough.The ICAI issued Statements on Auditing Practices, later formalised into Standards on Auditing. It continued to pronounce Accounting Standards for all entities, both corporate as well as non-corporate, till the time the National Advisory Committee on Accounting Standards (NACAS) was set up under the Companies Act 1956. Subsequent to this, ICAI would prepare the Accounting Standards and send the same to NACAS, who having gone through the same would recommend the government to notify the same, to be complied with by the companies. This, in a way, strengthened the implementation of Accounting Standards.ICAI continues to run the Board of Studies. It has been responsible for laying down the curriculum for studies. Needless to say, administratively, it functions under the Ministry of Corporate Affairs (MCA) which has a say in certain matters including change in curriculum. It acts as a catalyst on behalf of the profession in its engagement with the Government.An elected body that represents the interests of its members is perceived to be accommodative with its members when issues arise. It may not necessarily be true, but the risks cannot be denied altogether. As corporate failures mounted and public scrutiny of audit quality intensified, the argument for an independent regulator became harder to resist. To further strengthen the system and address the perceived limitations of the self-regulation model, the stage was set for the eventual emergence of NFRA, with effect from 1st October 2018.The establishment of National Financial Reporting Authority (NFRA), alongside the continued stewardship of Institute of Chartered Accountants of India (ICAI) and the oversight roles of regulators such as SEBI, RBI, and IRDAI, has contributed to a stronger governance ecosystem.The Continuous Evolution in the CurriculumAsk any CA who qualified before 2000 what they were taught about auditing, and they'll describe a curriculum built largely around vouching, verification, and the Companies Act. Ask someone who qualified in 2015, and you'll hear about risk assessment, internal controls, and information systems. Ask a current student, and they'll mention data analytics, sustainability reporting, and professional scepticism. The curriculum has evolved consistently. However, the continuing challenge is to ensure that it keeps pace with emerging technologies, evolving business models, and the changing expectations of the profession.The ICAI has, to its credit, periodically overhauled its examinations and syllabi, introducing the Common Proficiency Test, revamping the IPCC and Final examinations, and restructuring articleship requirements. The introduction of the Integrated Professional Competence framework, and more recently the new scheme of education and training, reflect genuine attempts to keep pace with a changing profession. At times, it appears that the changes are too frequent. And it raises an issue with regard to vision about the profession.Although the curriculum adopted by the Institute has undergone frequent revisions, but in a rapidly evolving economic environment, it is acceptable that the curriculum still has some scope of improvement. There have been times when the change in technology has outpaced the change in curriculum. It is a structural challenge for every professional body that must consult, deliberate, and reach consensus before moving. But it is a real gap, and closing it requires a more agile approach to curriculum development than the profession has historically managed.Recent Times: Gamut of Changes, or rather, a Tsunami of ChangesIf the first six decades of the profession were defined by gradual evolution, the last fifteen years have felt more like a series of seismic shocks arriving in quick succession. Several forces have converged simultaneously, and their cumulative impact on the profession in India is immense. This has been a period of unlearning what we learnt in the past and relearning new concepts.The Advent of GSTThe introduction of the Goods and Services Tax in July 2017 was, for the Chartered Accountancy profession, simultaneously an enormous opportunity and a steep learning curve. GST subsumed a bewildering patchwork of central and state indirect taxes into a single, technology-driven framework, and in doing so, transformed the compliance landscape for virtually every business in India.For auditors, GST created entirely new assurance territory. GSTR reconciliations, input tax credit verification, and anti-profiteering demanded competencies that most practitioners had to acquire on the job, often simultaneously with the clients they were advising. The profession adapted effectively to the new GST regime, with practitioners steadily enhancing their expertise and strengthening the quality of assurance services as the ecosystem matured.Cross-Border Transactions and Transfer PricingIndia's integration into global value chains has accelerated dramatically. Indian companies are either acquiring or setting up businesses abroad. This has led to cross-border transactions which need to be structured fairly. Transfer pricing, the pricing of transactions between related entities in different tax jurisdictions has become one of the most contested areas in corporate taxation, and auditors are expected to have a working grasp of it.The complexity here is real. A transfer pricing audit requires not just accounting knowledge but an understanding of economics, global value chains, and the OECD's BEPS (Base Erosion and Profit Shifting) guidelines. It is specialist work that demands specialist skills, and yet it falls squarely within the terrain that many CA firms are expected to navigate for their clients.New and Complex Financial InstrumentsThe days when the most complex items on a balance sheet were a bank overdraft, term loans, debentures etc, are gone. Indian companies, particularly in the financial services sector, now routinely deal in derivatives, convertible products, securitised assets, foreign currency convertible bonds, and a range of hybrid instruments that sit between debt and equity. Auditing the fair value of these instruments, assessing the appropriateness of the valuation models used, and evaluating the disclosures around them requires a level of financial sophistication that was simply not part of the traditional CA skill set.IFRS and International Standards on AuditingThe convergence of Indian Accounting Standards with IFRS, through the Ind AS framework, has been one of the most significant technical transformations in Indian financial reporting history. Ind AS introduced principles-based accounting, fair value measurement, and a fundamentally different approach to financial statement presentation that required auditors to develop new competencies, new scepticism about management estimates, and new ways of communicating audit findings.On the auditing side, Indian SAs remain substantially, but not fully aligned with ISAs. The gap matters most in areas like group audits (SA 600 vs ISA 600), where India's unique regulatory landscape has led to meaningful divergence. The NFRA's push to bring SA 600 in line with ISA 600 and the ICAI's vigorous advocacy on behalf of smaller firms reflect an important point to balance global harmonisation with local relevance. There is an urgent need for both the regulators to sit and resolve the issue without further delay.Ethical Standards Including NOCLARThe introduction of the Non-Compliance with Laws and Regulations (NOCLAR) framework into the ICAI's Code of Ethics was a quiet but significant moment. NOCLAR places an affirmative obligation on professional accountants who encounter, or suspect, non-compliance with laws or regulations to take appropriate action, including, in certain circumstances, reporting to an appropriate authority even without the client's consent.This is a substantial departure from the traditional model of professional confidentiality, and it has not been universally welcomed. For auditors who have spent their careers in a culture where the client relationship is sacred and confidentiality near-absolute, NOCLAR requires a fundamental reorientation of professional instincts. More importantly, it is the most difficult area for the auditor. An auditor may be able to report on certain non-compliances of different laws having bearing upon financial statements (this in any case is the requirement of SA 250 as well) but expecting him to ascertain the cases of bribes, money laundering etc, may be a real difficult proposition for the auditors. It is also an area where continued capacity-building, guidance, and experience can help bridge the gap between the expectations of the standards and their implementation in practice.Recognition for Larger Firms to Render Services Under One RoofThe regulatory permission for larger CA firms to offer multi-disciplinary services, combining audit, tax, advisory, and consulting under one organisational roof has reshaped the competitive landscape of the profession. Few of the firms have responded by building out capability in areas ranging from forensic accounting to cybersecurity advisory to sustainability consulting, presenting themselves to clients as comprehensive professional services organisations rather than traditional audit shops. But the profession continues to be dominated by smaller firms, particularly in smaller towns, and offers considerable potential for further growth and consolidation. ICAI's efforts to promote mergers and networking in past have not yielded desired results for varied reasons. One looks forward with keen interest to the effect of recent guidelines on Aggregation of CA Firms.This consolidation of firms may be commercially successful but professionally complicated. The more services a firm provides to an audit client, the more fraught the independence question becomes. Managing these conflicts, through robust internal governance, service restrictions, and transparent disclosure is a real quality challenge of the modern large firm.Information Technology and Artificial IntelligenceMost important change the profession faces today is the rapid change in technology which is bound to change the entire working of the profession.Technology has moved from a tool auditors used occasionally to the central medium through which modern business operates, and therefore the central medium through which modern audit must be conducted. Data analytics, continuous auditing, robotic process automation, and now artificial intelligence are all reshaping audit methodology. AI-powered tools can now scan entire transaction populations, identify anomalies, read contracts, and flag fraud indicators at a speed and scale that would have been unimaginable a decade ago.But technology also creates new risks. Clients are using AI to generate financial estimates, manage complex portfolios, and automate revenue recognition. Auditing the output of an AI system requires the auditor to understand, at least at a conceptual level, how that system works, what data it was trained on, and what its failure modes are. This is genuinely new territory, and the profession is still working out how to navigate it. ICAI has taken a number of initiatives to upskill the members in this respect. But far more requires to be done. More than seminars and conferences, ICAI needs to focus on workshops to train members in these areas.New RegulatorsPerhaps nothing has changed the landscape of the profession more fundamentally than the emergence of new regulators. The establishment of National Financial Reporting Authority (NFRA), alongside the continued stewardship of Institute of Chartered Accountants of India (ICAI) and the oversight roles of regulators such as SEBI, RBI, and IRDAI, has contributed to a stronger governance ecosystem.This is, on balance, a healthy development as the independent oversight raises the floor of audit quality, creates accountability that self-regulation cannot fully provide, and sends an important signal to capital markets that India takes the quality of financial assurance seriously. Further, it also creates complexity, potential for regulatory overlap, and, occasionally, conflicting demands that leave auditors genuinely uncertain about what is required of them.Strengthening Audit and AccountabilityThe profession has been called upon, repeatedly, to reflect on and strengthen its practices through the lens of high-profile corporates. Few of those have already been mentioned in the article. Each of these episodes raised the same important question: where were the auditors? In some cases, the answer was malfeasance. In others, there was a need for greater professional scepticism. In others still, it was an opportunity to strengthen the audit methodology. But in all of them, the profession gained valuable insights for improvement, and the scrutiny that followed was instrumental in driving reforms and enhancing audit quality.These failures matter beyond their immediate reputational consequences. They have driven regulatory change, prompted curriculum reform, and most importantly, encouraged individual practitioners to confront the gap between the assurance they provide and the assurance that stakeholders actually need. The auditor who signs off on financial statements that subsequently prove to be materially misleading cannot simply point to compliance with technical standards as a defence. The expectation has shifted and it will continue to shift.The Methodology of Audit: What Has ChangedThe Change from Substantive to Risk-Based SamplingThe shift from traditional substantive testing, where auditors would vouch and verify individual transactions from a random or judgement-based sample, to a risk-based approach, represents perhaps the most fundamental methodological evolution in audit over the past three decades. Under risk-based auditing, the auditor identifies where the risks of material misstatement are greatest, concentrates testing effort there, and calibrates the nature, timing, and extent of procedures accordingly.This sounds like common sense, and it is. But implementing it properly requires a rigour and sophistication that is not easy. A genuinely risk-based audit demands deep knowledge of the client's business, its industry, its control environment, and the specific risks that flow from all of these. It requires the auditor to make judgement calls about where risk is concentrated, and to be right about those calls. The failure in many audit quality deficiencies is not in the concept of risk-based auditing but in its execution: risk assessments that are superficial, control reliance that is not properly tested, and substantive procedures that are too thin to provide the assurance claimed.Risk-Based Audits: The New StandardThe SA 315 framework, Identifying and Assessing the Risks of Material Misstatement, is the backbone of modern audit methodology. It requires auditors to develop a thorough understanding of the entity and its environment, including its internal controls, and to use that understanding to design an audit that responds to the specific risks identified. Done well, it produces audits that are both more efficient and more effective than the old substantive-first approach.As the profession continues to strengthen its implementation of the framework, there are growing opportunities to further enhance the quality of risk assessments, deepen the understanding of internal controls, and align audit procedures more closely with identified risks. NFRA's inspection findings have provided valuable insights in this regard, helping to highlight areas for continued improvement and professional development. The solution lies not in a different standard as the standards are broadly sound, but in sustained investments in training, supervision, engagement quality reviews, and a professional culture that views risk assessment as a meaningful exercise of professional judgment and insight rather than merely a procedural requirement.As the profession continues to strengthen its implementation of the framework, there are growing opportunities to further enhance the quality of risk assessments, deepen the understanding of internal controls, and align audit procedures more closely with identified risksConclusion: The Road AheadSeventy-seven years is a long journey for any profession. The Chartered Accountancy profession in India has travelled from a small band of practitioners in a newly independent nation to a community of hundreds of thousands of qualified professionals operating across every sector of one of the world's fastest-growing economies. That journey deserves to be celebrated. With the celebration, every member should keep in mind that we should always learn from the past.The profession stands at the most consequential inflection point in its history. The forces pressing upon it, such as technological disruption, regulatory intensification, expanding stakeholder expectations, and the sobering lessons of repeated corporate failures, are not going to abate. They are going to intensify. The question is not whether the audit profession will change. It is whether the profession will lead that change or not.What Leadership looks like in Concrete TermsGreater Role in Corporate Governance Through TransparencyThe auditor's report has, for too long, been a document that almost nobody reads and that says almost nothing useful to those who do. The move towards more informative audit reporting, Key Audit Matters, enhanced going concern disclosures, commentary on significant estimates and judgements, is a step in the right direction. But it needs to go further. Future-ready auditors must see themselves as active contributors to the quality of corporate governance, not merely as attesters of financial statements. That means engaging more substantively with audit committees, communicating findings with clarity and courage, and being willing to say difficult things to powerful people.Upskilling in Laws, Ethical Standards and AIThere is no polite way to say this: a certain proportion of practising auditors in India may not be adequately current on developments in company law, taxation, ethical standards, or technology. This is not a personal failing; the pace of change has been extraordinary, and continuing professional education system needs substantial improvement. But it is a gap that the profession must close, deliberately and urgently. The ICAI's CPE requirements are a floor, not a ceiling. Every practitioner, whether a partner of a bigger firm or a sole proprietor in a small town, has a professional obligation to understand Accounting and Auditing Standards, NOCLAR, to engage with AI, and to keep their legal and regulatory knowledge current.Prepared for Greater Public ScrutinyThe era of the audit profession operating in comfortable obscurity is over. Parliamentary committees ask pointed questions about audit quality. Financial journalists scrutinise audit reports for what they don't say as much as what they do. Social media amplifies audit failures with brutal speed. The profession must accept this scrutiny not as an intrusion but as a legitimate consequence of the public trust it claims. Transparency, in audit quality, as in corporate governance, is not a risk to be managed, it is the price of relevance.Prepared for Class Action SuitsIndia does not yet have a mature class action litigation culture for audit-related failures, but the direction of travel is clear. The Companies Act 2013 introduced class action provisions. SEBI has mechanisms for investor complaints. As awareness of audit's role in investment decisions grows, and as spectacular failures continue to occur, the legal exposure of auditors will increase. This is not a reason to stop working out of fear; it is a reason to do the work properly, document it thoroughly, and ensure that every engagement is conducted with the rigour that would withstand judicial scrutiny.Challenges in the Assessment of Going ConcernThe COVID-19 pandemic exposed, with unusual clarity, how difficult going concern assessment can be in conditions of genuine uncertainty. But the pandemic was simply an extreme version of a challenge that auditors face constantly: how do you assess the ability of an entity to continue as a going concern when the future is, by definition, unknowable? The standards provide a framework, evaluate management's assessment, look at a minimum of twelve months from the date of the financial statements, consider the adequacy of disclosures but the judgement that fills that framework is the auditor's own. In an era of rising interest rates, geopolitical volatility, and supply chain disruption, going concern assessments will only become more complex and more consequential.Engaging With Those Charged With GovernanceThe relationship between the auditor and those charged with governance i.e., the TCWG, the audit committee and the board, is one of the most important and most underdeveloped aspects of modern audit practice in India. Too often, the interaction is perfunctory, a brief presentation at the end of the audit, the signing of management representation letters, a polite exchange about the audit fee. This is not good enough. The future-ready auditors engage with the TCWG, the audit committee throughout the year, not just at the end. They share their risk assessment findings early. They communicate difficult matters candidly. They treat the audit committee not as a formality to be managed but as a genuine partner in the assurance process. NFRA, recently formalised a very important concept of having planning and pre-audit meetings with TCWG. If done in substance, this can serve as a very good communication platform with TCWG. But for this, both auditors and TCWG members have to come out of their comfort zone and ask real questions.Techniques of Audit Must ChangeSampling process has to undergo a complete change. A sample of fifty invoices may not be sufficient for a world in which clients process millions of transactions a day. Audit techniques must evolve to match the complexity and volume of what is being audited. Population-level data analytics, continuous monitoring tools, AI-assisted anomaly detection, and blockchain-based audit trails are not futuristic concepts, these are available today, and the firms and practitioners who deploy them effectively will produce better, more efficient, more insightful audits than those who do not. Resistance to technology adoption in audit is a slow form of professional obsolescence.The Modern Auditor: Vigilant, Responsive and Forward-LookingThe traditional auditor is the watchdog: present, observant, a deterrent to misconduct by virtue of being there. It is a comforting image but an increasingly inadequate one. A watchdog that only watches is not much of a safeguard against a determined fraudster, a compliant management team, or a board that prefers comfortable ignorance to uncomfortable truth.The profession needs to evolve into something beyond watching. It should look for what is hidden rather than waiting to be shown what is visible. It must apply professional scepticism not as a compliance obligation but as a genuine investigative instinct, probing unusual transactions, questioning implausible explanations, following the trail of risk wherever it leads. The profession should report what it finds, loudly and without any reservation, regardless of how inconvenient that finding might be for the client or how much pressure is applied to soften the message.The auditor who is genuinely willing to qualify the opinion, issue an adverse report, report suspected fraud to the appropriate authority, or resign from an engagement where the auditor's independence or the integrity of the financial statements cannot be preserved will be ready for the future-vigilant, responsive and forward looking. The credible threat that the auditor will act on findings rather than accommodate them, is precisely what gives the audit opinion its value.India needs auditors of this calibre. The investors who rely on audited financial statements deserve them. The employees and pensioners whose economic security depends on the soundness of the companies they work for need them. The capital markets, which cannot function without credible assurance, require them. And the profession must produce them to claim the public trust and social standing that it rightly aspires to.The journey from 1949, to today has been remarkable albeit a mixed one. The journey ahead will be harder, more complex, and more demanding than anything that has come before. The profession is up to it, but only if it is honest about what is required, courageous in demanding it of itself, and unwilling to settle for anything less than the standard that the public interest requires.Authors may be reached at eboard@icai.inwww.icai.org July 2026
SPECIAL-WRITE-UP
Ep. 59 — Trust in Financial Ecosystems: Technology and Accountability
CA Journal
· July 2026
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Trust in Financial Ecosystems: Technology and Accountability“Numbers may be precise, but trust arises not from numbers alone. It is built through transparency, strengthened by accountability, and sustained through independent verification.”IntroductionTrust has always been the cornerstone of financial systems. Businesses across time and the globe have been extending credit facility based on trust. The ability of financial institutions to mobilise savings and support economic growth depends fundamentally on the confidence stakeholders place in them. Depositors expect banks to safeguard their funds; investors rely on credible information to make decisions; citizens expect public money to be spent as intended and honestly accounted for. For decades, this confidence rested on institutional reputation, regulatory oversight and periodic audit. That foundation of trust is still running the system. However, the environment around it has changed beyond recognition.As the Supreme Audit Institution of India, the Comptroller and Auditor General (CAG) occupies a distinctive vantage point on this change.Under Article 148 of the Constitution, the CAG audits the receipts and expenditure of the Union and the States.CAG also audits the accounts of Public Sector Undertakings and Autonomous Bodies including numerous entities in the public financial landscape dealing in niche sectors such as: NBFCs & Development Finance Institutions; Insurance; Capital Markets & Securities; Asset Management, Pension & Trusteeship; Payments, FinTech & Digital Financial Infrastructure; Asset Reconstruction & Stressed Assets; Credit Rating, Risk & Credit Guarantee, Trade Finance & Financial Services; Consultancy, Project Development & Infrastructure; and Regulators, Foundations & Governance Institutions.CAG has been increasingly auditing the digital systems through which public money now moves i.e., Aadhaar-enabled welfare payments, the Unified Payments Interface, and the core operations and IT systems of financial sector service providers.Audit reports placed before Parliament and State Legislatures have, for over a century, served as a foundational mechanism of public accountability, placing this institution squarely at the intersection of how financial systems are evolving in the digital age, why accountability remains indispensable despite rising automation, and how audit must adapt to preserve trust in an increasingly interconnected world.Financial systems today are powered by integrated ERP platforms, cloud-based accounting, AI, Machine Learning, blockchain, robotic process automation and digital payment infrastructure. Data is generated continuously and decisions are increasingly made in real time. India’s own digital public infrastructure has been built on exactly these technologies, and the CAG’s audit mandate has grown alongside it.Financial systems today are powered by integrated ERP platforms, cloud-based accounting, AI, Machine Learning, blockchain, robotic process automation and digital payment infrastructure. Data is generated continuously and decisions are increasingly made in real time. India’s own digital public infrastructure has been built on exactly these technologies, and the CAG’s audit mandate has grown alongside it.Trust Has Become Ecosystem-CentricA financial ecosystem is no longer a single institution but a network of interconnected banks, fintechs, payment processors, regulators, auditors and technology vendors operating through shared digital infrastructure. A citizen’s experience of a single welfare payment or digital transaction may depend on the coordinated functioning of a mobile app, a payment gateway, banking infrastructure, cloud servers and fraud-monitoring tools working simultaneously. A weakness anywhere in that chain can damage confidence in the whole. Trust has, therefore, evolved from institution-centric to ecosystem-centric, which is precisely why audit has had to widen its lens from individual entities to the systems connecting them.The economic value of this trust is considerable. High-trust environments see lower transaction costs, deeper market liquidity and faster capital allocation; deficiencies bring higher compliance costs and reputational damage that can take years to repair. As Warren Buffett observed, “it takes twenty years to build a reputation and five minutes to ruin it”. The 2008 global financial crisis showed how governance and transparency failures can erode confidence rapidly; more recent cyber incidents confirm that threats to trust now extend well beyond financial reporting into the integrity of the technology itself. For a public audit institution, the stakes are no different in kind: a citizen’s trust in digital governance rests on the same foundations as an investor’s trust in a balance sheet.Technology: An Enabler of Trust, and a Source of New RiskThe modern financial system can be understood as operating through three interconnected layers: a transaction layer i.e., ERP systems, payment platforms and APIs that captures financial events in real time with minimal manual intervention; an analytics layer that converts this data into insights through dashboards and AI, letting management monitor risk on near real-time information rather than historical reports alone; and a reporting and assurance layer where information is consolidated into financial statements and regulatory filings, and audit validates its reliability. This structure is as visible in government financial management, through systems such as the Public Financial Management System (PFMS), as in the private sector, and audit must engage with all three layers, not the last alone.AI and Machine Learning now support credit assessment, fraud detection, anti-money laundering monitoring and predictive analytics, identifying patterns that traditional methods would miss; government auditors increasingly encounter the same tools in beneficiary-identification systems built into welfare schemes. But outcomes are only as good as the data behind them: biased datasets can produce unfair results, and complex algorithms can generate decisions that are difficult to explain. The auditor’s task of examining an insurance company’s credit model or a scheme’s eligibility algorithm alike is shifting from testing only a model’s output to questioning the model itself; an unusual flag is a reason to ask further questions, not proof of fraud. Advances like blockchain would create tamper-resistant, time-stamped records that strengthen confidence in cross-border payments and digital identity, reducing some manual checking since the technology leaves its own trail. But it does not remove the need for audit; it relocates scrutiny to whether the data was accurate when first entered and whether the underlying code does what it claims, since incorrect data on a ledger remains permanently wrong even as it looks authoritative.Cloud computing has made sophisticated financial systems accessible even to smaller entities and enabled real-time reporting, but it creates dependence on third-party providers visible in government systems too, as departments migrate core applications to the cloud. This is double-edged for audit: it offers direct, read-only access to systems for testing, but requires auditors to understand the cloud provider’s own controls, making reports such as SOC 1 and SOC 2 essential reading wherever systems are hosted externally. Cybersecurity threats and weak data governance sit behind all of this: institutions holding vast amounts of sensitive data are natural targets for attackers, and every downstream decision depends on the integrity of the data feeding it. Technology, in short, creates trust only when matched by sound controls and governance.Accountability Still Matters MostMany of the most damaging failures in modern finance occurred not because technology malfunctioned, but because organisations lacked adequate oversight of it. Accountability i.e., the obligation to explain and accept responsibility for decisions, needs examining at three levels, and audit itself is one of the principal mechanisms through which that examination occurs.Governance accountability requires boards and audit committees, and in the public sphere, secretaries, public sector boards and the legislatures to whom they report to understand the technologies generating the information placed before them. A director relying on an AI-driven model for a critical estimate, or a department relying on an algorithm for welfare eligibility, must be able to challenge its assumptions, not merely accept its output. CAG’s audit reports, tabled before Parliament and the State Legislatures and examined by Public Accounts Committees, exist precisely to test whether that challenge function is being exercised.Process accountability requires rethinking internal controls built for a manual world. Where automated tools now perform work once divided among several people, segregation of duties must be redesigned around new questions: who designed the automated process, who can change it, and who monitors its exceptions? Internal Financial Controls frameworks under the Companies Act, 2013 and equivalent requirements within government financial rules must address these automated control points explicitly, since weaknesses here directly affect the reliability of financial reporting in both sectors. CAG’s financial audit of Government Companies under Section 143(6) of the Companies Act exists precisely to point out these weaknesses.Professional accountability rests on the principle that technology is a powerful aid but never a substitute for judgment. Auditors, whether examining a listed company or a government scheme, remain responsible for the tools they use, including AI-enabled analytics, and must understand their limitations rather than treat their output as self-evidently correct.India’s own digital financial ecosystem illustrates the scale of what is at stake, and much of it now falls directly within this institution’s audit purview. Digital India, Aadhaar-enabled authentication, UPI, the Account Aggregator Framework and early CBDC experimentation have transformed access to financial services within a decade. As these platforms have scaled, CAG’s audits have correspondingly expanded to examine the IT systems and control environments underpinning them, alongside the Reserve Bank of India, SEBI, IRDAI, the IFSCA and the Ministry of Corporate Affairs, each raising its own expectations on governance and technology oversight. Sustainable innovation, in government and the financial sector alike, must be matched step for step by accountability.The Audit Profession Is Being RedefinedThe traditional image of an auditor, i.e. checking vouchers, tracing entries, and confirming balances, is giving way to a professional fluent in data and technology, in government audit, no less than in the Chartered Accountancy profession. CAG’s own offices have built dedicated data analytics and IT audit capabilities to keep pace with the systems they examine.The traditional image of an auditor, i.e. checking vouchers, tracing entries, and confirming balances, is giving way to a professional fluent in data and technology, in government audit, no less than in the Chartered Accountancy profession. CAG’s own offices have built dedicated data analytics and IT audit capabilities to keep pace with the systems they examine. We have comprehensively moved towards data-driven audits through our high-performance computing centre at our Centre for Data Management and Analytics (CDMA). This Centre has been the nodal driver for this transformation, guiding field offices, and developing analytics models and audit toolkits. In addition, we have recently inaugurated the Centre of Excellence in Financial Audit (CoEFA) at Hyderabad to lead our digital transformation by becoming a global leader in leveraging technology for strengthening and transforming financial audits.This mirrors the framework Standards on Auditing provide for the profession at large. SA 315 requires auditors to understand an entity’s IT environment and automated controls when identifying risk; SA 330 requires responses that increasingly involve testing automated controls and data analytics rather than sampling alone, scanning entire ledgers or scheme databases for unusual patterns to build conclusions on a broader evidence base. SA 240’s fraud-risk requirement in digital environments may now involve unauthorised system access rather than only manual misstatement, which is equally relevant to a government payment system as a corporate ledger. SA 402 has gained relevance as institutions outsource cloud services to third parties, and SA 500’s requirement for sufficient evidence now extends to system-generated logs and metadata, making IT General Controls core audit competence rather than a peripheral specialism.Continuous auditing takes this further by embedding monitoring directly within organisational systems, so exceptions are detected in near real time rather than months later, shifting audit from a retrospective exercise to a proactive one. Assurance is also expanding into ESG reporting, cybersecurity and data privacy compliance, domains where independence and scepticism remain directly transferable. None of this should reduce professional scepticism; if anything, it demands more. A well-designed algorithm can create false confidence, sometimes called automation complacency, and audit must remain alert to both human and machine output to protect the credibility of its conclusions.Building Trust in Digital Financial EcosystemsOrganisations and audit institutions alike can anchor efforts to strengthen stakeholder confidence around four ideas. Transparency of design means being able to explain how critical systems and automated processes work, including the data, assumptions and controls behind them. A system that cannot be explained tends to undermine the confidence it was meant to inspire. Traceability of data means every material figure, in a corporate statement or a scheme’s expenditure report alike, should be traceable to its originating transaction through a clear, auditable trail. Resilience of controls means controls must withstand system failures and unauthorised overrides, not merely operate correctly under normal conditions. Independence of verification remains the cornerstone beneath all three: however, sophisticated internal systems that become an objective external assessment by professionals with no stake in the outcome are what ultimately allow investors, regulators and citizens to rely on what they are told, i.e. the same principle, exercised through Parliament’s oversight of public accounts, that has anchored the CAG’s work for over a century.ConclusionTrust in financial systems is not a static achievement but a continuous commitment that must evolve alongside changing technology and stakeholder expectations. The digital age has brought genuine gains in transparency and real-time insight, but it has also introduced complexities that demand stronger oversight, not less. Far from diminishing the relevance of audit, these developments reinforce it: as the means by which information is generated change, the need for independent assurance and professional judgement becomes more critical, not less.Technology can make financial information faster and more accessible; accountability, supported by sound governance and independent assurance, is what makes it trustworthy. For centuries, financial systems have been built on trust. Technology may redefine how that trust is earned and verified, but it can never replace the need for it, and this institution remains committed to that enduring task.For audit, under constitutional mandate or professional standards, the path forward lies neither in uncritical adoption of every new technology, nor in resistance to change, but in disciplined integration guided by independence, objectivity, skepticism, and integrity. Technology can make financial information faster and more accessible; accountability, supported by sound governance and independent assurance, is what makes it trustworthy. For centuries, financial systems have been built on trust. Technology may redefine how that trust is earned and verified, but it can never replace the need for it, and this institution remains committed to that enduring task.Author may be reached at eboard@icai.inTHE CHARTERED ACCOUNTANT | www.icai.org | July 2026
Ep. 60 — Union Budget 2026–27: Growth and Structural Transformation
CA Journal
· July 2026
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Union Budget 2026–27: Growth and Structural TransformationThe Union Budget 2026–27 has come amid global economic uncertainty and domestic economic resilience. It focuses on investment-led growth and structural reform, along with fiscal consolidation. The budget seeks to achieve rapid, sustainable and inclusive economic growth, and toward this objective, it prioritises capital expenditure within a prudent fiscal approach. Rationalisation of subsidies, selective customs duty adjustments, and reforms in financial markets reveal the structural transformation agenda of the budget. The budget moves toward improved fiscal sustainability by narrowing the fiscal deficit, primary deficit and the debt-to-GDP ratio, combining macroeconomic discipline, reforms, and productive public investment.IntroductionThe Union Budget 2026–27 has come amid an uncertain and fragile global economic scenario caused by geopolitical tensions, trade fragmentation, and elevated sovereign debts across developed and developing economies. In contrast, domestic economic performance showed resilience. With an estimated strong growth rate of real GDP of 7.4 per cent in the fiscal year 2025–26, the Indian economy emerged as the fastest-growing major economy for the fourth consecutive year. Robust domestic demand, enhanced capital outlays, sound macroeconomic fundamentals, and prudent monetary and fiscal policies have accentuated the pace of growth.The Union Budget for FY 2026–27 emphasises policy continuity and fiscal consolidation and reflects a structural shift in the role of government from direct provider of goods and services to a facilitator of private investment and market-led growth. With enhanced capital expenditure, along with reduced fiscal deficits and debt-GDP ratio, the budget reaffirms the government’s belief in investment-led growth and its commitment to fiscal prudence and inclusive development.Revenue and Expenditure TrendsTraditionally, the Union Budget presents estimates for three consecutive years1. Total government expenditure, which peaked at 17.7% of GDP during the pandemic year 2020–21, has since moderated and stabilised at around 15% of GDP. In contrast, and more importantly, effective capital expenditure has steadily increased from 2.6% of GDP in FY 2020–21 to 4.4% in FY 2026–27 (BE). Revenue expenditure is on a declining trend without compromising developmental expenditure. This compositional shift reflects a systematic transition from consumption-led fiscal expansion to asset creation and public investment.Figure 1: Trends in Union Government Expenditure (% of GDP)YearRevenue ExpenditureEffective Capital ExpenditureTotal Expenditure2019-2010.82.613.42020-2114.43.317.72021-2212.53.516.12022-2311.73.915.62023-2410.84.215.02024-25 (RE)10.54.014.62025-26 (RE)10.93.914.82026-27 (BE)11.04.415.5Source: Union Budget DocumentsIn terms of absolute figures, Union Government expenditure has more than doubled over the past decade, from ₹21.4 lakh crore in FY 2017–18 to ₹53.5 lakh crore in FY 2026–27 (BE). However, this fiscal growth has been broadly aligned with economic growth, reflected by a more stable expenditure-to-GDP ratio. The upward trend reflects growing developmental commitments, infrastructure expansion, and higher capital allocations.Figure 2: Trends in Union Government Expenditure (₹ Lakh Cr.)2017-182018-192019-202020-212021-222022-232023-242024-252025-26 (RE)2026-27 (BE)21.4223.1526.8635.1037.9441.9344.4346.5349.6553.47Source: Union Budget DocumentsThe revenue profile of the budget shows that Union Government revenue mainly comes from tax sources. About two-thirds of revenue comes from taxes, where income tax, corporation tax and GST are the largest contributors, reflecting improved compliance and formalisation of the economy. Government borrowings also significantly contribute to overall revenue, but a declining primary deficit indicates that these borrowings are largely used to meet interest liabilities.Figure 3: Sources of Revenue in the Union Budget, 2026-27 (% of Total Receipts)SourceShare (%)Borrowings & Other Liabilities24Income Tax21Corporation Tax18GST and Other Taxes15Non-tax Receipts10Union Excise Duty6Customs Duty4Non-debt Capital Receipts2Source: Union Budget, 2026-27The expenditure profile of the budget 2026–27 shows that a significant portion of the total expenditure is committed expenditure, wherein interest payments and states’ share of central taxes account for over 40 per cent of the budget. Further, defence expenditure and subsidies have about 18 per cent share. This profile indicates that the government has limited flexibility in its expenditure due to mandatory obligations, while the Fiscal Responsibility and Budget Management (FRBM) Act constrains its debt-raising capacity.Figure 4: Items of Expenditure in the Union Budget 2026-27 (% of Total Expenditure)ItemShare (%)States Share of Taxes and Duties22Interest Payment20Central Sector Schemes (excl. Capex on Defence & Subsidies)17Defence11Centrally Sponsored Schemes8Finance Commission & Other Transfers7Other Expenditure7Major Subsidies6Pension2Source: Union Budget, 2026-27Trends in Revenue from Direct and Indirect TaxesSustained buoyancy of central taxes over the last decade has strengthened the Centre’s fiscal position. Gross tax revenue remained mostly stable at around 11–12% of GDP, showing improved revenue productivity of central taxes. The share of direct tax relative to indirect taxes has been rising over this period due to greater tax elasticity with respect to income growth and the growing formalisation of the economy.The Threefold Approach in the BudgetThe budget introduces a threefold duty-based approach. The first duty is to accelerate and sustain economic growth; the second is to fulfil people’s aspirations and build their capacity; and the third is to ensure that growth provides inclusive access to resources and opportunities. This reflects a departure from fragmented, piecemeal policymaking to an integrated framework where economic growth, human capital, and inclusion support each other. The budget emphasises continuous, adaptive and forward-looking structural reforms, a robust and resilient financial sector, and cutting-edge technologies, envisaging greater complementarity between state and market, or public and private sectors.Scaling up ManufacturingToward the first duty of promoting economic growth, the budget proposes a strategic boost for manufacturing by focusing on legacy industrial sectors, MSMEs, infrastructure, energy, and city economic regions. Key steps include: biopharma SHAKTI (with an expenditure of ₹10,000 crore over the next five years) to develop India as a global biopharma manufacturing hub; India Semiconductor Mission 2.0; boosting expenditure on the Electricity Components Manufacturing Scheme; the establishment of rare earth corridors; and three dedicated chemical parks.MSME“A three-pronged approach has been proposed to provide equity support, liquidity support, and professional support to the MSMEs — including a ₹10,000 crore SME Growth Fund for equity and quasi-equity financial support.”The budget recognises that MSMEs are often trapped in low scale and low productivity despite being central to growth, employment and supply chains. As many MSMEs fail due to lack of risk capital and managerial capacity, the SME Growth Fund will provide equity and quasi-equity support. The TReDS platform will help garner liquidity support to loosen working capital constraints, while para-professionals trained by ICAI, ICSI and ICMAI, and the Corporate Mitras, will provide professional support to MSMEs at affordable costs.Capex and InfrastructureThe government has once again reaffirmed its commitment to infrastructure development by enhancing capital expenditure to ₹12.2 lakh crore and effective capital expenditure2 to ₹17.1 lakh crore. Despite progressive fiscal consolidation, there has been a six-times rise in capital expenditure in the last ten years, confirming a decisive shift toward asset creation as part of the core growth strategy. Alongside existing initiatives such as InVITs, REITs, NIIF and NABFID, there will be an Infrastructure Risk Guarantee Fund (IRGF) to provide a partial credit guarantee to lenders.The budget recognises cities, especially Tier II and Tier III, as engines of growth, innovation and opportunity, and a transformative concept of City Economic Regions (CERs) has been evolved with an allocation of ₹5,000 crore per CER for the next five years. It also emphasises environmentally sustainable freight and passenger transportation systems for logistics efficiency and regional connectivity, including freight corridors, coastal shipping, national waterways, high-speed lanes and seaplanes.Rationalisation of SubsidiesThe trend in expenditure on the three major subsidies (food, fertiliser and petroleum) shows a gradual recalibration of expenditure priorities. Food subsidy has stabilised at around 4–4.5 per cent of total expenditure; however, a sharp moderation is visible in the fertiliser subsidy for FY 2026–27, mainly due to the normalisation of global commodity prices rather than the withdrawal of support3. Petroleum subsidy remains marginal throughout. The overall pattern suggests that subsidy rationalisation is creating fiscal space for capital expenditure without compromising welfare commitments.Financial Sector ReformsThe budget proposes to take financial sector reforms forward by setting up a High-Level Committee on Banking for Viksit Bharat and restructuring Power Finance Corporation and Rural Electrification Corporation. India has evolved a robust banking system where banks have strong balance sheets, high profitability and near universal coverage; the committee will review the banking sector to align it further with the vision of Viksit Bharat. The budget also mentions corporate bond market reforms, incentives for municipal bonds and a review of foreign investment rules.Macroeconomic Framework in the Budget“The government’s focus remains largely on the enhancement of productive capacity and long-term economic resilience rather than redistribution and subsidisation for consumption. The budget targets around 7 per cent growth.”The budget has a nuanced macroeconomic framework visible in its approach toward public investment-led growth, fiscal consolidation, supply-side reforms, and thrust on the role of the private sector. The target of around 7 per cent growth is quite plausible against the underlying macroeconomic fundamentals.Fiscal Framework in the BudgetLike several past budgets, this budget shows the continued commitment of the government to fiscal prudence along with growth-accelerating expenditure. The budget proposes to prune the fiscal deficit to 4.3 per cent of GDP in FY 2026–27 and targets a reduction in the debt-to-GDP ratio to 55.6 per cent without compressing expenditure in productive sectors. Primary deficit is projected to decline to 0.7 per cent of GDP, while revenue deficit will remain at 1.5 per cent of GDP.A stable revenue deficit signals stability in the gap between revenue receipts and revenue expenditure. A lower revenue deficit means a larger share of government borrowings is directed toward capital expenditure rather than current consumption. A lower primary deficit reflects a move towards greater long-term debt sustainability, wherein the government reduces its reliance on borrowing beyond the cost of debt servicing4. These indicators suggest that the fiscal behaviour of the government is well aligned with the FRBM Act, which mandates fiscal prudence and sustainable debt management.Figure 9: Trends in Deficits of the Union Government (% of GDP) — selected yearsYearFiscal DeficitRevenue DeficitEffective Revenue DeficitPrimary Deficit2020-219.27.36.25.82022-236.43.92.83.02024-25 (A)4.81.70.91.42025-26 (RE)4.41.50.60.82026-27 (BE)4.31.50.30.7Source: Union Budget DocumentsService Sector, Human Capital and EmploymentThe budget realistically recognises that manufacturing alone cannot address the employment challenge for India’s growing workforce, and that the services sector has a comparative advantage in human capital-intensive activities. There is renewed emphasis on services like healthcare, the care economy, tourism, AVGC, design, education, and sports. Planned initiatives include university townships, one girls’ hostel in each district, and upgraded research infrastructure to boost participation and productivity. Rather than short-term employment schemes, the budget adopts a capability-building approach, treating skills, credentials and institutions as drivers of labour market outcomes.Agriculture SectorThe budget looks forward to a productivity-oriented empowerment of diversified areas within agriculture, comprising fisheries, livestock, high-value crops, and value chains. Greater focus is visible on high-value crops such as coconut, sandalwood, cocoa and cashew in coastal areas, and almonds, walnuts and pine nuts in hilly areas. An AI tool-based system named Bharat-VISTAAR for advisory support to farmers, and SHE-Marts to support rural women-led enterprises, will be launched.Tax ProposalsThe budget maintains a status quo in the rate and slab structure of income tax, and base corporate tax rates remain unchanged. The tax proposals are mainly focused on stability, which provides certainty to taxpayers, investors and businesses, with emphasis on administrative simplification, TCS rationalisation, and compliance reforms. A significant change has been made in the Securities Transaction Tax (STT) to rationalise taxation of high-frequency and speculative trading segments — a modest change that will enhance revenue from capital market taxation without any change in capital gains tax.Indirect tax proposals focus mainly on rationalisation of customs duties and simplification. The budget extends several basic customs duty exemptions and relaxations to support domestic manufacturing in sectors like energy, aviation, critical minerals, and defence, and to boost export-oriented sectors like marine, leather textiles, and e-commerce. Relaxations on personal use goods, certain lifesaving medicines and rare disease treatments will improve ease of living. Decriminalisation of minor tax offences and expansion of faceless, technology-driven assessments will further strengthen administrative efficiency.ConclusionThe Budget for the fiscal year 2026–27 shows policy continuation and a further investment-centric approach. Sustained enhanced capital expenditure is its main strength, and the persistence of high levels of effective capital expenditure shows that public investment will be the catalyst of economic growth. The budget unequivocally accepts the role of the private sector in development and proposes a facilitating framework for it to operate. Declining fiscal and primary deficit targets, along with a stabilising debt-GDP ratio, will provide confidence to investors in the economy.The government is steering the Indian economy toward a model of development that is inclusive and sustainable. With targeted capability creation, an improved fiscal framework, and investment in human capital, the budget will prove to be a catalyst for rapid economic growth.ReferencesGovt. of India, Union Budget documents for various yearsGovt. of India, Economic Survey, 2025-26Musgrave, A. Richard & Peggy B. Musgrave. 1989. Public Finance in Theory and Practice, 5th Edition, McGraw-Hill Book CompanyRangarajan C. & D.K. Srivastava. 2005. Fiscal Deficits and Government Debt: Implications for Growth and Stabilisation, Economic & Political Weekly, JulyRao, M.G. 2000. Tax Reform in India: Achievement and Challenges, Asia Pacific Journal, Vol. 7, No. 2Sury, M.M. 1990. Government Budgeting in India, Commonwealth Publishers, DelhiThe Annual Financial Statement presents estimates for three years: Revised Estimates (RE) for the ongoing year, Actual Estimates (AE) for the previous year, and Budget Estimates (BE) for the ensuing year.Effective capital expenditure is the sum of capital expenditure and grants given by the central government for capital asset creation.The fertiliser subsidy spiked during 2022–24 due to a surge in the prices of natural gas and fertiliser caused by the pandemic and geopolitical conflicts. As international commodity prices stabilise, the subsidy burden has decreased without any reduction in support to farmers.In India, fiscal deficit equals the net borrowings of the government. Primary deficit = Fiscal deficit − Interest payments. Revenue deficit is the difference between revenue expenditure and revenue receipts.Author may be reached at eboard@icai.in | www.icai.org | March 2026
Ep. 61 — Ease of Doing Business & Ease of Living : Exploring through the Lens of Tax Reforms
CA Journal
· July 2026
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Ease of Doing Business & Ease of Living : Exploring through the Lens of Tax ReformsIndia’s journey in improving the ease of doing business has been noteworthy, with the country climbing 79 places in the World Bank Group’s Doing Business Report (DBR) over five years, reaching the 63rd position in 2019. With the DBR discontinued in 2020, the World Bank introduced the B-Ready Assessment in 2024. Business Ready (B-Ready) project developed by the World Bank Group for international benchmarking takes a broader view, examining more than 180 economies across ten topics of the business lifecycle as depicted in Table 1.Table 1.Stage of Business LifecycleTopicsOpening a businessBusiness Entry, Business LocationOperating a businessUtility Services, Labour, Financial Services, International Trade, Taxation, Dispute Resolution, Market CompetitionClosing a businessBusiness InsolvencyThe emphasis is on “quality of regulation” and its implementation. India is slated to feature in the third B-Ready Report, scheduled for release in 2026, setting the stage for the next chapter in its journey toward becoming a more competitive and business-friendly economy.India’s Tax Framework and the Three Pillars of Ease of Doing BusinessIn India, a Joint Working Group was constituted under the Chairmanship of Joint Secretary (Department of Revenue) in May 2024 to steer the mandate under Taxation topic for the World Bank’s Ease of Doing Business (EoDB) and Ease of Living initiatives (B-Ready Project). The Taxation topic measures the quality of regulation, administration, and practical implementation of tax systems across the three defined pillars. Each pillar is divided into categories and each category is further divided into sub-categories, which have indicators. A snapshot of the three pillars under the Taxation topic, and India’s Tax Framework vis-a-vis select categories of the said pillars is outlined in Table 2.Table 2.Select Categories and IndicatorsIndia’s Tax FrameworkSelect Categories and IndicatorsIndia’s Tax FrameworkSelect Categories and IndicatorsIndia’s Tax FrameworkPillar I: Quality of Regulations on TaxationThe first pillar assesses the quality of regulation related to taxation, encompassing both the legal framework (de jure) and the implementation (de facto) of the legal requirements.Clarity of Tax RegulationsIssuance of rulings and interpretations of the law in a timely, transparent, and consistent manner is important for promoting predictability and fairness in tax administration, providing certainty for taxpayers, improving the tax environment for businesses and addressing tax uncertainty. One of the indicators in this category is availability of tax guides and the means to obtain the tax guides.FAQs and Tutorials on a number of topics are available on the Income-tax website, which serve the purpose of tax guides. Tax charts and tables and calculators are also available on the website to facilitate computations.Circulars are also issued by the CBDT from time to time clarifying the position of law and these also serve as guidance to taxpayers.In the Union Budget 2026-27, not only is there an Explanatory Memorandum to the provisions of the Finance Bill, 2026, but also detailed FAQs have been issued by classifying the budget proposals in different categories.Also, the CBDT proposes to come out with a comprehensive Guidance Note containing FAQs on the different provisions of the Income-tax Act, 2025 which is to roll out from 1st April, 2026. These FAQs, Tutorials, Explanatory memorandum are available on the website of the Income-tax Department.All these indicate the sustained efforts taken by the Government to educate and increase awareness amongst the public on provisions of the income-tax law as well as the related procedures and compliances.Transparency of Changes in Tax RegulationHaving a transparent and predictable tax regulation enactment process enhances tax certainty. One of the most effective tools are announcing important changes in advance and engaging key participants of the private sector and society in the consultation.Accordingly, one of the indicators is Obtaining Feedback and Broad Public Consultation.The Income-tax department invites feedback and holds comprehensive stakeholder engagements while preparing and implementing the new income-tax law.As regards the new income-tax law, the department had invited public feedback on the Income-tax Bill, 2025 tabled in the Parliament on 13.02.2025. The Select Committee of the Parliament, which was entrusted with the task of examining the Income-tax Bill, 2025, conducted extensive stakeholder consultations and then gave its recommendations.Public feedback was also invited as early as in March 2025 seeking stakeholder inputs for drafting Income-tax Rules consequent to the Income-tax Bill, 2025. Thereafter, the Draft Income-tax Rules, 2026 have now been placed in public domain and public feedback is also being invited on the said Rules and forms. The Central Board of Direct Taxes is consulting with the stakeholders, including ICAI, on the changes required in the Draft Rules before notifying them.Pillar II: Public Services Provided by the Tax AdministrationThe second pillar measures the quality of tax administration by assessing the public services related to tax matters.Digitisation of the Tax Administration, Governance of Tax Authority and Dispute Resolution Mechanism fall under this pillar.One of the indicators is the availability of the facility of electronic filing of returns and making payments of tax.In India, all categories of taxpayers can file their return electronically and pay their taxes online. In addition, they can submit response to outstanding tax demand, request for rectification, respond to defective notice, view tax credit etc. online. TAN and PAN can be applied online and TDS return can be filed online. A step by step guide is available for each of the activities in the portal.Availability of two level Dispute Resolution Mechanism.Yes, the first appellate authority is the JCIT (Appeals)/CIT (Appeals) and the second appellate authority is the Income-tax Appellate Tribunal. The appealable orders before the different appellate authorities are provided in the Income-tax Act.Governance of Tax AuthorityPublic AccountabilityExistence of Code of Ethics of Tax administrationThe Taxpayers’ Charter of the Income Tax Department is a declaration of its Vision, Mission and Standards of Service Delivery. The same is available on the Income-tax website, which details what the Income-tax Department is committed to do and what it expects from the taxpayers.Taxpayers’ Charter reports are also publicly available on the Income-tax website.Existence of a tax ombudsman or equivalent authority.Taxpayer can file their grievances at CPGRAMS which is an online platform available to the citizens to lodge their grievances to the public authorities on any subject related to service delivery.Pillar III: Efficiency of Tax Systems in PracticeThe third pillar evaluates the practical effectiveness of the implemented tax regulations and public services.Time to file and pay taxes and use of electronic systems to file and pay taxes.The total time taken for preparation, filing and payment is an indicator.The total time taken for preparation, filing and payment would differ depending on the ITR which a person is required to file. ITR 1 and 4 can be filed very quickly since the details required are less.ITR 3, 5, 6 and 7 may take a longer time due to the extensive disclosures required. Auto-population from Form 3CD, AIS and Form 26AS reduces the time taken for preparing the return.Pre-filled electronic declarations are available for all assessees, irrespective of size, turnover/gross receipts. The data from TDS statements and Annual Information Return are pre-filled in the income-tax return of the taxpayer, in addition to their personal information which is pre-filled from the earlier year’s return of income.Use of electronic systems to file and pay taxes.In India, maximum percentage of the taxpayers use electronic systems to file and pay taxes.Thus, we can see India’s substantial progress in –ensuring clarity of tax laws by simplifying the tax law and making available FAQs and tutorials on the provisions of tax laws and tax tables and charts on the website.transparency of tax laws by inviting public feedback and holding extensive stakeholder consultations.enabling e-filing of returns and e-payment of taxes for all categories of tax-payers to ensure ease of compliance.It is noteworthy that a pan-India sensitisation exercise is being undertaken by the Tax Policy Research Unit (TPRU) of the Department of Revenue to apprise stakeholders on India’s engagement with the B-READY assessment.Tax Reforms for facilitating Ease of Doing Business: India’s Path to Viksit Bharat@2047Transformation of the direct tax framework, evolving from a system defining enforcement and deterrence into one that embodies simplicity and voluntary compliance, is the core to achieve India’s aspiration of Viksit Bharat@2047. This shift reflects a deeper commitment to building a tax regime that fosters confidence between the Government and its people. Landmark initiatives such as the Transparent Taxation – Honouring the Honest platform, the Jan Vishwas Act, 2023, and the enactment of the Income-tax Act, 2025 stand as milestones in this reform agenda.The Transparent Taxation – Honouring the Honest platform, encompassing major reforms like Faceless Assessment, Faceless Appeal and Taxpayers Charter, is part of the Government’s resolve to provide maximum governance with minimum government.The Jan Vishwas (Amendment of Provisions) Act, 2023 which received Presidential assent on 11th August 2023 decriminalized 183 provisions across 42 Acts. It adopted multiple approaches to decriminalization, including removing both imprisonment and fines, converting imprisonment and/or fines into monetary penalties, and introducing compounding of offences in some cases.Following recommendations of the Joint Parliamentary Committee, the Department for Promotion of Industry and Internal Trade (DPIIT) initiated further identification of minor criminal provisions for inclusion in a subsequent amendment bill. Building on this success, the Jan Vishwas (Amendment of Provisions) Bill, 2025, approved by the Union Cabinet on 12th August 2025, was introduced in the Lok Sabha on 18th August 2025. The Bill was then referred to a Select Committee, where it is currently under examination.This new reform initiative expands the scope to 16 Central Acts, proposing amendments to 355 provisions in total. Of these, 288 provisions are targeted for decriminalization to promote Ease of Doing Business, and 67 provisions are proposed to be amended to facilitate Ease of Living.Against this backdrop, it would be pertinent to examine the direct tax proposals in the Union Budget 2026-27 amending the Income-tax Act, 2025 aimed at enhancing ease of doing business and ease of living in India.Union Budget 2026-27: Direct Tax Proposals to facilitate Ease of Doing Business in IndiaEase of Doing Business (EoDB) stands as a central pillar of India’s reform strategy, propelling growth and fostering sustainable development. The Union Budget 2026-27 drives India’s EoDB agenda by ensuring tax clarity, easing compliance, and fostering trust-based governance. Key direct tax reforms include rationalising Minimum Alternate Tax (MAT) and buyback taxation, decriminalising prosecution provisions and rationalising penal provisions.Rationalisation of MATIn order to encourage companies to shift to the new tax regime under Section 200, the Finance Bill, 2026 proposes to allow set-off of MAT credit only in the new tax regime for domestic companies to the extent of 25% of the tax liability. Tax paid under the provisions of MAT would be the final tax in the old regime as per the regular provisions of the Act and no new MAT credit would be allowed. The rate of MAT is proposed to be reduced to 14% of book profit from the existing 15%. Also, all non-residents who pay tax on presumptive income would be exempt from MAT.However, only domestic companies shifting to the new tax regime under Section 200 from April 1, 2026 will be eligible for MAT credit. According to the FAQs issued by the Department, companies that transitioned earlier did so voluntarily, based on their financials, status, and analysis of deductions/exemptions, and benefited from lower tax rates under the new regime compared to the old. This rationale given highlights that inspite of being early adopters, the companies which shifted earlier are not entitled to MAT credit.In contrast, the tax treatment proposed for gains arising from sale of Sovereign Gold Bonds reflects a different approach. Even in respect of bonds purchased from the secondary market prior to the proposed amendment by the Finance Bill, 2026, capital gains exemption would be denied inspite of holding the same until maturity. If we apply the rationale of denying MAT credit to early adopters in this case, then, those who purchased the bonds at that point of time were aware of the exemption and this benefit governed their decision to purchase the bonds. The proposed denial of capital gains exemption on bonds purchased from the secondary market before February 1, 2026, even if held until maturity, would cause hardship to taxpayers. Investors acquired these bonds with the legitimate expectation of exemption, and this tax benefit influenced their purchase decision. A grandfathering provision is, therefore, essential to protect the exemption for bonds purchased prior to February 1, 2026 and held until maturity.Rationalisation of Buyback TaxationIt is proposed to rationalise the taxation of share buy-backs by providing that consideration received on buy-back shall be chargeable to tax under the head “Capital gains” instead of being treated as dividend income. This is a much sought after investor-friendly proposal in the Union Budget.However, in case of promoters, it is proposed that the effective tax liability on gains arising from buy-back shall be 30%, comprising tax payable at the applicable rates together with an additional tax. In case of promoter, being a domestic company, the effective tax liability will be 22%. The definition of promoter would be as per SEBI (Buy-back of Securities) Regulations, 2018 made under the SEBI Act, 1992, in case of a company whose shares are listed on a recognized stock exchange. In case of a company other than a company whose shares are listed on a recognized stock exchange in India, “promoter” would mean a promoter as defined in Section 2(69) of the Companies Act, 2013 or a person who holds, directly or indirectly, more than 10% of the shareholding in the company. There may be venture capital investors holding more than 10% who do not exercise promoter-like control. These investors may also be subject to higher rate of tax on capital gains on account of the 10% shareholding criterion. Also, since both direct and indirect holding are being considered, there could be issues relating to legal ownership versus beneficial ownership. These are some concerns which need to be addressed.Decriminalisation of Prosecution Provisions and Rationalisation of Penal ProvisionsProsecution provisions are being decriminalised and penal provisions are being rationalised to foster trust-based governance, which will facilitate ease of doing business.The Finance Bill, 2026 proposes complete decriminalisation of offence wherein a person fails to produce accounts and documents. Also, complete decriminalisation is proposed for failure to ensure payment of tax in case of benefits and perquisites provided or winnings from lotteries, crossword puzzles, online games or consideration for transfer of virtual digital asset, where the winnings/consideration are wholly in kind or partly in kind, and the part in cash is not sufficient to meet the TDS liability. It may be noted that at present, both penalty and prosecution are being attracted in respect of this offence.Offences where the amount sought to be evaded does not exceed Rs.10 lakh to attract only fine and there would be no imprisonment in such cases.The remaining prosecution provisions are being graded in commensuration with the tax sought to be evaded or income under-reported. Instead of rigorous imprisonment, there would be a simple imprisonment, with maximum imprisonment reduced from 7 years to 2 years, which would be in a case where the amount sought to be evaded or tax on under-reported income exceeds Rs.50 lakhs. The maximum imprisonment would be 6 months where the amount sought to be evaded or tax on under-reported income is between Rs.10 lakhs to Rs.50 lakhs. Fine can be imposed in lieu of or in addition to simple imprisonment in both cases.Penalties for certain technical defaults such as failure to get accounts audited, non-furnishing of transfer pricing audit report and default in furnishing statement for financial transactions, are proposed to be converted into fee.However, in case of fee for failure to get accounts audited, there is a concern due to the fee being a fixed amount of Rs.75,000 upto one month of delay and Rs.1,50,000 thereafter. It is noteworthy that the requirement to get books of account audited in case of an eligible assessee who declares lower than 6%/8% of total turnover as his profits and gains from business and whose total income exceeds the basic exemption limit has been introduced in the Income-tax Act, 2025. On account of this provision, even those individuals whose total income is less than Rs.12 lakh and have no tax liability on account of rebate under Section 156 (corresponding to Section 87A of the Income-tax Act, 1961) would be required to get their accounts audited, failing which they would be liable for a fee of Rs.1,50,000. Also, a salaried individual having a salary of say, Rs.9 lakh, and who makes a profit of say, Rs.20,000, from F & O transactions would have to get his accounts audited on account of his total income being higher than the basic exemption limit, failing which he would be liable for a fee of Rs.1,50,000. Here again, the individual does not have to pay tax consequent to rebate, but would be liable for a fee of Rs.1,50,000 for failure to get accounts audited. The fee should, therefore, ideally be a percentage of total turnover subject to a maximum of Rs.75,000, for delay upto a month and a maximum of Rs.1,50,000, for delay beyond a month.Addressing this concern will be essential as the Finance Bill, 2026 proceeds in the Lok Sabha.Immunity from penalty and prosecution for misreporting would be available if the taxpayer pays 100% of the tax amount as additional income-tax over and above the tax and interest due.Immunity from prosecution with retrospective effect from 01.10.2024 for non-disclosure of non-immovable foreign assets with aggregate value less than Rs.20 lakh.Union Budget 2026-27: Direct Tax Proposals for “Ease of Living”It is interesting to observe that this year, the Union Budget 2026-27 has introduced tax proposals in the category of “Ease of Living”. The introduction of simplified rule-based automated processes for obtaining lower or nil deduction certificates, relief measures such as exemption of interest awarded by the Motor Accident Claims Tribunal and consequent relief from deduction of tax, ease of compliance to investors filing declaration for no deduction of tax by enabling filing the same with the depository, increase in the time limit for filing revised return, extension of due date for filing of return in case of assessees carrying on business but not subject to audit are some of the proposals under this category.However, the inclusion of “supply of manpower” in the meaning of work for the purposes of TDS and the extension of the timeline for depositing employee contributions to provident fund, superannuation fund, etc., until the due date of filing the return, does not align with the category “Ease of Living”. While the former proposal introduces liability to deduct tax, the latter allows the employer to claim deduction by permitting remittance of employee’s contribution to provident fund etc. upto the due date of filing return. Though it may be argued that there are deterrents in the respective laws for delaying remittances, still the extension of time does not lead to “ease of living” for the employee to whom these sums belong.Outlined below are the tax proposals in the Union Budget 2026-27 aimed at facilitating ease of living –Extending the period of filing revised return by 3 months from its existing time limit of nine months to twelve months from the end of the relevant tax year i.e., from 31st December to 31st March. However, for revised returns which are filed beyond nine months from the end of relevant tax year, a fee of a sum of Rs. 1000 is proposed to be levied, if the total income of such person does not exceed Rs. 5,00,000; and a sum of Rs. 5000, in any other case.Extending the due date for filing return of income from 31st July to 31st August of the financial year following the relevant tax year in the case of assessees having income from profits and gains of business, or profession whose accounts are not required to be audited, and in the case of a partner of a firm whose accounts are not required to be audited.Exemption to an individual or his legal heir, on any interest awarded on compensation under the Motor Vehicles Act, 1988. At present, TDS is applicable on interest on the compensation amount awarded by the Motor Accidents Claims Tribunal to any person if such interest exceeds Rs.50,000 during the tax year. Consequent to the exemption, there would be no requirement of TDS on the payment or credit of interest on the compensation amount awarded by a Motor Accidents Claims Tribunal, to an individual.Enabling Electronic filing of application for issuance of certificate of lower or nil deduction of tax to reduce the compliance burden of small taxpayers. It is proposed to allow electronic filing of applications for such certificates before the prescribed income-tax authority, which may issue the certificate subject to prescribed conditions or reject the application if the conditions are not fulfilled or the application is incomplete.Enabling depositories to accept Form 15G/Form 15H from the investor and provide it directly to the companies for ease of taxpayers holding securities in multiple companies.Exemption from Tax deduction account number (TAN) for a resident buying immovable property from a non-resident. Tax can be deducted and deposited through resident buyer’s PAN based challan. This facility is already available to a resident buying immovable property from another resident. It is now being extended to a resident buying immovable property from a non-resident.The launch of the Foreign Assets of Small Taxpayers – Disclosure Scheme, 2026 (FAST-DS) reflects the Government’s responsiveness to the genuine difficulties faced by small taxpayers in cases of inadvertent foreign asset non-disclosure.Trust-Driven Tax Regime: Fostering Business & Empowering CitizensThrough these tax reforms, India takes a decisive step toward aligning its tax framework with global benchmarks of governance. This transformation embodies the Government’s vision of a modern, trust-driven direct tax regime; one that empowers citizens, strengthens transparency, and reinforces India’s commitment to fair and progressive taxation. These reforms pave way for greater ease of doing business and ease of living, making India’s tax system globally aligned, people-centric and business friendly.ReferencesBudget Speech Union Budget 2026-27Finance Bill, 2026, Explanatory Memorandum & FAQsIncome-tax Act, 2025PIB Headquarters Press Release posted on 5th February, 2026PIB Press Release posted on 6th February, 2026 – Ministry of FinancePIB Press Release posted on 10th February, 2026 – Ministry of Commerce & IndustryWorld bank website – Topic “Business Ready” [https://www.worldbank.org/en/businessready/topic/taxation]Author may be reached at eboard@icai.inThe Chartered Accountant • March 2026 • www.icai.org
Ep. 62 — Union Budget 2026: Recalibrating India’s Transfer Pricing and Cross-Border Tax Framework
CA Journal
· July 2026
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Union Budget 2026: Recalibrating India's Transfer Pricing and Cross-Border Tax FrameworkThe Union Budget 2026 was announced by the Hon'ble Finance Minister of India on 1st February, 2026. It demonstrates a significant shift in India's international tax policy, shifting the focus on fine-tuning of a framework for greater certainty. Instead of limiting changes to rate adjustments or procedural refinements, the Finance Bill, 2026, recalibrates the key aspects of the transfer pricing regime. The primary focus is on dispute prevention & resolution, systematic management of technical defaults, and strict enforcement of statutory timelines to improve closure discipline.This article details the key international taxation initiatives within the Finance Bill, 2026, which impact transfer pricing and cross-border taxation. Emphasis is on compliance rationalization as well as enhancement of Safe Harbour and APA mechanisms, with specific focus on the IT services sector, and the evolution of tax systems targeting digital infrastructure. It also offers a synopsis of the consequences these amendments may have on the compliance side for multinational groups, ranging from governance to visibility in planning.CA. Rishabh AgarwalMember of the Institute CA. Praneeth NarahariMember of the InstituteSummary of the Finance Bill, 2026The Finance Bill, 2026 introduces a set of reforms that:Soften the compliance issues for technical TP defaults.Tighten APA implementation across group entities.Tie digital-infrastructure incentives with administrable TP certainty, building out a certainty regime for the IT services sector.Tighten procedural certainty on TP/DRP timelines and limit annulments on the basis of limitation.The Bill proposes to amend the fixed penalty exposure for failure to furnish the accountant's report for international/specified domestic transactions with a tiered fee regime linked to the length of time of delay. It signals a shift in approach where compliance discipline is retained, but the response to procedural delay becomes proportionate rather than punitive. Alongside this, the Safe Harbour certification ecosystem is supported through a rationalisation of the accountant definition, aimed at easing access and operational frictions in dispute-prevention entry points.The Bill addresses a known implementation gap by enabling associated enterprises covered by an APA (not only the applicant) to align return positions through return/modified return filing within a prescribed statutory window, limited to the APA's scope. This improves group-level coherence and reduces residual disputes arising from correlative impacts of APA outcomes.The Bill provides long-term tax certainty for foreign participation in India's data centre and cloud ecosystem through an extended exemption window for specified procurement models, while preserving tax jurisdiction over India-facing revenue streams via structuring conditions. Complementing this, a Safe Harbour margin for related-party data centre services introduces a clear pricing rule for a segment where benchmarking disputes are structurally frequent.The Bill consolidates dispute prevention for IT services by expanding Safe Harbour eligibility, shifting processing towards rule-driven automation, providing multi-year pricing continuity once opted, and fast-tracking unilateral APAs through a defined completion timeline with a taxpayer-request extension. The reforms, in aggregate, are intended to shift routine IT/ITeS pricing out of an extended controversy cycle into certainty predictable resolutions.Further, the bill reinforces procedural certainty in TP and DRP assessments by codifying limitation mechanics that have driven technical litigation. It clarifies the computation of the sixty-day TPO order buffer (including leap-year treatment) and aligns timelines across the 1961 Act and the Income-tax Act, 2025. It also ring-fences DRP finalisation timelines from general limitation rules, reducing limitation-based annulments.Overall, the package signals a clear direction: certainty-first administration for scaled cross-border service models, reduced controversy for technical defaults, and better operational alignment of APA outcomes across group entities.Procedural Rationalisation and Compliance LiberalisationDecriminalisation of Technical Transfer Pricing DefaultsLegislative AmendmentUnder the earlier framework of the Income-tax Act, 2025, Section 447 provided for a penalty of ₹1,00,000 for failure to furnish the report from an accountant as required under Section 172, which relates to reporting of international transactions or specified domestic transactions.The Finance Bill, 2026 proposes to replace Section 4281 and replace the penalty provision under Section 447 with a compliance mechanism based on fee.Therefore, under the substituted Section 428(d):Where any person fails to furnish a report from an accountant as required under Section 172, he shall be liable to pay by way of fee:₹50,000 for delay up to one month; and₹1,00,000 where the delay exceeds one month.2This replaces the earlier fixed penalty structure under Section 447 with a graded fee regime.RationaleThe previous regime imposed the same penalty regardless of the time of delay.The amendment attempts to:Decriminalise technical non-compliance,Introduce proportionality through graded fees, andDistinguish procedural lapses from substantive tax violations.Impact AssessmentThe reform reduces adversarial escalation in routine compliance and aligns enforcement with international documentation standards. Substituting punitory penalties with proportionate monetary levies, it improves the compliance framework without weakening reporting obligations.Rationalised Definition of “Accountant”Legislative AmendmentThe Hon'ble Finance Minister, in her speech, also announced to revise the definition of “accountant” for the purposes of the Safe Harbour Rules by widening professional eligibility under the certification framework.3 The change is primarily financial in nature, aimed at easing entry barriers for practitioners.Under the revised thresholds:The annual professional receipt limit for individual practitioners or valuers is reduced from ₹1 crore to ₹50 lakhs.For firms or entities engaged in accountancy or valuation services, the ceiling is lowered from ₹10 crores to ₹3 crores.Importantly, the qualitative safeguards remain intact. The minimum ten-year professional experience requirement continues to apply, as does the condition relating to multi-country presence wherever relevant. Recognition of foreign-qualified professionals is also retained.4RationalePreviously, the higher receipt thresholds effectively limited participation to larger firms, restricting access for competent mid-sized practices. The revision is intended to widen the certification base without relaxing experience or competence criteria.Impact AssessmentIn practical terms, the expanded eligibility pool of accountants should ease procedural constraints and improve access to Safe Harbour certifications. Over time, this may reduce compliance inefficiencies and improve overall efficiency of the framework.Structural Strengthening of the APA RegimeAPA Benefits Extended Across Associated EnterprisesLegislative AmendmentEarlier, under Section 169(1), the ability to file a modified return pursuant to an APA was confined to APA applicants only. The associated enterprises affected by the APA outcome had no statutory resort to align or revise their return accordingly.Section 169(1) now permits both the APA applicant and any affected associated enterprise to file a return or modified return, restricting to the matters falling within APA's scope. Such filings must be made within three months from the end of the month in which the APA is entered into5, and applies to agreements entered into on or after 1 April 2026 and to tax years commencing thereafter.6RationaleIn practice, transfer pricing adjustments under an APA frequently generate a corresponding effect across multiple group entities. Limiting the modified return facility to the APA applicant created structural imbalance and administrative rigidity in implementing group-level outcomes where the associated enterprises are also liable to tax in India.The amendment addresses this structural gap by enabling alignment of tax positions among group entities.Impact AssessmentBy means of extension of the modified return facility to AEs, the reform facilitates corresponding adjustments at the group level. Affected entities can realign their tax positions and, where relevant, seek refunds of taxes previously paid or withheld that no longer reflect the agreed APA pricing. This adjustment removes earlier administrative rigidity and supports coordinated implementation of APA outcomes. In doing so, it mitigates double taxation risk and reduces the likelihood of post-APA disputes.Fast Track Unilateral APAs for IT Services7Legislative AmendmentDraft rule 109 of the Income-tax Rules, 2026 (Erstwhile Rule 10L of Income-tax Rules, 1961) introduces defined timelines for concluding unilateral APAs. A new sub rule 3 has been added which states that a unilateral agreement be finalised within one year from the end of the financial year in which application is accepted for processing.Further, newly inserted sub rule 13 & 14 states that if a unilateral APA application for IT services is not concluded within two years from the end of the quarter in which it was filed, the proceedings are deemed to be closed automatically.However, the law allows the assessee to formally request an additional extension of six months beyond the initial two-year limit. This effectively allows a maximum window of up to two and a half years.RationaleThis procedural mandate aligns with the government's strategic objective to provide forward visibility and certainty in transfer pricing governance for India's global leadership in software and IT-enabled services.Impact AssessmentThe proposed APA timelines materially re-balance the unilateral APA process towards time-bound certainty and administrative accountability, particularly for IT/ITeS transactions where volume is high and fact patterns are repeatable. Introducing a wherever possible one-year completion objective signals an institutional expectation of faster closures, which should improve forward pricing visibility and reduce the commercial cost of prolonged uncertainty. More importantly, the automatic closure mechanism for IT-services unilateral APA applications that remain unresolved after two years creates a hard outer boundary that is likely to compress internal processing timelines and reduce indefinite pendency, which has historically been one of the primary practical limitations of APAs as a dispute-prevention tool.Overall, the change should increase the attractiveness of unilateral APAs for routine IT service models, but it will also reward disciplined documentation, early issue crystallisation, and proactive engagement to ensure that certainty is achieved within the statutory window.Tax Architecture for Digital Infrastructure and Cloud EcosystemsLong-Term Tax Certainty for Foreign Data Centre ProcurementLegislative AmendmentThe Finance Bill, 2026 amends Schedule IV of the Income-tax Act, 2025 to provide an exemption to a foreign company in respect of income accruing or arising in India, or deemed to accrue or arise in India, from procurement of data centre services from a specified data centre, for a period up to the tax year ending 31 March 2047.8The explanatory memorandum indicates that this measure is intended to incentivise long-term investment in India's data centre ecosystem and support the growth of an advanced digital infrastructure, including AI-driven capacity expansion.9RationaleLarge-scale data centre infrastructure and AI-based digital ecosystems are capital intensive, have long asset life cycles, and operate on long-term revenue models. Such investments require predictable tax treatment over extended periods.The amendment is intended to:Enhance India's attractiveness as a regional cloud and digital infrastructure jurisdiction,Provide long-term fiscal certainty to foreign cloud and hyperscale operators, andFacilitate expansion of high-capacity data centre and AI-linked infrastructure within India.The proposed convergence seeks to harmonise financial reporting and tax computation standards.Impact AssessmentThe extended exemption window strengthens India's positioning as a regional cloud and hyperscale infrastructure hub. It enhances investor confidence while preserving domestic tax jurisdiction over Indian customer revenues. At the same time, the reseller-based servicing model preserves domestic tax jurisdiction in respect of Indian customers.Safe Harbour for Related-Party Data Centre ServicesLegislative AmendmentA Safe Harbour has been introduced for data centre services provided from India to a related foreign entity, prescribing a 15% mark-up on operating cost as the arm's length price for such international transactions.The measure was announced in the Union Budget Speech, wherein the Hon'ble Finance Minister indicated the introduction of a Safe Harbour margin of 15 percent on cost for such services.10Further, the 15% operating profit margin is proposed to be incorporated within the Safe Harbour provisions of the Draft Income-tax Rules, 2026, thereby extending notified Safe Harbour treatment to intra-group data centre service transactions under the transfer pricing regime.11RationaleIntra-group data centre service arrangements typically involve infrastructure-intensive operations with limited external comparables, leading to frequent benchmarking disputes. The introduction of a fixed Safe Harbour margin seeks to provide certainty in pricing, reduce interpretational disputes, and simplify transfer pricing compliance for digital infrastructure service models.Impact AssessmentThe Safe Harbour delivers upfront pricing certainty, reduces documentation complexity, and enables scalable operating models for multinational digital groups. It complements the long-term exemption regime and creates a vertically integrated digital tax framework.Integrated Certainty Framework for the IT Services SectorScale Expansion of Safe Harbour EligibilityLegislative AmendmentThe turnover threshold for availing Safe Harbour in respect of IT services has been enhanced from ₹300 crores to ₹2,000 crores.12 The revised eligibility parameters have been incorporated in the Draft Income-tax Rules, 2026.13Further, India is a global leader in software development services, IT enabled services, knowledge process outsourcing services, and contract R&D services relating to software development. These business segments are quite inter-connected with each other. All these services are proposed to be clubbed under a single category of Information Technology Services.14 Thus, corresponding changes have been made in rule 88 (Eligible international transaction) of the Draft Income-tax Rules, 2026.This substantially widens the class of IT service providers eligible to opt for the Safe Harbour regime.RationaleThe earlier framework limited Safe Harbour access largely to smaller service providers. As the IT services sector expanded in scale and global integration, a significant segment of mid-sized and large enterprises remained outside the certainty mechanism.Further, the earlier Safe Harbour Rules had margins ranging from 17-24% for IT services which were quite inter-connected. Thus, there was a need to simplify and remove the overlap and cover all the IT services under a single Safe Harbour rate.The enhanced threshold aligns the Safe Harbour framework with the current scale of operations in the IT industry.Impact AssessmentThe substantial enhancement of the turnover threshold to ₹2,000 crores democratizes access to tax certainty, enabling a significant segment of mid-sized and large IT enterprises to bypass protracted transfer pricing audits. The reforms consolidate interconnected segments such as software development, ITES, KPO, and contract software R&D into a single Information Technology Services category. A uniform, competitive, fixed 15.5% margin is prescribed for this integrated segment. The reform reduces classification disputes and simplifies compliance.Automated Processing and Five-Year Pricing ValidityLegislative AmendmentThe Union Budget 2026 announced that the Safe Harbour regime for IT services would shift to an automated, rule-based processing model, removing the requirement for an officer-level examination.15The Draft Income-tax Rules, 2026 propose the effect to this change. The framework intends the electronic filing of Form 49, system-based verification of eligibility conditions, and electronic communication of decision to accept or reject the application within a prescribed period.16Additionally, where the Safe Harbour option is validly exercised, it shall be applicable for five consecutive tax years, which would make it possible to price or tax IT services for multiple years.17RationaleThe need for manual verification and re-verification year-on-year is debatable, and the scope for administrative delay is high. Hence, the reform is intended to reduce subjectivity and compliance inefficiencies by making the process automated and by allowing multi-year pricing continuity.Impact AssessmentUnder this provision, the option of a five-year Safe Harbour is very critical for multinationals, as it will help them in long-term fiscal planning for their Indian operations. This will mitigate the litigation uncertainties in the most critical service sector of India.Strengthening Procedural Certainty in TP and DRP ProceedingsClarifying TPO Order Timelines and ComputationLegislative AmendmentThe Finance Bill, 2026 has now made explicit time limits within which the Transfer Pricing Officer (TPO) has to pass an order. The revised Section 166(7) of the Income-tax Act, 2025 has drafted a systematic link between the assessment limitation period and the outer date on which the TPO's order must be issued.18Where the limitation period for completion of assessment expires:On 31 March of any year, the TPO order must be passed on or before 31 January of that year.On 31 December of any year, the TPO order must be passed on or before 31 October of that year.The amendment provides statutory clarity on the manner of computing the sixty-day buffer preceding the assessment limitation date.To reinforce this position, a clarificatory Sub-section (3AA) has been inserted in Section 92CA of the Income-tax Act, 1961. The provision expressly sets out the computation methodology for the sixty-day period referred to in Section 92CA(3A), including specific guidance for leap years.19RationaleThe change addresses a long-standing interpretational dispute concerning how the sixty-day timeline under Section 92CA(3A) is to be computed. That provision governs the deadline for the TPO to pass an order before the assessment limitation expires.While the legislative intent has consistently been to include the limitation date in computing the sixty-date period, certain judicial decisions excluded it. As a result, otherwise substantive transfer pricing determinations and corresponding assessments were quashed on a narrow procedural issue. The controversy has created unavoidable litigation, procedural uncertainty, and revenue leakage, with assessments being set aside despite there being a clear sixty-day buffer in practical terms for completing the final assessment process.With the introduction of the Finance Bill, 2026 from 1 April 2026, the broader objective has been to minimise interpretational disputes through clearer drafting. Hard-coding the intended computational rule and aligning the position in the Income-tax Act, 1961 ensures uniformity across both statutes. The notwithstanding clarification is therefore designed as a harmonising measure, thereby restoring consistency and limiting technical invalidations.Impact AssessmentThe clarification is likely to have immediate practical consequences for transfer pricing assessments. By prescribing a uniform method of computing the sixty-day period, the amendments reduce reliance on judicial interpretations that excluded the limitation date. This significantly reduces the risk of assessments being struck down on timing grounds rather than on merits of arm's length analysis.For ongoing and future cases, the measure enhances procedural predictability. TPO timelines and downstream assessment timelines become clearer and less vulnerable to last minute limitation challenges. In effect, disputes are likely to shift back to substantive issues like comparability analysis, margins, and adjustments rather than procedural computation.Where the clarification is issued with overriding effect, it may also affect pending cases where the taxpayers have been relying on more favourable precedents. This limits the scope for time baring based defence strategies and magnifies the importance of substantive grounds in appeals.In general, the amendment enhances uniformity and enforceability in both the statues.Clarification of Time Limits under Section 275 (DRP Mechanism)Legislative AmendmentThrough the Union Budget 2026, Section 275 of the Income-tax Act, 2025 has been amended to clarify the interaction between the DRP framework and the general limitation provisions under Sections 286.20The amendment makes it explicit that while Sections 286 govern the outer time limit up to the draft order stage, the one-month period prescribed under Section 275(4) and Section 275(14) for completion of assessment after acceptance of variations or receipt of DRP directions shall apply notwithstanding the limitation framework under Sections 286.Corresponding amendments have been made in Section 144C of the Income-tax Act, 1961 as well for maintaining coherency.RationaleThe amendment is driven by the need to restore certainty and coherence in the time-limit framework governing assessments routed through the Dispute Resolution Panel (DRP) under Section 144C.The structure of Section 144C is clear. Once a draft assessment order is issued to an eligible assessee, the subsequent stages operate within distinct and self-contained timelines. Section 144C(4) governs cases where the assessee accepts the variations or does not file objections before the DRP, while Section 144C(13) applies where DRP directions are issued. Both provisions function independently of the general limitation framework under Section 153 and 153B.Despite this statutory design, judicial interpretation has not been uniform. Certain decisions have treated Section 153 and 153B as imposing an overriding outer limitation even at the post-draft order or post-DRP stage, notwithstanding the specific carve-outs within Section 144C.The resulting divergence, further intensified by conflicting rulings including a split verdict at the apex level, has heightened litigation exposure on limitation grounds, particularly in high-value cases involving transfer pricing adjustments and non-resident assessments.Impact AssessmentThe clarification is likely to have immediate practical consequences for transfer pricing assessments. By prescribing a uniform method of computing the sixty-day period, the amendment curtails reliance on judicial interpretations that excluded the limitation date. This significantly reduces the risk of assessments being struck down on timing grounds rather than on the merits of the arm's length analysis.For current and future cases, the measure provides predictability as to procedural timelines in terms of TPOs and downstream assessments that are no longer at risk of a last-minute limitation challenge. Consequently, we anticipate that the disputes will come back to the substance of comparability analysis, margins, adjustments, etc.Where the clarification operates with overriding effect, it may impact pending disputes based on favourable precedents. Limitation-based challenges will narrow, increasing reliance on substantive appellate grounds. In sum, the amendment enhances consistency across both statutes, increases administrative certainty, and reduces reliance on limitation-based technical objections.ConclusionThe Union Budget 2026, along with the Draft Income-tax Rules, 2026 introduces a deliberate move towards certainty in India's transfer pricing and cross-border framework. The policy agenda is reflected in three key areas: increased automation, proportionate consequences for technical defaults, and expanded access to dispute prevention mechanism. Replacing a fixed penalty for TP reporting defaults with a graded fee structure reduces adverse clashes by procedural defaults, whilst upholding the reporting discipline. Likewise, the rationalised Safe Harbour certification framework reduces practical barriers in accessing certainty tools.The APA related changes are equally significant. Extending the modified return facility to associated enterprises closes a structural gap in group level implementation and is likely to reduce residual disputes and instances of economic double taxation. Defined timelines and an outer limit for unilateral APAs in the IT services segment introduce clearer administrative discipline. While this enhances forward visibility, it also places greater importance on timely submissions and active case management by taxpayers.They also align tax policy with India's digital infrastructure ambitions. The extension of foreign procurement exemption for data centre services, coupled with the fixed Safe Harbour margin for related-party data centre transactions, results in a multi-level model which blends investment certainty at capital stage with administrable pricing outcomes during the operational stage.They further add more certainty in TP and DRP workflows. It does this by structuring TPO timeline computation and making rules about data-specific calculations and leap-year treatment. It also stops litigation over the sixty-day buffer. It says that general limitation applies up to the draft order stage. DRP finalisation timelines work separately. Together, these things reduce limitation-based annulments and make disputes focus on substantive TP merits.The IT services package quickly expanded Safe Harbour eligibility, made service categorisation the same, did automated processing, and allowed five-year continuity to reduce audit intensity and stop classification disputes. For multinationals, the message is that certainty mechanisms are being extended and made into a system. Taxpayers will make more money if they adopt these mechanisms early with documentation and governance.Finance Bill, 2026, clause 83 (substituting section 428 of the Income-tax Act, 2025)Ibid.Union Budget 2026–27 Speech, para 137Draft Income-tax Rules, 2026, Rule 86 (definition of “accountant”).Finance Bill, 2026, Clause 45 (Substitution of section 169(1) of the Income-tax Act, 2025).Memorandum Explaining the Provisions in the Finance Bill, 2026, p. 42.Union Budget 2026–27 Speech, para 128Finance Bill, 2026, clause 109 (Amendment of Schedule IV of the Income-tax Act, 2025)Memorandum Explaining the Provisions in the Finance Bill, 2026, p. 43Union Budget 2026–27, Budget Speech of the Hon'ble Finance Minister, para 131Draft Income-tax Rules, 2026, Draft Rule 89, Table Sl. No. 9.Union Budget 2026–27 Speech, para 126.Draft Income-tax Rules, 2026, Rule 89, Table Sl. No. 1.Union Budget 2026–27 Speech, para 124-125Union Budget 2026–27 Speech, para 127Draft Income-tax Rules, 2026, Rule 91(2) and (3)Draft Income-tax Rules, 2026, Rule 91(1)Finance Bill, 2026, Clause 44 (Substitution of section 166(7) of the Income-tax Act, 2025).Finance Bill, 2026, Clause 4 (Insertion of section 92CA(3AA) in the Income-tax Act, 1961 – retrospective from 1 June 2007).Finance Bill, 2026, Clause 61 (Substitution of sub-sections (4), (14) in section 275 of the Income-tax Act, 2025).Authors may be reached at rishabha505@gmail.com, narahari.praneeth@gmail.com and eboard@icai.in
Ep. 63 — GST Amendments – Proposed through The Finance Bill, 2026
CA Journal
· July 2026
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GST Amendments – Proposed through The Finance Bill, 2026The Finance Bill, 2026 proposes significant GST amendments primarily aimed at reducing litigation and improving cash flow. Post-supply discounts will now require only issuance of a credit note and ITC reversal by the recipient, removing the need for prior agreements or invoice linkage. Section 34 is amended to expressly permit credit notes for such discounts. Provisional 90% refunds are extended to inverted duty cases, easing working capital blockage. Refunds below ₹1,000 are allowed for exports with tax payment, benefiting small consignments. Pending constitution of the National Appellate Authority, GSTAT may hear conflicting advance rulings. Importantly, intermediary services will now follow recipient-based place of supply, impacting both imports and exports related services.Multiple expectations surround the budget for trade and industry. The intrigue associated with such expectations compounds the excitement around such proposals. With the year-round functioning of the GST Council and key decisions announced after every Council meeting, the surprise element of GST amendments has reduced significantly. However, the exact verbatim of the amendments still adds spice to known decisions. It is quite interesting to study both the intended and unintended, direct and far-reaching consequences of such amendments. On this notion, all the proposed amendments in the GST law have been examined below:1. GST reduction on discount only subject to ITC reversal by recipientSourceClause 137 of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionSub-section (3) of Section 15 of the CGST Act, 2017.Provision Before AmendmentSection 15(3): The value of the supply shall not include any discount which is given—(b) after the supply has been effected, if—(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.Provision After AmendmentSection 15(3): In the Central Goods and Services Tax Act, 2017, (hereinafter referred to as the Central Goods and Services Tax Act), in section 15, in sub-section (3), for clause (b), the following clause shall be substituted, namely:—“(b) after the supply has been effected, if for such discount, a credit note has been issued by the supplier and input tax credit as is attributable to such discount has been reversed by the recipient of the supply, in accordance with the provisions of section 34.”Effect of the AmendmentThe conditions for the reduction of outward supply value for post supply discount are as follows:A credit note has been issued by the supplier with GSTITC attributable to such discount has been reversed by the recipientThe mechanism for tracking ITC reversal by the recipient has already been established through the invoice management system (IMS). In the IMS portal, if the ITC is rejected by the recipient, the tax attributed to such credit note is appended to outward tax liability in Table 3.1.(a) of the subsequent Form GSTR 3B.After an amendment, the following conditions would no longer stay relevant for post supply discounts:Having to be established in terms of agreement at or before the time of supplyHaving to be specifically linked to relevant invoicesAfter the given amendment, one need not link the credit note against the relevant invoices for satisfaction of Section 15(3)(b).However, the conditions for issuing of credit note u/s 34 would still be applicable towards discounts indirectly. Therefore, the said credit note for discount still needs to be issued and reported within 30th November of the financial year following the year in which the supply was made.In other words, even for post supply discount, one cannot issue credit notes with GST if the invoice for the original supply precedes the timelines defined above as per Section 34(2).2. Conditions for issuance of credit note to include post supply discountsSourceClause 138 of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionSub-section (1) of Section 34 of the CGST Act, 2017.Provision Before AmendmentSection 34(1): Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.Provision After AmendmentSection 34(1): Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, or where a discount is referred to in a clause (b) of sub-section (3) of section 15 is given, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.Effect of the AmendmentCredit notes can currently be issued in the following situations:Taxable value or Tax charged in Invoice > Taxable value or Tax charged for supplyWhere goods supplied are returned by the recipient, i.e. Sales returnDeficiency in the supply of goods or servicesHowever, there was no reference to the issuance of a credit note in the most common situation, i.e. in the case of post supply discount given under Section 15.The post supply discount has now been proposed to be specifically covered as one of the reasons for the issuance of a credit note under Section 34.This seems to be more of a corrective action to correct the lacuna in the law. Even before such amendment, the credit notes with GST u/s 34 have been issued in the past for post supply discounts. Such actions of the past would continue to stand valid in our view even though the specific allowance u/s 34 has been proposed only through the Finance Bill 2026.3. 90% Provisional refund applicable for inverted-rated supplies as wellSourceClause 139(a) of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionSub-section (6) of Section 54 of the CGST Act, 2017.Provision Before AmendmentSection 54(6): Notwithstanding anything contained in sub-section (5), the proper officer may, in the case of any claim for refund on account of zero-rated supply of goods or services or both made by registered persons, other than such category of registered persons as may be notified by the Government on the recommendations of the Council, refund, on a provisional basis, ninety percent of the total amount so claimed, in such manner and subject to such conditions, limitations and safeguards as may be prescribed, and thereafter make an order under sub-section (5) for final settlement of the refund claim after due verification of documents furnished by the applicant.Provision After AmendmentSection 54(6): Notwithstanding anything contained in sub-section (5), the proper officer may, in the case of any claim for refund on account of zero-rated supply of goods or services or both, or of unutilised input tax credit allowed under clause (ii) of the first proviso to sub-section (3), made by registered persons other than such category of registered persons as may be notified by the Government on the recommendations of the Council, refund, on a provisional basis, ninety percent of the total amount so claimed, in such manner and subject to such conditions, limitations and safeguards as may be prescribed, and thereafter make an order under sub-section (5) for final settlement of the refund claim after due verification of documents furnished by the applicant.Effect of the AmendmentCurrently, 90% of the provisional refund has to be sanctioned within 7 days of the issue of acknowledgement in RFD-02 (to be issued within 15 days of application in RFD-01) for the following types of supplies:Export of goods and/or servicesSupplies to SEZ unit/developerThis 90% provisional refund and the timeline would now be applicable to refund under the inverted rated structure as well. This would improve cash flow for businesses whose working capital is unnecessarily blocked due to purchase of higher-rated GST inputs.Having said this, the power to identify and evaluate risk still lies with the proper officer before granting such refund. Therefore, the discretion remains with the officer whether or not to grant such refund. However, any request for such provisional refund from the taxpayer would require documentation and adequate reasoning from the proper officer in case of non-compliance by such officer.Given that this amendment is prospective, it would only be applicable for all refunds filed after the effective date of such amendment irrespective of the periods for which they are filed.4. Refund of less than Rs. 1000 allowable for exports with payment of taxRefund is not permitted for an applicant if the refund is less than Rs. 1000. The reason behind this is that for small value refunds, the resources of the GST Department should not be invested.SourceClause 139(b) of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionSub-section (14) of Section 54 of the CGST Act, 2017.Provision Before AmendmentSection 54(14): Notwithstanding anything contained in this section, no refund under sub-section (5) or sub-section (6) shall be paid to an applicant, if the amount is less than one thousand rupees.Provision After AmendmentSection 54(14): Notwithstanding anything contained in this section, no refund under sub-section (5) or sub-section (6), other than cases where refund of tax is claimed on account of goods exported out of India with payment of tax, shall be paid to an applicant if the amount is less than one thousand rupees.Effect of the AmendmentRefund is not permitted for an applicant if the refund is less than Rs. 1000. The reason behind this is that for small value refunds, the resources of the GST Department should not be invested.However, this restriction has been relaxed for the export of goods with payment of tax. This means that refunds of less than Rs. 1000 would be allowable for such exports made with tax payment.Such allowance is also because the process of exports with payment of tax is an automated process through ICEGATE portal, without the Department having to separately invest their resources in processing such refunds.For exports with payment of tax, every shipping bill is deemed to be an application. In certain industries, particularly e-commerce, each consignment sent by courier may be of very low value. They could not make exports because of this restriction on low-value refunds.This amendment aims to automate refunds on small-value consignments, particularly for exports made through courier.Also, exports through courier mode were not getting reflected on the ICES portal due to certain system limitations. With the upgradation of the systems in the recent past, it is now possible to match the invoices/shipping particulars from the GST portal with that reflecting on the ICEGATE portal.Therefore, these types of exporters can now plan for applying a refund with payment of tax rather than ‘without payment of tax’ as was being done earlier under compulsion.5. GSTAT to hear decisions on contrary rulings by Advance Ruling AuthoritiesGSTAT would only hear those questions which are subject matter of dispute with the other Advance Ruling authorities. For the other questions within the same judgement, the same may not be heard by the GSTAT.SourceClause 140 of the Finance Bill, 2026.Effective DateWith effect from 01.04.2026.Affected ProvisionInsertion of New Sub-section (1A) in Section 101A of the CGST Act, 2017.Insertion of New SectionIn Section 101A of the Central Goods and Services Tax Act, after sub-section (1), the following sub-section shall be inserted, namely:Section 101A(1A):“(1A) Notwithstanding anything contained in sub-section (1), till the National Appellate Authority is constituted under that sub-section, the Government may, on the recommendations of the Council, by notification, empower any existing Authority constituted under any law for the time being in force to hear appeals made under section 101B and in such case,––(a) the provisions of sub-sections (2) to (13) shall not apply; and(b) any reference to the National Appellate Authority under this Chapter shall be construed as a reference to such Authority.Explanation.–– For the purposes of this sub-section, the expression “Existing Authority” shall include a Tribunal”.Effect of the AmendmentIn case of conflicting Advance Ruling by different State authorities, the matter may be referred to the National Appellate Authority for Advance Ruling.However, such authority has not been constituted to date.Pending such constitution, the Government has the power to empower any other existing authority, including GSTAT, also in its place to hear appeals of advance ruling.Likely, all such appeals would be heard by the Principal Bench of the GST Appellate Tribunal.One may need to consider the following before applying for appeal before the said Appellate Tribunal for such matters:The Appellate Tribunal would only hear such matter if there are contrary advance ruling judgements. All other rulings, if made by the Appellate Authority for Advance Ruling, would attain finality unless a writ is admitted by the High Court.GSTAT would only hear those questions which are subject matter of dispute with the other Advance Ruling authorities. For the other questions within the same judgement, the same may not be heard by the GSTAT.The procedure and time limit would not be driven by Section 112 and their relevant rules. Instead, it would be driven by that established by the National Appellate Authority for Advance Ruling under Section 101B and 101C along with their respective rules.6. Place of supply for intermediary services to be based on the location of the recipientSourceClause 141 of the Finance Bill, 2026.Effective DateProspectively from the date of the enactment.Affected ProvisionClause (b) of Sub-section (8) of Section 13.Provision Before AmendmentSection 13(8): The place of supply of the following services shall be the location of the supplier of services, namely:(a) services supplied by a banking company or a financial institution, or a non-banking financial company, to account holders.(b) intermediary services.(c) services consisting of hiring of means of transport, including yachts but excluding aircraft and vessels, up to a period of one month.Provision After AmendmentSection 13(8): The place of supply of the following services shall be the location of the supplier of services, namely:(a) services supplied by a banking company or a financial institution, or a non-banking financial company, to an account holder.(b) services consisting of hiring of means of transport, including yachts but excluding aircraft and vessels, up to a period of one month.Effect of the AmendmentPlace of supply in case of intermediary services was considered to be the location of the supplier. This had the following implications:Fees paid to an intermediary outside India were not regarded as import of services. Therefore, no tax would be leviable on such transactions.Similarly, services provided by an intermediary to a recipient outside India were taxable and not classifiable as export of services.The differential treatment for ‘intermediary’ services has now been omitted from the GST law. Therefore, the place of supply for intermediary services will be considered as the location of the recipient from now on.This would have the following implications:Fees paid to ‘intermediary’ outside India will now be classifiable as import of services and taxable under reverse charge basis.Services provided by the ‘intermediary’ to the recipient outside India would be regarded as export of services.This is bound to reduce significant litigation under the GST law wherein an unnecessary distinction had been created for services of intermediary and other services. The most common ones have been described below:On the front of imports, it was quite difficult to convince the Department that any supplier of services was falling within this ambit of intermediary and therefore, the tax under reverse charge mechanism (RCM) was not paid. The Department would allege that if the payment is made outside India, then RCM would be bound to be applicable.Further, in case of exports of services, the Department would challenge the refunds applied on the grounds that it was falling within the scope of intermediary. This was more so in case of services of business promotion, consultancy and advertisement made on own account by a supplier within India.Author may be reached at eboard@icai.inThe Chartered Accountant • March 2026 • www.icai.org • Pages 37–41
Ep. 64 — Union Budget 2026: Transformative Amendments in Customs Law
CA Journal
· July 2026
00:00
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Union Budget 2026: Transformative Amendments in Customs LawCustoms Law in India, enshrined in the Customs Act, 1962, serves as a cornerstone for regulating international trade by imposing duties on imports and exports. The proposed amendments in the Union Budget 2026 aim to modernize the Act by extending its jurisdiction to offshore activities like fishing, simplifying procedural requirements such as warehouse transfers and duty recoveries, enhancing the validity of advance rulings for greater predictability, and introducing duty-free treatments for specific sectors, ultimately fostering ease of doing business, encouraging voluntary compliance, reducing litigation, and supporting key industries like fisheries and e-commerce for importers, exporters, and taxpayers alike.CA. Shaikh Abdul Samad AhmadMember of the InstituteIntroductionThe Union Budget regulates international trade by imposing duties on imports and exports, and safeguarding domestic industries while promoting economic growth. A detailed examination of the amendments proposed and introduced to the Customs Act, 1962, under the Union Budget 2026 is set out below.i. Revolutionizing Fisheries TradeThe fisheries sector plays a vital role in India’s economy, contributing significantly to exports, employment, and food security. However, for decades, deep-sea fishing and offshore harvesting by Indian vessels remained outside the clear regulatory framework of the Customs Act, 1962. Prior to the Budget 2026, the Customs Act applied primarily within India’s territorial waters (up to 12 nautical miles). Fish harvested by Indian vessels in the Exclusive Economic Zone (EEZ) (up to 200 nautical miles) or on the high seas often faced ambiguity regarding duty treatment, export status, and regulatory oversight. This resulted in compliance uncertainty, potential duty leakage, and restricted growth of deep-sea fishing. The amendment extends the jurisdiction of the Customs Act beyond territorial waters, introduces special provisions for fish harvested in the EEZ and high seas, and aims to formalize and boost India’s marine exports. Key changes in Union Budget 2026 are as follows:Extension of Territorial Application (Section 1(2)): The Customs Act has been extended to cover fishing and fishing-related activities carried out by Indian-flagged fishing vessels beyond territorial waters, including the EEZ and high seas.Definition of “Indian-flagged Fishing Vessel” (Section 2): A new definition has been inserted to clarify that only vessels registered under the Merchant Shipping Act, 1958 and entitled to fly the Indian flag will qualify for the new benefits.Insertion of New Section 56A: This new provision provides for:Fish harvested by Indian-flagged vessels beyond territorial waters may be brought into India free of customs duty.Fish landed at foreign ports shall be treated as exports, subject to prescribed procedures, declarations, and safeguards.Allow C.B.I.&C to frame regulations regarding declaration, examination, assessment, and transit of such fish.1Extended Territorial Application2Clear Vessel Definition3New Section 56A FrameworkThe amendments mark a transformative step for India’s fisheries and seafood export industry. Deep-sea fishing operators can now harvest tuna, shrimp, and other high-value species in international waters without fear of customs duty on return. Landing catch at foreign ports (e.g., for better prices or processing) is now recognized as a legitimate export, improving foreign exchange earnings.ii. Substituting ‘Penalty’ with ‘Charge’ to Promote Voluntary Duty SettlementsSection 28 of the Customs Act, 1962 lays down the mechanism for recovery of duties that have not been levied, have been short-levied, not paid, or short-paid, together with applicable interest and penalty. Sub-sections (5) and (6) provide for closure of proceedings where importers or exporters voluntarily discharge the duty liability along with interest and a reduced levy of fifteen per cent within thirty days, thereby encouraging self-compliance and reducing litigation. However, under the erstwhile framework, amounts paid in such non-litigated cases continued to be characterised as “penalty”, leading to unintended consequences such as unfavourable accounting treatment, reputational concerns, audit objections, and a disincentive to voluntary compliance.The amendment to Section 28 reflects a clear policy shift towards encouraging voluntary compliance and reducing the adversarial nature of duty recovery proceedings. Under sub-section (6), the expression “penalty” has been replaced with “charge for non-payment of duty” in cases where importers or exporters voluntarily settle instances of short-paid or unpaid duty in terms of sub-section (5).This reclassification removes the negative stigma traditionally associated with the term “penalty,” which often implied wrongdoing even in cases arising from bona fide errors or inadvertent omissions. Importantly, the amendment does not alter the settlement mechanism itself. The timelines and the quantum payable, comprising the applicable duty, interest, and a charge equivalent to the earlier reduced penalty of fifteen per cent, remain unchanged. Nevertheless, the change strengthens a trust-based compliance framework, facilitates quicker dispute resolution, reduces avoidable litigation, and aligns with the Government’s broader objective of enhancing ease of doing business in international trade. The amendment applies prospectively, and pending matters may continue to be governed by the pre-amendment provisions, necessitating a case-specific evaluation.iii. Extension of Advance Ruling Validity from 3 Years to 5 Years“The Finance Bill, 2026 proposes a significant amendment to Section 28J of the Customs Act, 1962, which governs the applicability and validity of advance rulings issued by the Authority for Advance Rulings.”Under the old provisions (as amended by the Finance Act, 2022), an advance ruling was binding on the applicant, the concerned Commissioner of Customs and subordinate officers, and remained valid only for three years or until there was a change in law or facts on the basis of which the ruling was pronounced, whichever was earlier; a transitional proviso from 2022 reckoned the three-year period from the date of presidential assent for rulings then in force. The new proposal substitutes “three years” with “five years” and replaces the proviso to allow any advance ruling in force on the date of assent to the Finance Bill, 2026, to be extended (upon a request by the applicant) for five years from the original date of the ruling, while retaining the safeguard that the ruling ceases upon any change in law or facts.1Previous DurationAdvance rulings binding for 3 years or until change in law or material facts, requiring frequent reapplications.2Extended PeriodValidity now extends to 5 years with transitional extensions available upon request, significantly reducing administrative burden.3Strategic AdvantageEnhances predictability for importers and exporters, enables long-term supply chain planning, and reduces compliance costs substantially.This extension brings substantial benefits to trade and industry by providing long-term certainty and predictability in customs classification, valuation, exemption claims, and other critical matters. Importers and exporters can now plan multi-year investments, supply chains, and pricing strategies with greater confidence, without the frequent need to seek fresh rulings or face uncertainty after three years.iv. Deferred Payment of Import Duty – Extended to 30 Days and Opened to Eligible Manufacturer ImportersThe Government has significantly expanded the Deferred Payment of Import Duty facility under Section 47 of the Customs Act, 1962. Earlier limited to AEO Tier-2 & Tier-3 and Authorised Public Undertakings with only a 15-day deferral period, the scheme is now being opened to a new category called “Eligible Manufacturer Importers” and the deferral period has been doubled to 30 days. These changes, notified through Notification Nos. 12/2026-Customs (NT) and 13/2026-Customs (NT) dated 01.02.2026 and Circular No. 03/2026-Customs, will come into effect from 01.03.2026.Eligible Manufacturer Importers (approved by the Directorate of International Customs) can avail the 30-day deferral facility till 31st March 2028. The window is deliberately time-bound to encourage these manufacturers to eventually obtain AEO certification and graduate to continuous deferral benefits. The Indian AEO Programme is implemented vide CBIC Circular 33/2016–Customs dated 22.07.2016, as amended & Circular 26/2018-Cus dated 10.08.2018, which provides the statutory framework for the AEO programme.Once approved, the facility is available pan-India across all Customs locations and requires only a one-time authorisation of a nodal person with ICEGATE credentials. Importers simply select “D” (Deferred) instead of “T” (Transactional) in the Bill of Entry.Payment is now aligned with monthly cycles: duty on Bills of Entry returned in any month (except March) is payable by the 1st of the next month; March bills must be paid by 31st March itself. No interest is charged if paid on time. The reform directly improves working capital for manufacturers, reduces transaction costs, supports MSMEs, and strengthens the overall trust-based facilitation ecosystem while protecting revenue.Eligibility & Timeline: AEO Tier-2 & Tier-3 entities; Authorized Public Undertakings; NEW: Eligible Manufacturer Importers (approved by Directorate of International Customs). Facility available until March 31, 2028 for new manufacturers — designed to encourage AEO certification for continuous benefits. Simple Implementation: Approval is pan-India across all customs locations. One-time authorization of a nodal person with ICEGATE credentials is all it takes. At import: select “D” (Deferred) instead of “T” (Transactional) in your Bill of Entry. Payment due by 1st of next month (March bills paid by March 31). No interest if paid on time.v. End of Prior Permission – India’s Customs Warehousing Goes Fully Digital & Trust-BasedThe amendment to Section 67 of the Customs Act, 1962 removes the requirement of prior permission of a Customs officer for removal of warehoused goods from one bonded warehouse to another. Earlier, the owner could remove goods only with explicit officer permission and prescribed conditions to ensure due arrival. The new provision allows removal simply on system-based self-declaration and online intimation through the Indian Customs portal. Compliance is monitored through digital audit trails and risk-based holistic audits rather than transaction-wise checks.The Electronic Cargo Tracking System (ECTS) with GPS-enabled e-seals is being rolled out in phases for real-time visibility (with exceptions for bulk liquids, over-dimensional cargo, etc.). This change eliminates transaction-wise approvals, reduces paperwork, cuts delays, improves cash flow, and gives businesses greater flexibility in supply-chain planning while shifting oversight to automated digital tracking and risk-based monitoring.Customs bonded warehousing enables importers to store goods without paying duty upfront, with duty becoming payable only when goods are cleared for home consumption or export. The current reforms introduce end-to-end digital processes: electronic intimations, system-generated acknowledgements, automatic validity checks for bonds/insurance, and real-time alerts for warehousing period and timely removal. Inter-warehouse movements no longer require prior permission, transhipment bonds, or physical verification; space availability is confirmed online by the receiving warehouse itself.Goods are processed via a system-driven self-declaration on the Indian Customs portal. Automated acknowledgements are triggered by electronic intimations, shifting compliance monitoring from individual transaction checks to digital audit trail and strategic, risk-based holistic audits.vi. Inclusion of “Custody” in Postal & Courier RegulationsThe proposed amendment to Section 84 of the Customs Act substitutes the words “the examination” with “the custody, examination” in clause (b). Previously, Section 84(b) empowered the C.B.I.&C to frame regulations only for the examination, assessment of duty, and clearance of goods imported or to be exported by post or courier, leaving a statutory gap in regulating their physical custody during the interim period when such goods are held by postal authorities, courier terminals, or authorised handling centres before final clearance or export.The new provision explicitly brings “custody” within the regulatory ambit, enabling the Board to prescribe detailed rules on safe storage, security standards, accountability, and liability for loss or damage. This change is particularly beneficial in the context of surging e-commerce and express courier volumes, as it provides a clear legal foundation for safeguarding high-value consignments, reducing risks, and ensuring a more comprehensive, transparent, and accountable end-to-end framework for postal and courier shipments (indicate amendment to Notification 45/2017 - Custom).vii. Revised Baggage Rules, 2026: Key Updates and Passenger Facilitation Measuresa. IntroductionAs one of the world’s largest economies, India has become increasingly connected globally, with heightened movement of professionals, businesspeople, entrepreneurs, and skilled personnel for employment, investment, and collaboration opportunities. This has also led to a greater inflow of tourists from abroad, necessitating updates to align customs procedures with contemporary realities. The revisions to the Baggage Rules aim to address genuine passenger concerns encountered at airports, such as outdated allowances and procedural complexities. By enhancing duty-free limits and clarifying rules on temporary carriage of goods, the changes seek to prevent unnecessary detentions and ensure a smoother, faster, and hassle-free arrival process.The Baggage Rules, 2026, introduce rationalized definitions for key terms, including personal effects (which now explicitly include personal jewellery) and a new passenger category for foreigners holding a valid visa other than a tourist visa for extended stays. Duty-free exemptions continue for used personal effects and travel souvenirs, with revised general free allowances tailored to passenger categories and restricted benefits for land border arrivals. Provisions for temporary import and re-import of valuable goods are added, supported by digital monitoring and simplified procedures. Special jewellery allowances are now based solely on weight limits, eliminating outdated value caps, to modernize the framework.b. Duty-Free AllowancesDuty-free entitlements are available to various passenger categories arriving in India, including residents, tourists of Indian origin, foreigners with a valid visa other than tourist visa, tourists of foreign origin, and crew members. These include clearance of used personal effects required for daily necessities, along with general free allowances for articles excluding those in Annexure-I. Articles in Annexure-I are subject to restrictions and not permitted duty-free beyond specified limits (if any). The details of the permissible allowance (any mode other than land) and list of Negative Goods are given below:Sr. No.Class of PassengersDuty-Free Allowance (INR)1Resident75,0002Tourist of Indian origin75,0003Foreigner with valid visa (other than tourist)75,0004Tourist of foreign origin25,0005Crew Members (any mode)2,500Annexure-I Articles (Not Duty-Free Beyond Limits)FirearmsCartridges of firearms exceeding 50Cigarettes exceeding 100 sticks or cigars exceeding 25 or tobacco exceeding 125gAlcoholic liquor or wines in excess of two litresGold or silver in any form other than ornamentsTelevisionc. Used Personal JewelleryPassengers may bring used personal jewellery duty-free, provided it is reasonably necessary for their personal use during the journey and meets the essential needs of daily life.d. Special Jewellery AllowancesBesides the above, special duty-free allowances apply to jewellery for eligible residents or tourists of Indian origin residing abroad for over one year. These allowances are now based solely on weight limits, eliminating outdated value caps, to modernize the framework. The limit allowed in the new rules is as follows:Jewellery AllowanceWeight LimitFemale passengerUp to 40 gramsOther than female passengerUp to 20 gramse. Transfer of Residence FrameworkThe transfer of residence provisions has been simplified by merging previous annexures into a single rationalized list of duty-free items, incorporating an overall value cap and updating or removing obsolete items. Benefits are extended to foreign professionals based on their intended stay in India, while enhancements for Indian residents depend on their duration abroad. The details of the permissible allowance are as follows:CategoryStay DurationValue Limit (INR)Residents / Tourists of Indian Origin3 – 12 months1,50,000.001 – 2 years3,00,000.00More than 2 years7,50,000.00Foreigners with Valid Visa (Non-Tourist)6 – 12 months1,50,000.001 – 2 years3,00,000.00More than 2 years7,50,000.00Safeguards include frequency restrictions on claims and condonation of shortfalls in stay durations under special circumstances. Concessions for laptops and pet imports are now integrated, ensuring a unified, transparent regime that reduces disputes and facilitates clearance.Besides the above, the rules allowed one unit of the following articles, provided they fit within the total value caps mentioned above. The sample list is as follows:Appliances & ElectronicsLifestyle & KitchenModern Tech & GadgetsAir-ConditionerMicrowave OvenPersonal Computer (Desktop)Domestic RefrigeratorGas Cooking RangeLaptop or NotepadWashing MachineDish WasherTablet (e.g., iPad)Deep FreezerAir FryerPlay Station or Gaming ConsoleTelevisionElectric OvenSmall Bluetooth SpeakersHome Theatre SystemWater DispenserProjectorVideo Camera or ComboOil HeaterAmplifierVacuum CleanerAir CoolerMultifunction PrinterRobotic Vacuum CleanerDehumidifierAir PurifierDryer MachineMassage ChairMusical Instrumentf. Procedural and Implementation AspectsThese regulations come into force from 02.02.2026, implemented through notifications including No. 14/2026-Customs (N.T.) for the rules, No. 15/2026-Customs (N.T.) for declaration and processing regulations, and others for amendments and rescissions. Passengers carrying dutiable or prohibited goods must declare electronically via the automated system up to three days before arrival, with options for updates or alternative filing. Temporary certificates for import/re-import of valuables are valid up to six months or first departure/return, without extension provisions. Unaccompanied baggage must meet dispatch timelines, with extensions possible under specified circumstances, ensuring efficient clearance while upholding customs integrity.viii. Other Changes Proposed in the Custom NotificationsThe Union Budget 2026 has introduced a series of targeted amendments in Customs duty exemptions aimed at strengthening strategic manufacturing, clean energy, defence aviation, nuclear power, healthcare, and critical minerals supply chains. These changes primarily involve rationalisation and expansion of existing exemption notifications, insertion of new serial entries, extension of validity periods, and alignment of exemptions with end-use–based compliance frameworks such as the IGCRS Rules, 2022. Collectively, the amendments seek to promote domestic manufacturing, support public sector and strategic projects, ensure affordable access to essential medicines, including those for rare diseases, and simplify the customs exemption structure without altering the effective Basic Customs Duty rates.Table 1 summarises the key Customs duty changes and their respective effective dates.Sl. No.Description of ChangeEffective Date1Modification of S. No. 69A of Notification No. 25/2002: Extension of BCD exemption on capital goods used for manufacturing Lithium-Ion Cells for batteries of Electrically Operated Vehicles to also cover stationary energy storage applications (BESS).02.02.20262Insertion of S. No. 334A in Table I of Notification No. 45/2025-Customs: BCD exemption on raw materials for manufacture of aircraft parts for maintenance, repair or overhaul (MRO) of aircraft/parts/engines; applicable to PSU imports under MoD, subject to IGCRS Rules, 2022 and end-use certificate (JS level).02.02.20263Insertion of S. No. 335A in Table I of Notification No. 45/2025-Customs: BCD exemption on components or parts (including engines) of aircraft for manufacture of aircraft and parts thereof, subject to IGCRS Rules, 2022.02.02.20264Amendment to S. No. 66 of Table II of Notification No. 45/2025-Customs dated 24-10-2025: Exemption extended to goods for setting up specified Nuclear Power Projects irrespective of capacity; certification by JS level officer, DAE. Validity extended up to 30.09.2035 (contracts registered with the Customs Houses concerned on or before this date eligible).02.02.20265Amendment to List 3 appended to Table I of Notification No. 45/2025-Customs: Inclusion of 17 additional drugs/medicines for BCD exemption.02.02.20266Amendment to List 22 appended to Table I of Notification No. 45/2025-Customs: Inclusion of 7 rare diseases (as per NPRD, 2021) for customs duty exemption on drugs, medicines, and food for special medical purposes imported for personal use.02.02.20267Notification No. 36/2024-Customs simplification measure: 29 entries omitted and shifted to Tariff (01.05.2026); 22 redundant entries omitted (02.02.2026); 3 entries merged into Notification No. 45/2025-Customs dated 24-10-2025 w.e.f. 02.02.2026. Notification rescinded from 01.05.2026. Effective BCD rates unchanged.02.02.2026 / 01.05.2026Table 1. Key Customs Duty ChangesS. No. in Notification No. 36/2024-CustomsDescriptionInserted as S. No. in Table I of Notification No. 45/2025-Customs38Salts of oxometallic or peroxometallic acids of Beryllium and Rhenium110B39Inorganic or organic compounds of rare earth metals111A55Unwrought; waste and scrap; powders of (i) Gallium (ii) Germanium (iii) Indium (iv) Niobium (v) Vanadium226AEntries Merged from Notification No. 36/2024-Customs into Notification No. 45/2025-Customsix. Social Welfare Surcharge (SWS) RationalisationThe Social Welfare Surcharge (SWS) framework was amended via Notification No. 11/2018-Customs for exemption rationalisation. Continuity is ensured for graphite, quartz, silicon dioxide, compound alcoholic preparations, and spent catalysts/ash with precious metals. Personal-use imports (heading 9804) now attract SWS from 01.04.2026. Electronic toy parts are exempted from SWS (full exemption under heading 9503) from 02.02.2026. No increase in effective duty.x. Aircraft Tyres – AIDC ContinuityNew pneumatic rubber tyres for aircraft (4011.30.00) continue to attract 0.5% Agriculture Infrastructure and Development Cess (AIDC). Notification No. 11/2021-Customs was technically amended from 02.02.2026 to remove an obsolete reference — no change in AIDC rate. Applies except where NIL BCD exists.◆◆◆Author may be reached at eboard@icai.in | The Chartered Accountant • March 2026 • www.icai.org
Ep. 65 — Union Budget 2026-27 Highlights: Impact on MSMEs
CA Journal
· July 2026
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Union Budget 2026-27 Highlights: Impact on MSMEsUnion Budget 2026 offers significant support for MSMEs across sectors. The Government's key interventions focus on liquidity, equity, compliance, and sectoral competitiveness, from the ₹10,000 crore SME Growth Fund to the strengthened TReDS framework and structured compliance support. Several sector-specific initiatives have also been introduced, particularly in textiles, electronics, solar, agro-processing, and tourism. The Budget reflects a clear shift from a debt-based financing model to an equity and working-capital oriented approach, enabling MSMEs to truly scale and contribute meaningfully to the GDP under the vision of Aatmanirbhar Bharat. Every strengthened MSME reflects the unseen contribution of a Chartered Accountant to India's economic backbone.The Union Budget 2026-27 presents a balanced framework which is aimed at accelerating economic growth and development. The proposal for FY 26-27 is described as the “Yuva Shakti-Driven Budget”. As the name suggests, it focuses on unlocking entrepreneurial potential by focusing on improvement of liquidity access, expanding risk capital availability and strengthening institutional guidance and support for small business.The data given below, in itself, is loud enough to establish that MSMEs have become the backbone of this nation's economy.The Budget is inspired by Three Kartavyas:Economic GrowthCapacity BuildingUniversal AccessAccording to The Economic Survey 2025–26, key highlights of the MSME Sector are:7.47 CrMSMEs across the country34.03 CrEmployment31.1%Contribution to GDP48.58%Of total exports35.4%Of manufacturing outputThe Key MSME Initiatives under the Union Budget 20261. INR 10,000 crore SME Growth Fund – A strong push towards Scale & CompetitivenessThe announcement of the ₹10,000 crore SME Growth Fund in Union Budget 2026 represents a structural intervention in India's MSME financing architecture. Unlike traditional credit-linked schemes, this initiative recognises a fundamental issue within the sector, i.e., the absence of adequate growth-stage capital.A significant number of MSMEs in India reach a “threshold stage” where demand exists, orders are coming in, and product-market fit is established; however, expansion is constrained due to limited access to capital.The proposed Growth Fund is expected to provide equity and quasi-equity support to high-performing and scalable MSMEs. This shift from pure debt financing to blended capital structures can materially strengthen businesses.Equity-style support improves debt-equity ratios, enhances creditworthiness, and increases the enterprise's ability to leverage additional funding at competitive rates.From a policy standpoint, this move is particularly noteworthy because earlier fund-of-funds frameworks were largely concentrated on startups. By extending similar structured capital mechanisms to established MSMEs, the government acknowledges that scale-ready manufacturing and service enterprises also require institutional capital support to compete globally.2. INR 2,000 crore top-up to Self-Reliant India Fund for Micro EnterprisesThe Union Budget 2026 provides a ₹2,000 crore top-up to the Self-Reliant India (SRI) Fund, reinforcing the government's commitment to MSME equity support. Originally established under the Atmanirbhar Bharat initiative, the SRI Fund is structured as a Category-II Alternative Investment Fund (AIF), with the aim of addressing the long-standing gap in growth capital for viable and high-potential MSMEs. It channels risk capital through a mother fund–daughter fund architecture, wherein the mother fund (managed by NSIC VC Fund Limited) invests into professionally managed daughter funds, which in turn deploy equity and quasi-equity into MSMEs.Under this model, the SRI Fund has a total corpus target of ₹50,000 crore, with ₹10,000 crore committed directly by the Government of India and the remaining ₹40,000 crore expected to be mobilised from private equity and venture capital investors. As of January 2026, the cumulative investment from the fund structure into investee entities stood at around ₹14,781 crore from the fund itself, while daughter fund investments into the MSME sector amounted to approximately ₹1,962 crore, leading to a total deployment (direct + daughter fund) in MSMEs of around ₹16,743 crore.The Budget-2026 infusion of an additional ₹2,000 crore specifically for micro enterprises is particularly significant for the smallest players in the ecosystem. Micro units often operate on thin margins, lack access to substantial collateral, and find it difficult to attract risk capital through conventional channels. By enhancing the SRI Fund corpus, the government aims to ensure that these enterprises do not get left behind in the transition from debt-dependent growth to equity-enabled scale-up, helping them adopt modern technologies, expand capacity, and participate more actively in value chains.Figure 1: SRI Fund Allocation Graph Post Budget 2026 (₹ in crore)Govt. Contribution10,000Private Equity Commitment40,000Budget 2026 Top-up2,000Source: Author's Compilation3. Liquidity Support Through TReDS ReformsDelayed payments remain one of the most persistent challenges faced by MSMEs. While often dismissed as a routine working capital issue, the problem runs much deeper. When payments are delayed, liquidity tightens. When liquidity tightens, confidence weakens. And when confidence weakens, expansion plans are postponed.The Economic Survey 2025–26 highlights that MSMEs continue to face significant outstanding dues running into lakhs of crores. Despite contributing approximately 30–31% to India's GDP and generating employment for over 34 crore individuals, MSMEs frequently struggle with uneven cash flows. A large share of manufacturing units falls in the small category, yet their ability to scale into mid-sized or large enterprises remains limited.To address this systemic issue, the Government introduced the Trade Receivables Discounting System (TReDS), a digital platform that allows MSMEs to discount their approved invoices and receive early payment from banks and NBFCs.Since its launch, TReDS platforms (including RXIL, M1xchange, InvoiceMart, and Invoicemart/DTX) have cumulatively financed over ₹5 lakh crore worth of invoices, with volumes steadily increasing. Further, companies with turnover exceeding ₹250 crore have been mandated to register on TReDS, strengthening participation and widening the receivables ecosystem.However, Budget 2026 proposes to deepen this framework further through a structured four-pillar reform approach as under:i. Mandatory TReDS Usage for CPSEsThe Budget mandates that all Central Public Sector Enterprises (CPSEs) must route MSME payments through TReDS. CPSE receivables are considered high-quality and low-risk from a credit standpoint. Routing them through TReDS significantly increases the availability of reliable, government-backed invoices on the platform. Once public sector entities demonstrate structured payment routing, large private corporates may also feel market pressure to align with similar transparency standards.Expected outcome:Higher transaction volumes across TReDS platformsFaster settlement cycles for MSMEsImproved liquidity stability for small businessesii. Credit Guarantee Support via CGTMSETo further strengthen lender participation, the Budget extends credit guarantee coverage for invoice discounting under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). As per available data, cumulative guarantees approved under CGTMSE have crossed ₹12 lakh crore, covering over one crore guarantees. This scale significantly reduces perceived risk for banks and NBFCs. By extending guarantee backing to invoice discounting transactions, lenders gain additional comfort. This is likely to increase competition among financiers on TReDS platforms.Expected outcome:Lower perceived credit risk for lenders & more participation by banks and NBFCsCompetitive discounting ratesiii. Integration with Government e-Marketplace (GeM)The proposed integration between GeM and TReDS aims to create seamless digital data flow. Currently, MSMEs supplying through GeM generate invoices that are verified within the procurement system. By linking GeM with TReDS, these verified receivables can be digitally transmitted to financiers without repetitive documentation and manual verification. This reduces due diligence friction and speeds up financing decisions. Moreover, payments from government departments would speed up to match the standards or MSMEs would be able to get the invoices discounted from TReDS, increasing their liquidity.Expected outcome:Improved data transparency & paperworkShorter cash-conversion cycles for MSMEsiv. Developing a Secondary Market for ReceivablesThe fourth reform pillar introduces the development of a secondary market for MSME receivables through securitisation. Under this model, receivables discounted on TReDS can potentially be packaged into asset-backed securities, allowing broader participation from institutional investors.Expected outcome:Expansion of the trade finance ecosystemBetter pricing of buyer credit riskIncreased liquidity across the MSME financing chainIf implemented effectively, TReDS reforms under Budget 2026 could become one of the most consequential liquidity interventions for MSMEs in recent years.4. The ‘Corporate Mitras’ InitiativeThis initiative directly addresses one of the less discussed yet deeply felt challenges of MSMEs, i.e., the burden of regulatory compliance and procedural formalities. The government plans to introduce a cadre of “Corporate Mitras”, particularly in Tier-II and Tier-III cities.In her Budget speech, the Finance Minister indicated that professional institutions such as ICAI, ICSI, and ICMAI will be encouraged to design short-term, modular training programmes to build this cadre. These trained Corporate Mitras are expected to assist MSMEs in managing compliance requirements, maintaining documentation standards, and navigating procedural obligations in a structured and affordable manner.For many micro and small enterprises operating in smaller towns, access to professional advisory support remains limited. However, in the last few years, we have noticed that more and more professionals are leaving jobs and coming into practices in their hometowns which in turn is already removing this gap in the market.The expected impact of the above proposal has many advantages like:Improved quality of documentation and statutory filingsAllowing entrepreneurs to focus more on operations and growth rather than procedural complexitiesBetter trained accountants and compliance officers for professional officesHowever, certain disadvantages/challenges may arise for existing professionals in such smaller towns wherein these professionals' recurring income comes from accounting and compliance services to these same MSMEs. This proposal may, on the contrary, lead to cost cutting and reduced quality in such compliances by creating an unhealthy competition between existing qualified professionals and trained Corporate Mitras, which in turn would increase litigation and have a negative impact on business readiness for expansion. Keeping this in mind, this proposal may turn out to be groundbreaking in Metro and Tier-I cities.Additionally, the Budget proposes the formation of an Education-to-Employment and Enterprise Standing Committee, with particular attention to the services sector.5. Self Help Entrepreneurs – SHE MartsThe Union Budget 2026 introduces the Self-Help Entrepreneur (SHE) Marts initiative to promote women-led entrepreneurship, particularly in rural and semi-urban regions.The concept goes beyond providing credit support; it focuses on creating community-owned retail spaces where women can operate and manage their own enterprises. These marts are proposed to be developed at the cluster level through Cluster Level Federations (CLFs), supported by structured financing mechanisms.Expected Outcome:Encourage growth of micro enterprises at the village levelImprove income stabilityPromote community-based enterprise financing modelsThe Key Sector Specific MSME Initiatives under the Union Budget 20261. Textile SectorInitiativeFocusTextile Expansion and Employment SchemeSupport for the adoption of modern machinery and technology upgrades.National Fibre SchemeFocuses on achieving self-reliance in natural fabrics like silk, wool etc.Tex-Eco InitiativeSupports MSMEs in meeting the rising global demand for environmentally sustainable and “green” textile products.Samarth 2.0Strengthens the skilling ecosystem by linking MSMEs with a pool of trained, industry-ready workers.Mega Textile ParksOffers plug-and-play infrastructure to MSMEs, enabling faster project execution and lower setup costs.2. Chemical SectorThe Budget proposes the development of Rare Earth Corridors in states such as Odisha, Kerala, Andhra Pradesh, and Tamil Nadu to support domestic processing capabilities.3. Agro-Processing SectorExtension of the PLI Scheme for Food Processing by an allocation of ₹1,200 crore.Targeted Crop Development will focus on high-value crops such as coconut, cashew, cocoa, and sandalwood.Hilly Region Rejuvenation: Post-harvest processing for walnuts, almonds, pine nuts.Boost to Seafood Exports by the duty-free import limit for key processing inputs has been increased from 1% to 3% of FOB value.4. Tourism and Hospitality SectorEstablishment of Regional Medical Tourism Hubs.Upgradation of selected archaeological sites.Promotion of environmentally sustainable eco-tourism initiatives.These initiatives create opportunities for MSMEs in hospitality, transport, local handicrafts, and service sectors.5. Education and SkillingA pilot programme with IIMs will train 10,000 tourism guides across 20 key tourist destinations.Existing institutions will be upgraded to train 1 lakh Allied Health Professionals and 1.5 lakh caregivers.6. Lower Input Costs, Stronger EcosystemsBudget 2026 reduces customs duties on selected capital goods and key inputs used in lithium-ion battery manufacturing and solar-related production. The proposal to develop rare earth corridors further supports domestic supply chains, reducing dependency on imports for EV motors and advanced manufacturing inputs.Other Key MSME Initiatives through Tax and Compliance Relief under the Union Budget 2026The Budget proposes rationalisation of certain TDS and TCS rates and procedures, reducing unnecessary tax deductions and collections that often lead to blockage of funds.The new Income Tax Act, expected to come into force from April 2026, aims to simplify provisions, reduce interpretational complexity, and enhance clarity.The MAT rate has been reduced from 15% to 14%.Relaxations in Provisional Refund
BANK AUDIT
Ep. 66 — RBI Investment Directions: The New Playbook for Treasury and Audit
CA Journal
· July 2026
00:00
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RBI Investment Directions: The New Playbook for Treasury and AuditRBI's investment framework for banks has shifted from a rule-heavy classification and caps approach to a principles & governance-driven, risk-aligned architecture synced with Basel III and Accounting Standards. The trajectory across the 2021, 2023, and 2025 Directions shows a clear pivot from mechanical limits and asymmetric valuation to SPPI-based classification, symmetric fair value treatment, and Board-anchored accountability. The 2025 Directions — the Reserve Bank of India (Commercial Banks – Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025 dated 28th November 2025 — consolidate prior reforms and embed governance, valuation rigor, liquidity treatment, and prudential filters into a unified operating code for treasury portfolios.From Caps to Intent Based GovernanceThe earlier regime had a 25% HTM (Held to Maturity) cap with asymmetric accounting where mark-to-market losses hit P&L (profit and loss) immediately while gains were constrained. The 2023 revamp removed the HTM cap, introduced the SPPI (Solely Payments of Principal and Interest) test, and made fair value changes symmetric across AFS (Available for Sale) and FVTPL (Fair Value Through P&L). Also, the holding period norm for HFT instruments is eased. The new directives hard code governance through a standalone Board chapter and embedded FAQs clarifying LCR (Liquidity Coverage Ratio) monetisation, NPI (Non-Performing Investments) segregation, and non-SLR controls. Audit focus correspondingly shifts from mere numerical threshold/defeasance checks to documented acquisition intent, behavioural consistency, accounting, reporting and governance evidence. (Chapter II Para 6–14; Chapter IV Para 33–41).Board Oversight: Non-Delegable Core Chapter II Para 6–14There must be a Board approved detailed Investment Policy covering objectives for own and client/constituent books, eligible instruments and derivatives, sanction authorities, exposure ceilings (issuer, PSU/corporate, private placement), valuation frameworks, broker policies, limit and risk systems (Para 16-17). An Investment Committee is mandatory for equity, preference, convertibles, and equity-like exposures (Para 7 and 22). Boards must define impairment thresholds for subsidiaries, associates, and JVs (joint ventures), which sit outside HTM/AFS/FVTPL buckets (Para 8; Para 64(5)). Bank shall not reclassify investments between categories. Any portfolio reclassification requires Board and RBI's pre-approval, creating a control gate/hard bar against switching (Para 9; Para 66). A Board-approved HTM sale policy must specify permitted exits such as credit deterioration, buybacks, or OMO (open market operations) participation without invalidating HTM intent (Para 10; Para 69).Non-SLR investments require Board ensured risk systems and quarterly reviews of credit quality, valuation, and compliance with the 10% unlisted cap (Para 11–12; Para 90(12)). Broker concentration breaches must be reported post-facto to the Board (Para 13; Para 92(8)). A half-yearly portfolio review as of March 31 and September 30 must reach the Board by end-May and end-November, covering performance, prudential limits, SPPI consistency, and Level 3 valuation exposures (Para 14; Para 93). Audit work must inspect Board and Committee minutes, policy, and evidence of challenge as best audit practice (Para 93-94).Classification: SPPI and Business Model Tests Chapter IV Para 33–41All investments (excluding subsidiaries, associates, JVs) must be classified at or before acquisition into HTM, AFS, or FVTPL, with HFT (Held for Trading) as a sub-category within FVTPL (Para 33). An instrument is SPPI compliant when its contractual cash flows represent only payments of principal and interest on the outstanding principal, where interest is restricted to basic lending components (i.e. time value of money, credit risk, and a normal lending margin) and does not include equity type returns, conversion features, or loss-absorbency triggers. Classification is objective driven, not instrument type driven. Even identical ISINs bought in the same lot can be placed in different buckets if acquisition intent differs and is documented (Para 34 FAQ). SLR status does not determine classification and instruments failing SPPI go to FVTPL (Para 34 FAQ). Investments in subsidiaries, associates, and joint ventures are kept outside (held sui generis) the HTM/AFS/FVTPL classification framework and are subject to specified impairment and prudential checks. Impairment thresholds for these investments must be Board-approved, and monitoring sits at Board level rather than treasury bucket classification level (Chapter IV and Chapter II Para 8 read with Para 64).An instrument is SPPI compliant when its contractual cash flows represent only payments of principal and interest on the outstanding principal, where interest is restricted to basic lending components (i.e. time value of money, credit risk, and a normal lending margin) and does not include equity type returns, conversion features, or loss-absorbency triggers.HTM eligibility requires intent to hold till maturity and SPPI compliant cash flows (Para 35). Instruments automatically failing SPPI and therefore barred from HTM/AFS include convertibles, Basel III AT1/Tier 2 loss-absorbent bonds, equity-linked coupon notes, and equity or preference shares unless an irrevocable AFS equity election is made (Para 36). Securitisation notes other than equity tranches can qualify for HTM/AFS if tranche cash flows are SPPI, the underlying pool is SPPI, and tranche credit risk is not higher than the pooled assets (Para 37). AFS classification requires dual intent (collect cash flows and sell the paper) plus SPPI compliance (Para 38). AFS bucket includes SPPI compliant debt securities held for ALM (asset–liability management) where the bank's intent is flexible i.e., to collect cash flows and can also be sold before maturity (Para 39). FVTPL is the residual class and includes Non-SPPIs, equities unless onetime AFS election, mutual funds, AIFs (Alternative Investment Funds), REITs, InvITs, equity tranches, and index-linked bonds tied to equity indices (Para 40).HFT: The Active Trading SignalsHFT sits within FVTPL as a sub-category and demands daily fair valuation through P&L (Para 41(2)). Inclusion is presumed where securities are held for short-term resale, price movement gains, arbitrage, or hedging of trading books (Para 41(3)). Underwriting commitments expected to settle are included (Para 41(4)). Exclusions cover unlisted equities, securitisation warehousing, direct real estate, and equity funds unless look-through criteria are met (Para 41(6)). There must be no legal impediment to sale or fully hedge the HFT instruments (Para 41(1)). Unless specifically exempted, instruments arising from market-making, most fund equity exposures, listed equities, and trading-related repo-style transactions are presumed to be classified under HFT (Para 41(7)).Liquidity and LCR: HTM Guardrails Chapter IV Para 35 & 38 FAQsHQLA (High Quality Liquid Assets) as LCR holdings can sit in HTM if the bank does not routinely sell them. Repo usage is not inconsistent with HTM classification (Para 35 FAQ). However, if securities are intended for LCR monetisation and anticipated sales exceed 5% of opening HTM carrying value, they cannot be in HTM (Para 35 FAQ). Securities bought mainly for day-to-day liquidity management belong in AFS, while HTM is for structural ALM (Asset Liability Management) positions (Para 38 FAQ). Audit testing must validate SPPI assessments at acquisition, check classification consistency with behaviour, reconcile LCR holdings with HTM tagging, and can challenge borderline instruments like AT1, Tier 2, and structured notes.Valuation: Fair Value Hierarchy Discipline Chapter IX Para 73–87Valuation follows a three-level fair value hierarchy based on input observability. Level 1 uses unadjusted quoted prices in active markets (FBIL / NDS-OM traded prices) with no significant adjustments permitted (Para 73–75). Level 2 uses observable inputs other than direct quotes, such as yield curves, credit spreads, and matrix pricing for comparable instruments, with no significant unobservable inputs (Para 76–78). Level 3 relies on unobservable inputs (DCF (discounted cash flow) assumptions, recovery estimates, and model-based valuations) covering unquoted non-SLR securities, AIF units without daily NAV, and distressed debt without market prices (Para 79–87 in fragments).Level 3 valuations run on unobservable inputs, so RBI hard wires capital conservatism into their gain recognition. Net unrealised gains on Level 3 investments recognised in P&L or AFS-Reserve must be fully deducted from CET1 capital and are not available for distribution (except where SPPI instruments carry ≤50% credit risk weight) (Chapter IX Para 87). Further, Day-1 gains on Level 3 instruments are not taken upfront (they are deferred or amortised) while Day-1 losses are recognised immediately, enforcing asymmetric prudence at entry (Chapter V Para 46–47). For Level 3 derivatives too, unrealised gains routed through P&L are deducted from CET1 and barred from dividend payout (Chapter XII Para 109-111). Audit must verify Level 1 marks, test Level 2 model governance, challenge Level 3 assumptions, and verify CET1 deductions and reporting/disclosures.HTM securities are carried at amortised cost, not MTM, with premium/discount amortised over remaining life and subject to IRACP provisioning norms (Chapter V Para 48–49). AFS securities are fair-valued at least quarterly, with net unrealised gains/losses parked in AFS-Reserve (not P&L), premium/discount amortised, and post-sale gains moved to P&L (equity AFS gains to Capital Reserve) (Chapter V Para 50–55). FVTPL securities are fair-valued through P&L, with all valuation gains/losses recognised in earnings (Chapter V Para 56-58).Operational Controls: Non-SLR and Dealing Framework Chapter X Para 88–94Government securities must be held in demat form and settled via CCIL/NDS-OM, with STRIPS treated per norms. Short sale, When Issued and Value Free transfers should be in adherence with respective directions (Para 88–89). Non-SLR investments carry tighter filters: unlisted exposure capped at 10% of the non-SLR portfolio, limited headroom for infrastructure securitisations and ARC (Asset Reconstruction Company) paper, prohibition on zero coupon bonds with sinking fund exception, unrated exposures except defined infra contexts, and mandatory entry-level ratings supported by internal credit analysis (Para 90(1)–90(6)).Internal controls require segregation of front office, back office, and risk, review for Level 2/3 instruments, and exception reporting for limit or valuation breaches. Banks must perform their own credit assessment and not rely solely on external ratings when investing in non-SLR paper (Para 90 credit due diligence clauses). Exposure look-through rules apply for MF/AIF units when underlying unlisted exposure ≥10% for limit computation (look-through rule). Internal control architecture must enforce front–mid–back-office segregation, ACB review, book reconciliation, and audit trail across investment operations. Broker engagement needs Board-approved empanelment and limits, with breach reporting to the Board (Para 94; Para 92(8)). Audit must reconcile non-SLR caps, inspect internal credit files, test segregation of duties, and verify reporting thresholds and timelines.Prudential Treatment: Income, NPI, IFR Chapter XI Para 95–108Interest income on performing investments is accrued. Dividend income can be recognised after declaration and with right to receive being established. Broken Period Interest (BPI) is treated as income or expense and not capitalised (Para 95–97). Investments become NPI when overdue >90 days or earlier if credit-impaired (Para 98). NPIs must be segregated from performing portfolios with no offsetting of gains against NPI losses and valued instrument wise with haircuts. Preference share dividend arrears and ₹1-valued equities (no financials) also trigger NPI tagging. Issuer-level stress linkage applies: if borrower exposure is NPA, the bank's investment in its securities is also treated as NPI, and vice-versa (Para 99–100).Provision should be higher of IRACP (Income Recognition and Asset Classification Provisioning) norms or depreciation at NPI recognition (Para 101). Upgrades from NPI to standard require structured review and approval as per internal process. Central and State Government securities are never classified as NPI; Government-guaranteed paper turns NPI only if guarantee is repudiated (Para 104). Banks must maintain an Investment Fluctuation Reserve (IFR) of at least 2% of AFS + FVTPL portfolios as buffer, with limited Tier 2 capital recognition (Para 105-108). Audit must verify NPI registers, segregation logic, provisioning math, upgrade approvals, and IFR adequacy.Trade smart, classify smarter, document smartest — that's the new carry trade, because strong treasury books are built in policy rooms before they show up on trading screens and management dashboards.ConclusionReturns come from yield curves and spreads, but survival comes from SPPI logic, classification, valuation hierarchy, correct accounting, documentation and Board outcomes. Trade smart, classify smarter, document smartest — that's the new carry trade, because strong treasury books are built in policy rooms before they show up on trading screens and management dashboards. Duration risk is evident while governance risk is invisible, and RBI has a detailed framework which prices in both.Reach the author at eboard@icai.inThe Chartered Accountant • Bank Audit March 2026 • www.icai.org
BANK AUDIT
Ep. 67 — Requisites of a Quality Bank Audit
CA Journal
· July 2026
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Requisites of a Quality Bank AuditBanks are subjected to several types of audits — Internal Audit, Concurrent Audit, Revenue Audit etc. In this article, we are going to discuss only about the statutory audits of bank as all the banks are statutorily required to get their financial statements audited for the year ended March 31 every year.Through this article, an effort is being made to highlight the important issues to be considered and the methodology to be followed, primarily while conducting the statutory audits of bank branches.Statutory bank branch audit is a two-step process wherein the branches are audited by the respective branch auditors who are appointed by the Head Office of the respective banks through a well-regulated and laid down process. The branch auditors are required to conduct the statutory audits of the bank branches allotted to them and issue their reports to the respective Statutory Central Auditors (SCAs) who have been entrusted with the exercise of consolidation of the branches under respective regional office(s)/zonal office(s). Once all SCAs are able to conduct the verification of the consolidation of the respective branches allotted to them, along with the completion of audit of the respective audit areas allotted to each one of them at the bank’s Head Office, the overall consolidated financial statements of the bank, including Notes to Accounts, are drawn up by the bank’s Head Office and verified by the SCAs, and the draft audit report on the consolidated financial statements of the bank as a whole is issued by them. Post this, the financial statements are reviewed by the audit committees of the respective banks who, on being satisfied, recommend the same to the bank’s Board of Directors for adoption/approval. On approval of the financial statements by the bank’s Board, the same are signed off by all the SCAs of the bank along with the audit report on the said financial statements.Therefore, the statutory audits of all public sector banks are conducted in two phases i.e., first at the branch level, and then at the Head Office level, after which the overall set of financial statements of the bank as a whole is produced.In case of private sector banks, however, there are usually two joint auditors who undertake the work of the statutory audit of the entire bank, and there is usually no involvement of statutory bank branch auditors.In case of private sector banks, however, there are usually two joint auditors who undertake the work of the statutory audit of the entire bank and there is usually no involvement of statutory bank branch auditors.While conducting the bank branch audits, the following issues need to be kept in mind:The audit work needs to be carried out diligently, ensuring compliance of all the applicable regulations.Recently, on November 28, 2025, the Reserve Bank of India has announced the consolidation of its appx. 9,455 circulars into 244 Master Directions with the aim to simplify its regulatory framework and enhance compliance efficiency. The branch auditors need to be updated on this aspect to ensure that the audit is conducted by taking into consideration the relevant Master Directions. Every year, the Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) issues the revised edition of the “Guidance Note on Audit of Banks” to provide detailed guidance to the auditors carrying out audit of banks and bank branches. For detailed guidance, reference may be made to this Guidance Note.Invariably, there is a pressure of time within which the branch audit work is supposed to have been completed. The branch auditors have to appreciate that, in view of the two-stage process of the audit (as explained earlier), their output in the form of issuance of their audit report becomes the input for the SCAs who have to take their observations into consideration.The time-frame is usually shared with the branch auditors as part of their appointment letter and is to be respected. Under no circumstances should the branch auditors hold up their work, which in turn would lead to the holding up of the audit work of the bank as a whole. In case the desired information is not made available, they should clearly mention that fact in their statutory audit report. SCAs are duty bound to go through the contents of each branch audit report (in respect of the branches allotted to them) and take appropriate view of the same.The best way to ensure that the audit work is concluded on time is to plan for the audit work well in advance by duly identifying the audit team members and giving them adequate training so that the audit work progresses smoothly while the audit is underway. Understanding the scope of work is equally important for the above planning. The engagement partner (EP) needs to lead the team in terms of understanding the final deliverable i.e., the authentication of financial statements, related schedules, annexures and details, various certificates, Long Form Audit Report, Tax Audit Report etc. The EP needs to allocate his resources for each of the above activities so that the work on the above progresses simultaneously, or else it would be a challenge to meet the deadlines.The audit team should have a good mix of experienced and trainees/article assistants, who need to be guided properly before commencement of the audit work, along with adequately detailed check-lists in respect of all the audit work-related areas. There is no substitute for experience and therefore, each bank branch under audit needs to be handled by an EP and audit manager having adequate experience of conducting bank audits.It is to be clearly understood that there are a variety of audit reports to be issued while conducting the branch audit such as Statutory Report, Long Form Audit Report (LFAR), Tax Audit Report etc. The branch auditors need to be sure that each of the above reports are independent of each other and not a substitute. Mere LFAR reporting is not sufficient, particularly in case of non-compliance of RBI IRAC norms i.e., if in the opinion of the branch auditor, an account is NPA and a detailed write-up of the same is mentioned in the LFAR, that alone is not sufficient. This fact has to be duly reported in the main report, i.e., the Statutory Audit Report as well through Memorandum of Changes (MoC).The branch auditors may be aware that the bank branch audit is unlike any other audit where the auditor ensures that the requisite rectification accounting entries are passed in case of any deviation/error. In case of bank branch audit, no accounting entry needs to be passed at the branch level and all the rectification accounting entries suggested by the branch auditor need to be routed through the MoC. All such entries suggested through the MoC are then compiled by the bank management and, on their due verification by SCAs, effect thereof is given at the bank’s Head Office.It is generally seen that for many audit firms, audit fee from the bank branch audit is their main source of income. Therefore, it is all the more important to ensure that adequate planning is done so as to be able to deliver a quality audit.It goes without saying that the branch auditors have to be cognisant of the fact that they need to maintain sufficient working papers demonstrating the execution of work, duly documenting issues raised, and their resolution and the methodology followed while conducting the branch audit. It is to be remembered that ‘work not documented is work not done’.It is to be noted that AASB, every year during the bank audit season, takes the initiative to set up an expert panel for resolving the issues being faced by the bank branch auditors. It is suggested to make use of this resource to the maximum possible extent.To Sum UpWe, the bank auditors are being watched by the sector regulator RBI and the society at large. Tremendous responsibility has been cast on us. It is up to us to take up the challenge and strive to do quality audit in the specified limited time-frame allotted. There is absolutely no excuse for a poor-quality audit.◆◆◆Author may be reached at eboard@icai.inwww.icai.org March 2026
Audit Trail - Requirements & Responsibilities"Audit Trail/Edit log" is the new buzzword that draws the attention of the management from a compliance perspective and of the auditors from reporting perspectives. These requirements emanate from the rules issued by the Ministry of Corporate Affairs under the Companies Act, 2013. This article is an attempt to break down the legal requirements and responsibilities from the perspective of management and the auditor.Audit TrailIt is a chronological record of the changes that have been made to the data that captures any change to a record, including:who made the changewhen it was madewhat fields were changedSimply, any change to data, including creating new data, updating, or deleting data, must be recorded.Management PerspectiveStatutory RequirementProviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 requires that for the financial year commencing on or after the 1st day of April 2023, every company that uses an accounting software for maintaining its books of account, shall use only such accounting software which has a feature of:recording an audit trail of each and every transaction,creating an edit log of each change made in the books of account, along with the date when such changes were made, andensuring that the audit trail cannot be disabled.ApplicabilityFrom the above, it is clear that every company (OPC/Section 8/Private/Public/foreign company) that uses an accounting software shall use such accounting software that has the capabilities to comply with the requirements of Rule 3 of the Companies (Accounts) Rules, 2014.The said rule is applicable only in case of accounting data maintained with the aid of an accounting software, i.e., working records that are maintained electronically but not through an accounting software do not require the audit trail. For example, fixed asset register, paysheets, calculations maintained in excel without the aid of any accounting software will not be under the purview of Rule 3(1) of Companies (Accounts) Rule, 2014. However, the entries passed in the accounting software, which are resultant of the above excel workings, will be under the purview.The audit trail functionality is only applicable for the books of accounts as defined in Section 2(13) of the Act. Therefore, the maintenance of an audit trail is not applicable to the "books and papers" and "books or papers" as defined in Section 2(12) of the Act, which includes deeds, writings, documents, minutes, and registers maintained on paper or in electronic form.Audit trail functionality is required even in cases where the accounting software does not allow the users to make any modifications subsequent to the entry posting.Management's ResponsibilityThe responsibility of the management includes:Determining the Books of AccountsAll the books of accounts that are maintained in an accounting software require the maintenance of an audit trail. Hence, it is of utmost importance to determine the books of accounts that the company intends to maintain/ maintain in the accounting software. The records maintained manually do not require the maintenance of an audit trail even though they are maintained electronically in excel. Only the changes made to books of accounts requires audit trail in accordance with the proviso to Rule 3(1) and not all the changes in the accounting software. For instance, creation/deletion of a user to the accounting software or changes to ESG data are the changes made to the accounting software and not to the books of accounts.Section 2(13) defines the books of accounts as records maintained in respect of (i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place; (ii) all sales and purchases of goods and services by the company; (iii) the assets and liabilities of the company; and (iv) the items of cost as may be prescribed under Section 148 in the case of a company which belongs to any class of companies specified under that section.Requirement of audit trail is applicable irrespective of the fact that the accounting software is maintained by an in-house team of accounts or outsourced to a third-party service provider.Selection of Accounting SoftwareThe management should maintain its accounting records in an accounting software that is empowered to provide the entity with an audit trail feature for all transactions made in the books of accounts. This feature should be capable enough to maintain a record of 1. change made (i.e., creation, modification, or deletion of a record), 2. when the change is made (i.e., time stamp of the change), 3. who made the change (i.e., user ID), 4. what data was changed (i.e., the transaction reference).The selected software, having the feature of an audit trail, should also be able to generate a report of the said trail when required.The requirement of an audit trail is applicable irrespective of the fact that the accounting software is maintained by an in-house team of accounts or outsourced to a third-party service provider. Hence, it is the responsibility of the management to evaluate whether the third-party service provider maintains the company's records on a platform that is capable of capturing an audit trail as required.RetentionAn Audit Trail will form part of the books of accounts required to be maintained in accordance with Section 128 of the Companies Act, 2013 and hence it has to be retained for a period of not less than eight financial years, immediately preceding a financial year or such higher period as may be prescribed by the central government in case of investigation under Chapter XIV of the Act.Non-ComplianceAccording to Section 128(6), non-compliance may lead to a fine which shall not be less than fifty thousand rupees, but which may extend to five lakh rupees.ChallengesChallenges majorly include:Cost of storage as such a huge record of data repository can be built only with enlarged storage capacities.Time invested in structuring the audit trail reports and run time efficiencies in a real environment may take a hit due to backend tracking of all changes.Effective and efficient controls need to be designed, implemented and maintained in order to comply with the new regulations.Daily backup will be an additional burden in view of the new audit trail requirement.Auditor PerspectiveStatutory RequirementSection 143(3)(j) of the Companies Act, 2013, read with Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 requires the audit reports issued for the financial year commencing on or after April 01, 2022, and shall include views or comments of the auditor on whether:the accounting software for maintaining its books of account, which has a feature of recording audit trail (edit log) facility, andthe same has been operated throughout the yearfor all transactions recorded in the software, andthe audit trail feature has not been tampered with andit has been preserved as per the statutory requirements for record retention.However, proviso to Rule 3(1) of Companies (Accounts) Rules, 2014 requires the maintenance of an Accounting Software which commences from April 01, 2023, creating an impediment for the auditor's ability to report on the said software from the financial year commencing on or after April 01, 2022. Hence, the reporting requirement under Rule 11(g) stands deferred to the financial year commencing on or after April 01, 2023.ApplicabilitySection 143(3)(j) of the Companies Act, 2013 read with Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 is applicable for the audit of all class of companies that maintains the Books of Accounts as specified in Section 128 of the Companies Act, 2013 with the aid of an Accounting Software for the financial year commencing on or after April 01, 2023.As the Section 129 extends the requirement of the Act to both standalone and consolidated financial statements on a par basis, the reporting on an audit trail is also mutatis mutandis applicable to both standalone and consolidated financial statements. However, the said reporting is not applicable for the components if the components included in the consolidated financials are an entity incorporated under statutes other than the Companies Act, 2013 (such as firm, LLP, etc.,) or those entities incorporated in a jurisdiction outside India where there is no similar accounting/reporting obligation cast. In such cases, the auditor of the parent company in his report on consolidated financial statements needs to report such fact of non-applicability on such components included.The reporting under this Rule is only applicable in case of audit reports issued in accordance with the Companies Act, 2013 where the "Report on other legal and regulatory" is included. Hence, it is not applicable for audit reports or limited review reports issued in accordance with SEBI Regulations or other special-purpose reports issued in accordance with other statutes.In case the accounting function has been outsourced to a third-party service provider who maintains the books of accounts of the entity using its own accounting software, then the audit trail requirements extend to the third party's accounting software as well.Audit ProceduresUnderstandAuditors need to:understand the books of accounts maintained and management's assessment of those books of accounts that are maintained in an accounting software from those that are maintained manually, accounting software used by the Company, whether the accounting function has been maintained internally or outsourced to a third-party service provider,identify the risks and controls implemented by the management,assess the risks identified and plan appropriate responses in order to address the audit risk through control and substantive testing.Risks may include, but are not limited to:Risk of audit trail may be disabled on a need basis.Unauthorized access to the audit trail report.Changes to audit trail functionality/configuration is not authorized/ log of those changes is not maintained.The audit trail may not cover the total period under consideration/ all transactions in the books of accounts.Audit trail may not be retained for the period as stated in Section 128 of the Companies Act, 2013.Changes may be made at data base level without the aid of the accounting application and the trail present may not capture the same.Other accounting software-specific risks.Use of ExpertsIt may be appropriate for the auditors to seek expert support considering the complexity of the accounting software. Auditor may involve the experts in the field of information technology to assist in obtaining a reasonable assurance about:the use by the management of an appropriate accounting software that is aided with an audit trail feature,audit trail has been operative throughout the year under consideration for audit for all transactions in the books of accounts at the application and database level,the trail is not compromised/tampered/disabled, andthe audit trail has been retained.Auditors need to carefully consider and determine the nature of the experts used. If the experts are specialized in the field of auditing, they will be covered under the definition of audit team and accordingly apply the requirements of SA 220 - Quality Control for an Audit of Financial Statements, and if the experts are specialized in the fields other than auditing i.e., only in information technology, they will be covered under the definition of auditors expert and accordingly apply the requirements of SA 620 - Using the Work of Auditors Expert.The auditor has the sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the auditor's use of the work of an auditor's expert; hence, he is responsible for concluding that the work of that expert is adequate for his purposes, and he may accept that expert's findings or conclusions in the expert's field as appropriate audit evidence.MaterialityAs the requirement of maintaining an audit trail is applicable for each and every transaction made in the books of account throughout the year, the materiality threshold is not applicable for evaluation, as it is a factual reporting.Controls & Substantive Testing PlansBased on the understanding of accounting software, risk, and control environment, auditors need to develop a plan to test the compliance by combining control and substantive procedures. The list provided includes some of the possible testing methods:Evaluate the controls implemented by the management to prevent unauthorised access, modifications to the audit trail, and those controls to ensure the audit trail captures all modifications to all transactions throughout the year.Inquiry with the system administrator about the customizations made to audit trail configurations where ERPs are customized in accordance with business requirements.Test and check the transactions for evidence of operating effectiveness of the audit trail feature throughout the year under consideration for audit for all modifications to the books of accounts.Check the configuration settings to identify whether the audit trail feature can be turned off/disabled at any time. In such scenarios, obtain the edit log of configuration settings to check the instances.Test the audit trail in the test environment by editing and deleting some sample transactions rather than making edits on the main/real environments.Verify the edit logs of the databases to ensure no direct modifications are made on the raw data.Auditors may use the results of the above procedures as corroborative audit evidence to confirm some other findings and may also use the above results to perform substantive analytics, which may reveal any structured misstatements/anomalies that may reduce the auditor's detection risk.Service OrganisationIn case where the accounting function has been outsourced to a third-party service provider who maintains the books of accounts of the entity using its own accounting software, the audit trail requirements extend to the third party's accounting software as well. In such scenarios, auditor may consider using independent auditor's report on service organisation (For Example, SOC 1/ SOC 2/SAE 3402) for compliance with audit trail requirement, and accordingly comply with SA 402 "Audit Considerations Relating to an Entity Using a Service Organization" or SAE 3402, "Assurance Reports on Controls at a Service Organization".Accounting SoftwareRecords maintainedMaintained Inhouse or OutsourcedIndependent auditor's report (in case outsourced)Hosting locationData baseOperating systemAudit trail EnabledRetention of Audit trail available for previous periodsApplicationDatabase DocumentationAuditor documentation should include the understanding obtained, procedures performed, conclusions reached, details w.r.t consultation or expert involvement, SOC-2/SAE 3402 reports on controls at a service organization, and other considerations of SA 402 (if applicable), and a written representation obtained from the management.In addition to the above, an auditor may also resort to the illustrative table provided above for documentation of audit evidence w.r.t the audit trail and its retention.ReportingThe auditors' views or comments w.r.t the audit trail need to be reported under the "Report on other legal and regulatory requirements" section of the audit report issued in accordance with SA 700 (Revised), "Forming an Opinion and Reporting on Financial Statements" or SA 705 (Revised), "Modifications to the Opinion in the Independent Auditor's Report".In case of any modification in the reporting as per the requirement of Rule 11(g), the auditor needs to check the said implications on the reporting of the following, as the requirement of maintaining an audit trail falls under the ambit of Section 128, which deals with "Books of Accounts to be kept by the Company".Section 143(3)(b) of the Act, requires the auditor to report on - whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him.Section 143(3)(h) of the Act requires the auditor to report on any qualification, reservation, or adverse remark relating to the maintenance of accounts and other matters connected therewith.In case of modification to Rule 11(g) on account of lapse of internal controls (design deficiencies or operation inefficiencies), the auditor needs to consider the said impact on the Report on the Internal Financial Controls with reference to the Financial Statements issued in accordance with Section 143(3)(i).For modifications in specific scenarios, auditors may recourse to para 30 and 31 of the Implementation Guide on Reporting on Audit Trail issued by the Institute.ConclusionThe new requirements do not prevent the management from deleting or modifying any books of accounts, whereas it requires the management to have a log of all details of subsequent modifications/deletions, which enables the management, auditor or other regulators to identify any structured/unstructured anomalies that may lead to the identification of material misstatements or other irregularities/contraventions.◆ ◆ ◆Author may be reached at kypagowtham@gmail.com and eboard@icai.inwww.icai.org March 2026
Commercial Law
Ep. 69 — India’s Ongoing Battle against Money Laundering and Terrorist Financing
CA Journal
· July 2026
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India's Ongoing Battle against Money Laundering and Terrorist FinancingIndia, the world's fourth-largest economy and a leader in combating Money Laundering and Terrorist Financing, faces persistent threats from several terror groups. Its rapid economic digitisation, financial inclusions, and growing global financial integration pose evolving challenges in protecting its financial ecosystem from illicit activities.India's Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT) Framework is engineered to adapt to emerging threats and for compliance with International Standards set by FATF. As a member of the Financial Action Task Force (FATF) since 2010 and of the Asia/Pacific Group on Money Laundering (APG) since 1998, India implements the FATF's 40 Recommendations to combat illicit financial flows.Understanding Money Laundering, Terrorism Financing, and Anti-Money LaunderingMoney Laundering – A criminal process of making illegally-gained proceeds (known as 'Dirty Money') from illicit activities (Drug Trafficking, Corruption, Human Trafficking, Wildlife Trafficking, Tax Evasion, Terrorism Financing, etc.) appear to have come from a legitimate source.Terrorist Financing – Channelising funds for terrorist activities, regardless of whether the source is legal or illegal.Anti-Money Laundering (AML) – A set of policies and practices to ensure that financial institutions and other regulated entities prevent, identify, and report illicit activities.Key Legislative Pillars Enhancing India's AML/CFT FrameworkThe Prevention of Money Laundering Act (PMLA), 2002The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of India's legal framework to combat money laundering. It mandates banks, financial institutions, intermediaries, and people carrying a designated business or profession to verify client identities, maintain records, and furnish information to the Financial Intelligence Unit of India (FIU-IND). The objective of the Act is to prevent money-laundering, confiscate illicit property, and adhere to regulations. The PMLA has reinforced anti-money laundering efforts to adapt to emerging financial crimes and international standards.The Act now includes CAs, CSs, and CMAs carrying out financial transactions on behalf of their clients.Cryptocurrency and Other Virtual Digital Assets are under its purview to intensify regulatory oversight over digital finance.Beneficial Ownership threshold reduced to 10% from 25%, expanding accountability.Redefinition of Politically Exposed Persons (PEPs) to boost the AML/CFT Framework.Religious and Charitable entities are brought under the purview of AML/CFT to avoid misuse for terror financing.Online Aadhaar authentication is exclusively permitted for Banking and Telecom sectors, with offline verification for Insurers.Development of Central KYC to prevent redundant data and streamline the KYC Process.Reporting entities to retain records for 5 years.Unlawful Activities (Prevention) Act (UAPA), 1967India's Anti-Terror Act for robust prevention of certain unlawful activities by individuals and associations in India, including terrorist activities and related matters. The UAPA Amendment Act, 2019, empowered the Union Government to designate individuals as terrorists without a formal judicial process, and the DG NIA to seize/attach the properties related to proceeds of terrorism in NIA Investigated cases.The Armed Forces (Jammu and Kashmir) Special Powers Act, 1990The Act provides Special Powers to the Armed Forces in the JK disturbed areas for Anti-Terrorism Operations.A high-level meeting chaired by Union Home Minister Amit Shah, attended by Union Home Secretary, Director (Intelligence Bureau), DGs of CRPF, BSF, and other senior officers, was held at New Delhi on 11-02-2025, which focused on monitoring terror-financing, intensifying actions over Narco-terror cases, and 'Zero Terrorism' in JK. A similar high-end meeting was held at Srinagar on 08-04-2025 to serve the aim of AML/CFT.Key Roles and Contributions of India's Central AML/CFT AuthoritiesFinancial Intelligence Unit-India (FIU-IND)FIU-IND is the central agency for receiving, processing, analysing, and disseminating information regarding suspect financial transactions. It coordinates and strengthens the efforts of national and international intelligence, investigation, and enforcement agencies in global Anti-Money Laundering and Counter Terrorism Financing. It reports directly to the Economic Intelligence Council, headed by the Finance Minister.It is a central repository for Critical Financial Intelligence and collating reports on Cash Transactions, Non-Profit Organisation Transactions, Cross Border Wire Transfers, Purchase or Sale of Immovable Property, Suspicious Transactions, and other reports obtained from the Reporting Entities. The intelligence is shared with national intelligence and regulatory authorities and Foreign FIUs to combat money laundering and related crimes. FIU-IND tracks money laundering trends, typologies, and developments for coordinated action.Enforcement Directorate (ED)The Nodal agency is crucial in safeguarding the nation's financial system by investigating serious economic offences where the crime proceeds are from predicted offences—corruption, fraud, organized crime, drug trafficking, environmental crime, and terrorism. Employing a risk-based approach, ED prioritises high-impact cases threatening economic stability/national security by tracing illicit funds, identifying shell companies, and dismantling complex laundering networks. ED supports and supplements global efforts in combating financial crime.Contributions during (2014-2024):April 2014-March 2024, ED initiated 5113 PMLA investigations (averaging 511 cases annually), filing 1332 Prosecution Complaints.FY2024-25 marked a remarkable achievement with 775 new investigations and 333 PCs filed, approx. INR 30,036 Cr assets provisionally attached (astonishing rise of 141%) and securing 34 individual convictions.By March 2025, INR 1,54,594 Cr in assets were under provisional attachment (with INR 15,261 Cr reconstitution across 30 cases during FY24-25). The process is expected to accelerate during FY25-26. Simultaneously, notable 1739 Prosecution Cases are currently at Trial with 47 decided cases. With only 3 acquittals on Merit, striking 93.6% conviction rate is commendable, reflecting the strengthened capabilities in Combating Money Laundering, showcasing its increasing efficacy in securing justice and financial integrity.National Investigation Agency (NIA)A Central Counter-Terrorism Law Enforcement Agency was established post 26/11 Mumbai attacks. As a professional investigation bureau, it adheres to international AML/CFT Standards. NIA sets standards of excellence in Counter Terrorism and national security investigations through a highly trained, partnership-oriented workforce. Serving as a vital intelligence hub, NIA deters existing and potential terrorist groups and individuals, thereby preventing potential attacks.To strengthen the national security, NIA has adopted a Multi-Pronged approach through major structural and collaborative initiatives:Establishment of the National Terror Data Fusion & Analysis Centre (NTDFAC) by NIA/Counter Terrorism Research Cell by the Government enhances investigative capabilities using Big Data analytics.Creation of Anti-Human Trafficking Division (AHTD), Anti-Cyber Terrorism Division (ACTD), and a Special Cell comprising legal experts to address emerging threats.Constitution of Terror Funding and Fake Currency (TFFC) Cell investigating Terror Funding and Fake Indian Currency Notes (FICN) cases.Collaborating with 26 nations and hosting the 2022 "No Money for Terror" conference reflects the global engagement.Capacity Building Programmes for its officers, police, and forces with foreign agencies and training law enforcement (including Bangladesh and Nepal police) on Fake Indian Currency Notes, fortify India's Counter-Terrorism framework. 40 Capacity Building programmes have trained State Police Forces (the first responders to any terrorist incident) on Counter Terrorism.The MoU between NIA and the National Forensic Science University strengthens Forensic Expertise.Since its inception, the NIA has registered 640 notable cases (pronounced judgment in 147 cases), achieving a striking conviction rate of 95.23%, thus reflecting the agency's investigation expertise and national security enforcement.Reserve Bank of India (RBI)RBI, a supreme regulator for banking and the financial system in India, is responsible for control, issuance, and maintenance of the supply of Indian Currency along with managing the country's main payment system and striving to promote India's Economic Development.The RBI sharply updates its Master Circulars/Directions to determine extensive KYC/AML/CFT norms and guidelines to be followed by the banks and other financial institutions (including NBFCs) with the aim of preventing them from being a channel for ML/TF.The guidelines cover the following crucial aspects:Develop a clear customer acceptance policyRisk ManagementRobust Customer Identification ProcedureCustomer Due Diligence, Beneficial Ownership Identification, On-Going/Enhanced and Simplified Due Diligence ProceduresTransaction MonitoringRecord ManagementReporting requirements to FIU-INDAppointment of Principal OfficerRequirements/obligations under International Agreements – Communications from International AgenciesReference: Master Direction – Know Your Customer (KYC) Direction, 2016 (Updated as on 14-08-2025)In October 2024, RBI issued guidelines on internal risk assessment for ML/TF risks for banks, NBFC's, and regulated entities to lay the foundation, methodology, and follow-up actions for internal risk assessments to identify and mitigate money laundering, terrorist financing, and proliferation financing risks across clients, geographies, products, and delivery channels.In April 2025, RBI signed an MoU with FIU-IND to enhance liaison efforts. The key aspects included designation of nodal officers for coordination, sharing relevant intelligence, establishing reporting procedures for regulated/reporting entities, outreach and training programs for the REs, skill enhancement, assessment of ML/TF risks and vulnerabilities, identifying red flag indicators signalling suspicious transactions, supervising and monitoring compliance with PMLA, its rules and RBI instructions, ensuring adherence to relevant AML/CFT international standards and hold quarterly meetings to discuss and exchange information on mutual interests.The Central Board of Direct Taxes (CBDT)The Income Tax Department combats tax evasion and avoidance. The Investigation Wing conducts search/seizures and surveys to locate undisclosed/unexplained incomes and assets. The DTAAs aid in detecting concealed foreign income. Reporting entities are mandated to file SFTs for high-value transactions, thereby providing a Crucial Tool in detecting Black Money. CBDT's financial intelligence supports India's compliance with International AML/CFT Standards, reinforcing transparency and accountability.The Central Board of Indirect Taxes and Customs (CBIC)CBIC robustly combats illicit financial activities, intercepting smuggling and controlling Narcotics. CBIC has introduced a Risk Management System for Imports by streamlining trade and interdicting high-risk shipments.The Department of Revenue has designated 'CBIC' as a PMLA 'Regulator' for the Dealers in Precious Metals and Stones and Real Estate Agents. DG-Audit, CBIC has issued guidelines on AML/CFT and Proliferation Financing for Real Estate Agents and Dealers in Precious Stones and Precious Metals. These mandates include client due diligence, transaction monitoring, record keeping, and suspicious transaction reporting to facilitate investigations. This multidimensional approach enhances transparency and national security.Securities and Exchange Board of India (SEBI)SEBI regulates securities and commodities market imposing vigorous AML/CFT compliance on market intermediaries through Master Circulars and guidelines, which include Client/Enhanced Due Diligence, Internal Control and Policies, Monitoring and Reporting of Suspicious/Cash Transactions to FIU-IND, record keeping, mandatory client account opening procedures, implementation of Group-wide AML/CFT Procedures, compliance with WMD Act and its Delivery Systems (Prohibition of Unlawful Activities) Act, 2005. SEBI AML/CFT Certificate Course is launched for Securities Intermediaries, enhancing market resilience, deterring financial malfeasance, and upholding global compliance standards.Insurance Regulatory and Development Authority of India (IRDAI)A Statutory Body covering the policyholder's interests and regulating, promoting, and enriching the systematic growth of the insurance sector in India. The provisions of PMLA extend to Life Insurers. The International Regulatory agencies underline the application of Anti-Money Laundering measures as a bedrock in battle against illicit activities.The IRDAI instructed insurers to upload individual and Legal Entity (LE) KYC records to the Central KYC Registry, maintain confidentiality of unique KYC Identifiers, and to periodically update existing KYC records, in line with PML Rules, with LEs compliance starting from 01-04-2021.In January 2025, an MoU was signed with FIU-IND to facilitate seamless intelligence sharing. The collaboration mandates procedures for reporting to FIU-IND, enhancing training programs, conducting assessments of AML/CFT risks prevalent in the insurance sector, upgrading skills in entities regulated by IRDAI, and identifying red flag indicators for Suspicious Transaction Reports. This strengthens insurance sector integrity through transparency, vigilance, and regulatory collaboration.Ministry of Corporate Affairs (MCA)Strengthens AML/CFT efforts by ensuring corporate governance and transparency, targeting Corporate Financial Frauds. Recent amendments lowered the beneficial ownership disclosure to 10%, aligning with Global AML/CFT practises thereby strengthening the identity of the ultimate owner and preventing hiding illicit funds via Shell Companies. Mandated record keeping (including backups) and regular compliances creates transparent financial trail.A formal MoU with FIU-IND enables seamless sharing of financial data. Inter-agency partnership enhances enforcement, accountability, and global financial integrity.National Bank for Agriculture and Rural Development (NABARD)NABARD and FIU-IND's MoU in September 2024In September 2024, an MoU was signed with FIU-IND to enhance PMLA Act compliance. The MoU laid down procedures for reporting to FIU-IND under the PML Rules, upgradation of AML/CFT skills, assessment of risks and vulnerabilities, identification of red flag indicators for Suspicious Transaction Reports (STRs), and supervision of compliance with obligations under the PMLA and NABARD Guidelines. The MoU also aimed to ensure compliance with international standards and to assess and upgrade the skills of regulated entities in AML/CFT.Financial Action Task Force (FATF)i. The role of the Financial Action Task Force (FATF)The Financial Action Task Force (FATF) is a globally recognised key independent inter-governmental body that develops and promotes policies (known as FATF Recommendations) to guard the global financial system against money laundering, terrorist financing, and the proliferation financing of weapons of mass destruction. Its Recommendations are recognised as the global Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) standard.ii. India's progress in AML/CFT and areas for strengthening: FATF Mutual Evaluation Report (September 2024)FATF Mutual Evaluation Report applauded India's efforts in tackling illicit finance, highlighting its strong technical compliance with FATF's Recommendations. A joint FATF-APG-Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) evaluation honoured India's effective AML/CFT framework, emphasising the utilisation of financial intelligence and advancements in financial inclusion. Classified under the 'Regular Follow-up' Category by FATF alongside the UK, France, and Italy within the G20, India was praised for the risk management and preventive measures adopted by commercial banks. India has excelled in international co-operation, asset recovery, and financial sanctions for proliferation financing.However, the report spotted the areas requiring intensified efforts. The report urged strong prosecutions and sanctions for terrorist financiers, imposition of cash restrictions on precious metals and stones dealers (being a sensitive sector), strengthening risk-based measures to prevent NPO misuse for terror financing, and full compliance with Politically Exposed Persons (PEP) regulation to bolster financial security and mitigate risks involved.iii. India's Recent Collaborative/Capacity Building Initiatives1. Private Sector Collaborative ForumThe 2025 FAFT Private Sector Collaborative Forum (PSCF), hosted by RBI and MCA in Mumbai (25th-27th March 2025) stressed on Public-Private Partnerships to combat Financial Crime. Over 200 participants, including representatives from international banks, Fintechs, gatekeepers, and civil society, discussed money laundering, terror/proliferation financing, payment transparency, data protection, risk-based approaches, and beneficial ownership. FATF President, Elisa de Anda Madrazo, emphasised collaboration between the public and private sectors. RBI Governor, Shri Sanjay Malhotra, underscored collaboration and innovation for a safer, secure, fast, convenient, accessible, and affordable financial ecosystem. Highlights included—proposed FAFT Standard 'Travel Rule' revision, tripartite dialogue on NPO financial access, and WMD financing through global cooperation.2. Capacity Building Programme for Central Asian Republics on CFTThe Department of Revenue, in collaboration with the Ministry of External Affairs and National Security Council Secretariat, hosted the inaugural Capacity Building Programme for Central Asian Republics (CARs) (21-22 April 2025) on 'Countering the Financing of Terrorism (CFT) through Cryptocurrencies, Crowdfunding and Non-Profit Organisation'. Experts from Uzbekistan, Turkmenistan, Kazakhstan, Tajikistan, and Kyrgyzstan exchanged knowledge and advanced regional cooperation in countering terrorism financing led by experts from the FATF Cell of the Department of Revenue, Ministry of Home Affairs, NIA, and FIU-IND. Experts from the Eurasian Group (EAG) and the FATF-style Regional Body (FSRB) provided valuable AML/CFT insights regarding NPO/Virtual Assets.Tailoring to Central Asian needs, discussions covered Financial Intelligence in terrorism investigations, risks from misuse of Virtual Asset Service Providers (VASPs), radicalization financing, Crowdfunding and NPOs misuse for terrorist activities. The initiative strengthens Counter-Finance and Global dedication.Technical Advancements and Measures to Strengthen India's AML/CFT Framework1. Digital KYC for REsDigital KYC involves capturing the live photo (along with the Latitude and Longitude of the location) of the customer by the authorised officer of the Reporting Entity in compliance with the provisions, alongside officially valid document/the proof of Aadhaar possession in situations where offline verification is not viable. RBI has directed RE to develop a secure and authenticated application specifically for the digital KYC process, accessible across all customer touch points, ensuring that the KYC process is exclusively conducted through this approved platform.2. FINnet 2.0FIU-IND developed Financial Intelligence Network 2.0 (FINnet 2.0), an advanced AI-Machine Learning integrated IT system escalating AML/CFT efforts by flagging high-risk cases for immediate actions through risk scores generated for individuals, businesses, reports, networks, and cases. It enhances Financial Analysis by applying a Natural Language Processing system. The Sub-systems are:FINGate – Collects data from REs,FINCore – Uses AI and Machine Learning for summary generation and risk analysis,FINex – Disseminates Financial Intelligence to investigate and intelligence organisations for timely action.Existing entities on FINnet 1.0 must re-register on FINnet 2.0, while new entities require immediate registration. Non-Compliance prompts a violation of the act and regulations.3. Central KYC Records Registry (CKYCR)A Centralised repository for KYC records, which streamlines the KYC Process and reduces duplication. The 2015 amendment to PML (Maintenance of Records) Rules, 2005 requires every reporting entity to electronically file the client's KYC records with the CKYCR within 10 days of the establishment of a client-based relationship.India strengthens its financial integrity with digital innovation, streamlined regulations, inter-agency collaboration, and inclusive compliance enforcement.Challenges due to Judicial BacklogsThe May 2025 annual report of the ED highlighted that despite 100 special PMLA courts across the country, Money Laundering trials face several "systematic" and "procedural" hurdles. The primary challenge is the intrinsic linkage between the prosecutions of ML cases and the progress of the investigation/trial of the corresponding predicate offense. Delays in these primary proceedings invariably impact the PMLA trial.PMLA investigations involve complex financial structures, large volumes of financial data, and cross-border transactions necessitating intensive forensic analysis and extensive documentation, prolonging scrutiny.ConclusionIndia is progressing positively to combat illicit finance with its AML/CFT infrastructure undergoing a significant transformation, and by enhancing its domestic and international alliances. Yet continuous enhancement persists. Laws require continuous updating to combat emerging methods of Money Laundering and Terrorist Financing, especially those involving Fintech platforms and Virtual Assets.Securing the financial system and national security effectively requires providing ongoing training to enforcement and regulatory agencies and technological modernisation. Improved collaboration between FIU-IND, ED, NIA, SEBI, and RBI is also crucial. To boot, Financial Institutions require clear guidance and shared intelligence to actively participate in India's AML/CFT efforts.ReferencesAnnual Report – ED FY 2024-25PIB (Finance Ministry) – Capacity Building Programme for Central Asian Republics on CFT (22-04-2025)PIB (Ministry of Home Affairs) (11-02-2025)PIB (Finance Ministry) – FATF Private Sector Collaborative Forum (24-03-2025)Master Circular on AML/CFT, Ref No-IRDAI/SDD/GDL/CIR/175/09/2015 (29-09-2015)PIB (Finance Ministry) (MoU between RBI-FIU-Ind) (17-04-2025)PIB (Finance Ministry) – FATF MER (19-09-2025)PIB (MHA) – National Investigation Agency (11-12-2024)ICAI Article – Financial Intelligence Unit of India Leveraging AI to Combat Money LaunderingInternal Risk Assessment Guidance for Money Laundering/Terrorist Financing Nov/Dec 2024Author may be reached at casonia.ks1988@gmail.com and eboard@icai.inThe Chartered Accountant • March 2026 • www.icai.org
Financial Market
Ep. 70 — Cracking the Code of Credit Ratings: Practical Insights for Businesses and CAs
CA Journal
· July 2026
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Cracking the Code of Credit Ratings: Practical Insights for Businesses and CAsIn today's credit-driven economy, businesses of all sizes require external funding to expand operations, invest in new projects, or manage working capital. A crucial enabler in accessing this capital at favorable terms is a good external credit rating. Assigned by independent credit rating agencies, this rating evaluates a company's ability to meet its financial obligations.A strong credit rating offers numerous benefits, including access to lower interest rates, increased investor confidence, and enhanced market reputation. Credit rating agencies rely on comprehensive methodologies that include financial performance, business risk, operational efficiency, management quality, and industry outlook.Chartered Accountants (CAs), with their deep financial and regulatory expertise, play a critical role in preparing businesses for the credit rating process. From preparing robust documentation to guiding strategic improvements and acting as liaisons with agencies, their contribution can significantly impact the final rating outcome.This article explores the fundamentals of external credit rating, methodologies adopted by agencies, how financial ratios play a role, and how CAs can support businesses throughout the journey.Introduction to External Credit RatingAn external credit rating is a formal, independent opinion on a borrower's creditworthiness, issued by a recognized Credit Rating Agency (CRA). It serves as a vital tool for lenders and investors to assess the risk associated with lending to or investing in a particular company.In India, key agencies include CRISIL, ICRA, CARE Ratings, and India Ratings & Research. Globally, agencies like Moody's, Standard & Poor's (S&P), and Fitch are prominent.Credit ratings are typically expressed in letter grades (e.g., AAA, AA, BBB, BB, etc.), where higher grades indicate better creditworthiness. These grades may also include modifiers like “+” or “–” for finer differentiation.Grades of Credit Ratings and their TypesCredit rating agencies use alphanumeric symbols to assign grades that reflect the creditworthiness of a borrower or financial instrument. These grades are broadly classified into investment grade and speculative (or junk) grade, with separate scales for long-term and short-term instruments.Long-Term Credit Rating ScaleUsed for instruments with a maturity period exceeding one year (e.g., bonds, debentures, term loans).Rating GradeMeaningCredit QualityAAAHighest safety; negligible credit riskInvestment GradeAAHigh safety; very low credit riskInvestment GradeAAdequate safety; low credit riskInvestment GradeBBBModerate safety; moderate credit riskInvestment Grade (lowest tier)BBModerate risk of defaultSpeculative GradeBHigh risk of defaultSpeculative GradeCVery high risk; near defaultSpeculative GradeDDefault or expected to defaultDefault GradeEach category from AA to B may have a “+” (plus) or “–” (minus) to show relative standing within the category.Example: AA+, AA, AA–Short-Term Credit Rating ScaleUsed for instruments with a maturity period of less than one year (e.g., commercial papers, working capital loans).Rating GradeMeaningCredit QualityA1+Highest degree of safetyInvestment GradeA1Very strong capacity to meet obligationsInvestment GradeA2Strong capacity; marginally lower safetyInvestment GradeA3Moderate safetyInvestment GradeA4Inadequate safety; high riskSpeculative GradeDDefaultDefault GradeSME Credit Rating Scale (By Indian Rating Agencies)Used for Micro, Small & Medium Enterprises (MSMEs) to assess creditworthiness for bank loans and government schemes.SME RatingMeaningSME 1Highest level of creditworthinessSME 2High level of creditworthinessSME 3Good creditworthinessSME 4–5Moderate creditworthinessSME 6–8Weak to poor creditworthinessSovereign Credit Rating Scale (For Countries)Used to assess the ability of a government to repay debt. Issued by global agencies like Moody's, S&P, and Fitch.AgencyInvestment GradeSpeculative GradeS&P / FitchAAA to BBB–BB+ to DMoody'sAaa to Baa3Ba1 to C“Credit rating agencies use alphanumeric symbols to assign grades that reflect the creditworthiness of a borrower or financial instrument. These grades are broadly classified into investment grade and speculative (or junk) grade, with separate scales for long-term and short-term instruments.”Why Credit Ratings Matter in Business FinancingCredit ratings serve as a shorthand for a company's financial health and repayment capability. Here's why they are so critical:Access to Cheaper Credit: Lenders rely heavily on credit ratings when determining interest rates. A higher credit rating reduces the perceived risk, enabling banks and financial institutions to offer loans at lower interest rates.Improved Loan Sanction Chances: Even if credit is available to an unrated or poorly rated company, the process is more stringent, slower, and often comes with stricter terms and higher collateral requirements.Increased Investor Confidence: Institutional investors often require a minimum credit rating before considering investment. A strong rating widens the investor base and allows participation in capital markets through bonds or commercial papers.Regulatory Compliance: In many cases, regulators and exchanges require credit ratings for issuing debt instruments or for listing securities. This is especially true for non-convertible debentures, bonds, and structured finance products.Business Reputation and Transparency: Ratings reflect sound financial practices and corporate governance. A consistently good rating enhances brand value and builds trust with suppliers, customers, and partners.Methodology Used by Credit Rating AgenciesWhile each credit rating agency has its own proprietary model, their methodologies typically include both quantitative and qualitative assessment. Here's a breakdown:a) Business Risk ProfileIndustry Risk: Is the industry cyclical, growing, or facing regulatory challenges?Competitive Position: Market share, pricing power, and barriers to entry.Revenue Diversity: Concentration risk across clients, geographies, or product lines.b) Financial Risk ProfileHistorical and Projected Financials: Revenue, profit margins, and growth.Leverage: Capital structure, debt-equity ratio.Cash Flow Adequacy: Whether operational cash flows are sufficient for debt servicing.c) Operational EfficiencyProductivity, fixed asset turnover, and capacity utilization are examined to judge the efficiency of resource deployment.d) Management and GovernanceManagement track record: Experience, strategic direction, and responsiveness.Governance: Board independence, audit practices, and related party transactions.e) Legal and Regulatory EnvironmentImpact of pending litigation, compliance issues, or regulatory action.f) Macroeconomic FactorsOverall economy, currency risk, and sector-specific economic indicators.g) Rating Committee DecisionAfter all analysis, a Rating Committee, usually composed of senior analysts and sector experts, reviews the case and assigns the final rating.Role of Financial Ratios in Credit RatingFinancial ratios are fundamental to the quantitative part of the credit rating process. Refer to the table provided below representing the key categories.Ratio CategoryRatio NameIdeal BenchmarkSignificancea) Leverage RatiosDebt-to-Equity RatioBelow 3:1 (varies by industry)Measures long-term solvency and financial leverage. Lower ratio = stronger capital structure.TOL / TNWBelow 4:1 (depends on sector)Reflects overall leverage; includes total liabilities vs. tangible net worth.b) Liquidity RatiosCurrent Ratio1.33:1 and aboveIndicates ability to meet short-term obligations using current assets.Quick Ratio1:1 or higherMore stringent test of liquidity; excludes inventory.c) ProfitabilityEBITDA MarginIndustry-dependentMeasures operational efficiency before interest, tax, depreciation, and amortization.Net Profit MarginPositive and consistentIndicates how much of revenue is retained as profit after all expenses.Return on Capital Employed (ROCE)Industry-dependentShows how effectively the company uses capital to generate profits.d) Coverage RatiosInterest Coverage Ratio (ICR)Above 2.5–3xShows ability to service interest obligations; higher is safer.Debt Service Coverage Ratio (DSCR)Minimum 1.25xReflects ability to repay both interest and principal from operational cash flows.e) Cash Flow MetricsFree Cash Flow to Firm (FCFF)Should be positive & consistentIndicates availability of internal cash to support operations and investments.Operating Cash FlowStable & positive vs. net incomeMeasures actual cash generation from core business operations.Maintaining favourable financial ratios can greatly improve or sustain a company's credit rating.Role of Chartered Accountants in Credit Rating ProcessChartered Accountants bring strategic, analytical, and compliance expertise to businesses undergoing the rating process.Step 1: Pre-Rating PreparationFinancial Health AnalysisSimulating Rating OutcomesIdentifying WeaknessesStep 2: Documentation & ReportingAudited Financial StatementsBusiness Plans & ProjectionsProject ReportsInternal Control DocumentationStep 3: Ratio Optimization & AdviceRestructuring Debt to improve leverageWorking Capital EfficiencyMargin & Cost Structure EnhancementsStep 4: Liaison with AgenciesMeetings with AnalystsHandling QueriesProviding ClarificationsStep 5: Post-Rating MonitoringOngoing Compliance MonitoringAddressing Triggers for DowngradesReadiness for Periodic ReviewsRegulatory and Market TrendsSEBI & RBI Regulations: Mandate credit ratings for certain instruments like commercial papers, NCDs, and structured obligations.MSME Focus: Various government schemes offer interest subsidies for MSMEs with external ratings.ESG Considerations: Many rating agencies now include Environmental, Social, and Governance (ESG) metrics in their frameworks.Technology and Data Analytics: CRAs are increasingly adopting AI tools and automated financial monitoring.Tips & Tricks for a Company to Achieve an Investment Grade Credit Rating(Investment grade = AAA to BBB-/Baa3 by rating agencies)Achieving an investment grade credit rating is a strategic goal that significantly reduces borrowing costs, boosts investor confidence, and improves market reputation. While the final rating is at the discretion of the rating agency, companies can take proactive measures to optimize their financial profile and transparency to influence the rating positively.1. Strengthen Financial RatiosCredit rating agencies put heavy emphasis on financial ratios. Here's how to improve them:a. Leverage RatiosKeep Debt-to-Equity (D/E) ratio low.TOL/TNW (Total Outside Liabilities to Tangible Net Worth): Keep it under control by reducing external liabilities.TipsUse retained earnings to fund expansion instead of debt.Repay high-cost loans early.b. Liquidity RatiosMaintain Current Ratio above 1.33 and Quick Ratio above 1.0.Have adequate working capital margins.TipsMonitor receivables and inventory cycles.Avoid overtrading and stretch supplier credit carefully.c. Profitability RatiosImprove EBITDA margins, Net Profit Margins, ROCE, and ROE.Margins reflect pricing power and cost efficiency.TipsInvest in automation, better vendor management, and product differentiation.Avoid frequent one-time losses.d. Coverage RatiosEnsure Interest Coverage Ratio (ICR > 2.5x) and DSCR > 1.5x.These reflect the ability to meet debt obligations.TipsRestructure existing loans for longer terms if DSCR is low.Keep EMI schedules in line with cash flow projections.2. Establish Robust Internal Controls and GovernanceA well-managed company is a safer bet for lenders.TipsForm an active Board with independent directors.Implement ERP software or MIS systems for real-time data and controls.Follow transparent accounting standards and get audits done by reputed firms.Document risk management policies and internal controls.3. Improve Cash Flow VisibilityAgencies value businesses with predictable and stable cash flows.TipsEnter into long-term contracts or repeat orders with clients.Reduce volatility in revenues by diversifying products or geographies.Maintain consistent operating cash flows even during low seasons.4. Maintain Clean Credit & Compliance Track RecordTipsAvoid defaulting on any statutory dues (GST, PF, TDS).Ensure timely loan repayments; even minor delays can hurt ratings.File all returns and statements regularly (ROC, Income Tax, etc.).5. Prepare a Strong Business Plan with Future OutlookAgencies assess forward-looking capabilities, not just historical performance.TipsCreate a clear business plan with revenue forecasts, capex needs, and funding structure.Highlight competitive advantages and market position.Include SWOT analysis and stress testing (e.g., impact of a demand drop).6. Optimize Capital StructureTipsKeep equity levels strong relative to debt.Convert some debt into equity or quasi-equity (like CCDs or preference shares).Use less risky funding instruments like ECBs, lease financing, or vendor credit.7. Maintain Industry Benchmarks and Peer ComparisonsAgencies evaluate you relative to industry peers.TipsTrack and match industry-average ratios.Benchmark costs, debt levels, and ROCE.If you're a market leader or innovator, highlight this explicitly.8. Avoid Red Flags that Lower RatingsDon'tsFrequent restructuring of debt.Reliance on promoter loans without documentation.Delay in publishing audited results.Aggressive expansion without stable cash flow backing.CruxAchieving an investment-grade credit rating is not just about numbers; it's about sound business practices, transparency, financial discipline, and strategic clarity. With consistent efforts and professional guidance, companies of all sizes, including MSMEs, can earn and maintain a favourable rating that unlocks better funding and growth opportunities.Conclusion and Way ForwardExternal credit ratings are more than just a regulatory checkbox — they are a reflection of a company's financial health, transparency, and future potential. For growing businesses, especially MSMEs, obtaining and maintaining a favorable credit rating can unlock significant financial advantages.“Chartered Accountants, as trusted financial advisors, can guide the credit rating process from start to finish. Their role is vital not only in helping businesses secure funding but also in establishing long-term financial discipline.”As rating methodologies evolve and become more sophisticated, businesses that invest in strong financial practices, compliance, and transparency — with expert support — will be best positioned to benefit.ReferencesSEBI (Credit Rating Agencies) Regulations, 1999RBI credit risk guidelines and Basel normsMSME schemes: CGTMSE, SIDBI programs, Interest SubventionRating methodologies from Indian agencies: CRISIL, ICRA, CARE, India RatingsGlobal frameworks: Moody's, S&P, Fitch RatingsRatio analysis: liquidity, leverage, profitability, coverageBest practices: financial structuring, internal controls, corporate governanceRole of Chartered Accountants as rating advisorsPractical insights from real-world consulting, audit, and financial managementAuthor may be reached at joshiritik037@gmail.com and eboard@icai.inThe Chartered Accountant • Financial Market • March 2026 • www.icai.org
MSME
Ep. 71 — Evaluating the Role of the Ministry of Food Processing Industries in Strengthening India’s Food Processing Ecosystem
CA Journal
· July 2026
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Evaluating the Role of the Ministry of Food Processing Industries in Strengthening India’s Food Processing EcosystemThe Ministry of Food Processing Industries (MoFPI) was established to enhance food processing and reduce post-harvest waste in India, add value to farm produce goods, offer employment opportunities, and empower farmers’ incomes. This article is a brief discussion on the role of MoFPI, its key schemes, and the socio-economic significance of food processing in India. The flagship interventions by the ministry include the Pradhan Mantri Kisan SAMPADA Yojana (PMKSY), the PM Formalisation of Micro Food Processing Enterprises (PMFME), and the Production Linked Incentive Scheme for Food Processing Industry (PLISFPI) along with the Mega Food Park scheme, which help in the provision of infrastructure, incentives and capacity building to formalize and scale up processing units throughout the country. Such efforts have led to increased value addition, greater efficiency in the supply chain and increased exports of processed foods. Nonetheless, challenges such as a lack of cold chain and transport infrastructure, fragmentation of the supply chain among smallholders, state-level regulatory compounding, uneven implementation across states, and financing constraints faced by micro and small enterprises are still encountered in the sector.The article compares the benefits, such as income diversification for farmers, wastage minimization, job creation, and export potential, with drawbacks and limitation in the operation. It also proposes policy suggestions such as investment, specifically in the creation and preservation of food processing capacities, cold chains, making credit and packaging technology accessible to micro-enterprises, strengthening linkages between farmer-producer organisations and processors, and the simplification of commercialisation processes. Thus, with a sustained focus on infrastructure, technology adoption, and market linkages, MoFPI can achieve significant social and economic returns for India, as long as policies are framed to address on-the-ground bottlenecks and are implemented in a region-sensitive manner.MoFPI and Its Role in the Indian EconomyThe agricultural commodities produced by India are enormous in number, and a significant proportion of all the produced commodities is sold in raw form or lost due to spoilage before reaching the consumers. To fill this gap, the Ministry of Food Processing Industries (MoFPI) was established to reduce this gap through the enhancement of value addition, the development of processing infrastructure and the improvement of the food supply chain. The ministry seeks to reduce post-harvest losses, increase farmers’ earnings, generate employment, and increase exports of processed foods. The significance of the sector has increased due to increasing income levels, changing diets, urbanisation, retail, and expanding markets via exports. Organised programmes and incentives offered by MoFPI are focal in ensuring that the production of raw agricultural output is partly transformed into processed products that match both international and domestic standards.The Chartered Accountants play an essential role in the schemes offered by the Ministry of Food Processing Industries (MoFPI) related to grants and subsidy programs, which require assuring financial assurance and ensuring that funds are utilised well.The functions of MoFPI include policy support, infrastructure and enterprise development schemes, and food processing and state coordination. It has major schemes such as:Pradhan Mantri Kisan SAMPADA Yojana (PMKSY): A comprehensive scheme for creating processing units and clusters, cold chains, and infrastructure for perishables. It aims to create modern infrastructure with efficient supply chains.PM Formalisation of Micro Food Processing Enterprises (PMFME): Focused on micro enterprises, it promotes credit-linked support, branding, and common facilities to formalize and scale micro food processors.Production Linked Incentive Scheme for Food Processing Industry (PLISFPI): Designed to build globally competitive food manufacturing champions in India by incentivizing value-added food production.Mega Food Parks and other infrastructure schemes: These provide end-to-end infrastructure for aggregation, processing, and marketing to link farmers with processors and markets.Recent government press releases and budget allocations indicate continued financial assistance and targeted disbursement under these schemes to speed up processing infrastructure and formalisation. For example, the ministry has reported substantial disbursements under flagship programmes to support rural economies.India has long grappled with substantial post-harvest losses, particularly in perishable commodities, which not only undermine food security but also result in the inefficient use of agricultural produce. It is critical to develop infrastructure capacities like cold chains, pack-houses, and processing units that can prevent waste and expand shelf life. In addition to the intended waste minimisation, food processing also increases value addition substantially, with farmers and processors turning raw produce into products with high margins, such as using mangoes to make mango pulp or manufacture mango sauce. Such value addition is not only able to achieve improved price realisation, but also reduces dependence on fluctuating raw-commodity markets.Additionally, the food processing industry is labour-intensive by nature, bringing employment at various levels, such as collection, sorting, processing, packaging and cargo. Its growth presents ample prospects in rural and semi-urban employment generation activities as an alternative means of livelihood alongside traditional farming activities. The socio-economic significance of food processing has recently been seen in government figures that show millions of people working in registered and unregistered food processing units. Exports of processed foods have a better foreign exchange income on a global scale than raw commodities. The processed food exports of India have been soaring, creating numerous national brands and providing opportunities to enhance trade balances by minimizing reliance on imported processed goods. Aligning with India’s Mission of “Atmanirbhar Bharat”, the expansion of local processing capacity is, therefore, central to the realization of the full potential of economic and developmental prospects in the sector.Advantages of MoFPI InterventionsInfrastructure Development: Support in the form of subsidies, grants, and public–private partnerships under schemes such as PMKSY and Mega Food Parks has resulted in the establishment of new processing capacities, pack houses, and cold storage facilities. These measures have helped minimize post-harvest losses at the local level and enhance the resilience and efficiency of local agricultural supply chains.Support to Micro and Small Enterprises: The PMFME scheme supports micro-enterprises and producer groups by giving subsidies in the form of credit, training, and branding. This promotes formalization and allows entry into markets and access to institutional buyers for micro-units.Use of Technology and Advancements in Quality: Subsidies for modern machinery, cold chains, and packaging enable small and medium processors to be compliant with food safety and export standards so that Indian processed foods have a greater marketability. For example, PLISFPI promotes higher-value manufacturing.Value-chain Integration: Mega Food Parks and cluster-based interventions assist in aggregating farmers’ produce, connecting them with processors and reducing transaction costs. The models have the potential of eliminating exploitation of middlemen and stabilizing supplies of processors.Employment and Rural Development: Interventions that promote local processing diversify economic activity in rural areas and provide non-farm employment, which is particularly useful in under-employed agricultural areas.Disadvantages and ChallengesDespite progress, significant issues remain including inadequate cold-chain and refrigerated transport capacity, fragmented farm production, limited credit and technical support for micro-enterprises, complex regulatory compliance, uneven implementation across states, and exposure to market risks such as fluctuating prices and import competition.Evidence of ImpactAccording to recent government reporting and other global studies, investments has increased, and exports of processed food have been on the rise. For instance, MoFPI schemes have enabled numerous initiatives under PMKSY with high levels of grant aid, and national figures indicate increasing proportions of processed-food exports and employment in both registered and non-registered divisions. These indicators suggest positive growth trends and raise the possibility of further investment and reform that can achieve a greater level of growth in the sector.Policy Recommendations and Practical StepsA multi-pronged strategy is key to the implementation of MoFPI to maximize positive impacts and address existing challenges. First and foremost, cold-chain investments need to be focused on where it matters by having public investments and concessional finance targeted for refrigerated transport, rural pack-houses, and temperature-controlled storage, particularly in high-wastage zones such as horticulture belts and dairy corridors. This will serve to reduce post-harvest losses and stabilize supply chains.It is also important to enhance aggregation of farmers through Farmer Producer Organizations (FPOs) and cooperatives so that farmers can deliver reliably to processors and enjoy a larger value share. Contract farming and producer-processor collaborations with equitable and transparent risk-sharing agreements should be encouraged in an effort to include producers even more in the value chains. In the case of micro-enterprises, simplification of regulations by designing tiered, risk-based rules and developing streamlined pathways and systems through which basic hygiene approvals can be secured quickly and cheaply, coupled with the availability of shared facilities, will make a big difference in terms of entry barriers. Access to affordable credit will also have to be increased with the help of blended financing schemes, product-specific lending products, and guarantee schemes targeting food processing.Schemes are needed to assist small units to build brands, access e-commerce platforms, and contact institutional buyers as well as “India-made” brands to be promoted, with relevant incentives and facilitation of exports in processed food. Lastly, the actualization of better data collection of district and state level post-harvest losses and processing capacity will permit better-targeted interventions. Enhanced central and state government coordination will assist in eliminating regional inequalities and in guaranteeing uniform execution throughout the nation.Role and Achievements contributed by Chartered Accountants in the MoFPIThe Chartered Accountants play an essential role in the schemes offered by the Ministry of Food Processing Industries (MoFPI) related to grants and subsidy programs, which require financial assurance and effective utilisation of funds. Applicants under schemes such as Operation Greens and the Creation/Expansion of Food Processing & Preservation Capacities (CEFPPC) must provide certificates issued by Chartered Accountants. These certificates ensure the validation of key factors such as the expenditure of 2/3rd of the project cost on authorised components, 10% or even 100% of the project cost, as required, and that expenditure on unsecured loans or bridge loans have been properly certified and PAN numbers of lenders have been disclosed.These certifications are an effective way to ensure financial transparency, prevent the misuse of funds belonging to the state population and allow MoFPI to manage its programs successfully. Contributions of Chartered Accountants are not commonly featured as direct accomplishments, yet their role is clearly reflected in the seamless operation of MoFPI programmes. By facilitating adequate financial compliance, providing credible reporting on fund utilization, and promoting transparency in lending practices related to the projects, Chartered Accountants contribute to the strengthening of regulatory oversight and the enhancement of the credibility of the ministry. By doing this, they maintain financial discipline and play an important role in the success of food processing programs in the nation.Future Role of Chartered Accountants in MoFPIChartered Accountants (CAs) can contribute to a greater extent in assisting the Ministry of Food Processing Industries (MoFPI) in the future. In addition to issuing certificates, they are able to do yearly financial audits of projects to ensure that the funds are utilized appropriately and that businesses are financially stable. They can also educate small businesses and Farmer Producer Organisations (FPOs) on simple accounting and reporting to ensure that those who are covered in schemes such as PMFME are more adept at the financial management of their businesses.Their knowledge and expertise can also help CAs advise MoFPI to develop simpler and more cost-effective rules for grants and compliance which would facilitate faster releases of funds and easier payments. Another significant area is digitalization, where CAs can assist in creating systems to submit and validate certificates online, in particular, with respect to project costs and loan information, thereby saving time and effort. Lastly, CAs have the ability to evaluate project-related risks and propose means of mitigating it, enabling MoFPI to make better decisions regarding the allocation of financial resources. Through such roles, CAs can expand their focus beyond verification and emerge as strategic partners, making MoFPI schemes more effective and impactful.Recent Developments and Current StatusAn integrated summary of the new events and the prevailing position of the food processing industry in India is provided, based on similar and publication-quality information in the government sources. This analysis is chronologically organized in terms of year and includes major trends of the budgetary allocations, program implementation, sectoral performance and results of flagship projects carried out by the Ministry of Food Processing Industries (MoFPI). It has been synthesized and presented in a transparent, consistent and clear manner to aid a rigorous research and policy-driven analysis of the changing path of the sector and its potential future growth.Tremendous gains in cold-chain capacity building, operationalisation of Mega Food Parks, as well as financial support to micro and small business, especially in rural and semi-urban areas was achieved by 2023-24.In recent years, the Ministry of Food Processing Industries (MoFPI) has become much more policy-oriented in terms of infrastructure development, enterprise formalisation, and export-orientation. According to government statistics and budgetary requirements, there is a growing trend in the government spending on flagship programs like Pradhan Mantri Kisan SAMPADA Yojana (PMKSY), PM Formalisation of Micro Food Processing Enterprises (PMFME), and the Production Linked Incentive Scheme of Food Processing Industry (PLISFPI). Tremendous gains in cold-chain capacity building, operationalisation of Mega Food Parks, as well as financial support to micro and small business, especially in rural and semi-urban areas was achieved by 2023-24. World Food India 2023 further showcased India as a more attractive location in the global food processing sector, attracting substantial investment and foreign participation. The 2025-26 Budget Estimates support this trend, continuing the focus on technology adoption, capacity building, institutional support, and strengthening the value-chain links. These changes point to the fact that interventions by MoFPI are slowly shifting from policy formulation to on-ground implementation, although regional difference and implementation issues still exist.ConclusionThe Ministry of Food Processing Industries plays a strategic role in the efforts made by India to transition its economy from a predominantly agrarian-based to a value-based agri-food system. Through specific programs for infrastructural development, MoFPI has helped in the reduction of post-harvest losses, formalisation of enterprises and incentive-based production, thus increasing income opportunities for farmers, creating non-farm jobs, and expanding the export opportunity of processed food in India.Most of the recent developments under flagship programmes with the support of higher budgetary allocations and policy continuity implies a slow enhancement of the food processing ecosystem. Nevertheless, systematic issues associated with cold-chain lapses, a disjointed supply chain, regulatory complexity, and asymmetric state-level practices continue to limit the best possible results. Going forward, long-term investments, less complex compliance systems, better connections between farmers and processors, and area-specific implementation will be key to maximizing the socio-economic benefits of MoFPI initiatives. The programmes of the ministry can be decisive in establishing resilient, inclusive, and globally competitive agri-food value chains in India with the co-ordinated efforts of policymakers, industry players, and professionals like the Chartered Accountants.ReferencesPMFME – Welcome to PMFME-MOFPI, PMFME (Gov’t of India), https://www.pmfme.mofpi.gov.in/ (last visited Aug. 8, 2025).Ministry of Food Processing Industries, Production Linked Incentive Scheme for Food Processing Industry (PLISFPI), Ministry of Food Processing Industries (Gov’t of India), https://www.mofpi.gov.in/en/PLISFPI/central-sector-scheme-production-linked-incentive-scheme-food-processing-industry-plisfpi (last visited July 27, 2025).Ministry of Food Processing Industries, Mega Food Park, Ministry of Food Processing Industries (Gov’t of India), https://www.mofpi.gov.in/en/Schemes/mega-food-parks (last visited Aug. 5, 2025).SAMPADA Portal / PMKSY Scheme Management System, Ministry of Food Processing Industries, https://sampada-mofpi.gov.in/ (last visited July 28, 2025).Press Information Bureau, PIB Press Release — PLISFPI / PMKSY Updates, Press Information Bureau (Gov’t of India), https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2081393 (last visited Aug. 10, 2025).Ministry of Food Processing Industries, Evaluation Report — Mega Food Park Scheme (Evaluation Report PDF), https://www.mofpi.gov.in/sites/default/files/evaluation_report_mega_food_park.pdf (last visited Aug. 11, 2025).PMFME, PMFME Success Story — Sindh Dairy Product, PMFME Newsletters / Success Stories, https://www.pmfme.mofpi.gov.in/newsletters/success_stories/SindhDairyProduct.html (last visited July 28, 2025).PLISFPI Portal (Implementation), PLISFPI / IFCI Portal, https://plimofpi.ifciltd.com/ (last visited Aug. 11, 2025).Author may be reached at eboard@icai.in
Direct Tax
Ep. 72 — Indexation- Restored or Redesigned
CA Journal
· July 2026
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Indexation — Restored or Redesigned?The Finance (No. 2) Act, 2024, initially led many to believe that indexation benefits had been restored for long-term capital gains on land and buildings — creating an illusion of relief. However, a closer look reveals that while the second proviso to Section 112(1)(a) offers a tax cap through a notional comparison with the pre-amendment regime, actual capital gains computation no longer includes indexed costs. This inflates taxable income, leading to loss of the rebate and exposure to surcharge if income exceeds ₹50 lakh. Furthermore, capital losses arising due to indexation are no longer recognized, eliminating the option for carry forward or set-off.It has been nearly a year since the Finance (No. 2) Act, 2024, reshaped the Indian tax landscape, and yet, one provision continues to spark debate among tax professionals and taxpayers alike — ‘The Indexation’. While the Act spanned reforms across personal income tax, corporate taxation, green initiatives, and digital compliance, the most significant and far-reaching impact has arguably emerged in the domain of capital gains taxation, which has seen a historic shift in both computation and taxation.The Finance Bill (No. 2), 2024, had proposed to withdraw the indexation benefit altogether. However, what eventually found its way into the final Act was more calibrated: a tax liability cap that simulates relief.It may look like indexation has returned — but has it, really?Evolution of Indexation: A Quick RecapThe concept of indexation has matured significantly since its inception in Indian tax law. It was first implemented in the 1992 Budget, following recommendations from the Raja Chelliah Committee, which sought to rationalise the taxation of long-term capital gains (LTCG) by accounting for inflation. The government introduced the Cost Inflation Index (CII), with 1981-82 as the base year (index value = 100), allowing taxpayers to adjust the cost of acquisition and improvement for inflation. This ensured that only real gains and not nominal increases, due to inflation, were taxed. In 2001, the government shifted the base year for indexation from 1981 to 2001 to simplify valuation and align it with more accessible historical data.More recently, the year 2024 saw a significant policy shift, with the gradual withdrawal of indexation benefits culminating in the Finance (No. 2) Act, 2024, which eliminated indexation for all capital assets in gain computation.But a pertinent question remains: Even after its withdrawal, does indexation persist in a different form?Demystifying the ConceptAt first glance, the final provisions led to a wave of optimism among taxpayers and professionals, with many interpreting them as a revival of indexation for long-term capital gains (LTCG). This perception stemmed from the shift between the original Finance Bill, which had proposed a complete withdrawal of indexation, and the enacted law, which introduced a tax liability cap on the sale of land & buildings by resident individuals and HUFs.But as is often the case in taxation, the devil lies in the details. The truth is more nuanced and a bit trickier than what the headlines suggest.Traditionally, Section 48 of the Income-tax Act, 1961, has governed the indexation in the computation of capital gains. It allowed for the deduction of the “indexed cost of acquisition” and “indexed cost of improvement” while calculating long-term capital gains. This often led to significantly reduced tax liability.However, the Finance Act (No. 2), 2024, changed the rules of the game.The second proviso to Section 48 is reproduced verbatim below:“Provided further that where long-term capital gain arises from the transfer [(which takes place before the 23rd day of July, 2024)] of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted:”This makes it clear that for transfers on or after 23rd July 2024, indexation is no longer available for computing the capital gains.Then, Why the Talk of “Restoration”?This confusion stems from a new relaxation introduced under the second proviso to Section 112(1)(a). Section 112 of the Act governs the chargeability of Tax on long-term Capital Gains on all capital assets except listed equity shares of domestic companies, Units of Equity-oriented Mutual Fund, and Units of Business Trusts. The proviso attempts to cushion the impact of the withdrawn indexation benefit at the time of tax computation, though not for income inclusion.Section 112(1) stipulates that — “Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of, —(a) in the case of an individual or a Hindu undivided family, being a resident, —the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; andthe amount of income-tax calculated on such long-term capital gains, — (A) at the rate of twenty per cent for any transfer which takes place before the 23rd day of July, 2024; and (B) at the rate of twelve and one-half per cent for any transfer which takes place on or after the 23rd day of July, 2024:Further, the second proviso to the above stipulates that,“Provided further that in the case of transfer of a long-term capital asset, being land or building or both, which is acquired before the 23rd day of July, 2024, where the income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment by the Finance (No. 2) Act, 2024, such excess shall be ignored;”From this, we deduce that the benefit of indexation exists only for tax liability comparison, not for computing the actual capital gain. This relief allows assessees to effectively claim indexation “at the tax stage” if it results in lower tax payable, but not at the stage of income computation. It is pertinent to note that this relief is available only for sale by a Resident Individual or HUF of land or building or both. This relief is not available for Non-Resident Individuals, Companies, LLPs, Partnership Firms, etc.The capital gain added to the Gross Total Income will not reflect any indexed cost. It’s not a return of indexation but a cleverly worded tax cap!IllustrationLet’s break this down with an example covering different scenarios:Mr. D, who is a resident, sells his Residential flat for a consideration of Rs 1,20,00,000. The dates of acquisition and sale for the 3 scenarios are listed below:Flat acquired on 1st April 2007 and sold on 22nd July 2024.Flat acquired on 1st April 2007 and sold on or after 23rd July 2024.Flat acquired on 24th July 2024 and sold on 1st April 2028.He also invests ₹20 lakhs in another flat eligible for Section 54 exemption.The Computation of Capital gains and tax under each Scenario is as follows:ParticularsScenario 1Scenario 2Scenario 3Sold before 23rd July 2024Bought before 23rd July and sold on or after 23rd July 2024Bought & sold after 23rd July 202420% Tax with Indexation12.5% Tax without Indexation (Option-I)20% Tax with Indexation (Option-II)12.5% Tax without IndexationDate of sale of flat22nd July 2024On or after 23rd July 2024On or after 23rd July 20241st April 2028Date of acquisition of flat1st April 20071st April 20071st April 200723rd July 2024Sale Consideration1,20,00,0001,20,00,0001,20,00,0001,20,00,000Cost of Acquisition35,00,00035,00,00035,00,00035,00,000CII For FY 2007-08129NA129NACII For FY 2024-25363NA363NAIndexed Cost of Acquisition98,48,837[35,00,000×363/129]NA98,48,837[35,00,000×363/129]NACapital Gains21,51,16385,00,00021,51,16385,00,000Less: Exemption u/s 5420,00,00020,00,00020,00,00020,00,000Net Capital Gain1,51,16365,00,00065,00,000Capital gains for Tax Computation (A)1,51,16365,00,0001,51,16365,00,000Rate applicable (B)20%12.50%20%12.50%Tax on Capital Gains [A×B]30,2338,12,50030,2338,12,500 = 30,233 (Lower of Option I & II) RemarksAs the flat is sold before 23rd July 2024, Tax at 20% with indexation is applicable.Section 112 gives relief to resident Individuals & HUF on any excess tax payable under the new regime, i.e. the excess of Rs 7,82,267/- (8,12,500 − 30,233) shall be ignored. Thus on Capital gains of Rs 65,00,000, tax payable shall be Rs. 30,233/-As the flat is acquired and sold after 23rd July 2024, the New Capital Gains regime of 12.5% without indexation is applicable.Continuing the above example, assume Mr. D has income from other sources of Rs 5,00,000. Total Tax liability computation in the above scenarios is below:ParticularsScenario 1Scenario 2Scenario 3Capital Gains1,51,16365,00,00065,00,000Income from other sources5,00,0005,00,0005,00,000Total Income6,51,16370,00,00070,00,000Tax on LTCG (As computed above)30,23330,2338,12,500Tax on income from Other Sources10,000[After exhausting the basic exemption of Rs. 3 lakhs, the balance 2 lakhs is taxed at 5%]10,000[After exhausting the basic exemption of Rs. 3 lakhs, the balance 2 lakhs is taxed at 5%]5,000[After exhausting the basic exemption of 4 lakhs, the balance 1 lakh is taxed at 5%] * 40,23340,2338,17,500Less: Rebate u/s 87A25,000NANA 15,23340,2338,17,500Surcharge @10%NA4,02381,750 15,23344,2568,99,250Health and Education Cess @ 4%6091,77035,970Total Tax Payable15,84246,0269,35,220* It has been assumed that the budget 2025 rates shall prevail from FY2025-26 and onwards in Scenario 3.AnalysisThe comparative scenarios presented above bring into sharp focus the nuanced effect of the Finance (No. 2) Act, 2024. When Mr. D sells his flat before 23rd July 2024, the availability of indexation drastically reduces his capital gains, qualifying him for the rebate under section 87A due to lower total income. However, scenarios 2 and 3 demonstrate the reality of the post-amendment. Despite identical sale consideration and acquisition cost, the unavailability of indexation post-July 2024 inflates the reported capital gains, raising the total income significantly. This not only results in income surpassing the rebate threshold of Rs 7,00,000/- (or Rs 12,00,000 from FY2025-26 onwards) but also pushes the assessee to the surcharge territory.What should be the ideal Reinvestment?Whether it is investment under Sections 54, 54EC, or 54F, the maximum amount eligible for exemption remains unchanged from what it was before the Finance (No. 2) Act, 2024, amendments on properties acquired before 23rd July 2024. In other words, the reinvestment amount required to claim the exemption shall remain the same as before the amendment. The proviso in Section 112(1)(a) ensures that any excess tax payable, arising due to the withdrawal of indexation benefits, will be ignored, but only to the extent that the reinvestment complies with these pre-amendment limits. This means taxpayers can continue to plan their capital gains reinvestment based on erstwhile provisions without worrying about additional tax burdens triggered by the new computation rules.Loss of LossesOne of the most understated implications of this amendment is the erosion of capital losses that previously arose due to indexation. Under the old regime, an inflated indexed cost could turn even a high-value transfer into a long-term capital loss, eligible for carry-forward and set-off. The new regime eliminates this possibility altogether.For instance, in the above example, assume the purchase cost of the old flat was Rs. 1 Crore.Capital Gains calculation is as follows:ParticularsTransfer madeBefore 23rd July 2024On or After 23rd July 2024 Sale Consideration1,20,00,0001,20,00,000Less:Cost of Acquisition—1,00,00,000 Indexed Cost of Acquisition2,81,39,535[1,00,00,000×363/129]— Capital (Loss)/Gain(1,61,39,535)20,00,000ObservationAs illustrated above, if a property with a purchase price of ₹1 crore is sold for ₹1.2 crore, the indexed cost (₹2.81 crore) under the old regime would have generated a capital loss of over ₹1.6 crore, which is valuable for tax planning over future years. Post-23rd July 2024, this flips into a gain of ₹20 lakh, simply due to the withdrawal of indexation.ConclusionWhile the Finance Act appears to offer some relief through Section 112(1)(a), the core benefit of indexation, i.e., reducing the quantum of capital gains itself, has been fundamentally diluted. The restoration is, in effect, a comparative tax capping mechanism, not a reinstatement of indexation in its original sense.It may be noted that the provision parallel to section 112 of the Income-tax Act, 1961, in the 2025 Act is section 197, which also provides for the levy of tax on long-term capital gains @12.5% and adjustment of unexhausted basic exemption limit against long-term capital gains in case of resident individuals and HUFs. Further, in respect of long-term capital gains arising on transfer of land and building acquired before 23.7.2024 by resident individuals and HUFs, this section also provides that the excess tax computed by applying 12.5% on long-term capital gains (calculated without indexation of cost of acquisition/improvement) over the tax computed by applying 20% on long-term capital gains (calculated with indexation of cost of acquisition/improvement) has to be ignored.For practitioners and taxpayers alike, it’s crucial to differentiate between Indexed gains, which impact gross income, and Indexed tax, which impacts only final liability.As we navigate these transitions, a clear understanding and precise planning will be the key to minimising tax impact under the new regime. Planning must now consider not just rates and exemptions but the interplay between gross income reporting and tax liability computation.Referenceshttps://incometaxindia.gov.in/Pages/acts/income-tax-act.aspxhttps://youtu.be/5-5TwwzM8xs?si=HKNWOPuMnR8U0-0uhttps://youtu.be/G1ojtTKUI1w?si=Yre1z287p64ZZJizAuthor may be reached at raoramya005@gmail.com and eboard@icai.inThe Chartered Accountant • Direct Tax • February 2026 • www.icai.org
Audit
Ep. 73 — Understanding the Risk and Its Impact on Audit
CA Journal
· July 2026
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Understanding the Risk and Its Impact on AuditSA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, lays down the foundational principles for risk assessment in audit engagements. Whereas SA 330, Auditor’s Response to Assessed Risk, requires designing and performing the audit process to respond to such risk in an audit engagement. While both of these standards offer a comprehensive framework, their practical application, particularly at the level of individual account balances, often poses challenges in real-world audit scenarios. While the importance of risk identification, assessment, and response is well understood by audit professionals, applying these concepts in a consistent and defensible way might be a practical challenge. This article explores these practical challenges and outlines a structured approach to help auditors more effectively identify, assess and respond to risks in line with the principles of SA 315 and SA 330.IntroductionSA 315 lays down a comprehensive framework for identifying and assessing the risks of material misstatement. It clearly defines how to understand the entity and its environment, and how to use that understanding to identify and assess risks at both the financial statement and assertion level.However, the objective of this article is to make that framework more relatable and operational through real examples and grounded explanations. This article is about building defensible audit workpapers, not just to satisfy regulators, but to strengthen confidence in our work. It’s not always about getting everything right in hindsight. Regulators, such as NFRA and others, assess whether the auditor applied professional logic at the right time. Even if a mistake is identified later, if auditors have defensible documentation showing that the audit response was designed based on the understanding and context available at that time, it will stand up to review.The article primarily focuses on understanding the risk and its impact at the transaction level. Accordingly, a prior comprehensive understanding is required, as per SA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, in respect of:The entity and its environment including industry and regulatory factors;The applicable Financial Reporting Framework;Business model and strategies;Entity level control, IT environment and all components of Internal controls.Risk & AuditThe context of risk in an audit of a financial statement needs to be understood to take the discussion further and to ultimately plan and include our response as an audit process. Often, risk is misunderstood and perceived as more complex than the outcomes it is meant to address. In audit, generally, the desirable outcome is clear: a clean audit report, no qualifications, no disclaimers, no adverse opinions. The risk assessment ought to start from this point itself. The moment a clean audit report is perceived as the desirable outcome, the risk of not achieving it must be assessed. Ultimately, the attainment of such an outcome depends entirely on the reliability of the underlying financial statements on which the audit opinion is based. A clean report may not be achieved if account balances and disclosures in the financial statements are misstated.Hence, the risk of material misstatement is a risk and may change the desirable outcome of having a clean audit report. This perception itself shapes the thinking that drives us to identify the risk, assess it and respond to it appropriately.Identification and Assessing Risk at the Account Balance LevelTo identify the risk in the context of audit, it would be essential to align our focus to the matters that may affect the accounts balance and disclosures included in the financial statement. Anything that has the capacity to impact the balances and disclosures appearing in the financial statements can be a factor for identifying and assessing the risk. The balances are the result of transactions and adjustments. Therefore, to analyze a balance appearing in the financial statements, transactions or adjustments beneath it need to be analyzed.Now, the real question is: what should be the approach to analyze these transactions or adjustments? This needs a clear and clinical approach, which should be done in a manner that ensures completeness in the overall risk identification and assessment process. The question must be examined further to understand why an account balance becomes riskier. The answer could be –Complexity of Transaction/AdjustmentSusceptibility to FraudControl over the account balanceAccordingly, risk can be identified and assessed by analyzing each class of transaction and adjustment through the lenses of complexity, susceptibility to fraud, and control. This will give a structure and clinical approach to the overall risk assessment process for each account balance or disclosure appearing in the financial statements.Simultaneously, risks arising from weak control management, lack of management integrity, deficiencies in the IT system affecting multiple processes, and frequent changes in accounting policies without justification may be pervasive and impact the overall financial statements. Accordingly, such risks need to be analyzed and addressed through an overall audit strategy.The identification and assessment of risks at the account balance level, discussed in this article, will further complement the risks assessed and identified at the overall financial statement level.a. ComplexityAn account balance may be affected due to an error arising from the complexity of a particular transaction. Such complexity can be assessed in respect of each of the criteria attached to the transaction, i.e., recognition, measurement, subsequent measurement and derecognition. This aligns with how accounting standards themselves are structured.Table 1.CriteriaConsiderationLess Complex Vs ComplexRecognitionIs there clarity on when to recognize a transaction?Asset Purchased from Third Party Vs Internally Constructed AssetsMeasurementIs there clarity on how to measure the value of a transaction?Asset Purchased from Third Party Vs Internally Constructed AssetsSubsequent MeasurementIs there clarity on how to subsequently measure the value of a balance?Depreciation of PPE Vs Testing Intangibles for ImpairmentDerecognitionIs there clarity on how to derecognize a balance?De-recognition of Trade Payables Vs De-recognition of Inter Company Loan on change of termsThe analysis provided in Table 1 for each class of transaction helps in identifying the complexity of the transaction and the resulting account balance. Where transactions are complex, they lead to riskier account balances that require greater focus, an increased extent of audit procedures, and a tailored audit approach.b. Susceptibility to FraudAn account balance may get impacted due to fraud and ill motive of the people responsible for processing the transaction. If the transaction is susceptible to fraud, then the consequent account balance will be riskier.To assess the susceptibility to fraud in a transaction or adjustment, three factors need to be analyzed –Stakeholders involved in the transactionPossibility of Collusion, if anyMotive(Refer to Table 2)Table 2.Transaction/ AdjustmentStakeholders InvolvedPossibility of CollusionSusceptible MotiveRevenueEntity Client/ CustomerInvestorGovernmentClient/Customer is a related party and may colludeManagement of a listed entity may want to show more than actual revenue to achieve positive sentiments in the market Management of an entity may want to show less than actual revenue to achieve less profit and consequent taxesc. ControlA transaction or account balance may turn out to be riskier in case the controls are not designed and working effectively for processing such transactions. Therefore, to assess the risk of the account balance, controls around the transactions need to be analyzed. Control over transactions at the account-balance level can be analyzed with respect to the management assertions for each account balance or class of transactions. If the management is exercising control before giving assertions for each account balance, then the account balance will be less risky and vice versa. This can be analyzed and understood as under –Line Items in FSAmount (INR in crores)Management AssertionsManagement ControlImpact on RiskRevenue50OccurrenceRevenue has been recorded based on approved sales invoices by the head of salesRiskier, if revenue is being recorded by a staff accountant without having approved sales invoicesAccuracySales have been recorded accurately as per the terms of the agreement, which is duly verified by the sales headRiskier, if revenue is being recorded by a staff accountant without any review or cross-check of the terms of agreementClassificationBefore posting the sales by the staff accountant, it is being approved by the GM – AccountsRiskier, if revenue is being recorded by a staff accountant without any approvalCut offPeriod-end entries have been tested and reviewed by the GM – AccountsRiskier, if there is no review mechanism for period-end entriesCompletenessMonthly/Annual sales are closed post approval of GST reconciliation by GM – AccountsRiskier, if sales are not getting reconciled before the monthly/annual closureSA 315, however, requires an understanding of internal control across multiple components, including the control environment, the entity’s risk assessment process, the information system (including IT) relevant to financial reporting and communication, control activities relevant to the audit, and monitoring of controls. The “control factor” in this model primarily relates to control activities at the transaction or adjustment level, evaluating how well such activities mitigate specific risks of misstatement.Each balance and disclosure in the financial statement needs to be analyzed from the perspectives of complexity, susceptibility to fraud and control effectiveness at the transactional level, to assess the risk of misstatement at the overall financial statement level.A summary of the framework for assessing and identifying the risks is presented below for ease of reference –FactorsAssessmentRisk AssessedComplexityTransactions are ComplexHighTransactions are regular and general in natureLowSusceptibility to FraudInvolvement of a related party in a transactionHighTransaction between two independent enterprisesLowControlRevenue is being recorded by the staff accountant without having any sales invoices [Incorrect Occurrence Assertions]HighMonthly/Annual sales are closed post approval of GST reconciliation by GM – Accounts [Correct Completeness assertions]LowThis structure has been developed from an accountant’s perspective of the financial statements, including the balances and disclosures presented therein. The idea was never to replace what the standard says, but to make it easier to apply. Whether someone is working in a small or big engagement, this structure ought to help in understanding the nature of risk better, assess it consistently, and most importantly, design the right audit response.Response to Assessed Risk at Assertion LevelOnce the risk is identified and assessed, the question is: How to address/respond to such a risk?SA 330, Auditor’s Response to Assessed Risk, also requires designing and performing the audit process to respond to assessed risk. To address this, it is important to plot the likely audit response against the assessed risk, along with the assertion that should be addressed.This can be understood by mapping relevant assertions against the account balance as shown below –FactsObservationFactorsRisk AssessedAudit ProcessAssertionsThe entity is involved in construction contracts. Invoices are raised as per milestone, but revenue gets booked as per Percentage Completion. So, the accounting is relatively complex.Over/Understatement of Revenue/Unbilled RevenueComplexityMediumReview of Subsequent Invoicing/ReversalsCut off, ValuationThe entity is listed on the stock exchange. Generally, sales transactions are more susceptible to fraud due to pressure to meet market expectations. Here, KPI is profitability and top line.Over/Understatement of Revenue – Trade Receivables/Unbilled RevenueSusceptibility to Fraud/ErrorHighGetting Direct Balance confirmation; Review of Subsequent ReceiptCut off, ValuationSales need to be recorded based on approved invoices by the sales head.Over/Understatement of Revenue/Unbilled RevenueControlHighIncrease in Sample Size and Extent of CheckOccurrenceFollowing the risk assessment, it becomes clearer to determine a tailored audit approach as a response to the identified risks. Additionally, the extent of testing should be appropriately increased for each relevant class of account balance.This is how risk should be assessed — by analyzing each factor affecting the account balance and related disclosures. This exercise should be carried out for every account balance and disclosure in the financial statements. It will result in a clear risk profile for each account balance and disclosure, which will, in turn, guide the audit response.Response to Assessed Risk Considering its Impact on the Extent of CheckThe assessed risk can further impact the intensity of the audit response. Higher risk should have a higher intensity of audit response. Accordingly, the extent of the check in a high-risk scenario should be more intense as compared to a standard/low-risk scenario. The standard sample size can also be adjusted for risk with more weights for riskier account balances. Therefore, the higher the risk, the higher the intensity of audit response and the higher the sample size.Risk AssessedIntensity of Audit ResponseExtent of CheckLowStandard audit processNormal ExtentMediumAbove-standard audit effortsNormal Extent × WeightsHighIntense Audit effort and an increase in the extent of checksNormal Extent × Increased WeightsIt ensures:Less time consumed over-testing low-risk areas.High-risk areas are subject to appropriate and sufficient testing.Audit effort is proportionate to actual risk.Consider the illustrations below to understand this better:Illustrative ExampleConsider an entity engaged in the provision of software development services. The entity has agreements/contracts with each of its clients, and services are delivered as per the terms of these agreements.In FY 2024-25, the entity has achieved a sales turnover of ₹25 crores, raised 750 sales invoices during the year.Considering the nature of the operation, including the control environment, the entity’s risk assessment process, the information system (including IT) relevant to financial reporting and communication, control activities relevant to the audit, and monitoring of controls, the auditors have estimated the standard sample size as 100 invoices for account balance – Revenue from Operations/Sales.Risk Assessment across ScenariosChanges in audit procedures and the extent of check/sample size can be understood as a direct response to the assessed level of risk –ScenarioAccount BalanceFactorsRisk AssessedControlComplexitySusceptibility to Fraud01Revenue from Software Development ServicesLowLowLowLow02Revenue from Software Development ServicesMediumMediumMediumMedium03Revenue from Software Development ServicesHighHighHighHighAudit Response based on Assessed RiskScenarioRisk LevelIntensity of Audit ResponseExtent of CheckResultant Sample SizeAudit Response1LowStandardNormal Extent100 InvoicesRandom testing of invoices.Limited review of contracts.Analytical review for unusual fluctuations.2MediumAbove StandardNormal Extent × Weights100 × 125%* = 125 InvoicesReview key client contracts.Vouch for selected invoices.Recalculate billed amounts.Verify timing and pattern of revenue recognition.Confirm balances with selected major customers.3HighIntense/DeepNormal Extent × Increased Weights100 × 150%** = 150 Invoices100% review of large contracts.Detailed testing of revenue recognition.Confirmations from major clients.Analytical procedures to detect anomalies.* Say for Examples Weights as 125% ** Say for Examples increased Weights as 150%ConclusionRisk assessment in audit need not be an overwhelming exercise. By following a structured, top-down approach, starting from the financial statements and drilling down to individual account balances, this allows us to bring clarity and precision to the risk assessment process.Risk-adjusted sampling ensures that our audit effort is appropriately scaled, focusing more on high-risk areas without unnecessarily over-auditing low-risk balances.This article includes a practical, scalable, and defensible method for audit risk assessment using the 3 Factor (Complexity, Susceptibility to Fraud and Control) structure. It can be implemented through simple documentation and consistent application.The goal is to help professionals develop a structured and defensible risk assessment approach, one that withstands peer reviews and regulatory inspections. The 3-Factor Structure brings clarity, consistency, and confidence to the most critical part of an audit, i.e., risk identification, risk assessment, and responding to risk.This approach not only strengthens audit quality but also enhances efficiency and defensibility. Ultimately, risk assessment ought not to be perceived as a hurdle but instead should be considered as an integral tool for reliable and effective audit.ReferencesSA 315 – Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environmenthttps://resource.cdn.icai.org/15382Link17_315SA.pdfSA 330 – The Auditor’s Responses to Assessed Riskshttps://resource.cdn.icai.org/15384Link19_330SA.pdf◆◆◆Author may be reached at praveendaga1985@gmail.com and eboard@icai.inThe Chartered Accountant | February 2026 | www.icai.org
Accounting Standards
Ep. 74 — Proposed Ind AS 118: A Milestone in Strengthening Presentation and Disclosure in Financial Reporting
CA Journal
· July 2026
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Proposed Ind AS 118: A Milestone in Strengthening Presentation and Disclosure in Financial ReportingIn an evolving global economic environment, high-quality financial reporting plays a significant role. Transparent, comparable, and decision-useful financial information forms the backbone of investors’ confidence and capital-market efficiency.Recognising this, India has implemented globally accepted high-quality accounting standards, i.e., International Financial Reporting Standards converged Indian Accounting Standards (Ind AS) for large companies. Moving forward in this direction, proposed Ind AS 118, Presentation and Disclosure in Financial Statements, has been formulated by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI), a standard aimed at redefining the structure and clarity of financial statements prepared under the Ind AS framework.While in India, there is a presentation format of financial statements in the form of Schedule III to the Companies Act, 2013, notified by the Ministry of Corporate Affairs, the proposed Ind AS 118 aims to further improve the way entities communicate their financial story based on principles of relevance, faithful representation, and enhanced comparability. The proposed Standard focuses on how financial performance is presented in the statement of profit and loss. While Ind AS 118 does not change the measurement of financial performance, it introduces new requirements for its presentation and disclosure only. This Standard seeks to enhance the quality of financial reporting by introducing requirements for the presentation of defined subtotals in the statement of profit or loss, disclosures relating to management-defined performance measures, and strengthened principles for the aggregation and disaggregation of information.This Standard is converged with IFRS 18, issued by the International Accounting Standards Board (IASB), and aligns India’s financial reporting landscape with global best practices.Ind AS 118 sets out principles for companies on how to group transactions and other events within the line items of the primary financial statements and the accompanying notes.Effective Date of IFRS 18 and Global AlignmentGlobally – Accounting periods beginning on or after January 1, 2027.Proposed in India – Annual reporting periods beginning on or after April 1, 2027, as per the Exposure Draft issued by the ICAI.Main Changes for Entities in the Profit or Loss Section of the Statement of Profit and LossRequired SubtotalsEntities will be required to present ‘operating profit or loss’ and ‘profit or loss before financing and income taxes’ (unless prohibited in specific circumstances) as additional subtotals in the profit or loss section.The introduction of these subtotals establishes a consistent structure for profit or loss and enhances comparability, while leaving unchanged the measurement of financial performance and the overall profit figure.Understanding the Categories for Classifying Income and ExpensesIncome and expenses included in the profit or loss section of the statement of profit and loss will be required to be classified into the following five categories:CategoriesParticularsOperatingThe operating category provides a complete picture of an entity’s operations. It consists of all income and expenses that are not classified in the investing, financing, income taxes or discontinued operations categories.The operating category is the default category and includes all income and expenses arising from an entity’s operations, regardless of whether they are volatile or unusual. Operating profit provides a complete picture of an entity’s operations for the period.This category includes, but is not limited to, income and expenses from an entity’s main business activities. Income and expenses from other business activities, such as income and expenses from additional activities, are also classified in the operating category if those income and expenses do not meet the requirements to be classified in any of the other categories.InvestingThe investing category enables investors to analyse returns from stand-alone investments separately from an entity’s operations. The investing category includes:income and expenses from assets that generate returns separately from an entity’s business activities – for example, an entity might collect rentals from an investment property or dividends from shares in other entities; andincome and expenses from cash and cash equivalents and investments in associates and joint ventures – for example, an entity might earn its share of profits from an associate.FinancingThe financing category and the subtotal for profit before financing and income taxes enable investors to analyse entities’ performance before the effects of its financing. The financing category includes:expenses on liabilities such as bank loans and bonds (liabilities arising from pure financing transactions), for example, interest expense on debt instruments issued; and income on certain liabilities such as fair value gains on a liability designated at fair value through profit or loss; andinterest expenses on any other liability, for example, lease and pension liabilities.Income TaxesThis category consists of income tax expense (or tax income) that is included in profit or loss in accordance with Ind AS 12, Income Taxes.Discontinued OperationsThis consists of income and expenses from discontinued operations recognised in accordance with Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations.Presentation and Disclosure of Expenses in the Operating CategoryInd AS 1, Presentation of Financial Statements, currently requires an entity to present an analysis of expenses recognised in profit or loss using nature-wise classification of expenses. However, IAS 1 permits entities to present such expenses using either a nature-based or function-based classification.Ind AS 118 proposes that in the operating category of profit or loss, an entity shall classify and present expenses in line items in a way that provides the most useful structured summary of its expenses, using characteristics of the nature of expenses or characteristics of the function of the expenses within the entity or both these characteristics (‘mixed presentation’). In accordance with the factors set out in the Standard, an entity shall determine the appropriate classification and presentation of expenses by their nature or function or on a mixed basis, considering what line items:provide the most useful information about the important components or drivers of the entity’s profitability; andmost closely represent the way the entity is managed and how management reports internally.The requirements of proposed Ind AS 118 are based on the premise that the entity should be able to provide the most useful structured summary of its expenses. It is not a free choice to present expenses based on their nature or function. Some entities might decide that classifying some expenses by nature and other expenses by function provides the most useful structured summary of their expenses.The Standard also requires entities that present expenses classified by function to disclose the following in a single note:depreciation;amortisation;employee benefits;impairment losses and reversals of impairment losses; andwrite-downs and reversals of write-downs of inventories.In India, this is a major change from the current requirements since presently, Ind AS 1, Presentation of Financial Statements, requires only nature-wise classification of expenses.Illustrative Profit or Loss Section for CompaniesConsidering the presentation requirements of categories for classifying income and expenses, as well as the presentation and disclosure of expenses in the operating category, the profit or loss section of the Statement of Profit and Loss can be illustrated as under:ParticularsCategoryRevenueOperatingCost of salesGross ProfitOther operating incomeSelling expensesResearch and development expensesGeneral and administrative expensesGoodwill impairment lossOther operating expensesOperating profitShare of profit and gains on disposal of associates and JVsInvestingProfit before financing and income taxes Interest expense on borrowings and lease liabilitiesFinancingInterest expense on pension liabilities and provisionsProfit before income taxes Income tax expenseIncome taxesProfit from continuing operations Loss from discontinued operationsDiscontinued operationsProfit Legend: Required subtotals Examples of additional subtotalsIn the above illustrative format:It is assumed that the company presents some operating expenses by function and some by nature.Subtotals highlighted in green are required, and highlighted in blue are examples of additional subtotals. A company presents additional subtotals if necessary to provide a useful, structured summary of the company’s income and expenses.Ind AS 118 will be applied differently by companies with specific business activities, such as banks, insurers and investment property companies.Ind AS 118 proposes that in the operating category of profit or loss, an entity shall classify and present expenses in line items in a way that provides the most useful structured summary of its expenses, using characteristics of the nature of expenses or characteristics of the function of the expenses within the entity or both these characteristics (‘mixed presentation’).Entities with Specified Main Business ActivitiesThe Standard requires an entity to assess whether it has a specified main business activity, viz., investing in particular types of assets. For e.g., investment entities, investment property companies and insurers or providing financing to customers, for e.g., banks.Entities with specified main business activity classify some income and expenses in the operating category that would have been classified in the investing or financing category if the activity were not a main business activity.Management-defined Performance Measures (MPM)Entities often report their own performance measures, including subtotals of income and expenses, which they communicate externally outside the financial statements to provide insights into financial performance.Ind AS 118 requires an entity to include information about such measures in a single note to improve the transparency of those measures.The Standard prescribes that MPM is a subtotal of income and expenses that:is used in public communications outside financial statements;is used to communicate to investors management’s view of an aspect of the financial performance of the entity as a whole; andis not listed in Ind AS 118 or specifically required by Ind AS.Subtotals of Income and ExpensesOther Performance MeasuresMPMsInd AS – SpecifiedAdjusted profit, such as profit adjusted for items of income or expense that the entity does not expect to arise for several future annual reporting periods, e.g., impairment and gain (loss) on disposal of PPEAdjusted operating profitAdjusted earnings before interest, tax, depreciation and amortisationOperating profitOperating profit before depreciation, amortisation and impairments within the scope of Ind AS 36, Impairment of AssetsFree cash flowReturn on equityNet debtNumber of customersCustomer satisfactionPerformance MeasuresEnhanced Requirements for Aggregation & Disaggregation of InformationOften, companies group information in financial statements that may not always provide the information the users need for their analysis—for example, some information is not shown in enough detail, while other information is obscured with too much detail.Ind AS 118 sets out principles for companies on how to group transactions and other events within the line items of the primary financial statements and the accompanying notes. Under these principles, companies are generally required to:Aggregate items that share similar characteristics and disaggregate those that differ;Group items in a manner that does not obscure material information or compromise the clarity and understandability of the financial statements; andPresent items in the primary financial statements and notes in a way that ensures both serve their complementary roles.Consequential AmendmentsInd AS 118 will replace Ind AS 1, Presentation of Financial Statements. As a result, the requirements in Ind AS 1 will be:replaced by new requirements in Ind AS 118;transferred to Ind AS 118 with only limited wording changes; ormoved to amended Ind AS 8, Basis of Preparation of Financial Statements, or Ind AS 107, Financial Instruments: Disclosures, with only limited wording changes.There are also consequential amendments to some other Ind ASs.As part of global consequential amendments, IAS 7 has been revised to remove the presentation alternatives for cash flows related to interest and dividends paid and received.It may be worth mentioning here that as part of global consequential amendments, IAS 7 has been revised to remove the presentation alternatives for cash flows related to interest and dividends paid and received. In India, these alternatives have already been eliminated under Ind AS 7, meaning that the requirements of IAS 7 are principally aligned with those of Ind AS 7 for entities engaged in specified business activities, such as banks. The provisions of Ind AS 7 are proposed to be updated to reflect the language of the revised IAS 7, ensuring greater consistency.Preparing for ImplementationAlthough the effective date of Ind AS 118 may seem distant, entities are encouraged to assess the potential impact of the new requirements early, for which the Management needs to plan in advance.ReferencesExposure Draft of Ind AS 118 issued by the ASB, ICAI – https://resource.cdn.icai.org/83846asb67639.pdfProject summary and Effects analysis of IFRS 18 issued by the IASB – https://www.ifrs.org/content/dam/ifrs/project/primary-financial-statements/ifrs-standard/projectsummary-ifrs18-april2024.pdfhttps://www.ifrs.org/content/dam/ifrs/publications/amendments/english/2024/effect-analysis-ifrs18-april2024.pdfAuthors may be reached at eboard@icai.inThe Chartered Accountant • February 2026 • www.icai.org
Accounting Standards
Ep. 75 — The Consolidation Conundrum: Real-World Battles with Ind AS 110 That Every CA Must Win
CA Journal
· July 2026
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The Consolidation Conundrum: Real-World Battles with Ind AS 110 That Every CA Must WinInd AS 110 has transformed consolidation from a mechanical exercise into a battlefield of professional judgment. This article addresses the complex challenges faced by Indian Chartered Accountants in implementing control-based consolidation, covering real-world consolidation failures and their financial impact on Indian corporates, practical frameworks for assessing control in Special Purpose Vehicles (SPVs), joint ventures, and structured entities, regulatory enforcement trends including recent SEBI penalties and NFRA quality reviews, sector-specific challenges in renewable energy, fintech, and startup ecosystems, and comprehensive documentation strategies that withstand regulatory scrutiny. With consolidation-related penalties exceeding ₹50 crores, regulatory reviews exposing widespread audit quality deficiencies, and increasing enforcement actions impacting CFOs and audit firms, mastering Ind AS 110 has become essential for career advancement and regulatory compliance in India’s evolving business environment.The ₹500 Crore Mistake: Why Consolidation Keeps CFOs AwakePicture this scenario: You are the CFO of a mid-cap infrastructure company with a board meeting scheduled for tomorrow. You have just discovered that three “independent” SPVs worth ₹500 crores should have been consolidated under your company’s financial statements. Your auditors are expressing serious concerns, SEBI is asking pointed questions, and your Managing Director is understandably furious about this revelation. Unfortunately, this scenario is becoming increasingly familiar to Indian finance teams across various sectors.This situation represents more than a fictional case study; it reflects the daily reality confronting Indian corporates since the implementation of Ind AS 110. The transition from AS 21 to Ind AS 110 has fundamentally altered the consolidation landscape, evolving from a straightforward majority ownership test to a complex web of professional judgment calls that can significantly impact careers and corporate fortunes.Consider the recent experience of a leading renewable energy company that narrowly avoided substantial consolidation penalties. The company had carefully structured fifteen solar SPVs as seemingly “independent” entities, each featuring separate boards of directors and trust-based ownership structures. These entities appeared autonomous when examined superficially, presenting all the hallmarks of independent operation. However, the underlying reality painted a starkly different picture, as the parent company maintained comprehensive control over every aspect of operations, from project financing arrangements to operations and maintenance contracts.When regulatory authorities finally conducted their detailed investigation, the company faced a ₹25 crore penalty along with a comprehensive management overhaul. This case exemplifies the fundamental transformation that Ind AS 110 has brought to consolidation practices. Where AS 21 simply required answering whether you owned fifty-one percent of an entity, Ind AS 110 demands a comprehensive analysis across three interconnected dimensions: whether you possess power over the investee, whether you face exposure to variable returns from your involvement, and whether you can utilize your power to influence those returns.This seemingly straightforward framework becomes extraordinarily complex when applied to India’s intricate corporate structures. From complex cross-holding arrangements to multilayered step-down subsidiary structures, major corporate groups now face consolidation challenges that would have been virtually unimaginable under the previous regulatory regime.The SPV Deception: When Small Entities Hide Massive RisksSpecial Purpose Vehicles represent perhaps the most significant consolidation challenge facing Indian companies today. These entities extend far beyond mere accounting conveniences; they constitute the operational backbone of critical sectors, including infrastructure development, power generation, and real estate construction. Simultaneously, they have become the primary source of the most spectacular consolidation failures witnessed in recent years.The case of a Mumbai-based infrastructure giant provides a compelling illustration of these challenges. The company had established twenty SPVs to execute a major highway project, with each SPV featuring nominal share capital of merely ₹1 lakh, independent boards populated with local directors, separate banking relationships and legal identities, and project-specific financing arrangements. These structural elements created an appearance of genuine independence that initially satisfied both management and auditors.However, deeper analysis revealed a fundamentally different operational reality. The parent company had provided ₹200 crores in subordinated debt to each SPV, creating substantial financial dependence. All significant operational decisions required explicit approval from the parent company, effectively negating the independence supposedly provided by separate boards. The parent company had guaranteed all project loans totalling ₹500 crores per SPV, creating massive contingent liabilities. Revenue flows remained subject to the parent company’s centralized cash management policies, and board meetings were consistently conducted at the parent company’s offices rather than at independent locations.The decisive evidence emerged through detailed examination of email communications, which revealed the parent company’s CEO providing direct instructions to SPV boards on matters ranging from vendor selection processes to payment scheduling decisions. When auditors finally challenged the consolidation treatment of these arrangements, the combined SPV debt of ₹10,000 crores impacted the parent company’s balance sheet with devastating effect.Chartered Accountants must develop the professional scepticism necessary to look beyond formal corporate structures and understand the true nature of control relationships.This experience demonstrates that legal independence becomes meaningless when economic dependence is comprehensive. Chartered Accountants must develop the professional scepticism necessary to look beyond formal corporate structures and understand the true nature of control relationships. The key lies in identifying who actually controls critical decisions such as board member appointments, funding decisions, cash flow management, and genuine board deliberations versus mere rubber-stamping exercises.The Forty Percent Controlling Shareholder: Understanding De Facto ControlContemporary Indian corporate structures frequently present scenarios where promoters maintain effective control despite holding minority shareholdings. This phenomenon has become increasingly common as companies seek to optimize their capital structures while maintaining operational control. A typical scenario involves a promoter group holding forty percent of shares while the remaining sixty percent remains distributed among foreign portfolio investors, retail shareholders, and mutual funds.A leading pharmaceutical company exemplifies this challenge perfectly. The promoter group held precisely forty-two percent of outstanding shares, while the remaining fifty-eight percent was distributed among foreign institutional investors holding twenty-two percent, domestic mutual funds with eighteen percent, retail investors controlling twelve percent, and employee trusts holding six percent. Despite this apparent minority position, the promoter group maintained comprehensive operational control.The promoter group’s control manifested through the appointment of six out of nine board members over a five-year period, achieving unanimous success in all shareholder resolutions without a single defeat, controlling all major strategic decisions affecting the company’s direction, and exercising unilateral authority over key management appointments and removals. The transformation occurred when a new auditor challenged the existing consolidation treatment of this purported “associate” company.Historical analysis spanning fifteen years of operations revealed that other shareholders had never successfully opposed any promoter proposal, creating a clear pattern of de facto control. Average attendance at Annual General Meetings remained consistently around forty-five percent, with most institutional shareholders demonstrating minimal active participation in corporate governance processes.The auditor’s comprehensive de facto control assessment involved detailed voting pattern analysis covering five years of AGM and EGM records, assessment of shareholder participation rates and voting outcomes, board composition history tracking director appointments and removals, evaluation of board decision-making independence, shareholder behaviour studies analysing institutional investor participation patterns, retail investor engagement level assessment, and management control reviews evaluating strategic decision-making processes and operational control mechanisms.This pharmaceutical company’s experience demonstrates the critical importance of documenting clear patterns of de facto control. The auditors’ comprehensive analysis forced consolidation of what had previously been treated as an associate investment, resulting in ₹800 crores in additional debt recognition and a fifteen percent credit rating downgrade.The Option Trap: When Future Rights Create Present ObligationsPotential voting rights provisions under Ind AS 110 have generated some of the most intellectually challenging consolidation scenarios facing modern practitioners.Potential voting rights provisions under Ind AS 110 have generated some of the most intellectually challenging consolidation scenarios facing modern practitioners. The fintech sector provides particularly complex examples of these challenges, as demonstrated by a leading Non-Banking Financial Company’s experience with a payments company investment.The NBFC acquired thirty percent of the payments company for ₹200 crores, accompanied by call options for an additional twenty-five percent exercisable at any time within eighteen months, rights to appoint three out of five board members, veto rights over key business decisions, and first refusal rights on any equity dilution. The options were attractively priced at ₹100 crores for the twenty-five percent stake, representing a significant discount to the company’s ₹2,000 crore valuation.The NBFC’s CFO initially classified this arrangement as a thirty percent associate investment, arguing that options represented “merely potential” control rather than actual control. However, this position faced a serious challenge when auditors applied the substantive rights test mandated by Ind AS 110. The analysis revealed that options were currently exercisable without restriction, exercise would be economically beneficial given the substantial discount to fair value, and no barriers existed to prevent immediate exercise.Combined with the NBFC’s practical control over key operational decisions, auditors concluded that effective control existed from the initial investment date. This determination created a massive financial statement impact, transforming a ₹200 crore investment into a consolidation of ₹800 crores in assets and ₹400 crores in liabilities.The evaluation of potential voting rights requires careful consideration of whether rights are currently exercisable or convertible, whether exercise represents economically rational decision-making, whether legal, regulatory, or contractual barriers exist, and whether the rights, when combined with existing holdings, create overall control. This framework ensures that substance takes precedence over legal form in determining appropriate consolidation treatment.The Joint Venture Masquerade: When Equal Ownership Masks Unequal ControlIndian companies frequently structure fifty-fifty joint ventures as vehicles for keeping assets off balance sheets while sharing operational risks. However, Ind AS 110 mandates that every such arrangement must first be tested for control before joint venture accounting principles can be appropriately applied.A co-lending platform established between a leading bank and an NBFC illustrates this challenge effectively. The structure appeared perfectly balanced, featuring a fifty-fifty shareholding between the partners, equal board representation ensuring balanced governance, shared investment of ₹100 crores from each party, and a comprehensive joint management agreement. These formal arrangements suggested genuine shared control consistent with joint venture treatment.However, operational reality revealed fundamental imbalances in actual control. The NBFC’s proprietary technology platform powered all operational activities, NBFC employees occupied seventy percent of key management positions, the bank’s participation remained largely limited to funding provision and regulatory compliance, and all critical operational decisions flowed through the NBFC’s established risk management framework.The decisive breakthrough emerged through detailed examination of underlying agreements, which revealed that the NBFC maintained exclusive control over technology infrastructure and customer data, possessed authority to approve all loan applications, enjoyed rights to determine pricing strategies and product features, and held the ability to hire and terminate operational staff. Despite the appearance of equal shareholding, the NBFC clearly controlled the “relevant activities” that determined financial returns.This analysis forced reclassification of the joint venture as a subsidiary requiring full consolidation, adding ₹500 crores to the NBFC’s balance sheet. The experience demonstrates that joint venture classification requires careful evaluation of who controls technology and operational platforms, where key personnel decisions are made, which party determines pricing and product strategies, and which entity bears primary operational risks.The Startup Consolidation Challenge: Modern Structures and Traditional RulesIndia’s dynamic startup ecosystem has created entirely new categories of consolidation challenges that traditional frameworks struggle to address effectively. Employee Stock Ownership Plan trusts, complex investor rights structures, and platform-based business models present unprecedented analytical challenges for consolidation specialists.A leading e-commerce platform’s ESOP trust structure exemplifies these emerging challenges. The trust held eight percent of company shares, with employees unable to vote shares directly, company funding for all trust operations, company guarantees for trust investments, and the company CFO serving as trust advisor. Initially, the company argued for trust independence, emphasizing separate legal existence and independent trustee appointments.Detailed analysis revealed a different reality. The company controlled all trustee appointments, trust operational decisions required company approval, economic risks and rewards remained with the company, and the trust could not survive without continuous company support. These factors led auditors to conclude that the trust represented merely an extension of the company requiring consolidation treatment, exposing previously hidden leverage and off-balance-sheet obligations.ESOP trust consolidation analysis must consider who controls trustee decisions, where economic risks actually reside, whether the trust can operate independently, and who ultimately benefits from trust returns. This framework ensures appropriate consolidation treatment regardless of formal legal structures.Series A and B startup investments present additional challenges. A strategic investor acquired only twenty percent of a fintech startup but obtained board control through three of five seats, veto rights over key strategic decisions, comprehensive anti-dilution protection, and exit drag-along rights. Despite minority ownership, the investor’s ability to control strategic decisions, combined with substantial economic incentives, created unexpected consolidation requirements.The Documentation Imperative: Building Defensible PositionsIn the contemporary Ind AS 110 environment, comprehensive documentation extends far beyond good professional practice to become essential survival armor. Recent regulatory reviews have consistently revealed that most consolidation failures stem from inadequate documentation rather than fundamentally flawed professional judgments.A leading audit firm’s comprehensive internal review determined that seventy percent of consolidation challenges could have been successfully avoided through better documentation practices. The most successful practitioners now maintain annual control matrices for all investee relationships, comprehensive board resolution analyses with voting pattern summaries, legal opinion files addressing complex structural arrangements, detailed economic risk and reward mapping, and quarterly reassessment triggers with established protocols.One mid-cap company successfully avoided a major regulatory penalty by producing a comprehensive 200-page control assessment file documenting every aspect of its SPV relationships. This file included detailed email trails demonstrating actual decision-making processes, comprehensive financial flow diagrams, complete board meeting minutes with detailed voting records, professional legal opinions addressing complex arrangements, and quarterly reassessment reports tracking changes in control relationships.The company’s Chartered Accountant had invested three months developing this documentation framework following a significant concern raised by their previous auditor. When SEBI investigators conducted their detailed review, the comprehensive documentation convinced them that the company’s consolidation decisions represented well-reasoned professional judgments supported by appropriate analysis.The Regulatory Environment: Consequences of Getting It WrongThe regulatory enforcement environment has become increasingly aggressive, with recent actions providing stark warnings about the consequences of consolidation failures.The regulatory enforcement environment has become increasingly aggressive, with recent actions providing stark warnings about the consequences of consolidation failures.SEBI Enforcement Scorecard 2023–24₹50 crores in consolidation-related penaltiesFifteen companies required to restate financial statementsEight CFOs facing personal penaltiesTwelve audit firms subjected to comprehensive quality reviewsThe most dramatic case involved a renewable energy company facing a ₹25 crore penalty for failing to consolidate ten SPVs. The company’s defense emphasizing legal independence of the SPVs was decisively rejected when SEBI investigators documented unified cash management across all entities, common management teams, consolidated business planning processes, and comprehensive shared guarantees and support agreements.The penalty represented only the beginning of the company’s challenges. Subsequently, the company faced credit rating downgrades, multiple investor lawsuits, significant management changes, and prolonged regulatory scrutiny, affecting all future activities. The National Financial Reporting Authority’s quality review findings reveal that forty percent of reviewed audits contained consolidation deficiencies, with over-reliance on legal form representing the most common issue, inadequate documentation ranking second, and failure to reassess control relationships completing the top three problem areas.Practical Frameworks for SuccessBased on extensive real-world experience, successful consolidation analysis requires a systematic five-step protocol. The process begins with comprehensive ecosystem mapping to document all legal and economic relationships while identifying key stakeholders and their interests. Next, practitioners must identify relevant activities by determining which decisions genuinely matter for investment returns and assessing the distinction between operational and strategic decision-making.The third step involves a comprehensive power source assessment, looking beyond formal voting arrangements to evaluate operational control mechanisms and contractual rights and obligations. Economic exposure evaluation follows, requiring practitioners to follow money and risk flows while assessing variable return mechanisms. Finally, scenario testing considers how control relationships might evolve and evaluates potential future developments.Quarterly health checks should review any new investments or arrangements, assess changes in board composition or management, evaluate new agreements or contract modifications, monitor changes in economic exposure or risk-sharing, and document any shifts in operational control. A comprehensive red flag warning system should monitor related party transactions that appear commercial but lack substance, board meetings that represent formalities rather than genuine deliberations, funding arrangements creating economic dependence, management overlap suggesting unified control, and guarantee structures shifting risks back to parent entities.Future Considerations and ConclusionESG-driven structures, impact investing, and sustainability-linked arrangements create entirely new control paradigms requiring fresh analytical approaches.The consolidation landscape continues evolving rapidly, with emerging areas requiring constant monitoring. Cryptocurrency and digital assets raise questions about consolidating decentralized autonomous organizations and assessing control over blockchain-based entities. Artificial intelligence and platform businesses create scenarios where automated systems make operational decisions, complicating traditional control assessments. ESG-driven structures, impact investing, and sustainability-linked arrangements create entirely new control paradigms requiring fresh analytical approaches.Cross-border complications through GIFT City entities and international expansion create jurisdictional complexity, while regulatory technology, including regulatory sandboxes and fintech licensing, affects consolidation considerations. These developments ensure that consolidation expertise will remain a dynamic and evolving field requiring continuous professional development.Ind AS 110 represents far more than a technical accounting standard; it has become a critical career differentiator for Indian Chartered Accountants. Practitioners who master its complexities become trusted advisors capable of navigating the most challenging business structures. Those who fail to develop this expertise risk becoming mere compliance casualties in an increasingly sophisticated business environment.The fundamental lessons from consolidation practice emphasize that substance invariably trumps form, comprehensive documentation provides the best defense against regulatory challenge, professional scepticism remains non-negotiable, regular reassessment prevents unpleasant surprises, and when genuine doubt exists, consolidation represents the prudent choice. As Indian businesses become increasingly complex and regulatory scrutiny intensifies, consolidation expertise will separate successful practitioners from those who struggle to adapt.The question facing every Chartered Accountant is not whether they will encounter complex consolidation challenges, but whether they will possess the technical knowledge, professional judgment, and documentation skills necessary to succeed when those challenges arise. Companies investing in robust consolidation frameworks today will become tomorrow’s success stories, while those failing to adapt may find themselves subject to the next wave of regulatory enforcement action.ReferencesSecurities and Exchange Board of India. (2024). Enforcement Actions Report: Consolidation and Group Reporting Violations. SEBI Annual Report 2023-24.National Financial Reporting Authority. (2024). Audit Quality Review: Consolidation Assessment Deficiencies. NFRA Technical Bulletin No. 12.Institute of Chartered Accountants of India. (2023). Ind AS 110 Implementation Challenges: A Practitioner’s Guide. ICAI Research Publication.Ministry of Corporate Affairs. (2024). Corporate Governance and Consolidation: Regulatory Perspectives. MCA Compliance Review 2023-24.Reserve Bank of India. (2023). NBFC Consolidation Guidelines: Implementation of Ind AS 110. RBI Master Circular 2023-24.Ernst & Young India. (2024). Consolidation Challenges in Digital Economy: Ind AS 110 Applications. EY Technical Update.KPMG India. (2024). SPV Consolidation: Practical Framework for Infrastructure Companies. KPMG Accounting Advisory.Deloitte India. (2023). Fintech Consolidation: Navigating Complex Investor Structures. Deloitte Insights.PricewaterhouseCoopers India. (2024). Startup Consolidation: ESOP Trusts and Investor Rights. PwC Technical Guide.Business Standard. (2024). SEBI Penalties on Consolidation Lapses Cross ₹50 Crores. January 15, 2024.Economic Times. (2024). Infrastructure Companies Face Consolidation Scrutiny. March 22, 2024.Financial Express. (2023). NFRA Audit Quality Review Highlights Group Reporting Gaps. December 8, 2023.Chartered Accountant Journal. (2024). Consolidation Best Practices: Learning from Regulatory Actions. April 2024 Issue.Indian Accounting Standards Board. (2023). Frequently Asked Questions on Ind AS 110. ICAI Technical Publication.Supreme Court of India. (2019). Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta. Civil Appeal No. 8766-67 of 2019.Author may be reached at nekzadbajan87@gmail.com and eboard@icai.inThe Chartered Accountant • February 2026 • Accounting Standards
International Taxation
Ep. 76 — Permanent Establishment: Understanding its Nuances from Leading Judicial Decisions
CA Journal
· July 2026
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Permanent Establishment: Understanding its Nuances from Leading Judicial DecisionsThe recent SC judgement in the case of Hyatt International Southwest Aisa Ltd.1 (Hyatt International) has again spurred the discussion around constituting a Permanent Establishment (PE) for a foreign company in India. The Hon’ble Supreme Court has upheld the decision of Delhi High Court and has hence ruled that, Hyatt International (global hotel chain) has a fixed place PE in India and consequently, that its income derived under the Strategic Oversight Services Agreement (SOSA) entered in this respect is taxable in India.Post various landmark decisions like Formula One and E-Funds Inc., this is again an important development in the field of PE that gives rise to various questions, as to when and under what circumstances can a foreign company be said to be having a PE in India. Here, the author has analyzed the various important judgments and basis that identified the major conditions under which a PE for a foreign company can be triggered in India.Permanent Establishment in IndiaDuring the past couple of years, it has been observed that foreign companies are engaging Indian entities for outsourcing their backend operations like accounting, human resources, software services, etc. in India. In such circumstances, Indian tax authorities are worried about the fact whether by undertaking such arrangements, the foreign companies are avoiding the tax implications that may be triggered in India.Thus, whenever a foreign company plans to outsource its operations to India or undertake any business activities in India, either by setting up a subsidiary or by entering into a contract with a third-party entity, there is a risk that such subsidiary or entity may be construed as a PE of the foreign company in India. Let us understand what the meaning of PE is.The term PE is defined under Section 92F of the Income Tax Act, 1961 (‘the Act’)2, which states that PE includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. The concept of PE is elaborated in the Double Taxation Avoidance Agreements (‘DTAA’) entered into by India with various countries. Broadly speaking, the PE can be of the following types:Fixed Place PE – A place of business of the foreign company where it has a certain level of permanency and right to use it for the purposes of its business.Service PE – Furnishing of services by a foreign enterprise through its employees or other personnel, if the activities of that nature continue for a period of generally more than 183 days in any 12-month period. However, the time period may vary from treaty to treaty.Agency PE – If an agent habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts routinely concluded without material modification by the foreign company. In certain cases, an Agency PE may also arise where the agent maintains a stock of goods or merchandise in the Source state from which goods or merchandise are regularly delivered on behalf of that enterprise.The concept of PE is of considerable importance in the field of international taxation as business profits of a foreign enterprise cannot be taxed by a Source State (the country in which the said income is earned) unless it proves the existence of a PE in that State. The comparable term to PE under the Indian Income-tax Act, 1961 (‘ITA’) is “business connection”,3 which prescribes conditions under which a foreign company shall be considered as conducting business in India.Further, even if it is established that a foreign company has a business connection in India, its business profits shall be taxed in India, only if it has a PE in India as per the respective DTAA. Thus, the concept of business connection is wider than PE. If it is established that the foreign company has a PE in India, then the profits attributable to such PE are liable to tax in India.As the PE of a foreign company in India gives the Source State the right to tax, it is an important Article under the DTAA, majorly for the developing countries. Let us understand the conditions under which an entity may be considered as a PE in India.For any enterprise to be considered as a PE, the following tests are to be analyzed and, if the same are fulfilled, it is said that the foreign company has a PE in India:Location and Permanency TestDisposal TestBusiness Activity TestThus, it can be understood that if any foreign company has a place of business in India, which has some level of permanency and is available at the disposal of the foreign company from where it can conduct its business activities, such place can be considered as a PE of the foreign company in India. While analyzing PE, especially a Fixed Place PE, it has been held by the courts that any place available at the disposal of the foreign company for conducting its business activities shall be considered as a PE in India. The duration for which such place was permanently available at the disposal of the foreign company may not be relevant, if, in substance, the place was available to conduct the business activities. The Article 5(1), i.e. Fixed Place PE does not make reference to any minimum period for which a PE should be in existence in the source States. Generally, as per the UN and OECD commentaries, a Fixed Place PE is not considered to be in existence where the place of business is maintained for a period of less than six months.The Formula One JudgementThe landmark judgement passed by the Hon’ble Supreme Court in the case of Formula One4 has highlighted that, irrespective of the duration of the place of business available to the foreign company, it can constitute a Fixed Place PE in India if all the other factors are fulfilled. In the said case, the assessee being a UK based company had granted the right to host and promote Formula F-1 Race at a motor racing circuit owned by Jaypee Sports, an Indian Company.The assessee had full access to the circuit and it could dictate as to who was authorized to access it. Further, although the circuit belonged to Jaypee Sports during the said period, organizing any other event at the circuit was not permitted. Thus, based on the facts of the case, the courts observed that the assessee has a place to conduct its business activities in India that was at its disposal with a certain level of permanency. Hence, it was held that the said circuit constituted a PE of the assessee in India, irrespective of the duration of such permanency of the place of business.Further, any income attributable to such circuit would be deemed to be taxable in India. This judgement laid down a precedent that if the conditions for establishing a PE are fulfilled, then irrespective of the period of existence of such place of business, it may be construed as a Fixed Place PE in India. The Hon’ble Supreme Court, in the case of Formula One (supra), has indicated that to hold a place of business as a PE, the place should be available at the disposal of the foreign company irrespective of the time period.The Hyatt International JudgementIn the recent case of Hyatt International (supra), the Hon’ble Supreme Court has placed reliance on the abovementioned judgement of Formula One. The facts of the given case were that Hyatt International had entered into a Strategic Oversight Services Agreements (SOSA) with Asia Hotels Limited (‘AHL’) India, under which it agreed to provide strategic planning services and “know-how”. The main aim of providing such services was to ensure that the hotel was developed and operated as an efficient, high-quality, and an international full-service hotel meeting the global level of standards of Hyatt International.To undertake and implement the activities mentioned in the SOSA, executives and employees of Hyatt International made frequent and regular visits to India to oversee the hotel operations. Such employees were involved in substantive hotel operations, like recruitment of staff, formulation of policies, and other managerial functions etc. Further, as per the India-UAE DTAA, a Service PE is established if the employees provide services for a period of more than 9 months.The Delhi HC ruled in favor of the Revenue and concluded that Hyatt International had a PE in India as per the India-UAE DTAA. The decision was appealed before the Supreme Court. Upon considering the facts of the case, the Supreme Court upheld the decision of the Delhi High Court and held that the role of Hyatt International was not merely providing support advisory or auxiliary services to AHL India. Instead, the activities performed were core and essential functions, clearly establishing their control over the day-to-day operations of the hotel.Further, the agreement included terms for revenue sharing with Hyatt International based on the revenue generated by AHL in India. With respect to the duration of the employees’ stay in India, it was held that though the same was less than the prescribed time of 9 months in the DTAA, in substance, the employees were involved in the major decision-making and revenue-generating activities of the AHL. Thus, it was clearly stated that Hyatt International had a place of business at its disposal wherein business activities were being carried out, thereby resulting in the existence of a Fixed Place PE.An important factor that is common in both the above cases is that the courts have given importance to the substance over the legal form of the transactions.If the foreign companies were exercising substantial rights and undertaking/affecting business activities in India, it was held that they had a PE in India, irrespective of technical conditions such as time period, etc. The nature of the activities undertaken were given more importance as opposed to the time period for which the said activities were conducted in India.This also takes us to certain other questions such as, if a foreign company incorporates a subsidiary in India, outsources its backend activities in India, deputes some of its employees in India, or has a liaison office in India, can it be termed as a PE in India?Subsidiary as a PEThere have been some instances in the past wherein the revenue has held that an Indian subsidiary of a foreign company may be termed as a PE in India if it is established that the subsidiary is, in substance, nothing but a fixed place for the foreign company through which it is carrying out its business in India.In the case of Carpi Tech SA v. ADIT5 (International Taxation), Chennai, the ITAT Chennai held that since the assessee, a Switzerland-based company, had received a power project from NHPC, in view of fact that all correspondences relating to prospecting of clients, participation in bids, communication with customers, signing of contract documents, execution of the project, and closure of the project etc. were initiated or routed through business address of its subsidiary company in India, it would be considered as a PE in India.A similar contention was upheld in the case of Huawei Technologies Co. Ltd. v. ACIT, International Taxation6 by the ITAT Delhi, wherein a China-based company engaged in the sale of telecom equipment, supplied equipment and handsets to its Indian subsidiary. Since the assessee was conducting its business in India with the active involvement of employees of its Indian subsidiary, who jointly prepared bidding documents, negotiated, and concluded contracts on behalf of the foreign company with its Indian customers, the Indian subsidiary was held to constitute a PE of the foreign company.While there are cases where a subsidiary has been held to be a PE in India, alternative arguments have also been held by the courts of law.In the case of Progress Rail Locomotive Inc. v. Deputy Commissioner of Income-tax, International-Taxation, Delhi HC7, the assessee, being a US-based company was engaged in the business of manufacturing and sale of locomotives and locomotive parts, supplied equipment directly to Railways and had a subsidiary in India. However, neither email correspondence, communication trails, nor the statement of employees could lead to conclude that the business of the assessee was managed by an Indian subsidiary. Thus, it was held that though the foreign company had a subsidiary in India, it did not result in a PE in India. Similar contentions have been upheld in respect of liaison offices in India, where it has been held that since they assist only in the exchange of information and do not conduct any business activities, they shall not constitute a PE for the foreign company in India.8Outsourcing of Backend Operations in India – Deputation of its Employees in IndiaIn many cases, it is observed that foreign companies outsource their non-core or backend operations to India. The Supreme Court, in the case of Director of Income-tax (International Taxation) v. Morgan Stanley & Co.9 analyzed different categories of PE, i.e. Fixed Place PE, Agency PE and Service PE, in quite detail in a similar arrangement where the Indian Company provided backend support services to the foreign company.As per the facts of the case, the foreign company had outsourced some of its services like information technology support, account reconciliation, research support, etc. to an Indian company related to it. Further, in order to provide some specific services, some personnel of the foreign company were also deputed to the Indian group company and worked under the supervision and control of the Indian company. Herein, the Supreme Court analyzed all three categories of the PE as follows –Fixed Place PE – In respect of Fixed Place PE, the Supreme Court observed that the Indian Company would not be considered a PE in India, as it would be performing only back-office operations, which could not be construed as business activities of the multinational enterprise. Further, such activities were of a preparatory or auxiliary character and hence fell under Article 5(3)(e) of the treaty, which excludes such activities from constituting a PE in India.Agency PE – It was concluded that no Agency PE existed, as the Indian company did not have the authority to conclude any contracts on behalf of the foreign company.Service PE – On the facts of the given case, the services were bifurcated into two activities, namely stewardship activities and work performed by employees on deputation. It was concluded that stewardship activities involved only briefing the Indian staff to ensure that the output met the global standards and that no specific or technical services were provided. Thus, a Service PE was not established due to stewardship services.Further, in respect of services provided by the employees on deputation, it was observed by the Supreme Court that the deputed employees did not become the employees of the Indian Company. The foreign company remained responsible for their work, and the employees continued to be on its payroll. Hence, a Service PE was held to be established.Thus, based on the above decisions, it can be understood that the courts have given importance to the nature of activities performed by employees of the foreign company in India and the factors determining who is to be considered as the real employer for the employees.In another case, Asstt. DIT v. E-Funds IT Solution Inc.10, employees were deputed to India and worked under the control and supervision of E-funds India, and their remuneration was borne solely by E-funds India. Further, it was observed that as no customers of the foreign company were located in India or had received any services in India, merely because auxiliary operations that facilitated such services were carried out in India, it could not be held that the foreign company was carrying out business activities in India. Accordingly, no Service PE was constituted in India.However, in Centrica India Offshore (P.) Ltd. v. CIT11, Teradata Operations Inc. v. Dy. CIT12, courts held that since the right of the seconded employees to receive salaries, other emoluments, and the right of dismissal, etc. vested with the foreign company, such employees were to be considered employees of overseas entities rendering services for their employer in India. In such cases, a Service PE may be held to be established in India.ConclusionWith the growth and development of the Indian economy and business, many foreign companies are keen to conduct business in India. In such cases, it becomes important to ensure that such transactions do not camouflage their actual nature and that taxes are rightfully received by India.From the above analysis, it can be understood that the new-age India does not necessarily focus solely on the written laws but goes beyond the words to understand the substance of the transaction undertaken.Further, if a foreign company has a place of business for a certain period that is under its control and is available at its disposal for carrying out business activities, a PE may be established. For this to happen, it is important that the foreign company is engaged in conducting its business activities in India and not merely carrying on auxiliary or support services. If the services are only in the nature of backend or support services, it may be argued that they do not lead to the constitution of a PE in India.A similar contention may be made in respect of services provided through its employees in India. If the employees are providing only stewardship services, or if their activities are controlled by the Indian employer, a Service PE may not come into existence.These are some of the common conclusions that can be drawn on the basis of the abovementioned landmark judgements held in the context of PE in previous years. However, the facts of each case must be analyzed individually, and the decision of whether a foreign company has a PE in India or not will always depend on the specific facts and circumstances of the case.◆◆◆TS-954-SC-2025Section 173 in Income-tax Act, 2025[Section 9(1)(i)] of the Income Tax Act, 1961 or section 9(2) of the Income-tax Act, 2025[2017] 80 taxmann.com 347 (SC)[2016] 76 taxmann.com 101 (Chennai - Trib.)[2023] 149 taxmann.com 77 (Delhi - Trib.)[2024] 163 taxmann.com 52 (Delhi)[2024] 169 taxmann.com 461 (Delhi), [2025] 170 taxmann.com 828 (SC), [2025] 171 taxmann.com 757 (Delhi)[2007] 162 Taxman 165 (SC)[2017] 86 taxmann.com 240/251 Taxman 280/399 ITR 34 (SC)[2014] 44 taxmann.com 300/224 Taxman 122/364 ITR 336 (Delhi)[2020] 116 taxmann.com 404 (Delhi – Trib.)Author may be reached at kmprajakta@gmail.com and eboard@icai.inwww.icai.org February 2026
MSME
Ep. 77 — The MSME Evolution: From Credit-Constrained Units to Equity-Funded Corporations
CA Journal
· July 2026
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The MSME Evolution: From Credit-Constrained Units to Equity-Funded CorporationsIf you had asked a small factory owner in Ludhiana or a textile merchant in Surat ten years ago about “listing on the stock exchange,” they would have thought you were joking. For decades, the “Indian MSME” was synonymous with perseverance — “informal,” “unorganized,” and “perpetually in debt.” The dream wasn’t to go public; it was simply to get the bank manager to extend the Cash Credit (CC) limit by another five lakhs.But today, we are standing in a different India. We are witnessing a “Great Formalization.” The Indian MSME is no longer just a provider of low-cost employment; it is becoming a sophisticated, equity-funded engine. In this deep-dive, I want to pull back the curtain on the regulatory shifts of 2025, the new “Rules of the Game” for IPOs, and why your balance sheet needs a complete rethink if you want to survive the next decade.The Macro Reality – Breaking the 30% BarrierLet’s start with the hard truth of the numbers. “As a CA, I always say: ‘Emotions are for the heart, but data is for the bank.’”By the end of the 2024-25 fiscal year, the MSME sector’s contribution to India’s GDP stabilized at 30.1%. To the layman, this is just a percentage. To us, it represents a massive recovery from the pandemic low of 27.3% in 2020-21. More importantly, MSMEs are now responsible for 45.79% of India’s total exports.30.1%Contribution to India’s GDP (FY 2024-25)45.79%Share of India’s total exports6.5 croreUdyam registrations by late 2025The Udyam-GST MarriageThe secret sauce behind this growth is the Udyam Registration Portal. By late 2025, we crossed 6.5 crore registrations. But here is the technical detail most people miss: the Udyam portal is now seamlessly integrated with the GSTN and Income Tax databases.Earlier, a business would tell the bank they had a 10-crore turnover, tell the taxman it was 2 crore, and tell the labor department they only had 5 employees. Those days are dead. Today, data is transparent. While this feels like “Big Brother” is watching, it is actually the greatest gift to the sector. Why? Because transparency creates Trust. And trust is the currency of the capital market. Without that Udyam-verified data, the SME IPO boom we see today would have been impossible.The Death of “Dwarfism” – The 2025 Classification RevolutionOne of the biggest tragedies I’ve seen in my career is what economists call “Dwarfism.” This is where a company stays small on purpose. Why? Because the owner is terrified that if they cross the “Small” threshold, they will lose their subsidies, their priority sector lending, and their peace of mind.The Union Budget 2025-26 finally gave us the “Growth Headroom” we needed. Effective from April 1, 2025, the limits were pushed to levels we never thought possible.Breaking Down the New LimitsLet’s look at the “Medium” category specifically. A company can now have an investment of ₹125 crore and a turnover of ₹500 crore and still be called an MSME.Do you realize what this means? A company with a ₹400 crore turnover is a “Mid-Cap” giant in any other country! By keeping these firms under the MSME umbrella, the government is allowing them to scale up, buy global-grade machinery, and hire top-tier talent while still enjoying the protection of MSME interest rates and the Credit Guarantee Scheme (CGTMSE).The doubling of the CGTMSE guarantee ceiling to ₹10 crore is the cherry on top. It means you can now get ₹10 crore in collateral-free credit. If you aren’t using this to modernize your plant, you are leaving money on the table.The SME Exchange – From “Lottery” to “Legitimate Market”Now, let’s talk about the SME IPO market. In 2023 and 2024, the market was a “wild west.” We saw IPOs oversubscribed 500 times. We saw “shell-like” companies listing and doubling on day one. It was speculative, it was risky, and it was dangerous for the long-term health of the sector.The July 1, 2025 Reform: A Game ChangerThe regulators (SEBI and the Exchanges) stepped in with a heavy hand. On July 1, 2025, the rules changed. Here is what every entrepreneur and investor needs to know:The ₹2 Lakh Filter: The minimum application size was raised to over ₹2 lakh (minimum 2 lots). This was a masterstroke. It removed the “retail gamblers” who were looking for a quick listing gain and replaced them with “Individual Investors” who have the stomach for risk and the capital to back it.Discontinuation of “Cut-off Price”: This is a technical but vital change. You can no longer just tick a box saying, “I’ll buy at whatever price.” You must now specify your price. This forces investors to actually read the DRHP (Draft Red Herring Prospectus).No Cancellation/Modification: Once you bid, you are committed. This stopped the “fake demand” created by operators who would bid thousands of crores just to show high subscription numbers and then withdraw at the last minute.The ResultSME IPOs in late 2025 and early 2026 are more “sober.” The listing gains are 10-20% instead of 200%, but the investors who are coming in are long-term partners, not “flippers.”Case Studies – Blueprints of SuccessLet’s look at the companies that have navigated this transition successfully. These are the “graduates” of our ecosystem.1. Strategic Use of IPO Proceeds and Growth-Led ValuationA leading player in the advanced manufacturing and automation space, named as Jyoti CNC Automation Ltd, went public in early 2024. By January 2026, it had achieved a market capitalisation exceeding ₹22,000 crore. The company strategically deployed its public issue proceeds to strengthen its balance sheet while also investing in the development and launch of high-end products. Its strong profit growth trajectory underscored how consistent financial performance and innovation can significantly enhance market valuation.2. From SME Listing to Mainboard Transition: A Graduation JourneyAn enterprise named Suyog Telematics Ltd initially listed on the SME platform leveraged this phase to strengthen its operational and financial fundamentals, achieving a robust operating profit margin. After establishing scale, governance, and performance consistency, the company successfully transitioned to the Mainboard in late 2024. This progression illustrates how the SME platform can serve as a strategic launchpad for growth-oriented companies rather than a permanent endpoint.The Financial Infrastructure – CGTMSE and Digital CreditBeyond the stock market, the way we get loans is changing. We are moving from “Asset-Based Lending” (where you give your house as collateral) to “Cash-Flow Based Lending.”Because the GST data is now real-time, banks like Jana Small Finance Bank can see exactly how much you sold yesterday. They don’t need to see your balance sheet from two years ago; they see your bank statement from two hours ago. This is “Digital Credit,” and it is the only way to bridge the ₹30 lakh crore credit gap.The expansion of the Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE) is the engine behind this. By doubling the guarantee to ₹10 crore, the government has told the banks: “Don’t be afraid to lend to these guys. If they fail, we will back you up.” This is a massive psychological shift for bank managers who were previously too scared to lend without a property mortgage.The Export Promotion Mission (EPM) – Winning the WorldI often hear MSME owners say, “Manoj ji, I want to export, but the interest rates are too high, and the paperwork is too much.”The government’s ₹25,060 crore Export Promotion Mission (EPM), launched in late 2025, is the answer. It is built on two pillars:Niryat Protsahan (The Money)This focuses on trade finance. It offers interest subvention and export factoring. If you are an e-commerce exporter, there are now specialized credit cards to help you manage international working capital. This is crucial because global buyers often want 90-day credit, and a small Indian business can’t afford to have its money blocked for that long.Niryat Disha (The Method)Selling in Germany is different from selling in Gwalior. You need certifications, specialized packaging, and international branding. The EPM provides assistance for all of this. They have even mandated that 35% of all participants in international trade fairs must be MSMEs. The door to the global market is being held open for you.The “Productivity Gap” – Our Greatest ChallengeI must be honest with you, it’s not all sunshine and IPOs. We have a serious problem, which is Productivity.As of late 2025, Indian MSMEs are only 18% as productive as large-scale industries. In Germany or the US, that number is closer to 60%.Why are we lagging?Technological Lag: Many of our units are still using manual processes where AI and automation should be.The Skill Gap: We have the people, but do they have the skills for “Industry 4.0”?Delayed Payments: This is the “silent killer.” Even with the new 45-day payment rule (Section 43B(h)), billions of rupees are stuck in the accounts of large buyers. This kills innovation because the owner is too busy chasing payments to think about new products.To fix this, the government launched the “MSME-TEAM” scheme. This isn’t just about money; it’s about Trade Enablement. It helps you get onto e-commerce platforms like ONDC and adopt modern tech.The Social Impact – Inclusion and EmpowermentWe cannot talk about MSMEs without talking about the people. This sector employs 29 crore people. That is more than the population of most countries!What is heartening in 2026 is the rise of Women-owned MSMEs, which now account for 22% of rural units. Through the “Yashasvini” campaign, we are seeing a focus on “formalization with mentoring.” It’s not enough to just give a woman a loan; we must give her the digital skills and the market access to compete.Over 51% of recognized startups are now coming from Tier II and Tier III cities.The era of “Everything happens in Mumbai or Bangalore” is over. Whether it’s a food processing unit in Nagpur or a tech startup in Kochi, the Indian growth story is now truly decentralized.Preparing for the Future – The ZED StandardIf you want to be part of the global supply chain, you must understand ZED (Zero Defect, Zero Effect).By late 2025, over 2.83 lakh enterprises had been ZED certified. This is not just a fancy certificate to hang on your wall. It tells a global giant like Apple or Walmart that your factory:Produces zero defective goods (Quality).Has zero negative impact on the environment (Sustainability).In 2026, ESG (Environmental, Social, and Governance) is no longer a buzzword for big companies; it is a survival requirement for small ones. Investors on the SME Exchange are now looking for “Green MSMEs.”Checklist for EntrepreneursAs we wrap up this masterclass, I want to leave you with a concrete “Action Plan.” If you are an MSME owner, here is what your dashboard should look like for the next 12 months:Audit Your Classification: With the new ₹500 crore turnover limit, are you still calling yourself “Small”? Re-classify on Udyam to take advantage of the new “Medium” category benefits.Clean Up the Books: If you have even a 1% dream of going public, stop treating your company account like your personal wallet. Transparency is the only way to get a high valuation.Invest in Technology: Use the MSME-TEAM incentives to automate your production line. Remember, productivity is your only shield against rising labor costs.Explore Equity: Don’t be afraid to dilute your ownership. It is better to own 70% of a ₹500 crore company than 100% of a ₹5 crore company.Go Global: Check the EPM guidelines today. If your product has quality, there is a buyer in Japan, Europe, or the USA waiting for you.The evolution of the Indian MSME from a “credit-starved unit” to an “equity-funded corporation” is the most significant structural shift in our economy since 1991.Final ThoughtsThe evolution of the Indian MSME from a “credit-starved unit” to an “equity-funded corporation” is the most significant structural shift in our economy since 1991. The “Safety Net” of the new classification limits, the “Launchpad” of the SME Exchange, and the “Wind in the Sails” from the Export Mission have created a perfect storm for growth.The question is: Are you ready to stop surviving and start scaling? Keep your compliances high and your dreams higher!Author may be reached at camanojlamba@gmail.com and eboard@icai.in
Management
Ep. 78 — Unlocking Kaizen Costing: Methods, Classifications, and AI‑Driven Strategies for Sustainable Cost Reduction
CA Journal
· July 2026
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Unlocking Kaizen Costing: Methods, Classifications, and AI‑Driven Strategies for Sustainable Cost Reduction‘Kaizen’ comprises two Japanese words: Kai (change) and Zen (for the better), together meaning continuous improvement. The term Kaizen is about consistent improvement that assists with making long-term progress and doesn’t require enormous ventures. It is additionally significant for the executives and collaborators to take an interest in the progress.In today’s rapidly evolving industrial landscape, organizations are under constant pressure to reduce costs, improve efficiency, and enhance productivity. Kaizen Costing, with its foundation in continuous incremental improvement, has long served as a strategic tool for sustainable cost reduction and operational excellence. However, with the advent of advanced technologies, particularly Artificial Intelligence (AI), there is a growing opportunity to enhance the effectiveness of traditional Kaizen practices. AI helps reduce process time, automate repetitive tasks, and streamline operations through data-driven decision-making.When integrated with Kaizen, AI not only strengthens the pace and accuracy of continuous improvement but also unlocks new potential for real-time monitoring, predictive analysis, and smart optimization. This powerful combination offers organizations the dual advantage of human-centric innovation and intelligent automation, driving faster development, improved production quality, and significant cost savings. This article explores this evolving synergy, presenting a structured review of Kaizen Costing methods and examining how AI integration is reshaping its role in modern cost management.Sub-Classification of Kaizen CostingTo better understand the ideas of Kaizen/Continuous Improvement, this section provides brief explanations of the following four classifications.Figure 1: Kaizen Sub-ClassificationThe Kaizen’s Objective CategoryThe Concept of ProductivityThe Kaizen’s Result CategoryThe Concept of Just-In-TimeThe Concept of KanbanThe Kaizen’s Main CategoryThe Concept of Quality Control Circles (QCC)The Concept of Suggestion SystemThe Kaizen’s Extension CategoryThe Concept of Total Productivity Maintenance (TPM)The Concept of Total Quality Control (TQC)The Concept of Zero Defects (ZD)The Concept of Six SigmaThe Concept of Total Quality Management (TQM)Sources: Adapted from Imai (1983)I. The Kaizen’s Objective Categoryi. The Concept of ProductivityProductivity, as defined by Tangen (2002), is the ratio of output to input in manufacturing, reflecting how efficiently resources like labour, capital, materials, and energy are used. It’s often misunderstood as mere production volume; however, true productivity requires consideration of both outputs and inputs. It is relative and is evaluated through comparisons over time or against competitors.Productivity improves in five ways, such as by increasing output more than input or by reducing input while maintaining the same level of output.Over time, productivity has been confused with performance, efficiency, and effectiveness. Performance includes factors like cost and quality, efficiency means “doing things right” with minimal resources, and effectiveness means “doing the right things” to create customer value. High productivity results from a combination of both efficiency and effectiveness.The Kaizen philosophy of continuous improvement supports productivity growth by enhancing efficiency and effectiveness, especially at the shop-floor level, through incremental gains and better resource utilization. Waste reduces productivity and should be systematically eliminated to achieve sustainable improvement.AI PerspectiveThe integration of Artificial Intelligence (AI) into the Kaizen framework significantly enhances its core objective of continuous improvement. AI transforms traditional manual systems into smart, proactive processes that can detect inefficiencies, reduce waste, and drive sustainable productivity. With the use of advanced tools such as sensors, IoT devices, and AI-based analytics, organizations can now monitor operations in real time, gaining deeper visibility into performance metrics. Through predictive analytics and machine learning, AI can anticipate potential issues before they occur, enabling timely, preventive actions. Additionally, AI systems are capable of processing large volumes of data, recommending optimal solutions, and helping prioritize improvement initiatives. This not only reduces the cognitive load on human decision-makers but also ensures more consistent, accurate, and data-driven strategies to support ongoing operational excellence.The integration of Artificial Intelligence (AI) into the Kaizen framework significantly enhances its core objective of continuous improvement. AI transforms traditional manual systems into smart, proactive processes that can detect inefficiencies, reduce waste, and drive sustainable productivityII. The Kaizen’s Result CategoryThis category comprises two key concepts: Just-In-Time (JIT) and the Kanban system. These are often regarded as outcomes or by-products of Kaizen initiatives implemented during the initial stages of continuous improvement.i. The Concept of Just-In-TimeAccording to Imai (1986), Just-In-Time (JIT) ensures that each stage of production receives the exact number of units required at the right time. Ohno’s system at Toyota reduced inventory by reversing the traditional supply flow. Shingo (1981) further linked JIT to minimize the time between order and delivery through small-lot production, faster tool changes, and one-piece flow. Ishikawa and Lu (1985) emphasized that quality control is vital for JIT success, as poor quality disrupts the flow of inventory. Kaizen supports JIT by helping suppliers deliver quality products on time. JIT is also closely tied to the Kanban system (Monden, 1983), which helps synchronize production.ii. The Concept of KanbanAccording to Imai (1986), Kanban is a communication tool within the JIT production and inventory control system developed by Taiichi Ohno at Toyota Motor Corporation. A Kanban, or signboard, is attached to specific parts in the production line, signifying the delivery of a given quantity. The concept of the Kanban system was inspired by the supermarket system, as noted by Shingo (1981).Shingo (1981) and Imai (1986) further observed that Kanban coordinates the inflow of parts and components to the assembly line, minimizes process delays and enables rapid throughput. For example, an engine block brought into the plant in the morning can be assembled into a completed automobile by evening. However, the Kanban system cannot be effectively implemented in isolation; it must operate alongside other TQC components as part of an integrated production system.According to Gross and McInnis (2003), the benefits of Kanban can become a driver for creating a culture of continuous process improvement. They also offered the Kanban implementation method, which enables management to assess the existing state of the business, its goals, and the best way to get there.AI PerspectiveThe integration of AI allows JIT systems to leverage real-time data and advanced demand forecasting, enabling them to respond instantly to changing market conditions. In the context of Kanban, AI enhances efficiency by intelligently monitoring workflow signals and automatically regulating the number of work-in-progress (WIP) items. It adjusts task flow based on real-time capacity and demand patterns, an otherwise complex task to handle manually. As a result, organizations benefit from faster production cycles, reduced bottlenecks, and more efficient resource utilization, all of which reinforce Kaizen’s core principle of creating lean, adaptable, and continuously improving processes.III. The Kaizen’s Main Function CategoryUnder this category, there are two key concepts: Quality Control Circles and the Suggestion Sheet System. The details of these concepts are discussed below.i. The Concept of Quality Control Circles (QC Circles, QCC)Small Groups for Quality Improvement: QCCs are small, voluntary groups of frontline workers focused on continuously improving quality in products, services, and processes.Ideal Group Size: An effective QCC typically consists of around five members to allow better interaction and teamwork.Same Workshop Participation: Members usually belong to the same workshop or department, which enables them to address relevant, shared problems through regular communication.Based on PDCA Cycle: QCCs perform quality control tasks using the PDCA (Plan-Do-Check-Act) method, aiming at continuous process improvement rather than supervision.Voluntary Participation (Jishusei): Activities are self-initiated, internally motivated, and go beyond regular job responsibilities without formal compulsion.Part of Company-Wide QC: QCCs align with broader organizational quality goals and are supported by management to ensure strategic improvement.Personal and Social Development: Participation in QCCs helps members grow through skill development, teamwork, and increased engagement.Data-Driven Methods: QCCs rely on Statistical Quality Control (SQC) tools and logical analysis, avoiding decisions based on mere opinions or feelings.Workshop-Focused Issues Only: The topics tackled must relate directly to the circle’s work area and not to broader organizational or labour matters.Continuous Activity: QCCs are expected to operate continuously, regardless of staffing changes, supporting the Kaizen principle of ongoing improvement.Universal Staff Participation: All employees should be involved, promoting collective responsibility for quality across all organizational levels.ii. The Concept of Suggestion SystemAccording to Lillrank and Kano (1989), the suggestion system is the bottom-up channel through which improvement ideas and proposals are presented to management. Fundamentally, the suggestion system is unrelated to QCC activities. It is frequently used before circular activity, even in businesses without QCCs. The suggestion system can serve as a systematic tool within the QCC process to generate and refine workers’ ideas by integrating closely with QCC activities. Imai (1986) proposed that the suggestion system is an integral part of individual-oriented Kaizen. Additionally, when QCCs are viewed collectively as a group-oriented system of improvement suggestions, their role and function become more clearly understood.The suggestion system was historically introduced to Japan by TWI (Training Within Industries) and the U.S. Air Force following the conclusion of World War II. A Japanese-style suggestion system replaced the American-style approach.The suggestion sheet is commonly used as the primary medium through which employees communicate their ideas to management within the suggestion system. When they discover difficulties with their working procedures, employees can document them on the suggestion sheet form, develop possible remedies, and propose them to their supervisors. Direct supervisors typically review these suggestions, assessing their economic value and feasibility for implementation. Following their approval, supervisors will present the employees’ ideas to management for implementation consideration. The ideas made by the employee will be carried out if the approvals are given.To build the appropriate mindset and sustain momentum for suggestion activities, supervisors play a crucial role in sharing successful cases as best practices, encouraging wider employee participation. About half of small and medium-sized businesses and the majority of large manufacturing organisations use suggestion systems as part of their Kaizen programmes. According to Imai (1986: 112), common areas for suggestions in Japanese companies include improvements in work methods, working environments, machinery and processes, jigs and tools, office operations, product quality, and customer service.AI PerspectiveAI improves the way data is collected and analyzed by offering real-time insights, visualizing trends, and identifying root causes of problems. This helps Quality Control Circles (QCCs) make quicker and better decisions. It also allows teams from different departments or locations to work together more easily through AI-powered dashboards, removing the barriers of time and place. In the case of suggestion systems, AI can automatically gather, sort, and analyze employee ideas using natural language processing (NLP). It not only helps prioritize the most useful suggestions but also spots patterns and recommends practical actions. This makes the entire process faster, more efficient, and more impactful.In the case of suggestion systems, AI can automatically gather, sort, and analyze employee ideas using natural language processing (NLP). It not only helps prioritize the most useful suggestions but also spots patterns and recommends practical actions.IV. The Kaizen’s Extension CategoryUnder this category, there are five key concepts: TPM, TQC, ZD, Six Sigma, and TQM. The details of these concepts are discussed below.i. Concept of Total Productive Maintenance (TPM)According to Imai (1986: xxv), Total Productive Maintenance aims at maximizing equipment effectiveness throughout its entire life cycle. TPM is now used at a sizable number of Japanese manufacturing organisations, and is strongly promoted by the Japan Institute of Plant Maintenance, although it is less well known outside Japan as compared to TQC.While TPM is focused on equipment improvements, TQC’s primary goal is to raise overall management quality. TQC is more focused on software, whereas TPM is more focused on hardware. Like TQC, training is a crucial component of TPM, with emphasis placed on fundamental knowledge such as machine operations and maintenance practices at the shop-floor level.Just as organizations excelling in TQC are recognized through awards such as the Deming Prize and the Japan Quality Control Prize, the Japan Institute of Plant Maintenance honors successful TPM implementation through the PM (Plant Maintenance) Distinguished Plant Award and other recognitions.AI PerspectiveAI improves TPM by using predictive maintenance systems powered by IoT sensors and machine learning. These tools can forecast equipment failures before they occur, reducing downtime and improving machine reliability, perfectly aligning with TPM’s goal of maximizing equipment effectiveness.ii. The Concept of Total Quality Control (TQC)The concept of quality has evolved from a narrow production focus to a comprehensive management philosophy valued at all organizational levels. The most critical factor is customer satisfaction, which directly influences company profits. The idea is simple: happy customers lead to business success.A TQC (Total Quality Control) manager, it can be argued, is more concerned with customer complaints than with stock prices or return on assets. TQC covers not just product quality, but also manufacturing processes, delivery, customer support, planning, and internal practices. In this context, quality in Japan aligns with the Western idea of “excellence.”Despite much discussion, the Japanese quality movement has not reached a uniform definition of quality. Therefore, each company promotes TQC based on its unique conditions, competitive situation, and top management preferences. No single pattern fits all; TQC evolves through trial and error. It is guided by principles and tools, without which it would be a mere spiritual idea. Both management and shop-floor operations participate in TQC, with QCC (Quality Control Circles) and PDCA cycles being key elements.Most firms using TQC also implement QCCs, which are often seen as a foundation for broader TQC efforts. According to Feigenbaum, quality control must be part of a system for development, maintenance, and improvement, and should be defined by the customer.Feigenbaum stressed that if data from QC tools, like control charts and sampling, aren’t used in decision-making, they do not guarantee quality. TQC is a decision-making framework combining data processing with managerial actions. He cautioned that if quality is everyone’s responsibility, it could end up being no one’s responsibility.From a Western perspective, TQC has shifted quality from an operational to a strategic concern, gaining importance as top management becomes involved. If quality is seen only as an engineering issue, it will be ignored by top leaders. However, in competitive markets, defining product features has become essential. Related concepts like productivity, turnaround time, responsiveness, and operational effectiveness are now central to strategic thinking. Innovations like JIT (Just-in-Time) have redefined competition by boosting efficiency and quality.iii. The Concept of Zero Defects (ZD)According to Calvin (1983), Zero Defects (ZD) means producing products that perform flawlessly in the field, with zero operational failures, not necessarily zero flaws. Flaws may exist, but must not cause failures. Achieving zero faults requires “designing it right the first time” and ensuring specifications support performance, reliability, and manufacturability. Statistical methods like process capacity studies and design of experiments help, but traditional tools like control charts and sampling need re-evaluation for near-zero failure levels. Both Kaizen and Zero Defects aim to reduce defects, emphasizing continuous improvement and process excellence to minimize product failures.AI PerspectiveAI enhances TQC and ZD by enabling real-time quality monitoring using computer vision and deep learning. Defects can be detected automatically during production, and root causes can be identified quickly, helping maintain high-quality standards and achieve zero-defect goals.iv. The Concept of Six SigmaImai (1986) did not discuss the relationship between Kaizen and Six Sigma, as Six Sigma emerged as a management concept at a later stage. According to Klefsjö et al. (2001), sigma is a statistical measure of process variation, commonly referred to as the standard deviation. The term Six Sigma generally implies the occurrence of defects at a rate of 3.4 defects per million opportunities (DPMO).The sigma value indicates how often defects are likely to occur; however, according to Hahn et al (1999) and Linderman et al (2003), Six Sigma has not been carefully defined in either the practitioner or academic literature. Six Sigma uses unique metrics, including Process Sigma measurements, critical-to-quality metrics, defect measures and 10× improvement measures (Hahn et al., 1999; Harry, 1998; Hoerl, 1998). Whatever method is chosen, however, it is essential that the technique is carefully followed, and a solution should not be offered until the problem is clearly defined. Common features of Six Sigma programmes include a top-down implementation approach, a highly disciplined methodology, and a data-driven framework that makes extensive use of statistical decision-making tools. These programmes typically follow the DMAIC cycle—Measure, Analyse, Improve, and Control—to achieve sustainable process improvement.AI PerspectiveSix Sigma is supported by AI techniques like data mining and statistical learning algorithms, which enhance the Define-Measure-Analyse-Improve-Control (DMAIC) procedure. AI makes Six Sigma projects quicker and more accurate by accelerating data collection, identifying hidden patterns, and suggesting process improvements.v. The Concept of Total Quality Management (TQM)Even Total Quality Management was not mentioned by Imai (1986); however, when analysing the components and definition of this concept, we found the similarity between the concept of Kaizen and the idea of TQM. Therefore, this research provided some basic idea of the concept of Total Quality Management (TQM). Powell (1995, 16) further noted that the TQM must be capable of having a mentality of zero defects. Instead of having to check and redo the task, it needs to be able to detect defects as they happen. When comparing the TQM and Kaizen philosophies, TQM’s core idea might be considered as Kaizen. When businesses prioritise the fundamentals of Kaizen from the start, TQM implementation may produce more significant results.AI PerspectiveAI facilitates organization-wide quality improvement within the larger context of TQM by means of continuous feedback loops, real-time dashboards, and automated insights. It supports long-term quality excellence by enabling teams and management to make data-driven decisions and rapidly monitor performance metrics.Statistical methods like process capacity studies and design of experiments help, but traditional tools like control charts and sampling need re-evaluation for near-zero failure levels. Both Kaizen and Zero Defects aim to reduce defects, emphasizing continuous improvement and process excellence to minimize product failures.ConclusionTo sum up, the continuous improvement concept of Kaizen is still an essential tactic for attaining long-term cost effectiveness and operational excellence. The integration of AI into Kaizen Costing amplifies its impact by enabling real-time monitoring, predictive analytics, and process automation. Without making major expenditures, this synergy enables firms to realize considerable cost reductions, improved quality, and speedier advancements. As industries continue to evolve, leveraging both human-driven innovation and AI-driven intelligence will be key to maintaining competitiveness. In the end, the combination of AI with Kaizen is a revolutionary strategy for contemporary cost control and sustained company performance.ReferenceTangen, S. (2002, December). Understanding the concept of productivity. Proceedings of the 7th Asia-Pacific Industrial Engineering and Management Systems Conference, Taipei Tech, Taiwan (pp. 18–20)Imai, M. (1986) Kaizen: The Key to Japan’s Competitive Success. McGraw-Hill Education, New York.Shingo, S. (1981). A Study of the Toyota Production System: From an Industrial Engineering Viewpoint. Productivity Press.Ishikawa, K. (1985) What Is Total Quality Control? The Japanese Way. Translated by Lu, D.J., Prentice-Hall, Englewood Cliffs, New JerseyMonden, Y. (1983) Toyota Production System. Institute of Industrial Engineers Press, Norcross.Hahn, G., Hill, W., Hoerl, R., Zinkgraf, S., 1999. The impact of Six Sigma improvement—a glimpse into the future of statistics. The American Statistician 53 (3), 208–215Harry, M.J., 1998. Six Sigma: a breakthrough strategy for profitability. Quality Progress 31 (5), 60–64Hoerl, R.W., 1998. Six Sigma and the future of the quality profession. Quality Progress 31 (6), 35–42.Gross, J. M., & McInnis, K. R. (2003). Kanban made it simple: Demystifying and applying Toyota’s legendary manufacturing process. New York: AMACOMMcLeod, A. D. (1991). Continuous Improvement: Quality Control Circles in Japanese Industry. By Paul Lillrank and Noriaki Kano. Michigan Papers in Japanese Studies 19. Ann Arbor: The University of Michigan Center for Japanese Studies, 1989, xvi, 294 pp. $13.95. The Journal of Asian Studies, 50(2), 416–418. doi:10.2307/2057250.Powell, T. C. (1995). Total quality management as competitive advantage: A review and empirical study. Strategic Management Journal, 16(1), 15-27.Author may be reached at kananibaijul@yahoo.com and eboard@icai.in
Digital Technology
Ep. 79 — Cloud-Based Accounting: Transforming Financial Management In The Digital Era
CA Journal
· July 2026
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Cloud-Based Accounting: Transforming Financial Management In The Digital EraThis paper explores the evolution, benefits, and challenges of cloud-based accounting systems in the digital economy. Cloud-based accounting offers flexibility to manage finances anytime, anywhere, enabling real-time collaboration, automation, cost savings, and regulatory compliance. Its popularity stems from mobile access, scalability, and integration with other business tools. However, issues such as cybersecurity, vendor lock-in, and internet reliance persist. Case studies highlight its impact on operational efficiency across sectors. Emerging trends point to the growing influence of AI, blockchain, and stricter regulations, underscoring the strategic importance of cloud-based accounting in modern financial management.Concept and Architecture of Cloud-Based AccountingFinancial software hosted on remote servers, as opposed to local desktop computers, is referred to as cloud-based accounting systems. These systems utilise cloud computing technologies to deliver accounting functions on a subscription basis, encompassing bookkeeping, financial reporting, invoice management, and payroll.Three layers make up the core architecture:Infrastructure-as-a-Service (IaaS): Provides foundational IT resources, including storage and servers.Platform-as-a-Service (PaaS): Provides a platform for developers to build customised applications.Software-as-a-Service (SaaS): Delivers the actual accounting applications used by end-users.The article highlights the role of cloud-based accounting in improving operational efficiency with an exhaustive list of case studies from across various industries. Future trends appear to revolve around AI and blockchain playing a larger role, with tighter regulation, underlining the influential role they play in the current financial era.Cloud vs Traditional Accounting Software: A Quick ComparisonThe basic difference lies in collaboration and accessibility. Cloud-based accounting helps people to collaborate from any location with an internet connection. It allows for multiple users to work simultaneously without any paperwork. Conventional software, in contrast, is installed on a single system, which limits access to that specific location and device.Need for Cloud-Based & Online Accounting SoftwareThe adoption of cloud-based accounting systems varies by business type and size. Online accounting software provides a centralised, real-time solution for businesses operating from multiple locations, such as retail chains, large audit firms, and multinational corporations (MNCs).Cloud-based accounting helps members to communicate easily from anywhere, unlike desktop accounting systems, which improves operational efficiency, especially in digital-first businesses. One industry expert expressed it well:“Cloud is no longer a choice; it is the default.”Outdated legacy technologies, frequently located in remote locations, can impede corporate agility and responsiveness in today’s fast-paced world. Modern company continuity requires remote access and issue resolution, which offline technologies inhibit. If their operating demands are simple and localised, a traditional configuration may work for relatively tiny enterprises or those with minimal digital infrastructure.The rise of SaaS accounting models presents an attractive cloud-based alternative to traditional systems, such as Tally, now known as Tally Prime. Due to their affordability, automation capabilities, and compliance readiness, these online platforms are popular among medium-sized firms, microenterprises, and small businesses in India.When Should a Business Adopt Cloud-Based Accounting?Businesses seeking flexibility, real-time information, and cost-effective financial administration should use cloud-based accounting. Due to their low cost and simplicity, startups and modern organisations use cloud solutions early.As small businesses grow, spreadsheets and manual bookkeeping become error-prone and inefficient. Cloud-based accounting systems automate, improve accuracy, and ensure tax and financial compliance to avoid such complications.Cloud-based accounting is a good alternative for almost every firm, regardless of size or industry, due to its scalable options.India’s Accounting Software MarketIndia’s Accounting Software Market was valued at USD 3.38 billion in 2024 and is expected to reach USD 5.75 billion by 2030, exhibiting a compound annual growth rate (CAGR) of 9.1% during the forecast period. This is fueled by increased digitisation, demand for real-time financial reporting, regulatory compliance, and operational efficiency. SMEs are increasingly adopting cloud-based accounting tools for their scalability and cost-effectiveness. Government initiatives, such as the integration of GST and digital payments, also support market expansion. Key players are innovating with AI and machine learning to enhance automation and predictive insights, positioning the market for continued growth and technological advancement.YearSpending (USD Billion)YearSpending (USD Billion)201322.3202074.1201426.4202171.8201532.2202287.7201635.72023110.6201747.42024181.09201866.12025271.5201966.8 Annual spending on Cloud IT Infrastructure worldwide from 2013 to 2025 (in billion U.S. dollars)Source: StatistaYearMarket Size2024USD 3.38 Billion2030USD 5.75 BillionIndian Accounting Software Market — forecast to grow at a CAGR of 9.1%Source: https://www.researchandmarkets.com/report/india-accounting-software-marketKey Drivers of Cloud-Based Accounting AdoptionCost Efficiency: Cloud-based accounting reduces capital expenditure on IT infrastructure and decreases operational costs associated with system upgrades and maintenance. The pay-as-you-go pricing model is particularly attractive for startups and small businesses with limited budgets. There is no more requirement for dedicated IT support staff to manage on-premise servers.Accessibility and Mobility: The ability to access financial data from any device connected to the internet enhances mobility for accountants and business owners. This feature became especially crucial during the COVID-19 pandemic, which accelerated the adoption of remote work models. Cloud-based systems facilitated remote auditing and virtual financial closing.Scalability and Flexibility: Cloud-based solutions enable businesses to scale their operations quickly without requiring significant changes to their IT infrastructure. This is very helpful for seasonal businesses or firms undergoing rapid expansion.Integration Capabilities: Cloud platforms often provide API connectivity with other business tools, such as ERP, CRM, and inventory management systems, enabling a seamless flow of information and facilitating better decision-making. Integration with banking APIs also allows automatic bank reconciliations and cash flow forecasting.Innovation and Automation: Cloud-based accounting tools aid in categorising transactions, identifying unusual activity, and generating audit trails through the use of AI. This type of automation not only reduces human errors but also saves time, enabling businesses to focus more on strategic planning and informed decision-making.Benefits to Business Performance and EfficiencyCloud-based accounting enhances the speed, accuracy, and transparency of financial data. Cloud computing in accounting enhances decision-making by providing real-time analytics and dashboards, which in turn lead to improved operational and strategic outcomes.“Businesses seeking flexibility, real-time information, and cost-effective financial administration should use cloud-based accounting. Due to their low cost and simplicity, startups and modern organisations use cloud solutions early.”Real-Time Financial Reporting: Businesses can now monitor real-time cash flows, receivables, and payables, resulting in more effective working capital management. Cloud-based tools generate interactive dashboards, scenario models, and visual financial summaries that help in quick decision-making.Enhanced Collaboration: Multiple stakeholders, such as accountants, tax advisors, and auditors, can simultaneously access financial records, and thereby reduce information asymmetry and facilitate collaboration. Cloud-based accounting fosters collaborative budgeting and planning processes, especially for multinational teams.Environmental Sustainability: By minimising the use of paper and physical infrastructure, cloud-based accounting supports corporate sustainability initiatives. Digitised invoicing, e-signatures, and electronic archiving help firms reduce their carbon footprint.Improved Auditability and Compliance: Audit trails, version histories, and permission logs in cloud systems enhance regulatory compliance. Auditors can review data remotely and conduct real-time verifications. Many platforms also issue alerts for overdue tax filings or suspicious transactions.Sectoral ApplicationsSMEs and Startups: SMEs form the largest segment of cloud-based accounting users. The low entry cost and simple user interface enable smaller firms to access sophisticated financial tools previously reserved for larger corporations. These tools help SMEs manage vendor payments, customer billing, and tax compliance efficiently.Public Sector and NGOs: Government agencies and NGOs have started using cloud systems for budget tracking, grant management, and regulatory compliance. The transparency of these platforms helps donors to check fund utilisation and support audit purposes.Educational Institutions and Research Organizations: Academic institutions use cloud-based accounting to manage grants, research funding, and payroll operations with transparency and efficiency. It also helps align educational budgets with national guidelines and reporting requirements.Healthcare and Retail Sectors: In the healthcare industry, cloud-based accounting facilitates insurance reimbursements, inventory management, and patient billing. In retail, it enables dynamic pricing, supply chain visibility, and multi-channel transaction reconciliation.Drawbacks of Cloud-Based AccountingCybersecurity and Data Privacy: Despite the numerous advantages, cloud-based accounting raises critical concerns about data security and privacy. Service Level Agreements (SLAs) must be clearly defined to protect against data breaches and ensure compliance with data protection regulations such as GDPR and India’s DPDP Act.Risk of Data Breaches: Financial information is a favourite target of hackers. Companies need to evaluate the security practices of their service providers, including encryption policies, multi-factor authentication (MFA), and zero-trust environments.Regulatory Compliance: Cloud providers are also subject to compliance and regulations across multiple jurisdictions. It is important to comply with ISO standards (such as ISO 27001) to establish trust in the system. Nations such as the US, EU members, and India have enacted strict rules for data localisation and audit.Disaster Recovery and Redundancy of Data: The majority of cloud platforms include automated backup and disaster recovery features, which keep your data safe from hardware failure and ransomware. Data availability is also guaranteed, even in worst-case scenarios, due to the geo-redundant storage.Internal Controls and Access Rights: User access permissions must be strictly followed. There should be a proper system for role-based access, audit trails and user authentication.Challenges in ImplementationInternet Dependency: A stable internet connection is a prerequisite. This can be a limiting factor in rural or underdeveloped regions. Network outages or latency issues can temporarily halt accounting operations.Resistance to Change: Old firms and traditional accountants often resist cloud-based systems due to a lack of digital literacy and concerns about job loss. Effective training and change management programs are needed.Vendor Lock-In: Firms should use platforms having data portability and open API facilities, as it is challenging to switch between cloud vendors due to different data formats.Hidden Costs: Initial installation costs for cloud-based accounting are relatively low. However, with the growth of business, renewal fees and the addition of the latest features can be costly. Businesses should do a total cost of ownership (TCO) analysis before adopting a cloud-based system.Comparative Case StudiesCase Study 1: Cloud-based accounting in South African SMEs — The examination of key drivers of cloud-based accounting in South Africa found that perceived ease of use, technological readiness, and top management support significantly influenced adoption decisions. SMEs that use cloud-based accounting report better tax compliance and operational efficiency.Case Study 2: Adoption in Manufacturing Firms — It was found that cloud server deployment resulted in significant cost savings and operational efficiency in Chinese manufacturing firms that integrated their accounting and production planning systems. AI-based scheduling further optimised inventory levels and payroll management.Case Study 3: Cloud-based accounting in the Middle East — It was found that cloud computing improved sustainability accounting practices in Jordanian companies by enhancing transparency and stakeholder engagement. It also enabled digital audits and ESG reporting for investors.Case Study 4: Non-profit Sector in the United States — U.S.-based non-profits leveraged cloud-based accounting for managing large donor networks, grant compliance, and program funding. Tools like Sage Intacct and QuickBooks enabled real-time fund tracking and audit preparation.Way ForwardAI and Machine Learning Integration: Cloud-based accounting platforms are integrated with the latest AI features, which help in early fraud detection, invoice categorisation, and predictive analytics. Chatbots are used to answer accounting queries.Blockchain for Enhanced Transparency: Blockchain-based accounting systems help eliminate double entries and provide non-alterable audit trails.Customised Solutions for Niche Industries: Businesses are now obtaining industry-specific solutions tailored to sectors such as construction, e-commerce, and healthcare from the market.Increased Regulation and Standards: International accounting bodies are releasing new standards for cloud-based accounting, which will help harmonise global practices. New guidelines on cloud-based audits, the ethical use of Artificial Intelligence, and transparent ESG (Environmental, Social, and Governance) reporting are needed in the current context.ConclusionCloud-based accounting is more than just a technological upgrade; it represents a strategic shift in how financial data is accessed, interpreted, and acted upon. It enables organisations to be more agile, data-driven, and collaborative. It is not easy to adopt cloud-based accounting, but from a cost-efficiency, real-time view, and operational scalability perspective, companies must start using cloud accounting. The power of these new advances in AI, blockchain and cybersecurity will add another layer of trust, reliability and functionality to cloud-based accounting systems in the future. As the digital transformation continues to evolve, redefining business ecosystems, the use of cloud-based accounting has become a necessity for firms to remain competitive and compliant in the ever-changing financial landscape.ReferencesBala, H., Zomaya, A. R., Omar, R., Al-Absy, M. S. M., Ya’u, A., Sani, A. U. A., & Khatoon, G. (2024). Effect of Cloud Accounting Computing on Firm Performance. In Harnessing AI, Machine Learning, and IoT for Intelligent Business: Volume 2 (pp. 593–609). Cham: Springer Nature Switzerland.Dlamini, B. (2025). Key Drivers of Cloud Accounting Utilization by Small and Medium Enterprises in Zimbabwe. International Journal of Economics and Financial Issues, 15(2), 183.Esawi, K. A. M., Shehab, L. S., & Benzerrouk, Z. S. (2025). The Impact of Cloud Computing on Achieving the Quality of Financial Reports. A Case Study of Egypt Bank. WSEAS Transactions on Business and Economics, 22, 48–57.Golec, M., Zhu, L., Hatay, E. S., Wang, H., & Gill, S. S. (2025). Music Emotion Recognition-Based Business-Oriented Visualization Framework Using AI-driven Serverless Cloud Computing. International Journal of Business Analytics (IJBAN), 12(1), 1–26.Liu, R. P., Mellou, K., Gong, E. X. Y., Li, B., Coffee, T., Pathuri, J., ... & Menache, I. (2025). Efficient Cloud Server Deployment Under Demand Uncertainty. Manufacturing & Service Operations Management.Moustakas, T., & Kolomvatsos, K. (2024). Drift-based task management in support of pervasive edge applications. Internet of Things, 27, 101277.Zamani, A. S., Jagadish, R. M., Kumar, B., Ghori, A. S., & Bhyratae, S. A. (2025). Perspectives of Machine Learning in the Convergence of Artificial Intelligence and Edge Computing. In Advances in AI for Cloud, Edge, and Mobile Computing Applications (pp. 189–211). Apple Academic Press.https://cloudcomputing.media/adoption/the-evolution-of-cloud-computing-a-comprehensive-overview/, John Connor, October 9, 2023https://dclouds.in/cloud-based-accounting-software-india/, Biplob Devhttps://www.netsuite.com/portal/resource/articles/accounting/cloud-accounting.shtml, Ian McCue, September 3, 2025https://silvermicrosystems.com/New-Digital-Ideas-Strategies-To-Accelerat-The-Business-Growth.htmlAuthor may be reached at muna.moonstar1987@gmail.com and eboard@icai.in
Work-Life Balance
Ep. 80 — Navigating the Complexities of WorkLife Balance
CA Journal
· July 2026
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Navigating the Complexities of Work-Life BalanceWork-life balancing is approached differently among sportspersons, students, decision makers, politicians, researchers, artists, businesspeople, workers, office staff, etc. Different phases of life have different impacts on work-life balance. For certain persons, worktime is protected by law to avoid exploitation. Work is composed of career-related work and home-related work. Life is composed of time for recharging the body, time for family and society and time for passion.Saving time is an important component of work-life balance. Save time by reducing unproductive time, idle time and improving efficiency, from work as well as from home, and devote that saved time to quality family time or quality office work. With every work-life choice one makes, there are consequences accordingly. One wrong choice or decision can ruin your career opportunity or your life at home.IntroductionThe concept of “work-life balance” is fast becoming a cornerstone of modern discourse, a siren song promising harmony amidst the cacophony of professional and personal demands. However, the reality is often far more complex, a delicate dance between the pressure of the work, the need for a livelihood, ambition and well-being. Achieving a truly sustainable balance requires a nuanced understanding of its components and a commitment to enact meaningful change.It was during the Industrial Revolution that the concept of separation between work and home became more defined. However, the challenges we face today are vastly different from those of the previous generations.Firstly, it is crucial to dispel the misconception that work-life balance is a perfectly symmetrical division of time; neither a rigid 50/50 split is right, nor any other fixed formula like 8 hrs work is right. It also can’t be governed solely by law, but yes, law can help in some cases.Work-life balance is not a static state but a dynamic equilibrium. Work-life balance is not a destination but a journey. It is a continuous process of evolution, adaptation and adjustment. It is the ability to effectively manage, balance and prioritize responsibilities across various domains of life, including career, family, personal interests, sleep, entertainment, society time, time for daily errands, time for health, time for children, and time for knowledge updation, among others. It is about feeling content and fulfilled in each area without sacrificing one for another. Importantly, it is a subjective experience; what constitutes balance for one person may be entirely different for another.The topic of work-life balance has generated significant discussion both in India and abroad over the past decade, with varying perspectives emerging from business leaders, policymakers, and social commentators. When some industry leaders made some statements with regard to longer working hours, or working on Sundays to increase productivity, this created some controversy among some sections of people. The statement released was not well understood, as given in what context, why made, and for whom.Life is important in terms of mental, physical, social and emotional well-being. At the same time, life without a good career is a life without a purpose. Without a career, affording luxury for oneself and one’s family can remain a pipe dream. Clearly, according to little time for work, must not be paraded as work-life balance – it is, instead, a recipe for ruining one’s career.The statement made by Jack Welch, former CEO of General Electric, is very interesting and most relevant to this era of life.“There’s no such thing as work-life balance. There are work-life choices, and you make them, and they have consequences.”I have tried to analyse this statement in depth in this article.Defining the Components of “Work-Life Balance”Human beings have a limited time out of the unlimited time available in the universe. And since the time is limited for human beings, the question or discussions of work-life balance come into the picture, as we all have to make our lives purposeful. This phrase “work-life balance” is much more complex than it looks.It has two components, i.e.,WorkCareer-related workActivities undertaken for achieving the purpose or goals of life. Career-related work can be done from both the workplace and home.Home-related workWork related to household management and daily errands, such as grocery shopping, laundry, home cleaning, dropping off and picking up children from school, and providing medical care to one’s spouse and children, etc.LifeActivities undertaken to remove fatigue, or to recharge the body and mind.Recharging the body and mind through sleep, entertainment, exercise, and health is primarily possible only at home, but has its own presence at the workplace, in the form of small breaks, etc.To devote time to your family, friends and community.Time for knowledge update or personnel interest.Now, since time is limited for the human being, and life needs to have a purpose, all aspects of work life need to be managed in the best optimal manner, as all are correlated and have an impact on each other.Challenges to Work-Life Balance:Several factors contribute to the difficulty of achieving work-life balance in today’s world:Technological Intrusion: The constant connectivity because of smart phones etc., has blurred the lines between work and personal time.The “Always-On” Culture: Many workplaces foster a culture that values constant availability and responsiveness. This can lead to burnout and stress. The rising cost of living and job insecurity can force individuals to work longer hours or take on multiple jobs, leaving little time for personal pursuits.Societal Expectations: Societal norms often place unrealistic expectations on individuals to excel in both their careers and personal lives.The Rise of Remote Work: Although remote work can offer flexibility but fails in establishing boundaries between work and home.Personal Ambitions: Driven individuals may struggle to prioritize personal life over career goals.Changing Family Structures: Dual income households, single parenthood or caring for elderly relatives are responsibilities, making it difficult to manage work and family life effectively.Globalization: The globalized economy has intensified competition in the workplace, leading to longer working hours and increased pressure to perform.Infrastructural Challenges: Especially for India and in many other countries, the road, rail, or metro network is not streamlined for fast commuting. The precious working hours are lost in traffic jams, and this severely hampers work-life balance.Why the Need for Work-Life Balance?Work-life balancing means balancing the following aspects of life:* Mental, physical and emotional well-being: This involves prioritizing sleep, nutrition, and exercise. Neglecting these fundamental needs can lead to burnout, decreased productivity, and compromised overall health. It can impact physical, mental and emotional health.* Social Well-being: This encompasses nurturing relationships with family and friends, participating in community activities, and maintaining a sense of belonging. Time dedicated to family and friends strengthens bonds and provides essential social support.* Professional Well-being: This involves finding meaning and purpose in work, setting realistic goals, and maintaining healthy boundaries between work and personal life.Employer’s Role in Work-Life BalanceEmployers play a critical role in fostering a culture that supports work-life balance. This can be achieved through the following measures:Promoting a Culture of Flexibility: Offering flexible work arrangements, such as remote work, flexible hours, and compressed workweeks.Encouraging Time-off: Promoting the importance of taking vacations and time-off to recharge.Providing Employee Wellness Programs: Offering programs that support employee physical and mental well-being, such as stress management workshops and fitness classes.Leading by Example: Leaders should model healthy work-life balance practices and encourage their employees to do the same.Reducing Workload: Where possible, workloads should be reduced to prevent burnout.Providing Adequate Time for Breaks: Breaks during the day are very important for mental and physical well-being.Changing the Method of Wages: Focus on outcome-based work instead of time-based work. Instead of traditional in-time/out-time calculations, performance and deliverables become the primary basis for remuneration.Good HR policies: Clear policies are required for workers and general office staff, including defined limits on overtime hours and assured minimum wages for overtime work.However, a negative practice observed in some Indian workplaces is the expectation that subordinates should not leave the office before their seniors. Often, employees remain at work without productive tasks merely to comply with this unwritten convention, even when supervisors may be engaged in personal activities. Such unproductive time-wastage in the name of hierarchy or tradition should not be encouraged.Work-Life Balancing during Different Phases of LifeLife is fluid, and our needs fluctuate. Some weeks, work may demand more attention, while personal commitments may dominate on other days. Similarly, the phase of life also determines where the weightage of the work-life balance will lie — it will differ for students or for someone just building their career. Similarly, one with toddlers to manage will have a different equation from one at retirement age. Irrespective of any phase of life, a minimum time is needed towards life well-being, otherwise a person can get burned out and ruin the other remaining phases of life.Defining the Importance or the Role of Time in Work-Life BalancingBoth work and life are affected by:Quality or Efficiency of Doing ThingsThere is a continuous need to improve the efficiency and quality of the time spent either at work or in life.Unproductive WorkTime consumed in activities with no contribution towards one’s purpose of life, like too long commuting time between home and workplace, wasteful/excessive scrolling of social media or watching excessive TV etc need to be reduced as it is unproductive work.Idle TimeTime consumed in doing nothing, like too long sleep, etc, may be termed as idle time, and it needs to be converted into usable time.Improving efficiency, identifying and reducing unproductive time, and idle time is a continuous process, and one will always find areas of improvement. This extra time generated by improving efficiency, or by reducing unproductive time or by reducing idle time can be used for either work or for life.Explaining Work-Life Balancing among various Categories of PersonsCategory 1:For Students / Sports Persons / Self-Employed Businessmen or Professionals / Scientists or Researchers / Investors / Experts like Individual Contributors / Artists / Authors, etc.For such individuals, there is no question of an employer as they are self-employed, or career-oriented students and sportspeople. Their work is not monotonous. This category of personnel is not governed strictly by rules and law. These individuals are passionate about developing extraordinary skills and hence are self-motivated.At some point in their life, such individuals, because of the nature of their work, have to get more inclined towards work to produce outstanding results. But while achieving their goal, they are also supposed to give enough time to their health and well-being.Category 2:For Decision Makers / CEOs / Government Bureaucrats / Politicians, etc.For such individuals, there is always an employer or the voter who has elected them for a specific period. Such individuals are career-oriented, passionate and self-motivated about what they do. They are not governed strictly by the rules of the employer but rather more by deliverables and targets of performance. Their work is not monotonous; it is rather creative. They have liberty or flexibility in their working schedule. Their working hours cannot be protected by law.This class of employees are normally working at senior positions, and their decisions or work impact a large section of society. They are supposed to think about business or ways of improving service to their beneficiaries 24 hrs and are supposed to be available physically or on call at any point of time, to the service of their beneficiary. And because of the nature of their work, their work-life balance should be more inclined towards work at the cost of other activities, but not at the cost of their health and well-being.Category 3:For WorkersFor such individuals, there is always an employer. They are governed strictly by the rules of the organisation in terms of time, output and quality standards. On many occasions, these individuals do work for their living only, and the element of passion is minimal. Employers need to keep their workers motivated by providing job security and career opportunities, as their work is very monotonous.The role of the employer is highly significant here. It is critical to balance all three, i.e., (a) employees’ wellness, (b) wages and (c) efficiency, to achieve the win-win position for both employer and employee. While the employer should not exploit this category of workers or staff, the employee should also see that they give the maximum output for the time spent at the organisation. And because of the nature of their work, the work-life balance for them must be protected by law. Also, it is equally important for this class of employees that the time they get after work is well spent. Otherwise, the meaning of work-life balance would be wasted even if the law protects it.Category 4:General Office or Sales Staff / Supervisors / Jr Managers / Jr Government Employees, etc.For such individuals, there is always an employer. Normally, their working time is not regulated by law. A good number of these individuals are working only for a living. Like workers in category 3, their work is mostly monotonous, and so by giving job security, providing career opportunities can make staff motivated, which in turn can result in better output.It is this class of personnel who often talk or make noise about work-life balance. Sometimes they feel they are not paid enough, or sometimes they themselves are not career-oriented or sometimes their employer is exploiting them as they are more vulnerable.Category 5:For SpouseHow spouses can help each other in work-life balance:So, while we talk of work-life balancing, we also need to talk of sharing responsibility among spouses.When both husband and wife are workingIf the spouse is also working, then dividing the work at home between both, according to one’s expertise, would be a smart approach. Cooking, household chores, parenting responsibilities and caregiving often fall on women’s shoulders in many societies. Women who try to juggle both home and office without spouse support either over-stress themselves or fail to achieve their best at either one or both fronts. The task of striking a balance between home and office is, therefore, a more enormous challenge for the women workforce who have less support at home from their spouses.“I have so much admiration for women who are mothers, who balance family and work.”— BeyonceWhen the husband is only working, or the wife is only workingIn case one is working, and the other is staying at home, he or she who is not working should take more responsibility for work at home, as much as possible. This will generate more quality free time for each other, and chores will not feel like a burden to either partner.Summarising Work-Life BalancingWe all talk about saving the environment, emphasizing on energy, water, and soil, but hardly anyone talks about saving time. I would say, instead of talking too much about work-life balance, we should learn to save time by reducing unproductive time, minimising idle time, and improving efficiency—both at work and at home—and devote that saved time to quality family time or meaningful office work.Work-life balance is an art. Demanding fewer working hours, i.e., working 48 hrs a week, does not guarantee a better work-life balancing as one may waste it as idle time or unproductive time. Even working 70 hrs a week, you can balance your home life and achieve excellence in office work. One needs to master this art. We need to make our lives better by effectively utilizing the time we have at home, with family and to recharge ourselves. It’s not just about the quantity of time you spend with your loved ones or staying at home. It is the quality time spent that will matter to achieve the best result of work-life balancing.Let us not look at work and life as if they are opposed to each other. Let us not over-negotiate work time and ruin one’s career. Let us not stress out and burn out, while compromising health and family. Both aspects are equally important, and we need to integrate them to give a feeling of satisfaction with the time spent in each area of life. It is important to note that the debate surrounding work-life balance is complex and evolving, with varying perspectives on the optimal approach. Work-life balance is not a luxury but a necessity for thriving in today’s fast-paced world.“When you have balance in your life, work becomes an entirely different experience.”— Cara DelevingneOne may choose work with limited working hours, or one may work hard to gain expertise or financial stability; however, balancing these choices with mental, social, and physical well-being, based on one’s personal dynamics, is equally important. With every work-life choice one makes, there are consequences. A single wrong choice or decision can adversely impact one’s career opportunities or life at home.◆◆◆Author may be reached atchaplotrajeshug@gmail.com and eboard@icai.inFebruary 2026 www.icai.org
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Ep. 81 — Startups and India’s Economic Transformation: The Expanding Role of Chartered Accountants
CA Journal
· July 2026
00:00
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Startups and India's Economic Transformation: The Expanding Role of Chartered AccountantsStartups are no longer a buzzword; they have become a part of our daily lives. We can see why the term startup revolution feels more real today than before. A transformation is happening now. Families that once pushed children toward professions such as engineering, medicine, law or government service now celebrate risk-taking as a real career choice. The startup revolution is driving a transformation in the Indian business landscape, reflecting how families are increasingly valuing risk-taking. We can notice that discussions around seed funding, valuation, and acquisitions take place in company boardrooms, while conversations about startups are equally common in college canteens, co-working cafés, group discussions, and industry networking spaces. This goes on to show that Startups are changing the identity of the country.We can see transformation in the decisions individuals make each day. Groceries arrive at home within minutes of an order placed through a quick-commerce app. Cab services anticipate the need for mobility even before it arises. Food aggregators deliver meals at all hours.It can be seen that India today is home to one of the fastest-growing startup ecosystems in the world. The number of startups has grown rapidly, and unicorn valuations have risen at a speed that earlier seemed impossible for a developing economy with regulatory constraints. The spread of entrepreneurship beyond the cities is also noteworthy. Cities that were once unknown to venture capital firms are now places for ideas. These cities may be manufacturing hubs, college towns, or new technology clusters that get help from state incentives.Today, India proudly stands as the third-largest startup ecosystem in the world, with nearly 125 unicorns and thousands of early-stage ventures emerging not just from metros but also from Tier-2 and Tier-3 cities. More importantly, there has been a cultural shift. Young Indians are no longer asking, "Where will I get a job?" Instead, they are asking, "What problem can I solve?" In doing so, they are creating jobs for many others. For years, parents encouraged their children to get stable government or corporate jobs. That mindset is now changing. Rather than prioritizing job security, young professionals want to create job opportunities for other people, address problems in industries, and use technologies to solve challenges. This shift shows renewed confidence among the youth and highlights their aspiration to become creators instead of just consumers of global technology.Decoding the Startup Ecosystem and its DefinitionIn professional practice, especially for Chartered Accountants, clarity matters. Not every new business qualifies as a "startup" in the legal or policy sense.Under the DPIIT framework, a startup must satisfy specific conditions. It must be less than ten years old, structured as a private limited company, limited liability partnership (LLP), or registered partnership, and its turnover must not have crossed ₹100 crores in any financial year. Most importantly, it must be innovation-driven, working on a product, process, or service with scalability and the potential to generate wealth and employment.A business formed by simply splitting or restructuring an existing entity does not qualify. This distinction is crucial. Many founders often discover too late that their structure makes them ineligible for benefits they were counting on.This is where the CA's role begins, not at the time of audit, but at the very inception of the idea. One correct decision at the structuring stage can unlock years of tax benefits and government support.Government as an Enabler, Not Just a RegulatorThe Startup India initiative, launched in 2015, changed the tone of policymaking. Entrepreneurship was no longer treated as a risky deviation from stable employment but as a national priority. The government's approach rests on three pillars: funding support, regulatory ease, and digital infrastructure.Navigating the Tax Holiday: Section 80-IACSection 80-IAC offers eligible start-ups a 100% tax exemption on profits for three consecutive years out of their first ten years. On paper, it sounds straightforward, but in practice, it is not. Beyond DPIIT recognition, start-ups must clear scrutiny by the Inter-Ministerial Board (IMB), which evaluates whether the business is genuinely innovative. Documentation, audits, timely filings, and compliance discipline become non-negotiable.In order to successfully claim the deduction under Section 80-IAC, startups must follow a clear and structured process:Obtain DPIIT Recognition and Section 80-IAC Eligibility Certificate: The startup must first apply for DPIIT recognition through the official portal, submitting required documents such as the certificate of incorporation and details of its innovative business model. After DPIIT recognition, the Certificate of Eligibility must be obtained from the Inter-Ministerial Board (IMB).Tax Audit and Form 10CCB: The startup's accounts must be audited by a Chartered Accountant. The audit report must be submitted in Form 10CCB, which includes details of the profits and the calculation of the deduction under Section 80-IAC.File the Income Tax Return (ITR): The ITR should be filed by the due date, including the details of the 80-IAC deduction claimed under the Chapter VI-A deductions section.The Startup India Seed Fund Scheme (SISFS), an oxygen tank for ideation, ensures that many promising ideas do not die, not because they lack merit, but because they run out of money too early and was designed precisely to address this gap.The Startup India Seed Fund Scheme (SISFS), an oxygen tank for ideation, ensures that many promising ideas do not die, not because they lack merit, but because they run out of money too early and was designed precisely to address this gap. With an outlay of ₹945 crore, the scheme provides grants of up to ₹20 lakh for proof of concept and prototype development, and debt or convertible instruments of up to ₹50 lakh for commercialization and scaling. Eligibility conditions are strict, and funds are routed through approved incubators. Preparing a credible fund utilization plan, milestone mapping, and financial projections is essential. This is where a CA quietly adds immense value, bringing structure, realism, and credibility to the founder's vision.The CA's advisory role is paramount in confirming eligibility. The startup must be DPIIT-recognized, incorporated not more than 2 years ago at the time of application, and have at least 51% Indian ownership. Furthermore, it must not have received more than ₹10 lakhs in monetary support from other government schemes. The CA assists in crafting a compelling application, which requires detailed financial statements, a clear fund utilization plan, and a milestone roadmap. The incubators evaluate applications based on novelty, team strength, and the feasibility of the technical claims. The CA ensures the financial presentation is robust, credible, and aligns with the scheme's evaluation criteria.It can be seen that financial support comes with reforms that aim to cut the compliance burden and build trust in the ecosystem. In the past, inspection mechanisms made new businesses feel apprehensive about harassment or unexpected penalties. Now, companies can self-certify labour and environmental compliance requirements for a specified period. Insolvency and exit processes now make business closures quicker. Intellectual property laws have also been strengthened, with rebates on patent filing fees, faster procedures, and access to facilitators who help with applications. These measures encourage the founders to focus on protecting innovation. Protecting innovation attracts quality investors. The government has also provided significant non-fiscal support, which are as follows:Intellectual Property (IPR) Rebate: Startups receive an 80% rebate on patent filing fees, along with a panel of facilitators to assist in the process. Protecting intangible assets such as patents and trademarks is fundamental to a startup's valuation.Regulatory Relaxation: In the case of labour laws, no inspections will be conducted for a period of 5 years.Startups shall be allowed to self-certify compliance with 6 labour laws and 3 environmental laws through a simple online procedure.Closure/Winding up will be a quicker process, completed within just 90 days!In the case of environment laws, startups that fall under the 'white category' (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases.The BHASKAR Platform: The Bharat Startup Knowledge Access Registry (BHASKAR) aims to be a single, centralized database connecting all stakeholders, including founders, investors, mentors, and policymakers. The CA guides startups to leverage this network, enhancing their credibility and access to resources.Startups receive an 80% rebate on patent filing fees, along with a panel of facilitators to assist in the process. Protecting intangible assets such as patents and trademarks is fundamental to a startup's valuation.From Compliance Agent to Growth PartnerIt can be noticed that the profession of Chartered Accountancy has grown alongside the growth of startups. In the past, the Chartered Accountant focused primarily on tax, audit, and bookkeeping. Today, the entrepreneurial world asks the Chartered Accountant to do more. The Chartered Accountant now works as an advisor for business decisions at every stage. The Chartered Accountant builds budget plans, checks cash flows, maps risks, creates models, runs audits, prepares MIS reports, performs valuation, advises on funding tools, plans cap-table structures, and designs investor communications. Many first-time founders do not know these frameworks and try to grow without guidance. Rapid scaling can bring chaos to records and also lead to governance deficiencies. Chaos in records and governance deficiencies can threaten the survival of the business even when revenue grows.Deal structuring is a part of a startup's life and requires professionals who understand both the rules and the business. Investors seek returns while also expecting transparent accounting and a fair price, whereas founders want money but want to retain control. Striking a balance requires people who know the rules and the business. Chartered Accountants who advise founders during deal structuring ensures that agreements, share issuances, convertible instruments, and funding terms follow tax rules, FEMA regulations, and long-term plans. It is advisable to startups to plan their structure carefully, as poor planning can lead to faster-than-expected dilution, which in turn reduces the founders' ability to protect their vision.The profession of Chartered Accountancy has grown alongside the growth of startups. In the past, the Chartered Accountant focused primarily on tax, audit, and bookkeeping. Today, the entrepreneurial world asks the Chartered Accountant to do more.Artificial Intelligence, machine learning platforms, predictive analytics, automation software, and cloud-based ERP solutions are tools that CAs use every day. CAs used to reconcile hundreds of entries by hand. Now, CAs use automated checks to spot anomalies. CAs used to prepare MIS by hand. Now, dashboards auto-generate real-time insights for decision-makers. These developments let CAs deliver value and move from a compliance practice to a strategic advisory role. Automation is not a threat. Instead of fearing automation, the profession is learning to embrace automation as a partner.The profession is redirecting its focus toward interpretation, planning, and governance.New areas now need advisory systems. Deep-tech ventures working in AI, machine vision, or robotics need cost plans for computer setup, data collection, model learning, and ongoing improvement. Green-tech ventures need advice for carbon tracking, reporting, subsidy utilization records, and financing. Agri-tech ventures need guidance on buying prices, supply chain grouping, FPO structuring, and taxation of primary produce. Healthcare technology ventures must also comply with service delivery models, hybrid pricing plans, and liability exposure. It can be noticed that travel technology enterprises need expertise in cross-border taxation. Travel technology enterprises also need expertise in testing pricing algorithms and managing fluctuating forex exposures.All of these developments point to one fact i.e., innovation works best when it rests on the foundation of governance, compliance, and financial discipline. Ideas alone do not build a lasting business. Trust comes from conduct, sound controls, and accurate financial disclosures. Trust grows when a CA's work is honest and well-checked. These expectations elevate the CA's role from a mere compliance agent to an integral part of the startup ecosystem.The Chartered Accountant can support this journey. The Indian CA curriculum provides knowledge in tax, finance, audit, and corporate law. When the Chartered Accountant adds the right mindset, technology skills, and sector focus, they become a guide. The Chartered Accountant must now grow both in skill and in thinking. We should stop seeing the Chartered Accountant as a watchdog or compliance enforcer. Instead, start seeing the Chartered Accountant as an architect of trust and a growth partner in the startup journey.In my view, India's economic future depends on the ability to nurture entrepreneurship and maintain honesty and responsibility. If startups fail, it is because the market did not accept the innovation, not because of governance problems. If startups succeed, they must follow the rules, not exploit regulatory loopholes. This development strengthens the economy.ConclusionIndia's journey as a startup powerhouse has only just begun. The immense potential of our youth, combined with the government's digital and financial infrastructure, promises a future brimming with opportunities. However, ideas alone do not build economies; compliant, financially disciplined execution does.The Chartered Accountant is not merely a service provider in this journey; we are the architects of trust and scalability. By mastering complex funding schemes like SISFS, navigating the tax maze of Section 80-IAC, and specializing in future-ready domains such as ESG and AI governance, CAs transform raw, high-risk ideas into stable, profitable, and global business models. It is a time for our profession to embrace innovation and move beyond the ledger to the boardroom, seizing the massive opportunity before us. Let us embody the spirit of the ecosystem and carry on with the mission "Har Har Startup! Har Ghar Startup!" (A Startup in Every Street, an Entrepreneur in Every Home).Referenceshttps://www.startupindia.gov.in/https://seedfund.startupindia.gov.in/https://economictimes.indiatimes.com/https://www.startupindia.gov.in/bhaskarAuthor may be reached at mukullamba62@gmail.com and eboard@icai.inJanuary 2026 | www.icai.org | Pages 23–26
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Ep. 82 — The 21st Century Uprising of India as a Global Innovation Leader
CA Journal
· July 2026
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The 21st Century Uprising of India as a Global Innovation LeaderGone are the times when there used to be underdog stories about India rising to the global stage and becoming a leader. Gone are the times when “The Great Indian Dream” was just an aspiration, or at best, a projection. Today, we are living in the era of Indian excellence, and that too across a number of sectors. India leads the bandwagon of innovation in technology, manufacturing, logistics, and a number of services.While it's still a bit away for India to be on the absolute top in everything, no matter what industry you consider, India would be in the top 5, or even top 3, to watch out more often than not.Indian enterprises are no longer here only for participation; they are here to win and that too, with domination. Today, they are playing a key role in shaping global markets and paving the way for the future. What is actually interesting, or rather almost shocking, is not the speed at which India has grown, but the nature of that growth. If you think about it, post-independence India has never had a huge chunk of capital, bankable inherited privileges, or even a pre-existing pool of talent. What it did have was sheer discipline in entrepreneurship, effortless problem-solving ability, and the biggest difference maker in the Indian success story — efficiency that the West could only dream of achieving.Amidst this phase of transformation, there’s a whole new generation of entrepreneurs in India who are building sustainable systems. They understand that this game is not to be won by building corporations, chasing trends, or mirroring an existing success model. Instead, they are identifying gaps in systems that have been taxing for decades, and fixing the real problem — the system itself. At the heart of it all is technology. They are combining their sectoral expertise with next generation technology and, gradually, they have stopped playing by the textbook and created innovative solutions that the world, today, banks heavily upon.While it may sound a little over the top, India has defied odds with its success in systems like UPI (United Payment Interface), Aadhaar Cards, and world class pharmaceutical manufacturing that is exported all across the globe. Not only that, with moves like global tech giants shifting their manufacturing to India, ISRO’s historic success with Chandrayan, the unprecedented growth of quick commerce, and their rising EV-ecosystem, the world is well-aware of India’s arrival at the leadership table.What is staggering about all of this is how efficiently it was built. Limited capital, price-sensitive markets, market fragmentation, and a complex regulatory structure — all of these obstacles didn’t bring the Indian entrepreneurs down. Instead, they thrived under pressure, only to use these conditions to their advantage later. Because of these constraints, Indian businesses and brands today ensure clarity, transparency, and efficiency. Today, you cannot get away with selling a substandard product to an Indian consumer. Businesses need to provide incredible value, quick delivery, and justify their price tag every step of the way. If a business can create a buyer’s haven, it can also create an entrepreneur’s haven. This has become a mindset today, rather than a consequence of the system. That is exactly why the Indian growth story includes contributions from both private startups as well as government backed infrastructure.At a times when global markets are becoming increasingly unstable, the Indian model has proved to be quite solid and sustainable. Indian entrepreneurship is perfectly aligned with the needs of the global economy, and it is pushing qualities like scalability, efficiency, and result-driven solutions.Especially over the last decade and a half, India’s startup ecosystem has grown manifold. The focus is shifting from products and marketplaces to infrastructure and platforms. This shift is part of the “build systems, not companies” mindset. Indian businesses are continuously boosting the growth of platforms that enable better planning, execution, analysis and optimization, ultimately allowing the entire industry to function better.“ At a times when global markets are becoming increasingly unstable, the Indian model has proved to be quite solid and sustainable. Indian entrepreneurship is perfectly aligned with the needs of the global economy, and it is pushing qualities like scalability, efficiency, and result-driven solutions. ”This shift is not merely an observational analysis. It is quite evident across a number of sectors such as finance, logistics, education, media, and commerce. This is a major reason why not only local markets, but also other consumer bases are leaning towards solutions from Indian enterprises owing to their global relevance. They are not really trying to be global. They are global by design. This is because India is spearheading the growth wagon.Artificial Intelligence is another term that rarely misses a conversation in the Indian context. Afterall, it has played a significant role in the country’s current success and will continue to power Indian innovations in the future too. Today, AI is no longer a buzzword or something that we are supposed to prepare ourselves for. It’s not going to arrive. It has arrived, and it has changed everything. It impacts decision-making in nearly every major industry today. Whether it is prediction, personalization, optimization, learning, executing, or analyzing, AI is everywhere and undeniably so.Image 1This is quite a significant development, especially when it comes to India. This is one of the first major waves in the past few decades that has not originated in the West first, but has spread across the world simultaneously. It could turn into either a catastrophe or an opportunity, depending on what you make of it. As far as India is concerned, it is the beginning of a golden age. A market that had mastered affordability, now also possesses unparalleled intelligence. How powerful is that combination?Moreover, it is taking the game to the next level by providing high-quality products and services at highly competitive prices. As a result, Indian startups have today become the number one choice for global clients.However, this age of innovation in India is also focusing more and more on decentralization. Entrepreneurship is not limited to Tier 1 metros. Founders from Tier 2 & Tier 3 areas are rising to global standards just as strongly. That is what the development of technology and the internet has given us over the last few years. It has enabled possibilities that were unimaginable for rural residents just a couple of decades ago. Geography is no longer a catalyst for success.At its heart, Indian entrepreneurship is rooted in a deep understanding of human behavior. We don’t say “Unity in diversity” for nothing. It requires incredible empathy, adaptability, and research to understand the diversity of Indian culture. And once that cultural understanding comes together with machine intelligence, magic happens!Having the right balance is what fuels the sustainability of this system. Only businesses that gain and maintain that balance will lead the future. AI is meant to enhance humans, not replace them. This is the philosophy at the core of brands that are making it big during this era of AI adoption.Another significant theme of the era we live in today is sustainability. Growth without discipline brings chaos. Therefore, it is very important that value governance, transparency, and long term planning remain at the core of our near future. Great technology combined with strong ethics is what earns global credibility.This firm belief in building systems is something that I have experienced personally. Over a decade ago, outdoor advertising in India was highly fragmented. It lacked structure, transparency, and effective ways to measure the performance of campaigns. Over time, we realized that our business would not find success merely by running campaigns, but by organizing them and creating an ecosystem. That belief has been at the centre of everything we have built.“ The next ten to twelve years are not going to be about catching up to speed, but about setting new benchmarks for building businesses. They will have to be future-ready, sustainable, efficient, and of course, value conscious. ”Today, we are focused on creating platforms that allow brands to plan, execute, and measure the success of their campaigns with a single tap. The lower the dependency, the better the experience.To add more structure and flexibility in the advertising field, we also developed an artificial intelligence based media planner where brands can develop their own media plans irrespective of location. As the owner of an advertising firm, my biggest dream is for advertisements to move beyond the limitations of location, network, and scalability, and reach people who are ready to grow and develop.Our AI media planner enables brands to independently investigate and choose the media they would like to advertise on, and our AI media optimizer smartly helps the brand to optimize the media mix. Brands can now view the options, weigh their choices, and plan their campaigns depending on their needs, without any manual intervention.It does not substitute strategic thinking; in fact, it reinforces it. It enables brands to make informed decisions about planning and entering the advertising ecosystem because of its simplicity and the absence of entry barriers.Another crucial aspect of the ‘Digital India’ campaign is the ability to make use of fragmented public knowledge in terms of intelligence within minutes. This is because AI-based applications can now assist businesses in understanding who exactly they are communicating with. Through the development of ‘Know Your Customer’ by Excellent Publicity, we are now capable of understanding who we are engaging with, including their professional background, organizational role, and industry perspective, long before the conversation has even commenced. This is achieved through the use of 5 LLMs and 2 search engines.Image 2It also becomes a great ice-breaker and a statement of intentions. It reveals that we are truly interested in the business, that we have taken time to learn about the person behind the position, and that we value a two-way communication process rather than merely listening to elevator pitches.Know Your Customer is an improvement to human judgment and not a substitute for it. This allows our teams to focus on strategy, relevance, and relationship building, so that meetings become informed conversations and opportunities become partnerships.What happens next, in my opinion, depends on three key factors.First, constrained innovation. By constrained, I mean the constraints that encourage you to find creative and efficient solutions without suppressing the idea.Second, intelligence powered by AI but not dependent solely on it.And third, ethical management.Indian founders understand this complex scenario better than most, having faced a lot of these challenges themselves. Now, with AI as their thinking partner, India absolutely can and will become the next global leader.Let me share a recent experience of mine that reinforced this belief. I was travelling to Ranchi for a meeting when my bag suddenly tore. After the initial few moments of habitual panic, I took out my phone and looked up some bags on a quick commerce app. Ten minutes later, all my stuff was in a brand new bag. This is what I mean when I say that India is bringing together cultural understanding with advanced technology. And it’s all instant. There’s no waiting in lines or filling up forms or describing your problems to an expert anymore. One tap, and voila! It’s almost a norm today in India and soon will be in the rest of the world.The next ten to twelve years are not going to be about catching up to speed, but about setting new benchmarks for building businesses. They will have to be future-ready, sustainable, efficient, and of course, value conscious. The world is more connected than ever today, and India is undeniably rising as the leader of this new age. And that, more than anything else, is what will define India’s global leadership.◆◆◆Author may be reached ateboard@icai.inJanuary 2026 | www.icai.org | 29
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Ep. 83 — India’s Startup Ecosystem: Advancing Towards the Milestone of ‘VIKSIT BHARAT@2047’
CA Journal
· July 2026
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India's Startup Ecosystem: Advancing Towards the Milestone of ‘Viksit Bharat@2047’Over the years, with transformations motivated by the entire development and upsurge of an enthusiastic professional workforce, the ‘Startup Ecosystem of India’ has grown rapidly. Now, it is documented as the third-largest startup ecosystem in the world. When India is striving to realize the vision of ‘Viksit Bharat’, this ecosystem stands out as an important milestone. This article outlines the key components and shining signals of India's startup ecosystem, highlights cutting-edge initiatives taken by the Central Government, and discusses the major challenges faced by Indian startups.IntroductionWhat a startup ecosystem is, and why India's is growingThe term ‘startup ecosystem’ refers to a physical or virtual network of individuals and organizations that work collectively through shared events, mentorship and interactions to create and nurture a new model of business, i.e., ‘Startups’. These organizations may be in the form of educational institutions, funding firms, legal and financial service organizations, research groups, private corporations, government agencies, media, etc. In addition, incubators, accelerators and angel investors are also essential components of a startup ecosystem.India's startup ecosystem has experienced remarkable growth since 2016, driven by the country's rapidly booming business environment. During the last nine-year period (2016–2024), some metropolises of India like Mumbai, Bengaluru, Hyderabad and Delhi-NCR have arisen as epicenters of startup companies. However, this ecosystem is now witnessing a significant shift towards Tier II and III cities. These cities offer abundant opportunities, along with a young and skilled workforce and a supportive environment. With the help of dynamic employees, government initiatives, and affordable internet access, India has firmly recognized itself as the third-largest vibrant startup ecosystem in the world.In the present wave of tech-based developments, India's startup ecosystem serves as a driver of technological advancement and innovations. It plays a transformative role in mounting economic growth, generating extensive employment opportunities, encouraging digital adoption, boosting GDP growth, stimulating climate financing, providing an R&D environment, etc. Rural-focused startups are improving the living standards of people by addressing critical gaps in agriculture, education and healthcare. Additionally, startup companies in India attract substantial investments in the form of Foreign Direct Investment (FDI), Private Equity (PE), Angel Investor and Venture Capital.When India initiated its journey towards becoming a ‘Viksit Bharat’ (developed country) by 2047, the importance of the startup ecosystem became self-evident. This ecosystem has a great transformative capacity to become a milestone for developed India. It can provide a strong foundation along with practical opportunities to achieve the ambitious goals outlined in the ‘Approach Paper’ on ‘Vision for Viksit Bharat@2047’, released by NITI Aayog on July 27, 2024. This paper underlines that, “As for the economy, to become a developed nation, we need to strive to be a USD 30 trillion economy by 2047 with a per capita income of USD 18,000 per annum. The GDP would have to grow nine times from today's USD 3.36 trillion and the per capita income would need to rise 8 times from today's USD 2,392 per annum.” In the pursuit of these significant targets, India's startup ecosystem has consistently played a vital role.As on 9th December 2025, 2,03,463 startups in 779 districts of the country have been recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). In these startups, over a hundred unicorn companies play a vital role in boosting domestic progress through their innovations and resilience. A ‘unicorn startup’ is a privately owned company having a scalable business model valued at over USD 1 billion. It is estimated that the number of unicorns in India will reach 250 by 2030.2,03,463DPIIT-recognized startups (9 Dec 2025)779Districts covered100+Unicorn companies today250Unicorns projected by 2030Fig. 1Startup Ecosystem Value to Gross Domestic Product in 2024 (in %)U.S.14.1U.K.13.8India10.8South Korea9.8Canada8.6France5.9Brazil5.8Australia5.7Germany5.2China4.0Indonesia3.8Argentina2.1Turkey1.8Japan1.7Mexico1.6South Africa1.2Russia1.2Saudi Arabia1.0Italy0.802468 10121416SEV to GDP (in %)Source: Startup Genome, 2024Key Components of the Startup EcosystemCutting-edge government initiativesTo support and nurture the startup ecosystem, the Central Government has introduced a series of advanced initiatives. Some contemporary initiatives may be pointed out as below:Under the Credit Guarantee Scheme for Startups (CGSS), 2022, INR 555.24 crores in loans were granted to 235 startups, including INR 24.60 crores to 18 women-led startups as of October 31, 2024 (data released by DPIIT on January 15, 2025).Fund of Funds Scheme (FFS), 2022, for startups having a corpus of INR 10,000 crores managed by SIDBI.Mentorship, Advisory, Assistance, Resilience and Growth (MAARG) Portal, 2022, a one-stop platform to provide personalized, efficient and expert guidance along with customizable mentorship for startups across diverse sectors and stages.National Deep-Tech Startup Policy, 2023, aims to thrive and address the exclusive and multifaceted challenges faced by deep-tech startup companies. It also provides guidelines to these companies regarding innovations, research and development.To establish a seamless business regulatory framework across India, the Business Reforms Action Plan-2024 was introduced.To empower student entrepreneurs by facilitating their meeting with capital providers, policy makers and big business houses, ‘UDYAMOTSAV 2025’ was organized by the Ministry of Education's Innovation Cell and AICTE in January 2025. As part of ‘National Startup Week, 2025’, it was held across 14 cities in India.National Startup Day is celebrated on January 16th every year. On the 9th Startup Day celebration, major DPIIT (Startup India) initiatives were launched, i.e., Bharat Startup Grand Challenge and PRABHAAV Factbook (Powering a Resilient and Agile Bharat for the Advancement of Visionary Startups), to mobilize private capital, particularly to support startups in Tier-II and Tier-III cities.Launched BHASKAR (Bharat Startup Knowledge Access Registry), 2024, a digital platform which brings entrepreneurs, mentors, investors, service providers and government bodies onto a unified platform. Through unique BHASKAR IDs and personalized dashboards, the platform enhances visibility, networking and discoverability. As on 9th December 2025, 6,49,482 BHASKAR users are registered with Startup India.The DPIIT organized the 2nd Edition of ‘Startup Mahakumbh-2025’ — India's largest startup showcase with 2,923 exhibitors, 103,349 exclusive attendees and over 2.5 lakh exhibition footfall, with the involvement of 60 countries. ‘Startup Mahakumbh – 2026’ will take place on March 9–10, 2026, at the Yashobhoomi Convention Centre in New Delhi. Additionally, the DPIIT is organizing a “Startup Mahakumbh Road Show”, scheduled from December 5, 2025 to January 23, 2026, across 7 cities like Mumbai, Kolkata, Bangalore, etc.The Central Government has reduced compliance burdens and relaxed norms for startups by offering:Tax exemptions on capital gains and investments above market value.“White Category Startups” can self-certify compliance in respect of three environmental Acts.Startups Intellectual Property Rights Protection (SIPP) Scheme for facilitating fast-track filing of patents, trademarks, designs and other IPRs, with an 80% reduction in the cost of filing patents.Simplification of reverse flipping standards (September 2024).Abolishing the Angel Tax from FY 2025-26.Self-certification (through the Startup mobile app) with 9 Labour Laws and 3 Environment Laws.Income Tax Exemption on profits under Section 80-IAC of the Income Tax Act.Atal Innovation Mission (AIM) — this mission includes ‘Atal Tinkering Labs’ at the school level to foster creativity, ‘Atal Incubation Centers’ to build a robust startup system, and ‘Atal Community Innovation Centers’ to serve unserved and underserved regions.Budget (2025-26) Proposals, projected on 1st February 2025 by Finance Minister Smt. Nirmala Sitharaman in her eighth consecutive Union Budget:Extension of the time limit by another five years u/s 80-IAC for eligible startups incorporated before 1st April 2030.A ‘Deep Tech Fund of Funds’ will be explored to catalyze the next generation of startups.A new ‘Fund of Funds’ with a fresh contribution of another Rs. 10,000 crores will be set up.The credit guarantee cover for startups will be enhanced from Rs. 10 to 20 crores.Fig. 2Major Components of the Startup EcosystemMajor Components of Startup EcosystemEducational InstitutionsPrivate CorporationsIncubators & AcceleratorsAngel Investors & Fund ProvidersGovernment Agencies & MediaService OrganizationsSource: Department for Promotion of Industry and Internal Trade (DPIIT)Emerging TrendsHow the ecosystem has transformed over nine yearsIncreasing number of tech-driven startup firms Startup companies have leveraged emerging technologies such as Artificial Intelligence (AI), blockchain, Language Models (LM) and the Internet of Things (IoT) to provide solutions to domestic and global problems. These technologies are transforming healthcare, e-commerce, q-commerce, finance and logistics. Data shared by the Press Information Bureau, Delhi (press release — 29th May 2025) confirms that 10 cutting-edge Indian startups have been selected under MeitY for the prestigious AI Accelerator Program in Paris (France) — a four-month program providing global market expansion, mentorship and investor networks. India AI Mission's partnership with Station F and HEC Paris marks a significant step in strengthening India's innovation ecosystem.Recognizing women leadership The Government of India is executing schemes such as the Women Capacity Development Program (WING), Virtual Incubation Program, Super Stree podcast, State Workshops for Women Entrepreneurship and Startup India Hub. As a result, as of 30th June 2025, 87,285 startup companies with at least one woman director/partner are contributing to the economy — nearly half of the 1,80,683 startups of India.Becoming a job provider podium India's startup landscape is becoming a new platform for jobs. It provides employment opportunities for IP/Patent Executives, data analysts, project managers, machine-learning engineers, robotics programmers, software architects, content creators, growth hackers, customer relationship managers, design managers, user researchers, visual designers and mobile app developers (Android/iOS). According to DPIIT data, recognized Indian startups have created 17,69,605 direct jobs since 2016, growing at over 25% year-on-year. In 2023, startups provided 3,92,181 jobs compared to 2,74,920 in 2022; in 2024, 3,51,921 jobs were provided. It is estimated that they could employ over 50 million people by 2047.Watching towards stock exchanges Favourable stock market sentiment attracts startup companies for collection of funds. In 2024, INR 29,000 crores were collected through Initial Public Offers (IPOs) by 13 startup companies. As of October 2025, 10 startups have been listed on the stock exchanges — a shining signal of the maturity of India's startup ecosystem.Accrescent role as wealth creators Startups give shares through an Employee Stock Option Plan (ESOP) to uplift the economic standard of employees, generating a sense of proprietorship. In 2024, shares valued at INR 1,470 crores were distributed by 23 startups to nearly three thousand employees.Attracting domestic investment Earlier, global venture capitalists were the main source of financing. Startups now have outstanding funding from domestic investors, including Qualified Institutional Buyers (QIBs), nationalised banks and State Finance Corporations. At present, more than 80% of funds are collected through domestic investors. Schemes like CGSS (implemented by NCGTC), the Atal Innovation Mission (launched by NITI Aayog) and the Startup India Seed Fund Scheme (SISFS) play a vital role here.Strengthening the arena of regional startups Capacity-building workshops are organized year-round in Tier-II and Tier-III cities under the ‘States Startup Ranking Framework’. These workshops assist States in developing local ecosystems for young entrepreneurs, with special handholding sessions for incubators.Stepping up towards sustainable solutions Prominent startups are moving towards waste management, renewable and clean energy, green-tech and organic farming — playing a vital role in sustainable development, an essential element for Viksit Bharat.Fig. 3Industry-wise job creation in Indian startups (as of 31st January 2025)2.10 LakhsIT services1.51 LakhsHealth care and Life sciences96,474Professional and Commercial services94,311EducationSource: Press Release by PIB, Ministry of Commerce and Industry, GOI, on 31st January 2025.New roles of women entrepreneurs are emerging regularly in the corporate sector, including startups. The Government of India is executing specific schemes and programs like the Women Capacity Development Program (WING), Virtual Incubation Program, Super Stree podcast, State Workshops for Women Entrepreneurship and Startup India Hub, which are supporting women-led startups.Major ChallengesOperational barriers on the growth pathDespite remarkable growth, India's startup ecosystem faces many operational challenges/problems, some of which are:Selection of appropriate business structure Due to the involvement of so many factors like the nature of business, regulatory attentions, growth strategies, cost of operation, peripheral capital need and plans for profit sharing, founders/owners cannot make the right decision easily.Compliance with rules and regulations Complex rules governed by different laws and Acts are a key challenge. Time-consuming activities like obtaining permits, approvals and licenses, acquiring land and buildings and purchasing foreign machinery create a depressing atmosphere for many budding entrepreneurs. Obedience to SDGs, CSR and ESG also needs attention. The State Single Window Clearance Portal should contain all 200 services, like Tamil Nadu.Protection of Intellectual Property Rights (IPRs) Due to lesser knowledge and ignorance, protection of high-tech uniqueness and innovation in the form of IPRs is a significant problem for startups.Problems in respect of employment agreements Unclear terms and conditions regarding job profile, compensation, benefits, participatory management, operation of competing business and claiming of IPRs can create conflicts with employees, which sometimes end in legal battles. Founder's agreements and third-party agreements also create obstacles.Challenge of fund management Due to a shortage of working and fixed capital, Indian startup companies frequently encounter funding issues. It is more challenging for early-stage startups, because VCFs, angel investors and other capitalists consider the degree of high risk involved. New startups don't have credit platforms and sufficient security properties for obtaining required funds. Nationalised banks should fund these startups.Shortage of skilled personnel force Startups cannot attract trained and efficient employees due to a lack of competitive pay and incentive plans, an absence of sufficient training facilities, uncertainty of future growth and a lack of job security. There is still a deficiency of AI professionals, data scientists and cybersecurity experts. State Skill Development Corporations should train them accordingly.Worrying about intense competition Thousands of startup companies are stressed to overcome the severe consequences of competition, which increases due to superior offerings, brand recognition, strategic alliances, changing technologies, innovative marketing methods, AI and ML-based production procedures and rising customer expectations. Startups should make use of the Government e-Marketplace to get more orders.As per data shared by the Ministry of Commerce & Industry, GOI, on July 25, 2025, 6,019 recognized startups have been categorized as closed and 59 recognized startups have been categorized as dormant. For this unfortunate situation, common reasons like insufficient funding, an unsustainable business model framework and a mismatch between the offerings and genuine market demands are held responsible. Nationalised banks should intervene and provide sufficient working capital.ConclusionIndia's startup ecosystem emerged as a catalyst for the nation's journey towards ‘Viksit Bharat’. It contributes to industrial growth, technological advancements, socio-economic transformation, sectoral innovations and employment. Moreover, it also adopts sustainable business practices to align with the SDGs of the UN as well as the key pillars of the vision of developed India.Despite achieving 3rd position at a global level, India's startup ecosystem is in its investigational stage, and so many financial and operational problems create barriers in the growing path of this landscape. To make India a global leader in the arena of startups, emerging opportunities should be explored, and existing challenges must be addressed through effective measures and long-term strategies. Continued contribution and the rapidly changing trends of this ecosystem will certainly lead the efforts towards accomplishing the goals of ‘Viksit Bharat’ by 2047.India's startup ecosystem emerged as a catalyst for the nation's journey towards ‘Viksit Bharat’. It contributes to industrial growth, technological advancements, socio-economic transformation, sectoral innovations and employment.ReferencesFinance Minister's Budget 2025-26 speech, Ministry of Finance, GOI.https://static.pib.gov.in (Press releases — December 25, 2024; February 1, 2025; May 29, 2025 and August 1, 2025)Financial Express, 16th January 2025, P-21 and 21st January 2025, P-8Business Standard (Hindi), 16th January 2025, P-10The Economic Times, 17th January 2025, P-14The Indian Express, 16th January 2025https://sansad.inhttps://startupmahakumb.co.inhttps://startupgenome.com/report/apexe-report-2024/introductionAuthors may be reached at sharmafalna1961@gmail.com and eboard@icai.inThe Chartered Accountant · January 2026 www.icai.org · Pages 886–891
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Ep. 84 — IPO Surge and Public Market Evolution in Indian Startups: Structural Transformation of India’s Capital Markets
CA Journal
· July 2026
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IPO Surge and Public Market Evolution in Indian Startups:Structural Transformation of India's Capital MarketsThe landscape of India's first public offering has radically changed since 2021, shifting towards a less niche exit path of established companies and toward an overall mainstream capital-raising strategy of high-growth startups. This article is a study that explores the IPO boom based on market dynamics, investor participation, as well as development of regulations. Based on the empirical data of India's 80 mainboard IPOs in fiscal 2025, which raised ₹1.63 trillion, this article concludes that the IPO boom in India signifies a structural change because of three forces, including the emergence of a domestically rooted investor base, increased financial discipline amongst startups, and active regulatory reforms by SEBI. Viewing case studies of some of the unicorns, it can be seen that the investor expectations on profitability and sustainable business models have changed drastically as compared to the growth-at-any-cost mindset of 2021.IntroductionThe global rise of the Indian startup ecosystem has been widely covered, but its development as a market destination has not been properly studied. During the 2010s, Indian entrepreneurs perceived foreign markets, especially those in the United States, as natural destinations of venture-backed exits. In 2021, an online platform for food ordering, restaurant discovery, and dining-out services named Zomato became the first unicorn to seek a domestic IPO; however, the story took a very different turn. The implications of this shift in the domestic market fundamentally altered how the Indian public market was perceived.The change is indisputable five years down the line. In the fiscal year 2025, 80 mainboard IPOs were done in India with a raise of ₹1.63 trillion, which was the strongest capital mobilization cycle in the country. Most importantly, investors within the domestic market are providing 75% of IPO funds, compared with 25% ten years ago. This reversal is an indication of the development of a self-perpetuating, self-determined capital market, not reliant on foreign flows to be authenticated or liquidated.The 2021 Inflection PointIn July 2021, Zomato's IPO of ₹9,375 crores at ₹76 per share (NSE) had 52.63% first-day listing returns, to ₹116 (opening price). This premium indicated that homegrown investors had gained confidence in the unprofitable technology firms, an impressive change. This was followed by an Indian omnichannel retail company, Nykaa, in November 2021, which shot up 79.4% between ₹1,125 and ₹2,018, achieving aspirational profitability. Another leading digital payment company, Paytm, which collected ₹18,300 crore at ₹2,150 per share, listed at ₹1,950 (NSE), a 9.3% loss, an indicator that investors' enthusiasm had definite boundaries.These three products were important firsts: home investors were able to value technology businesses with global-level multiples; investor interest in startup IPOs was real but discriminating; and valuations without profitability vehicles were still at risk. The fact that Paytm fell by 9.3% in the short run proved that market discipline had certain limits and that size alone was not going to make investors gung-ho.Table 1: Major Indian Startup IPOs (2021) – Inaugural Offerings Establishing Market DisciplineCompanyIPO YearIssue Price (₹)Listing Price (₹)IPO Size (₹ Cr)First Day Return (%)Zomato202176116.009,37552.63Nykaa20211,1252,018.005,349.7279.38Paytm20212,1501,950.0018,300-9.3Source: NSE/BSE Official Records, Goldman Sachs IPO Track Record, SEBI-registered data providersThe Profitability Pivot: Financial Discipline as Entry FeeBetween 2022 and 2023, with Paytm stock crashing and startup funding halting, investor hopes were summarized in profitability timelines. By 2024, this wisdom, which was established with difficulty, had percolated into the ecosystem. Businesses that were planning their 2024–2025 listings — Swiggy, Ola Electric, FirstCry — had their explicit focus on unit economics and path-to-profitability stories.Swiggy showed cyclic expansion in EBITDA margins; food delivery was profitable; FirstCry had unit economics, although it incurred losses; even Ola Electric had a runway to profitability, despite cash burn. This openness was a stark contrast to the 2021 growth-at-all-costs positioning. Regulatory adjustments by SEBI strengthened the expectations by introducing higher expectations of profitability of SME IPOs, which indicated that there was a market where profitable or near-profitable businesses could be floated in the public markets as opposed to an open cash burn subsidization.The Domestic Investor RevolutionThe biggest structural transformation regards the inversion of investor identity. As of 2020, 75% of IPO capital came as a result of foreign portfolio investors; by 2025, 75% was domestically sourced, i.e., retail investors, mutual funds, insurance companies, and pension funds.This change indicates a trend of several forces: the number of demat account holders has grown by 18.5 crore (December 2024) over 4 crore (2020); the young investor, less than 30, forms 48% of the base; 25% of NSE investors are women. The assets being managed by mutual funds grew by ₹68.5 lakh crore (Oct 2024), by comparison to ₹12 lakh crore (2020), and this generated efficient aggregation mechanisms.The numerical scale of such a base transformation of investors is impressive. The recent change in the IPO capital sourcing structure over the past six years demonstrates the shift in the dominance of foreign portfolio investors over domestic investors.Case Study Analysis: Divergent 2024 TrajectoriesProfitability Pathway to a Leading Online Food Ordering and Delivery CompanyAn online food ordering and delivery company, Swiggy, went public in November 2024, debuting with a modest first-day listing premium of 7.7% at ₹390 and attracting an oversubscription of 3.59 times. The depressed performance indicated by the scales of investor discrimination alone was no longer charged with premiums. Most importantly, the food delivery segment had become profitable in terms of EBITDA, and the losses were accumulated in experimental sections. The 34% year-on-year revenue growth and the reduction of the losses gave apparent profitability highway maps.Growth vs. Reality CheckIn August 2024, in the IPO that Ola Electric conducted at ₹76 at a 19.97% premium, the pre-profit company was valued at ₹73,000 crores by a valuation of ₹6,146 crores. The projections of electric two-wheelers hitting 60–70% of the market by 2030 by a multinational strategy and management consulting firm were an excuse to become a real enthusiast in the long term. However, an increase in losses despite 88% revenue growth casts some concerns on execution. This was followed by trading below the opening prices in the following weeks, indicating that investors were not homogeneous; there was retail trading fuelled by narrative and institutional investors who were disciplined in their analysis.Brand-Driven MoatsIn August 2024, an Indian multinational retail company, FirstCry, held an IPO at ₹465 which soared 40% to ₹651 and raised ₹4,194 crore. Even after incurring losses of ₹321.51 crore, unit economics increased, and 1,063 physical retail touchpoints served as competitive moats worth the ₹43,000 crore market cap. Shareholders were aware of true business excellence and not the speculative enthusiasm.The following three case studies demonstrate the non-uniform investment by investors in mega 2024 IPOs. The correlation between the size of the IPO and the enthusiasm of the investors shows that bigger offerings do not necessarily result in higher first-day returns and shows a higher level of discriminating investor behavior.Table 2: Major Indian Startup IPOs (2024) – Profitability-Focused Offerings with Market MaturityCompanyIPO YearIssue Price (₹)Listing Price (₹)IPO Size (₹ Cr)Listing Returns (%)Swiggy202439042011,3277.69Ola Electric20247691.186,14619.97FirstCry20244656514,19440Source: NSE/BSE Official Records, SEBI-registered data providers, IPOJIRegulatory Framework EvolutionThe regulatory direction of SEBI during 2021–2025 was becoming more and more sensitive to the idea that active IPO markets must have their balance between investor protection and issuer accessibility. In response to the recognition that deep capital markets do not need large floats to be efficient, the September 2025 amendments reduced minimum public float requirements by a factor of two to 2.5% of ultra-large caps.The December 2024 reforms of SME IPO proposed explicit profitability requirements (operating profit of ₹1 crore in two of three previous years), tightened the offer-for-sale rule, and increased disclosures. These are the calibrated guardrails which avoid abuses and do not eliminate access to capital to really growing businesses. The provisions of expanded anchor investors now incorporate insurance companies and pension funds whose long-term obligations provide inbuilt basic value-investment incentives.Market Evolution: Quantified TransformationThe development of the market is an expression of maturity that goes through various stages of development and redemption. The curve shows a movement from the sporadic extravagance of speculation to a rigorous tightening to a steady expansion.Capital Mobilization Through Mainboard IPOs: India's IPO market developed during a specific cycle that lasted between FY2020 and FY2025. Activity level in FY2020–21 was low and was ₹31,000–31,300 crore per annum. The inflection point came in FY2021–22, when 47 mainboard IPOs mobilised ₹1,09,900 crore, the highest ever in a single year, reflecting heightened domestic investor participation and several high-profile market debuts — Zomato, Nykaa and Paytm. Activity was reduced in FY2022–23 by valuation corrections, which included 37 IPOs raising ₹52,116 crore. Nonetheless, starting with FY2023–24, the market showed a strong recovery: 76 IPOs raised ₹61,915 crore in FY24, and record activity in FY2024–25: 80 IPOs raised ₹1,63,000 crore, the highest amount of capital raised in any given financial year. This path is the process of maturation out of speculative excess (FY22) to disciplined correction (FY23) to sustainable growth on the basis of better issuer profitability and investor selectivity (FY24–25).Transaction Volume: Having fallen to 32 IPOs (FY2021) and then 25 (FY2023), followed by 76 (FY2024) and 80 (FY2025), suggests that the market is coming to be dominated by smaller offerings and purely random mega-caps.Domestic Participation: To be changed to 75% (FY2025) versus 25% (FY2020) and closer to or more mature market ratios.Subscription Metrics: Unsubscriptions have been normalized with high ratios (25x–30x) in 2021 and brought within 3–4x healthy ratios, which translate to sensible investor positioning and pricing discipline.Table 3: IPO Market Evolution in India (2020–2025) – Structural Transformation MetricsFinancial YearNumber of Mainboard IPOsTotal Capital Raised (₹ Crore)Total Capital Raised (₹ Billion)Average Issue Size (₹ Crore)NotesFY 2019–2030₹ 31,512₹ 315~₹1,050Pre-pandemic baselineFY 2020–2135₹ 31,268₹ 313~₹893Limited activity during COVID-19FY 2021–2253₹ 1,11,547₹ 1,115~₹2,104All-time high: Zomato, Nykaa, Paytm IPOs; strong domestic investor appetiteFY 2022–2337₹ 52,116₹ 521~₹1,408Correction phase; LIC mega-IPO (₹20,557 Cr) drove aggregateFY 2023–2476₹ 61,915₹ 619~₹815Recovery begins; 76 IPOs (highest count); diversified sectorsFY 2024–2580₹ 1,63,000₹ 1,630~₹2,038Record capital mobilization: Ola Electric, Swiggy, FirstCry; PE-backed IPOs (₹562 Bn) prominentSource: KPMG India (2025). IPOs in India – FY 2025, based on final offer documents filed with ROC, NSE, BSE. PRIME Database Group (2023, 2024) press releases on FY22, FY23, FY24 capital mobilization. All figures in Indian Rupees (₹); financial year = 1 April – 31 March.Venture Capital Pipeline and IPO ReadinessThe Indian venture capital ecosystem had become symbiotic with the maturity of the IPO markets. In 2024, total VC/growth equity funding had increased to ₹1,19,437 crore (USD 13.7 billion), and the number of transactions (1,270) showed 43% year-over-year growth, a 45% growth that indicates it has been widely participated in.Those firms that successfully oriented through the 2022–2023 funding downturn did so having gained a better ability to manage their finances and established profitability roadmaps.Small and medium-ticket transactions of 95% dealings formed pipelines of hundreds of high-growth companies with enhanced unit economics; exactly what the public market was gaining greater and greater favor.The various government policy efforts, such as the abolition of angel taxes, reduction of long-term capital gains taxes, simplification of foreign VC registration, etc., have further boosted the attractiveness of venture investing and minimized the cost of friction.The Convergence Thesis: Why 2024–2025Record IPO activity reflected multiple converging forces:Retail Investor Maturation: By 2024, pandemic-era account openings had created experienced investor cohorts with 2–3 years of market experience and rational valuation frameworks, contrasting with 2021's less sophisticated participants.Profitability Achievement: The 2018–2020 venture groups to go to IPO by 2024–2025 had many companies that had already achieved profitability or had been operating at near-profitability; as compared to 2021, when most startups were burning cash as long as they were open.Regulatory Clarity: Cumulative SEBI developments created increased transparency in IPO procedures, disclosure standards, and investor protections, reducing uncertainty costs for both issuers and investors.Global Capital Reorientation: The global markets changed to focus on profitable-growth models instead of growth-at-any-cost models. When the revaluation of public technology became apparent throughout 2022, Indian startups that had been showing better performance in profitability worked to their advantage, as the valuation of global technology began to stabilize.Remaining ChallengesA number of issues are to be addressed in order to have sustainable growth. The sustainability of post-IPO performance is based on the ability of companies to fulfill profitability promises, but the level of shortfalls would instantly kill retail confidence and limit subsequent issues. Some of the 2024–2025 products are still trading at valuations based on heroic growth assumptions, most notably in quick commerce and electric mobility.Although the shift in domestic capital is an actual type of strength, there may be some global institutional involvement that can add depth to the market and offer stabilizing large-block investors. The participation of lower-tier cities is still limited; the geographical expansion to smaller areas will further diversify the domestic capital base and will democratize investment.ConclusionThe IPO boom in India through 2024–2025 will embody structural development to the prevalence of local-investor control, enhanced issuer financial discipline, and regulatory regulations in consonance with fresh market best practices. The progression from an initial breakthrough phase to sustained record performance reflects a broader maturation process, where early enthusiasm gives way to valuation discipline, eventually evolving into a more stable and advanced market equilibrium.The present IPO market, with features of healthy subscription multiples, better profitability profile, capital mobilization by domestic sources, and a regulatory environment, can be viewed as being on the path of long-term growth and not the cyclical fluctuations. To the greater Indian economy, thriving domestic IPO markets decrease reliance on foreign capital, allow venture-funded entrepreneurs to find domestic liquidity, and introduce congruence amid start-up development and capital formation.Mega-technology firms such as PhonePe, Flipkart India, and Reliance Jio Infocomm are possible future products that may easily surpass the existing records, further pushing the boundaries of the Indian market and institutional maturity. The 2024–2025 experience offers the assurance that the capital markets of India have the infrastructure and investment savvy to take such transformational capital raises in a disciplined and well-judged way.ReferencesIndian Private Equity and Venture Capital Association (IVCA) & Bain & Company. (2025). Indian Venture Capital and Growth Equity Report 2024.National Stock Exchange of India (NSE). (2025). Indian Stock Market Infrastructure Report: Investor Participation and Market Evolution.Prime Database. (2025). Capital Mobilization and Investor Composition in Indian IPOs 2020–2025.Securities and Exchange Board of India (SEBI). (2025). IPO Regulatory Framework Amendments and Market Impact Analysis.EY & IVCA. (2025). H1 2025 PE/VC Investment Report: India as Asia-Pacific Growth Hub.Inc42. (2025). Indian Startup IPO Tracker and Pipeline Analysis 2025.KPMG Assurance and Consulting Services LLP (2025). IPOs in India – FY 2025. Analysis based on final offer documents filed with ROC, NSE, BSE. Data: 80 mainboard IPOs; ₹1,630 billion (₹1,63,000 crore) raised in FY25.Forbes India (2024, 4 April). IPO boom is here to stay: Prime Database Group MD. Quotes Pranav Haldea on FY21 data: ₹31,268 crore.AMFI (Association of Mutual Funds in India). (2024). AMFI Monthly Note – December 2024. Data on total mutual fund assets under management, folio count, and industry composition. https://www.amfiindia.com/Themes/Theme1/downloads/AMFIMonthlyNote_December2024.pdfSEBI, National Securities Depository Limited (NSDL), and Central Depository Services Limited (CDSL). (2024). Demat Account Statistics – December 2024. Total demat accounts reached 18.5 crore comprising CDSL (14.65 crore) and NSDL (3.95 crore).SEBI Monthly Bulletin (December 2024) and NSDL/CDSL combined data showing total demat accounts at 18.5 crores by end of December 2024, with CDSL maintaining 16.8 crore and NSDL maintaining 3.95 crore accounts.Authors may be reached at harsh.goel@mail.ca.in and eboard@icai.inThe Chartered Accountant · Theme January 2026 · www.icai.org · Pages 36–40
Theme
Ep. 85 — From MSMEs to Markets: Strengthening India’s Growth Pipeline
CA Journal
· July 2026
00:00
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From MSMEs to Markets: Strengthening India’s Growth PipelineIndia is an entrepreneurial powerhouse with tens of millions of micro, small, and medium enterprises (MSMEs), and a swelling base of growth-ready companies. Yet, only a vanishing fraction reaches institutional scale or the public market. This persistent “graduation gap” is at once a challenge and an opportunity. Closing it by improving governance and market readiness will deliver a governance dividend: lower cost of capital, formalisation of business practices, higher valuations, deeper capital markets, and stronger global competitiveness. The Small and Medium Enterprise (SME) segment’s recent listing surge suggests India is at an inflection point. But the funnel remains narrow and leaky, underscoring the urgency for systemic reforms.“ Firms with audited accounts, transparent disclosures, and independent boards secure better borrowing terms and higher valuations in initial public offerings (IPOs). ”The Numbers: The FunnelThe entrepreneurial pyramid is steep and unforgiving:Micro, Small and Medium Enterprises (MSMEs): ~6.33 crore registered enterprises (NSSO 73rd Round, Udyam 2024–25). This makes India one of the three largest MSME ecosystems globally, alongside China and Indonesia.Small and Medium Enterprises (SMEs, ₹10–500 crore turnover): ~3.3 lakh enterprises, which is just 0.5% of the total MSME base. This tiny fraction reflects the difficulty of scaling beyond the micro-enterprise level.Listed SMEs: ~1,231 on BSE SME and NSE Emerge (as of mid 2025), just 0.4% of the SME pool.By contrast, India’s ~25,000 large enterprises (>₹500 crore turnover) include ~6,000 listed companies – a listing ratio of ~25%. This gulf shows how few Indian businesses successfully move from micro → SME → listed entity.In developed economies, 20–25% of micro-enterprises graduate into the SME band. In India and other developing markets, the figure is closer to 0.5% – a gap of 40–50x. The “funnel” is simply too narrow, with leakage at every stage.Why This Gap MattersMSMEs are not a fringe sector – they are the backbone of the Indian economy:Gross Domestic Product (GDP) contribution by MSMEs: 30–35%.Exports by MSMEs: ~45%.Employment generated by MSMEs: 12–20 crore people, second only to agriculture.Yet most MSMEs remain undercapitalised and informal, unable to transition into high-growth SMEs or listed entities. This has several consequences:Shallow capital markets – A handful of large firms dominate indices, while SMEs remain excluded from equity financing.Constrained job creation – SMEs that scale are the true engines of formal employment; their underdevelopment caps India’s job potential.Export competitiveness – While MSMEs contribute significantly, their fragmented scale limits global competitiveness.Governance trap – Without strong disclosure, board, and control structures, SMEs face high borrowing costs and limited investor trust.In short, India’s economic promise is tied to whether this vast entrepreneurial base can graduate and integrate into capital markets.Snapshot: SME IPO Activity (2012–2025)The evolution of SME Initial Public Offerings (IPOs) over the past decade highlights why governance readiness is now urgent:2012–2014: SME IPOs were experimental and modest. Average issue size was <₹10 crore, largely restricted to a few regional industrial clusters. Investor appetite was thin, and awareness was minimal.2015–2019: Listings gained momentum, though still concentrated in selected states. Average issue sizes rose gradually, signalling deeper acceptance of the SME platform.2020–2022: The COVID-19 pandemic briefly disrupted momentum. However, liquidity support measures, lower interest rates, and rapid digital adoption gave SMEs renewed growth trajectories. By late 2021, the rebound was visible.2023: A breakout year. ~175 listings raised ~₹4,600 crore, with average issue size climbing to ~₹27–28 crore. Investor participation expanded beyond regional circles, and SME IPOs began drawing pan-India attention.2024: A record year. ~240–246 listings raised ~₹8,700–9,500 crore. Average issue size rose further to ~₹36–37 crore. The market witnessed an average of one IPO every working day – a milestone signalling scale and regularity.2025 (till August): Already ~87 listings raising ~₹4,000 crore, with average issue size crossing ~₹45–46 crore. This indicates not just higher volumes but larger, more ambitious SMEs accessing the market.Cumulative ImpactFunds raised since inception: ₹28,000+ crore.Market value generated: ~₹4 lakh crore.One-third of SME-listed companies have migrated to the main board, validating the SME platform as a proven gateway for scaling.Trendlines reveal that average issue size has quadrupled within a decade. A present-day SME IPO of ₹40–50 crore resembles the scale of mid-cap fundraising a decade earlier. The trajectory is unmistakable: SMEs are scaling larger, faster, and with growing investor interest. Yet, when viewed against the universe of ~3.3 lakh SMEs, the listed pool of ~1,231 remains a drop in the ocean.India at an Inflection PointTwo truths emerge clearly: (i) SME listings are finally achieving scale and visibility, and (ii) the graduation rate remains negligible compared to the massive MSME universe. This is the defining inflection point. Governance through better disclosures, stronger boards, and professional management is the multiplier that can bridge the gap. Without it, India risks falling into an “SME trap”: a vast pool of entrepreneurial energy unable to cross the formalisation threshold.Why So Few Graduate? The Scale BottleneckDespite 6.3 crore Micro, Small, and Medium Enterprises (MSMEs), only ~3.3 lakh qualify as Small and Medium Enterprises (SMEs). Of those, barely ~1,231 are listed. Why do so few firms climb the growth ladder? The answers lie in a combination of structural, operational, and market frictions.Graduation rate: In India, only 0.5% of MSMEs evolve into SMEs. In developed economies, 20–25% of micro firms manage the transition. This stark contrast highlights the scale bottleneck and explains why India lags 40–50 times behind advanced peers in terms of enterprise graduation.Comparison with large enterprises: Around 25,000 enterprises in India qualify as large (turnover >₹500 crore). Nearly 6,000 of them are listed, translating to ~25%. Compare this with SMEs, where the ratio is only 0.4%. Clearly, barriers are not about the market alone, but about readiness to scale and comply with governance norms.Structural Barriers: Finance & Market LinkagesAccess to finance is the single largest bottleneck:Credit gap: International Finance Corporation (IFC) and Reserve Bank of India (RBI) estimates that MSMEs face a documented credit gap of ₹20–25 lakh crore. Banks remain hesitant, citing limited collateral and weak balance sheets.Informality: Many SMEs remain half-informal, with unreported revenue or cash transactions. This reduces their ability to present auditable, reliable accounts for lenders or investors.High cost of capital: Borrowing costs for SMEs can be 300–500 basis points higher than for large corporates, reflecting perceived governance and disclosure risk.Market access is equally challenging:SMEs struggle to secure steady buyer relationships, particularly in export markets, due to size, certification gaps, and inability to meet scale requirements.Value chains remain dominated by large corporates, with SMEs often squeezed on margins, preventing long-term growth planning.Operational Barriers: Governance, Audit & ComplianceScaling requires not just more revenue, but more robust systems:Governance culture: Many SMEs are promoter-driven, with family-style management and minimal delegation. Independent directors are rare; boards often function informally, leading to limited accountability.Financial reporting: Delays in audited financials, non-standardised disclosures, and inconsistent internal controls are common. For investors, this translates into heightened risk perception.Tax & regulatory compliance: Frequent Goods and Services Tax (GST) disputes, labour compliance lapses, and Registrar of Companies (ROC) penalties deter SMEs from engaging with formal equity markets.Succession planning: Family succession without formal governance structures creates uncertainty for investors and disrupts continuity.Market Barriers: Liquidity & Investor ConfidenceEven when SMEs are listed, challenges persist:Liquidity issues: SME shares are thinly traded. Retail investors dominate, while institutional investors remain cautious due to research coverage gaps and small free floats.Analyst coverage: Very few brokerage houses provide research on SME stocks, which limits visibility and valuation discovery.Volatility: Thin liquidity magnifies volatility, reinforcing the perception of risk and making long-term institutional participation rare.Why Governance is the MultiplierGovernance is not just a compliance cost, it is a growth enabler:Lower cost of capital: Firms with audited accounts, transparent disclosures, and independent boards secure better borrowing terms and higher valuations in initial public offerings (IPOs).Investor trust: Disclosure discipline and credible governance practices widen the pool of investors, including institutions.Migration pathway: Of the ~1,231 SMEs listed, one-third migrated to the main board. These firms are typically those that invested in governance early – better boards, stronger financial reporting, and internal controls.Global BenchmarksComparisons underscore India’s challenges:UK AIM (Alternative Investment Market): Hosts more than 800 growth companies, with average deal size far larger than India’s SME IPOs. AIM’s success is built on strong disclosure standards and an active investor-analyst ecosystem.Hong Kong GEM (Growth Enterprise Market): Provides a structured pathway for SMEs to graduate into the main board, but requires strict governance practices upfront.Taiwan & Korea SME boards: Heavily supported by state-backed credit guarantees and investor education, ensuring liquidity and trust in the SME equity segment.India’s SME exchanges have achieved rapid growth in listings, but the governance ecosystem still lags these global counterparts, limiting scalability and investor confidence.Case Evidence: The SME ChallengeSome SMEs that fail to build robust governance structures often stall after IPO. Thin liquidity, compliance lapses, or promoter disputes lead to erosion of investor trust and long-term value.By contrast, SMEs that prioritise governance – regular disclosures, professional management, and transparent reporting – secure higher valuations and sustained investor interest.“ As India aims to quadruple its Gross Domestic Product (GDP) in the coming decades, the burden cannot be borne only by large corporations. SMEs must be empowered to scale. The key lever is governance: from promoter-led informality to professionalised, transparent, and investor-ready enterprises. ”Fixing the BottleneckThe graduation bottleneck is not just about finance – it is fundamentally about governance. Without reliable disclosures, institutional investor participation will remain limited, and the listing funnel will stay narrow. As India aims to quadruple its Gross Domestic Product (GDP) in the coming decades, the burden cannot be borne only by large corporations. SMEs must be empowered to scale. The key lever is governance: from promoter-led informality to professionalised, transparent, and investor-ready enterprises.Policy and Regulatory SignalsIndia’s Small and Medium Enterprise (SME) ecosystem is at a critical inflection point, shaped by reforms and regulatory nudges:Securities and Exchange Board of India (SEBI) reforms: Streamlined disclosure norms, more flexibility in migration, and stricter eligibility criteria for main board listing. Migration requirement was extended from 2 years to 3 years, ensuring SMEs demonstrate robust governance before scaling.Exchange initiatives: National Stock Exchange (NSE) Emerge and Bombay Stock Exchange (BSE) SME actively run awareness programs, regional investor connect sessions, and SME indices to boost visibility.Government policy: Schemes like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), the Fund of Funds for Startups, and the Production Linked Incentive (PLI) scheme indirectly strengthen SME capital bases, making them stronger IPO candidates. In addition, some state governments directly incentivise listing. For example, Kerala offers a subsidy of up to ₹1 crore to eligible SMEs to cover SME IPO issue expenses, while Rajasthan provides a subsidy of up to ₹30 lakh for the same purpose. These state-level measures encourage more SMEs to enter the capital markets and offset initial listing costs.Financing Corridors: New Channels EmergingBeyond traditional bank finance and SME IPOs, several new financing corridors are opening up:Institutional participation: The interest of mutual funds and Alternative Investment Funds (AIFs) is increasing in the SME space. Dedicated SME-focused funds are being established.Green/Impact capital: Environmental, Social, and Governance (ESG)-focused funds are targeting SMEs in renewable energy, manufacturing efficiency, and social enterprises. Governance upgrades make such SMEs prime beneficiaries.Private equity/venture debt: Though concentrated in start-ups, there is a growing appetite for established SMEs with revenues between ₹50–200 crore, especially export-oriented firms.Migration Playbook: From SME Board to Main BoardThe SME platform is not the destination, but a gateway. The migration journey offers important lessons:Track record: Roughly one-third of SME-listed companies have successfully migrated to the main board.Timeframe: Migration can occur after 3 years of listing, after satisfying several criteria of stock exchanges – governance, profitability, and compliance standards are consistently met.Valuation uplift: Migration often results in significant re-rating, as institutional investors gain access.Governance requirement: Migration-ready SMEs typically display timely disclosures, professional boards, internal audit frameworks, and consistent dividend and earnings records.India’s Opportunity WindowIndia is projected to be the world’s third-largest economy by 2030. For this ambition to materialise, scaling SMEs is indispensable:Employment: To absorb ~10 million annual workforce entrants, SMEs must expand faster and formalise jobs.Exports: India’s target of US$1 trillion exports by 2030 rests significantly on SME competitiveness and integration into global supply chains.Capital markets: Deepening beyond ~6,000 listed large companies into tens of thousands of SMEs would make Indian markets more representative and resilient.If even 2% of SMEs (~6,000 firms) list over the next decade, India could see:Fund mobilisation of ₹3–4 lakh crore.Market capitalisation creation exceeding ₹15–20 lakh crore.Millions of new formal jobs in urban and semi-urban India.Conclusion – The Governance DividendIndia’s ~6.3 crore Micro, Small, and Medium Enterprises (MSMEs) prove that it is a land of entrepreneurs. But only ~3.3 lakh SMEs and ~1,231 listed firms highlight the scale barrier. Bridging this gap requires more than finance, it demands governance: transparent disclosures, professional management, and investor trust. The SME platform is now validated as a powerful gateway, but its true potential lies in pulling thousands more firms into the formal capital market fold.The next decade will decide whether India leverages its entrepreneurial base to build global champions or remains constrained by informality. By focusing on governance as the key multiplier, SMEs can unlock lower capital costs, stronger valuations, and integration into global supply chains. That is the governance dividend and it is India’s next big growth lever.ReferencesMinistry of Micro, Small and Medium Enterprises (MSME) – Annual Report 2023–24.Press Information Bureau (PIB) / Udyam registration counts (2024–25 releases).India Brand Equity Foundation (IBEF) MSME sector overview.BSE SME & NSE Emerge exchange statistics (listings, funds raised, migration).NSE Emerge factsheets and listings page.Reserve Bank of India (RBI) – Report on Trends and Progress of Banking (2023–24).Securities and Exchange Board of India (SEBI) – SME Platform consultation papers (2012–2024).Organisation for Economic Co-operation and Development (OECD), World Bank reports on SME boards (UK AIM, GEM Hong Kong, Korea, Taiwan).SEBI circulars on SME listing and migration (2012–2024).Ministry of Finance & Ministry of MSME policy updates (PLI, CGTMSE, taxation).India Brand Equity Foundation (IBEF) projections for India’s GDP and export growth.◆◆◆Author may be reached ateboard@icai.inJanuary 2026 | www.icai.org 41–44
Internal Audit
Ep. 86 — Real-Time Impact: RBI’s Concurrent Audit Framework Driving Accountability and Risk Mitigation in Indian Banks
CA Journal
· July 2026
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Real-Time Impact: RBI's Concurrent Audit Framework Driving Accountability and Risk Mitigation in Indian BanksThe RBI's Concurrent Audit Framework ensures real-time or near real-time examination of banking transactions to proactively detect irregularities, manage risks, and enhance compliance. Introduced in the 1990s, it has evolved to cover key areas like loans, forex, KYC/AML, and treasury operations across public, private, and cooperative banks. Unlike traditional audits, concurrent audits offer immediate feedback, deter fraud, and strengthen operational efficiency. With rising digitization, banks are leveraging automation, AI, and analytics to enhance audit effectiveness. Concurrent audits not only ensure regulatory adherence but also provide critical business insights, supporting strategic decision-making and reinforcing trust in India's banking ecosystem.Introduction: The Essence of Concurrent AuditIn the dynamic landscape of India's banking sector, Concurrent Audit stands out as a powerful mechanism for near real-time vigilance and proactive risk control. Mandated by the Reserve Bank of India (RBI), the concurrent audit is a system of simultaneous examination of transactions and procedures as they occur, ensuring that any deviations, inefficiencies, or non-compliance issues are flagged immediately.Unlike conventional audits that are conducted post-facto, concurrent audits operate in parallel with the day-to-day operations of a bank, thereby serving as a near-instant feedback loop on operational integrity and compliance adherence.Genesis and Regulatory EvolutionThe concept of concurrent auditing emerged in India during the early 1990s as the banking sector was undergoing liberalization. As private and foreign banks entered the market, the volume of financial transactions increased, financial products expanded, and the risk of fraud and non-compliance grew.To address fraud and malpractices in banks, the RBI formed a High-Level Committee in 1992, led by Shri A. Ghosh, the then Deputy Governor of RBI. Among other measures, the Ghosh Committee recommended introducing concurrent audits in commercial banks to improve internal controls, support administrative functions, ensure adherence to systems and procedures, and detect lapses and irregularities. Consequently, all scheduled and primary (urban) cooperative banks with deposits over Rs. 50 crores were required to adopt the concurrent audit system.Thereafter, the Concurrent Audit Regulatory Framework has evolved as below:1996–1997: Defined scope, coverage, reporting systems and remunerations.2001–2007: Enhanced scope and responsibilities under concurrent audit, including mandatory coverage of sensitive and high-value branches.2015: Revised guidelines on concurrent audit system, including the requirement to have at least 50% of their business under concurrent audit coverage, along with a detailed minimum audit program.2019 and onwards: Scope of work and sampling coverage to be at the discretion of the internal audit team of the bank, with broad minimum areas of coverage defined. Specific regulations issued by the RBI from time to time mandate coverage of certain areas under concurrent audit review.Scope and ApplicabilityScope of Concurrent AuditThe RBI has laid down broad guidelines for minimum areas of coverage under Concurrent Audit in its circular on Concurrent Audit System dated September 18, 2019 (DBS.CO.ARS.No.BC.01/08.91.021/2019-20). However, banks are expected to define the specific scope based on their risk profile and business complexity. Minimum areas of coverage include loans and advances, treasury operations and foreign exchange transactions, Know Your Customer / Anti-Money Laundering guidelines, Remittances, Trade Finance, Branches, SWIFT transactions, Internal Accounts and as per regulatory guidelines issued from time to time.ApplicabilityScheduled Commercial Banks (including Public and Private Sector Banks and Foreign Banks)Small Finance BanksPayments BanksLocal Area BanksMethodology: How Concurrent Audit is ConductedAppointment of Concurrent AuditorsCan be conducted by internal teams or external Chartered Accountant firms empanelled with the bank, at the discretion of the individual banks.In case of outsourced concurrent audit function, the Internal Audit team should participate in the selection process, and the auditors should be rotated every 3 years to ensure independence.Typical Concurrent Audit Lifecycle / Process FlowConcurrent audit in Indian banks is a cyclical and continuous process, aimed at ensuring real-time transaction scrutiny, regulatory compliance, and operational risk control. Fig. 1 shows a breakdown of the concurrent lifecycle / process flow.Fig 1. Concurrent audit lifecycleActivities during initial set up stage for external concurrent audit teamEmpanelment of external concurrent auditors by the BankFinalization of scope of review, sampling criteria and review frequencyBank to provide concurrent audit team with system access to Bank's domainConcurrent Audit team to conduct process walkthroughs with Bank stakeholdersConcurrent audit team to prepare checklist in line with regulations and internal policiesBreakdown of the concurrent lifecycle, typically followed on a monthly rolling basis1. Transaction TestingData for the review period is extracted from the Bank's system (where feasible) for conducting review. Samples are selected as per methodology defined in scope. Review is conducted on daily / weekly / monthly frequency in line with the checklist.2. Query IssuanceBased on the review conducted, exceptions / outliers are flagged as queries immediately upon identification to the Bank stakeholders for clarification.3. Query ResponsesStakeholders provide responses on the queries raised. The additional evidence submitted may either result in queries being dropped or an observation arising as an outcome.4. Observation and MAPFor exceptions which are agreed as observations, root cause assessment and management action plan is sought from the bank stakeholder along with action owner and timelines.5. ReportingObservations are issued as a draft report for concurrence from stakeholders. The final report is issued post concurrence received.6. Tracking of Open IssuesAction plans for open issues are tracked for closure in line with the target date provided by the management.Concurrent audit is a near real-time review with a monthly reporting cycle. Quarterly reporting (minimum) of observations noted during Concurrent Audit review is to be placed before the Audit Committee of the Bank.Benefits of Near Real-Time AuditingConcurrent audits offer a multitude of advantages, especially when compared to traditional, retrospective audit frameworks:Proactive Risk Management: Irregularities are flagged at the time of occurrence or shortly thereafter, enabling early intervention and damage control.Deterrent to Frauds: Employees are aware that transactions are under continuous scrutiny, reducing the likelihood of fraudulent behaviour.Faster Decision Making: Audit insights help in real-time correction, improving efficiency and reducing customer grievance redressal time.Improved Regulatory Compliance: Banks can ensure ongoing alignment with RBI norms, reducing the risk of regulatory action or penalties.Enhanced Customer Confidence: A robust audit framework instills trust among stakeholders, reinforcing the credibility of the banking system.Uniqueness of Concurrent Audit in the Indian ContextUnlike many global internal audit practices that are periodic in nature, concurrent audit in India is real-time or near real-time, offering a continuous assurance mechanism. This model reflects India's regulatory expectations and the need for robust internal control in a rapidly evolving financial ecosystem.Concurrent audit in India holds a distinct and critical role in the country's financial system, especially in the banking sector.Volumes and Scale: India's banking ecosystem is vast, with a high volume of transactions occurring across both urban and rural branches daily. Concurrent audits are uniquely designed to handle this scale, including review of branches at multiple locations.Mandatory Oversight and Effectiveness Review by Audit Committee of the Bank: Regulation mandates annual review of the effectiveness of the concurrent audit system as well as the performance of the concurrent auditors, with a performance memo issued by the bank.Accountability: Empanelled concurrent auditors are expected to maintain high standards of integrity and independence, failing which their appointment may be cancelled in case of any serious acts of omission or commission. Material irregularities, fraud indicators, and non-compliance cases are expected to be reported immediately to higher management and, if necessary, the regulator.Direct Interactions with Regulators: Regulators in India place strong reliance on concurrent audits as a frontline defense mechanism. In some cases, regulators / inspectors have direct interactions with concurrent auditors during their annual inspections and other calendarized inspections.Adaptability to Change: The environment in which concurrent audit operates is dynamic, with shifts in business models, regulatory framework and technology landscapes constantly triggering the need for concurrent audits to evolve.Policy & Process Changes: Organizations frequently revise internal policies and standard operating procedures due to changing business objectives, risk appetite, or external market dynamics. Auditors must quickly adapt to revised process flows and control points and update their checklists and test procedures accordingly.Regulatory Change: India's financial regulatory environment is dynamic, with frequent updates to KYC norms, provisioning rules, credit assessment frameworks, and digital compliance. Regulatory change management is important to ensure audit checklists remain current and aligned with the latest regulatory circulars. Concurrent auditors are usually among the first to validate implementation of regulatory changes at the operational level.Technology and System Changes: Introduction of new systems (e.g., CBS, ERP), automation tools, digital platforms, or data analytics engines requires auditors to review data sources, test procedures and existing checklists.People and Organizational Changes: Changes in organizational structure, staff turnover, or shifts in roles and responsibilities can alter how processes are executed, and it is critical to manage these changes by way of adequate training.Access to Banks' Systems: One of the defining features of concurrent audit is the direct access granted to auditors to banking systems, enabling auditors to view real-time transactions, customer profiles, sanction notes, loan documents, and exception reports.Integration with Third Line of Defense: Concurrent audit acts as a support to the Third Line of Defense (Internal Audit), and findings from concurrent audits are directly reviewed and acted upon by the internal audit department, which is considered the independent assurance provider to the board and audit committee.How Concurrent Audit Can Deliver Business Insights Beyond AssuranceIn today's fast-paced business environment, the role of audits has evolved significantly. No longer confined to a backward-looking assessment of compliance and control, concurrent audits, conducted in real-time or near real-time, have the potential to deliver deep, actionable insights that drive operational efficiency, strategic planning, and business innovation.Real-Time Process Monitoring and Optimization: Auditors often identify inefficiencies, delays, or deviations from standard procedures in near real time. Management can use these observations to reengineer processes, reduce turnaround time, or eliminate redundant workflows, ultimately improving service delivery and cost efficiency.Early Detection of Trends: By consistently monitoring transactions, concurrent auditors are uniquely positioned to detect patterns and anomalies early, long before they escalate into larger issues. A surge in certain types of customer complaints, an increase in unauthorized overrides, or a shift in transaction volumes may signal underlying operational or market trends, which can enable organizations to be proactive rather than reactive.Enhanced Risk Management: While concurrent audits naturally contribute to risk mitigation, their data-rich findings can significantly enhance enterprise risk intelligence. Frequent breaches of specific controls, recurring procedural lapses, or concentration of risk in certain branches or segments can all be captured and analyzed.Assessing Efficiency of Operations: Concurrent audits can help identify areas of repeat operational errors, such as delays in processing, frequent manual interventions, or high error percentages. Management can use these insights to improve staff training, redesign workflows, or invest in automation where needed.Support for Strategic Decision-Making: Over time, concurrent audits produce a wealth of data that goes beyond compliance. Aggregated findings on process performance, risk exposure, and operational gaps create a real-time snapshot of business health. Such insights can inform digital transformation plans, mergers and acquisitions evaluations, and long-term policy revisions.How Automation is Reshaping Concurrent Audit PracticesAs banking operations shift toward digital and real-time environments, concurrent audits have embraced technology for enhanced efficiency and scope. The following are the trends in technology adoption in the concurrent audit space:Real-time dashboards and audit planning tools.Automation for routine audit checks; for example, automation of daily SWIFT reconciliation, regulatory reporting checks, etc.System Generated Exception Reports (SGERs) to reduce manual errors.Data analytics to identify trends, outliers, red flags and anomalies.API-based data extraction from source systems.Centralized monitoring for tracking audit findings, open issues, etc., in real time across multiple locations.Leveraging Optical Character Recognition (OCR) technology for converting scanned documents, such as account opening forms, into machine-readable text format.Note: The above are applicable for private sector banks and foreign banks, where all the data is available centrally at the HO and not fragmented across branches.Potential of Artificial IntelligenceIntelligent Anomaly Detection: AI models, especially those based on machine learning, can detect outliers and anomalies far beyond the capability of traditional rule-based systems. For example, an AI model monitoring transactions can flag deviations in amount, frequency, or timing that don't match the user's historical behaviour, even if the transaction is technically within the policy limits.Natural Language Processing (NLP) for Document Review: NLP can be used to scan and interpret policy documents, contracts, or communication logs, identifying risk keywords or non-compliance issues.Risk Scoring and Prioritization: AI can score transactions or business units based on their risk levels, enabling auditors to focus on high-risk areas — for example, auto-prioritizing branches or departments for deeper review based on fraud likelihood, previous audit scores, or transaction volume anomalies.Continuous Control Monitoring (CCM): AI-driven systems can monitor key controls 24/7, sending alerts in real time when thresholds are breached — for example, detecting unauthorized access attempts, changes in vendor bank details, or back-dated entries immediately.Predictive Risk Intelligence: Using historical data, AI can predict where future breaches or compliance failures are likely to occur based on past trends.Challenges and Key Considerations for Using AIData Quality: AI is only as good as the data it learns from. Poor data can lead to inaccurate results.Change Management: Auditors must be trained to trust and interpret AI outputs.Ethical Use: Clear governance must be in place to avoid bias or misuse of AI tools.Integration: Aligning AI tools with legacy systems and existing audit workflows can be complex.ConclusionThe RBI-mandated concurrent audit system is one of the most comprehensive and unique real-time audit frameworks in the Indian banking ecosystem. It not only enhances transparency and governance but also acts as an early warning system to detect serious errors and irregularities.As banks move deeper into digital transformation, the concurrent audit mechanism will continue to evolve, blending human expertise with machine intelligence to build a more resilient, secure, and compliant financial system.ReferencesRBI's circular on Concurrent Audit System dated September 18, 2019 — rbi.org.inRBI's circular on Concurrent Audit System in Commercial Banks – Revision of RBI's Guidelines dated July 16, 2015 — rbi.org.inRBI's circular on Concurrent Audit in Banks dated January 30, 2003 — rbi.org.inRBI's Master Circular – Inspection and Audit Systems in Primary (Urban) Co-operative Banks dated July 1, 2009 — rbi.org.inICAI's Manual on Concurrent Audit of Banks (2023 Edition) — icai.orgAuthor may be reached at artithakar1589@gmail.com and eboard@icai.inThe Chartered Accountant — Internal Audit January 2026 | www.icai.org | 45–49
GST
Ep. 87 — Fuelling the Future: Landscape, Challenges, and Tax Optimisation in the Oil and Gas Industry
CA Journal
· July 2026
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Fuelling the Future: Landscape, Challenges, and Tax Optimisation in the Oil and Gas IndustryIndia’s oil and gas sector, a prospective $8.6 trillion GDP market, fuels the economy but grapples with tax inefficiencies. Exclusion from GST denies utilisation of ITC, leading to a cascading tax burden and ultimately an increase in the cost of fuel. Additionally, states’ reliance on petroleum tax revenue makes them reluctant to transition to GST. Considering the uncertainty of GST integration and the unavailability of ITC, the industry must leverage the exemptions and concessions available under GST to structure transactions efficiently. While concerns over revenue loss exist, a balanced approach of integrating tax reforms with fiscal incentives can transform the sector. Proactive reforms today will ensure a resilient energy future tomorrow.IntroductionAmidst a rapidly evolving global landscape, one sector has emerged as a linchpin of India’s economic framework. An industry that not only fuels the ambitions of a growing nation but also positions itself as a critical player on the global stage. The industry, which is expected to reach $8.6 trillion GDP by 2040, exported 64.7 MMT of products while producing 264 MMT domestically. Drawing $8.22 billion in cumulative FDI inflows since 2000, this sector underpins the nation’s foreign reserves and industrial backbone as one of the eight core industries. The Oil and Gas Exploration Industry drives India’s energy future in every aspect of growth, right from revenue to returns, investments to international trade and from forex to fiscal contributions.The industry operates across three interconnected sectors.The upstream sectorThe midstream sectorThe downstream sectorO&G’s Three Primary StagesUpstreamExplorationDrilling, andProduction of crude oil and natural gasMidstreamTransportationStorage of crude oil and natural gasDownstreamRefiningProcessingDistribution of crude oil and natural gas into a wide range of end productsThe industry, being heavily regulated, also requires massive capex in exploration and infrastructure development. However, the pressing concern of the industry is upon the taxation policies implemented on them. With varied taxes and duties imposed without adequate benefits, especially under Indirect taxes, the members consistently urge the ministries to consider their hardships.Levy of Indirect Taxes in the IndustryUntil the implementation of the Goods and Services Tax Act, 2017 (hereinafter referred to as “The CGST Act, 2017” or “The Act”), multiple indirect taxes were levied by both the Central and State governments, leading to inefficiencies and cascading effects. The CGST Act, 2017, unified varied taxes as one single tax. However, vide Article 279A (5) of the Constitution and Section 9(2) of the Act, the Central Board of Indirect Taxes and Customs (hereinafter referred to as “CBIC”) deferred petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel from GST.Further, Article 246 of the Constitution grants power to the Parliament and the Legislatures of States to make laws with respect to matters under the Seventh Schedule. While entry no. 84 of the Union List empowers the Central Government to levy excise duty, entry no. 54 of the State List allows the State Government to impose VAT on the aforementioned goods. This has resulted in a situation wherein petroleum products are taxed separately through different taxes, and that too at different rates.This exclusion of petroleum products from the ambit of GST has deferred the Government’s vision of implementing the “One Nation, One Tax” policy. The introduction of GST aimed to unify taxation, reduce the cascading effect, and establish an efficient tax collection system, which currently seems to be defeated.Since inputs required for production are taxed under GST while outputs are excluded, the break in the Input Tax Credit (hereinafter referred to as “ITC”) chain adds a significant cost burden. As of 2025, India, the third-largest oil consumer, faces higher fuel prices due to this cascading tax effect. One of the key reasons for inflated fuel costs is the inability to offset input taxes, increasing the overall financial strain on the industry and consumers. To illustrate this, a detailed cost breakup of petrol and diesel as applicable in the State of Maharashtra is provided in Table 1.Table 1ParticularsPetrol PriceDiesel PriceCrude Oil (from Brent Crude + Russian Import + Other Crude Import)Rs. 40Rs. 40OMC Processing Cost (Freight + Refinery Processing + OMC Margin + Logistics Operational Costs)Rs. 7.35Rs. 8.15Buffer for Future Inflationary Aspect etcRs. 10Rs. 8Fuel Price after processing (A)Rs. 57.35Rs. 56.15Central Government Taxes and Dealer CommissionExcise Duty (all inclusive) + Road Cess as Charged by Central GovernmentRs. 19.9Rs. 15.8Commission to Petrol Pump DealersRs. 3.8Rs. 2.6Fuel Cost Before VATRs. 81.05Rs. 74.55State Taxes (Maharashtra)VAT @ 25% on petrol / VAT @ 21% on dieselRs. 20.26Rs. 15.65Additional taxRs. 5.12–Final Retail Price in Mumbai (B)Rs. 106.43Rs. 90.60Proportion of Total Tax to Final Cost42.5%34.71%Cost per litreGiven that the petroleum product prices are generally determined by global benchmarks such as Brent Crude and WTI, the cost of the products cannot be increased arbitrarily, ultimately leading to the cost of input taxes being absorbed by the industry.The Federation of Indian Petroleum Industry (FIPI) has been actively advocating for the industry’s concerns regarding GST exclusion. FIPI, a society representing hydrocarbon sector entities, serves as an interface with the government.The Federation of Indian Petroleum Industry (FIPI) has been actively advocating for the industry’s concerns regarding GST exclusion. FIPI, a society representing hydrocarbon sector entities, serves as an interface with the government. According to a report for F.Y. 2021-22, “exclusion from the GST regime and dealing with multiple taxes has resulted in a cascading tax effect, reversal of ITC, leaving the industry stranded with taxes as high as 60%.” Given the uncertainty surrounding GST inclusion, the industry must thoroughly assess contracts, meticulously examine invoices, and accurately determine tax rates to minimize procurement costs effectively.Tax Optimisation StrategiesIndustry relies heavily on specialised services and complex equipment, making cost and financial liquidity the foremost deciding factor. Industry’s versatile landscape requires services like Front End Engineering Design Services, also known as FEED services in the upstream sector, pipeline construction and maintenance in the midstream sector and product distribution in the downstream sector. Given its capital-intensive nature and the unavailability of ITC, optimizing taxes becomes a key consideration.Relaxation of IGST for Goods Imported under LeaseCertain goods integral to exploration operations are required to be imported, often incurring significant costs in the form of customs duties. CBIC vide NN 50/2017-Customs introduced entry 557A and 557B, levying a Nil rate of IGST for specified goods. This exemption applies to rigs imported for oil or gas exploration and production under lease agreements.However, the exemption is conditional. The importer must re-export the goods within three months from the expiry of the lease. Failure to comply would result in the payment of applicable duties as if the goods were imported under normal circumstances. Therefore, strict adherence to these conditions is essential to retain the benefits.Maintenance, Repair or Overhaul services (MRO) for ships and vesselsThe industry often ensures that imported vessels are ready for use by maintaining and repairing them before shipping, reducing reliance on local repair services and affecting domestic sales and tax revenues. Usually, such services are exigible at a rate of 18%, thereby increasing the industry’s cost burden. To create a level playing field, CBIC issued NN.02/2021-CTR, establishing a concessional 5% rate on MRO services for ships, vessels, engines, etc. Vessels such as drillships, anchor handling tug vessels, and FPSO units can benefit from this notification. However, it is important to determine whether the goods qualify as “vessels”.Furthermore, NN. 03/2021-CTR clarified that the POS for these services shall be the location of the recipient. This allows suppliers to benefit from export provisions under the IGST Act where the recipient is a foreign entity. This ultimately benefits both the service providers and recipients of services provided to incoming foreign vessels.Destiny Redefined: The Industry TransformationThe industry significantly contributes to the exchequer through royalty and cess over and above the direct and indirect taxes. With continued performance and persistent representation, CBIC provided certain reliefs; however, all such reliefs have now been snatched away from the industry — thanks to the government’s decision to expel the 12% tax rate. This decision has not only added to the cost burden for the companies operating in this sector but also increased the intricacies, which are outlined below:As GST is a destination-based tax, the inclusion would shift revenue from oil-producing states to consuming states, creating concerns about revenue distribution.Concessional Rate on Specified GoodsWith petroleum exploration requiring a range of goods, CBIC offered a concessional tax rate on specified goods that are integral to exploration projects, vide NN. 03/2017-CTR. The said notification set a concessional rate of 5% on goods essential for petroleum operations, which were later amended to 12% vide NN 08/2022-CTR effective from 18.07.2022. Further, vide NN.11/2025-CTR, the tax rate has been amended to 18% w.e.f 22.09.2025.While the previous rate benefited a wide array of equipment from technical drawings and jack-up rigs, the updated tax rate provides no comfort to the industry. The changes in tax rate shall also impact the IGST payable on imports made under Sr No. 404 of NN.50/2017-Customs, which shall also increase from 12% to 18%.One of the questions arises as to how one should proceed when the same commodity is subject to varying tax rates. Consider helicopters. As per NN. 09/2025-CTR, these goods attract a 5% tax rate under Sr No. 463 in Schedule I. However, vide NN. 11/2025-CTR, the same goods carry a 18% rate. This presents a dilemma: should the industry follow the general notification with a lower rate or the specific exemption notification, which imposes additional conditions and a higher rate? Additionally, it is essential to examine the legal basis for such notifications. NN. 03/2017-CTR, issued under Section 11(1) of the CGST Act, grants CBIC the power to exempt goods or services. However, instead of providing relief, the tax rates have been increased and that too under conditional circumstances, which include obtaining an Essentiality Certificate issued by the DGH. Navigating these complexities requires a precise understanding of both legislative intent and practical application, elements that can be easily misinterpreted without specialized expertise.Offshore Works Contract ServicesBefore understanding the change, it is important to distinguish between offshore and onshore services. Offshore activities refer to operations that are carried out in the water bodies, typically in deep water, which include services like exploration, drilling, extraction, etc. Onshore activities, on the other hand, are conducted on land. Depending on the location of oil fields, both onshore and offshore exploration may be conducted.During exploration, certain equipment cannot be purchased directly from vendors, necessitating specialized engineers for the manufacturing and fabrication of goods. These services, which involve the supply of goods, may result in the construction of immovable property, potentially qualifying as works contracts under Section 2(119) of the Act. To address this, CBIC issued NN. 39/2017-ITR, providing a concessional tax rate of 12% on the composite supply of offshore works contracts relating to oil and gas exploration in the area beyond 12 nautical miles, thereby providing a significant relief from the standard 18% rate. However, vide NN.15/2025-CTR, the tax rate has been increased to 18% w.e.f. 22.09.2025.Upon perusal of Para 25.1 to 25.2 of minutes of the 22nd GST Council, one can find the logic behind the change of rate on the aforesaid services from 18% to 12%. One of the reasons was the taxability of such services at 12% in the pre-GST regime. Further, the area beyond 12 nautical miles was beyond the jurisdiction of States, and therefore, VAT was not applicable, and only the Service Tax of 6% was charged. It was recommended to apply a tax rate of 12% instead of 18%. However, it seems that the new tax rate is contrary to the discussion held during the meeting.With the offshore works contract services involving costly activities like construction and installation of wellhead platforms, derricks, etc, rather than shifting it to the 5% tax rate, the burden has been shifted onto the industry. The government must reconsider this, given petroleum’s GST exclusion and the resulting cascading tax impact.Support Services to the IndustryTo facilitate operations across the upstream sectors, CBIC vide NN 20/2019-CTR introduced a 12% concessional rate for professional, technical and support services provided to the industry. However, the said rate has also been amended to 18% vide NN. 15/2025-CTR. One of the important concessions provided to the industry has now been snatched away. The government shall not just reconsider this decision but also provide clarity on the word “support services”. At first glance, one might assume that all services in this industry qualify as “support services.” However, Circular No. 114/33/2019-GST clarifies the services that can be brought under the umbrella to avail the concessional rate of tax. The circular provides two explanatory notes to determine the eligibility of services for the concessional benefit. Although the explanatory notes use the term ‘includes’ to define the list of services, the list itself is ‘restrictive’, thereby creating a dilemma for the industry. Misinterpretation has led to being prey of litigation and payment of taxes at a higher rate. CBIC should clarify the restriction or inclusiveness of the term “Includes” to avoid disputes.RecommendationsThe exclusion of petroleum products from GST has sparked concerns due to its impact on production costs and consumer prices. The interplay of various taxes has increased the tax burden, while geopolitical factors further escalate production costs. Since fuel prices directly affect inflation and economic stability, government intervention often prevents companies from transferring the full tax burden to consumers. Subsuming these taxes under GST could streamline the tax structure and reduce inefficiencies.The 45th GST Council Meeting acknowledged the industry’s cost burden but deferred the proposal, citing that “this is not the right time to bring Petrol and Diesel within the ambit of GST.” The decision stems from the significant revenue reliance on petroleum products by both the central and certain state governments. Taxes on fuel have been a major source of revenue, which is why the Council would not bring it under GST. Further, the recent changes have pushed all the tax rates relevant to the industry into the 18% tax bracket, which further adds to their grievances. As GST is a destination-based tax, the inclusion would shift revenue from oil-producing states to consuming states, creating concerns about revenue distribution. As per a report by Petroleum Planning and Analysis Cell (PPPAC), tax collected on petroleum products contributed Rs. 4,14,244 crore to the Central exchequer, whereas Rs. 3,25,583.5 crore to the State in F.Y. 2024-25. Additionally, the top-ranked states specifically with respect to revenue from taxes are provided in Table 2.Table 2Sr. NoStateSales Tax/VATSGST/UTGSTTotalState wise Collection of State Tax/VAT/GST on Petroleum, Oil and Lubricants1Maharashtra36,992.171,653.9038,646.072Uttar Pradesh31,214.11909.7232,123.833Tamil Nadu24,861.32712.9625,574.284Gujarat24,586.232,980.2427,566.475Karnataka23,427.58410.0923,837.67Amount in CroresThe revenue dynamics in the petroleum industry highlight a stark difference between state taxes on goods and GST collected on sales by the downstream industry. In the meantime, CBIC could provide the industry with temporary relief, discussion about which is as discussed below:Refund of Input Tax CreditThe inclusion of petroleum products under GST is likely to take time as states work toward a consensus. Meanwhile, what interim measures can the government implement to support the industry? Under Section 55 of the Act, the CBIC, through NN. 06/2017-CTR, granted a 50% refund of tax paid on all inward supplies of goods received by the Canteen Stores Department (hereinafter referred to as “CSD”) to compensate for the pre-GST exemptions and to ensure that essential goods remain affordable for the armed forces.A similar approach could be applied to the industry. The government could identify key goods and services and introduce a partial refund mechanism, allowing businesses to claim refunds up to a specified limit.A structured mechanism may also be instituted whereby a fixed percentage of the total input cost can be utilized against tax liabilities such as import duties or excise duty on crude, similar to the duty credit framework presently extended to exporters.Shifting of tax rate for all goods and servicesCurrently, the GST rate of 18% applies to all necessary goods and services affecting not only companies but also consumers of petroleum products like diesel and petroleum. While other sectors received tax relief, the emerging oil and gas exploration industry is being ignored. It’s crucial to address this by reducing the GST rate to 5% to stabilize the sector.ConclusionExcluding petroleum products is not just a taxation issue but an economic roadblock that increases costs and distorts market dynamics. Without GST, fuel prices remain artificially inflated due to multiple embedded taxes, ultimately increasing the costs of end products.The industry constantly urges the ministries to include petroleum products into GST, but will this resolve all the issues? While to some extent, yes and to some, the issues still persist. Excluding petroleum products is not just a taxation issue but an economic roadblock that increases costs and distorts market dynamics. Without GST, fuel prices remain artificially inflated due to multiple embedded taxes, which translates into increased costs for the end products. Integrating petroleum into GST would eliminate these inefficiencies and ensure a seamless credit mechanism in the supply chain.A key justification for inclusion under GST is to utilize ITC, which is currently blocked, adding financial strain on the industry. Businesses could offset input taxes against output liability, reducing cascading effects. However, concerns remain that several critical inputs will still be ineligible for ITC under Section 17(5)(c) of the Act, as it disallows ITC on immovable property (except plant and machinery), impacting works contract services. Since “plant and machinery” excludes civil structures, ITC on infrastructure such as wellhead platforms may remain ineligible. While GST inclusion lowers tax costs, ITC restrictions will still inflate expenses, thereby raising consumer prices.On the other hand, where petrol and diesel are taxed at approximately 42% and 34% of their final cost, respectively, alongside the imperative for states to sustain their revenue streams, if brought under GST, the rate would likely be no less than 28%.Now, consider energy-intensive industries, particularly the fertilizer industry. According to an industry consumption report by the Petroleum Planning and Analysis Cell, the industrial sector, driven by the steel and cement industries, remains the largest energy consumer of natural gas, by consuming 31% share between the period April 2025 to August 2025.Natural Gas Sectoral Consumption, Apr – Aug 2025 Fertilizer 8,109 · 31%CGD 6,711 · 25%Others 4,156 · 16%Power 3,797 · 14%Refinery 2,120 · 8%Petrochem 1,705 · 6%Also, the logistics and transport industry, where petroleum products constitute a major component of inputs and output services, capped at 5% or 18%, including petroleum under GST, would create an inverted duty structure, with input taxes exceeding the output taxes. This issue extends beyond transport and logistics to telecommunications, aviation, and other fuel-intensive industries. Further, with recent changes in the tax rates, the question of the inverted duty structure and refunds in relation to the same remains to be answered.Additionally, the refund of ITC due to an inverted duty structure creates dual financial strain of reducing state revenue and an additional refund burden. CBIC must ensure inclusion is a comprehensive reform benefiting consumers, industries, and the economy.Countries like New Zealand, Canada, and Saudi Arabia have successfully adopted a unified tax system for petroleum products. India, too, stands to gain from such a reform. The 55th GST Council meeting had initiated discussions on including natural gas, considering its role in fuel and fertilizers. However, prioritizing the inclusion of other petroleum products is equally essential. While concerns over revenue distribution persist, strategic and equitable tax allocation could address these challenges. The government must prioritize long-term economic stability over short-term revenue concerns. Delays in reform will hurt industrial competitiveness and global standing, while this reform is inevitable. It is now a question of when and how the government will make this historic transition.Author may be reached at akshay.sharma@bathiya.com and eboard@icai.in The Chartered Accountant · January 2026
GST
Ep. 88 — Interpreting ‘Own Account’ and ‘Plant and Machinery’: A Practitioner’s Guide to ITC on Civil Structures
CA Journal
· July 2026
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Interpreting ‘Own Account’ and ‘Plant and Machinery’: A Practitioner’s Guide to ITC on Civil StructuresThe article critically examines the evolving interpretation of Section 17(5)(d) of the CGST Act concerning Input Tax Credit (ITC) on immovable property. It discusses the Safari Retreats judgment, which introduced the functionality test, and contrasts it with the retrospective amendment in Finance Act 2025 aligning clause (d) with clause (c). It also analyzes the Bharti Airtel ruling’s six-fold test for movability. Through practical tests and case law, the article argues for a harmonized reading of exclusions and emphasizes that if an asset serves as a business tool, it may still qualify as “plant and machinery,” allowing ITC eligibility.IntroductionAlthough the Safari Retreats judgment has a significant impact by introducing the functionality test to determine whether a building qualifies as a Plant, its influence has been short-lived due to a recent retrospective amendment proposed in the Union Budget 2025–26. Acting on the recommendations of the 55th GST Council Meeting, “plant or machinery” in Section 17(5)(d) has been replaced with “plant and machinery” to ensure consistency with the language used in Section 17(5)(c). Consequently, the explanation to Section 17(5), which defines “plant and machinery,” will now also apply to the provisions under Section 17(5)(d).Kindly note that retrospective amendment has not yet been effective.The Safari Retreats judgment also underscored that the phrase “on his own account” in clause (d) of Section 17(5) should be interpreted with a purpose, rather than a narrow or literal approach. Notably, this interpretation remains untouched by the Finance Bill, 2025.In contrast, the Bharti Airtel judgment has had a lasting impact on the availability of CENVAT credit on Telecommunication towers. The ruling provided a comprehensive analysis by laying down six guiding principles for determining whether a property qualifies as movable or immovable. These principles include: (i) the nature of annexation, (ii) the object of annexation, (iii) the degree of permanency, (iv) the intention of the parties, (v) the functionality test, and (vi) the marketability test. Based on these criteria, the classification of a property as movable or immovable is to be assessed.Assessment of Input Tax Credit Eligibility on Inputs and/or Services Used for Construction of Immovable Property — Section 17(5)(d)In this case, the restriction applies to the project owner or the end user, and more importantly, for determining the eligibility of Input Tax Credit, the assessment must be made from the perspective of the recipient of the taxable supply — commonly referred to as the recipient’s test.Given the restriction under clause (d), input tax credit (ITC) is not available on goods or services (or both) received by a taxable person for the construction of an immovable property on their own account. However, there are two key exceptions to this restriction:Where the construction relates to plant and machinery; andWhere the construction is not on the taxpayer’s own account.In light of the above, a three-step test should be applied to determine the eligibility of ITC on inputs and/or services used in the construction of immovable property.The goods and/or services are received by a taxable person for the construction of immovable property or movable property.The goods and/or services are received by a taxable person for the construction of immovable property, whether for his own account or otherwise.The goods and/or services are received by a taxable person for the construction of immovable property, whether such property qualifies as “plant and machinery” or not.Test 1Immovable Property or NotThe first test is to examine whether the inputs and/or services received are used for the construction of an immovable property or movable property. As the term immovable property is not defined under the GST law, its interpretation must be drawn from the General Clauses Act and the Transfer of Property Act.Notably, the recent Supreme Court judgment in the case of Bharti Airtel Limited has set out six guiding principles for determining whether a property qualifies as movable or immovable. In light of these principles, the nature of the property must be assessed. If, upon such assessment, the property is found to be movable, input tax credit (ITC) on goods and/or services used for its construction would be admissible.Notably, in the explanation for the purposes of clauses (c) and (d) of Section 17(5), the following items are outside the purview of the definition of Plant and Machinery:Land, building or any other civil structureTelecommunication towersPipelines laid outside the factory premisesThe restriction on Input Tax Credit (ITC) in relation to the above three items applies specifically to the construction of immovable property. The exclusion of certain items from the definition of “plant and machinery” does not automatically render those items immovable in nature. Therefore, if an article qualifies as movable property based on the criteria laid down by the Supreme Court in Bharti Airtel Limited, ITC on such goods or services would remain admissible.ExamplesTo assess the credit eligibility of a solar power plant, the first step is to determine whether it qualifies as immovable property, based on the six principles established in the Bharti Airtel judgement.Degree and Object of Annexation – It is essential to analyze the degree of attachment, which may differ depending on whether the installation is ground-mounted (suggesting a more permanent setup) or rooftop-mounted. However, even where solar modules are affixed to a civil foundation which is embedded in the earth, such attachment would render the structure immovable only if the modules are installed for the permanent and beneficial enjoyment of the civil foundation itself. Conversely, if the civil foundation is embedded in the earth solely to facilitate the effective and enduring functioning of the solar power generating system, and not the other way around, then the system cannot be regarded as immovable property.The Degree of Permanency – It is essential to assess whether the plant can be dismantled and reinstalled at another location. The mere fact that the plant is fixed to a foundation using nuts and bolts does not, by itself, render it permanently attached to the earth, particularly if such a foundation is required solely to ensure stable and vibration-free operation of the machinery.The owner’s intention is key i.e., if the structure serves a temporary, project-specific purpose, it indicates movability; if intended to become a permanent part of the land or building, it is deemed immovable.The Object of Annexation – Even if a solar power plant is fixed to a civil foundation for operational efficiency, that will not make the power plant an item of immovable property, and it may also happen that some of the items may be assembled on site. That too will not make any difference to the principle. The test is whether the installed solar power plant can be sold in the market. In case it can be sold in the market, then the solar power plant must be a movable property.The Intention of the Parties – The solar power plant, when affixed to a civil structure using nuts and bolts, does not become permanently integrated with the land or building. This attachment is merely to provide structural stability and ensure a wobble-free installation, enabling the plant to operate effectively. The purpose of such affixation is not for the permanent beneficial enjoyment of the land or building but to support the plant’s optimal functioning and ensure uninterrupted service delivery.The Functionality Test – If a solar power plant remains operational after being dismantled and is not location-dependent, it is considered movable. Conversely, if dismantling renders it non-functional or unfit for use elsewhere, it is treated as immovable.The Marketability Test – A structure is considered movable if it can be disassembled and sold or transferred, either wholly or in parts, without losing its utility. However, if it cannot be marketed without being damaged or destroyed in the process, it is regarded as immovable.If a solar power plant remains operational after being dismantled and is not location-dependent, it is considered movable. Conversely, if dismantling renders it non-functional or unfit for use elsewhere, it is treated as immovable.Test 2Receipt of Goods/Services for Construction of Immovable Property on His Own Account or NotA new line of jurisprudence has emerged through the Safari Retreats judgment concerning the interpretation of the phrase “on his own account.” The judgment emphasized that this phrase should be read down and interpreted with a purposive approach rather than a narrow or literal one. In essence, if a person constructs a property and subsequently uses it for taxable outward supplies, such as leasing the premises and charging GST, such construction cannot be regarded as being undertaken on his own account. Consequently, Input Tax Credit (ITC) in such cases should be permitted.Construction is said to be on a taxable person’s “own account” in two scenarios –Made for personal use and not for provision of service.When used as a setting for carrying out own business.On the other hand, construction cannot be said to be on a taxable person’s “own account”, if it is intended to be sold or given on lease or license.Let’s now explore the meaning of the phrase on his own account with the help of some examples.ExamplesXYZ Ltd. received various goods and/or services for construction of an office building or factory buildingScenario 1: XYZ Limited further leases out whole units in the office/factory building to customers and discharges output GST on the rental income. In such a case, it cannot be construed that the construction of the immovable property is undertaken on its own account. Accordingly, Input Tax Credit on goods and/or services received for the construction of such immovable property shall be allowable.Scenario 2: XYZ Limited uses the office/factory building for its own purpose and in this case, no further GST on the sale/lease of such a building occurs and accordingly the embargo under Section 17(5)(d) on ITC will apply as it is construed on his own account.XYZ Ltd. received various goods and/or services for construction of a DATA warehouse which is to be used as a cloud serviceIn this case, the data warehouse is intended to be used for storing client data, meaning the immovable property is directly utilized for providing taxable supplies on which GST is payable. Consequently, the restriction under Section 17(5)(d) on availing Input Tax Credit (ITC) would apply, as the construction is deemed to be undertaken on the taxpayer’s own account.Test 3Whether the Property Qualifies as “Plant and Machinery” or NotThe third test involves examining whether the resulting immovable property falls within the scope of “plant and machinery” as defined in the Explanation to clauses (c) and (d) of Section 17(5) of the CGST Act.As stated in the supra, the retrospective amendment substituting the term “plant or machinery” with “plant & machinery” in Section 17(5)(d) of the CGST Act, 2017 has been introduced vide Section 124 of the Finance Act, 2025, and the said amendment has come into force w.e.f. 01-10-2025.Input Tax Credit (ITC) is not barred in respect of goods or services used for the construction of an immovable property, which qualifies as plant and machinery as so defined in the explanation to clauses Section 17(5)(c). According to the definition, “plant and machinery” refers to an apparatus, equipment, or machinery that is fixed to the earth by means of a foundation or structural support and is used for making outward supplies of goods or services or both. It also includes such foundation or support structures. However, it explicitly excludes:land, buildings or any other civil structures,telecommunication towers, andpipelines laid outside the factory premises.Input Tax Credit (ITC) is not barred in respect of goods or services used for the construction of an immovable property, which qualifies as plant and machinery as so defined in explanation to clauses Section 17(5)(c).Following the retrospective amendment introduced by the Finance Act 2025, substituting the expression “plant or machinery” with “plant and machinery” in Section 17(5)(d) of the CGST Act, 2017, the core issue that now arises is whether, in light of the functionality test propounded in the Safari Retreats judgment, buildings can still be regarded as falling within the ambit of “plant.” To examine this proposition more closely, a few illustrative examples may be construed.Data Warehouse as Cloud Service: Since the building has been specifically planned and constructed for the purpose of storing client data, it can be classified as a “plant” by applying the principle laid down in the Karnataka Power Corporation [(2002) 9 SCC 571] judgment, which held that a building which has been planned and constructed so as to serve special technical requirements of the assessee may be treated as a plant.Power Generating Station: The Hon’ble Apex Court held in the case of Karnataka Power Corporation that the assessee’s power generating station building is an integral part of its generating system, and therefore, the same could be treated as a plant.Installation of Sanitary Fitting and Pipelines in a Hotel: The Apex Court held in the case of Andhra Pradesh vs. Taj Mahal Hotel [(1971) 82 ITR 44] that the installation of sanitary fitting and pipelines in a hotel constitutes “plant”.Cold Storage Building: The Calcutta High Court in the case of Commissioner of Income-Tax vs. Shree Gopikishan Industries Pvt. Ltd. on 11 June, 2003, held that the building of a cold storage is a plant.Even after the amendment, it can still be contended that the aforementioned buildings or immovable properties, being an essential tool of trade with which business is carried on, may qualify as “plant and machinery,” thereby reinforcing the relevance of the functionality test.As evident from the above, applying the functionality test, as laid down by the Hon’ble Supreme Court in the Safari Retreats judgment, structures such as data warehouses, power generating stations, and installations like sanitary fittings may fall within the scope of “plant.” However, this interpretation appears to be at conflict with the explicit exclusion of “land, buildings, or any other civil structures” from the definition of “plant and machinery” under the Explanation to Section 17(5) of the CGST Act, 2017.It is a well-settled principle of statutory interpretation that when two or more provisions of a statute appear to be in conflict, they must be read harmoniously. The aim is to interpret them in a way that gives effect to each provision, ensuring that none is rendered redundant or ineffective.Applying this principle, the exclusion of “building” or “civil structure” should be interpreted to apply only to those structures that merely provide the backdrop or setting for business activities, and not to those that function as essential means or tools for carrying on the business itself.Post Bharti Airtel Judgement EraIn the case of Sterling & Wilson Private Limited [Writ Petition No. 20096 of 2020], the primary issue was classification of the supply and installation of a solar power generating system. The tax authority held the transaction to be a “works contract” (immovable property) and levied a tax of 18%, whereas the petitioner objected to the same on the ground that the activities of the petitioner would have to be treated as composite supply. The Hon’ble High Court of Andhra Pradesh had observed that the solar power generating system, while attached to the ground, was not embedded for permanent beneficial enjoyment of the land but rather, the foundation served the system. Therefore, the supply is not a “works contract” but a “composite supply” as defined under GST law.Relying on the similar ratio of the Bharti Airtel judgement, in the present case, it was held that the installation of a solar power generating system would qualify as movable property and thus the said supply is not a works contract, but composite supply, as a works contract requires the involvement of an immovable property.Post Safari Retreats Judgement EraIn the case of Shibaura Machine India Pvt. Ltd. [Advance Ruling No. 36/ARA/2025 dated 02-09-2025], the Advance Ruling Authority of Tamil Nadu has ruled that structural supports erected specifically for the overhead crane and HVAC machinery fall within the extended definition of “plant and machinery.” Accordingly, the proportionate Input Tax Credit (ITC) attributable exclusively to the secondary steel structural supports associated with the overhead crane’s movement and the HVAC system is not excluded under Section 17(5) of the CGST Act, 2017, and is therefore eligible for the applicant to claim.Although the aforesaid ruling refrained from employing the functionality test when classifying the structural supports specifically erected for the overhead crane and HVAC equipment as “plant and machinery,” it nonetheless adopted a comprehensive and expansive construction of the term “plant and machinery.”ConclusionThe interpretation and application of Section 17(5) of the CGST Act, 2017, particularly clause (d), continue to be complex and evolving. The Safari Retreats judgment brought to light a purposive interpretation of the phrase “on his own account” and reaffirmed the relevance of the functionality test in determining whether an immovable property can be treated as “plant.” Subsequent to the Supreme Court’s dismissal of the Review Petition filed by the Revenue [Review Petition (Civil) Diary No(s). 1188/2025 in C.A. No. 2948/2023], the issue has become final and conclusive.However, the retrospective amendment introduced through the Finance Act, 2025, substituting “plant or machinery” with “plant and machinery” in clause (d), has introduced new interpretational challenges. While it brings clause (d) in line with clause (c), it also reinforces the statutory exclusion of “land, buildings, or any other civil structures” from the definition of plant and machinery.Nonetheless, the consistent judicial emphasis on the functionality and purpose of the asset, as seen in the Safari Retreats case, suggests that if an immovable structure functions as an integral tool of trade, beyond serving as a mere location, it may still be contended to fall within the scope of “plant and machinery”.In this context, the principle of harmonious construction becomes essential. Rather than allowing the exclusion clause to override the entirety of the definition, the courts may adopt an interpretation that preserves the legislative intent while ensuring that structures genuinely functioning as tools of business are not unfairly denied Input Tax Credit.As jurisprudence continues to develop and the retrospective amendment awaits notification, taxpayers, particularly those in infrastructure-heavy sectors like IT, telecom, and commercial real estate, must carefully evaluate the purpose, design, and use of constructed assets to determine ITC eligibility. Until further clarity emerges through judicial or legislative intervention, a case-specific, functionality-driven assessment remains the most prudent approach.◆ ◆ ◆Author may be reached atsabya.chakraborty@gmail.com and eboard@icai.inThe Chartered Accountant — GST January 2026 | www.icai.org | Pages 56–60
Accounting Standards
Ep. 89 — Lack of Exchangeability – What is Changing?
CA Journal
· July 2026
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Lack of Exchangeability – What is Changing?Ind AS 21 (The Effects of Changes in Foreign Exchange Rates) – inter alia – sets out the exchange rate that an entity uses when it reports foreign currency transactions or balances in the functional currency, translates the results and financial position of a foreign operation in a different currency, or translates its own results and financial position into a presentation currency.Until the recent amendment in May 2025, paragraph 26 of Ind AS 21 specified the exchange rate to be used when exchangeability between two currencies is temporarily lacking; however, it didn't provide specific guidance for situations where lack of exchangeability was not temporary.This article seeks to provide an insight on what has changed after the recent amendment to Ind AS 21 and how the revised Standard helps entities (a) assess whether a given currency is exchangeable into another currency, and (b) determine the spot exchange rate when exchangeability is lacking. The article also sheds light on the key disclosure requirements arising from the amendment.Introduction and BackgroundAt the outset, it may be recalled that IAS 21 The Effects of Changes in Foreign Exchange Rates and the corresponding converged Indian Accounting Standard (Ind AS 21) provide guidance on the exchange rate that an entity uses, when:it reports foreign currency transactions or balances in the functional currency;it translates the results and financial position of a foreign operation in a different currency; andit translates its results and financial position into a presentation currency.Before the recent amendment, these Standard provided guidance on the exchange rate to be used when exchangeability between two currencies was temporarily lacking. However, there was no explicit guidance on the determination of the exchange rate when the lack of exchangeability was not temporary. Accordingly, this led to diversity in practice.Genesis of the IssueThe genesis of the amendment lies in a submission received by the IFRS Interpretations Committee regarding how to determine the exchange rate when there is a long-term lack of exchangeability. The question before the IFRS IC arose from a specific situation faced by an entity in the context of its operations in Venezuela.Accordingly, the IFRS IC recommended that the International Accounting Standards Board (IASB) develop a narrow-scope amendment to IAS 21 to address this issue.Fig. 1 – The exchangeability questionVenezuelan Bolivar (Bs)⇄ exchange ⇄Say, Euro (€)Source: Self-compiledDevelopments at the Standard-Setting BodiesFollowing the above recommendation, the IASB issued amendments to IAS 21 in August 2023, specifically addressing the issue of lack of exchangeability. Subsequently, corresponding amendments to Ind AS 21 were considered and formally issued by the Ministry of Corporate Affairs (MCA) on 7th May 2025. These amendments reflect the standard-setters' response to extensive feedback from users of financial statements, who had raised concerns regarding the inconsistency in accounting practices in situations involving a lack of exchangeability between currencies, as illustrated in Fig. 2.Fig. 2 – Exchangeability between two currenciesCurrency A⇄ exchange ⇄Currency BSource: Self-compiledMoreover, the amendment requires an entity to provide more useful information in their financial statements when a currency cannot be exchanged into another currency.Key Requirement under the AmendmentThe amendments mainly require an entity to:assess (i) when a currency is exchangeable into another currency; andestimate the spot exchange rate when a currency is not exchangeable into another currency.This is illustrated in Fig. 3.The amendment also includes application guidance to (i) assist entities in assessing whether a currency is exchangeable into another currency, and (ii) support the estimation of the spot exchange rate when a currency is determined to be not exchangeable. In addition, the amendment requires entities to provide specific disclosures in cases where the spot exchange rate is estimated due to a lack of exchangeability between currencies.Fig. 3 – The two-step approachStep 1 – Determining whether the currency is exchangeablePara 8, 8A & 8BWhether the currency is exchangeable into another currencyat the measurement datefor the specified purposeYes → Apply the applicable requirements under Ind AS 21No ↓Step 2 – Estimating the spot exchange rate when a currency is not exchangeableEstimate the spot exchange rate that meets the objective of Ind AS 21 in Para 19A:Either by using "an observable exchange rate without adjustment" (Para A11 to A16)Or by using "another estimation technique" (Para A17)Source: Self-compiledHow to Apply the Two-step Approach under the Amendment – a Deep DiveStep 1: Determining whether the currency is exchangeable into another currencyWhen evaluating whether a currency is exchangeable into another currency, the entity must assess its ability to obtain the other currency, rather than its intention or decision to do so.The amendment introduces a definition of the term 'exchangeable' in paragraph 8. According to the requirements of paragraph 8, a currency is considered exchangeable into another currency when the entity is:able to obtain the other currency;within a timeframe that reflects a normal administrative delay;through a market or exchange mechanism; andwhere the exchange transaction results in enforceable rights and obligations.Paragraph 8A further clarifies that the assessment of exchangeability must be performed (i) at the measurement date and (ii) for a specified purpose.In addition, paragraph 8B states that a currency is not considered exchangeable into another currency if, at the measurement date and for the specified purpose, the entity can obtain no more than an insignificant amount of the other currency. For example, if an entity with the Venezuelan Bolívar as its functional currency has liabilities denominated in euros, it must assess whether the 'total amount of euros obtainable for the purpose of settling those liabilities' is no more than an insignificant amount relative to the 'aggregate amount of its euro-denominated liabilities'.In this regard, it is relevant to note that paragraphs A3 to A10 of Appendix A provide application guidance to assist entities in evaluating whether a currency is exchangeable into another currency.Fig. 4 summarises the key requirements outlining how an entity can assess the exchangeability of a currency.Fig. 4 – Factors in assessing exchangeabilityStep 1 – Determining whether the currency is exchangeableAssess the exchangeability between two currencies @ the measurement dateFactors to be considered by an entity in assessing the exchangeability between two currenciesPara A3Timeframe to obtain the other currencyA4Ability (and not, the intention per se) to obtain the other currencyA5Market mechanism (or other mechanisms) – resulting in enforceable rights and obligationsA6Purpose of obtaining the other currencyA10A currency is not exchangeable into another currency if the entity is able to obtain no more than an insignificant amount of the other currencySource: Self-compiledAs can be appreciated from the above, an entity takes into account the following factors when assessing exchangeability of a currency:Time Frame to Obtain the Other CurrencyParagraph 8 defines a spot exchange rate as the exchange rate applicable to immediate delivery.The amendment clarifies that the existence of a normal administrative delay in obtaining the other currency does not, in itself, prevent a currency from being considered exchangeable into that other currency.Further, the determination of what constitutes a normal administrative delay is based on the specific facts and circumstances.Ability to Obtain the Other CurrencyWhen evaluating whether a currency is exchangeable into another currency, the entity must assess its ability to obtain the other currency, rather than its intention or decision to do so.Additionally, the amendment clarifies that a currency is considered exchangeable into another currency if the entity is able to obtain the other currency, whether directly or indirectly.Market (or Other Mechanisms) Resulting in Enforceable Rights and ObligationsThe amendment clarifies that, in assessing whether a currency is exchangeable into another currency, an entity must consider only those markets or exchange mechanisms in which a transaction to exchange the currency for the other currency would result in enforceable rights and obligations.Furthermore, as enforceability is a legal matter, the determination of whether an exchange transaction in a particular market or exchange mechanism gives rise to enforceable rights and obligations depends on the specific facts and circumstances.Purpose of Obtaining the Other CurrencyThe amendment clarifies that multiple exchange rates may exist for different uses of a currency. As a result, a currency may be exchangeable into another currency for certain purposes, but not for others.Consequently, when assessing exchangeability, the entity is required to determine its purpose in obtaining the other currency, based on the nature of the underlying transaction, as illustrated in Table 1.Also, an entity is required to assess exchangeability of a currency into another currency separately for each purpose.Type of TransactionPurpose in Obtaining the Other CurrencyReporting foreign currency transactions in the entity's functional currencyTo realise or settle individual foreign currency transactions, assets, or liabilitiesTranslation to a presentation currency other than the entity's functional currencyTo realise or settle individual foreign currency transactions, assets, or liabilitiesTranslation of the results and financial position of a foreign operation into the presentation currencyTo realise or settle its net investment in the foreign operationTable 1 – Purpose in obtaining the other currencyAbility to Obtain Only Limited Amounts of the Other CurrencyThe amendment clarifies that a currency is not considered exchangeable into another currency if, for a specified purpose (e.g., paying dividends), the entity is able to obtain no more than an insignificant amount of the other currency.For this assessment, the significance of the amount obtained is evaluated by comparing that amount with the total amount of the other currency required for the specified purpose.Step 2: Estimating the Spot Exchange Rate when a Currency is not Exchangeable into AnotherWhen a currency is determined to be not exchangeable into another currency at the measurement date for a specified purpose, paragraph 19A of the amended standard mandates that the entity must estimate the spot exchange rate as at the measurement date.Further, the newly inserted paragraph 19A specifies the objective in estimating the spot exchange rate as follows (emphasis added):'…. An entity's objective in estimating the spot exchange rate is to reflect the rate at which an orderly exchange transaction would take place at the measurement date between market participants under prevailing economic conditions.'However, the standard does not prescribe detailed requirements for how an entity should estimate the spot exchange rate to meet the objective outlined in paragraph 19A. Instead, it establishes a framework that enables the entity to determine the spot exchange rate as at the measurement date.Accordingly, paragraph A11 of the application guidance in Appendix A specifies that an entity can use:an observable exchange rate without adjustment — e.g. (i) spot exchange rate for a purpose other than that for which an entity assesses exchangeability or (ii) the first exchange rate at which an entity is able to obtain the other currency for the specified purpose after exchangeability of the currency is restored; oranother estimation technique — say, any observable exchange rate adjusted as necessary to meet the objective of paragraph 19A.Fig. 5 – Estimating the spot exchange rateStep 2 – Estimate the spot exchange rateFor estimating the spot exchange rate an entity may use … (Para A11)Para A12 to A16 Observable Exchange Rate (without adjustment)Spot exchange rate for a purpose other than that for which the entity assesses exchangeability (say, import of goods vs dividend payment)Or, the first subsequent exchange rateif that observable exchange rate meets the objectives in Para 19APara A17 Another Estimation TechniqueAny observable exchange rate, andadjust that rate to meet the estimation objective in Para 19ASource: Self-compiledFig. 5 summarises the key requirements on how an entity can go about estimating the spot exchange rate when a currency is not exchangeable into another.In jurisdictions experiencing a prolonged lack of exchangeability, it is important to recognize that certain markets or exchange mechanisms such as unofficial or parallel markets may exist without creating enforceable rights and obligations. When assessing whether a currency is exchangeable under Step 1, entities must disregard the availability of the currency in such unofficial markets or mechanisms.However, if an entity determines under Step 1 that the currency is not exchangeable at the measurement date for a specific purpose and therefore proceeds to Step 2 to estimate the spot exchange rate at that date and for that purpose, it may then refer to observable exchange rates from transactions in unofficial markets or mechanisms that do not establish enforceable rights and obligations. Such observable rates may be used, with appropriate adjustments.Additionally, in formulating the amendments, the standard-setters have deliberately chosen not to prescribe a hierarchy of observable exchange rates for estimating the spot exchange rate. Although a hierarchy could enhance consistency, it was considered that doing so might introduce unnecessary costs without yielding more useful information.Consequently, while the amendments define a clear objective for estimating the exchange rate, they allow entities discretion in selecting an appropriate approach, based on their specific circumstances.Key Disclosure RequirementsThe amendment has introduced additional disclosure requirements when an entity estimates a spot exchange rate because a currency is not exchangeable into another currency. The overarching objective of the new disclosure requirements (as stipulated in paragraph 57A) is 'to enable users of its financial statements to understand how the currency not being exchangeable into the other currency affects, or is expected to affect, the entity's financial performance, financial position and cash flows'.Put differently, the new disclosure requirements under the amended standard seek to help investors in better understanding the effects, risks and estimated rates and techniques used when a currency is not exchangeable.Fig. 6 summarises the key disclosure requirements under the amended standard (as contemplated under paragraphs A19 and A20 of Appendix A, containing the application guidance).Fig. 6 – Key disclosure requirementsDisclosure objective (Para 57A) – to help investors understand the (a) effects, (b) risks, (c) estimated rates and (d) techniques used when a currency is not exchangeableKey disclosure requirements include the following (Para A19)aDetails of the currency and description of the restrictionbDescription of the affected transactioncCarrying amount of the affected assets and liabilitiesdThe spot rate(s) used and whether they are observable rates without adjustment or estimated rateseDescription of the estimation technique used, and qualitative & quantitative information about inputs and assumptions usedfQualitative information about the risk to which an entity is exposed because of the currency's lack of exchangeability, and the nature and carrying amount of assets and liabilities exposed to riskPara A20Additional disclosures will apply when a foreign operation's functional currency lacks exchangeabilitySource: Self-compiledEffective Date and TransitionFrom an IFRS perspective, an entity shall apply the amendments for annual reporting periods beginning on or after 1st January 2025 (with earlier application permitted). However, preparers of financial statements applying Ind AS 21 shall apply the amendments for annual reporting periods beginning on or after 1st April 2025 (no provision for earlier application). The date of initial application is the beginning of the annual reporting period in which an entity first applies those amendments and in applying the amendments, an entity is not permitted to restate comparative information.Key Impact and ConclusionThe amendment provides helpful guidance on accounting for a lack of exchangeability and is expected to reduce existing diversity in practice, especially in countries facing currency controls or hyperinflation. While applying the requirements of the amended standard, entities will need to make significant judgement and have a good understanding of the facts and circumstances relating to currencies that suffer from a lack of exchangeability. This will also require entities to evaluate the changes required in their systems and processes to comply with the requirements of the revised standard (including the disclosure requirements).Since entities are expected to exercise significant judgement, both in assessing exchangeability and in estimating exchange rates, a robust documentation of assumptions, data sources, and rationale will be critical for auditability and regulatory scrutiny. Entities will be required to use a consistent approach when assessing whether a currency can be exchanged into another currency. If this is not possible, entities will be under obligation to provide the required disclosures explaining how the alternative exchange rate was determined, within the framework provided under the amended standard. The amendment provides guidance that will increase the comparability between financial statements and provide more useful information to the user.◆◆◆Author may be reached at anjanikhetan@gmail.com and eboard@icai.inThe Chartered Accountant — Accounting Standards January 2026 | www.icai.org | Pages 62–66
GST
Ep. 90 — Reversal and Re-availment of Input Tax Credit (ITC) under GST: Legal Provisions and Practical Disclosure in GSTR-3B
CA Journal
· July 2026
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The Chartered Accountant ▸ GST | August 2026Reversal and Re-availment of Input Tax Credit (ITC) under GST: Legal Provisions and Practical Disclosure in GSTR-3BInput Tax Credit (ITC) under the GST regime is a conditional benefit, governed by statutory restrictions and compliance requirements under the CGST Act, 2017. This article examines the legal framework relating to reversal and re-availment of ITC, with a clear distinction between permanent reversals arising from inherent ineligibility, and temporary reversals triggered by procedural or compliance-related lapses. It provides a consolidated analysis of key provisions such as Sections 16 and 17, relevant rules, and their practical implications in GSTR-3B reporting. The article further explains the mechanism for disclosure, reversal, and subsequent re-claim of ITC in GSTR-3B, enabling taxpayers to ensure accurate compliance, reduce litigation risk, and maintain audit transparency.IntroductionInput Tax Credit (ITC) is one of the fundamental features of the Goods and Services Tax (GST) regime, aimed at avoiding cascading of taxes. However, the entitlement to ITC under GST is not absolute and is subject to conditions, restrictions, and procedural compliances as prescribed under the CGST Act, 2017 and the rules made thereunder. Where such conditions are not satisfied, ITC is required to be reversed, either permanently or temporarily. The GST law also provides mechanisms for re-availment of ITC in certain situations, depending upon the nature of such reversal.Types of Reversal of ITC under GSTUnder GST law, ITC reversals can broadly be classified into two categories, based on the nature of ineligibility and the possibility of future compliance:(i) Permanent Reversal of ITCPermanent reversal refers to such ITC which is not eligible under the provisions of the GST law itself. The ineligibility arises due to statutory restrictions, and therefore, once such ITC is reversed, it can never be re-availed, irrespective of future events, usage or compliance. These reversals result in a permanent loss of credit to the registered person.Permanent reversal refers to such ITC which is not eligible under the provisions of the GST law itself. The ineligibility arises due to statutory restrictions, and therefore, once such ITC is reversed, it can never be re-availed, irrespective of future events, usage or compliance.(ii) Temporary Reversal of ITCTemporary reversal refers to ITC which is otherwise eligible in principle, but is temporarily restricted due to non-fulfilment of certain prescribed conditions under the GST law. Such reversals are compliance-based or procedural in nature, and once the relevant conditions are fulfilled, the ITC can be re-availed in a subsequent tax period in the manner prescribed.Temporary reversal refers to ITC which is otherwise eligible in principle, but is temporarily restricted due to non-fulfilment of certain prescribed conditions under the GST law. Such reversals are compliance-based or procedural in nature, and once the relevant conditions are fulfilled, the ITC can be re-availed in a subsequent tax period in the manner prescribed.Legal ProvisionsSection 17(4) CGST Act, 2017 read with Rule 38 of the CGST Rules, 2017 provides a special optional scheme for banking companies and financial institutions, including NBFCs, engaged in accepting deposits or extending loans or advances. Such entities may opt to avail ITC equal to 50% of the eligible ITC on inputs, capital goods, and input services every tax period, in lieu of proportionate reversal under Section 17(2). The remaining 50% of eligible ITC shall lapse permanently and cannot be reclaimed. The option, once exercised, is irrevocable for the remainder of the financial year. However, this restriction does not apply to tax paid on supplies received from another registered person having the same PAN. Rule 38 prescribes the detailed mechanism for availing and reversing ITC under this scheme.Section 17(1) and 17(2) of the CGST Act, 2017 read with Rules 42 and 43 of the CGST Rules, 2017 restrict input tax credit to the extent attributable to taxable supplies and business purposes where goods or services are used partly for exempt supplies or non-business use. For inputs and input services, Rule 42 prescribes a formula-based monthly attribution and reversal of common credit, with annual final adjustment before the September return of the succeeding financial year. For capital goods, Rule 43 mandates proportionate reversal of ITC over a deemed useful life of five years where such goods are commonly used for taxable and exempt supplies. The ITC attributable to exempt supplies or non-business use is required to be reversed periodically and constitutes a permanent reversal, with no provision for re-claim once reversed.Section 17(5) of the CGST Act, 2017 overrides Sections 16(1) and 18(1) and specifies categories of blocked input tax credit, which are permanently ineligible under GST law. ITC is not available on motor vehicles for transportation of persons (with limited exceptions), vessels and aircraft, related insurance and maintenance services, food and beverages, outdoor catering, health and insurance services, club memberships, employee travel benefits, works contract services for construction of immovable property (other than plant and machinery), and goods or services used for own construction. Further, ITC is blocked on supplies taxed under the composition scheme, CSR-related activities, personal consumption, goods lost or disposed of as gifts or free samples, and tax paid under Section 74 of the CGST Act up to FY 2023–24 (Section 74A is applicable from FY 2024–25). Such blocked credits are absolute and non-reclaimable.The second proviso to Section 16(2) of the CGST Act, 2017, read with Rule 37 of the CGST Rules, 2017 mandates that where a registered recipient fails to pay the supplier, other than in reverse charge cases, the value of supply along with applicable tax within 180 days from the date of invoice, the ITC availed shall be reversed or paid back along with interest under Section 50, in the prescribed manner. Such reversal is required to be effected in the return for the tax period immediately following the expiry of 180 days and is applicable on a full or proportionate basis. Upon subsequent payment to the supplier, the recipient is entitled to re-avail the reversed ITC, and the time limit under Section 16(4) does not apply to such re-availment.Section 16(2)(c) read with Section 41 CGST Act, 2017 and Rule 37A of the CGST Rules, 2017 provides that ITC may be availed by a registered person on a self-assessment basis, subject to the condition that the tax charged on the supply is actually paid to the Government by the supplier. Where ITC has been availed on the basis of invoices furnished in FORM GSTR-1 but the supplier fails to furnish FORM GSTR-3B and discharge the tax liability by 30th September following the end of the relevant financial year, such ITC is required to be reversed by the recipient in FORM GSTR-3B on or before 30th November, along with applicable interest if delayed. The reversed ITC may be re-availed once the supplier subsequently furnishes FORM GSTR-3B and pays the tax.Section 16(6) of the CGST Act, 2017 provides relief to a registered person whose registration was cancelled under Section 29 and subsequently revoked under Section 30 or pursuant to an order of the Appellate Authority, Appellate Tribunal, or a court. Where ITC in respect of an invoice or debit note was otherwise eligible and not barred under Section 16(4) as on the date of cancellation, such registered person is entitled to avail the said ITC in a return furnished under Section 39. The credit may be claimed up to the later of (i) 30th November following the end of the relevant financial year or the date of furnishing the annual return, whichever is earlier, or (ii) within thirty days from the date of the order revoking the cancellation, for the period during which the registration remained cancelled.The First Proviso to Section 16(2) of the CGST Act, 2017 stipulates that where goods covered by a tax invoice are received in lots or instalments, ITC shall be available to the registered person only upon receipt of the last lot or instalment of such goods. Accordingly, ITC cannot be availed proportionately or on receipt of partial consignments, even if the tax invoice has been issued for the entire quantity. This provision operates as a timing restriction and not as a permanent disallowance of credit. Once the final lot or instalment is received, ITC may be availed in the return furnished under Section 39, subject to fulfilment of other conditions prescribed under Section 16, including the time limit specified under Section 16(4).Detailed Analysis of ITC Reversal and Re-claim ProvisionsS. No.Nature of ITC ReversalSection*Rule**Re-Claim Allowed?RemarksType of ReversalWhen ITC can be Re-claimed / Re-availed1ITC under special scheme for banks / financial institutionsSection 17(4)Rule 38NoBanking companies or financial institutions opting for the 50% ITC scheme cannot claim the remaining ITC at any later stage.PermanentNot Applicable2ITC attributable to exempt supplies / non-business use (Inputs & Input Services)Section 17(1) & 17(2)Rule 42NoITC attributable to exempt supplies or non-business use is required to be reversed for every tax period.PermanentNot Applicable3ITC attributable to exempt supplies / non-business use (Capital Goods)Section 17(1) & 17(2)Rule 43NoProportionate ITC on capital goods used for exempt supplies is required to be reversed for every tax period.PermanentNot Applicable4Blocked CreditsSection 17(5)—NoITC on motor vehicles, food & beverages, works contract services, personal consumption, etc., is completely ineligible under law.PermanentNot Applicable5Non-payment of consideration to supplier within 180 daysSecond Proviso to Section 16(2)Rule 37YesITC reversed along with applicable interest; re-availment permitted upon payment to supplier.TemporaryOn actual payment to supplier (full or proportionate), no time limit prescribed.6Supplier failed to pay tax / file GSTR-3BSection 16(2)(c) read with Section 41Rule 37AYesITC initially availed on self-assessment basis; reversed if supplier defaults; re-availed once supplier furnishes GSTR-3B and discharges tax liability.TemporaryNo specific time limit prescribed; upon supplier filing GSTR-3B and payment of tax, subject to sub-section 11 of Section 39 which restricts the furnishing of return after the expiry of three years from the due date of furnishing the said return.7Cancellation of registration and later revokedSection 16(6)—YesITC reversed / not claimed during cancellation; can be re-claimed / claimed after revocation, subject to prescribed conditions.TemporaryITC may be claimed in a return under Section 39 up to 30th November of the following financial year or furnishing of the annual return, whichever is earlier, or for the cancellation period if the return is filed within 30 days from the revocation order, whichever is later.8Goods received in lots / instalmentsFirst Proviso to Section 16(2)—YesITC can be availed only upon receipt of the last lot or instalment.TemporaryOn receipt of last lot / instalment and subject to Section 16(4).Consolidated table of reversal scenarios* Sections referred to above relate to the Central Goods and Services Tax Act, 2017.** Rules referred to above relate to the Central Goods and Services Tax (CGST) Rules, 2017.(Note: The above provisions are summarized for understanding purposes; please refer to the relevant section and rule for detail.)Disclosure of ITC Reversal in GSTR-3BThe reversal of Input Tax Credit (ITC) is required to be appropriately disclosed in Part B of Table 4 of GSTR-3B to ensure correct reflection of eligible credit in the electronic credit ledger. Table 4B(1) is meant for reporting permanent reversals of ITC, i.e. credit which is ineligible under the GST law itself and cannot be re-availed in the future, such as blocked credits or ITC attributable to exempt supplies. In contrast, Table 4B(2) is intended for reporting temporary reversals of ITC, where the credit is otherwise eligible but reversed due to non-fulfilment of prescribed conditions, such as non-payment to suppliers within 180 days or supplier default in payment of tax. This segregation ensures a clear distinction between permanent reversal and temporary reversal. The ITC reversed in Table 4B(2) will be reflected in the “Electronic Credit Reversal and Re-claimed Statement” on the GST portal and the same can be re-availed in the future.DetailsIntegrated TaxCentral TaxState/UT TaxCasesA. ITC Available (whether in full or part)(1) Import of goods0.000.000.000.00(2) Import of services0.000.000.000.00(3) Inward supplies liable to reverse charge (other than 1 & 2 above)0.000.000.000.00(4) Inward supplies from ISD0.000.000.000.00(5) All other ITC0.000.000.000.00B. ITC Reversed(1) As per rules 38, 42 & 43 of CGST Rules and section 17(5)0.000.000.000.00(2) Others0.000.000.000.00C. Net ITC available (A-B)0.000.000.000.00D. Other Details0.000.000.000.00(1) ITC reclaimed which was reversed under Table 4(B)(2) in earlier tax period0.000.000.000.00(2) Ineligible ITC under section 16(4) & ITC restricted due to PoS rules0.000.000.000.004. Eligible ITCPermanent reversal — cannot be re-claimed / re-availed in future.Temporary reversal — can be re-claimed / re-availed in future.Re-claim / Re-availment of ITC in GSTR-3BWhere ITC has been temporarily reversed in an earlier tax period and disclosed in Table 4B(2) of GSTR-3B, and the prescribed conditions are subsequently fulfilled, the registered person becomes eligible to re-avail such ITC. The re-claim or re-availment of ITC is required to be reported in Table 4D(1) and Table 4A(5) of GSTR-3B, which captures ITC reclaimed that was earlier reversed. This mechanism ensures that only eligible credit is restored to the electronic credit ledger and provides a clear audit trail linking the earlier reversal with its subsequent re-availment, thereby ensuring consistency and transparency in ITC reporting.ConclusionThe provisions relating to the reversal and re-claim of Input Tax Credit (ITC) under GST underscore the principle that while ITC is a substantive benefit, it is strictly governed by statutory conditions and compliance requirements. A clear distinction between permanent reversals and temporary reversals is crucial, as permanent reversals result in an irreversible loss of credit due to inherent ineligibility under the law, whereas temporary reversals merely represent timing or compliance-related restrictions, allowing re-availment once the prescribed conditions are fulfilled. Proper classification, accurate disclosure in Table 4B(1) and 4B(2) of GSTR-3B, and timely re-claim through Table 4D(1) are essential to ensure correctness of the electronic credit ledger, avoid litigation, and maintain audit transparency. A sound understanding of these provisions enables registered persons to optimize eligible ITC, ensure robust compliance, and effectively manage GST risks.ReferencesCentral Goods and Services Tax (CGST) Act, 2017Central Goods and Services Tax (CGST) Rules, 2017GST portal — https://www.gst.gov.in/Author may be reached at cachanderkumar@gmail.com and eboard@icai.inThe Chartered Accountant | August 2026 | www.icai.org
Ep. 91 — Post-Retirement Medical Benefits (PRMB): Actuarial Valuation and Accounting Challenges
CA Journal
· July 2026
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Post-Retirement Medical Benefits (PRMB): Actuarial Valuation and Accounting ChallengesPost-Retirement Medical Benefits (PRMB) is one of the most complex defined benefit plans in large Indian organisations, especially public sector undertakings.Unlike other defined benefit plans, PRMB is not a formula-based plan but depends on various factors such as medical inflation and longevity. As medical costs continue to rise and life expectancy improves, these obligations have become material and sensitive to actuarial assumptions.This article examines the actuarial valuation and accounting treatment of PRMB under Ind AS 19, with particular attention on the consideration of assumptions, projection of medical cost per beneficiary, accounting treatment of employee contributions, and the tax and regulatory framework of PRMB Trusts. The article also highlights differences in accounting treatment between Ind AS 19 and AS 15, especially in recognition of actuarial gains and losses.BackgroundIn many large Indian corporates, particularly public sector undertakings, Post-Retirement Medical Benefits (PRMB) is one of the most complex and judgement-based employee benefit obligations. Unlike gratuity, PRMB does not operate on a predetermined benefit formula. The ultimate liability depends on uncertain future medical costs and longevity. As healthcare costs have increased and life expectancy has improved considerably in recent years, PRMB liabilities are becoming material and more sensitive to changes in assumptions. As a result, even slight changes in assumptions such as medical inflation or discount rate can materially affect the defined benefit obligation (DBO) as on the reporting date.Under Ind AS 19 – Employee Benefits, PRMB schemes are in the nature of defined benefit plans, because the employer bears both actuarial (longevity, medical inflation) and investment risks (in case of a funded scheme). The obligation therefore represents the present value of expected future post-retirement medical expenses that the company expects to incur, which will include benefits extended to eligible dependents of the employee.One practical challenge observed in typical PRMB schemes is behavioural, when benefits are fully reimbursable and there is co-sharing of medical expenses by retirees. The way beneficiaries use medical benefits in such schemes may be very different from schemes that have co-sharing or spending caps.Typical PRMB StructureGenerally, PRMB schemes usually have the following features:Coverage: Benefits are given to retired employees and, in many cases, to their eligible dependents.Nature of Benefit: Medical expenses may be reimbursed on submission of claims by the retiree and/or provided through a cashless facility.Duration: Benefits are generally available until death for the retiree and his/her eligible dependents.Funding Arrangement:Unfunded (the company meets medical expenses as and when they arise), orFunded through a separate Trust, where contributions are made based on the actuarial gap (difference between PRMB obligation and Fund Assets) calculated through actuarial valuation at each year end.Employee Contributions:Lump-sum contribution at the time of retirement, and/orPeriodic contributions during active service.Actuarial Valuation under Ind AS 19As per para 67, Ind AS 19 requires that an entity shall use the projected unit credit method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. Under this method, each period of service gives rise to an additional unit of benefit entitlement (para 70–74) and measures each unit separately to build up the final obligation (para 75–98). Even though medical benefits are only paid after retirement, the liability builds up year by year during active service. In practice, the expected benefit payable after retirement is spread across the employee's total service tenure.PRMB obligation is typically long term, often extending well beyond the maturity range of actively traded government securities. As per para 86 of Ind AS 19, in such situations there may not be a deep market in bonds matching the full term of projected benefit cash outflows.The actuarial valuation includes the following steps:Identification of eligible beneficiaries.Calculation of medical cost per beneficiary.Projection of future medical costs by applying the medical inflation rate on current medical cost per beneficiary.Estimation of the benefit payment period for each beneficiary based on applicable mortality tables.Discounting the projected cash flows to arrive at the present value of the defined benefit obligation using the discount rate.Spreading the expected total benefit payout across the employee's service tenure using the PUC method.Allocation of PRMB Obligation under the Projected Unit Credit MethodTo understand the allocation of PRMB obligation under the Projected Unit Credit (PUC) method, the following simple example may be considered:Employee A joins Company X on 1 April 2025 and is expected to retire after 30 years of service, i.e., in the year 2055. Based on the applicable mortality table, Employee A is expected to avail post-retirement medical benefits for 20 years after retirement as on the reporting date.Although medical benefits will be utilised only during the 20-year post-retirement period, the total projected medical cost is required to be allocated over the 30 years of service under the PUC method during the service tenure of Employee A.Accordingly, the actuarially projected total post-retirement medical benefit is first estimated. This total expected cost is then attributed proportionately over the employee's entire service period of 30 years. After completion of one year of service, 1/30th of the total projected benefit (discounted) needs to be recognised as the defined benefit obligation (DBO) in Company X's books.Fig 1: Actuarial valuation of PRMB schemes under Ind AS 19Total expected cost to be allocated against total service tenure proportionallyTotal expected cost to be considered for this periodTotal number of years of service — 30 yearsMedical facility availment — Post-Retirement (20 years)1 Apr 2025Employee A joined31 Mar 2026Reporting date2055Retirement year2075Expected survival per actuarial assumptionsFig. 1 shows the fundamental principle underlying actuarial valuation of PRMB schemes under Ind AS 19. Although medical benefits are expected to be paid only after retirement, the obligation accrues progressively in line with an employee's service tenure.The actuarial valuation first considers estimating the total expected post-retirement medical cost based on current medical cost per beneficiary and actuarial assumptions relating to medical inflation, discount rate, attrition rate and longevity. This total obligation is then allocated proportionately over the employee's entire service period using the PUC method.The portion attributable to service rendered up to the reporting date is recognised as the defined benefit obligation (DBO) as on the reporting date, while the balance relates to future service. This approach ensures that PRMB costs are recognised in tandem with service provided by the employee.Information Requirements for PRMB Actuarial ValuationCompared to other defined benefit plans like gratuity, PRMB requires more detailed and specific data which typically includes the following:Details of active employees and retirees including date of birth, date of joining and expected retirement date.Details of eligible dependents.Medical claims data for past years to calculate the medical inflation rate.Current medical costs per beneficiary based on medical cost incurred on retired employees.Employee contribution details, if any (periodic or lump-sum).Fair value of plan assets as at the reporting date and movement during the year (where the scheme is funded).Scheme features such as monetary ceilings and cost sharing by employee clause (if applicable).Changes in the scheme over time — such as the introduction of or changes in co-pay clauses or monetary caps — can make past claims data less reliable for current actuarial valuation. In addition, abnormal years, such as the COVID period, may distort average medical costs and therefore need necessary adjustments before being used for estimation of future medical costs and the medical inflation rate.Key Actuarial Assumptions(a) Discount RateAs per para 83 of Ind AS 19, the rate for discounting post-employment benefit obligations, whether funded or unfunded, is determined with reference to market yields on government bonds at the reporting date.PRMB obligation is typically long term, often extending well beyond the maturity range of actively traded government securities. As per para 86 of Ind AS 19, in such situations there may not be a deep market in bonds matching the full term of projected benefit cash outflows. Accordingly, organisations discount shorter-term cash flows using observable market yields and estimate rates for longer maturities by extrapolating the yield curve.Therefore, selection of the discount rate in PRMB valuation needs careful judgement, particularly in determining the extrapolation methodology and ensuring consistency from year to year.(b) Medical Cost Inflation RateMedical cost inflation is the most sensitive assumption in PRMB actuarial valuation. Medical inflation is influenced by factors such as new medical technology, more advanced treatments involving increased medical costs, and higher usage of medical benefits, especially in schemes where there is no cost sharing of medical treatment expense by the beneficiary.Ideally, the medical inflation assumption should be based on the company's own past claims experience, after necessary adjustments for unusual years or changes in scheme design. Since PRMB obligations are long term in nature, the assumption should consider a long-term period rather than short-term fluctuations.(c) Medical Cost per BeneficiaryMedical cost per beneficiary forms the basis for projecting future medical expenses. In existing PRMB schemes, sufficient past claims information is generally available to analyse and calculate annual medical cost per retiree. Using actual past data strengthens the reliability of the actuarial valuation.(d) Mortality AssumptionsDifferent mortality tables are generally used for the pre-retirement and post-retirement periods, as the risk profile changes once an employee retires. Actuaries often refer to the Indian Assured Lives Mortality (2012–14) table for active employees and the Indian Individual Annuitant's Mortality (2012–15) table for retired employees.(e) Employee Turnover AssumptionsEmployee turnover assumptions represent the probability of employees leaving the organisation before retirement and, therefore, not qualifying for post-retirement medical benefits. Turnover rates are generally based on the company's historical experience.Interdependence of Actuarial AssumptionsWhile individual actuarial assumptions are analysed separately, their interdependence in PRMB valuation should also be recognised. For example, an increase in medical inflation combined with a reduction in the discount rate can have a cumulative effect on the defined benefit obligation, thereby significantly increasing actuarial losses.Accounting professionals and actuaries should therefore review assumption changes collectively and ensure that they remain consistent with broader economic and demographic conditions. Appropriate disclosure of key assumptions and sensitivity analysis, as required under para 144 and 145 of Ind AS 19, helps users understand the potential volatility in PRMB obligations.Sensitivity Analysis of PRMB ObligationThe sensitivity analysis (as depicted in Table 01) is indicative and has been prepared with reference to sensitivity disclosures made by large public sector enterprises in India in their annual reports. Actual sensitivities may vary depending on the specific scheme design applicable to the organisation.It may be noted that the above sensitivities are based on isolated changes in individual assumptions while keeping other assumptions constant. Generally, assumptions may change simultaneously, and the combined impact may not be a simple addition of individual sensitivities as shown in the above table.AssumptionChangeImpact on DBODiscount rateDecrease by 1%Increase by 15–20%Discount rateIncrease by 1%Decrease by 12–16%Medical cost inflationIncrease by 1%Increase by 10–15%Medical cost inflationDecrease by 1%Decrease by 8–12%Table 01. Sensitivity AnalysisActuarial Gains and Losses: Drivers and Accounting TreatmentActuarial gains and losses arise when there are changes in assumptions or when actual experience differs from what was previously considered in assumptions. In PRMB schemes, such gains and losses can be significant because the liabilities are long-term and highly sensitive to healthcare-related factors.As per para 76–79 of Ind AS 19, actuarial assumptions represent an entity's best estimates of the variables that determine the ultimate cost of post-employment benefits. These assumptions comprise both demographic factors (such as mortality and employee turnover) and financial factors (such as discount rate and future medical costs). The Standard further requires such assumptions to be unbiased and realistic.Actuarial gains and losses typically arise from:(a) Financial Assumption ChangesChanges in discount rate and medical cost inflation rate have a material impact on PRMB obligations. A decline in discount rate or an upward revision in medical inflation generally results in actuarial losses.(b) Demographic Assumption ChangesImprovements in post-retirement life expectancy increase the benefit payment period, resulting in a higher obligation.(c) Experience AdjustmentsIf actual medical claims, retirements or mortality differ from earlier assumptions, the difference gives rise to actuarial gains or losses on account of experience adjustments.Under Ind AS 19, remeasurements comprising actuarial gains and losses are recognised in Other Comprehensive Income (OCI) in accordance with para 120(c). Introduction of the OCI concept in the Ind AS framework prevents assumption-driven volatility from directly affecting operating performance.In contrast, under AS 15, actuarial gains and losses are recognised immediately in the Statement of Profit and Loss as required by para 92. The differing accounting treatment can result in significant variation in reported profit trends between entities applying Ind AS and those following AS 15.In existing PRMB schemes, cumulative actuarial losses arising from sustained medical inflation may exceed the annual service cost, highlighting the importance of governance over selection of assumptions.Case Study: PRMB Actuarial ValuationEmployee Profile & AssumptionsJoined Company X1 Apr 2025Age at joining30 yearsSuperannuation age60 yearsDate of superannuation31 Mar 2055Eligible membersEmployee & spousePost-retirement survival20 yearsAnnual medical cost / beneficiary₹50,000Medical cost increase rate7% p.a.Discount rate7% p.a.For easy understanding, medical inflation and discount rates are considered equal, and attrition rate and mortality rate during service are ignored. The total projected post-retirement medical benefit is spread evenly over the 30-year service period under the Projected Unit Credit method. Contribution from the employee is not considered in this example.Table 02: PRMB Actuarial ValuationYear 1 — As on 31.03.2026Step 1 · Annual medical cost₹50,000 × 2 beneficiaries = ₹1,00,000Step 2 · Total projected PR medical cost₹1,00,000 × 20 years = ₹20,00,000Step 3 · PUC over 30 years (Service Cost)₹20,00,000 ÷ 30 = ₹66,667Step 4 · DBO at end of Year 1₹66,667Note: In Year 1, there is no interest cost and no actuarial loss/gain against Employee A in the books of Company X.Year 2 — As on 31.03.2027Revised annual medical cost per beneficiary: ₹60,000Step 1 · Annual medical cost₹60,000 × 2 beneficiaries = ₹1,20,000Step 2 · Total expected PR medical cost₹1,20,000 × 20 years = ₹24,00,000Step 3 · Service Cost & InterestService Cost = ₹24,00,000 ÷ 30 = ₹80,000Net interest = ₹66,667 × 7% = ₹4,667Step 4 · Closing DBO & Actuarial LossClosing DBO = ₹24,00,000 × (2 ÷ 30) = ₹1,60,000Actuarial loss (OCI) = ₹1,60,000 − (₹66,667 + ₹80,000 + ₹4,667) = ₹8,666Impact on Profit & Loss — Year 1Under Ind AS 19P&L · Current Service Cost₹66,667OCI · RemeasurementNilTotal P&L impact₹66,667Under AS 15P&L · Service Cost₹66,667OCI conceptDoes not existTotal P&L impact₹66,667For the year ended 31 March 2026, the impact is the same under both standards.Impact on Profit & Loss — Year 2Under Ind AS 19P&L · Current Service Cost₹80,000P&L · Net Interest Cost₹4,667Total P&L impact₹84,667OCI · Actuarial Loss₹8,666Under AS 15Service Cost₹80,000Interest Cost₹4,667Actuarial Loss₹8,666Total P&L impact₹93,333It is clear from the given example that changes in medical cost assumptions give rise to actuarial gains and losses. Further comparative analysis of Ind AS 19 and AS 15 shows that although total liability remains the same under both standards, accounting treatment in Profit & Loss is different in both regimes. While under Ind AS 19, actuarial losses and gains are shown in Other Comprehensive Income (OCI), as per AS 15 they are shown as expense in the Profit and Loss, which may lead to greater volatility in reported earnings for Company X while comparing with the previous year's earnings.Funding Arrangements and Plan AssetsPRMB schemes may be either unfunded (pay-as-you-go) or funded through a separate trust. In funded schemes, contributions are invested in a mix of debt and equity instruments with the objective of meeting future medical obligations.In funded schemes, companies contribute to the trust annually based on actuarial gap funding — which is the difference between the defined benefit obligation (DBO) and the fair value of plan assets as at the reporting date.In funded schemes, the investment performance of plan assets directly affects contributions required to be made by the company. Mismatch between asset returns and medical cost escalation may widen the funding gap, requiring additional contributions.In contrast, unfunded schemes expose the entity directly to future cash flow volatility, as benefit payments are met by operating cash flows.Accounting Treatment of Employee ContributionsEmployee contributions under PRMB schemes may be periodic during the service period and/or made as a lump sum at retirement.As per para 92 and 93 of Ind AS 19, where employee contributions are linked to service and payable during the service period, such contributions reduce current service cost. If the contribution depends on years of service, it is attributed over the service period; if it is independent of service length, it may be recognised as a reduction of service cost in the period in which the related service is rendered, as further clarified in Appendix A to Ind AS 19. This treatment reflects the economic substance that employees bear part of the cost of benefits earned during service.Where the employee contribution is not linked — for example, taken for reduction in deficit arising from losses on plan asset or from actuarial losses — they will form part of remeasurement of the net defined benefit liability, in accordance with para 93.In contrast, under AS 15, employee contributions are generally recognised as a reduction of service costs in the Statement of Profit and Loss, and the Standard does not distinguish between service-linked and non-service-linked contributions in the same manner as provided in Ind AS 19. Further, the concept of recognition of remeasurements in Other Comprehensive Income (OCI) is not provided in AS 15.Tax and Regulatory Framework for PRMB TrustsPRMB trusts seeking income-tax exemption must comply with Section 10(23AAA) of the Income-tax Act, 1961, along with Rule 16C of the Income-tax Rules, 1962. One important requirement under Rule 16C(2) is that employees contribute to the fund through regular subscriptions. This makes the structure and timing of employee contributions significant not only from an actuarial and accounting perspective but also from a regulatory requirement. Trusts that rely on a single contribution at the time of retirement may need to consider whether such an arrangement truly meets the "periodical subscription" requirement for tax exemption status.Role of Professional Judgement and DisclosureDue to the complex and long-term nature of PRMB schemes, professional judgement plays a crucial role in actuarial valuation as well as in accounting.At the same time, the disclosure of these issues also assumes equal importance. Transparent communication of key assumptions, sensitivity analyses, and funding policies help users of financial statements understand the risks and uncertainties inherent in PRMB schemes.Strong disclosures, supported by consistent application of assumptions, not only strengthen the credibility of financial reporting but also enable stakeholders to make better-informed decisions.Conclusion and Way ForwardPRMB schemes are a long-term obligation requiring disciplined actuarial valuations, transparent accounting and disclosure. Transparent accounting and reporting practices demand reasonable assumptions and strict adherence to tax and regulatory laws.With rising medical costs, organisations need to take a more thoughtful approach in managing these schemes. This includes aligning actuarial assessments with scheme design, funding and governance so that the benefits remain sustainable over time while continuing to support the health and well-being of employees' post-retirement.The Chartered Accountant · August 2026 · www.icai.org Author may be reached at eboard@icai.in
Ep. 92 — IPR Violations in Cyberspace
CA Journal
· July 2026
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IPR Violations in CyberspaceThe rapid growth of cyberspace has reshaped the enforcement of Intellectual Property Rights (IPR), exposing creators and businesses to new risks of piracy, counterfeiting, and misappropriation. Copyright violations through illegal downloads, trademark misuse via domain squatting, and online patent theft exemplify the challenges of a borderless digital world. Indian courts have responded by adapting traditional legal principles to cyberspace. This article examines these developments, highlights emerging concerns like NFTs and AI, and underscores the need for balanced regulation to safeguard innovation while ensuring access and fair use in the digital era.IntroductionThe digital revolution has created unprecedented opportunities for the creation and dissemination of intellectual works, while simultaneously generating novel challenges for the protection of Intellectual Property Rights (IPR). Cyberspace, the virtual and borderless realm of the internet and global computer network, where electronic communication and data exchange occur, enables the effortless duplication and distribution of creative and technical works/contents, posing threats to copyright, trademark, patent, and trade-secret protection. This article highlights the principal forms of IPR infringement, analyses key case laws dealing with such violations in India, addresses the issue and extracts strategic lessons for internet users in this fast-changing arena of cyberspace and digitalization.Brief on IPR Laws in IndiaIPRs primarily refer to rights attributed to creations of the mind, such as inventions, literary and artistic works, designs, and symbols. India has had a legal framework for its protection for over a decade, with the oldest act being the Act VI of 1856 on the protection of inventions. Over the years, India has aligned its intellectual property regime with global commitments under international agreements and conventions, such as the WTO’s TRIPS Agreement and various WIPO treaties, and has shaped its robust legal framework for patents, trademarks, copyrights, and industrial designs. The following laws are key to IPR protection in India:The Patents Act, 1970, which governs the protection of inventions, granting exclusive rights to inventors, for a certain and limited period.The Copyright Act, 1957, which protects original works of authorship, including literary, dramatic, musical, and artistic creations.The Trademarks Act, 1999, which deals with the registration and protection of trademarks, which are symbols, names, or logos used to identify goods and services.The Designs Act, 2000, which protects the visual appearance or design of a product.The Geographical Indications of Goods (Registration and Protection) Act, 1999, to protect products that have a specific geographical origin and possess qualities or a reputation due to that origin.The Protection of Plant Varieties and Farmers’ Rights Act, 2001, for the protection of new plant varieties developed by farmers, andThe Semiconductor Integrated Circuits Layout-Design Act, 2000, protects the layout design of integrated circuits.While ensuring global commitments are met, these legislations have been designed, keeping in view India’s IPR policy that is focused on its national interests, public health, and socio-economic development. Moreover, judicial interpretations have been pivotal in clarifying the contours of IPR infringement. IPR protection in virtual cyberspace is more complicated than in the physical world due to the lack of traditional geographic boundaries. Even establishing jurisdiction can be challenging for online actions that can originate from one place, be directed at another, and have effects felt in a third location. Besides, once things are on the World Wide Web, after-effects and consequences cannot be easily controlled, and the scale of infringement can be very large. Since the challenges in cyberspace are different, another Act that is instrumental in IPR protection is the Information Technology Act, 2000 (IT Act). It protects IPRs by providing legal recognition for digital signatures and electronic transactions. It also directly contains provisions deterring copyright infringement through sections like Section 66B of the IT Act, which penalizes the possession of pirated content and ensures data protection and helps in safeguarding the confidentiality and integrity of digital IP assets like trade secrets. It is also pertinent to note that even though the IT Act primarily applies to cyber offences and contraventions in India, Section 75 of this Act makes it applicable to offences or actions committed outside India also, if such contravention is in respect of a computer programme, system or network in India.Copyright Infringement in CyberspaceWe often come across instances where original videos online are reposted by someone else on their own YouTube channel, without permission and without giving due credit to the creator of the original work or an audio version of the copyrighted book is published illegally on YouTube. These are cases of copyright infringement u/s 51 of the Copyright Act, 1957. Copyright infringement is the unauthorized use of copyrighted work, without permission of the author/copyright holder, thereby violating the exclusive rights of the copyright holder to display, distribute or reproduce the copyrighted work. When such an infringement occurs on a mass level, it is called as piracy. We normally understand that literary, dramatic, artistic or musical works are subject matter of copyright, so there is infringement of copyright, where portions of books, movies, songs, etc. are circulated online without the permission of the author, and some revenue is generated out of it. Besides, websites and webpages also have copyright, which is owned by the creator of the webpage or the owner of the website. So, if a webpage of a website is copied, the owner can sue others for infringement. In cyberspace, the process of infringement can be designed in multiple complicated ways, for instance:torrent sites and cyber-lockers can be used for unauthorized streaming or downloading of music and films,unlicensed uploads of songs or video clips to social-media platforms,derivative works such as remixes or AI-generated content that reproduce substantial parts of the protected work,software piracy and distribution of cracked programmes.Also, normally, in the case of webpages and websites, the traffic or number of visits to a webpage determines its commercial value. However, infringers may use a process called Linking, in which the user is directly connected from one website to another through hyperlinks, without having to type in the URLs. This diverts the traffic from one website to another. Linking affects the rights of the actual owner of the website, as the linked site lose their revenue, which depends upon the number of people visiting the website.a) Legal testIndian courts apply the “idea–expression” dichotomy and the “substantial similarity” or “material part” test. The core question is whether the infringing work reproduces protectable expression and whether the copying is substantial enough to give the ordinary observer an unmistakable impression of reproduction. The principle is that while abstract ideas are not protected by copyright, the specific way those ideas are expressed is protected.Copyright infringement is the unauthorized use of copyrighted work, without permission of the author/copyright holder, thereby violating the exclusive rights of the copyright holder to display, distribute or reproduce the copyrighted work.b) Key casesThe Supreme Court in R. G. Anand v. Deluxe Films1 held that copyright does not protect ideas or general plots; protection extends only to the expression of those ideas. The test is whether a viewer would obtain an “unmistakable impression” that the subsequent work is a copy of the earlier one. This principle remains the touchstone for film-script disputes and is equally applicable to digital adaptations and AI-generated derivatives. This judgment provided a crucial framework for distinguishing between unprotected ideas and protected expression and helped define the limits of intellectual property rights, ensuring that while creators’ works are protected, the free flow of ideas and artistic innovation remains possible.In Gramophone Co of India Ltd v. Super Cassettes Industries Ltd2, the Delhi High Court examined remix recordings and clarified that making a “version recording” of a copyrighted song, without a proper license, constitutes infringement, unless it falls within statutory exceptions. The decision illustrates that transformation or remixing of sound recordings does not automatically escape liability. Subsequently, a new Section 31C was introduced through the Copyright (Amendment) Act, 2012, which provides a statutory license to create a cover version, with the consent of the owner of the work.Online enforcement is complicated by the anonymity of uploaders and the transnational location of servers. Courts increasingly orders to block infringing websites, requiring Internet Service Providers (ISPs) to disable access to specified URLs.c) Intermediary Liability: Platforms as GatekeepersAnother issue that arises in the digital arena is that, as most digital infringement occurs through platforms like YouTube, Facebook, Spotify, Kindle, etc., the question of liability of such intermediaries is crucial. To protect such intermediaries, Section 79 of the Information Technology Act, 2000, read with Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021 grants “safe harbour” to intermediaries that observe due diligence and act expeditiously on takedown notices.In Super Cassettes Industries Ltd v Myspace Inc3, the Delhi High Court examined whether a social-media platform could claim safe harbour for user-uploaded infringing content. The judgment clarified that intermediaries are not liable for copyright infringement if they lack “actual knowledge” of the infringing content, provided they promptly remove it upon receiving proper notice. The decision underscores the need for robust content-management systems.Trademark Infringement and CybersquattingA trademark is a symbol, word, or phrase that legally identifies a brand’s goods or services and distinguishes them from those of competitors, which can include logos, names, slogans, sounds, and even specific colors, and once registered, they are legally protected against unauthorized use.a. Digital formsForms of trademark infringement in cyberspace include:Cybersquatting: It is a specific form of infringement, where a person registers a domain name identical or confusingly similar to a trademark with malicious intent, to profit from the trademark’s goodwill. For instance, the well-known organization People for the Ethical Treatment of Animals (PETA) sued Michael Doughney for registering the domain peta.org and using it to promote “People Eating Tasty Animals,” a message directly opposed to PETA’s mission.Typosquatting: It is also a kind of cybersquatting where infringers register domain names that are common misspellings, variations, or alternative top-level domains of legitimate websites to trick users into visiting malicious or fraudulent sites. For instance, a user might mistype “google.com” as “gogle.com” or “googgle.com”.Keyword Advertising: When a person uses the trademarked name of a competitor as a keyword to display sponsored ads on search engines like Google, aiming to divert customers, it may be regarded as infringement. While not all usage is infringement, Indian courts have ruled that using a rival’s trademark, as a keyword, can be infringement if it causes consumer confusion and deceit regarding the source of goods or services. The Court held that third-party bidding on trademarks as sponsored keywords, for use by internet search engines, is ‘misrepresentation’ and thus constituted an infringement. However, using the trademark without confusing may not be deemed infringement.Meta-tagging: Meta-tags are hidden code that describes a page and are not visible to users. Meta-tag trademark infringement occurs when someone uses another company’s registered trademark in their website’s meta-tags without authorization, aiming to divert traffic or gain an unfair advantage by misleading consumers and appearing in search results. Courts view this practice as a serious violation of trademark law, especially under Section 29 of India’s Trade Marks Act, 1999.Social Media Misuse: It involves using brand names, logos, or other protected elements without authorization, leading to consumer confusion, brand dilution, and potential financial losses. It is not uncommon to see local shoemakers selling shoes with Nike’s tick logo, or counterfeited watches, handbags, and clothes being sold using Facebook, WhatsApp, X, etc. These are all forms of infringement, and addressing these issues requires proactive monitoring of online activity, reporting violations to social media platforms, issuing cease and desist letters to infringers, and staying informed about evolving intellectual property laws.Each method exploits a trademark’s goodwill for unauthorized gain, leading to consumer confusion and economic harm.b. Legal TestUnder Section 29 of the Trade Marks Act, infringement occurs where the impugned mark is identical or deceptively similar and likely to confuse as to origin or sponsorship.c. Leading Case LawsYahoo! Inc v Akash Arora4, the first ever case of cybersquatting in India, way back in 1999, the Delhi High Court held that domain names are entitled to the same protection as trademarks and restrained the defendant from using the domain “yahooindia.com,” which was confusingly similar to the plaintiff’s well-known trademark “Yahoo!”. This early decision set the foundation for Indian jurisprudence on cybersquatting and remains widely cited till date.In Consim Info Pvt. Ltd. v. Google India5, the appellant, being involved in an online matrimonial service, was the registered trademark owner for terms like Bharat matrimony, Tamil matrimony, Telugu matrimony, etc., and prayed for a permanent injunction against the defendants from using these trademarks or the likes in AdWords or as keywords for internet search. It was argued by the respondents (a common contention by the advertisers) that the usage of the trademark as a keyword did not constitute ‘use in course of trade’—an important element for trademark infringement under the Act, as the usage did not involve using the trademark over goods or services as provided in the Act. Further, the use conformed with honest business practice and also the words ‘matrimony’, ‘Tamil’ or “bharat” are generic words. The Madras High Court held that the use of registered trademarks as keywords in the advertisement did fall under Section 2(2)(c)(ii) and Section 29(6)(d) of the Trademark Act, 1999 and though such words when used independently did not constitute a trade marks infringement, but when used conjunctively, with or without a space, constitutes an infringement.The Delhi High Court’s ruling in Titan Company Limited v. Lenskart Solutions Pvt. Ltd6, has underscored a vital principle that invisibility does not shield illegality. Using a competitor’s trademark in website meta-tags, even if invisible to users, amounts to trademark infringement under the Trade Marks Act, 1999.On the other hand, the Supreme Court of India dismissed a trademark infringement case by Make My Trip (MMT) filed against Booking.com and Google for use of words “MakeMyTrip” as a Google Ads keyword as it held there is no likelihood of confusion because MakeMyTrip and Booking.com are both well-known, distinct platforms in the travel industry, and a user searching for one is unlikely to confuse the other’s services.Patent Infringement in the Digital WorldPatents are legal rights issued to inventors to protect their inventions from anyone else claiming or using them for a certain time. Patent infringement may occur when someone unauthorizedly makes, uses, sells, or imports a patented invention, often a computer-related process or software feature, through digital means like the internet, apps, or software-as-a-service (SaaS) platforms. This can involve the unlawful use of a company’s proprietary algorithms, unique features, or other patented aspects of their SaaS offering by a competitor.Another form of infringement can happen due to the advent of 3-dimensional printing, which, if users are allowed to download patented designs or create them from existing ones and then print physical copies. A patent holder can sue for direct or indirect infringement for actions like making, using, or selling the infringing item, though enforcement can be difficult, due to the distributed nature of file sharing and 3D printing.Patent infringement in the digital realm has given rise to newer problems. Key challenges in identifying and stopping such infringements include the global nature of the internet, making it difficult to pinpoint the infringer’s location and apply jurisdiction, and the ease with which digital content can be copied and distributed. The Patent Act of 1970 provide penalties, but issues arise in applying these laws to digital inventions and thus Indian case laws on purely digital patents remain sparse. However, injunction standards from conventional patent disputes, like prima facie case, balance of convenience and irreparable harm would guide courts in deciding the matters.Emerging Challenges in IPR Protection in the Era of NFTs and Artificial IntelligenceNon-Fungible Tokens (NFTs) are unique digital assets, like digital art or collectables, that act as a verifiable certificate of ownership recorded on a blockchain. They provide proof of authenticity and ownership for digital items, allowing creators to monetize their work and enabling collectors to own unique digital property. The rise of NFTs has introduced new disputes as artists have found their works “minted” as NFTs without their consent. Courts will apply standard copyright and trademark principles, but questions of jurisdiction and blockchain anonymity complicate enforcement.Generative artificial intelligence (AI) raises additional concerns. Training large language or image models on copyrighted datasets, without a license, may infringe reproduction rights, while the originality and ownership of AI-generated outputs remain unsettled. In a very short period, companies like Microsoft and OpenAI are facing numerous litigations for IPR violations. Policymakers globally are debating exceptions for text-and-data mining and mechanisms for collective licensing.Remedies and EnforcementRights-holders can pursue a mix of civil and criminal remedies:a. Civil RemediesInjunctions: temporary or perpetual orders to stop the infringing activity.Damages: monetary compensation for losses.An account of profits: repaying profits made by the infringer.The seizure and destruction of infringing goods.Besides, pre-trial remedies can also be obtained for evidence gathering and to prevent asset disposal by the infringer.b. Criminal RemediesSection 63 of the Indian Copyright Act 1957 imposes criminal liability for knowingly infringing copyright, with penalties of 6 months to 3 years imprisonment and a fine of Rs. 50,000 to Rs. 2,00,000.Sections 65A and 65B of the Indian Copyright Act, 1957 address digital copyright issues, providing criminal penalties for those who illegally circumvent technological protection measures (TPMs) and for those who alter or remove rights management information (RMI), and offenders can face imprisonment for up to 2 years and a monetary fine.Under India’s Trademark Act, 1999, penalties for trademark infringement can include imprisonment for a term not less than 6 months and up to 3 years, a fine not less than Rs. 50,000 and up to Rs. 2,00,000, or both. For second or subsequent offences under Sections 103 or 104, the penalty is enhanced, with imprisonment not less than one year and up to three years and a fine not less than Rs. 1,00,000 and up to Rs. 2,00,000.c. EnforcementEffective enforcement requires preservation of electronic evidence (server logs, timestamps, screenshots), use of blockchain or digital fingerprinting to prove ownership, and cross-border cooperation for servers located overseas.ConclusionCyberspace amplifies both the value of intellectual property and the risk of misappropriation. Indian jurisprudence has begun to chart the boundaries of online IPR enforcement by adapting classic principles such as the idea–expression dichotomy and the tests for substantial similarity, while recognising new doctrines for intermediary liability and domain-name protection. In India, there is still a lack of awareness among creators about proactive measures—watermarking, contractual safeguards and timely registration of rights. Moreover, rapid technological change—from blockchain to generative AI—demands continuous legislative and judicial evolution. Statutes need to be updated to address AI-generated works and data use for training AI. Intermediaries should be encouraged to adopt automated detection tools and transparent takedown processes.A coordinated strategy combining legal vigilance, technical safeguards and international collaboration will be essential to ensure that innovation and access do not come at the expense of creators’ rights. The legislature and its interpretation need to evolve very fast to keep pace with the ever-changing digital world.ReferencesWIPO, Understanding Copyright and Related Rights (2nd edn, 2016)The Copyright Act 1957The Trade Marks Act 1999The Patents Act 1970Information Technology Act 2000 (India)Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021.1. R.G. Anand v. Delux Films AIR 1978 SC 1613. ↩2. Gramophone Co of India Ltd v Super Cassettes Industries Ltd 2010 SCC Online Del 4743. ↩3. Super Cassettes Industries Ltd v MySpace Inc FAO(OS) 540/2011. ↩4. 1999 IIAD (DELHI) 229, 78 (1999) DLT 285. ↩5. 2013 (54) PTC 578 (Mad). ↩6. CS(COMM) 589/2025. ↩Author may be reached at rashmivika10@yahoo.co.in and eboard@icai.inThe Chartered Accountant ▸ Growth Strategies August 2026 | www.icai.org
Technology
Ep. 93 — The Future of Accounting in the Age of Artifi cial Intelligence and Automation
CA Journal
· July 2026
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The Future of Accounting in the Age of Artificial Intelligence and AutomationArtificial Intelligence (AI) and automation are transforming the accounting profession by redefining how financial data is processed, analysed, and interpreted. Advances in machine learning, deep learning, natural language processing, robotic process automation, and optical character recognition have significantly improved efficiency, accuracy, and decision-making across accounting functions. This article examines the role of AI in accounting, the key enabling technologies, integrated automation frameworks, applications in financial processes, challenges to adoption, and the evolving role of accounting professionals. While AI enhances operational capabilities and strategic insight, human judgment remains essential in professional reasoning, ethical oversight, regulatory interpretation, and advisory services. The article concludes that AI will not replace accountants but will fundamentally reshape the profession and require new skills and competencies.IntroductionThe speed and accuracy with which data entry, error detection, and compliance monitoring are performed today would have been unimaginable to accounting professionals only a few years ago. The emergence of artificial intelligence (AI) has fundamentally altered accounting practices by automating routine processes and enabling advanced analytical capabilities. AI-driven systems can process large volumes of structured and unstructured financial data, identify anomalies, and generate predictive insights that support managerial and regulatory decision-making.Accountants have always pursued accuracy, efficiency, speed, and consistency, yet achieving all these objectives simultaneously has traditionally been difficult. This constraint has been substantially reduced through the introduction of AI. By relieving professionals of repetitive and labour-intensive tasks, AI has enabled accountants to focus more on analysis, interpretation, and advisory functions. From transactional automation to AI-assisted auditing, the profession is undergoing unprecedented transformation. Hence, in response, the roles of accountants and auditors are evolving rapidly.Literature ReviewThe integration of AI into accounting has attracted increasing scholarly attention. Vasarhelyi et al. (2015) argue that continuous auditing systems enabled by advanced analytics will transform assurance services by allowing real-time monitoring of financial transactions. Sutton et al. (2016) highlight the role of analytics and AI in enhancing decision-making and improving the quality of financial reporting. Kokina and Davenport (2017) discuss the potential of cognitive technologies to augment accountants' capabilities and shift their roles towards advisory services.Bhimani and Willcocks (2014) emphasise that digital technologies are reshaping management accounting by enabling real-time performance measurement and predictive analytics. Brynjolfsson and McAfee (2017) suggest that AI-driven automation will transform knowledge-intensive professions, including accounting, by augmenting rather than wholly replacing human capabilities. IFAC (2020) similarly stresses the need for accountants to develop digital and analytical competencies to remain relevant in an evolving business environment.Recent industry reports from professional firms indicate that AI-enabled accounting platforms can automate transactional tasks, strengthen fraud detection, and generate strategic insights. At the same time, these reports emphasise persistent concerns regarding data governance, cybersecurity, regulatory compliance, and ethical accountability.Overall, the literature suggests that AI will significantly impact accounting processes, professional roles, and accounting education. However, much of the existing research focuses on specific applications or individual technologies. There remains a need for integrated conceptual frameworks that explain how AI and automation technologies interact within accounting systems. This article contributes to that discussion by proposing a holistic model of human–AI hybrid accounting systems.What is Artificial Intelligence?Artificial intelligence refers to the ability of systems to perform cognitive functions such as pattern recognition, inference, prediction, and decision optimisation by processing data and adapting to outcomes (Russell & Norvig, 2020). In accounting, AI systems mimic cognitive tasks traditionally performed by professionals, including transaction classification, anomaly detection, forecasting, and audit analytics.Although AI is often conflated with automation, the two concepts are distinct. Automation refers to the execution of predefined, rule-based, repetitive tasks. Automated tools require manual updates when processes change as they do not learn from experience. AI systems, by contrast, learn from historical data, adapt to changing conditions, and generate insights that support judgment-based decisions. Understanding this distinction is essential when evaluating the impact of AI on accounting practice.This article examines the major technologies driving AI in accounting, their integration into unified automation frameworks, their practical applications, the challenges associated with adoption, and the future role of accounting professionals.Artificial Intelligence in AccountingAI in accounting refers to the deployment of intelligent systems capable of analysing financial data, identifying patterns, detecting irregularities, and generating predictive insights. Its applications span transactional processing, financial analysis, audit and compliance, and advisory services.In transactional processing, AI automates workflows such as invoice processing, bank reconciliations, and expense validation. In financial analysis, AI supports forecasting, budgeting, and variance analysis. In audit and compliance, AI strengthens fraud detection, continuous auditing, and regulatory monitoring. In advisory services, AI assists with data-driven decision-making and financial communication. The integration of AI into accounting systems, therefore, enables organisations to reduce manual effort, improve accuracy, and enhance the timeliness and relevance of financial information.Key Technologies Driving AI in AccountingThe major technologies underlying AI in accounting include machine learning (ML), deep learning (DL), robotic process automation (RPA), natural language processing (NLP), and optical character recognition (OCR). Together, these technologies are reshaping the way financial data is captured, processed, analysed, and audited.Machine LearningMachine learning is a subset of AI that enables systems to learn patterns from historical data and make predictions or decisions without explicit programming. ML models are particularly effective for structured financial data and typically require feature engineering to identify relevant variables (Bishop, 2006).In accounting, ML is used for automated reconciliation, credit risk assessment, cash flow forecasting, fraud detection, and expense classification. By learning from historical transactions, ML systems improve their performance over time and can replicate consistent accounting judgments.Deep LearningDeep learning is an advanced form of ML that uses multi-layer neural networks to analyse complex and unstructured data such as scanned invoices, receipts, and bank statements (Goodfellow et al., 2016). Unlike traditional ML approaches, DL models can automatically extract features from data, thereby reducing the need for manual feature engineering.In accounting, DL enables template-free document processing, handwriting recognition, and intelligent extraction of data from complex financial documents. Hence, it significantly reduces manual data entry and supports sophisticated document automation.Robotic Process AutomationRobotic process automation automates repetitive, rule-based tasks by mimicking human interactions with software systems. Unlike AI, RPA does not learn from data; rather, it follows predefined rules and workflows (Lacity & Willcocks, 2016).In accounting, RPA is commonly used to download bank statements, post journal entries, onboard vendors, prepare tax returns, and generate management reports. Its value lies primarily in improving efficiency, consistency, and speed while reducing operational cost.Natural Language ProcessingNatural language processing enables systems to interpret and analyse textual data such as contracts, invoices, emails, and policy documents (Jurafsky & Martin, 2023). NLP supports tasks including sentiment analysis, compliance review, narrative financial reporting, and audit documentation analysis.This technology is particularly valuable in accounting because a large proportion of relevant information exists in textual form. Contracts, invoices, financial statement notes, and audit reports all contain texts that must be interpreted rather than merely recorded.Optical Character RecognitionOptical character recognition converts scanned documents into machine-readable text and structured fields such as dates, amounts, and vendor names. Traditional OCR systems are largely rule-based, whereas modern DL-powered OCR systems can interpret complex layouts and even handwriting.In accounting workflows, OCR serves as the data-capture layer, digitising paper-based or image-based financial documents and preparing them for further processing.Comparison of Core TechnologiesA clearer distinction among AI, ML, DL, RPA, OCR, and NLP is useful for understanding their respective roles in accounting. Table 1 summarises the major differences.Table 1 Comparative Overview of AI, ML, DL, NLP, OCR and RPA in AccountingAttributeAIMLDLNLPOCRRPANatureUmbrella conceptSubset of AISubset of MLDomain of AIEnabling technologyAutomation toolLearns from dataYesYesYes (advanced level)YesNoNoHandles unstructured dataModerateGoodExcellentExcellent (text-focused)Limited (image to text only)Very limitedPrimary useDecision support and intelligent analysisPattern recognition and predictionComplex pattern detection and deep analysisInterpretation of textual dataData extraction from documentsRule-based task executionExamples of accounting applicationsFraud detection, predictive analytics, smart validationAuto-categorisation, cash flow forecasting, anomaly detectionAdvanced fraud detection, document classificationInvoice interpretation, contract analysis, narrative reportingInvoice data captureFile downloads, journal postings, report generationNote. AI is used here as an umbrella term, while ML and DL represent increasingly specialised forms of intelligent data processing. RPA is included for comparison as a non-learning automation technology frequently deployed alongside AI in accounting systems.Unified Intelligent Automation FrameworkModern accounting automation increasingly relies on integrating OCR (often enhanced by deep learning), NLP, ML, and RPA into a unified intelligent automation framework. Within this framework, each technology performs a distinct but complementary function. OCR digitises documents, NLP interprets textual meaning, ML generates predictions and detects anomalies, and RPA executes actions within enterprise systems.This layered architecture enables end-to-end automation of accounting workflows, reduces manual intervention, accelerates month-end close processes, and improves the visibility of financial information. It also enhances scalability by processing higher transaction volumes without proportionate increases in staffing requirements.Table 2 Unified Intelligent Automation Framework for AccountingLayerTechnologyPurposeOutputData captureOCRExtract text and fields from financial documentsClean, digitised dataUnderstandingNLPInterpret meaning, context, and language patternsCategorised and contextualised informationIntelligenceMLLearn patterns, detect anomalies, and generate predictionsForecasts, classifications, and risk indicatorsExecutionRPAPerform actions in accounting and ERP systemsCompleted accounting tasks and workflow executionIllustrative Workflow ScenariosThe interaction between these technologies is evident clearly in practical accounting workflows.In an invoice-to-pay process, OCR first extracts relevant information from invoices. NLP then interprets line items, descriptions, and tax terms. ML classifies the expense, identifies the vendor, and checks for anomalies. Finally, RPA enters the invoice into the enterprise resource planning (ERP) system and routes it for approval.In bank reconciliation, OCR captures transaction lines from scanned or PDF bank statements, while NLP analyses descriptive narration fields. ML predicts the appropriate general ledger entry, often using fuzzy matching techniques, and RPA completes the posting, matching, and adjustment process.In audit and compliance workflows, OCR digitises invoices, contracts, and supporting records. NLP identifies unusual clauses, non-standard terms, or policy deviations. ML highlights anomalies and potential fraud indicators, after which RPA prepares working papers or initiates confirmation requests.A similar pattern can be observed in TDS reconciliation and related compliance activities. RPA downloads forms or vendor files and extracts the data into Excel; OCR reads certificates where required, ML helps identify discrepancies; and RPA compares datasets and flags differences for review. These examples show that the value of AI in accounting lies not only in individual tools but in the coordinated interaction of multiple technologies.AI Applications in AccountingTransaction ProcessingAI automates routine accounting tasks such as invoice processing, bank reconciliations, and expense validation. These automated workflows reduce processing time, improve accuracy, and minimise human error in high-volume environments.Financial Analysis and ForecastingAI systems can analyse historical financial data to predict cash flows, revenues, and expenses. Predictive analytics supports budgeting, scenario analysis, and strategic planning. AI also enables real-time variance analysis and benchmarking, thereby improving managerial responsiveness.Audit and ComplianceAI strengthens auditing by enabling continuous audit procedures, full-population testing, and anomaly detection. Instead of relying solely on sample-based procedures, auditors can examine complete datasets and identify suspicious transactions or fraud indicators more effectively.Advisory and CommunicationAI also supports advisory functions by generating narrative financial reports, summarising performance, and assisting in stakeholder communication. In this way, AI goes beyond back-office efficiency to support decision-making and create value.Conceptual Framework: Human–AI Hybrid Accounting ModelThis article proposes a conceptual framework for intelligent accounting systems that integrate AI and automation technologies with human judgment. The framework consists of four layers: data acquisition, intelligence, automation, and human oversight.Data Acquisition LayerThe data acquisition layer involves collecting information from internal and external sources, including enterprise systems, bank feeds, invoices, and regulatory databases. OCR and related data integration tools transform unstructured documents into structured datasets suitable for further analysis.Intelligence LayerThe intelligence layer comprises ML, DL, and NLP models that analyse financial data, detect anomalies, generate forecasts, and interpret textual information. This layer produces insights, predictions, and risk indicators that trigger actual decisions and actions.Automation LayerThe automation layer uses RPA to execute downstream tasks such as posting transactions, generating reports, and initiating compliance workflows based on outputs produced by the intelligence layer.Human Oversight LayerThe human oversight layer includes accountants, auditors, managers, and regulators who interpret AI-generated outputs, apply professional judgment, ensure ethical and regulatory compliance, and make strategic decisions. A feedback loop between human reviewers and intelligent systems supports continuous learning and improvement. The model can therefore be understood as a layered architecture in which data inputs form the base, AI analytics provide interpretive and predictive capabilities, automation processes translate these outputs into operational action, and human oversight at the top, connected by feedback loops, remains the final control mechanism.Challenges to AI AdoptionDespite its benefits, AI adoption in accounting faces several important challenges. High implementation costs and data infrastructure requirements may hinder adoption, especially among small and medium-sized enterprises. Data security and privacy concerns also require robust governance frameworks and strong cybersecurity controls.Regulatory uncertainty poses another challenge, as AI systems must comply with evolving accounting, audit, tax, and data protection standards. Ethical concerns are equally significant, particularly regarding transparency, bias, explainability, and accountability. Workforce readiness is also critical. Accounting professionals must acquire new skills in analytics, systems understanding, and technology governance to use AI effectively and responsibly.Selecting AI Tools for AccountingOrganisations should evaluate a range of factors when selecting AI tools for accounting. These include the intended use case, the availability and quality of historical data, integration with existing accounting or ERP systems, user capabilities, governance requirements, and cost of ownership.For example, the appropriate solution may differ depending on whether the primary need is reconciliation, forecasting, invoice processing, or fraud detection. Machine learning systems generally require sufficient historical data for training, whereas RPA tools may be deployed more quickly for repetitive tasks. Integration is also crucial, since the effectiveness of AI tools depends heavily on their ability to connect with systems such as SAP, NetSuite, Tally, or QuickBooks. In addition, organisations must consider whether end users possess technical expertise or whether no-code and low-code solutions are more suitable. Governance and security issues also need careful evaluation, including financial data handling, version control, model monitoring, and auditability. Finally, licensing, implementation, and maintenance costs must be assessed against expected benefits.Future Trends in AI-Driven AccountingAI is expected to support the emergence of real-time accounting, self-driven accounting systems, AI-generated narrative reporting, voice-enabled accounting tools, AI-driven audits, integrated accounts payable and receivable workflows, and predictive tax engines. These developments will continue to shift accountants' roles away from transaction processing to strategic advising.Human Judgment and Ethical ConsiderationsAlthough AI can automate many accounting tasks, human judgment remains indispensable. Accounting standards, tax laws, and regulatory requirements often require interpretation rather than simple application. Professional assessment, ethical oversight, client communication, and strategic judgment cannot be fully automated. Hence, the future of accounting should be understood not as the replacement of professionals by machines, but as a reconfiguration of professional work in which intelligent systems extend human capability.ConclusionArtificial intelligence and automation are reshaping the accounting profession by enhancing efficiency, accuracy, and analytical capability. AI systems can automate routine tasks, generate predictive insights, and support strategic decision-making across a range of accounting functions. However, human judgment remains central in regulatory interpretation, ethical oversight, and advisory services. The future accountant will increasingly operate as a technology-enabled strategic advisor. To remain relevant, accounting professionals must develop skills in data analytics, technology management, and strategic thinking. As AI adoption accelerates, the profession will continue to evolve, creating new opportunities for innovation and value creation.ReferencesBhimani, A. and Willcocks, L. (2014), “Digitisation, ‘Big Data’ and the transformation of accounting information”, Accounting and Business Research, Vol. 44, No. 4, pp. 469–490.Bishop, C. M. (2006). Pattern recognition and machine learning. Springer.Brynjolfsson, E. and McAfee, A. (2017), “The business of artificial intelligence”, Harvard Business Review, July.Deloitte. (2021). The AI-driven finance function.Goodfellow, I., Bengio, Y., & Courville, A. (2016). Deep learning. MIT Press.International Federation of Accountants. (2020). Artificial intelligence and the future of accountancy.Issa, H., Sun, T., & Vasarhelyi, M. A. (2016). Research ideas for artificial intelligence in auditing. Journal of Emerging Technologies in Accounting, 13(2), 1–20.Jurafsky, D., & Martin, J. H. (2023). Speech and language processing. Stanford University.Kokina, J., & Davenport, T. H. (2017). The emergence of artificial intelligence: How automation is changing auditing. Journal of Emerging Technologies in Accounting, 14(1), 115–122.KPMG. (2020). The future of audit with AI.Lacity, M., & Willcocks, L. (2016). Service automation: Robots and the future of work. SB Publishing.PwC. (2022). AI in finance: The next frontier.Richins, G., Stapleton, A., Stratopoulos, T., & Wong, C. (2017). Big data analytics: Opportunity or threat for the accounting profession? Journal of Information Systems, 31(3), 63–79.Russell, S., & Norvig, P. (2020). Artificial intelligence: A modern approach (4th ed.). Pearson.Sutton, S.G., Holt, M. and Arnold, V. (2016), “The reports of my death are greatly exaggerated—Artificial intelligence research in accounting”, International Journal of Accounting Information Systems, Vol. 22, pp. 60–73.Vasarhelyi, M.A., Kogan, A. and Tuttle, B.M. (2015), “Big data in accounting: An overview”, Accounting Horizons, Vol. 29, No. 2, pp. 381–396.Author may be reached at madhabi_sinha@yahoo.comThe Chartered Accountant · www.icai.org · August 2026
Ep. 94 — Towards a Unifi ed Public Financial Management System (UPFMS) for States
CA Journal
· July 2026
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Towards a Unified Public Financial Management System (UPFMS) for StatesState governments manage a wide and evolving set of public accounting and public financial management functions covering planning, budgeting, revenue generation, and expenditure oversight, including capital infrastructure spending, alongside the delivery of social welfare services. This mandate further extends to human resource management, asset and inventory control, public fund investment, debt and guarantee management, safeguarding long-term fiscal sustainability, etc.Over the last two decades, most States have progressively implemented digital systems to support budgeting, treasury operations, procurement, human resource management, accounting, audit, revenue administration and project monitoring. These initiatives have led to measurable improvements in transactional efficiency, transparency and compliance within individual functional domains. However, as the scale, diversity and velocity of public expenditure have expanded, the limitations of a fragmented and reporting-driven public financial management approach have become more apparent. In this evolving environment, the next phase of reform lies in deep integration, complete automation, use of Artificial Intelligence (AI) and Generative Artificial Intelligence (Gen AI), and transaction-driven governance.Keeping the above in mind, a Unified Public Financial Management System (UPFMS) is therefore envisaged as a comprehensive reform framework for States. The UPFMS would integrate all accounting, financial and administrative functions into a single source of truth, ensure that transactions are captured at the point of origin, and enable transaction/event-driven data flows across the entire accounting and public financial management lifecycle.The overall objective is to make UPFMS from accounting and reconciliation activities to real financial management system.Need for Stronger, Efficient State-level UPFMSMost of the States currently operate a diverse ecosystem of digital applications covering planning, budgeting, revenue management, expenditure management, treasury operations, procurement, Human Resource Management System (including processes relating to recruitment to retirement), accounting, audit, project monitoring, inventory management, asset registers, Personal Deposit Accounts, debt and guarantee management. These application systems were introduced mostly in an incremental manner (rather than in a transformational manner) to meet specific functional or compliance needs, and each initiative has delivered tangible benefits within its defined scope. However, this incremental approach has resulted in fragmented data landscapes. Budgeting may take time from collection of data till presentation for review and approval.As a result, in many cases, states' focus remains on accounting of transactions and reconciliation, rather than on proactive fund management, fiscal responsibility and timely utilisation of resources. This is due to the absence of a unified, transaction-driven system that automatically transforms transactions into auto-developed management information reports and present them in the form of informed decisions.This context presents a clear and timely opportunity for States to evolve from a report-driven public financial management framework to a transaction-driven, self-governing Unified Public Financial Management System (UPFMS).Conceptual Framework for UPFMSThe UPFMS would be founded on the following clear and explicit governance doctrines which are not incidental design choices rather they are the core drivers of the proposed reform:The UPFMS would prioritise self-governance over repetitive reporting — Functionaries at all levels, particularly at the Drawing and Disbursing Officer (DDO) and Budget Controlling Officer (BCO) levels, would be empowered to operate independently within clearly defined, system-enforced rules. Compliance, checks and balances would be embedded within workflows, approvals and validations, reducing dependence on manual supervision, inspections and repeated submission of returns.The UPFMS would be based on the core philosophy of single source of truth for all public accounting and financial data of the State. Financial and operational information would be created once, at the point of transaction, and reused seamlessly across planning, budgeting, execution, accounting, audit and reporting.The UPFMS would be transaction-driven and event-based. This means transactions would be captured at the time of their occurrence, rather than capturing them in a consolidated form or on a periodic basis. Financial intelligence would thus emerge as a direct by-product of operational activity.The UPFMS would enable drill-down analysis to the lowest operational level. This would enable decision-makers to move seamlessly from State-level aggregates to department-wise, scheme-wise, project-wise, DDO-wise, BCO-wise, vendor-wise or asset-wise views without requiring any additional data calls, manual compilation or even any MIS report.The UPFMS would enable a fundamental shift from gathering data to analysing results and taking informed decisions. A systematic automation and integration would free administrative capacity which is currently spent on data collection and reconciliation. This would allow greater focus on outcomes, fiscal risks and strategic fund management.The UPFMS should leverage AI/Gen AI and have the latest IT technologies to automate workflows, provide intelligent insights, and provide personalized user experiences. The system should be built with scalable microservices.The whole purpose of the above approach is to ensure that accounting within the UPFMS is treated as a by-product of integrated operations, not as the primary driver of financial management. With transactions captured at the time of their first occurrence, to a great extent, accounting entries are envisaged to be generated automatically and continuously, enabling finance leadership to focus on fiscal responsibility rather than reconciliation.The UPFMS is also intended to ensure that financial classification, data structures and accounting flows are aligned with the extended codification frameworks as finalised by the Central Government. This alignment would strengthen standardisation, auditability and inter-State comparability.Intended OutcomesThe proposed UPFMS is expected to deliver tangible improvements in governance outcomes. These would include faster budgeting exercise, smoother and need based utilisation of funds across the financial year, improved management of capital expenditure, enhanced accountability at the DDO and BCO levels, early identification of abnormal financial and operational trends, stronger automated controls over Personal Deposit Accounts (PD Accounts), and improved fiscal discipline.The overall impact of these changes would be a decisive shift from accounting and reconciliation-centric practices to real financial management, with efficient utilisation of public funds, strengthened fiscal responsibility and greater public confidence in State financial governance.Functional ModulesThe UPFMS would comprise several functional modules. These functional modules have been grouped in a very logical and scientific manner and discussed in subsequent paragraphs.Planning and Budget ManagementPlanning and Budget Management Module would operate as the central governance and control layer of the Unified Public Financial Management System. The objective of this module is not merely to prepare and publish an annual budget, but to convert legislative authorisation into an operational, continuously managed financial plan that supports timely execution and fiscal discipline.The UPFMS would enable budgeting within a very short span of time. Annual allocations would be operationalised through monthly and need-based releases, particularly for capital expenditure, aligned with execution readiness, procurement status and verified project milestones.The UPFMS would enable budgeting within a very short span of time. Annual allocations would be operationalised through monthly and need-based releases, particularly for capital expenditure, aligned with execution readiness, procurement status and verified project milestones. This approach would ensure that funds are available when they are to be utilised, rather than being front-loaded or bunched towards the end of the financial year. This would also ensure timely utilisation of funds and improved quality of expenditure.The module would be inherently transaction-driven. Every sanction, commitment, procurement approval and payment would update budget utilisation in real time, creating a single source of truth for budget status across the State. This would eliminate parallel tracking, manual registers and post-facto consolidation.This would also facilitate quick, routine and well-informed decisions on budget revision, re-appropriation and surrender. These would no longer be treated as exceptional or end-year exercises. Instead, the system would continuously analyse utilisation patterns, commitments, physical progress and cash position, enabling decision-makers to redirect funds to priority areas, release additional resources where required, or surrender unutilised provisions in time.Program, Project and Scheme ManagementThe Program, Project and Scheme Management Module is designed to serve as a foundation for the Planning and Budget Management Module.Under this module, the programs, projects and schemes would be arranged with distinctly specified objectives, landmarks, timeframes and expected outcomes. The material development would be taken at the initiation stage, using geotagged and time-marked indications wherever appropriate. Every individual confirmed milestone would create an entry in the computing system that routinely flows into fund accessibility, administration of expenses, asset development and accounting. This module would ascertain that fiscal choices are securely rooted in tangible development and intended results, instead of being determined solely by expenses.This occurrence and transaction-oriented correlation between material and monetary progress is focal to the governance philosophy of the UPFMS. It would allow the initial identification of anomalous trends, such as slow implementation, inflation in prices, or irregular spending habits, much before they become crucial. Decision-makers would be able to closely examine from State-level aggregates to individual projects, locations and implementing units, enabling timely and evidence-based interventions.To efficiently manage program, project, and scheme, an Evidence-Based Project Management System (EBPMS) is required in place. This module would assist in the management of empirical project, where financial reports, sustained funding, and resolutions related to re-orientation are determined based on validated implementation data instead of recurrent accounts of narratives. This would enable a decrease in the encumbrance of intermittent reporting and divert focus towards findings and conclusions.By securely incorporating program implementation with funds and expense control, the module would strengthen financial prudence while also enhancing the efficacy of delivery.Revenue ManagementThe Revenue Management Module within the UPFMS would surpass a limited focus on information gathering to evolve into becoming a crucial element of vigorous management of funds. The system would furnish near real-time discernibility of tax and non-tax revenue inflows, assimilated effortlessly with treasury, budgeting and cash management function.Income transactions would get recorded at the outset and displayed instantaneously in the unified financial view of the State. This would allow high-ranking officers across state departments to consistently evaluate the accessibility of resources and regulate the rate of expenditure consequently. Seasonal patterns, systematic transformations and potential risks impacting revenue streams would be recognizable at the initial level through system-generated metrics.Additionally, this would assist in making sound decisions related to borrowing, funding and spending allocation, enhancing broad budgetary management. Essentially, financial metrics would not remain as a distinct reporting stream but instead belong to the same primary source of truth that aid all monetary decisions.Expenditure ManagementExpenditure Management Module would be tightly integrated with Planning and Budget Management Module. By ensuring that expenditure is always aligned with budget availability and verified execution, this module would directly support timely utilisation of funds and improved expenditure quality. This module would operate entirely on transaction-driven, system-enforced controls, replacing manual oversight with embedded governance. Sanctions, commitments and payments would be processed only against available budget and validated system events.A key feature of this module would be the upfront recording of financial commitments, providing full visibility of future obligations. This would prevent inadvertent over-commitment and allow finance departments to manage cash flows and liabilities proactively.The design would enable DDO-centric self-governance, where officers operate independently within system-defined limits. Automated validations, alerts and controls would reduce the need for repetitive reporting and manual approvals, while strengthening accountability through audit trail/traceable transactions.Human Resource Management System (HRMS)The HRMS Module would be deeply integrated with the financial architecture of the UPFMS, covering the entire employee lifecycle from recruitment to retirement — thus covering both, monetary and non-monetary transactions/events.Recruitment actions, payroll processing, pension disbursements and retirement benefits would be aligned with real-time budget availability. Transactions would be captured at source and reflected immediately in budget utilisation, cash management and accounting records. This would eliminate delays, mismatches and reconciliation issues associated with parallel systems.Transaction-driven human resource data would facilitate effective trend analysis and forecasting of salary and pension liabilities, supporting medium-term and long-term fiscal planning. Decision-makers would be able to assess the financial implications of staffing policies, cadre strength and retirement patterns without relying on manual consolidation.Inventory ManagementInventory Management Module would move from being a peripheral store-keeping function to a core instrument of financial control and operational governance. Inventory often represents a significant component of working capital in public programs and capital projects, yet it is traditionally managed outside the mainstream financial decision framework.Under the UPFMS, all inventory transactions such as receipt, storage, issue, transfer, consumption and write-off would be captured at the point of occurrence and integrated with procurement, program execution, expenditure management and accounting. Inventory would no longer be tracked through parallel registers or periodic returns. Instead, each movement of material would generate a transaction that updates the single source of truth in real time.Further, inventory consumption linked to capital works would automatically flow into asset creation records, eliminating reconciliation gaps between material usage, project costs and asset valuation. This tight integration would strengthen fiscal discipline, improve cost accuracy and reinforce self-governance at the operational level by embedding controls directly into system workflows rather than relying on post-facto inspections.Assets ManagementAssets Management Module would provide end-to-end lifecycle governance of public assets, shifting the focus from mere asset creation to asset sustainability, utilisation and service outcomes. Public assets represent a substantial portion of the State's accounts, yet their financial and physical dimensions are often managed in silos.Within the UPFMS, assets would be created upon verified completion of capital works, based on transaction-driven data from the Program, Project and Scheme Management module. Physical assets would be geotagged to establish existence and location, ensuring transparency and reducing the risk of ghost or duplicate assets.Within the UPFMS, assets would be created upon verified completion of capital works, based on transaction-driven data from the Program, Project and Scheme Management module. Physical assets would be geotagged to establish existence and location, ensuring transparency and reducing the risk of ghost or duplicate assets. Financial valuation would flow directly from expenditure and inventory consumption records, ensuring accuracy and consistency.This module would also support maintenance planning, depreciation and eventual disposal within the same integrated framework. This would allow decision-makers to assess not only the creation of assets, but also their ongoing financial implications and utilisation patterns. Drill-down analysis would enable movement from aggregated asset values to individual assets and locations, strengthening accountability at all levels.Investment ManagementInvestment Management Module would cover the entire lifecycle of public investments, covering planning, approval, deployment, monitoring of returns, maturity management, reinvestment and closure. Investments of public funds would no longer be monitored through static registers or periodic statements, but through continuous, transaction-driven oversight.Each investment transaction would be captured at source and reflected immediately in the State's unified financial position. Returns, maturities and reinvestment decisions would be tracked automatically, providing real-time visibility of liquidity and performance on need-to-know basis. This would support treasury operations and ensure that idle funds are optimally used in accordance with policy objectives.Borrowing and Guarantee ManagementBorrowing and Guarantee Management Module would operate as a lifecycle-based fiscal control mechanism, providing continuous visibility of the State's liabilities and contingent exposures. Borrowings would be managed from proposal and approval through drawdown, servicing, refinancing and closure, with each stage captured as a transaction at source.Guarantees extended by the State would be recorded at occurrence of event(s) and tracked as contingent liabilities, with exposure monitoring and early warning indicators to flag potential risks of invocation.This integrated, transaction-driven approach would allow borrowing and guarantee decisions to be aligned with budget availability, revenue performance and long-term fiscal strategy, strengthening overall fiscal responsibility.Accounting ManagementAccounting Management Module would represent a fundamental shift in philosophy. Accounting would no longer drive financial management; instead, it would emerge as a by-product of integrated operations.With transactions captured at source across all modules and events driving system updates, accounting entries would be largely generated automatically and continuously. This would eliminate extensive reconciliation exercises and reduce dependence on manual adjustments.With transactions captured at source across all modules and events driving system updates, accounting entries would be largely generated automatically and continuously. This would eliminate extensive reconciliation exercises and reduce dependence on manual adjustments. Financial statements would be produced from the same single source of truth that supports planning, budgeting and execution.By freeing finance personnel from reconciliation-centric workloads, the UPFMS would enable a decisive shift towards proactive and real financial management, fiscal analysis and strategic oversight.Audit ManagementTo facilitate Internal and External Auditors as well, Audit Management Module would transition from episodic verification to continuous assurance. This would facilitate audit through innovative computer aided audit techniques.Auditors would have access to transaction-level data across planning, budgeting, procurement, inventory, assets, borrowings and guarantees within a unified system environment.By embedding audit readiness into system design, the UPFMS would enhance accountability while reducing audit cycle time and administrative burden.Financial Management, Analytics and Decision SupportFinancial Management Module would facilitate real financial management and thus a shift from 'accounting & reconciliation' to 'proactive' financial management. Financial Management Module would focus squarely on fiscal responsibility, fund optimisation and proactive decision-making. Advanced analytics would continuously analyse transaction-driven data to identify abnormal trends, emerging risks and performance deviations.AI and Gen AI tools would support predictive insights, scenario analysis and fraud analytics, enabling early identification of anomalies across planning & budgeting, revenue, expenditure, procurement, payroll, asset management, etc.Decision-makers would be able to drill down rapidly from high-level indicators to the underlying transactions driving those trends. Management Information System and Reporting would thus become an outcome of system activity rather than an administrative burden, reinforcing the principle of self-governance.This capability would transform financial governance from reactive oversight to anticipatory management.Fiscal Impact and Governance OutcomesThe cumulative impact of the UPFMS would extend beyond efficiency gains. By enabling rapid availability of budget, timely revision, re-appropriation and surrender, strong automated controls including over PD Accounts, early identification of abnormal trends and a decisive shift from accounting and reconciliation to real financial management, the UPFMS would materially improve utilisation of public funds.Taken together, the above reforms could result in a notional efficiency gain in the range of 0.5 percent to 1.0 percent of the State budget, while strengthening fiscal discipline, accountability and public trust.The administration of public finance in states is at a crucial stage. The intricacies of governance require a transition from a non-integrated data-driven framework to a harmonized, transaction-oriented and autonomous structure.Implementation Strategy and the Way ForwardUPFMS may be developed by the Centre Government and a developed application may be made available to States for the use at their will or this document (as a base document) may be shared with States for developing their own System. Development may be done through open tender or inhouse with the help of Centre's or State's Nodal Agencies. Ideally, the development may take around 9-15 months depending on the team's strength to be deployed for this work.ConclusionThe administration of public finance in states is at a crucial stage. The intricacies of governance require a transition from a non-integrated data-driven framework to a harmonized, transaction-oriented and autonomous structure. UPFMS would empower this shift by recording transactions at the outset, creating event-triggered data and incorporating organization, resource allocation, implementation, supplies, possessions, investments, credits, accounting and audit into a distinct and systematic architecture.By transitioning from accounting and harmonization to robust fiscal management, supporting financial accountability and facilitating timely, substantiated decisions, the UPFMS would encourage responsible, honest and ethical governance for states.Author may be reached atsanjaydelindia@rediffmail.com and eboard@icai.inThe Chartered Accountant · Public Finance · August 2026 · www.icai.org
Profession
Ep. 95 — Growth Strategies for CA Firms: Harnessing Global Outsourcing for Strategic Expansion
CA Journal
· July 2026
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Growth Strategies for CA Firms: Harnessing Global Outsourcing for Strategic ExpansionThe Indian Chartered Accountancy profession stands at a pivotal juncture. With over four lakh members and more than 90,000 practising firms registered under ICAI1, the landscape is increasingly competitive, particularly for small and mid-sized practices. Traditional models of organic growth are no longer sufficient in a market shaped by technology disruption, client sophistication, and globalisation.This article explores practical growth strategies for CA firms, with a focus on global outsourcing partnerships. It examines how Indian CA firms can leverage cost efficiencies, regulatory alignment, and sectoral expertise to expand their professional footprint, while adhering to ICAI's Code of Ethics and applicable foreign jurisdiction rules.Introduction: The Evolving Landscape of CA FirmsThe profession has undergone a remarkable transformation over the past three decades. From a largely compliance-driven practice in the 1980s and 1990s, Chartered Accountants today are engaged across audit, taxation, valuations, transaction advisory, insolvency, risk consulting, and forensic work.A striking reality, however, remains that a majority of Indian CA firms are small or mid-sized practices. While a handful of large players dominate high-value assignments, smaller firms form the backbone of the profession, servicing SMEs, start-ups, family-owned businesses, and, increasingly, global clients.In this environment, growth is not optional, it is a matter of long-term sustainability. Effective strategies must combine time-tested approaches with newer models built around technology, collaboration, and internationalisation.Traditional Growth StrategiesOrganic Growth through Client Relationships Building deep trust, delivering timely solutions, and cross-selling services remain fundamental. A tax client, well-served, can be a natural referral to assurance or advisory work. Firms that invest in structured relationship management consistently outperform those relying on reactive service delivery.Sectoral Specialisation Firms are increasingly recognising the value of industry focus. Positioning as a sector specialist allows firms to command better pricing and differentiate from generalist competitors. Key areas include:Infrastructure and renewable energy, requiring expertise in long-term project finance and regulatory compliance.BFSI clients, demanding deep knowledge of RBI guidelines, Basel norms, and risk management frameworks.Start-ups and technology companies, needing support in valuation, ESOP accounting, and international tax structuring.Domestic Alliances and Networks Joining national-level alliances allows firms to pool expertise, share resources, and collectively pursue larger mandates. In multi-state GST audits, for instance, an alliance enables firms to handle cross-geography assignments without relinquishing client control.Firms considering formal aggregation or network arrangements should refer to ICAI's Guidelines on Networking of CA Firms and the regulatory framework governing firm aggregation and associations, which set out the permissible structures and disclosure requirements applicable to such arrangements.New-age and Technology-led Growth StrategiesAdoption of cloud-based audit tools, AI-powered analytics, and blockchain-assisted reconciliations is no longer a luxury but a competitive necessity. Firms investing in digital capabilities can deliver faster, more reliable, and value-added services, strengthening both client retention and new business prospects.Beyond tools, technology-led growth involves re-designing workflows so that routine, repetitive tasks are automated, freeing professionals for higher-value analysis, advisory, and client engagement. Firms that make this transition early will have a structural advantage over those that do not.Adoption of cloud-based audit tools, AI-powered analytics, and blockchain-assisted reconciliations is no longer a luxury but a competitive necessity. Firms investing in digital capabilities can deliver faster, more reliable, and value-added services, strengthening both client retention and new business prospects.Global Integration and Outsourcing: A Strategic LeverIndia as a Professional Services HubIndia has emerged as a preferred destination for professional services outsourcing. Several structural factors underpin this:AdvantageDetailCost efficiencyAudit professionals in the US and UK typically cost USD 70–100 per hour; comparably skilled Indian professionals are available at USD 20–25 per hour2Talent availabilityIndia produces over 20,000 new Chartered Accountants annually3, alongside a large pool of finance graduates and MBAsTime-zone benefitIndian teams can work overnight to deliver for US and UK clients, enabling near-continuous service modelsRegulatory alignmentInd-AS is substantially converged with IFRS; ICAI's Standards on Auditing are aligned with ISA; and ICAI's Code of Ethics mirrors IFAC guidelinesStructural advantages of India as an outsourcing hubAn Illustrative Example4Consider a hypothetical scenario: a mid-sized Mumbai firm with renewable energy expertise partners with a UK-based financial advisory firm advising on a solar infrastructure project. The Indian firm provides IFRS-compliant financial modelling, valuation analysis, and regulatory review. The UK firm retains the client relationship and issues all final opinions and sign-offs, as required under UK regulations. The Indian firm earns a fee in foreign currency at rates well above domestic equivalents, improves its team's exposure to global valuation methodologies, and builds a track record for future international work.This model — where the Indian firm focuses on execution and technical support, and the overseas partner manages the client relationship and formal sign-off — is the appropriate structure for cross-border professional collaboration and is the one firms should seek to replicate.Regulatory, Legal, and Ethical ConsiderationsOne of the strongest advantages Indian firms enjoy in international collaborations is the alignment of professional and regulatory standards. At the same time, it is essential that firms structure such arrangements carefully and in full compliance with applicable rules.Standards AlignmentAccounting standards: Ind-AS is largely converged with IFRS, making Indian professionals readily adaptable to Western financial reporting requirements.Auditing standards: ICAI's Standards on Auditing (SAs) are aligned with the International Standards on Auditing (ISA).Tax frameworks: GST has structural parallels with VAT systems, and Indian tax professionals are increasingly proficient in cross-border compliance.Professional ethics: ICAI's Code of Ethics mirrors IFAC guidelines, ensuring consistency with global professional standards.Ethical and Regulatory Compliance in OutsourcingFirms entering into international outsourcing or collaboration arrangements must observe the following:Scope of work Indian firms should limit their role to execution and technical support. Final client opinions, audit sign-offs, and regulated deliverables must remain with the licensed overseas partner. This is not merely a commercial arrangement; it is a regulatory requirement in most jurisdictions, including the US and UK.No surrogate practice Indian firms must not represent themselves as practising in foreign jurisdictions or allow their name or brand to be used in ways that imply direct practice overseas. Any arrangement that creates this impression, even inadvertently, would raise serious ethical and regulatory concerns.ICAI Code of Ethics Firms are directed to the following ICAI reference materials when structuring international arrangements:ICAI Code of Ethics, 2020 (aligned with IFAC's Code of Ethics for Professional Accountants) — in particular, Part 4B on independence and Part 1 on the fundamental principles of integrity and professional behaviour.ICAI Council Guidelines on Outsourcing of Accounting/Finance Functions (where applicable).ICAI's Ethical Standards Board pronouncements on confidentiality and third-party arrangements.Members may also refer to the ICAI–ICAEW and ICAI–CPA Australia Mutual Recognition Agreements for guidance on permissible cross-border professional activity.Foreign jurisdiction rules Before entering any arrangement, firms should seek legal advice on the rules of the relevant foreign jurisdiction to confirm the structure is compliant.Advantages of Global CollaborationBenefitWhat It Means in PracticeAccess to wider client basePartnerships open doors to multinational assignments, cross-border M&A, infrastructure, and ESG that are difficult to secure independentlyRevenue diversificationEarnings in foreign currency improve profitability and offset domestic fee compressionSkill and knowledge upgradeExposure to IFRS, US GAAP, global valuation methods, and advanced audit technology strengthens professional competenceReputation buildingA track record of international work attracts both global clients and larger domestic mandatesTalent retentionYoung professionals value international exposure; global assignments help firms retain their best peopleFuture readinessFirms with international linkages are better positioned as global standards in accounting, tax, and ESG continue to convergeChallenges and MitigationRegulatory and Licensing Restrictions Many countries restrict foreign firms from directly practising regulated services such as statutory audit. In the US, CPA firms cannot outsource audit opinions; in the UK, only registered firms may sign statutory audits. Indian firms must structure collaborations carefully, focusing on execution and technical support, while leaving final opinions and client-facing sign-offs to the overseas partner.Brand and Perception Gap Global clients may be unfamiliar with Indian firms relative to established international networks. Building credibility requires a demonstrated track record, robust quality assurance processes, and, where appropriate, affiliations with recognised foreign professional bodies. Investing in case studies and testimonials from early international engagements can accelerate this process.Talent Retention and Training International exposure raises expectations. Professionals who gain global skills are in demand. Continuous training in IFRS, US GAAP, valuation methodologies, and emerging areas such as sustainability reporting (under ISSB standards) is essential. Firms should consider structured pathways for dual qualifications such as ACCA, CPA, or CFA alongside the CA as a retention tool as much as a quality measure.Technology and Cybersecurity Cross-border work requires secure data sharing, which brings obligations around data confidentiality, GDPR compliance (where EU clients are involved), and broader cybersecurity governance. Firms should:Deploy encrypted communication channels and secure cloud platforms approved for client data.Adopt a written data protection policy aligned with international standards (ISO 27001 provides a useful framework).Ensure engagement letters with overseas partners explicitly address data handling and confidentiality obligations.Conduct periodic IT security reviews and staff training on data protection protocols.Pricing Discipline While India's cost advantage is real, competing purely on price commoditises services and erodes firm value. Firms should anchor pricing to the expertise and outcomes they deliver, not just the labour cost differential. Tiered pricing models — where execution-only support is priced differently from specialised analytical work — allow firms to capture value more effectively.Strategic Roadmap for FirmsThe following roadmap provides a structured approach to internationalisation for small and mid-sized CA firms:Step 1Build Targeted Global AlliancesRather than waiting for a merger opportunity, firms should proactively approach overseas firms in sectors where they have genuine expertise. A firm with renewable energy or infrastructure knowledge, for example, could approach US or UK advisory firms needing execution support on IFRS valuations or ESG compliance work. These alliances create clear win-win structures: the foreign firm retains the client; the Indian firm earns forex revenues and builds a track record.Step 2Invest in Technology and Workflow SystemsOverseas clients expect seamless digital collaboration. Firms should invest in audit analytics tools, AI-assisted valuation models, cloud-based reporting platforms, and secure data rooms. Real-time dashboards and automated workflows are not differentiators abroad; they are baseline expectations.Step 3Specialise as a DifferentiatorCompeting on generic services against established global networks is not a viable strategy. Firms should identify two or three domains where they can genuinely be an expert: infrastructure valuations, transfer pricing, forensic accounting, green finance, or ESG reporting are all areas of growing global demand. Depth in a niche is more valuable and more defensible than breadth across many areas.Step 4Strengthen Quality ManagementGlobal clients expect work that meets international standards. Firms should implement ISQM (International Standard on Quality Management) frameworks, conduct regular peer reviews, and maintain strong engagement documentation. The ICAI's own quality review programme provides a useful internal benchmark. Developing dual-qualified professional CAs with CPA, CFA, or ACCA credentials adds credibility and reassures overseas partners.Step 5Apply a Considered Pricing StrategyThe foreign exchange benefit means that even moderately priced international work is typically more profitable than comparable domestic engagements. Firms should use this margin to invest in quality and specialisation, rather than simply competing at the lowest price point. A tiered model, where basic execution support is priced at a lower rate but specialised analysis commands a premium, reflects the actual value delivered.With Ind-AS aligned to IFRS and ICAI actively deepening its relationships with global bodies, including through memoranda of understanding with CPA Australia, CPA Ireland, and ICAEW, the regulatory barriers to cross-border collaboration are steadily reducing. This trend is likely to continue as international standard-setters push for greater harmonisation.Future OutlookThe projections and trajectories outlined in this section are indicative of directional trends rather than definitive forecasts; actual outcomes will depend on regulatory developments, market conditions, and the pace of adoption by firms and clients alike.Global Demand for Cost-efficient Professional ServicesInflationary pressures in Western economies have accelerated interest in outsourcing. Industry surveys indicate that a significant proportion of mid-tier US firms are actively exploring outsourcing arrangements to manage costs. This demand is structural, not cyclical, and Indian firms are well-positioned to serve it.Regulatory ConvergenceWith Ind-AS aligned to IFRS and ICAI actively deepening its relationships with global bodies, including through memoranda of understanding with CPA Australia, CPA Ireland, and ICAEW, the regulatory barriers to cross-border collaboration are steadily reducing. This trend is likely to continue as international standard-setters push for greater harmonisation.ESG and Sustainability Reporting: A Realistic Growth PathGlobal investors are demanding disclosures aligned with IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures), issued by the International Sustainability Standards Board (ISSB). In the Indian context, SEBI's Business Responsibility and Sustainability Reporting (BRSR) framework — mandatory for the top 1,000 listed companies by market capitalisation — provides an immediate domestic reference point. CA firms advising listed clients should be conversant with BRSR Core requirements and their alignment with IFRS S1/S2, as convergence between the two frameworks is actively progressing. A practical path involves:Training two or three team members in ISSB standards and climate risk frameworks in the near term.Offering ESG data assurance or gap analysis to existing clients as a starting point, before moving to full assurance engagements.Partnering with overseas firms on ESG-related assignments to gain exposure to international reporting expectations before building an independent practice.Over time, this incremental approach allows firms to develop credible ESG capability without over-investing before the market matures domestically.Renewable Energy and Infrastructure AdvisoryWith the US, EU, and major economies targeting net-zero emissions by 2050, there is a substantial pipeline of renewable energy projects requiring valuations, financial modelling, and compliance reviews. Indian firms with sector expertise in solar, wind, battery storage, or green hydrogen are well-placed to support global demand in these areas.India's Emerging Role in Professional ServicesJust as India became a global hub for IT outsourcing in the 1990s, there is a credible case that the next two decades will see Indian firms play a meaningful role in global professional services delivery. ICAI's international recognition, combined with India's large and growing CA community of over four lakh members and more than 8.5 lakh students as of 20255, provides the talent base for this shift.ConclusionGrowth for CA firms today requires a balanced approach: strengthening domestic practice while building selective international capability. For small and mid-sized firms, outsourcing partnerships with overseas firms represent a genuine and realisable opportunity, provided they are structured correctly, ethically, and with a clear focus on the value the Indian firm brings.The combination of regulatory alignment, cost efficiency, growing sectoral expertise, and an expanding talent base positions Indian CA firms favourably for this transition. The journey demands vision and sustained investment, but the potential rewards for firms, their teams, and the profession as a whole are substantial.Author may be reached atdsrhtr@gmail.com and eboard@icai.inNotesICAI membership and firm registration data as per ICAI website. ↩Audit professionals in the US and UK typically cost USD 70–100 per hour; comparably skilled Indian professionals are generally available at USD 20–25 per hour — a differential widely cited in professional services outsourcing literature, including reports by NASSCOM and Deloitte's Global Outsourcing Survey. These figures are indicative only and subject to variation by engagement type, firm size, seniority, and jurisdiction; they should not be treated as definitive market rates for any specific arrangement. ↩ICAI Exam passing data press release. ↩The India–UK solar valuation example in the section is a constructed hypothetical scenario provided for clarity and does not represent any specific actual engagement. ↩ICAI student and member figures as of 2025, per ICAI public disclosures. ↩The Chartered Accountant · Profession August 2026 · www.icai.org
SustainabiIity
Ep. 96 — Green Intent, Red Flags: Assurance over Sustainability and the Risks that Matters
CA Journal
· July 2026
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Green Intent,Red Flags Assurance over Sustainability and the Risks that MattersThis article highlights the growing importance of sustainability assurance in strengthening the credibility of corporate sustainability disclosures amid increasing stakeholder expectations and evolving regulatory requirements. It explains the significance of ESG reporting, the value of independent assurance in mitigating greenwashing risks, and the role of reliable sustainability information in enhancing trust, compliance, governance, and informed decision-making. It further outlines the key risk areas that Assurance Practitioners should evaluate — industry-specific sustainability risks, governance culture, reporting boundaries, data integrity, indicator selection, technical expertise, and external factors — and underscores the need for professional skepticism, transparent reporting, and alignment with emerging global frameworks such as ISSA 5000. Serving as a practical guide, it equips practitioners with a structured approach to identifying, assessing, and responding to sustainability assurance risks.The starting pointLooking beyond the green claimsAs companies commit to Net Zero, carbon neutrality, and make ambitious sustainability claims, stakeholders increasingly demand independent validation and a clear view on the green claims.To meet this expectation, Assurance Practitioners look beyond the disclosures, beyond the claims, beyond the bold statements. This article provides a brief guide to analyse the risk behind the green intents.DefinitionsWhat is sustainability?Things which can be sustained over a period without impacting on the people, environment and so on. As per the United Nations, it is defined as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” In practice, it means balancing three dimensions — the three pillars of sustainability recognised by the UN:EnvironmentalUse resources responsibly and judiciously, cut pollution and greenhouse gases, and protect ecosystems and biodiversity.SocialTreat people fairly and safely, support communities, and uphold human rights, inclusion, and equity.EconomicRun activities and businesses in ways that are resilient, ethical, and create long-term value.The UN’s five pillars — 17 SDGs link to thesePeople Planet Prosperity Peace PartnershipFrameworkSustainability and ESGSustainability is the broad goal and set of practices. The UN developed the Sustainable Development Goals (SDGs) — 17 goals interlinked to the pillars above. Sustainability is a broad term, and the need for reporting on it arose for companies. The Organization for Economic Co-operation and Development (OECD) suggested companies report and communicate their practices under the ESG criteria — the three keys shaping the sustainability reporting landscape.ESG criteriaEnvironment Social GovernanceIt is a way a company reports its performance, against which investors, regulators, and stakeholders assess it.Why sustainability / ESG reporting mattersThe essence of ESG reporting is to disclose how companies are being responsible under the categories of E, S and G, how they are managing the risk, and how it is being reflected upon. It is a way of building trust in society, ensuring regulatory norms are met, and providing a sense of comfort and confidence to stakeholders about preserving the future and having a system we all can rely on.The essence of ESG reporting is to disclose how companies are being responsible under these categories of E, S and G, how they are managing the risk and how it’s being reflected upon.— On why reporting mattersThe case for assuranceWhy it matters to get assurance over sustainabilityStakeholders increasingly require third-party validation of the claims companies make. When sustainability data sets — KPIs, metrics, disclosures — are assured, customers, investors, employees, value-chain partners, regulators, and stakeholders gain greater confidence. TrustCustomers get comfort that the products they invest in or buy are not harming the environment.Assurance on sustainable data sets reduces the risk of greenwashing / whitewashing / social washing, giving investors and stakeholders confidence that the offerings are genuine.It strengthens the brand reputation of the company and supports investors’ outlook towards it.It improves the credibility and clarity of public communications. ComplianceMany jurisdictions now expect assurance over sustainability reporting against defined frameworks, enhancing comparability between peers, sectors, and industry standards and helping readers — including regulators — understand a company’s standards and governance.In India, listed companies report through the Business Responsibility and Sustainability Report (BRSR), with mandatory assurance introduced.In the EU, the CSRD mandates limited assurance over ESRS disclosures, including GHG.In Australia, the Australian Sustainability Reporting Standards (ASRS) require phased auditing of climate reports.In Singapore, listed companies must obtain external limited assurance on Scope 1 and Scope 2 GHG emissions two years after they begin reporting — and other geographies are marching in similar ways. AccessibilitySustainability data sets are becoming a critical factor in financial decision-making. Lenders, insurers, investors, and customers use them to evaluate the overall risk and potential performance of a company or asset.Banks use verified ESG data to assess a borrower’s long-term viability and default potential; strong ESG practices can lead to better loan terms or access to green financing.Insurers use ESG metrics to determine coverage and premiums — poor ESG performance signals higher operational and liability risk, and higher insurance costs.Investors use verified data to identify sustainable, resilient investments, avoid greenwashing and social washing, and allocate capital in line with financial goals and sustainability values.Customers require audited supplier ESG data to meet their own targets and due-diligence obligations. Better risk management, governance and integration with financialsGetting data audited surfaces design gaps and control gaps for management, enabling stronger footing over data collection, methodology, and oversight.It helps the company put discipline in place, driving stronger policies, internal controls, and oversight — like financial reporting.It helps identify risks, opportunities, and the financial impact or provisioning that may be required. For example, if an asset emits high emissions and an alternate asset is assessed, that decision affects the asset’s useful life or impairment — no longer seen in isolation, but mapped onto financial impacts.In essence, verifiable sustainability data is transforming into a standard financial metric — moving beyond a niche ethical consideration to an essential component of mainstream risk assessment, and helping stakeholders assess decisions on investment and partnership.Table 1 — The red flagsRisks and measures for the Assurance PractitionerThe risks below guide the Assurance Practitioner in determining the red flags and the areas to be more mindful about. They help in determining the nature, timing, and extent of procedures across the entire engagement lifecycle — planning, execution, and completion. Foundational parameters must be clarified first: the rationale for the assurance, the required level (limited or reasonable), the purpose of the engagement, the intended users of the report, and the planned distribution. Compliance with the applicable framework is a must, and it is necessary to keep professional antennas up to smell the reds and apply professional skepticism throughout.7 risk areas What to evaluateR1Industry / Sector in which the Client belongsThe client’s industry and sector define the material topics of that specific business — sustainability impacts differ sharply by sector. There could be water and land-use concerns in agriculture; child labour, modern slavery, and human-rights concerns in manufacturing; human health, plastic pollution, waste, and water scarcity in beverages; land-clearance concerns when siting a plant far from a city; or cotton supply-chain risk in clothing.Geography also defines risk — climate risks such as flood, heat, and water stress depend on where the site is located, affecting the company’s strategy and KPIs. Industry knowledge is foundational to assessing sustainability risk at the start.This helps the practitioner evaluate whether the client is including the right information, whether the statement addresses the key risks, and whether material information is likely being omitted — enabling appropriate challenge of management and better-designed procedures.R2Knowledge about the Client and its governanceAssess how governance is structured and the tone set by senior leadership. When top management is genuinely committed to the sustainability roadmap, that mindset cascades through the organisation and aligns everyone toward shared targets — and drives the internal controls management wants for reporting.Conversely, if sustainability is treated mainly as a tick-in-the-box exercise, management may pursue targets differently, with reluctance to implement sufficient internal control or to address weaknesses and deficiencies.Assess how inclined clients are to achieve objectives — whether targets are over-ambitious, whether incentives are linked to compensation, and how much pressure exists. Where such pressures exist, the risk to management objectivity and fraud risk increases and should be assessed accordingly. To summarise, the tone at the top is pivotal.R3Reporting boundariesWhere clients have multiple branches, factories, units, or offices, understand the scope of the reporting boundaries used — and management’s rationale for scoping certain boundaries in and others out. Assess whether the boundaries not assured give rise to greenwashing or social-washing risk, and whether the residual risk would mislead the reader if the report covers only the scoped-in boundaries.Companies may try to limit scope to a narrow set that reflects positive impacts while ignoring material negative impacts.ExampleA manufacturing unit has 5 sites and has implemented emissions-reduction measures at only 3 — and considers only those 3 for reporting. At this juncture it is critical to evaluate:Is management clearly defining the reporting boundary in the Statement?What does the applicable regulation say — does it let management pick and choose boundaries?How will readers perceive the report — will the conclusion be read as substance over form even for sites outside scope?What is the risk of not assuring those sites — are they high-emission assets or subject to labour issues management would rather not report?Does cherry-picking fewer units misrepresent the sustainability reporting?There is significant risk that management may use assurance symbolically to boost reputation while engaging in greenwashing or social washing. Practitioners must apply professional skepticism to mitigate this.R4Synchronization of financial and sustainability data setsCompleteness and data accuracy are key. Unlike financial systems, record-keeping for sustainable transactions is less mature — so sustainability metrics and KPIs should speak to financial data to ensure completeness and accuracy. It is important that the finance department is involved in sustainability reporting to eliminate omissions that could lead to a misleading or incomplete opinion.For example, the property, plant and equipment schedule in the balance sheet details leased assets, manufacturing sites, freehold property, guest houses and so on. Tying sustainability data back to these financial parameters ensures completeness of the data captured.Management’s decisions also need integration across the sustainability report and financial statements. For a high-emission asset with a planned replacement addressed in the MD&A, the finance team may need to make provision or capex, and analyse remaining useful life or impairment. Without synchronisation, the risk of omission and inaccuracy is challenged.R5Indicators called for assurance and their selection processUnderstand the indicators presented, the indicators on which assurance is called for, and the rationale for those selected — and those not scoped in. Scoped-in indicators may be linked to measuring material topics, to public statements about achieving a desired level, or represent significant impacts, risks, and opportunities across the value chain.Assess that indicators called for assurance meet the following:Measurable and reliable: quantitative or semi-quantitative, accurate, robust, and consistent over time, allowing objective verification.Complete sets: a comprehensive picture across environmental, social, and economic dimensions, avoiding “cherry-picking” of only positive information.Comparable: clear, easy to understand, and comparable across time and, ideally, across similar entities or benchmarks.Subjectivity and estimates: many metrics involve significant judgment, forward-looking statements, and complex estimation (e.g. scenario analysis for climate risk).Scope limitations: management may scope only a narrow set of positive indicators — assess the total presented versus those assured, and the residual risk of the remainder.R6Technical nature of the metricThe assurance team may lack the specific expertise (e.g. in environmental science or social-impact assessment) required to adequately evaluate certain claims. Some environmental or social issues may need specialised experts, creating a need for multidisciplinary expertise.The Assurance Practitioner may assess the need for assembling a multi-disciplinary team with the expertise necessary to address the various risks envisaged.R7External factorsIt is important to check for external factors throughout the process:Any adverse media news.Any allegations against the company by stakeholders.The client’s ESG rating versus peers — whether it has been upgraded or downgraded, and the rating agency’s rationale.Market controversies in that sector.While it is important to understand the sector and the governance within the organisation, it is equally important to evaluate and assess the factors present outside it.As this domain matures, the future of assurance reports on sustainability reporting will see the inclusion of robust internal-controls reporting, other information paragraphs, and, potentially, the evolution of a concept similar to Key Audit Matters (KAMs) adapted for sustainability.— What’s nextWhat’s nextISSA 5000 and a single global baselineSustainability Assurance 5000 (ISSA 5000) is coming to provide a single, global baseline for assuring sustainability reports — driven by strong demand from investors and regulators for consistent, high-quality, comparable ESG data across sectors, industries, and locations. It aims to offer a unified, framework-neutral standard applicable to all topics and practitioners, moving beyond fragmented guidance to support decision-making with reliable information. Framework-agnostic, profession-agnostic, and scalable to both reasonable and limited assurance, it is designed for combatting the reds — a single stringent framework to build trust, improve comparability, and prevent greenwashing, social washing, and faulty decision-making based on unreliable data.All these standards aim to provide the highest level of trust to stakeholders. However, the responsibility of the Assurance Practitioner remains the same: to apply the highest level of professional skepticism to smell the reds, analyse inherent and potential risk, and apply appropriate measures and safeguards.ConclusionGuide light, not an exhaustive listThis article provides guide light to the Assurance Practitioner. It is not an exhaustive list of envisaged risks — there could be many more that a professional considers based on experience. The hope is that it helps professionals identify such risks, detect them, engage in constant dialogue with management, and address them — enabling green assurance without being in grey, and flagging off the red.Author may be reached at eboard@icai.inThe Chartered Accountant · Sustainability · August 2026 · www.icai.org
SustainabiIity
Ep. 97 — Biochar & Climate Finance: A New Playing Field for CAs
CA Journal
· July 2026
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Biochar & Climate Finance: a new playing field for CAsBiochar — the oxygen-free, carbon-rich substance formed when biomass is heated — is much more than a scientific footnote. It promises real financial prospects with real environmental value. For Chartered Accountants, it opens access to carbon accounting, financial modelling, project assurance, and governance that were niche only a few years ago. India has vast farm waste and is acting on climate change, and CAs are well positioned to inject financial discipline, transparency, and credibility into this emerging arena.IntroductionSustainability is now a business strategySustainability is no longer confined to conference rooms. Enter any business boardroom and you will hear discussions about ESG goals, carbon neutrality, and climate plans. Biochar is one of the climate solutions that has gained significant traction. In simple terms, it is produced when agricultural or forestry waste is heated in a low-oxygen environment — a process known as pyrolysis — converting short-lived plant carbon into a stable form that can remain in soil for hundreds of years.Biochar is typically applied where crop residues would otherwise be burned or left to decay, releasing carbon dioxide into the atmosphere. It is pursued because it locks carbon away permanently, improves soil health, and creates a measurable, financeable climate benefit.Researchers discuss soil health and carbon storage. These matter. But there is another facet that is equally important, and it concerns the professionals in finance and accounting — namely, the financial potential of biochar.For Chartered Accountants, biochar is not merely an environmental concept; it is a professional opportunity. The space involves reporting and verification systems, carbon credit trading, frameworks, and financial structures. Real work. Real complexity. A biochar project offers a new professional footing on which CAs can actually add value as India transitions to the low-carbon development phase.Most organizations getting into biochar do not have the financial infrastructure or accounting skills. They know the environmental narrative and are ecstatic about carbon credits — but they lack mechanisms to measure, report, and verify claims. They have no financial models to present investors with returns, and no governance frameworks to ensure everything is done right. This is the gap that CAs fit perfectly.Beyond the ScienceAn emerging financial storyBiochar is produced when biomass such as crop residues, agri-waste, and forestry by-products are heated through pyrolysis, converting unstable organic carbon into a stable form suitable for long-term soil storage. Once deposited in soil it lasts hundreds of years, which is why it has become one of the most persistent carbon sequestration practices in the current market — and why it is so highly regarded by global carbon markets.But beyond the science lies an emerging financial story. Biochar projects can tap into:Voluntary carbon marketsGreen financing instrumentsESG-linked fundingCorporate sustainability budgetsIndian government climate incentivesAll of these demand transparent accounting, verification, due diligence, and strategic financial planning — the very things Chartered Accountants have in abundance.The Value ChainBiochar production process01Biomass CollectionCrop waste & residues02Drying & PreparationMoisture reduction & shredding03PyrolysisHeating in low oxygen04Cooling & CollectionBiochar collection05Soil ApplicationImproving soil health06Credit VerificationMRV & carbon credits07Revenue & Co-BenefitsBiochar sales & energyPyrolysis yields Biochar Bio-Oil SyngasWhy CAs Should Pay AttentionFive places where CAs add valueBiochar presents unique opportunities for Chartered Accountants. Companies are on the lookout for accountants who can help them navigate this emerging field.01 / Carbon accountingMeasuring sequestrationThe carbon sequestered in soil is what lets biochar projects earn credits — and unless projects are measured properly, they have no strong financial foundation. CAs can build carbon accounting systems that trace the flow of carbon: measuring baseline emissions, projecting emissions under different scenarios, and quantifying the differences.Quality of biochar, soil condition, application rate, and decomposition all matter, as does adherence to international methodology. Checks on carbon-benefit calculations are what draw the line between credible and questionable projects. A third-party CA review provides the credibility investors require, and adherence to standards like Verra and Gold Standard enhances market confidence — because buyers demand assurance, and credibility earns superior prices.02 / Financial modellingModels that reveal the truthBiochar initiatives can be capital-intensive: pyrolysis equipment, feedstock supply chains, storage infrastructure, and monitoring systems. Initial projects can require capital of several crores. Shareholders want comprehensive forecasts — payback period, projected ROI, and what happens if carbon prices fall.The best CAs build realistic models that chart cash flows across the project lifespan, run payback analysis, and stress-test sensitivity to carbon prices and biochar cost. Grounded in biochar markets, past prices, feedstock dynamics, seasonality, and policy, they make conservative assumptions. Predicting carbon-credit revenue accurately is the difference between success and failure — and that is where CAs show their value.03 / GovernanceGovernance and internal controlsCarbon credits are now financial assets that must be governed and controlled, with audit trails that guard against fraud and error. CAs build control measures for generating and tracing credits: documenting biomass collection, monitoring processes, validating results, recording storage conditions, and logging credit generation and sales.The biomass purchase audit trail matters because buyers want to know the source of the biomass. Checkpoint-based approval workflows prevent errors and fraud such as duplicate claims or unauthorized sales. Strong safeguards are required to prevent double counting. Most biochar enterprises are technically capable but operate without dedicated finance or compliance leadership — CAs bridge that gap by designing audit-ready systems from the outset.04 / AssuranceAssurance of ESG claimsFirms seeking biochar offsets for their ESG commitments require independent verification. Some companies have genuine intentions but inadequate documentation; others may overstate benefits. An independent CA review can reveal both, and can check that carbon-credit valuations are fair and accurate.Reviewing valuation methodologies and scrutinizing environmental claims helps spot greenwashing before it becomes a reputational problem. As expectations around sustainability reporting keep rising, assurance from CAs gives organisations credible, standards-based confidence in their disclosures.05 / AdvisoryTransaction advisory & due diligenceInvestors need thorough due diligence. CAs develop realistic carbon-revenue projections based on actual project conditions, give an honest assessment of output versus competitors, and evaluate policy risks — including whether new regulation might add value or whether withdrawn support could hurt the project.They also scrutinize the fairness and enforceability of carbon-credit sales agreements, assess the financial health of technology providers, and surface hidden liabilities such as remediation costs, regulatory penalties, and contractual disputes — uncovering these risks early, before any investment is made.“As expectations around sustainability reporting continue to increase, assurance provided by CAs offers organisations credible, standards-based confidence in their environmental disclosures.”The India OpportunityThe emerging biochar carbon-credit ecosystemMillions of tons of agri-residue, every yearThe real challenge isn't sourcing biomass — it's converting it into verifiable creditsAt present, a significant part of this residue is burned. Stubble burning causes enormous air pollution — one of the country's major environmental problems. Burning is quick and cheap, but the residue can instead be collected and converted into biochar: once collected, it can be converted, sold, and used to generate credits. This is the point in the value chain where timing becomes critical.Biochar projects are typically initiated during post-harvest periods, when large quantities of crop residue are generated. If those residues are not collected and processed immediately, they are burned or decompose — releasing carbon back into the atmosphere. Converting the biomass at this stage ensures emissions are avoided and long-term carbon storage is achieved.This benefits farmers financially and offers multiple revenue streams. Selling biochar to industries and farmers generates product revenue and improves soil health; carbon credits add further income. Co-benefits such as higher crop yields, lower fertilizer needs, and greater water retention deliver still more return. It is a revenue model that supports India's climate commitment, increases farmers' earnings, and reduces stubble burning — cutting emissions in turn.To work efficiently here, CAs can draw on emerging accounting standards for carbon credits in financial statements, Ind AS guidance on recognizing, measuring, and valuing credits, and sustainability reporting frames that involve biochar. It would also help to fix standards of assurance for environmental claims — areas where ICAI can take the lead in influencing national structures, as it did in adopting IFRS-based practices.The CA's Unique AdvantageA blend few professions can matchCAs are not limited to a single field. They combine an understanding of complex technical standards, a working knowledge of law, and financial shrewdness — then translate the technical into something businesses can actually use. Engineers hold the tech; lawyers hold the regulation; CAs blend all three.They excel at financial modelling, having built countless models across industries. They are good at detecting when numbers fail to add up and at narrating financial stories that resonate with investors and boards. Compliance, for a CA, is not box-ticking but understanding why the rules exist — and every sign-off is a direct reflection of their credibility, integrity, and reputation. That credibility is built over decades of maintaining standards under the threat of real penalties for cutting corners — exactly what carbon markets need, where greenwashing and exaggerated claims are real-world problems.Governance and risk management are areas where CAs have deep experience: they serve on audit committees, encounter real control failures, and have learned what works rather than what merely looks good on paper. They take part in all stages of project development — installing accounting systems early, building fraud controls, designing models that survive scrutiny, offering audit-ready verification, and conducting due diligence that catches issues before they become serious. That full value-chain coverage, combining financial expertise, regulatory acumen, auditing credibility, governance experience, and a cross-industry viewpoint, is uncommon in professional services.In the biochar sector, projects must address financial modelling, assurance, compliance with carbon-market standards, and professional accountability. CAs are specifically trained in financial analysis, assurance frameworks, internal controls, and statutory responsibility — which lets them bring structure, reliability, and traceability to these engagements. This is not a marketing claim, but a reflection of how the profession is formally structured to support high-integrity climate and carbon-market projects.“Biochar is not simply an innovation in the environment, but a gateway to a new form of work, a new market, and new responsibilities of our profession as we begin to look into the future.”ConclusionA new chapter for climate-aligned financeBiochar is a rare case where environmental impact and financial value overlap. On its path to low-carbon development, India will see more industries entering carbon markets, diversifying revenues, and improving their ESG reputation — and Chartered Accountants are uniquely positioned to guide them.The profession can play a decisive role in biochar project implementation and monetization, whether through carbon accounting, assurance, due diligence, or financial modelling. More significantly, CAs can help ensure that climate-positive projects are built on integrity, transparency, and sound financial judgement.Approached thoughtfully, biochar can be one of the many means through which Chartered Accountants contribute to economic development and environmental responsibility.The Chartered Accountant · Sustainability · August 2026Author may be reached at eboard@icai.in
SustainabiIity
Ep. 98 — Integrating Sustainability in Banking and Strengthening Disclosures with the BRSR Mandate
CA Journal
· July 2026
00:00
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Integrating Sustainability in Banking and Strengthening Disclosures with the BRSR MandateThe world over, with increased focus on responsible business conduct, sustainability reporting has become crucial. SEBI has mandated the Business Responsibility and Sustainability Report (BRSR) for India's top-listed entities, including banks. This article explores how the banking sector can promote sustainability and use BRSR to catalyse the integration of sustainability with strategy. It also examines the significance of ensuring credibility to BRSR disclosures and the role of Chartered Accountants in adding credibility to the disclosures.IntroductionRealisation of the gravity of climate change and social inequalities has led to international initiatives such as the United Nations' Sustainable Development Goals (SDGs) and the Paris Agreement. These initiatives have pushed governments and businesses to look beyond economic growth and profits. Investors increasingly scrutinise environmental, social, and governance (ESG) performance as closely as financial performance. Meanwhile, businesses need significant financing to transition to more sustainable business models and processes.Banks, as conduits of credit flow and doubling as institutional investors, can give sustainability measures a real head start. Further, the present environment requires that banks must introspect their own strategy and operations, aligning themselves with sustainability principles, and making disclosures that depict their contributions to sustainability more accurately.Sustainability and the Banking SectorBanks can promote sustainability in two major ways:Ways to Promote SustainabilityThrough responsible lending and investment practicesAdopting sustainability in strategy and risk management(i) Responsible Lending and Investment PracticesPSL Norms: At the basic level, banks can serve the ends of sustainability by ensuring that funds reach the places where they are most needed. One of India's regulatory mechanisms to that end is the Priority Sector Lending (PSL) norms of the RBI. PSL focuses on areas like agriculture, MSMEs (Micro, Small and Medium Enterprises), export credit, education, housing, social infrastructure, and renewable energy. Banks must lend 40% of Adjusted Net Bank Credit or Credit Equivalent of Off-Balance Sheet Exposures, whichever is higher, to the priority sectors.1 However, PSL is only the starting point.Sustainability-conscious Criteria for Evaluating Loan Proposals: Worldwide, banks increasingly adopt more sustainability-conscious criteria for evaluating loan applications. For instance, they may recalibrate their exposure to heavy-polluting industries or those with unverifiable labour practices as a matter of policy. Beyond applying ESG criteria in standard credit evaluation, structured sustainable lending products have evolved that go further. The Green Loan Principles issued by the Loan Market Association (LMA) describe green loans as instruments where proceeds are exclusively applied to finance or refinance eligible green projects, with requirements for project evaluation, management of proceeds, and reporting.2 Separately, LMA describes Sustainability-Linked Loans (SLLs) as loans where the use of proceeds is unrestricted, but the pricing (interest rate) is tied to the borrower's performance against pre-agreed, measurable sustainability performance targets (SPTs) such as reduction in carbon emissions, improvement in energy efficiency ratings and so on.3 In the EU, disclosure mandates like the Sustainable Finance Disclosure Regulation (SFDR)4 require financial institutions to disclose how sustainability is integrated into their investment and lending decisions. Indian banks that proactively build green and sustainability-linked loan portfolios will be better placed when these become regulatory mandates.Responsible Investment Decisions: The investments made by banks, due to the sheer volume, are closely followed by markets and regulators. Hence, it becomes important that they consider sustainability criteria in their investment decisions along with financial performance. To signal sustainable investing more explicitly, banks can subscribe to green bonds issued by corporates, municipalities, and sovereigns. Green bonds are fixed-income instruments where proceeds are earmarked exclusively for financing or refinancing eligible green projects.Discharging Stewardship Responsibilities: Though they may not have significant influence in the boards of investees, as institutional investors, they can hold the boards accountable. As stewards of public money, banks must discharge their stewardship responsibilities as envisaged by the OECD (Organisation for Economic Cooperation and Development).5 They can foster respect for sustainability and better governance by actively engaging with the boards of their investees on sustainability concerns.Besides responsible lending and investment practices, banks must focus on their own strategy and operations aligning with sustainability.(ii) Integrating Sustainability with Strategy and Risk ManagementInterweaving Sustainability and Strategy: Banks' strategy must be aligned with the opportunities and threats associated with long-term environmental and social changes. This will include refining and redefining their business model, products and services, operations, pricing and presence.Immediate Measures: At a more immediate level, some of the measures that banks can take include developing green financial products, investing in sustainable infrastructure, housing branches in green buildings, setting up inclusive workspaces with improved accessibility, using green materials for interiors, adopting energy efficient practices, implementing effective waste management, and so on.Sustainability and Risk Management: While there is already a strong risk management framework with the Basel-III norms6 and RBI's supervision, identifying and addressing climate risks has become a priority. The Basel Committee on Banking Supervision has released principles for addressing climate-related financial risks.7 RBI has also issued a Discussion Paper on Climate Risk and Sustainable Finance in 2022,8 and a Draft Disclosure framework on Climate-Related Financial Risks in 2024.9 Climate risks need to be considered both at an entity level and at an individual loan or investment level. In credit risk analysis, performing scenario analyses on the impact of extreme weather events on specific loan portfolios like real estate or agriculture will help integrate climate risks.Banks' strategy must be aligned with the opportunities and threats associated with long-term environmental and social changes. This will include refining and redefining their business model, products and services, operations, pricing and presence.This process of reinforcing strategy, operations and risk management with sustainability has the added benefit of improving efficiency, reducing wastages, and enhancing goodwill of the bank in the process in the short run, while ensuring the bank's survival and success in the long run. Adopting a good sustainability reporting framework can provide a structured and goal-oriented way to achieve this integration of sustainability with strategy.The BRSR MandateThe National Guidelines for Responsible Business Conduct (NGRBC) were issued by the Ministry of Corporate Affairs in 2019. The NGRBC evolved a framework of nine principles aimed at responsible business conduct and mapped them to the UN's SDGs.10 Modelled on this, SEBI has mandated the Business Responsibility and Sustainability Report (BRSR) as part of the Annual Report for the Top 1,000 listed entities by market capitalization, which includes several banks as well. The updated version is applicable from 2023-24.11(i) The Anatomy of BRSRThe BRSR consists of three sections:Section AGeneral DisclosuresSection BManagement and Process DisclosuresSection CPrinciple-wise Performance DisclosureSection A of BRSR – General Disclosures: This section requires basic disclosures on the details of the listed entity, its products/services, its operations, employees, group entities and joint ventures, corporate social responsibility (CSR) and compliance with transparency and disclosure requirements.Section B of BRSR – Management and Process Disclosures: It contains disclosures relating to the existence of policy and management processes surrounding principles and questions about governance, leadership and oversight.Section C of BRSR – Principle-wise Performance Disclosures: The nine principles outlined in the NGRBC and adopted by BRSR are as follows:P1Ethics, transparency and accountabilityP2Sustainable and safe goods and servicesP3Promoting well-being of all employeesP4Being respectful of and responsive to stakeholdersP5Promoting human rightsP6Protecting and restoring the environmentP7Responsible and transparent manner of influencing public and regulatory policyP8Promoting inclusive growth and equitable developmentP9Providing value to consumers in a responsible mannerThis section requires disclosures under the nine principles, measured in terms of:Essential indicators — matters that are expected of an entity as a basic level of responsible business conduct, andLeadership indicators — matters that demonstrate taking leadership towards sustainable practices in the ecosystem in which the business operates. Usually these involve extending the actions required under essential indicators to value chain partners (like customers and suppliers).(ii) Strengths of BRSR FrameworkGranularity and Specificity of Disclosures: BRSR prioritises in-depth data more than vague, open-ended, or subjective statements. Granularity and specificity render measurability, comparability, and tangibility to the disclosures.Judicious mix of Quantitative and Qualitative Disclosures: The most information requirement is volume-based/quantitative instead of in monetary terms, for example, metric tonnes of waste generated, energy consumption in joules, etc. To render comparability, sometimes, monetary units are also used, for instance, greenhouse gas emissions per rupee of turnover. To put things into perspective, qualitative disclosures like details of public policy positions advocated by the entity, mechanisms to prevent adverse consequences to the complainant in discrimination and harassment cases, etc. also form part of the report.Fixed and Simple Disclosures: The disclosures are not customizable or open-ended like in other disclosure frameworks. This makes the exercise apt for nascent stages of sustainability reporting. This also makes it less susceptible to 'creative' reporting. There are no complex introspective exercises necessitated before making disclosures as in other frameworks. Here, the entity can dive into disclosures right away and the lessons on sustainability are learnt on-the-go.Forces Robust Data Collection Systems: The very exercise of filling BRSR forces identification of information gaps and blind spots. This in turn forces developing robust reporting mechanisms, and better discipline not just in reporting but also in operations.While the BRSR framework provides a strong foundation, its current scope leaves certain critical areas, particularly financed emissions, to voluntary initiative. The following approaches can help banks go beyond the minimum.(iii) Expanding the Impact of BRSR for BanksMeasuring Financed Emissions: Among the various sustainability metrics, the most consequential one for banks is financed emissions, which tells how much emission is being financed by the bank. The Partnership for Carbon Accounting Financials (PCAF) has evolved a framework to measure financed emissions to help financial institutions measure and report the climate impact of their lending and investment operations.12 PCAF uses the framework of the GHG Protocol, that is, Scope 1 (direct emissions from operations), Scope 2 (indirect emissions from energy consumed), and Scope 3 emissions (encompassing all value chain emissions). Financed emissions come under Scope 3. Banks, being in the service sector, have relatively lower Scope 1 and 2 emissions; however, financed emissions could far overshadow them. As per the report 'The Time to Green Finance' by CDP, a global not-for-profit organisation, in 2020, out of 332 financial institutions worldwide having a combined asset size of USD 109 trillion that self-reported that time, only 25% reported portfolio emissions.13,14 The Report observes that the emissions that could be attributed to the investing, lending and underwriting activities were almost 700 times more than their direct emissions. This underlines the urgent need to measure financed emissions for achieving real impact.It must be noted that BRSR requires disclosures of only Scope 1 and Scope 2 emissions and leaves voluntary disclosure of Scope 3 emissions to the bank's discretion. A 2025 study by Climate Risk Horizons assessing 35 Indian banks found that only about eight reported emissions across all three scopes, while the majority disclosed only Scope 1 and 2, leaving financed emissions largely unaccounted for.15However, measuring financed emissions is not straightforward. A bank can only know its financed emissions if its borrowers and investees measure and disclose their own emissions. Large listed entities would be disclosing emissions through their sustainability disclosures under mandates like the BRSR. For other borrowers, emissions may be estimated only using emission factors and broad assumptions. PCAF itself acknowledges this through its Data Quality Score (on a scale of 1 to 5, where 1 represents the highest quality), which allows banks to transparently communicate the reliability of the data underlying their financed emissions estimates.Even the EU, where sustainability disclosure mandates such as the Sustainable Finance Disclosure Regulation (SFDR)16 and the Corporate Sustainability Reporting Directive (CSRD)17 are in place, is still refining how financial institutions should disclose financed emissions in response to practical challenges.18However, the data gap and regulatory pause are still not reasons to defer the exercise. Banks may use PCAF's methodology as a starting point, disclosing financed emissions by asset class alongside the applicable Data Quality Score, so that readers can assess the reliability of the estimates. It is also worth noting that RBI's Draft Disclosure Framework on Climate-Related Financial Risks19 also signals that the regulatory environment is clearly moving towards disclosure of Scope 3 emissions. Also, IFRS S2, a much-relied-upon global framework, does require Scope 3 disclosures including financed emissions. Banks that begin this exercise now, even with estimated data, will be better positioned when stricter regulatory mandates arrive and as borrower-level data improves over time through India's evolving sustainability disclosure ecosystem.To signal sustainable investing more explicitly, banks can subscribe to green bonds issued by corporates, municipalities, and sovereigns. Green bonds are fixed-income instruments where proceeds are earmarked exclusively for financing or refinancing eligible green projects.Alignment with Global Reporting Frameworks: BRSR has conceptual overlaps with sustainability frameworks like the Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), IFRS S1 (General Requirements for Sustainability-Related Disclosures) and IFRS S2 (Climate-Related Disclosures). Adopting these provide global comparability.Leveraging Technology and Data: Enterprise-wide collection of data is required to ensure reliable reporting and to track ESG performance.Integrating Sustainability in CBS: The Core Banking System (CBS) may be equipped with sustainability-related modules and additional input fields at transaction level to capture sustainability parameters like units of electricity consumed or wastes disposed in kilogrammes and so on.Dedicated ESG Platforms and AI-driven Insights: Dedicated ESG platforms may provide dashboards, AI-driven alerts, and real-time advanced analytics. The entire ERP/CBS platform may be integrated with the platform and fitted with AI that can sift through the data and point to inconsistencies, study patterns and raise alerts.AI, Automation and IoT: Smart meters or remote sensors that use technologies like RFID, IoT, etc. can capture real-time data from physical objects and convert into executable actions like entries in ERP/CBS.The Core Banking System (CBS) may be equipped with sustainability-related modules and additional input fields at transaction level to capture sustainability parameters like units of electricity consumed or wastes disposed in kilogrammes and so on.(iv) How can Boards use BRSR to leapfrog into Sustainability?Active Board-level Engagement: BRSR, with introspection, can potentially transform how Boards look at their strategy. Having ESG experts on the Board is ideal. Tracking BRSR parameters should be a regular agenda matter in the board meetings.Takeaways from Section B of BRSR: Boards must assess the adequacy of the structures, policies, and processes they have put in place to adopt sustainability. They must also ensure that policies are translated into procedures and actual implementation happens.Board Performance: Including sustainability parameters in board performance evaluation criteria will demonstrate the seriousness with which Boards approach sustainability.Dedicated ESG Committee: Having a dedicated committee for ESG/Sustainability will enable holistic discussions and decisions on sustainability measures.Risk Management Committee: The Risk Management Committee's terms of reference must specifically include addressing ESG risks.Internal Controls and Monitoring Mechanisms: For continuous and sustained improvements in ESG performance, monitoring mechanisms are necessary. The adequacy and effectiveness of the structures, internal controls and processes, as well as the quality of data must be regularly monitored.(v) Building Awareness at Grassroots-levelAwareness at Branches: Branch personnel should be given awareness on sustainability both at macro-level and at micro-level. They should be made aware on how the loans advanced by them could impact the environment and society depending on where the money flows. Through suitable manuals, they may be instructed to include sustainability parameters in loan proposals. They must also be incentivized to meet ESG targets at the branch-level like reducing carbon footprint of the branch, achieving energy efficiency, and so on.Stakeholder Engagement: A participative approach should be adopted as each branch will face different constraints. Inputs of ground-level employees, branch managers, customers and vendors must be taken regularly.BRSR Assurance / Assessment(i) The need for Assurance / Assessment ExercisesESG-themed funds manage trillions of dollars under their fold.20 As more money backs ESG-themed instruments and entities, regulators are wary of greenwashing attempts, where entities make ESG disclosures only to "seem" sustainable rather than being so in reality. Hence, just as how financial statements require statutory audits for credibility, ESG disclosures too require independent scrutiny. Further, since BRSR contains data that may be fragmented across different branches and departments, robust assurance or assessment procedures are required. In a nutshell, third-party assurance on ESG reporting is required for the following reasons:Identifying inconsistencies or incomplete data.Strengthening internal controls and reporting processes.Preventing 'greenwashing' attempts.Enhancing trust among regulators, investors, and other stakeholders.(ii) SEBI's Assurance / Assessment MandateReasonable Assurance for BRSR Core, now reframed as Assessment or Assurance: BRSR Core refers to a specific subset of BRSR composed of select parameters from various principles. SEBI's July 2023 circular originally mandated independent reasonable assurance of the BRSR Core on a phased basis starting with the Top 150 companies from FY 2023-24, extending to all Top 1,000 by FY 2026-27.21 Pursuant to the Expert Committee's recommendations, SEBI, vide its March 2025 circular (since consolidated in the 2026 Master Circular)22,23, has since replaced this rigid assurance requirement with the option of "Assessment or Assurance." This move came as a result of discussions with stakeholders by SEBI and in the spirit of ease of doing business, as "assurance" has specific connotations in the field of audit. Without diluting the intent to prevent greenwashing, assessments will also be third-party assessment undertaken as per standards to be developed by the Industry Standards Forum (ISF) in consultation with SEBI.24 Considering India is not yet a mature ecosystem for sustainability disclosures, this move may spur more enthusiastic adoption of third-party assessment.Limited Assurance for Value-chain Disclosures: Originally, the top 250 listed entities were required to make ESG disclosures for the value chain on a comply-or-explain basis from FY 2024-25 with limited assurance of these disclosures from FY 2025-26. Now, for value chain ESG disclosures, SEBI's March 2025 circular has gone further, making both the disclosure itself and its assessment or assurance entirely voluntary: disclosure on a voluntary basis from FY 2025-26, and assessment or assurance of that disclosure on a voluntary basis from FY 2026-27.Industry Standards Forum: SEBI has constituted an Industry Standards Forum to recommend uniform standards for certain matters.25 The ISF has already come up with a reporting standard on BRSR Core. Among others, the document contains a provisional spend-based methodology allowing entities lacking quantity-based fuel and electricity data to estimate Scope 1 and 2 emissions from financial spend data, while recommending migration to quantity-based measurement as soon as practicable.26 While this is a reporting standard, whether separate standards on the exact process of assessment would be released remains to be seen.Who can conduct Assessment or Assurance: SEBI has not mandated any professional qualifications or affiliations for carrying out the assurance or assessment exercise. SEBI's circular only requires that the assurance or assessment provider has the necessary expertise and has no conflict of interest. Towards this, SEBI's Expert Committee has referenced IOSCO's Guiding Principle that third-party assessment of sustainability-related corporate disclosures should remain independent of any specific profession.27 The Committee has also mentioned the overarching goal of maintaining professional agnosticism.ICAI's Framework for Assurance Engagements and SSAE 3000: Chartered Accountants (CAs) in Practice and CA firms are governed by ICAI's Framework for Assurance Engagements and other applicable Standards while providing BRSR Core assurance. The Sustainability Reporting Standards Board (SRSB) of the ICAI has issued the Standard on Sustainability Assurance Engagements (SSAE) 3000 Assurance Engagements on Sustainability Information.28 It is mandated for assurance reports covering periods ending on or after March 31, 2024. The Standard on Assurance Engagements (SAE) 3410 Assurance Engagements on Greenhouse Gas Statements has also been issued.29 Recently, the SRSB has also issued an Exposure Draft of Standard on Sustainability Assurance SSA-5000 – General Requirements for Sustainability Assurance Engagements.30The very exercise of filling BRSR forces identification of information gaps and blind spots. This in turn forces developing robust reporting mechanisms, and better discipline not just in reporting but also in operations.Role of Chartered Accountants in Furthering the Impact of BRSRCAs can play a meaningful role in furthering sustainability by undertaking BRSR assurance or assessment engagements.Experience: CAs' experience in auditing and assurance frameworks, evaluation of internal controls, performing substantive procedures both at entity-level and branch-level, techniques of sampling, application of materiality, and most importantly, in exercise of professional skepticism and professional judgment, can play an effective role in preventing greenwashing. Further, in the context of BRSR of banks, CAs may have experience in bank audits and can leverage their familiarity with the banking environment.Adherence to Audit Standards and Code of Ethics: When there is a well-defined audit reporting framework, there is clarity in approach. CAs are required to perform their engagements in accordance with the applicable engagement standards and Code of Ethics issued by ICAI. This naturally renders credibility to the process as well as ensures independence of the professional.Assessing Financial Impact of ESG Metrics: Where statutory auditors undertake the assurance or assessment exercise, it may have the added benefit of parallel evaluation of evidence for both the exercises, and unearthing errors and misstatements may be easier.CAs are required to perform their engagements in accordance with the applicable engagement standards and Code of Ethics issued by ICAI. This naturally renders credibility to the process as well as ensures independence of the professional.Concluding ThoughtsThe BRSR framework can serve as a starting point for implementing sustainability measures. The disclosures made should be a natural consequence of embracing responsible business conduct, and not merely a tick-box response. When banks demonstrate their commitment to environment, social equity and good governance through their sustainability disclosures, businesses will turn to them as a trusted partner for their sustainable financing needs. And in this age when stakeholders stand by "Trust but verify," Chartered Accountants could add credibility to disclosures and valuable insights to the process, and guide banks in their journey towards sustainability.Referenceshttps://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12799Loan Market Association (2018). Green Loan Principles. LinkLoan Market Association, Asia Pacific Loan Market Association, Loan Syndications & Trading Association (2019). Sustainability Linked Loan Principles. Linkhttps://finance.ec.europa.eu/sustainable-finance/disclosures/sustainability-related-disclosure-financial-services-sector_enhttps://www.oecd.org/en/publications/g20-oecd-principles-of-corporate-governance-2023_ed750b30-en/full-report.htmlhttps://www.bis.org/publ/bcbs189.pdfhttps://www.bis.org/bcbs/publ/d532.htmhttps://rbidocs.rbi.org.in/rdocs/Publications/PDFs/CLIMATERISK46CEE62999A4424BB731066765009961.PDFhttps://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4393https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdfhttps://www.sebi.gov.in/legal/circulars/jul-2023/brsr-core-framework-for-assurance-and-esg-disclosures-for-value-chain_73854.htmlPCAF (2022). The Global GHG Accounting and Reporting Standard Part A: Financed Emissions. Second Edition. LinkCDP, 2020. The Time to Green Finance. Linkhttps://www.cdp.net/en/press-releases/finance-sectors-funded-emissions-over-700-times-greater-than-its-ownClimate Risk Horizons, Unprepared: India's Banks Moving Too Slowly in the Face of Climate Crisis (2025). Linkhttps://finance.ec.europa.eu/sustainable-finance/disclosures/sustainability-related-disclosure-financial-services-sector_enhttps://finance.ec.europa.eu/financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_enhttps://ec.europa.eu/commission/presscorner/detail/en/ip_25_614https://fidcindia.org.in/wp-content/uploads/2024/02/RBI-DRAFT-CLIMATE-RELATED-FINANCIAL-RISKS-28-02-24.pdfhttps://www.bloomberg.com/company/press/global-esg-assets-predicted-to-hit-40-trillion-by-2030...https://www.sebi.gov.in/legal/circulars/jul-2023/brsr-core-framework-for-assurance-and-esg-disclosures-for-value-chain_73854.htmlSEBI Master Circular (Jan 2026)SEBI Circular (Mar 2025)https://www.sebi.gov.in/media-and-notifications/press-releases/dec-2024/sebi-board-meeting_90042.htmlIndustry Standards Forum press release (Aug 2023)Industry Standards Note on BRSR with AnnexureBRSR Recommendations by Expert Committee (May 2024)https://resource.cdn.icai.org/72628aasb58538.pdfhttps://www.icai.org/post/srsb-sae-ggsExposure Draft on SSA-5000Authors may be reached at eboard@icai.inThe Chartered Accountant · August 2026 · www.icai.org
Ep. 99 — Depreciation of the Indian Rupee: A Deep Cut or an Opportunity?
CA Journal
· July 2026
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Depreciation of the Indian Rupee: A Deep Cut or an Opportunity?The Indian Rupee is passing through a tough time, becoming one of the weaker-performing Asian currencies this year. What is interesting is that this depreciation has taken place despite strong GDP growth which actually raises concerns about the real health of the economy.A common assumption is that if the Indian economy is growing faster than most countries, the rupee should automatically appreciate against the dollar.Economic growth is a key indicator, but currency markets react to far more variables than GDP alone. Currency health is directly affected by inflation, trade balances, fiscal deficits, interest rate differentials, geopolitical risks, commodity prices and global investor sentiment.So, the nose diving of the Indian currency vs the US dollar is the final outcome of many interconnected forces operating simultaneously across the global economy.Challenges of a Weaker RupeePotential AdvantagesImports become more expensive, especially crude oil and gas.Indian exports become cheaper and more competitive globally.Inflation rises due to higher import costs.IT companies earn higher rupee revenues from dollar income.Foreign education and overseas travel become costlier.Merchandise exports such as textiles, leather and agricultural products gain price competitiveness.Companies with dollar-denominated debt face higher repayment costs.Tourism and services become more attractive for foreign visitors.Government’s import bill increases, widening the fiscal burden.Higher export earnings improve foreign exchange inflows over time.Rupee Depreciation: Costs and OpportunitiesSource: Author’s CompilationLet’s peel the layers that has made the rupee so weak against the US Dollar.The rupee’s depreciation against the dollar suggests a deeper stress in India’s external sector. India is facing a chronic trade deficit1 as India’s imports have consistently outweighed its exports for decades. We are importing more and exporting less goods. In simple terms, it indicates more flow of capital than inflows of capital, putting direct pressure on the rupee.Official data showed that the trade deficit increased to $119.3 billion in financial year 2025-2026, compared with $94.6 billion in the previous financial year of 2024-2025.2 A big jump in the deficit with the oil crises has been compounding India’s economic woes.FactorImpact on the RupeeHow it Affects the CurrencyPersistent Trade DeficitHighIndia imports far more than it exports, increasing the demand for US dollars.Heavy Crude Oil ImportsVery HighNearly 89% of India’s crude oil is imported and paid for in dollars, putting constant pressure on the rupee.Foreign Investor Outflows (FIIs)HighInvestors convert rupees into dollars before exiting Indian markets, weakening the currency.Higher US Interest RatesHighAttractive returns in US bonds pull global capital away from emerging markets like India.Strong US DollarHighA globally stronger dollar automatically weakens most emerging market currencies.Geopolitical UncertaintyModerate to HighGlobal conflicts trigger a flight to safer dollar assets.Import Dependence on Electronics, Fertilisers & MachineryModerateLarge import bills increase dollar demand throughout the year.RBI InterventionStabilisingThe RBI sells dollars to reduce excessive volatility but cannot permanently reverse market forces.Why is the Rupee Under Pressure?Source: Author’s CompilationEconomic growth is a key indicator, but currency markets react to far more variables than GDP alone. Currency health is directly affected by inflation, trade balances, fiscal deficits, interest rate differentials, geopolitical risks, commodity prices and global investor sentiment.The Rupee’s Slide in over 75 YearsLet us look through the historical lens to understand the issues that led the Indian currency to the current tight spot. During independence, the rupee was valued at 4 rupees against a dollar. It was precisely four rupees and 76 paisa per dollar in August 1947.The rate continued till 1966 when wars, drought, and falling foreign reserves made India devalue its currency under difficult circumstances. There were oil shocks in the 1970s coupled with rising external debt, pushing the rupee lower. Our currency slid to 17 rupees and 50 paise per dollar by the 1990’s. The 1991 balance of payments crisis marked a turning point. India adopted economic liberalization that further devalued the rupee. It also marked a transition to a market determined exchange rate by 1993. By the late 1990s, the rupee depreciated further touching about 43 rupees against a dollar. The next decade saw economic gains in the 2000s due to strong IT exports and capital inflows.The growth rose but India’s dependence on oil imports kept the rupee volatile. The 2008 global financial crisis led to heavy outflows of capital, weakening the currency again. By 2014, the rupee crossed 60 rupees per dollar and over the last decade, we’ve seen the story unfold to where it is.The Role of Crude Oil and ImportsToday, India is the world’s third-largest consumer of crude oil. India imports nearly 89% of its crude oil requirement from other countries making the economy vulnerable. In the financial year 2025, India imported around 242 million tons of crude oil with the oil bill rising to nearly $161 billion.34India, with its burgeoning population, has massive energy needs, and when millions of barrels of oil are imported every day, oil marketing companies need to shell out billions of dollars from the foreign exchange market. The higher the demand for the dollar, the greater the pressure on the rupee.Apart from crude oil, India imports a sizeable chunk of edible oils and fertilisers for domestic consumption. From liquefied natural gas, semiconductor components, sophisticated machinery, medical equipment, pharma API’s and a large share of electronic goods, the huge import bill is partly responsible for weakening the Indian currency over the years.India, with its burgeoning population, has massive energy needs, and when millions of barrels of oil are imported every day, oil marketing companies need to shell out billions of dollars from the foreign exchange market. The higher the demand for the dollar, the greater the pressure on the rupee.FII’s Outflow from IndiaThe other side of the story has been that the FDI portfolio inflows into India’s equity markets have slowed in the last couple of years. A significant reason for the rupee losing sheen has been the big pullout by foreign investors from the financial markets of India since last year. Many foreign institutional investors have taken billions of dollars out of India to safer havens with lesser risk. These global investors became nervous because of global uncertainty, rising US interest rates or geopolitical tensions, and started selling Indian assets. They convert their rupees back into dollars before taking the money out of the country. This has led to the Balance of Payments or the BoP deficit, touching over $30 billion last year. It was more than a six-fold increase over 2024-25. Notably, the Balance of Payments (BoP) had remained in surplus as recently as 2023-24. This financial year, some experts believe that the BoP is expected to hover around $60 billion.India’s outward FDI has increased significantly in recent years. In 2023-24 and 2025-26, Indian firms invested nearly $65 billion outside India.Global HeadwindsA stronger US dollar and high US interest rates have further upped the ante on the Indian Rupee. The hegemony of the US dollar in global trade has been unchallenged. According to the International Monetary Fund, nearly 58% of global foreign exchange reserves are held in dollars. Close to 90% of all foreign exchange transactions worldwide involve the US dollar in one leg of the trade. From crude oil and natural gas to aircraft and defence equipment, a vast share of international trade is priced in US dollars, making it the world’s dominant reserve and settlement currency.The importance of US interest rates also needs to be factored in while assessing the downward pressure on the Indian Rupee. For a long time in the last decade or more, interest rates in countries like the US remained close to zero. Financial investors flocked to countries like India that were promising and showed potential.But the scales tilted back in favour of the US following an increase in interest rates by the US Federal Reserve. This made the US government bonds offer attractive returns with very low risk. As a result, global investors began pulling their money out of emerging economies to earn higher yields.This straight away boosts the value of the US dollar and weakens emerging-market currencies like the rupee simultaneously. In other words, currents in the US economy directly impact the flight of capital in and out of India.The Role of RBI in Currency ValuationThe story remains incomplete without examining the role of the Reserve Bank of India in the picture. The Reserve Bank of India holds one of the world’s largest stockpiles of foreign currency. As of July 10, 2026, India’s foreign exchange reserves stood at $675.16 billion.5 Therefore, whether the RBI should simply intervene to stem this free fall of the rupee against the US dollar remains a big question.The Central Bank acts not just when the rupee is depreciating but also when it appreciates. When depreciation happens, the RBI intervenes by selling dollars from its foreign exchange reserves. This increases the supply of dollars in the market, slowing down the pace of depreciation.On the other hand, when there is an influx of dollars via exports, foreign investments or overseas borrowing, the RBI often purchases those dollars. This holds the rupee against sharp appreciation as otherwise it would hurt Indian exporters.History has taught some lessons in the exchange rate management to India. In 1991, India’s foreign exchange reserves had bottomed out so much that the country had barely enough dollars to finance about two weeks of imports. It was a precarious situation, forcing the government to airlift nearly 67 tonnes of gold to secure emergency loans from overseas lenders.That moment was a watershed moment in India’s economic thinking.The liberalisation that happened post 1991 was also aimed at preventing such a severe foreign exchange crisis in the future. The goal has been met fairly, with India today holding foreign exchange reserves comfortably above $650 billion, making it one of the largest reserve holders in the world. These reserves include US dollars, euros, pounds, yen and gold.It signals to international players that India has the financial strength to absorb external shocks. These forex reserves also act as the country’s emergency savings account which is used judiciously by the RBI to handle genuine crises while allowing the rupee to calibrate itself in the changing economic conditions.So, when we say why the RBI cannot completely stop the depreciation of the rupee, the answer is rooted in the economic reality of the day. The RBI has no control over global economic pressures. If it keeps reacting to the rupee’s depreciation by pumping more dollars, the reserves might be seriously depleted without any certainty that this would plug the fall.This is precisely the reason why central bankers rarely describe the rupee as “weak” or “strong.” Instead, they underline the importance of an orderly market.The Positive Side of a Weak RupeeLet’s flip the issue of a weaker rupee hurting the economy.Necessarily, a weaker rupee doesn’t always mean doom for the economy. It can be a boon for exports if the currency becomes moderately weak. Export goods and services become competitive in global markets, with foreign buyers having to spend fewer dollars to buy our products. Food, agro-based products, merchandise, leather etc., are some of the few sectors that experience the positive side of a weaker rupee on the export front.₹The dominance of the dollar & the road ahead for the rupeeAnother issue that needs to be analysed in this context is the “dominance of the DOLLAR”. This is one subject that has begun to feature prominently in the corridors of power of central banks, finance ministries, and boardrooms around the world. Can the world finally move beyond the US dollar?America’s currency has become the de facto world’s currency. Be it crude oil, gold, aircraft and defence equipment, or any other international purchases, countries have traditionally been billed in dollars. This is one of the reasons why the USA holds unprecedented clout through measures such as economic sanctions on non-compliant regimes. After all, banks, corporations, and governments cannot afford to be shut out of that ecosystem.De-Dollarisation: A Reality or Noise?Fingers are being raised as to whether the dollar can be allowed to dominate forever. This thought has been accelerated by geopolitical events. When Russia’s forex reserves were frozen following the Ukraine conflict, the shockwaves were felt in many countries.This has given traction to conversations around de-dollarisation. De-dollarisation does not seek to eliminate the dollar from global trade. It simply means countries are trying to reduce their dependence on the dollar by finding alternative ways to transact in their own currencies. India has already joined this bandwagon.India has inked agreements with many countries, including Russia, that facilitate trade in rupees rather than dollars. The Reserve Bank of India has introduced mechanisms that enable international trade to be processed and encashed in Indian rupees.This is a welcome development, but it does not suggest that the dollar is going to weaken because many countries are opting to trade in their local currencies with their international partners. China is a befitting example here.China understood the need to decrease its reliance on the dollar in the long term for international trade and has therefore actively promoted the international use of its currency, the yuan. For over a decade, it has established currency swap arrangements, encouraged yuan-based trade, and expanded cross-border payment systems.Though China is the world’s second-largest economy, its currency still does not come anywhere near challenging the dollar’s dominance. The Chinese currency still accounts for only a small part of global reserves and international payments.China’s system is tightly controlled. It is viewed as lacking transparency that is heavily valued by investors. Be it independent institutions or freely functioning financial markets, all need the confidence that capital will not face sudden restrictions.The Road AheadThis is where India has an advantage. A rare demographic opportunity that India possesses is a young workforce. This, along with a swiftly expanding digital economy, one of the world’s most sophisticated payment infrastructures through UPI, a thriving services sector, and increasing manufacturing ambitions under initiatives such as Make in India, offers an opportunity to build export competitiveness.If we can raise the bar by giving a strong push to manufacturing and expanding our exports, the demand for our products and services will grow manifold. From semiconductors to green energy technologies, defence manufacturing, pharmaceuticals, artificial intelligence, advanced engineering and high-value services, demand for the rupee will naturally increase over time if we can produce for the world.A currency strengthens when a country’s economic capabilities flourish. If we have to arrest the depreciation of the Indian rupee, we should focus on making the Indian economy so productive, innovative, and trusted that the world chooses to buy from India.This is why the argument of the rupee crossing ₹95 or hitting ₹100 against the dollar often misses the larger picture. The reality is that there are no shortcuts to arresting the depreciation of the rupee in the short term. The solution is long term and lies in boosting our manufacturing, exports, and quality standards to earn more dollars through exports than are spent on imports.Author may be reached at richajainkallra@gmail.com and eboard@icai.inhttps://www.macrotrends.net/global-metrics/countries/ind/india/trade-balance-deficit ↩https://www.cnbctv18.com/economy/india-trade-deficit-data-march-widens-gold-silver-price-import-export-ws-el-19887138.htm ↩https://www.mospi.gov.in/uploads/publications_reports/...Energy_Statistics_India_2026_Final.pdf ↩https://www.newindianexpress.com/business/2025/Apr/18/crude-oil-import-up-by-42-to-242-mt-in-fy25-yoy-bill-falls-by-24-bn ↩https://m.economictimes.com/news/economy/indicators/indias-forex-reserves-rise-964-million-to-675-16-billion-for-week-ended-july-10/articleshow/132460094.cms ↩The Chartered Accountant · International Economics · August 2026 · www.icai.org
Ep. 100 — Impact of Artificial Intelligence (AI) on Procure-to-Pay (P2P): Transforming Financial Operations and Risk Management
CA Journal
· August 2026
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Impact of Artificial Intelligence (AI) on Procure-to-Pay (P2P)The procure-to-pay (P2P) cycle covers the full payment operation, starting with requisitioning, purchasing, invoicing, and payment. This function is central to corporate financial management and governance. Despite its importance, this function is affected by many issues such as manual errors, invoice fraud, and lengthy approval processes. Artificial Intelligence (AI) is currently one of the most powerful tools to revolutionize this function by assisting in automation, predictive analysis, fraud detection, and ensuring compliance.In this article, we discuss the application of AI in various stages of the P2P cycle, showcasing its benefits, challenges, and impact on finance professionals. While AI can help with cost efficiencies, speed of execution, and enhanced risk management capabilities, it also raises concerns regarding algorithm bias, data privacy, and regulatory frameworks. Finance professionals will play a key role in maintaining a balance between automation and professional judgement, shepherding its ethical adoption and guiding organizations through this major shift.Introduction The procure-to-pay is a back-office function and one of the most critical operations in any enterprise. Starting from the initial purchase requisitions to vendor selection, purchase order creation, invoice verification, and payment processing, P2P represents the backbone of organizational spending and cash flow control. For finance stakeholders including accountants, internal auditors, and CFOs, the effectiveness of P2P directly influences financial accuracy, supports effective working capital management, and ensures compliance with tax and regulatory/statutory requirements.Despite being such an important function, P2P has historically been infected with inefficiencies. Manual invoice processing has many problems like delays, errors in applying discounts, and it even leads to duplicate payments. Studies indicate that manual or paper-based invoice processing costs an organization much more than automated processing. Moreover, fraud by suppliers such as false invoices or collusion with employees always remains a high risk.1In the last decade, organizations have focused a lot on digitizing the P2P process through the implementation of Enterprise Resource Planning (ERP) systems and building e-procurement platforms. While these systems help in bringing more visibility into the system, they are developed on rule-based workflows that could fail in complex scenarios or fail to detect an emerging fraud pattern. This is where AI appears as the next frontier, ensuring that P2P becomes intelligent and not just a digital tool.AI is best suited for procurement and accounts payable because of its ability to process unstructured data, learn from past transactions, and make real-time predictions. AI is bringing a shift from reactive to proactive financial operation through different measures like invoice data capturing using natural language processing, and fraud detection through anomaly detection algorithms. This article explains how AI is redefining the P2P function, the benefits it has, the risks it may bring, and the impact on finance professionals.Historical Evolution of P2P As time has gone by, the P2P process has evolved in phases, showing technological development and progress in corporate finance.Pre-digital era Manual Operations Procurement & payables were completely manual functions. Invoices and purchase orders were paper-based and circulated for manual approval, mainly through signatures, making the process slow and error-prone.1990s – 2000s ERP Systems SAP and Oracle integrated procurement and finance. Automation helped standardize workflows, but these systems operated largely deterministically on pre-established rules. Manual intervention was needed for exceptions, which limited scalability.2010 Robotic Process Automation (RPA) Bots came with the capability to mimic human actions. Very useful for repetitive tasks, but they lacked cognitive ability — not very helpful in recognizing fraudulent invoices or negotiating supplier terms.Now AI Revolution Machine learning and natural language processing have reshaped the P2P function. Unlike ERP and RPA, AI continuously updates itself on data patterns, improves over time, and adapts to handle exceptions — an intelligent decision-making tool, not just an automation initiative.For example, when AI processes invoices, it continuously learns from different patterns and can identify suspicious entries far better than rule-based systems, proving that AI is an intelligent decision-making tool, not just an automation initiative.AI Applications in the P2P Cycle As per a 2023 survey conducted by a renowned global consulting firm, procurement leaders across over 40 countries are increasingly adopting digital transformation and advanced technologies, such as analytics and automation, to bring more efficiency and create value within the procure-to-pay function.2Enterprises are adopting AI and related technologies rapidly. According to a press release by a leading global research and advisory company, AI spending is projected to reach about USD 2.5 trillion by 2026, driven by growth in AI software, services, and infrastructure investment across the industry.3 As per another global management consulting firm, AI systems are redefining the procurement functions by automating routine activities and allowing teams to unlock more value and efficiency, thereby enabling strategic decision-making.4Applications of AI in the following stages of the Procure-to-Pay (P2P) cycle deliver both operational efficiency and strategic insights.Purchase Requisition and Supplier SelectionAI-enabled forecasting analytics can estimate demand based on historical liquidation or consumption patterns, seasonality, and market trends, and assist organizations in preventing stockout situations and minimizing excess inventory. Supplier selection can be done through an automated assessment that includes AI models evaluating a supplier's financial stability, past performance, credit score, and perhaps even news sentiments. For example, an AI system can bring the declining revenue or negative media coverage of a supplier to the forefront of the risk management process, reducing risk prior to contracting.Purchase Order ProcessingAI can be used to streamline the process of generating a purchase order by automating the clearing of low-risk transactions, thereby minimizing the need for human intervention. Current ERP systems also work very well when it comes to automating purchase order creation; the only difference AI makes is by suggesting which transaction can be automated based on their risk profile.Invoice ProcessingWith the help of Optical Character Recognition (OCR), in combination with Natural Language Processing (NLP), AI enables the automatic extraction of invoice data from PDFs, scanned images, or emails, even in different languages and formats. AI ensures accuracy by matching the invoice to the purchase order and goods/service receipt in an automatic environment and helps reduce errors and manual interventions. Anomaly detection algorithms can prevent duplicate invoice accounting, inflated amounts, and abnormal discrepancies, thereby preventing payment errors.Fraud Detection and CompliancePublicly available data highlights the rising risk of payment fraud in financial operations. According to the Federal Bureau of Investigation's Internet Crime Complaint Center (IC3) 2024 report, reported losses from internet-enabled financial crimes in the United States increased to approximately USD 16.6 billion in 2024, compared to USD 6.9 billion in 2021 (~140% increase).52024 by the numbersSource: FBI / IC3 Annual Report 2024859,532Total complaints in 2024$16.6BLosses in 202433%Increase in losses from 2023256,256Complaints with actual loss$19,372Average lossThis figure and growth show why continuous monitoring of transactions is a critical part of the P2P cycle for identifying fraud or collusion. However, when performed manually, this task is often time-consuming and monotonous, which makes it vulnerable to fraud. This is where AI can play an important role in preventing corporate fraud by analyzing patterns such as repeated invoice submission from shell vendors or unusual payments. AI also helps ensure compliance by matching invoices with tax filing authorities such as GST (India) and VAT (EU). AI can keep track of a real-time audit trail, thereby providing regulators and auditors with transparent documentation and approvals for all exceptions.Payments and Working Capital OptimizationAI analyzes the payment schedule, working capital requirements, and recommends early payment discount opportunities, extending supplier payment terms, and aligning with the organization's liquidity needs. Machine learning models can be used to accurately forecast an organization's cash requirements, enabling CFOs to maintain liquidity and optimize working capital requirements. Multinational companies use AI to ensure compliance in cross-border transactions and simulate currency exposures.User SupportAI chatbots can provide real-time information on procurement queries like invoice status, purchase order approval hierarchy, and supplier information. Conversational AI can also assist suppliers in monitoring the status of payments for greater transparency and relationship-building. In fact, this reduces the reliance on finance staff for day-to-day queries and enables them to concentrate on strategic tasks.Benefits of AI-Enabled P2P Operational EfficiencyThe introduction of AI and automation in invoice processing has shown significant improvements in operational efficiency, reducing manual effort, and lowering processing costs compared to manual methods. Companies that incorporate AI-powered automation have better data extraction and validation capabilities, resulting in higher throughput and better accuracy in accounts payable processes.6,7,8,9Accuracy and ComplianceAutomatic data capture helps reduce errors in invoice matching, accounting, and purchase order validation. AI can ensure compliance with several regulatory and statutory requirements like GST, VAT, or SOX, ensuring strong internal controls.For instance, under the GST framework, validation of e-invoices must be done through the Invoice Registration Portal (IRP) and linked to the Input Tax Credit (ITC) reconciliation process via GSTR-2A/2B. AI can significantly automate this process by:Extracting invoice metadata and validating the Invoice Reference Number (IRN), QR code, and HSN/SAC accuracy.Identifying mismatches between vendor-reported details on the IRP and purchaser-recorded invoices in GSTR-2A/2B on various fields such as GSTIN, invoice number, GST amount, invoice date, etc.Flagging ineligible ITC items, including blocked credits under Section 17(5) (e.g. personal consumption, food, club memberships), reverse-charge transactions where credit is deferred until tax payment, and exempt or non-GST supplies.Risk ManagementContinuous monitoring through AI helps identify potential duplicate payments, fictitious vendors, or unusual transactions. Predictive analysis can estimate supplier risk and mitigate insolvency or default risks well ahead of time.Supplier Relationship ManagementAccelerated transaction processing with minimum errors results in faster invoice approval, processing, and timely payments. This enhances supplier trust, which is especially important for MSMEs reliant on predictable cash flow. Improved communication and faster response times through AI chatbots help build strong strategic partnerships.Strategic InsightsAnalytics through AI caters to the CFOs' need for predictive insights on cash flow, working capital optimization, and procurement trends, enabling data-backed decisions rather than reactive management.The figure below presents an anonymized case example based on aggregated performance metrics consistent with commonly reported procure-to-pay process outcomes.AI-Driven Transformation in Accounts PayablePre-AI baselineInvoice posting cycle time~8 daysDuplicate payment rate~0.30%Exception rate~18%DPO42 daysManual touchpoints / invoice4–612 months post-AIInvoice posting cycle time~30–48 hoursDuplicate payment rate~0.05%Exception rate~7%DPO~48 daysManual touchpoints / invoice~1–2Enabled by: AI/OCR + NLP invoice data extraction, ML-based 3-way match engine, anomaly detection for duplicate/fraud payments, payment scheduling optimization, and vendor master data deduplication & risk scoring.Challenges and Risks Data Privacy and SecurityAI systems work mainly on datasets that mostly contain supplier and employee information. Ensuring compliance with different regulations like India's Digital Personal Data Protection Act (DPDP)10, GDPR (EU)11 and state-level privacy laws to protect the privacy of stakeholders is critical. Mishandling data could lead to penalties from these regulators, and at the same time, it can also damage the organization's reputation.For instance, the DPDP Act, 2023 requires companies to ensure that vendor KYC and banking verification data are processed:Legally and with consent for a specific procurement purpose.Following data minimization and purpose limitation principles.With clear retention and deletion policies.With protection against cross-border data transfer risks in case of a global AP platform.Incorporation of DPDP compliance logic, including masking, encryption, and access control audits, is a must in AI-based KYC and vendor risk screening.Algorithmic BiasTraining AI models with historical data might result in inadvertently penalizing certain suppliers; specifically those MSMEs with limited transaction history. Bias in risk scoring or invoice prioritization may lead to unfair exclusions.To prevent algorithm bias in the case of MSMEs, organizations should:Use alternate data sources (on-time delivery score, dispute ratio, GST compliance track record).Wherever possible, provide human review for avoidance of MSME risk.Monitor invoice ageing and adjust payment rules to prioritize MSME suppliers' payment on time to preserve their working capital flow.Ensure alignment with MSME payment guidelines as per the MSME Development Act, 2006, which mandates payment to MSME suppliers within 45 days.This ensures that MSMEs are getting equal or prioritized supply chain treatment, consistent with India's economic and inclusion priorities.Cybersecurity ThreatsAI systems are vulnerable to attacks such as data poisoning, model theft, or adversarial inputs. A compromised system could approve fraudulent payments at scale, creating operational and financial risks. Table 1 summarizes the key threats along with mitigation controls and audit test procedures.Integration and Digital MaturityIn the case of smaller organizations, AI may not seamlessly integrate with their legacy ERP systems (e.g., SAP ECC, Oracle E-Business Suite, Tally ERP) as these organizations often lack digital maturity, making adoption technically challenging and costly.Auditability and GovernanceIt is very well possible that AI-driven decisions can function as "black boxes", which can create complications when it comes to internal or statutory audits and regulatory reporting. Having explainable AI and a strong governance framework is critical to satisfy auditors, the board, and regulators.Table 1Key cybersecurity threats with mitigation controls and auditor testing procedures.ThreatMitigation ControlsAuditor Testing ProceduresData Poisoning (fraudulent or manipulated invoice data used for training)Input validation and automated checks on source invoice data integrityTraining data provenance logs capturing the source and timestamp of all data usedSegregation of duties ensuring model trainers do not have vendor creation or AP posting rightsModel drift monitoring to detect unexpected behavior shiftsInspect data lineage documentation and sample training datasets to confirm approved sourcesVerify access controls to training and confirm SoD enforcementReview drift monitoring logs and follow up on anomalies and remediation evidenceAdversarial Inputs (manipulated invoice or abnormal character sequences bypassing fraud detection)Robust document parsing with multi-engine NLP validationAnomaly scoring for unusual vendor behavior, invoice structures, or tax patternsEnsemble validation comparing system results with rule-based checksRejection thresholds that require human review for out-of-pattern invoicesValidate algorithm rule thresholds and exception escalation workflowReperform sample invoice testing to confirm anomalies are flaggedReview AI model explainability logs documenting why high-risk invoices were flagged or clearedImplementation / Practitioner Checklist for Finance Professionals The following checklist can help finance professionals operationalize AI in the P2P process. Each section summarizes key procedures and controls for ensuring compliance, accuracy, and audit readiness.Table 2 · (i) P2P Control MatrixControl ObjectiveAI Feature / ControlKey CheckpointsExample ParametersThree-Way MatchAutomated matching of PO, GRN, and InvoiceValidate logic for tolerance levels; review exceptions flagged±2% price variance or ±3 quantity tolerance, combined with a value limitDuplicate DetectionAnomaly detection / pattern recognitionConfirm that the training dataset includes duplicate casesThreshold: same vendor + same PO + same amount, or same vendor + same invoice + same amountVendor Fraud PreventionPredictive risk scoringValidate that the vendor risk model uses independent data sourcesRed flag on inactive or mismatched bank details, weak financial health, or promoter background, using third-party platforms such as LexisNexis, IDfy, SignalXPayment AuthorizationWorkflow automationConfirm that multi-level approval is triggered for high-value invoices> USD 50,000 requires dual authorization, and ensure segregation of duties between the initiator and approver of the paymentTable 3 · (ii) Model Validation Steps — A Practical ApproachStepObjectivePractical Action1. Data Integrity CheckEnsure training and transactional data are complete, accurate, and recentReconcile source data (invoices, vendor master) with ERP extracts; remove duplicates and incomplete records2. Model Accuracy TestingConfirm that AI output (e.g., fraud flag, duplicate detection) is reliableRun historical transactions through the model; compare results with known outcomes; document accuracy percentage3. Threshold & Rule ValidationEnsure AI parameters align with the business risk appetiteReview risk-scoring thresholds (e.g., duplicate detection >95% confidence) with the finance/controls owner4. Bias & Exception ReviewDetect unintended discrimination or false positivesSample flagged and non-flagged transactions across suppliers and geographies; analyze any bias-related trends5. Periodic Re-ValidationConfirm ongoing model performance and explainabilityRe-test the model quarterly or after major data updates; maintain a validation log with sign-off by the finance leadTable 4 · (iii) Audit Trail RequirementsEnsuring traceability, accountability, and SOX compliance in AI-P2P systems. Financial integrity is the backbone of a strong financial system; a robust, verifiable audit trail is essential to comply with SOX Sections 302 and 404 and to support both internal and statutory audits.12Audit Trail AreaControl RequirementPractical ExampleSOX / SOC ReferenceInput Data TraceabilityEvery data element (invoice, PO, GRN, vendor master) must be traceable to its source with date/time stampsRecord source document ID, import timestamp, and file hash in AI system logSOX 404 — Data integrity in financial reportingOutcome LoggingMaintain details of all AI-generated outcomes with reasoning or algorithmic parametersStore fraud scores, duplicate detection logic, and reviewer IDSOC 1 / SOX 302 — Transparency in automated control logicManual Override RecordRequire mandatory justification for every human override of AI suggestionsFinance users enter reasons for approval when overriding flagged invoicesSOX 404 — Management assessment of control effectivenessApproval & Exception Workflow HistoryTime-stamped records of all approvals, rejections, and escalationsApproval chain with names, roles, and timestamps stored in a read-only database to avoid alterationSOX 404 — Evidence of approval hierarchy and segregation of dutiesSystem Access & Security LogsTrack logins, admin changes, and data exports to detect unauthorized accessGenerate user ID, activity type, and timestamp reports for auditSOC 2 / SOX 404 — IT general controls (logical access)Retention and Archival PolicyPreserve audit logs as per statutory or corporate retention periods (typically 7–10 years)Secure read-only archival in compliance repository (e.g., SAP GRC)SOX 404 — Record retention for audit supportPolicy and Professional Implications For RegulatorsAccounting standard setters and tax authorities should modify the rules for AI-powered P2P interchange. For instance, as part of e-invoicing reconciliation requirements, AI systems may need to keep an audit trail to meet GST or SOX audit requirements.For Finance ProfessionalsTheir role must expand to assume additional responsibilities for auditing AI models, validating outputs, and providing recommendations on governance frameworks. They must ensure that controls are in place to enable ethical AI adoption, remove algorithm biases, and ensure compliance with corporate, tax, and payment regulations.For OrganizationsCFOs and finance leaders must drive AI adoption and manage risks through a robust internal control system and by establishing AI governance policies (e.g., risk registers, exception reporting, and exception oversight committees).For SuppliersIt helps improve supplier trust and engagement when organizations have transparent AI-driven P2P processes. It ensures fair treatment across the supply chain through ethical and compliant AI usage.Conclusion AI has transformed the P2P function and has taken it from being just a back-office process to a strategic tool for driving value, compliance, and trust. By improving efficiency, reducing fraud risks, and ensuring compliance, AI becomes an anchor of financial governance for P2P. But the change is not without risk. Governance framework issues related to cybersecurity threats, algorithmic bias, and auditability challenges highlight the importance of strong governance practices.In the case of India, where economic priorities are crucial for tax compliance, MSME supplier ecosystems, and digitization, the adoption of AI will have to be tailored and managed appropriately. Ultimately, finance professionals will continue to play a key role, making sure that AI-powered finance isn't just innovative but also ethical, transparent, and accountable.Author may be reached atskamber_2@outlook.com and eboard@icai.inReferencesU.S. Bank, Manual AP Process Inefficiencies: Risks and Solutions — manual AP increases fraud risk and inefficiencies, while automation strengthens controls. usbank.com ↩Deloitte, 2023 Global Chief Procurement Officer (CPO) Survey. deloitte.com ↩Gartner Press Release, 2024 — worldwide AI spending will total USD 2.5 trillion in 2026. gartner.com ↩McKinsey & Company, The future of procurement in the digital age, McKinsey Insights. mckinsey.com ↩Federal Bureau of Investigation (2025). 2024 Internet Crime Report. Internet Crime Complaint Center (IC3). ic3.gov ↩Onteddu, K. R. (2025). AI-Powered Invoice Automation in ERP Systems: Revolutionizing Accounts Payable, Journal of Computer Science and Technology Studies. researchgate.net ↩Accounts Payable Automation Trends 2024 Report — automated AP processes can reduce processing times and improve accuracy. acarp-edu.org2025 Accounts Payable Automation Trends, Concur Insights. concur.comAP Automation: Benefits to the Accounts Payable Process, JPMorgan Insights. jpmorgan.comMinistry of Electronics and Information Technology, Government of India, Digital Personal Data Protection Act, 2023. meity.gov.in ↩European Union, Regulation (EU) 2016/679 — General Data Protection Regulation (GDPR). eur-lex.europa.eu ↩Sarbanes–Oxley Act of 2002, Sections 302 and 404. govinfo.gov ↩The Chartered Accountant · Artificial Intelligence · August 2026 · www.icai.org
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Ep. 101 — Transforming India’s Financial Sector and Capital Markets to Power a $30 Trillion Economy
CA Journal
· August 2026
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Transforming India's Financial Sector and Capital Markets to Power a $30 Trillion EconomyA vibrant, thriving financial sector is core to India's GDP growth ambitions.GDP — Nominal ($ Tn)1.2'08 → 3.9'24 → 302047 PFinancial Assets ($ Tn)1.8'08 → 6.9'24 → 1202047 PFinancial Assets to GDP1.5×'08 → 1.9×'24 → 4×2047 PBank Assets to GDP0.9×'08 → 0.9×'24 → 1.5×2047 PWhere India stands — 2024 snapshot vs. peersEconomyGDP ($Tn)Fin. Assets ($Tn)Fin. Assets / GDPBank Assets / GDPUSA291444.9×1.1×China19774.1×2.5×Germany4.7224.7×2.5×Brazil2.262.7×1.0×India3.96.91.9×0.9×Financial assets cover banks, central banks, financial auxiliaries, insurance corporations, OFIs, pension funds & public financial institutions. All values are on a CY basis except India's GDP, financial assets and banking assets, which are on an FY basis. Source: Financial Stability Board; BCG analysis.A defining economic transformation shapes every generation. For India, that transformation is already underway. Over the past decade, India has moved from a relatively closed economy to one of the world's fastest-growing major economies, with rapid digital infrastructure, vibrant democracy, and a rising demographic boon, fuelled by domestic consumption. A strong culture of entrepreneurship, favourable demographics and deeper integration with the global economy have significantly altered the country's economic trajectory.As India works towards becoming a $30 trillion developed economy by 2047, the next phase of Viksit Bharat development will require more than sustained growth in national income. It will demand a financial system that is deeper, more efficient, more resilient and more inclusive. The experience of advanced and rapidly developing economies offers a clear lesson: durable economic progress depends on the strength of the institutions that mobilise, allocate and manage capital.As economies expand from the current $4 trillion to $8 trillion over the next 6–8 years, their growth becomes increasingly capital-intensive. Infrastructure, manufacturing, urban development, clean energy, healthcare, technology and innovation require substantial pools of long-term finance. Meeting these requirements depends on a financial architecture capable of converting household savings into productive investment while supporting enterprises at every stage of their development. India has already established a strong foundation. Following years of balance-sheet repair, regulatory reform and improvements in governance, the banking sector is better positioned to support economic growth. The country's capital markets have also developed into some of the most dynamic among emerging economies, supported by stronger regulation, improved transparency, better corporate governance and increasing participation from domestic investors.These developments have strengthened investor confidence and enhanced the resilience of the financial system. However, the scale of India's ambitions will require a further and more fundamental transformation. Over the next two decades, India will need unprecedented levels of investment. Significant capital will be required for transportation networks, urban infrastructure, renewable energy, semiconductor manufacturing, defence production, logistics, digital connectivity and advanced industrial capacity.This investment cannot be financed through bank lending alone. Banks will remain central to financial intermediation, but they must increasingly be complemented by deep and well-functioning capital markets capable of providing long-term funding, absorbing risk, and supporting innovation-led businesses.Capital Markets as InstitutionsCapital markets must therefore assume a more strategic role in India's development. Equity markets are not merely venues for trading securities or raising funds. They are institutions through which entrepreneurs can convert ideas into scalable enterprises, companies can finance expansion, and investors can participate in long-term wealth creation.At the same time, the development of corporate bond markets, Infrastructure Investment Trusts, Real Estate Investment Trusts, Alternative Investment Funds and private credit is broadening the range of financing available to businesses and infrastructure projects. These instruments can reduce excessive dependence on bank balance sheets and provide capital better suited to long-duration investments.An equally important change is taking place in the composition of household savings.For many decades, Indian households preferred physical assets, particularly gold and real estate. That pattern is gradually changing. Mutual funds, equities, insurance products, pension schemes and fixed-income securities are becoming a larger component of household wealth.The expansion of systematic investment plans, the rise in retail participation in equity markets and the growing acceptance of long-term financial investing indicate increasing confidence in formal financial institutions. This financialization of savings is among the most consequential structural shifts in India's economy.A stable domestic pool of financial savings can provide the capital required to fund infrastructure, enterprise and innovation while reducing dependence on volatile external flows.“The next phase of financial inclusion must move beyond account ownership. It must focus on improving the quality, affordability and relevance of financial services available to households.The New-Age Growth EnginesThe next stage of India's economic development will also be shaped by sectors that had little commercial significance a generation ago. Cotton, textiles, real estate, IT services, and consumption have driven the journey to date. However, the journey for Viksit Bharat will be driven by new-age sectors like artificial intelligence, semiconductor manufacturing, financial technology, biotechnology, renewable energy, electric mobility, defence, aerospace, robotics, and space technology, which are creating new areas of economic activity.These industries can improve productivity, generate high-skilled employment and strengthen India's position in global value chains. However, many of them require long development cycles, substantial research expenditure and a high tolerance for risk. Their growth will depend on access to patient capital through venture funds, private equity, institutional investors and deep public markets.Artificial intelligence, in particular, may become one of the most important drivers of productivity in the coming decades. Unlike earlier waves of automation, such as banking and railway offices, which were largely focused on replacing repetitive tasks, AI has the capacity to augment judgement, improve decision-making, and enhance efficiency across a wide range of sectors.Within the banking and financial services industry, AI has already shown use cases for better loan assessment, enhanced fraud detection, better tax compliance, regulatory compliance, risk management, customer service, and investment analysis. In manufacturing, it can improve production planning, quality control and supply-chain management. Its wider adoption could generate productivity gains across the economy and contribute meaningfully to India's long-term growth. We haven't spent money on developing AI, but for a capital-hungry country, it can unlock significant savings in our day-to-day functions.India also possesses a distinctive institutional advantage in the form of its Digital Public Infrastructure. The largest NBFC recently announced that, through the use of AI, it is listening to almost 2 crore customer calls and has disbursed about INR 2000 crore in additional loan book. These kinds of changes are a real example of the efficiency AI brings. Many manufacturing companies, hospitals, and pharma companies are already using technology across various processes to achieve process cost efficiencies.A Digital Foundation for InclusionPlatforms such as Aadhaar (India's social security number), the Unified Payments Interface (UPI), DigiLocker, and the Account Aggregator framework have transformed the delivery of financial services to millions at low cost. They have lowered transaction costs, improved identity verification, expanded access and enabled financial innovation at exceptional scale.This digital foundation allows banks, insurers, wealth managers, fintech companies and asset managers to serve hundreds of millions of individuals more efficiently. India has the highest per capita data usage and has recently crossed the 1 billion broadband connection mark, which shows that it has also created the basis for one of the world's most extensive and scalable digital financial ecosystems.India has succeeded in bringing a large proportion of its population into the formal banking system. Yet access to a bank account does not automatically provide access to finance. Many individuals still lack affordable credit, adequate insurance, retirement products and suitable long-term investment options. There is a huge opportunity for companies with these tools available at their disposal.The next phase of financial inclusion must therefore move beyond account ownership. It must focus on improving the quality, affordability and relevance of financial services available to households.This challenge is particularly acute for Micro, Small and Medium Enterprises, which are central to employment generation, local economic activity and entrepreneurship.Technology can materially improve this situation. Future lending models are likely to rely increasingly on digital payment histories, GST filings, banking patterns, transaction data and cash-flow analysis.Expanding access to credit for individuals and enterprises would have effects far beyond financial inclusion. It would support education, home ownership, business formation, investment, job creation and productivity growth.A More Specialised EcosystemAs the economy develops, the role of financial institutions will also become more specialised.Banks will increasingly provide sophisticated financial, insurance and advisory services over and above the traditional deposit and credit lending functions. Asset management and wealth management companies will play a greater role in mobilising household savings.Insurance companies and pension funds can emerge as important sources of long-term capital. Fintech firms will continue to improve accessibility, efficiency and customer experience.A mature financial system will depend not on any single category of institution, but on the interaction of banks, markets, insurers, pension funds, asset managers, fintech companies and regulators within a coherent and well-governed ecosystem.“India's ambition to become a developed economy is beyond a higher level of GDP; it includes more jobs, a stronger manufacturing sector, savings mobilised into productive assets, and an economy that is more productive, innovative, resilient, and globally competitive.Realising that ambition will require sustained investment, technological advancement, strong institutions and a disciplined approach to capital allocation. Funds must flow towards the sectors, enterprises and infrastructure that can generate durable economic and social value.The financial sector, represented by over 30% weight in the index, will be the bridge between household savings and its financialization, leading to national development. Across banking, investments, access to credit, insurance, and other products, we are deeply underpenetrated. Technology will improve efficiency and inclusion, while artificial intelligence will reshape the design and delivery of financial services.Together, these forces can create a virtuous cycle in which savings are converted into investment, investment raises productivity, and higher productivity supports broad-based prosperity.If manufacturing builds the productive capacity of the nation, the financial system will provide the capital required to sustain it.The coming decades may therefore be remembered not only for the scale of India's economic expansion, but also for the emergence of a sophisticated, inclusive and technology-enabled financial system capable of converting domestic savings into innovation, enterprise and enduring national progress.Author may be reached at eboard@icai.in The Chartered Accountant · August 2026
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Ep. 102 — Viksit Bharat@2047: Through the Lens of AI and Global Capability Centers
CA Journal
· August 2026
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Viksit Bharat@2047: Through the Lens of AI and Global Capability CentersAsk most people in major cities in India what “Viksit Bharat” means, and you’ll get a version of the same answer: a developed India by 2047, the hundredth year of independence. It’s a big, almost audacious target — a $30–40 trillion economy, built on inclusive growth, technological self-reliance, and a much louder voice on the world stage.The government has organised the vision around four groups it wants to lift: youth (Yuva), the poor (Garib), women (Mahila), and farmers (Kisan). Underneath all of it sits Atmanirbhar Bharat, the push for self-reliance, paired with an equally strong appetite for global partnerships and leadership in innovation and governance.Two things keep coming up whenever this vision gets discussed in policy circles: artificial intelligence and the explosive growth of Global Capability Centers, or GCCs. Together they’re doing a lot of the heavy lifting — creating high-value jobs, seeding indigenous innovation, and pulling India deeper into global supply and value chains. Prime Minister Shri Narendra Modi has said more than once that he wants India among the world’s top three AI powers — and not merely as a consumer of AI built elsewhere, but as a creator of sovereign, inclusive AI built on Indian terms.What follows is a look at how this vision came to be, where AI and GCCs fit into it (with examples), and what stands in the way between now and 2047.Where This Ambition Comes FromIt is worth reflecting on how far the journey has come from its humble beginnings. India in 1947 was a low-income economy just beginning to find its footing; today it’s the world’s fifth largest. That arc runs through the 1991 liberalization reforms, the Digital India push that took off around 2015, and more recently the production-linked incentive (PLI) schemes that tried to pull manufacturing back onshore.Getting to Viksit Bharat means sustaining something close to 8% annual GDP growth for two decades — a shift away from an economy driven mostly by domestic consumption toward one driven by manufacturing and innovation. That requires infrastructure most people take for granted in richer countries: better roads and ports, yes, but also the quieter digital plumbing — UPI, Aadhaar — that already underpins daily transactions for hundreds of millions of Indians. It requires skilling at a scale the National Education Policy 2020 is only beginning to attempt, and a genuine push toward net-zero, including a renewed bet on nuclear power.AI and GCCs matter here because they act as multipliers. They stretch the value of human capital further than it would otherwise go, and they pull in foreign direct investment that infrastructure alone can’t. India’s tech sector, GCCs included, is already a meaningful slice of GDP, and under an aggressive-adoption scenario, AI alone could add close to $1.7 trillion to the economy by 2035.Technology as the Connective TissueBeyond the four social pillars, there are strategic ones too: economic competitiveness, national security, global partnerships, strong legal and regulatory frameworks. Technology threads through all of them — semiconductors, quantum computing, supercomputing, and AI aren’t separate initiatives so much as the backbone that makes self-reliance possible at all.AI and GCCs matter here because they act as multipliers. They stretch the value of human capital further than it would otherwise go, and they pull in foreign direct investment that infrastructure alone can’t.The youth cohort — sometimes called Amrit Peedhi — is where a lot of this energy is concentrated. India already has the world’s third-largest startup ecosystem, and GCCs plus AI are turning what used to be described somewhat abstractly as a “demographic dividend” into actual jobs. Women-led enterprises are growing. Farmers are getting access, however unevenly, to precision agriculture tools built on AI. None of this is evenly distributed yet, but the direction is consistent.AI as the EngineIndia’s official framing is clear, concise, and impactful: “Make AI in India, Make AI Work for India.” The IndiaAI Mission, launched in March 2024 with an outlay of ₹10,372 crore, organizes the work around seven areas — compute infrastructure, foundational models, datasets, applications, entrepreneurship, skilling, and safe AI.On the compute side, capacity has grown fast — from around 10,000 GPUs to more than 38,000, made available to researchers and startups at subsidized rates of roughly ₹65 an hour. The stated goal is 100,000-plus publicly accessible GPUs, with private capacity pushing the national total well past 200,000.The more interesting story, though, is on the model side. Sarvam AI, a Bengaluru startup, was selected to build a sovereign large language model — one trained on Indian data, tuned to Indian languages and cultural context rather than adapted after the fact from a Western model. BHASHINI, the government’s multilingual AI initiative, supports similar work for public services. NITI Aayog has projected that AI could help push growth toward 8% annually, potentially lifting GDP to around $21 trillion by 2047, well above baseline projections without it.The sector-by-sector picture is wide: crop monitoring and yield prediction in agriculture, diagnostics and drug discovery in healthcare, personalized learning tools in education, predictive maintenance in manufacturing, fraud detection in finance. NITI Aayog’s roadmap singles out financial services, pharmaceuticals, manufacturing, and automobiles as priority sectors. The employment numbers being floated are large — up to 4 million new “AI-first” jobs by around 2030, with demand for AI talent expected to climb from roughly 800,000–850,000 today to over 1.25 million.Case · Sovereign AISarvam AI and the Case for Sovereign ModelsSarvam is a useful example of what “sovereign AI” actually looks like in practice. It’s building large language models trained on Indian datasets, capable across more than 20 languages, designed for voice-first use — which matters enormously in a country where a large share of the population is more comfortable speaking than typing. Access to IndiaAI Mission compute lets Sarvam train these models domestically rather than renting capacity or IP from abroad.The output feeds into “BharatGen,” aimed at public-service applications: a government chatbot that responds in a local dialect, for instance, isn’t a novelty here — it’s a genuine attempt to narrow the digital divide, and potentially something India could eventually export to other countries in the Global South facing similar language diversity.Case · Education & HealthMicrosoft and the ClassroomMicrosoft’s Bengaluru R&D team built AI tools that help Karnataka’s teachers generate personalized lesson plans, now integrated with the government’s DIKSHA education platform. In healthcare, a similar partnership with Apollo Hospitals produced a clinical AI assistant that reportedly saves doctors about 20% of the time they’d otherwise spend on data entry and record-keeping — time that goes back into seeing patients. Small efficiency gains like these, multiplied across a system serving over a billion people, add up.None of this is without friction. Data quality remains inconsistent. Talent retention is a real worry given how aggressively global firms compete for the same AI engineers. Compute-hungry training runs carry a real energy cost. The responses so far — responsible AI guidelines, large-scale reskilling programs like FutureSkills PRIME (which has already reskilled over 300,000 people), and deeper public-private collaboration — are reasonable starts, but nobody would call the problem solved.GCCs — No Longer the Back OfficeGlobal Capability Centers are, in essence, offshore units that multinational companies set up and fully own, rather than outsourcing to a third party, covering IT, R&D, analytics, finance, and increasingly, core product development. India now hosts the largest concentration of these centers anywhere in the world: roughly 2,100+ centers spread across 3,600+ individual units as of FY26, employing 2.2 million+ people and generating close to $98 billion+ in value. The ecosystem has grown 32% in size since FY21, with more than 500 new centers opening in recent years.What’s changed isn’t just the scale, it’s the nature of the work. Nearly half of these centers — 46% — now function as genuine “portfolio” or “transformation” hubs rather than cost-saving back offices, a marked shift from where things stood even a few years ago. AI and machine learning now run through more than 1,200 GCCs, supported by over 250 dedicated AI centers of excellence and more than 250,000 AI professionals — roughly 28% of the entire global GCC AI workforce sits in India. Hiring reflects this: an estimated 510,000 jobs are expected in 2026 alone, and 64% of them will require AI or data skills. Bengaluru remains the anchor, with around 1,080 units, followed by Hyderabad and the National Capital Region, while Tier-2 cities are now the fastest-growing segment of the map.The roster of companies setting up shop keeps widening too: Forbes Global 2000 firms, private-equity-backed companies, and newer entrants like Anthropic and Marriott. Increasingly, the innovation flow runs in both directions — products and solutions built in Indian GCCs are shipped out globally, not just adapted from headquarters.Case · Enterprise SoftwareSAP Labs and JouleSAP’s Bengaluru center built Joule, a generative AI copilot that sits across SAP’s enterprise software suite, letting users automate tasks and pull insights through natural-language queries. It was conceived and built in India, then rolled out globally — a fairly clean example of a GCC moving from support function to genuine product owner, which is exactly the kind of IP-building Atmanirbhar Bharat is meant to encourage.Case · RetailWalmart and Retail IntelligenceWalmart Global Tech India uses machine learning out of its Bengaluru hub for inventory forecasting, real-time product substitutions, and personalized recommendations — work that ultimately optimizes supply chains at global scale and cuts waste. There’s a sustainability angle too, in more efficient logistics. The savings run into the billions, and there’s an obvious path for these techniques to filter into Indian retail through Walmart’s stake in Flipkart, potentially pulling local small businesses into more sophisticated supply networks.Case · Pharma & HealthcarePharma and Healthcare GCCsNovo Nordisk’s India operation leverages AI across drug development support, regulatory documentation, and personalized diabetes care. Amgen’s Hyderabad center focuses on precision oncology analytics, backed by an investment north of $200 million. Siemens Healthineers uses AI in diagnostic imaging and radiology. Collectively, this work shortens R&D timelines and lowers costs, which matters directly for India’s stated goal of $350 billion in pharmaceutical exports by 2047.Case · Manufacturing & EnergyManufacturing and EnergyIn steel and energy, GCCs are using computer vision for defect detection and predictive maintenance, and for optimizing things like waste-heat recovery. At least one center reported a meaningful drop in downtime and carbon footprint as a result. Applied more broadly, this kind of work supports both the green transition and the manufacturing self-reliance that PLI schemes are trying to build.Beyond the direct economic output, GCCs are quietly building India’s digital sovereignty, cybersecurity capability, data localization practices, and a deep bench of trained talent that didn’t exist at this scale a decade ago. Many now work closely with local startups and universities, which is arguably where the longer-term payoff lies.Where AI and GCCs Reinforce Each OtherThe connection between the two isn’t incidental. Indigenous AI models reduce reliance on imported technology; GCC-driven R&D feeds into the broader push around semiconductors and AI hardware under Semicon India. Together they generate millions of jobs, give youth a reason to stay and build rather than emigrate, open doors for women in tech, and modernize agriculture and healthcare from the ground up.GCCs are turning India into more of an innovation exporter than an outsourcing destination — and combined with digital public infrastructure like UPI and the Open Network for Digital Commerce (ONDC), India is increasingly exporting its governance models, not just its labour.There’s a global dimension too. That said, geopolitical friction and global competition for talent means policy must stay nimble, especially around data protection law and IP frameworks.Closing ThoughtsViksit Bharat@2047 isn’t just an economic target, it’s closer to a national reinvention — and AI and GCCs are two of its clearest working examples. Sarvam’s sovereign models, SAP’s and Walmart’s product innovations, and the healthcare breakthroughs coming out of pharma GCCs all point to something concrete rather than aspirational: this is already happening, unevenly but genuinely.Whether India actually gets there by 2047 depends less on any single technology and more on follow-through — largely around policy continuity, sustained investment in skills, and enough patience to let institutions mature. If it works, the result won’t just be a bigger economy; it’ll be a different kind of development story, one built as much on indigenous capability as on capital. That’s the harder version of the bet India has placed, and the next two decades will show whether it pays off.The Chartered Accountant · August 2026 Author may be reached at eboard@icai.in
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Ep. 103 — From Vision to Execution: The Leadership Imperative for India @2047
CA Journal
· August 2026
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From Vision to Execution: The Leadership Imperative for India @2047India's ambition to become a developed nation by 2047 is both timely and demanding. The country enters this period with considerable strengths: a large domestic market, a young population, an expanding digital economy, a growing entrepreneurial base and greater influence in global affairs. Yet none of these advantages will automatically produce a developed India. Demographic potential can become demographic pressure. Technology can widen inequality instead of reducing it. Economic growth can coexist with inadequate public services, weak institutions and limited employment opportunities. The real test of Viksit Bharat is not the scale of the vision but the discipline of its execution.India has never lacked ideas, policies or programmes. The more persistent difficulty has been converting national intent into consistent outcomes across ministries, states, districts and institutions. A policy announced in New Delhi may be understood differently in different states and may encounter an entirely different reality when it reaches a municipal office, a village, a school or a small enterprise. The journey to 2047 must close this distance between policy and performance.This makes leadership central to the development process. Leadership in this context does not refer only to political authority. It includes administrative leadership, business leadership, institutional leadership and professional leadership. It must also extend beyond a few individuals. India will need a system in which thousands of people, working at different levels, can make sound decisions, accept responsibility and remain focused on long-term national goals.Turning 2047 into a sequence of achievable commitmentsA date as distant as 2047 can inspire, but it can also create a false sense that there is sufficient time. In public policy, twenty-one years is not a long period. A child entering school today will be part of the workforce before 2047. Infrastructure commissioned during the next few years may remain in use well beyond the centenary of Independence. Similarly, weaknesses in health, education and urban planning that are ignored today will become far more expensive to correct later. The first responsibility of leadership is, therefore, to translate the national vision into measurable intermediate commitments. India needs clear milestones for 2030, 2035 and 2040, supported by annual targets and public reporting. The World Bank estimates that India's gross national income per person would need to rise nearly eightfold from prevailing levels for the country to attain high-income status by 2047.Building institutions that can deliverOne of the common misinterpretations of strong leadership is that it denotes an over-centralised decision-making process. Central direction, however, must be exercised judiciously during a crisis or at the launch of a significant mission. But the management of a country as large as India cannot be done through central control. Local conditions are too different, and the search space too large. District officials should have room to adapt programmes to local needs, while remaining accountable for results. Municipal bodies, which will manage much of India's future urban growth, cannot continue to function with limited revenue, inadequate staff and fragmented authority. The quality of routine administration will matter as much as the quality of flagship projects. For a citizen, the state is experienced through an application processed on time, a functioning hospital, a safe road, a reliable water supply or a dispute resolved without years of delay. Viksit Bharat will become credible when these ordinary interactions become predictable.Institutional reform must also reduce the cost of compliance. The Economic Survey 2024–25 placed considerable emphasis on deregulation and argued that the next phase of reform must include systematic action by the states (Government of India, 2025). The objective should not be the absence of regulation. India requires firm standards in areas such as financial integrity, competition, labour protection, consumer safety and the environment. The need is for regulation that is clear, proportionate and consistently applied. Frequent changes, overlapping approvals and uncertain interpretation penalise honest businesses while creating room for discretion. Trust is an economic asset. When rules are stable and public institutions act within predictable timeframes, businesses invest with greater confidence and citizens are more willing to comply. Building such trust will be one of the most important, though less visible, leadership tasks of the coming decades.Making employment the centre of the growth strategyIndia cannot be the developed nation it aspires to be if its economic growth generates only a fraction of the quality jobs required. Employment links dignity with growth, and consumption with tax revenue and social stability. It should be regarded as a policy objective in its own right, rather than as an automatically expected by-product of economic policies. Growth is required in manufacturing, modern services, construction, tourism, care work, logistics and food processing. India also needs stronger small and medium enterprises, which provide jobs outside a few big companies. Access to credit remains vital for these firms, but finance is not sufficient by itself. They need:PowerSkilled workersTimely paymentBetter logisticsAccessible technologySimpler complianceEmployment growth will depend to a very large extent on the quality of education and training.While institutions need to be incentivised to innovate, there must also be accountability in terms of outcomes. Instead of grumbling about skill shortfalls, industry should help with curriculum design, apprenticeships and faculty development.We should focus on women's economic participation in India. Improved transport, secure jobs, childcare and flexible working hours are rights, not just welfare. They dictate the extent to which the nation makes the most of its talent. No country can attain developed status with a major portion of its educated populace outside the formal economy.❝ India needs clear milestones for 2030, 2035 and 2040, supported by annual targets and public reporting. The World Bank estimates that India's gross national income per person would need to rise nearly eightfold from prevailing levels for the country to attain high-income status by 2047. ❞Using technology without surrendering judgementIndia's digital public infrastructure has shown that technology can deliver services at a scale that was previously difficult to imagine. The next phase may use artificial intelligence and data systems in health, agriculture, taxation, education and urban management. NITI Aayog has also identified digital public infrastructure as an important means of achieving inclusive and scalable growth (NITI Aayog, 2026).Technology, however, should not be confused with reform itself. A poorly designed process does not become efficient merely because it is moved online. Digitisation can reproduce old confusion in a new format. The flip side is that it may also rule out those who do not have connectivity, language support or digital confidence.Prior to employing any new system, leadership must answer two simple questions. Does it work for a regular citizen without an intermediary? Is there an equitable means of redressing a mistake?Accountable government must therefore go hand in hand with data-driven government. Automated decisions, especially those affecting benefits, tax, access to credit or public services, should be reviewable. Cybersecurity and privacy need to be seen as an essential public good. A developed India should embrace technology to enhance human judgement rather than shy away from responsibility for decisions.Atmanirbharta should not be seen as looking inwards and shutting oneself away from the world. India will rely on foreign engagement in international trade, investment, technological partnerships and critical minerals supply chains. The capacity for self-reliance, consequently, should be based on domestic productive capability: designing, making and funding products or services in ways that let them compete in international markets.Protection sometimes provides a new industry with breathing space, but permanent protection dulls the incentive to get ahead. Public support must therefore be performance-, innovation- and export-linked. Indian firms need to aim for global standards on quality, cost, sustainability and corporate behaviour.This same principle will apply to research and innovation. India requires far more money for scientific research, and far greater independence for institutions and consequential scrutiny. Closer collaboration is needed between universities, public laboratories, start-ups and established firms. Innovation hardly ever comes from one initiative; it emerges from a culture that allows for questioning, embraces calculated risk and has an appetite to learn via failure.Ultimately, how India fares will depend on the strength of its institutions and actors. India's reputation will depend on whether contracts are fulfilled, disclosures are accurate, standards are met and disputes are settled fairly. A reputation lost is costly to earn back.Leadership through financial and professional integrityThe transition to a developed economy will require enormous public and private investment. Infrastructure, energy transition, urban development, health, education and technological capacity will all compete for financial resources. The quality of investment will matter as much as its quantity.Independent evaluation, reliable statistics, legislative scrutiny, professional audit and public consultation all improve the quality of decisions. They also protect long-term goals from short-term enthusiasm. Evidence may sometimes be inconvenient, but a country cannot manage a transformation of this scale by rewarding only favourable information.Most long-term programmes diverge from the original plan. India's trajectory will be shaped by economic shocks, climate events, technological disruptions and geopolitical ripples. That said, leadership needs to balance persistence of purpose with flexibility of method.Governments and organisations need to periodically re-examine major programmes and reveal what has worked, what has not and how they will change moving forward. The admission of a mistaken policy course should be considered responsible administration and not failure.The leadership testViksit Bharat is a shared horizon for India, which makes it valuable. But talking alone will not see us to 2047. Over the next twenty years, it will be determined by choices made in budgets, classrooms, boardrooms, laboratories, courtrooms and municipal offices.India does not require theatrical leadership; the focus should be on the practical side instead. It creates incentives, allocates accountability and is responsive to evidence. It gives capable individuals space to operate yet expects results and accountability. Even when inconvenient, it preserves the integrity of institutions. Most importantly, it understands that national rankings are not how citizens experience development; they experience it as opportunity, security, dignity and a belief in the future.India is ambitious in its vision. The challenge now is whether the nation can develop the habits of execution demanded by this vision. If it can, 2047 will be much more than just one hundred years after Independence. It will signify the coming of age of a country that learnt how to transform aspiration into enduring public value.ReferencesGovernment of India (2025), Economic Survey 2024–25, Ministry of Finance, New Delhi. https://www.indiabudget.gov.in/budget2025-26/economicsurvey/index.phpNITI Aayog (2025), India's Path to Global Leadership: Strategic Imperatives for Viksit Bharat @2047, Government of India, New Delhi. https://www.niti.gov.in/node/1630NITI Aayog (2026), DPI@2047 for Viksit Bharat: A Strategic Roadmap to Enable Non-linear Inclusive Socio-economic Growth, Government of India, New Delhi. https://niti.gov.in/sites/default/files/2026-04/DPI-2047-for-Viksit-Bharat-A-Strategic-Roadmap-to-Enable-Non-linear-Inclusive-Socio-economic-Growth.pdfVirmani, A. (2024), Viksit Bharat: Unshackling Job Creators and Empowering Growth Drivers, NITI Aayog, New Delhi. https://www.niti.gov.in/sites/default/files/2024-07/WP_Viksit_Bharat_2024-July-19.pdfWorld Bank (2025), India Country Economic Memorandum: Becoming a High-Income Economy in a Generation, World Bank, Washington, DC. https://openknowledge.worldbank.org/entities/publication/79e6a188-2329-42d4-91cf-b11c1b3cb8beAuthor may be reached at rudreshpandey@gmail.com and eboard@icai.inThe Chartered Accountant August 2026 / www.icai.org
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Ep. 104 — Performance over Privilege: The 16th Finance Commission’s New Fiscal Formula
CA Journal
· August 2026
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Performance over Privilege: The 16th Finance Commission's New Fiscal FormulaIntroductionThe President of India constituted the extant 16th (XVI Finance Commission) Finance Commission in accordance with Article 280 of the Indian Constitution under the Chairmanship of renowned economist Sri. Arvind Panagariya, former vice-chairman of NITI Aayog. Its primary mandate is to define the financial relationship between the Central Government and the States for a five-year "award period." This committee had submitted its report on 17th November, 2025, and the same was placed in Parliament on 1st February 2026, on the same day as Budget 2026-27.Like the 15th Finance Commission, it has also recommended transferring 41% of the Centre's Gross Tax Revenue (GTR) to the states. Unlike the 13th and 14th Finance Commissions, which employed only four parameters, both the 15th and 16th Finance Commissions have used six criteria for distributing central taxes among states, but with a twist. This commission has dropped the state's tax effort criteria and introduced, for the first time, a new criterion — contribution by a state to the country's GDP with a weight of 10%.Among all the parameters, the most dominant one is the income distance criterion. The commission has reduced the weightage by 2.5% (from 45% to 42.5%). This parameter spells out how far a state's average per capita income is below the per capita income computed by taking the three best-performing states. As this parameter is enjoying a greater share, it helps the poor states to get a better share. Other parameters that have seen a reduction in their weights are demographic performance by 2.5% and area by 5%. The Commission has assigned 10% weightage to the new criteria by reducing the weightage of the above three parameters.The weightage for the population criterion was enhanced by 2.5%, effectively replacing the 2.5% weightage previously assigned to the states' tax effort criterion, which had been introduced by its predecessor. Of these six criteria, it is the forest criterion that alone has enjoyed the same weightage under both the 15th and 16th Finance Commissions as depicted in table no. 01.Considering the contribution by a state to national GDP, it has helped almost all better-performing states as their share in the devolution has increased a little, including Karnataka.Taxes to be sharedThe following are the Central taxes divided among the states:Corporation TaxPersonal Income TaxCentral Goods and Services TaxCenter's share of IGSTTable No. 01: Criteria for distribution of the center's taxes among states in the 16th Finance CommissionCriteria15th FC Weight16th FC WeightChange in %Income Distance45%42.50%-2.5Population (2011)15%17.50%2.5Area15%10%-5Forest & Ecology10%10%0Tax Effort2.50%0%-2.5Contribution to GDP0%10%10Demographic Performance12.50%10%-2.5Total100%100% Source: 16th Finance Commission ReportThe divisible pool forms about 81% of the Center's Gross Total Revenue for 2025-26 after excluding cesses and surcharges.States that have gained and declined their share in the 16th Finance CommissionThe 16th Finance Commission has tweaked the formula of horizontal distribution; as a result, 14 states have gained marginally in their share of the divisible pool of taxes, and the other 14 states have witnessed a decline in their share.The above table no. 02 depicts that among all the states that witnessed a gain in their share, Karnataka is the biggest gainer. Its share has been increased to 4.131%, up from 3.647% under the 15th Finance Commission. This hike in its share is likely to increase around Rs. 12,248 crore annually to the state's exchequer.Together, these states receive a higher tax share by 2.41% points. The commission would like to recognize the contribution made by these states in enhancing the nation's GDP.Table No. 02: List of states that have witnessed a slight increase in their shareSl. No.StatesShare in Central taxes in RE of FY 2026 (%)Share in Central taxes in BE of FY 2027 (%)Increase (%)1Andhra Pradesh4.0474.2170.172Assam3.1283.2580.133Gujarat3.4783.7550.2774Haryana1.0931.3610.2685Himachal Pradesh0.830.9140.0846Jharkhand3.3073.3570.057Karnataka3.6474.1310.4848Kerala1.9252.3820.4579Maharashtra6.3176.4410.12410Mizoram0.50.5640.06411Punjab1.8071.9960.18912Tamil Nadu4.0794.0970.01813Telangana2.1022.1740.07214Uttarakhand1.1181.1410.023 Total37.37839.7882.41Source: Budget FY 2026-27Table no. 3 shows that among all the states, the share of Madhya Pradesh has witnessed a huge decline of 0.503%. The marginal decline in their share is because the "needs-based" criteria (poverty/income gap) were diluted to reward "growth-based" criteria.Table No. 03: States that have witnessed a decline in their shareSl. No.StateShare in Central taxes in RE of FY 2026 (%)Share in Central taxes in BE of FY 2027 (%)Difference (%)1Arunachal Pradesh1.7571.354-0.4032Bihar10.0589.948-0.113Chhattisgarh3.4073.304-0.1034Goa0.3860.365-0.0215Madhya Pradesh7.857.347-0.5036Manipur0.7160.626-0.097Meghalaya0.7670.631-0.1368Nagaland0.5690.481-0.0889Odisha4.5284.42-0.10810Rajasthan6.0265.926-0.111Sikkim0.3880.335-0.05312Tripura0.7080.641-0.06713Uttar Pradesh17.93917.619-0.3214West Bengal7.5237.215-0.308 Total62.62260.212-2.41Source: Budget FY 2026-27States bargainMany states have demanded a larger share. Around 18 states have demanded an enhancement of the state's share of distributable tax from 41% to 50%. Besides, they also demanded the inclusion of cess and surcharge in the divisible tax pool. Of course, the cess and taxes collected and retained by the central Government have been declining from the FY 2024-25 as depicted in table no. 04.However, the commission has a different version and views that "states already account for more than 2/3rd of the nation's non-debt revenue" and any further increase would adversely hinder the Government's fiscal space and its ability to meet national obligations.Further, the Commission suggests that if both the center and states would like to have an efficient and broad based tax system, they should come to a mutual Consensus in which case the center would forgo a large part of the revenue from cesses and surcharges into divisible pool of taxes and state would also agree to forgo a small share of this increased center's divisible pool of taxes, that protects interest of both the parties.Table No. 04: Reduction in Cess and Surcharge (Rs. in Cr)5,29,342 2024-254,93,550 2025-26 (RE)4,49,720 2026-27 (BE)Source: 16th Finance Commission Report and Union BudgetMajor discontinued grants in the 16th Finance CommissionThe Commission explicitly stated that it would not recommend three specific types of grants that were provided during the previous Finance Commission's tenure:Revenue Deficit Grants (RDG): The Commission has scrapped this grant to encourage states to achieve fiscal self-reliance and improve their own tax-to-GSDP ratios, and rationalize the expenditures.State-specific Grants: Grants previously pegged for specific sectors like health, education, or agriculture have been discontinued. These sectors are better funded through Centrally Sponsored Schemes (CSS) or the state's own increased tax shares.Sector Specific Grants: Specialized grants for specific projects within a single state, like building a specific bridge or university, have been scrapped to prevent political subjectivity and ensure a uniform formula-based distribution.Recommendations to bring fiscal discipline to the State and the CenterMost defining feature of the 16th Finance Commission report is its aggressive stance on Off-Budget Borrowing (OBB) by the States. The Finance Commission's report mandates that all OBB must be brought onto the books to ensure investors and the Union have a clear picture of India's debt-to-GDP ratio.The Finance Commission has established a clear fiscal roadmap to ensure long-term stability and debt sustainability for both the Union and the states. Deficit target for the state is 3% of its SGDP and the center 3.5% of GDP by the end of the award period (March 2031).Strategic Roadmap for the Next Finance CommissionWith a view to bringing financial discipline among the states, this Finance Commission has recommended the discontinuation of the Revenue Deficit Grants (RDG) to the states.The table no. 05 shows Revenue Deficit Grants provided during the last four Finance Commissions and the number of states benefited from the grants.In contrast to the prevailing practice of earlier Finance Commissions, this Commission explicitly mentioned in Para 9.48 of its report that it will no longer undertake assessments of post-devolution revenue needs for each state, nor will it recommend grants on this basis.Keeping in view the revenue-generating potential of some states and hill states like Himachal Pradesh and Uttarakhand, where tax collection potential is limited, the Commission could have proposed a gradual phasing out of the RDG instead of discontinuing it abruptly.To bring transparency into the devolution of taxes, the 16th Finance Commission has recommended that the center unveil financial data pertaining to the net proceeds, as certified by the Comptroller and Auditor General under Article 279 of the Constitution. It is also advisable on the part of the center to certify that the rate of vertical devolution of the tax pool is in tune with the rate of devolution as recommended by the Finance Commission.Table 06 illustrates that throughout the 15th Finance Commission's tenure, the effective rate of devolution consistently fell short of the recommended 41% target.Currently, the center collects cesses and surcharges that do not form part of the divisible pool of taxes. These now account for more than 10% of the Government of India's gross tax revenue (Table 4). Given that almost all states are demanding their inclusion in the divisible pool, future Finance Commissions should give serious attention to this issue.Keeping in view the FRBM Act, the Finance Commission advises both the center and the state governments to bring the combined debt from 77.3% in 2026-27 to 73.1% of GDP by 2030-31. This trajectory aims to instill fiscal discipline and eliminate hidden liabilities, ensuring a transparent reflection of India's sub-national debt. Consequently, both the center and the states should strictly adhere to these recommendations.Horizontal tax devolution currently relies on six criteria, where need-based factors like equity, population, and area carry over more than two-thirds of the weight. Performance-based criteria, such as demographic performance, contribution to GDP, and forest account for only one-third. Many performing states argue that this distribution is skewed and penalizes efficiency. To ensure fairness, the future Finance Commission should reassess the weightage assigned to various parameters rationally.The newly introduced GDP contribution criteria employ the "Square Root" formula to determine a state's share in horizontal distribution. The square root formula was meant to protect smaller states, but it creates a diminishing incentive. The square root function flattens the curve. A state that is 100 times larger than another in terms of GDP only receives a 10-fold reward. This ensures that the 10% weight doesn't lead to a catastrophic drop in funds for smaller or mid-sized states.Consequently, the core objective of the efficiency-based criterion is largely undermined by 'neutralizing' the reward. The formula fails to provide a meaningful fiscal incentive for states to maximize their economic contribution. The Finance Commission should guarantee an evenhanded relationship between performance and fiscal payoff.Table No. 05: Revenue Deficit Grants provided during the four Finance CommissionsCommissionsAmount provided (Rs in Cr)No. of States Benefited12th FC56,8561513th FC51,800814th FC1,94,8211115th FC2,94,51417Source: Finance Commission reports of 12th, 13th, 14th and 15thTable No. 06: Devolution of Taxes among StatesYearStates Share (in Cr)Divisible Pool (in Cr)Share (in %)2021-228,83,10022,17,73739.82022-239,48,98225,48,72337.22023-2411,29,49429,55,29638.22024-2512,86,88532,57,51339.52025-26 (RE)13,92,97135,74,60039.02026-27 (BE)15,26,25539,44,11038.7Source: 15th and 16th FC Reports and Union BudgetConclusionThe 16th Finance Commission marks a historic pivot in India's fiscal architecture. By introducing a 10% weightage for "Contribution to GDP", the Commission has finally addressed the long-standing grievance of industrial states, moving away from a purely redistributive model. While it maintained the vertical devolution at 41%, the real impact lies in its demand for fiscal discipline, specifically the strict ban on off-budget borrowings. Ultimately, the 16th FC serves as a financial manifesto for "Viksit Bharat 2047," signaling that the next phase of India's growth will be driven by efficiency, transparency, and urban transformation.ReferencesSixteenth Finance Commission — asset/doc/commission-reports/16th-FC/reports/Vol1-Main-Report.pdfUnion Budget of IndiaAuthor may be reached at mallikarjunbalit@gmail.com and eboard@icai.in
Theme
Ep. 105 — Accounting for Tomorrow: Mastering the Shift to Universal Sustainability Standards
CA Journal
· August 2026
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Accounting for Tomorrow: Mastering the Shift to Universal Sustainability StandardsThis article provides a clear overview of global sustainability and climate-related reporting frameworks, tracing the evolution from the Task Force on Climate-related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB), Climate Disclosure Standards Board (CDSB) and Global Reporting Initiative (GRI) to the consolidated IFRS Sustainability Standards — IFRS S1 and IFRS S2 — issued by the ISSB. It explains how these standards integrate financial and sustainability disclosures, emphasizing concepts such as enterprise value, materiality, and climate-related risks. With SEBI's Business Responsibility and Sustainability Reporting (BRSR) and ICAI's sustainability assurance initiatives, the landscape in India is rapidly evolving. The article highlights emerging opportunities for Chartered Accountants in sustainability reporting, assurance, and strategic advisory as ESG disclosures become mainstream and globally aligned, and positions Indian Chartered Accountants as the natural leaders of this capital-market transformation, drawing on their successful Ind AS convergence experience.Sustainability, climate change, and climate finance are among the recent buzzwords echoing through geo-politics, national politics and are even impacting the business landscapes. Even ICAI and SEBI have foreseen this trend, which is evident in their recent steps like SEBI's 2025 circular that revised the BRSR norms — including a tiered implementation for the top 1,000 listed companies and "BRSR Core" adoption with assured KPIs for the top 250 companies — and the launching of initiatives like SAE 5000 by ICAI.Even the IFRS Foundation has come out with IFRS S1 — General Requirements for Disclosure of Sustainability-related Financial Information — and IFRS S2 — Climate-related Disclosures — in June 2023, introducing the first global standards for the disclosure of investor-focused sustainability information.However, these recent standards are not pioneer efforts to establish globally accepted frameworks for sustainability. Multiple earlier initiatives have paved the way, as detailed in Table 01 below.Table 01 · Initiatives for Sustainability StandardsSr. No.ParticularsIssued byYear1Task Force for Climate-related Financial Disclosure (TCFD)FSB20152Sustainability Accounting Standards Board StandardsSASB20183Climate Disclosure Standards Board FrameworkCDSBMultiple4Global Reporting Initiative (GRI) FrameworkGRIF2016This multiplicity of standards can lead to confusion among professionals as to their application in a given scenario. This article aims to resolve these concerns of Indian Chartered Accountants. It emphasizes a brief account of the standards and where they can be used. It is also important to note that the IFRS Foundation, via the ISSB, has subsumed some of the above-mentioned bodies and attempted to integrate their disclosures in IFRS S1 and S2.Task Force for Climate-related Financial Disclosure (TCFD)It was established in 2015 by the Financial Stability Board (FSB). It focused on improving climate-related financial disclosures, with an emphasis on transparency and comparability. It classified risks into physical (e.g., extreme weather) and transition (e.g., policy shifts to low-carbon economies). Disclosures were structured around four pillars: Governance, Strategy, Risk Management, and Metrics & Targets. TCFD has been fully integrated into ISSB standards.Sustainability Accounting Standards Board Standards (SASB)It is a not-for-profit organisation focused on financially material ESG disclosures. SASB provided 77 industry-specific standards across five dimensions (Environment, Social Capital, Human Capital, Business Model & Innovation, Leadership & Governance). Emphasizing financial materiality, it was merged into the IFRS Foundation in 2022 and serves as guidance in ISSB standards.Climate Disclosure Standards Board (CDSB)Aiming at integrating environmental reporting with financial statements, CDSB targeted investors by equating natural and financial capital. It featured guiding principles (e.g., relevance, verifiability, forward-looking) and reporting requirements aligned with TCFD pillars. CDSB's content has been consolidated into ISSB standards.The Global Reporting Initiative (GRI) StandardsTill date it is widely used for stakeholder accountability. GRI emphasizes impact materiality (effects on economy, environment, and people), which is a combination of financial and non-financial factors. Its modular structure includes Universal Standards (foundation, general disclosures, material topics), Sector Standards (industry-specific), and Topic Standards (detailed ESG issues). While not fully subsumed, GRI complements ISSB by focusing on broader impacts.All these diverse standards overwhelm business owners and even professionals providing assurance on their statements. Further, with the addition of the EU's CBAM (Carbon Border Adjustment Mechanism), EUDR (European Union's Deforestation Regulation) and other similar statutes, one can only expect ESG and sustainability reporting to further expand.However, this plethora of standards and disclosures exhibits a silver lining for Chartered Accountants and other professionals in India. CAs are at the forefront of Financial Reporting and Auditing in India. This, coupled with the ongoing drive for incorporating sustainability and ESG reporting, provides a great opportunity for Chartered Accountants to reap maximum benefit from this integration movement.Another blessing in disguise came in the form of the establishment of the International Sustainability Standards Board (ISSB) by the IFRS Foundation. The above-mentioned CDSB, TCFD, SASB Standards and even the Integrated Reporting framework have been subsumed in ISSB. The IFRS Foundation is a not-for-profit organization which sets the reporting standards globally. Indian Accounting Standards (Ind AS) represent an adopted version of standards issued by IFRS. These were further finetuned by ICAI to suit domestic requirements by carve-ins and carve-outs.It is imperative to view IFRS S1 and S2 not merely as reporting checklists, but as foundational capital-market infrastructure. This represents a structural shift from voluntary ESG 'storytelling' to investor-focused enterprise value reporting, where sustainability risks are priced directly into the cost of capital, as depicted in Table 02 below.The consolidation of Financial Reporting Standards and Sustainability Reporting Standards under the same issuing body is highly significant, suggesting a future where many concepts and terminologies will overlap or be directly applicable across both domains. This is a considerable advantage for Chartered Accountants (CAs). The journey toward global sustainability benchmarks mirrors the profession's successful transition from Indian GAAP to Ind AS. Having already mastered the complexities of global financial convergence and local 'carve-ins/outs,' Indian CAs are the most qualified architects to lead the integration of non-financial data into mainstream corporate reporting. The profession that delivered Ind AS will now deliver the next-generation sustainability standards. Let's delve into IFRS S1 and S2 briefly.Table 02 · How Legacy Frameworks Map to IFRS Sustainability StandardsFormer InitiativeRole in IFRS Sustainability StandardsISSB Standard(s) ImpactedTCFD RecommendationsProvided the four core pillars of disclosure structure.IFRS S1 and IFRS S2 (Fully Integrated)SASB StandardsProvided the industry-specific disclosure topics and metrics.IFRS S1 and IFRS S2 (Integrated as guidance)Integrated Reporting FrameworkProvided the concept of value creation and integrated thinking.IFRS S1 (Foundational Concept)CDSB FrameworkProvided technical guidance on climate and environmental disclosures.IFRS S1 and IFRS S2 (Consolidated Content)IFRS S1 — General Requirements for Disclosure of Sustainability-related Financial InformationIt is the fundamental standard for all sustainability disclosures, comparable to IAS 1 / Ind AS 1 for Financial Reporting. Its primary objective is to assist reporting entities to disclose information regarding their sustainability-related risks and opportunities in a manner useful to the general user of financial statements, to assist them in their decision making.The standard also focuses on the "Enterprise Value" concept — i.e., factors affecting the entity's cash flows, access to finance, and/or cost of capital over the short/medium/long term are considered. Additionally, the coverage is not limited to climate; the entire ESG spectrum is included.The four core content areas: IFRS S1 requires disclosures over four core content areas. These areas are consistent with the recommendations of the Task Force on Climate-related Disclosures (TCFD), i.e., Governance, Strategy, Risk Management and Metrics & Targets.Key Principles and Requirements: IFRS S1 introduces several requirements to ensure usefulness and quality of disclosures. These are majorly consistent with IAS 1 / Ind AS 1.Connected Information: The user should be able to connect information in financial reports with the facts and figures presented in the sustainability report. For example, impairment of assets in a flood-prone area due to flood risk.Reporting Entity: The sustainability-related disclosures must pertain to the same entity/group to which the financial reports are referred. For example, a standalone sustainability report of a subsidiary can't be referred to in the Group's Financial Statements.Fair Presentation: The disclosure should provide a complete, neutral, and accurate depiction of the sustainability-related risks and opportunities.Reference to Other Standards: An entity is required to consider SASB Standards to identify industry-specific sustainability-related risks and opportunities and the corresponding metrics; and in case of unavailability of a standard, SASB / other standards are to be referred.IFRS S2 — Climate-related DisclosuresIFRS S2: Climate-related Disclosure is the first theme-based standard issued by the ISSB. It applies to one of the most discussed and debated topics of climate change. It effectively bridges the gap between the principles of IFRS S1 and detailed, mandatory disclosures about climate.The standard covers three categories of climate-related risk and opportunities:Climate-related Physical Risks: Risks related to the physical impacts of climate change.Acute: Event-driven (e.g., floods, wildfires).Chronic: Longer-term shifts (e.g., rising sea levels, sustained heat waves).Climate-related Transition Risks: Risks associated with the transition to a lower-carbon economy.Policy & Legal: New regulations (e.g., carbon pricing, emissions limits).Technology: Replacement of existing technologies (e.g., shift to electric vehicles).Market: Changes in supply and demand (e.g., consumer preference for low-carbon products).Reputation: Loss of reputation due to climate performance.Climate-related Opportunities: Potential benefits from adapting to or mitigating climate change (e.g., new product development, energy efficiency savings).Apart from the above, the standard also requires climate-specific disclosures structured around TCFD recommendations, i.e., Governance, Strategy, Risk Management and Metrics & Targets. However, it is also pertinent to note there are some critical requirements under Metrics & Targets in IFRS S2:Greenhouse Gas Emissions: Here, an entity is required to disclose its absolute GHG emissions for Scope 1, Scope 2 and Scope 3.Measurement: GHG emissions must be measured in accordance with the Greenhouse Gas Protocol Corporate Standard.Scope 1: Direct emissions from owned or controlled sources (e.g., company vehicles, owned facilities).Scope 2: Indirect emissions from the generation of purchased electricity, steam, heat, or cooling.Scope 3: All other indirect emissions in the value chain (e.g., purchased goods, business travel, use of sold products).Capital Deployment and Internal Carbon Pricing: IFRS S2 requires disclosures about the amount and percentage of assets susceptible to climate-related physical and vulnerable risk, and also those which can benefit from climate-related opportunities. Further, disclosures regarding the amount of capital expenditure towards climate-related risk and opportunities, and whether the company is using internal carbon pricing in its decision making, and how.Climate Targets: Disclosure regarding quantitative and qualitative climate-related targets (e.g., Net-Zero commitments, renewable energy goals) and the progress made toward achieving them. If a net GHG emissions target is set, the entity must also disclose the corresponding gross target.“The ICAI has already issued the Standard on Sustainability Assurance Engagements (SAE) 3000 and SAE 3410 (for GHG statements), providing the technical framework for practitioners to deliver these services.Alignment with India's SEBI BRSR CoreWhile IFRS standards provide a global benchmark, India has decided to come out with its own regulatory and reporting leadership by mandating one of the most descriptive and comprehensive frameworks in the global south. In 2021, SEBI replaced the narrative-based Business Responsibility Report (BRR) with BRSR. It was further evolved with the introduction of BRSR Core in 2023.SEBI's BRSR and BRSR Core align closely with IFRS S1 and S2. BRSR Core mandates assured KPIs on ESG metrics like GHG emissions (Scopes 1–3), water usage, and supply chain sustainability, mirroring IFRS S2's climate disclosures. While IFRS emphasizes investor-driven materiality tied to financial impacts, BRSR integrates broader stakeholder considerations but increasingly converges on enterprise value through value-chain reporting. This alignment facilitates Indian companies' compliance with global standards like EU CBAM, positioning CAs to advise on integrated reporting under both regimes. ICAI's SSA 5000 further supports assurance, ensuring BRSR disclosures are reliable and comparable.A key conceptual distinction runs through the global landscape. GRI follows impact materiality (double materiality): what the company does to the economy, environment and society. IFRS S1/S2 follow financial materiality (single materiality): what sustainability issues do to the company's cash flows, cost of capital and enterprise value.India sits at the perfect intersection. SEBI's BRSR began with a stakeholder lens (closer to GRI) but BRSR Core is rapidly converging toward financial materiality through assured KPIs and value-chain reporting, as depicted in Table 03. This dual approach gives Indian companies and CAs a natural advantage — we can speak both languages fluently when dealing with global investors and domestic regulators.The report is divided into three sections:Section A — General Disclosures: Details regarding size, location, and workforce.Section B — Management and Process Disclosures: Governance, leadership oversight, and policy implementation.Section C — Principle-wise Performance Disclosures: Granular reporting on indicators such as energy consumption, water withdrawal, and employee well-being.Table 03 · GRI vs. IFRS S1/S2 vs. SEBI BRSRFeatureGlobal Reporting Initiative (GRI)IFRS S1/S2 (ISSB)SEBI BRSR (India)Primary ObjectiveTo communicate organizational impact on society, economy, and environment.To provide information for assessing enterprise value and financial performance.To ensure regulatory compliance and responsible business conduct in the Indian market.Primary UsersMulti-stakeholder focus (investors, NGOs, employees, communities).Investors, lenders, and other financial creditors (capital providers).Regulators (SEBI/MCA) and a broad range of domestic stakeholders.Materiality LensImpact Materiality (double materiality: financial and societal impact).Financial Materiality (single materiality: impact on cash flows/risk).Compliance-based indicators / moving toward financial materiality via BRSR Core.Reporting ScopeOrganizations of any size, sector, or geography.Publicly listed entities and organizations raising capital.Top 1,000 listed companies by market capitalization in India.Assurance StatusHistorically voluntary; variable market practice.Integrated into audited annual reports (jurisdiction dependent).Mandatory reasonable assurance for BRSR Core KPIs (phased glide path).While the regulatory mandate begins with the top 1,000 listed companies, the ripple effects will reach far wider. Banks and large corporates are already demanding BRSR-aligned sustainability data from their suppliers and borrowers. Mid-sized companies seeking foreign funding, credit facilities, or participation in global value chains will face de-facto pressure to report under IFRS S1/S2 principles by 2027–28.For Small and Medium Practitioners (SMPs), this creates a significant new practice area: helping clients build basic sustainability data systems, conduct materiality assessments, and prepare for voluntary or bank-mandated disclosures. Early movers among SMPs will be able to offer high-value advisory services at a fraction of major multinational accounting firms' costs, expanding their relevance and revenue streams.The Global Convergence: How Legacy Standards Built the IFRS Foundation1 · The "DNA" Building Blocks (Legacy Frameworks) 2 · The "Engine Room" (Current IFRS Standards) 3 · The India Anchor & Local ContextTCFD — The Architecture4 pillars: Governance, Strategy, Risk, Metrics & Targets. Universal structure.SASB — The Industry Lens77 sector-specific standards. Financial-materiality focus.CDSB — The Environmental RigorIntegrating natural capital into mainstream financial reports.GRI — The Impact PartnerGlobal standard for impact materiality. Complementary "double materiality".→IFRS S1 — General RequirementsThe "general ledger" of ESG. All sustainability-related financial risks.IFRS S2 — Climate-related DisclosuresThe "climate specialist". Scope 1, 2, 3 & scenario analysis.→SEBI BRSR CoreQuantitative proof points. 9 key ESG attributes (GHG, energy, water, etc.).The CA's Role — Reasonable AssuranceGatekeepers verifying data meets SEBI & global IFRS baseline.Global Trade (CBAM)Non-compliance = export penalties.Cost of CapitalBetter IFRS/BRSR reporting = lower interest rates.Data IntegrityERP-integrated ESG data = audit-ready reports.“With the convergence of IFRS S1/S2 and India's BRSR framework, Chartered Accountants are uniquely positioned to lead this transition.Where do CAs fit in?The advent of these new sustainability standards and the integration of ESG data into mainstream reporting frameworks creates a multi-dimensional opportunity for Chartered Accountants. Chartered Accountants' pre-existing and thoroughly trained expertise in data integrity, audit aspects and methodology, and strategic financial and cost planning can be directly imported into the sustainability domain.Sustainability Assurance and the Audit of Non-Financial Information: This is the most immediate opportunity and a natural, almost inevitable, extension of a Chartered Accountant's traditional skill set. As sustainability data becomes mandatory and impacts the financial position, investors require independent assurance (audit) over the reported figures. The ICAI has already issued the Standard on Sustainability Assurance Engagements (SAE) 3000 and SAE 3410 (for GHG statements), providing the technical framework for practitioners to deliver these services.Preparation & Advisory Services: CAs can assist in preparation of the annual sustainability report (BRSR in India), advising on materiality, framework selection, etc. CAs can also assist in the prevention of greenwashing — i.e., when companies show themselves as more environmentally sound than they actually are.Corporate Strategy and Integration: These roles bridge the gap between finance, risk management, and sustainability, positioning the CA in a strategic leadership role. Mitigation of environment-based risks puts strain on the financial stability of companies. Usually demanding heavy upfront capital allocations, CAs can assist in the evaluation of Environmental-Risk-adjusted IRR/NPV and also in pricing of the end product by valuing the "Greenium" — amalgamating the concepts of carbon pricing in capital budgeting.Internal Controls over Sustainability Reporting (ICSR): Among the fundamental challenges in sustainability reporting is the reliability of underlying data. As non-financial data is often kept in fragmented form and is rarely linked to existing ERP applications, CAs can participate by providing some degree of assurance over completeness, accuracy and traceability of data.Sustainability reporting is no longer peripheral — it has become central to capital allocation, risk pricing, and regulatory compliance in global markets. With the convergence of IFRS S1/S2 and India's BRSR framework, Chartered Accountants are uniquely positioned to lead this transition.The same professionals who mastered Ind AS and built robust internal financial controls will now design internal controls over sustainability data (ICSR), assure GHG emissions and ESG metrics, price climate-adjusted risk into investment decisions, and advise boards on capital deployment that creates long-term enterprise value.The opportunity is clear: upskill in ESG assurance and advisory today, and Chartered Accountants will not only protect India Inc. against climate and regulatory risks — they will actively shape the future of responsible capital markets. The time to act is now.ReferencesIFRS S1 & IFRS S2 (Official Standards)IFRS S1 — General Requirements for Disclosure of Sustainability-related Financial Informationifrs.org/issued-standards/ifrs-sustainability-standards-navigatorIFRS S2 — Climate-related Disclosuresifrs.org/issued-standards/ifrs-sustainability-standards-navigatorSEBI — BRSR Format (Original 2021 Circular)Mandatory BRSR for top 1,000 listed companiessebi.gov.in/legal/circulars/may-2021/business-responsibility-and-sustainability-reporting-by-listed-entities_50096.htmlTCFD Overview (Official Website — Now part of ISSB)TCFD Knowledge Hubfsb-tcfd.orgSASB Standards (77 Industry-Specific Standards)Official SASB Standards Librarysasb.ifrs.org/standardsCDSB Framework for Reporting Environmental & Climate InformationCDSB Frameworkcdsb.net/resources/cdsb-publicationsGRI Universal Standards (2021 Update)GRI Standards Databaseglobalreporting.org/standardsThe Chartered Accountant · August 2026 · www.icai.orgAuthor may be reached at cagauravyadav@hotmail.com
taxation
Ep. 106 — Contract of Service vs Contract for Service
CA Journal
· August 2026
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Contract of Service vs Contract for ServiceThe recent judgement of Bombay High Court in CIT vs Dr Balabhai Nanavati Hospital (2025) brings back into focus one of the longest-standing disputes in the healthcare sector: whether doctors in hospitals should be treated as “employees” or as “independent consultants”? This distinction is important because it impacts the TDS section. “Salary payments” fall u/s 192 of the Income-tax Act, 1961 / section 392 of the Income-tax Act, 2025, while “professional fees” fall u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025. TDS officers check whether hospitals are wrongly treating the doctors as “consultants”. This has resulted in TDS litigation. The controversy is relevant not only for the healthcare sector but also for educational institutions. This is demonstrated by the latest decision in Brilliant Study Centre Pvt Ltd vs ITO (2026). If TDS u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025 is applied by the payer, then it is important to demonstrate that the individual (payee) is a “consultant” (non-employee) in both ‘form’ and ‘substance’. The article discusses these issues in detail, including for the entertainment & media industry. The article also discusses the expectations from practising Chartered Accountants in relation to the “Tax Audit Report”.IntroductionThe distinction between a “contract of service” (employment) and a “contract for service” (independent professional arrangement) has been one of the most debated issues in the income-tax law.These phrases differ only by a single word (“of” vs “for”). However, this small difference is not mere wordplay; it determines the character of the income and the related TDS obligations.Healthcare IndustryThis issue is relevant for the healthcare industry where Senior Doctors examine patients in private hospitals for part of the day and practice independently at their own clinics for the balance day.In this connection, a question arises:Are these doctors “employees” of the hospital?Or are they “independent consultants” to the hospital?Why the distinction mattersThe classification of the doctor affects the TDS rates:If a doctor is treated as an “employee”, TDS must be deducted u/s 192 of the Income-tax Act, 1961 / section 392 of the Income-tax Act, 2025. TDS on salary is to be applied based on the “average rate of income-tax” computed on the basis of the “rates in force for the concerned financial year”.On the other hand, if the doctor is treated as a “consultant”, then TDS is deductible u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025 at the rate of 10%.Incorrect classification of the doctor may lead to demands on the hospital for short-deduction of tax, interest and penalty.CBDT Instructions to its field officersThe issue has been the subject matter of heightened scrutiny of hospitals by the “TDS Wing” of the Income-Tax Department. This is evident from the following:CBDT Action Plan for 2014-15The action plan states as follows:“In the cases of professionals, e.g., doctors etc., salary payments are misclassified as professional payments and tax is deducted by applying lower rates. This aspect needs to be examined.”The Publication (July 2019) of the Income-tax Department titled “Techniques of Investigation for Assessment” discusses the controversy in detail.The ‘Nanavati Hospital’ CaseOne such hospital under scrutiny was Nanavati Hospital, Mumbai.In its TDS assessment, the Revenue alleged as follows:Honorary Doctors should be treated as “employees”.TDS u/s 192 of the Income-tax Act, 1961 ought to have been applied by the hospital instead of section 194J of the Income-tax Act, 1961.However, the Bombay High Court [CIT v. Dr Balabhai Nanavati Hospital (2025)] rejected the Revenue’s position. The High Court held as follows:There was no “employer-employee” relationship between the hospital & the honorary doctors.Payments to doctors represented “professional fees”, not “salary”.Hence, TDS u/s 194J of the Income-tax Act, 1961 was correctly applied by the hospital.Judicial Tests: Whether doctors are “consultant” or “employee” of hospitals?The Bombay High Court applied the following yardsticks to hold that the doctors were “independent professionals”:Variable remuneration: The doctor’s income depended on actual consultations or procedures performed — not on a “fixed monthly salary”.Revenue-sharing model: The hospital retained a percentage of billing to cover infrastructure, facilities and administrative support.Professional autonomy: Doctors were free to practise at other hospitals or run their own clinics.No employee benefits: Hospitals did not provide PF, ESIC or perquisites normally associated with employment.Flexible schedule: Doctors were not bound by fixed working hours; their availability depended on patient requirements.No control: Hospitals did not exercise “real supervisory control” in respect of the work entrusted to the doctors.Disclosure in income-tax return of doctors: Doctors disclosed their income under the head “Profits and Gains of Business or Profession”, not “Salaries”.What should hospitals do?Considering the TDS disputes, it is advisable for the hospitals to ensure the following:The hospitals should review contractual arrangements with doctors.The hospitals should align its TDS position with the substance of the relationship with the doctors — and not merely with the nomenclature of the agreement with the doctors.The hospitals should maintain factual evidence of the “judicial tests” discussed above.A proactive approach can reduce litigation risk for the hospitals.Is the TDS controversy restricted to hospitals?The short answer is “No”. The reasons are as under:Briefly speaking, whilst the doctor is subject to TDS rate of 10% u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025, the TDS rate can be reduced to 2% if the “consultant” does not provide “professional services” but, inter alia, provides “management services, technical services, and consultancy services”.Further, if an individual treats himself or herself as a “consultant” as opposed to an “employee”, then he or she can claim a tax deduction for expenses, presumptive taxation et al. As opposed to this, a “salaried employee” hardly gets any tax deductions.Hence, the general temptation may be to “call” people as “consultants / freelancers / contractor” and to treat their remuneration as “non-salary”.However, there is a need for caution in light of below discussion.Educational InstitutionsThe publication (July 2019) of the Income-Tax Department titled “Techniques of Investigation for Assessment” highlights the advance ruling of Max Muller (2004) for payments by educational institutes to honorary part-time teachers.In Max Mueller, an “educational institute” (EI) engaged “part-time teachers” on a “contract basis”. EI controlled the teachers as under:EI prescribed the syllabus.EI fixed the teaching period.EI fixed responsibility on teachers for completion of their assignment to the satisfaction of EI.EI required the teachers to be punctual and regular in their duty.EI mandated the teachers not to be absent without its permission.EI reviewed the work of teachers.In this backdrop, the “Authority for Advance Rulings” held that the teachers were “employees” of EI. This was in spite of the following facts:The agreement described the teachers as a “part-time casual honorary teacher”.The agreement provided that the teachers would not have the status of an “employee” and shall not be entitled to avail the benefits of the “regular employees”.The teachers were paid “honorarium” by EI for each semester.The teachers were entitled to work simultaneously for other establishments, while working with EI.However, in Brilliant Study Centre Pvt Ltd vs ITO (2026), the Cochin Tribunal held that the teachers were not “employees”. In this decision, the teachers were initially treated as “salaried employees” but were shifted to “professional category” based on market considerations. There was only a verbal agreement between the teachers and the coaching centre. The teachers were paid on hourly basis and had to take classes for 5 to 7 hours daily. During this time, they were not allowed to take classes in any other coaching centre. Further, the teachers were supposed to be available for extra lectures. An attendance register was maintained. The teachers were free to teach in their own way subject to curriculum. The coaching centre did not exercise any control, intervention or direction over the exercise of duties by the teachers. The teachers were paid monthly and promised a yearly increase in the remuneration of 10%. The teachers were supposed to intimate their leave, one day prior to the date of leave. The coaching centre provided medical insurance and transport facility to the teachers. However, the teachers were not entitled to the benefits of PF, gratuity, bonus, medical reimbursement, leave encashment etc. The teachers filed their income-tax return disclosing the remuneration as “professional fees” (and not as “salary”). These returns were accepted by the Revenue. In this backdrop, the Tribunal rejected the Revenue’s allegation that the teachers were “employees” of the coaching centre. The Tribunal held that the teachers did not cease to be “consultants” merely because the coaching centre had exercised some degree of control over the administrative and logistical functioning of the teachers.Thus, there exists contrary jurisprudence in the educational sector.Entertainment & Media IndustryTDS litigation has also arisen in the entertainment sector on account of unique arrangements with artists etc.In ITO vs Entertainment Network (I) Ltd (2017), it was held that the “radio jockeys” (RJs) were earning “professional fees” (and not “salary”) from a FM Radio broadcasting company (FMR). This was on account of the following facts:RJs were not required to provide services in compliance with the internal codes of FMR, unlike in the case of its employees.RJs were not required to report as per “duty hours for the employees”.RJs were not required to sign the muster.RJs were not governed by the leave rules of FMR.RJs were incentivised based on their popularity.RJs did not have any “probation period”.RJs were solely responsible for their acts.There was a full indemnification by RJs for injuries to FMR.FMR’s liability was limited for any damages.RJ’s compensation was not broken into basic allowances etc.RJs were not entitled to provident fund, gratuity, retirement benefits etc.The agreements with RJs were for a specific period and FMR was not bound to renew the same.RJs were free to take assignments from any company (except with any other radio broadcasting company). The individuals were not bound to act solely as RJs.RJs had shown their remuneration as “professional fees” in their respective returns, which had been accepted as such by the Revenue.RJs were liable to pay service tax.Post this decision, the publication (July 2019) of the Income-Tax Department titled “Techniques of Investigation for Assessment” (see page 333) raised an alarm for the film fraternity. This was because of the Tax Tribunal’s decision in Red Chillies Entertainment Pvt Ltd vs ACIT (2025).In this case, ‘retainership fees’ were paid by a film production company (FPC) to an individual who was appointed as a “production manager” (PM). The payer classified the payment as a “consultancy fee” and applied TDS u/s 194J of the Income-tax Act, 1961. However, the Income-Tax Department alleged that there was an “employer-employee relationship”. The Tribunal sided with the Revenue. This was due to the following facts:The individual was designated as a “production manager”.PM was required to perform the duties that were assigned to him by FPC from time to time.The remuneration was payable monthly and was of a ‘fixed amount’ (like a “salary”).PM was provided with a company car and mobile phone.PM was required to attend office daily to perform his duties as may be assigned to him by FPC from time to time.PM was provided with leaves of 30 days in a year. In other words, PM was required to attend office mandatorily for remaining days of the year.There was a clause in the contract for “termination of employment”.Identical contract was signed with other individuals who were designated as “production executive” and “production assistant”.The Tribunal was not influenced by the fact that PM was not paid PF, ESI, Gratuity & Bonus.Thus, there exists contrary jurisprudence in the entertainment & media industry.Tax Audit Report1The Tax Auditor is required to report the following:“Whether the assessee is required to deduct or collect tax……, if yes please furnish:Column 1: Tax deduction and collection Account Number (TAN)Column 2: SectionColumn 3: Nature of paymentColumn 4: Total amount of payment or receipt of the nature specified in column (3)Column 5: Total amount on which tax was required to be deducted or collected out of (4)Column 6: Total amount on which tax was deducted or collected at specified rate out of (5)Column 7: Amount of tax deducted or collected out of (6)Column 8: Total amount on which tax was deducted or collected at less than specified rate out of (7)Column 9: Amount of tax deducted or collected on (8)Column 10: Amount of tax deducted or collected not deposited to the credit of the Central Government out of (6) and (8)”.For this article, column (8) is relevant. In this connection, The Guidance Note on Tax Audit issued by The Institute of Chartered Accountants of India (2025 edition, para 66.11) states as follows:“……column (8) requires furnishing of the total amount, out of the amount deductible or collectible as mentioned in column (5), at which the tax was deducted or collected at the rate less than the specified rate out of Column (7). The lesser deduction is required to be reported in this clause. This will include deduction at a lower rate than what is prescribed, application of wrong section for deduction of tax at source, etc.…… In case, there is difference of opinion with regard to rate of deduction or applicability of a particular section, the auditor may appropriately report the difference of opinion…… giving both the views”.Consequently, if the Tax Auditor finds that TDS u/s 194J of the Income-tax Act, 1961 / section 393(1) of the Income-tax Act, 2025 has been applied (2% or 10%), but the Chartered Accountant believes that the TDS u/s 192 of the Income-tax Act, 1961 / section 392 of the Income-tax Act, 2025 ought to have been applied, then the aforesaid guidance of The Institute of Chartered Accountants of India would be relevant (presuming that the “Effective TDS rate on Salaries” is higher than “TDS rate for Consultants”).In light of the above, the Tax Auditor is required to evaluate on whether the individual is in “employment” or is a “consultant”. Now, can the nature of the relationship be determined solely based on the contract or agreement?In Vijay Mariappan Austin Prakash vs ACIT (2026) an individual assessee (VM) was a “salaried employee” with a company, ZBL, till 30.09.2020. After termination of employment, VM was appointed by ZB as a “consultant”. For this purpose, a “consultancy agreement” was entered into between VM and ZBL from 01.10.2020 to 30.09.2022. The nature of services provided by VM as an “employee on salary basis” and VM’s “services as per the consultancy agreement” remain the same. Hence, the Revenue alleged that VM had changed the source of income from “salary” to “consultancy fees” w.e.f 01.10.2020, to avoid paying tax in India. However, the Tribunal did not accept Revenue’s contentions. It held as under:“…observations of……AO do not have any merit due to the fact that change of the employment to consultant is with regard to the agreement between the concerned parties. However, we find from the records, assessee has been appointed as a consultant based on the agreement for the period from 01.10.2020 to 30.09.2022”.With due respect, the agreement, by itself, may not be determinative of the nature of the relationship (“employment” or “independent professional engagement”). Ideally, the Tax Auditor must go beyond the contract (form). The following questions can be asked by the Tax Auditor to the company (payer):Is the individual acting as an “independent contractor” on a principal-to-principal basis?Is there a “master-servant relationship”?Who controls the “work to be done” by the individual?Who controls the “manner in which such work should be done” by the individual?Who determines the “place and time of the performance of the services”?Who provides the “tools and other resources” to the individual, for the performance of the services?To what extent does the individual have “professional autonomy”?Are the “intricacies of the services” to be performed by an individual, “specified in advance”? Or are the individual assigned duties that are not feasible to be defined in specific terms in advance?Does the individual have “formal designation”?Is the remuneration “fixed” or “variable”? Does the “monthly remuneration” vary (increase or decrease) depending upon the “quantum of work”?Is the individual entitled to “social security benefits”?Does the individual get the “perquisites” (eg, company car or mobile) that are normally associated with an employment?Does the individual have to undergo “annual or bi-annual evaluation of performance”?Is the individual entitled to “annual increments and bonus”?Is the individual required to attend office on a “daily basis”?Does the individual have a “flexible schedule”? Is the individual bound by a “fixed number of working hours” in a day?Is the individual, “full-time” or “part-time”?Is the individual entitled to “annual leaves / national holidays”?Can the individual be absent “without permission”?Can “disciplinary sanctions” be imposed on the individual?Is there a “right to suspend or dismiss” the individual?Who bears the “risk and rewards” of the services? Is the individual “liable for damages”?What stand has the individual taken in the ITR (“Income from Salary” or “Profits and Gains from Business or Profession”)?Is the individual liable to pay GST?Does “Labour Laws” apply to the individual?These are indicative questions which may vary depending upon the industry.“ The hospitals should align its TDS position with the substance of the relationship with the doctors — and not merely with the nomenclature of the agreement with the doctors. ”ConclusionThere is no set formula to decide whether a relationship is a “contract of service” (employment) or a “contract for service” (independent professional engagement). Everything turns on facts. The contract has to be read as a whole. The circumstances have to be looked at in totality. The “real relationship” matters more than the “label” used in the agreement. Lastly, but equally importantly, every organisation & individual must ensure that its arrangements & tax position pass the “basic smell test”.ReferencesCIT vs Dr Balabhai Nanavati Hospital (2025) 178 taxmann.com 437 (Bombay) / IT Appeal Nos 2166, 2448, 2451, 2612, 2758 of 2018 and 605 of 2020: https://indiankanoon.org/doc/158154550/Brilliant Study Centre Pvt Ltd vs ITO (2026) 187 taxmann.com 816 (Cochin-Tribunal) / ITA No 545/Coch/2026: https://indiankanoon.org/doc/114480815/CBDT Action Plan for 2014-15: https://www.scribd.com/document/1060341438/2014-15Publication (July 2019) of the Income-tax Department titled “Techniques of Investigation for Assessment” (pages 332-333): https://www.scribd.com/document/811247308/Techniques-of-Investigation-for-Assessment-Vol1Max Muller (2004) 138 Taxman 113 (AAR) / AAR No 597 of 2002: https://indiankanoon.org/doc/830507/ITO vs Entertainment Network (I) Ltd (2017) 88 taxmann.com 843 (Mumbai-Tribunal) / IT Appeal Nos 1352 & 5227 (Mum) of 2014: https://indiankanoon.org/doc/140431337/Red Chillies Entertainment Pvt Ltd vs ACIT (2025) 181 taxmann.com 282 / IT Appeal Nos. 6655, 6656 & 6657 (Mum) of 2014 and 92 & 93 (Mum) of 2015: https://indiankanoon.org/doc/57040157/The Guidance Note on Tax Audit issued by The Institute of Chartered Accountants of India (2025 edition): https://resource.cdn.icai.org/87317dtc-aps1808gn-tax-audit2025.pdfVijay Mariappan Austin Prakash vs ACIT (2026) 182 taxmann.com 285 (Visakhapatnam-Tribunal) / IT Appeal No.89 (VIZ) of 2025: https://itat.gov.in/public/files/upload/1767073619-DkKP5F-1-TO.pdf1 See Form 3CD of Income-Tax Rules, 1962 (similar to Form 26 of Income-Tax Rules, 2026).Author may be reached at modinileshrajkumar@mail.ca.in and eboard@icai.in
Ep. 107 — Nation Building to Global Collaboration: Strengthening Trust, Enabling Growth
CA Journal
· August 2026
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Nation Building to Global Collaboration: Strengthening Trust, Enabling GrowthFrom gifting the world the concept of "zero" to cultivating philosophies that harmonize science, spirituality, and sustainability, India has long shaped global thought with wisdom rooted in its timeless resilience. Our nation's economic strength once earned it the title 'Sone ki Chidiya' (The Golden Bird), a testament to its unmatched stability and prosperity. As time evolved, visionary leaders recognized the need for a body of trusted financial professionals who could guide India's growth with integrity and precision. This responsibility found its rightful custodian in the Chartered Accountant.Enacted in 1949, before the Constitution came into force, the Chartered Accountants Act laid the foundation for the accountancy profession and granted it institutional autonomy. The Act not only formalized the role of professionals in the field and conferred upon them the distinguished designation of Chartered Accountant, but also highlighted their importance as guardians of transparency and integrity in India's economic landscape.The profession today is the fulcrum of India's financial integrity and economic stewardship. It is working with full determination and dedication to fulfill its responsibility as bestowed upon it under the historic mandate to uphold accountability, ensure transparency and safeguard the nation's economic interests. Chartered Accountants are serving as the quiet architects of successful financial systems, strengthening the pillars on which the economy stands. The Institute, as the wellspring of growth for professionals, has charted a journey defined by Independence, Integrity, and Excellence.ICAI has always stepped forward to serve as the guide of a forward-looking economy. At the heart of the Institute's consistency lies its timeless motto "Ya Esa Suptesu Jagarti", which has inspired the CA professionals to stay vigilant and be ahead of the curve, while staying committed to continuous learning in their respective areas. The stature and the global acclaim of ICAI's professionals stem from the values embedded in the ICAI motto, which has led to its fundamental and indispensable role in nation-building. The ascent of the Indian economy and the global image of the profession are testament to the profession's competence and credibility, as well as the ability to keep reinventing itself and be ahead of the curve to lead amidst the dynamically evolving economic landscape.ICAI has, over the years, nurtured a large pool of highly trained professionals who support businesses, enhance compliance, improve financial reporting, and drive operational efficiency across industries. Additionally, through initiatives that support MSMEs, Startups, and entrepreneurship, the Institute has emerged as a trusted advisor promoting governance and acting as a catalyst for sustainable transformation. The consistent efforts of the Institute for a growing nation are further strengthened by its growing and extensive network of 5 Regional Councils and 185 Branches, which ensures accessibility, consistent knowledge dissemination, stronger professional engagement, and deeper integration with local and national growth.The Institute's growing impact has naturally extended beyond national boundaries, driven by the global competence and resolute commitment of its professionals. ICAI has evolved from a domestic pillar of financial governance into a respected international stakeholder and a trusted architect of accounting excellence worldwide. To support this expanding global footprint, the Institute has established overseas Chapters, entered into 8 Qualification Reciprocity Agreements and 16 Technical Cooperation Agreements, and built a strong international presence through 54 Chapters and 31 Representative Offices across 85 cities in 47 countries, reflecting the rising stature of the Indian Chartered Accountancy profession on the world stage. Today, ICAI promotes global cooperation, creates opportunities for Chartered Accountants moving abroad, participates in international forums, and contributes to shaping global accounting dialogue, reflecting its evolution from a national institution to a global leader. ICAI's contributions towards the globalization of the CA profession led to its affiliation/membership with 15 International Bodies.The foundation of ICAI's global stature lies in its long-standing contributions at the international forums since the early decades of its formation. The Institute has served as the founding member of global professional bodies such as the Confederation of Asian and Pacific Accountants- CAPA (1957), International Federation of Accountants- IFAC (1977), South Asian Federation of Accountants- SAFA (1984), Edinburgh Group (2001), and the Asian Oceanian Standard Setters Group- AOSSG (2009), which has empowered the Institute to go global and reap the benefits of extensive exposure to international best practices. These engagements have not only elevated ICAI's institutional influence but also opened meaningful mobility pathways for Indian Chartered Accountants worldwide. Today, the forward-looking vision of the Institute is reflected in the expanding global footprint of our professionals, with over 40,000 members contributing across international markets, a testament to the growing global demand for the rigor, reliability, and excellence they represent.ICAI's working and functioning reflect not only the scale of the CA profession, but also the depth of its intellectual capital cultivated over the generations.From Professional Mastery to National and Global ImpactThe broadening horizons of the Institute have opened new realms of opportunity for its members. Today's Indian Chartered Accountants are not only versed in traditional accounting and auditing, but also skilled in forensic accounting, sustainability reporting, insolvency, valuation, data analytics, and digital governance, competencies that are increasingly vital in a rapidly changing global economy. This diversified expertise enables them to navigate evolving challenges such as rising debt levels, persistent inflation, geopolitical uncertainty, digital transformation and intensifying climate risks. The Institute always stands for its members and pushes them to become better, ensuring they remain adaptive, competent, and globally relevant. Against this backdrop, ICAI's 4.5 lakh-plus members and over one million students stand ready to meet global demand for ethical and skilled finance professionals. By aligning education and training with emerging global standards, including sustainability, transparency, digital assurance, and ESG reporting, ICAI continues to prepare its members to serve as trusted advisors, capable of supporting both corporate and national growth with resilience, foresight, and excellence. Equipped with these skills and driven by institutional support, our members are also integral to shaping standards and practices that strengthen India's economic framework.The Institute, as a Standard setter, has remained committed to building a transparent and sustainable future. The Institute recognizes that a robust economy is the backdrop of a nation's competitiveness. Over the years, the Institute has strenuously supported the development of standards in accounting, assurance, forensic, internal audit, sustainability, and other best practices to build India as a rising, attractive destination for foreign institutions. With India shining bright as the fourth-largest economy, a likely GDP growth of 6.8% in the financial year 2025-26, the lesson is that we all can contribute towards enhancing India's economic footprint and credibility on the world stage. Analysts indicate that India is on the right path to rank among the top three global economies by 2030, with a potential GDP of approximately $7.3 trillion.Building on this legacy, ICAI was, is, and will continue to be at the forefront when it comes to building economic resilience, enabling inclusive growth, and undertaking capacity-building initiatives, skill development programs, community welfare, and public service.Learning EcosystemBuilding on its commitment to empower professionals and budding minds and strengthen India's economic framework, ICAI has developed a dynamic learning ecosystem that forms the foundation of knowledge leadership. The Institute has always ensured that its members and students develop deep technical competence in accounting, auditing, taxation, finance, and law, as well as promoted strategic leadership skills, analytical thinking, technical prowess and professional judgment. Through its mandatory articleship program, ICAI integrates real-world experience into education, enabling students to learn directly from professional practice.The profession has built its legacy of trust through continuous professional development by introducing post-qualification courses, and specialized certifications and programs for developing future-ready skills aligned with international best practices, to steer the Indian economy on the path of progress. In alignment with its objective to nurture skilled professionals, the Institute has trained 22,000+ members in Ind AS. Furthermore, the Certificate Course on Overseas Outsourcing Services has been launched in the US and UK jurisdictions. DISA 4.0, advanced certifications in cybersecurity/data protection, and a forthcoming Diploma in Forensic Investigation will cement its stature as a global frontrunner in IS Audit, Cybersecurity, and Forensic accounting disciplines.Additionally, in the direction of nurturing professionals for the global market, ICAI has partnered with renowned institutions to offer online foreign language courses in German, Spanish, French, Japanese, and Business English. Driving towards the AI oriented economy of tomorrow, ICAI has also introduced AI-driven tools like CA GPT, demonstrating its strong commitment to equipping members with the knowledge and skills required to embrace emerging technologies. Further, to address the complexities of ESG disclosures, sustainable finance, and climate change, the Institute is committed to ensure that its members have the skills and support necessary to stay aligned with sustainability trends.VISHWANIYA – The Guiding PrincipleVISHWASNIYA is adopted as the guiding theme for the year 2025, which is deeply rooted in ICAI's values of trust, excellence, and a nation-first approach. The theme reinforces ICAI's role in shaping a dynamic financial ecosystem while supporting India's journey toward becoming a global economic powerhouse by 2047. The VISHWASNIYA framework is built on eleven core principles:The VISHWASNIYA Framework — Eleven Core PrinciplesVVision for Viksit BharatIIntegrity & EthicsSSustainability & Social ImpactHHolistic Professional and Leadership DevelopmentWWellness & Work-life BalanceAAccelerating Digital TransformationSStakeholder EngagementNNation-first ApproachIInnovation & EntrepreneurshipYYouth and Women-led DevelopmentAAccountability, Trust, and TransparencyICAI's working and functioning reflect not only the scale of the CA profession, but also the depth of its intellectual capital cultivated over the generations.Global Thought LeadershipICAI's intellectual capital lies in its proactive embrace of emerging domains such as sustainability reporting, ESG disclosures, digital assurance, forensic sciences, insolvency, valuation, cybersecurity, and AI-driven tools, positioning the Institute as a globally relevant thought leader. This global stature has been further reinforced through the hosting and organization of high-profile international events that set benchmarks for knowledge exchange and policy dialogue. Notably, ICAI proudly hosted the World Congress of Accountants (WCOA) 2022, a landmark event that brought together global thought leaders to discuss the future of accounting and governance. In 2023, the Global Professional Accountants Convention (GloPAC) provided an extensive platform for knowledge-sharing among international accounting professionals, while the World Forum of Accountants (WOFA) 2025 created a one-of-a-kind forum for AI, innovation, sustainability, and global collaboration. Through these initiatives and its cutting-edge focus on emerging professional practices, ICAI continues to shape global accounting discourse and inspire professional excellence worldwide.WOFA 2.0 is not merely a conference; it is a global movement for the future of the profession.WOFA 2.0Bridging our Institute's professional capabilities with the world's evolving expectations, the year 2026 will again welcome a unique event. ICAI opens the doors to the World Forum of Accountants 2026 (WOFA 2.0) for a gathering defined by collaboration and a shared commitment to strengthening global confidence, setting the stage for dialogue transcending borders and advancing the profession's highest purpose.The theme "Nation Building to Global Collaboration: Strengthening Trust, Enabling Growth" reflects the aim of the World Forum of Accountants 2.0. It highlights ICAI's vision to prepare the accounting profession for emerging challenges and for the shifts taking place in global economic landscape, while representing the nation's professionals and promoting trust, knowledge, and ethical leadership worldwide. The theme enunciates the profession's evolving responsibility, to build strong national institutions while simultaneously engaging in cross-border knowledge exchange, harmonizing standards, and enabling a more transparent, accountable, and sustainable global order.WOFA 2.0 is not merely a conference; it is a global movement for the future of the profession. It is an Expanded, Elevated, and more Exciting event than ever before, which offers such grandeur for the global accountancy and finance community to connect and lead the ever-changing dynamics of the field. It is going to be an expected gathering of 20,000 delegates from various countries worldwide, including policymakers, regulators, and industry stalwarts.Key thematic areas of WOFA 2.0Ethics, Integrity & Global Trust in the Digital Era — Ethical stewardship becomes the profession's most valuable currency as digital systems reshape transparency, reliability, and public confidence.Sustainability, Climate Action & Social Impact — The profession plays a pivotal role in translating environmental and social commitments into credible disclosures that guide responsible investment.Digital Transformation, AI & Innovation Leadership — As intelligent systems redefine financial analysis and decision-making, accountants lead the charge in embedding responsibility, accuracy, and oversight into digital innovation.Resilient Leadership, Wellness & Work-Life Balance — The profession embraces a model of leadership that values human resilience as much as technical excellence.Global Collaboration & Cross Border Partnerships — In an increasingly interconnected marketplace, the profession facilitates harmonization of standards and mutual recognition across jurisdictions.Youth & Women-Led Development for Global Leadership — Emerging professionals and women leaders bring fresh vision, inclusivity, and dynamism to the global financial landscape.Public Financial Management & Nation-First Governance — Accountants uphold fiscal discipline, transparency, and accountability within public institutions—cornerstones of national development.Entrepreneurship & Economic Growth through SMEs and Start-Ups — The profession empowers enterprises with strategic financial insight, disciplined compliance, and sustainable growth pathways.MSMEs & Startups: Engines of Inclusive Development — By guiding smaller enterprises through formalization, risk management, and access to finance, accountants help broaden economic participation.Next-Gen Skills for a Future Ready Profession — Rapidly evolving markets demand professionals who combine digital fluency with ethical intelligence and global perspective.Summing upAll these developments collectively redefine the modern Chartered Accountant. Our members today are multidisciplinary experts leveraging advanced analytics and navigating complex international regulatory environments. This goes on to show the dynamic nature of this profession. As India moves confidently towards a digital and globally integrated economy, Chartered Accountants remain the stewards of trust—Vishwasniya in every sense, empowering progress, inspiring confidence, and upholding the core values that define our profession.A nation moves forward with confidence when its profession learns, adapts, and leads ahead of every challenge. A profession that uplifts its nation can inspire the world, and a profession that connects with the world can help its nation soar even higher.These thoughts succinctly share the vision and the journey of the Chartered Accountancy profession, anchored in precision, integrity, and public trust. The Profession has emerged as a change agent shaping economic direction, institutional resilience, and societal progress. ICAI's resolute commitment to excellence has ensured that the profession evolves in tandem with the world's most transformative shifts, from technological disruption to sustainability imperatives and the growing complexities of global finance.◆ ◆ ◆The Chartered Accountant • Theme December 2025 | www.icai.org
Ep. 108 — Creating the Future Together in the Accountancy Profession’s AI Revolution
CA Journal
· August 2026
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Creating the Future Together in the Accountancy Profession's AI RevolutionIn a world consistently driven by technological transformation, the accountancy profession is faced with a choice today: to either embrace AI or resist it. Those willing to embrace the AI wave will influence strategic decisions and generate increasingly immense value for their organizations, while those who resist it will struggle to remain relevant in an increasingly data-driven world, in the long run.A wealth of opportunities lie ahead of us, but only if we choose to embrace this moment. Harnessing our collective strength, we must come together to shape our own future as a profession.From Automation to AugmentationAs a profession, technological transformation does not present itself as anything new for us and we have gradually become accustomed to it. Over the last few decades, digital technology has become readily available and its usage increasingly sophisticated. We have started to leverage it to automate many of our routine tasks that would otherwise prove to be time-consuming. However, AI brings with it a radically different level of transformation, not only because of its ability to automate tasks, but also because it can augment the intelligence of its human user. Modern AI systems can interpret natural language, detect anomalies, and even make recommendations based on patterns buried deep within data sets.There is enormous potential value for the accountancy profession in applying AI. As an agent of professional accountants and always subject to our professional judgment, AI can save its user days or even weeks' worth of time that relatively low-value tasks would otherwise consume. This allows professional accountants to shift their focus from backward-looking questions about "what happened" to more complex, valuable, and forward-looking questions about "what will happen." It allows professionals to spend more time advising clients or leadership teams, and not merely reporting outcomes but influencing them.The Challenge: Navigating Change and Managing RiskAI also challenges us to acquire new skills and a different mindset. Accountants need to become comfortable interpreting AI outputs, understanding how algorithms reach their conclusions, and questioning results when something does not add up. This does not mean every accountant needs to become a data scientist, but it does mean we need to become competent in a wide range of AI applications and appreciate the ways in which AI models can reach false conclusions.This is a growing need for our educational framework and training systems to evolve in response to the penetration of Artificial Intelligence, and professional accountancy organizations must work closely with educational institutions to revise and streamline the curriculum for accounting students in alignment with the latest technological developments. In this direction, the IFAC's International Panel on Accountancy Education is continuously exploring the knowledge base and competencies that the accountants of tomorrow will require and how the integration of AI is remodeling the learning process as per the need of the hour. The Panel's findings will be an important resource for professional bodies for attracting and properly training the next generation of professional accountants.It is also crucial to understand the ethical and governance considerations that are pertinent to AI. The AI systems are trained on and learn from massive amounts of data that may often contain errors or biases. A neglect in the oversight of automated decisions could lead to inadvertent consequences ranging from misclassified expenses to compliance and privacy breaches. Therefore, the professional accountant's traditional role as a guardian of accuracy, fairness, and integrity is more important than ever in an AI-powered world.AI and Auditing: Transforming AssuranceThe potential of AI in the field of auditing has been exceptionally remarkable. Traditionally, the auditors were required to test samples of transactions to arrive at conclusions about the whole, but AI has made it possible to inspect entire sets of data swiftly and continuously. By employing the use of machine learning and anomaly detection, auditors can accurately recognize uncommon transactions, inconsistencies, and potential fraud.“ A neglect in the oversight of automated decisions could lead to inadvertent consequences ranging from misclassified expenses to compliance and privacy breaches. Therefore, the professional accountant's traditional role as a guardian of accuracy, fairness, and integrity is more important than ever in an AI-powered world. ”However, despite such capabilities of AI, the need for professional skepticism or human judgment cannot be overstated. In fact, it emphasizes their importance. The proficiency of an auditor is paramount to elucidate findings, understand context, and assess whether anomalies truly represent risk. The analytical perspective of an independent and skeptical professional remains an indispensable factor in the credibility of an audit.A Call to Action: Shaping the AI NarrativeWith AI taking the center stage in businesses, professional accountants must also take it upon themselves to actively participate in shaping the dialogue around it. AI has gradually come to present itself as the leading cause of anxiety. However, AI, when utilized ethically, augments the efficiency of professional accountants and opens up new avenues to create greater value.Therefore, it is essential for the accountancy profession to alter the narrative surrounding AI. Embracing AI does not imply replacing people but instead empowering them to deliver deeper insight, stronger stewardship, and greater value. We, as members of this esteemed profession, must demonstrate the same through our work and support. By sharing achievements and narratives of success, mentoring peers, and promoting ethical AI adoption, accountants can play an instrumental role in assisting societies recognize that technology serves its best purposes when guided with human intelligence and ethical integrity. Most importantly, this perspective will prove to be far more effective in drawing the attention of the next generation of talented professionals.Creating the Future TogetherICAI has set a remarkable example for how professional accountancy organizations can and should support their members through the AI transformation. With the upcoming World Forum of Accountants, ICAI is making space for the global accountancy profession to create the future together by learning from ICAI's example and gathering experiences and perspectives from around the world.I must take this opportunity to compliment ICAI for creating this valuable space for knowledge sharing and mutual learning. This is yet another instance of the innumerable examples of global leadership being demonstrated by the Indian accountancy profession. I am excited to join you in Greater Noida and see where the discussion will take us.◆ ◆ ◆Author may be reached at eboard@icai.inThe Chartered Accountant · Theme December 2025 · www.icai.org
Ep. 109 — Digital Transformation, AI and Innovation Leadership
CA Journal
· August 2026
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Digital Transformation, AI and Innovation LeadershipNavigating a world where technology is moving faster than anyone could have imagined is a thought roaming around in the minds of all CEOs, business owners, policymakers, and young professionals. While interacting with such people, my reply to such thought is always simple: we stay human, we stay curious, and we stay courageous. Digital transformation is not merely about adopting tools; it is about embracing a mindset that encourages experimentation, continuous learning, and the confidence to redesign how we work and deliver value.The new business reality: Technology as a core capabilityMany still view technology as an “add-on”, a system to buy or a software upgrade to install. In reality, digital capability has become part of the identity of every successful organisation. This shift is especially visible in accounting and finance. Many firms are automating mundane tasks like bookkeeping and reconciliation. Finance teams monitor cash flows in real time rather than waiting for month-end. Auditors analyse full populations of transactions instead of small samples, while tax professionals use AI to track regulatory developments across jurisdictions. These instances feel familiar because they are happening all around us.The pattern is clear: organisations that embed technology into daily workflows become stronger, more agile, and more resilient. Yet, transformation is never purely technical. It is powered by people, such as leaders who set direction, teams who reimagine processes, and professionals who build the skills needed for the future. This is where innovation leadership becomes vital.Innovation leadership: Technology alone is not enoughBuying the latest system does not make an organisation innovative; people do.Innovation leadership creates an environment where ideas can breathe and where colleagues feel safe to test, explore, question, and learn. It means inviting “Why not?” into conversations, encouraging teams to reimagine familiar tasks, and supporting small experiments before committing to large-scale changes. It treats setbacks as part of the learning cycle and keeps the customer and the community at the centre of decisions.Today’s transformation journey requires leaders who can hold two responsibilities at once: protecting the organisation’s stability while enabling its evolution. The balance is not easy, but it is the only path forward. The organisations thriving today are those whose leaders embrace both.AI: A partner for growth, not a threatAI has opened doors that once belonged to science fiction, but its most meaningful impact is practical: it makes work smarter, faster, and more intuitive. Across accountancy and business, AI helps detect unusual transactions earlier, streamline invoice processing and matching, assist forecasting and budgeting, summarise lengthy documents, personalise client insights, improve audit quality through anomaly detection, and enhance compliance by scanning patterns across large datasets.In short, AI lifts heavy, repetitive work from our shoulders.However, the truth is that while Artificial Intelligence may serve as a valuable aid to professionals, it is the tasks that AI cannot perform that truly define our profession. It cannot exercise judgement, understand the story behind the numbers, uphold ethics, or champion trust. The future, therefore, is not AI versus humans; it is AI with humans, amplifying our roles, sharpening our insights, and freeing us to focus on what matters most.The role of accountants in a digital worldIn this fast-changing landscape, the accountancy profession stands at a uniquely important intersection. The professionals have always been trusted advisors: guardians of transparency, integrity, and sound decision-making. These responsibilities become even more essential in an AI-driven world.Accountants will shape the future in several practical ways:Guiding organisations in responsible use of AIAs businesses adopt AI, they need clear guardrails, such as policies, controls, and ethical considerations. With deep expertise in governance, risk, and controls, accountants can assess data quality, evaluate AI risks, ensure outputs are explainable, document accountability, and test whether AI-driven decisions align with corporate policies. In effect, we serve as the organisation’s AI sense checkers, protecting against unintended consequences.Making data useful and actionableWhile AI can generate dashboards and analyses, organisations still need professionals who can interpret them. Accountants translate trends into plain language, connect insights to business performance, highlight what truly matters, and help leaders prioritise decisions. That is how data becomes strategy.Helping SMEs start their digital journeySMEs often trust their accountants more than any other advisor. When they ask which tools to use or whether automation is worth the investment, we can guide them step by step, selecting affordable cloud solutions, automating basic workflows, clarifying the ROI of digital tools, avoiding technology for its own sake, and building practical digital habits. This guidance directly strengthens competitiveness.Transforming the finance functionAs automation reduces manual work, finance teams can spend more time on scenario planning, risk modelling, and insight-driven storytelling; they can support strategic decisions and partner more closely with business units. Accountants, in other words, become not just reporters of numbers but shapers of the future.The ISCA vision: Empowering the profession for an AI-enabled futureAt ISCA, we see the road ahead clearly: AI will transform our profession, and it will also strengthen it, provided we prepare intentionally, collaboratively, and confidently.Our AI strategy is built upon three pillars: Learn AI, Govern AI, and Apply AI.Learn AI: Building strong foundationsTo help every accounting and finance professional build digital confidence, ISCA offers learning opportunities across all stages. ISCA will launch free AI literacy modules in 2026, to introduce core concepts and governance, applied workshops that provide hands-on exposure to real tools, a national AI certification pathway that recognises competence, and the AI Nexus community where members explore tools, share workflows, and learn together.We want every accountant to feel equipped, not overwhelmed.Govern AI: Ensuring trust, ethics, and standardsTrust is the heart of our profession.In a 2025 global trust survey conducted by Chartered Accountants Worldwide, in partnership with a leading global research, analytics, performance and data consultancy named Edelman DXI, 86% of senior financial decision-makers in Singapore place trust in Chartered Accountants to help businesses navigate challenges arising from AI. As AI enters accounting workflows, we must ensure it is used responsibly by members of our profession. ISCA, together with Nanyang Technological University, recently developed a Responsible Artificial Intelligence Framework in Accountancy.By promoting transparency, professional scepticism, and clear expectations on AI use, we can safeguard trust while embracing innovation.Apply AI: Driving real-world impactUltimately, the value of AI comes from putting it to work.ISCA will support AI adoption through sector-specific AI playbooks, pilot projects with technology partners in areas such as audit, tax, climate, and financial reporting, and knowledge repositories for members. We will also conduct discovery sprints that connect schools with industry in a sandbox environment to test out new ideas.Our goal is to help accountants move from awareness to experimentation and, ultimately, to meaningful adoption.A shared future: Empowered professionals, stronger businesses, a trusted professionWe are living through one of the most exciting periods of transformation. Technology will reshape our work, but it is humans who will continue to shape the world around us. As accountants, our commitment to trust, ethics, and the public interest places us at the centre of this transition. With ISCA’s AI strategy, “Learn AI, Govern AI, Apply AI”, the profession is not only ready for the future, but ready to lead it.Professional accountants will not merely be responding to change; we are guiding organisations, communities, and economies through it. Together with ICAI and our global partners, we look forward to building a profession that is innovative, trusted, and ready to shape the digital age.◆◆◆Author may be reached at eboard@icai.inThe Chartered Accountant December 2025 | www.icai.org 20–21
Ep. 110 — Sustainability, Climate, and Social Impact
CA Journal
· August 2026
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Sustainability, Climate, and Social ImpactCPA Australia’s Initiatives and Perspectives on Promoting Sustainability and Social Responsibility in the Accountancy ProfessionToday, we are living in an era that is consistently driven by swift technological advancements, socio-economic instability, and climate crisis. Recognizing the implications of this shifting landscape, CPA Australia has upheld the responsibility of addressing key concerns, establishing itself as an eminent promoter of sustainability and social responsibility within the accounting profession. As considerations related to sustainability continue to take a centre-stage for businesses, a necessity for professionals with proficiency in environmental, social, and governance (ESG) matters has been persistently increasing.The world is constantly being faced with complex and interrelated challenges, stretching from climate change to social inequality, and CPA Australia remains at the forefront, supporting the crucial role of accountants contributing in driving genuine and long-term change. By making use of principled advocacy, robust education, and impactful collaboration, CPA Australia is reimagining the role of accountants to address the demands of an increasingly ambiguous, obscure, and often unpredictable global landscape.This article endeavours to probe into some of CPA Australia’s initiatives and perspectives in facilitating sustainability and social responsibility within the sphere of accountancy.A Vision for the FutureAccountants have a pivotal role to play in ensuring that businesses uphold compliance while also supporting the shift to a more sustainable global economy.In this regard, CPA Australia’s vision is to:“Lead the future of the global accounting profession and develop business professionals with tomorrow’s capabilities.”This progressive approach places ESG considerations at the core of CPA Australia’s mission.Accountants have the proficiency to define and quantify ESG risks and opportunities, and evaluate them in parallel with other business risks and priorities. This empowers the professionals to generate awareness and reinforce the successful management of challenges associated with sustainability.Realizing that climate change is not merely just an ecological concern but rather an intricate economic and social issue, CPA Australia urges for an entirely harmonized and collective international response.Governments and policy makers must formulate policies concerning the environment and the economy that not only engage but also partner, purposefully endeavouring to unlock invaluable synergies.As responsible advisors, accountants hold an advantageous position to synchronize strategies, value offerings, and revenue models as a response to climate-related uncertainties, steering organisations towards thoughtful and environmentally responsible decisions.Accountants have the proficiency to define and quantify ESG risks and opportunities, and evaluate them in parallel with other business risks and priorities.ESG driving Consumer ConfidenceAs the expectations of the stakeholders on sustainability increase, the focus on ESG performance has been more significant than ever before. Accountants have a crucial role to play in this landscape. Our comprehension of the potential threats and benefits related to sustainability equips us to counsel organisations towards secure and resilient futures.Both consumers and investors all over the world are minutely inspecting how corporations operate on ESG measures. The preferences of the consumers are progressively determined by a wish for authenticity, transparency and genuine social and environmental responsibility.Millennials, specifically, decide their monetary and buying choices based on ethical considerations, encouraging brands and companies that resonate with their values. The expanding perception of corporate sustainability, along with the skyrocketing living expenses, is dominating spending habits, with consumers emphasizing upon cost-effectiveness alongside ethical inclination.Investors share a mirroring viewpoint. They acknowledge that companies who are vigorously implementing ESG factors are likely to face reduced risks, be more favourably positioned for long-term progress, and remain resilient during periods of economic uncertainty.Global ESG Reforms and Integrated ThinkingCPA Australia promotes integrated thinking and reporting as fundamental instruments for executive leadership and board of directors. Integrated thinking help organisations become capable to contemplate deeply about the perils and prospects associated with sustainability alongside conventional business risks, establishing resilience and agility in both strategy and operations.This comprehensive approach that is being greatly embraced by major businesses, aids sound capital allocation and pushes long-term value creation.CPA Australia diligently bolsters global ESG reforms, including the adoption of the International Sustainability Standards Board (ISSB) standards. In Australia, the introduction of IFRS S2, locally applied as AASB S2, for climate-related financial disclosures underlines the salient role of climate reporting in furthering the Government’s net zero ambition. These frameworks are transfiguring corporate reporting and lodging accountants as prudent leaders in sustainable business.However, although these reforms augment transparency and accountability, they bring along with it an array of challenges. Smaller organisations in particular are confronted with uncertainty regarding in what form or manner do the standards apply to them, along with the pressures of compliance costs and managing non-reporting status.To resolve these concerns, CPA Australia unremittingly advocates for proportionality, scalability, and clear guidance to advise smaller organisations in traversing this dynamic sustainability terrain.As diligent upholders of Integrated Reporting, we are proud that CPA Australia’s 2024 Integrated Report Accelerating Impact received the Integrated Reporting Special Award at the 2025 Australasian Reporting Awards. We were also awarded Gold in the General Awards and named a finalist for Best Cover Design.Our 2023 Integrated Report, Transforming for the Future, was also recognised as a finalist in the Integrated Reporting category of the same awards. Together, these acknowledgments display our earnest commitment to sustainability and responsible business practices.CPA Australia diligently bolsters global ESG reforms, including the adoption of the International Sustainability Standards Board (ISSB) standards.Social Responsibility: The Broader ImpactThrough its various measures and endeavours, CPA Australia does not just support its members but also contributes to the larger interest of the public, confirming that the accounting profession stays pertinent, accountable and resilient in a world grappling with upheavals at a global scale.As an organisation, CPA Australia acknowledges the increasing prominence of social responsibility. The establishment of the Taskforce for Inequality and Social-related Financial Disclosures (TISFD) and the release of People in Scope highlight an increasing focus on creating social value.Diversity, Equity and Inclusion (DEI) remain central, yet CPA Australia stresses that social impact goes well beyond DEI. It also takes into account how organisations acquire and retain talent, furnish products and services, and interact with heterogeneous communities.We are likewise aware of global disparities, which are commonly influenced by a reliance on supply chains resulting from cost efficiency. Several organisations are now revaluating their supply chains and, in certain cases, steering proactively to integrate a fair compensation for all contributors across the value chain.The accounting professionals are instrumental in converting data into meaningful insights that define decisions and promote trust. Accountants hold an advantageous position to ensure that sustainability reporting transcend aspiration and rhetoric to exhibit genuine, quantifiable results that are integrated into financial disclosures.Reaching this congruence necessitates a synergistic partnership between the International Sustainability Standards Board (ISSB) and the International Accounting Standards Board (IASB), making certain that sustainability and financial reporting work hand-in-hand to reinforce accountability and transparency.Education and Support for MembersCPA Australia is devoted to enable its global membership of 175,000 professionals with the acumen and competencies to lead in sustainability.We are assisting members to remain ahead of the continuously emerging ESG standards and best practice by offering the education and qualifications required to succeed in this crucial and rapidly advancing field.Sustainability will be made an integral part of the CPA Program, with future programs and courses emphasising particularly on sustainability, making sure that new CPAs are prepared to address ESG challenges during the entirety of their professional journey.For current members, CPA Australia has refreshed its Professional Development program to include three new sustainability micro-credentials, each built around the key themes of Ambition, Action, and Accountability:Ambition: Setting strategic goals and establishing strong governance foundations.Action: Driving business transformation to meet sustainability objectives.Accountability: Managing performance and delivering credible reporting, audit, and assurance.These micro-credentials demonstrate a comprehensive approach towards sustainability and are complemented by CPA Australia’s Sustainability Hub on the website, a dedicated resource offering guidance, webinars, and member-led insights into sustainable transformations and innovations.Technology and InnovationCPA Australia also places huge emphasis on the invaluable role that technology, particularly Artificial Intelligence (AI), plays in facilitating progress towards sustainability.Automation is reinventing the conventional accounting functions, with the capabilities of AI that are able to swiftly process huge volumes of data, unlocking greater avenues for finance professionals to perform with optimal efficiency.Accountants are making use of AI to help them automate their routine activities such as bookkeeping and compliance, allowing them to devote time and direct their attention towards analysis, strategic insight, and advisory work.AI performs an indispensable role in sustainability reporting by managing extensive, complex, and largely non-financial data. This capability strengthens the profession’s capacity to provide credible, evidence-based insights that inform sustainable business decisions.Automation is reinventing the conventional accounting functions, with the capabilities of AI that are able to swiftly process huge volumes of data, unlocking greater avenues for finance professionals to perform with optimal efficiency.Advocacy and Public InterestCPA Australia advocates on behalf of its members and in the broader public interest. It maintains strong relationships with standard-setting and regulatory bodies within Australia.Internationally, CPA Australia represents its members through participation in the Integrated Reporting and Connectivity Council and the Accounting for Sustainability’s Accounting Bodies Network. These forums provide a global platform to advance the profession’s voice on sustainability and responsible business practices.Through these partnerships, CPA Australia promotes member perspectives and helps shape policies that support sustainable economic growth and improved productivity. It also plays an active role in informing government decision-making, as demonstrated by its contribution to the National Climate Risk Assessment.This landmark report outlines Australia’s exposure to climate-related risks, including disproportionate impacts on regional and indigenous communities, higher mortgage costs, and mounting pressures on insurers and banks.CPA Australia draws on its expertise to interpret these findings and advocate for policies that balance economic prosperity with environmental and social wellbeing.Leadership and CollaborationLeadership in sustainability is not determined merely by large public investments, but can also be exemplified through clear vision, collaboration, and practical cooperation that instigate meaningful transformations.CPA Australia opines that although Australia’s direct contribution to global emissions is comparatively minimal, the nation can and should lead by example. Its geographic position and economic influence places it in a strong position to promote sustainability across the wider region, including the Pacific Islands and Asia.The accounting profession acknowledges that to build an equitable and harmonious world necessitates a communal effort. Long-term growth and progress can be assured through the steadfastness of Boards and CEOs to employees in every department, and from all levels of the business ecosystem, to integrate sustainability into daily operations and decision-making.CPA Australia also stresses upon the indisputable significance of collaboration across various sectors, combining the expertise of finance professionals with other disciplines to support equitable economic growth and achieve lasting sustainability outcomes.The Way ForwardThe framework of CPA Australia towards sustainability and social responsibility is methodical, extensive, and goal-oriented.By thoughtfully integrating ESG principles into education, advocacy, reporting standards, and professional development, CPA Australia is consistently equipping accountants to evolve into leaders in advancing sustainable transformation.As we continue to face pressing global issues, CPA Australia emphasizes the key role accountants play in developing more responsible and sustainable organizational practices.Through its commitment to integrated thinking, technological innovation, and collaboration across sectors, CPA Australia is positioning the accounting profession as a driving force in creating a more sustainable, inclusive, and resilient future.◆◆◆Author may be reached at eboard@icai.inThe Chartered Accountant · Theme December 2025 · www.icai.org
Ep. 111 — India Emerges as the Global Accounting Outsourcing Hub
CA Journal
· August 2026
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India Emerges as the Global Accounting Outsourcing HubIndia has firmly established itself as the world's premier destination for knowledge-driven outsourcing, especially in the domains of finance, accounting, bookkeeping, taxation, and business process management. Over the past two decades, the country has transformed into a powerhouse for global accounting outsourcing, driven by a unique combination of skilled manpower, competitive cost structures, strong regulatory frameworks, and rapid adoption of digital technologies.With the Government of India recognizing accounting and finance services as a "Champion Services Sector," India's journey from a low-cost processing destination to a high-value knowledge hub is accelerating faster than ever.India's Service Sector: Backbone of the Outsourcing RevolutionThe service sector continues to be India's strongest economic pillar, with over 50% contribution to India's GDP; it therefore powers national growth through diversified segments such as IT-BPM, consulting, financial services, telecommunications, and business solutions.It includes the accounting and financial outsourcing industry, employs millions today, and holds more than 52% of the global market share in outsourcing services. Today, the Indian service ecosystem has grown significantly due to digitalization, automation, and cloud-enabled workflows as a global norm, and the country can deliver financial services seamlessly in real time to clients anywhere in the world.The Rise of Accounting Outsourcing in IndiaOutsourcing in the field of accounting started to develop rapidly as a result of several factors including:a) Qualified and Globally Competitive Labour ForceIndia, more than 12 lakh commerce graduates are being added up annually.In ICAI, around 30,000 Chartered Accountants are being added up each year.Indian professionals are trained in IFRS, US GAAP, UK GAAP, among other international standards.The combination of this skill pool with proficiency in the English language and strong analytical capabilities makes them reliable partners for business globally.b) Cost Advantage Without Compromising QualityOutsourcing costs for Indian accounting are approximately 40–70% lower than in Western markets.However, unlike the early 2000s, today the focus is not just on cost; quality, talent, and turnaround time have become India's strongest value propositions.c) Digital and Technological StrengthIndian firms increasingly use:Cloud accounting platforms: QuickBooks, Xero, Sage, NetSuiteERP solutionsAI-powered reconciliation toolsRobotic Process Automation (RPA)Cyber-secure cloud infrastructureSuch technological sophistication has increased India's standing, from merely outsourcing tasks to managing entire finance departments of international clients.Countries Outsourcing Accounting Work to IndiaAccording to various sources, insights from ICAI, and global demand trends, the main countries outsourcing accounting, bookkeeping, tax, audit support, and CFO services to India include:United States ~62% of the total international outsourcing revenue to India in the accounting and finance domain.United Kingdom ~17% of the outsourcing revenue to Indian providers.European Union ~11% overall, with key chunks from Germany, Netherlands, Ireland, and France.Others Balance Canada, Australia, UAE, Singapore, and New Zealand are routinely highlighted as major sources, making up the balance after the top three regions.Of these, the USA and UK hold the prime contributor positions due to:High accounting costs domesticallyShortage of qualified accountantsTime-zone advantage with IndiaMaturity of India's IT-BPM infrastructureWhat Attracts Global Clients to India?India's leadership in global accounting outsourcing is anchored in a unique combination of capability, technology, policy support, and trust. The following pillars play a critical role:i. Strong Regulatory Backbone: ICAI's Pivotal RoleThe Institute of Chartered Accountants of India is the world's most recognized accounting body that gives global clients unparalleled assurance. The Institute, being an educator, provides a world-class education system, international collaborations, UDIN framework, and maturity models like AQMM, DCMM, and SRMM create a standardized, reliable, and ethical outsourcing environment.ii. Government Policies & Institutional Support Across StatesMultiple Indian states, including Karnataka, Telangana, Maharashtra, Tamil Nadu, and Gujarat, actively promote the growth of outsourcing through policies focused on IT/ITES, startup incubation, skill development, and foreign investment. Several states offer incentives, special economic zones (SEZs), digital infrastructure, and support for outsourcing and GCC expansions, reinforcing India's leadership in the global services sector.iii. Professional Communication & English ProficiencyIndia is the world's second-largest English-speaking nation, with millions of professionals trained in global communication standards. This ensures that Indian accountants and finance professionals can work seamlessly with clients in the US, UK, Europe, Australia, and the Middle East, reducing communication barriers and improving client satisfaction.Whether customers need a large multi-shift operation or a small, specialized staff, India's outsourcing ecosystem offers unparalleled adaptability, responsiveness, and round-the-clock operational capabilities.iv. Growing Trust in Indian FirmsDecades of consistent delivery, strict professional ethics, and transparency have established Indian firms as trusted partners globally. Many global clients now outsource not only transaction-based work but also strategic financial processes, CFO services, and end-to-end finance management, reflecting rising confidence in Indian expertise.v. Scalability and FlexibilityIndia's enormous talent pool and multi-tiered city development (Tier 1–3) allow businesses to expand quickly in response to customer demands. Whether customers need a large multi-shift operation or a small, specialized staff, India's outsourcing ecosystem offers unparalleled adaptability, responsiveness, and round-the-clock operational capabilities.vi. Strong Data Security and Compliance FrameworkIndia has strengthened its data protection landscape significantly with adherence to global privacy norms such as GDPR and CCPA, implementation of secure cloud environments, and industry-wide adoption of robust cybersecurity frameworks. ICAI's regulatory systems, including UDIN, peer review mechanisms, and audit quality standards, further reinforce global confidence in the security and reliability of Indian service providers.vii. Mature BPO, KPO, and GCC EcosystemIndia houses one of the world's most mature outsourcing ecosystems, spanning Business Process Outsourcing (BPO), Knowledge Process Outsourcing (KPO), and Global Capability Centers (GCCs). Over 1,700 GCCs, including several Fortune 500 companies, have established operations in India, leveraging its advanced talent pool and operational excellence. This ecosystem supports seamless integration of finance, accounting, and global back-office functions.viii. Time-Zone AdvantageIndia's time zone enables overnight delivery for Western clients and round-the-clock services for global enterprises, enhancing productivity and reducing turnaround time.ix. Technological ReadinessIndian firms lead in adoption of cloud accounting, AI-based audit tools, robotic process automation, ERP systems, and cyber-secure platforms, ensuring accuracy, speed, and transparency for international clients.Types of Accounting Services Outsourced to IndiaThe range of outsourced services has expanded dramatically to include:a) Core Accounting FunctionsBook-keepingLedger maintenancePayroll processingAccounts receivable & payable managementb) Financial ReportingPreparation of financial statementsCompilation and review supportConsolidationsc) TaxationIndividual & corporate tax returnsGST/VAT complianceUS IRS filings, UK HMRC filings, and Australia ATO complianced) Audit SupportAudit samplingWorking paper preparationInternal audit supportSOX compliancee) High-End FP&A and CFO ServicesBudgeting and forecastingCash Flow AnalysisFinancial modelingInvestor reportingIndia is emerging as a global finance function hub and no longer operates just as a processing center.Potential to Enter New MarketsExport markets that could be considered for Indian accountancy services include:Middle East & AfricaAsia-Pacific: Japan, South Korea, Malaysia, IndonesiaNorth America: USA, CanadaEuropeThese regions face acute shortages of accounting professionals, thereby creating significant opportunities for India's outsourcing sector.Strategic Initiatives of ICAI to Enhance Global PresenceICAI, through its various committees and Directorate, is driving several initiatives:a) International RecognitionMoUs with global bodies for mutual recognition of qualificationsBuilding the brand "Indian CA" through global chaptersb) Digital Capability BuildingAccounting Process Outsourcing (APO) portalForeign language training for ICAI members and students in Spanish, French, Business English, Japanese, German etc.Jurisdiction based Overseas Outsourcing Services courses for ICAI members like the US, UK, Australia etc.Certificate Courses on International Taxation, Forensic Accounting, Valuation, InsolvencyICAI Digital Learning Hub – Global Reachc) Global Networking and PresenceICAI's presence is in more than 47 countries around the globe.International summits and trade delegationsSEPC and WTO stakeholder collaborationsChallenges to Scaling Accounting OutsourcingWhile India leads the global outsourcing domain, several challenges remain:Data protection and privacy compliance: GDPR, CCPAGlobal competition from Philippines, Vietnam, and Eastern EuropeTalent retention and upskillingNeed for stronger cybersecurity frameworksHowever, the regulatory systems of ICAI and strong policy support from the government are helping the industry overcome such barriers effectively.Future Outlook: India@100 and the Global Accounting LandscapeBy 2030, it is estimated that India will account for:65%of global outsourced accounting work$12–15Bin accounting exports10Mjobs related to accountingAI, machine learning, and cloud platforms will further redefine India's value proposition, moving the country from simple outsourcing to strategic finance transformation roles. With initiatives like UDIN, AQMM, DCMM, and the Accounting Process Outsourcing Portal, India is moving toward becoming the global headquarters of accounting excellence.ConclusionIndia has not emerged as an accidental global accounting outsourcing hub; it is a result of decades of investment in education, regulation, technology, and global collaboration. With proactive leadership from ICAI and support from the Government of India under the Champion Services Sector initiative, India is poised to drive the future of the global accounting profession.As companies worldwide face growing costs, talent scarcity, and increasingly demanding requirements for compliance, India offers a compelling solution: high-quality, technology-enabled, globally aligned, cost-effective accounting services.India is not only part of the world accounting ecosystem but is leading it.◆ ◆ ◆Author may be reached at eboard@icai.inThe Chartered Accountant | December 2025 | www.icai.org
Ep. 112 — The CA Advantage in the New World Order: How Indian Chartered Accountants are Becoming Global CFOs through India’s GCC Ecosystem
CA Journal
· August 2026
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The CA Advantage in the New World Order: How Indian Chartered Accountants are Becoming Global CFOs through India’s GCC Ecosystem“If you still think doing only taxation and audits will make you a global leader… consider thinking again.”For decades, the career path of Indian Chartered Accountants was typically limited to qualifying the examinations, joining an Audit Firm, and climbing the ladder to become a Partner. A few went beyond this curve and rose to become Chief Financial Officers or CFOs of domestic companies. However, in today’s new world order, where Artificial Intelligence, technology and automation are taking the centre stage, this is no longer the only path. Today, beyond fundamental practices, we now speak about strategic planning, business intelligence and much more.Moreover, it would not be wrong to mention that our actions today are not even the most impactful.Today, the world’s financial backbone is increasingly being run from India, largely through the rapidly growing GCCs. It is also eminent that we, the Chartered Accountants, are the architects of these new global finance engines.It cannot merely be termed as an “opportunity.” It’s a revolution.And we, the Indian Chartered Accountants, are sitting in the driver’s seat.The Rise of GCCs – India’s Strategic Advantage in the New World OrderGCCs or Global Capability Centers are the offshore hubs of multinational companies, setup within the country’s borders that manage global operations. To our astonishment, India hosts the majority of them i.e. over 51% of GCCs are present in the Indian subcontinent.To talk about the insights, more than 1,800 GCCs operate from India today. Approximately 2,400 – 2,500 of the GCCs are expected to be present in India by the year 2030. India’s GCC presence is the strongest in Tier-I cities, led by Bengaluru with about 487 centres, followed by Hyderabad (273), Delhi NCR (272), Mumbai (207), Pune (178) and Chennai (162). While these major cities remain the core hubs, GCCs are now steadily expanding into Tier-II locations like Indore, Coimbatore, Bhubaneswar, and Jaipur, supported by better infrastructure, strong talent pools, and proactive state policies. This marks a shift toward a broader, more balanced growth across the country.Such a shift will have a notable effect on us as professionals. Around 4.5 million high-quality jobs are expected to be created, with an annual valuation of approximately 100 billion US Dollars.Professionals in the Global Capability Centers now run end-to-end global finance, which includes consolidation & reporting, treasury, risk management, global financial planning & analysis, ESG & sustainability finance, digital finance transformation and much more. Some of the emerging avenues for such professionals include AI-enabled automation, global audits, finance controls, etc.An Indian Chartered Accountant sitting in Bengaluru or Gurugram now handles the same work today that was once performed in London, New York, Frankfurt, or Singapore.INDIAThe Epicenter for Global Capability Centers (GCCs)~30%of the top 100 employers in the country are GCCs, despite employing less than 1% of organised sector talent~60%of the top 10 percentile of STEM graduates are employed by GCCs~20%higher compensation on average paid by GCCs than services companies1580+Total number of GCCs2740+Total number of GCC units1.66 Mn+Total installed GCC talent71K+Installed Tier-2 GCC talentSource: zinnov.com/centers-of-excellence/india-gcc-juggernaut-unleashing-india-capability-stack-blogThe world’s financial architecture is experiencing a seismic shift and all eyes are on India. Behind the wheel are the young minds of Bharat and the vision of India@2047.But, have you ever thought of the fact – Why India? It is because of the sheer talent density, analytical rigor of the professionals, digital maturity of the youth, enormous geopolitical trust, and the ever-expanding GCC ecosystem.Evolving Regulatory Frameworks, India’s Policy Push & Data Security LeadershipIndia’s emergence as a Global Finance Capability Centre is not an accident; it is the result of a rapidly maturing regulatory, compliance, and policy environment. The Indian government has strengthened data protection laws, enhanced cyber-security standards, and introduced newer frameworks such as the Digital Personal Data Protection Act (DPDPA), tighter CERT-In protocols, and sector-specific standards that now compete with international standards. State governments, too, are vigorously promoting GCC expansion through plug-and-play infrastructure, single-window clearances, and fiscal incentives.India’s rapidly maturing policy landscape, from GST reforms to Unified Payments Infrastructure, to digital KYC and e-invoicing, has gradually made the country one of the most compliant, transparent, and technology-ready destinations for global finance work. As multinational organizations seek secure and stable jurisdictions, India’s strong data security, high governance standards, and pro-business policy architecture have made the country the most trusted global finance hub of the future.India’s rapidly maturing policy landscape, from GST reforms to Unified Payments Infrastructure, to digital KYC and e-invoicing, has gradually made the country one of the most compliant, transparent, and technology-ready destinations for global finance work.Let’s Start Thinking BIG – The Need to Change the MINDSETWe are entering a phase where our profession empowers us with greater scale, richer global exposure, and the chance to lead in the digital future. Even today, many young Chartered Accountants still follow the mental model of aspiring to become a CFO of a corporate after a studious career path as an Audit Manager. We must all understand that such a confined mindset limits global exposure, cross-cultural fluency, digital transformation experience, and also opportunities for strategic finance roles.Let me come directly to what I have been pondering upon, “If you can lead finance for over 30 countries at the age of 30, why settle for just being restricted to one city or one region?”The Skills Global Finance Leaders Need and How CAs and GCCs Create the Perfect Leaders from IndiaLet’s break down each competency one by one:Analytical Finance (A Chartered Accountant’s fundamental strength) We, the Chartered Accountants, excel in understanding accounting standards, ESG, tax frameworks, internal controls and financial strategy. These skills are applied across continents, industries, currencies, and regulatory systems.Digital Leadership (GCC’s strongest offering) Today, the Global Capability Centers in India expose Chartered Accountants to several new avenues such as GenAI financial tools, RPA automation, Cloud ERPs, predictive analytics and data governance frameworks. Being very fair, I must say that no domestic role offers such exposure at this scale.📈Finance Innovation🤖AI & Automation🔐Data Privacy & Governance🌍ESG & Sustainability⚖Governance & Compliance🛡Digital Risk & Cybersecurity🤝Talent Development & Transformation🧮Taxation & Global Mobility👥HR & People Strategy📢Marketing & Growth Strategy⚙Business Process Optimization🏢Real Estate & LocationThe Role of a Chartered Accountant in the New World Order – A Thought-Provoking PerspectiveThe Indian Chartered Accountant is no longer just a compliance professional. We are, now, the custodian of global trust and integrity. In a world where data flows faster than laws, Artificial Intelligence makes decisions before humans can review them, supply chains reroute overnight, risks multiply across borders, and ethics and governance are under scrutiny every day and everywhere.In the middle of everything, one profession stands uniquely equipped to manage the intersection of Trust, Technology, and Transformation: the Chartered Accountants from India.The Indian Chartered Accountant is no longer just a compliance professional. We are, now, the custodian of global trust and integrity.A 10-Year Roadmap – From a 22-Year-old Chartered Accountant to a Global CFOYears 1–2The Foundation PhaseMaster global processes, leadership traits, IFRS, Ind AS, ERP, SQL, business intelligence and so on.Years 3–5The Leadership PhaseTake ownership of global processes, stakeholder management, and automation projects.Years 6–8The Transformation PhaseDrive AI-led transformation and oversee global governance frameworks.Years 9–10C-SuiteProgress toward roles such as Global Controller, Regional CFO, or Virtual/Distant CFO.How is ICAI Enabling the TransitionThis transformation is not happening in isolation. The Institute of Chartered Accountants of India (ICAI) is playing a pivotal role in shaping India’s ascent as a global finance powerhouse. ICAI’s forward-looking curriculum integrates IFRS, Ind AS, digital audit, emerging technologies, and global regulatory frameworks, thereby preparing young CAs for high-impact cross-border roles. Through MRAs and MOUs with leading international accounting bodies, ICAI has significantly expanded global mobility pathways for Indian professionals.Additionally, the newly formed Group to Promote India as an Accounting GCC Hub has been pushing for focused industry engagement. ICAI has organized a series of GCC-focused conferences in Delhi, Ahmedabad, Hyderabad, and is now expanding to Pune and Bengaluru—platforms where industry leaders and government officials jointly discuss challenges faced by GCCs and explore practical, future-ready solutions. This initiative has received strong institutional support from key Government Ministries such as the Ministry of Electronics & IT (MeitY), NITI Aayog, Ministry of Commerce (MoC), and Ministry of External Affairs (MEA). Moreover, several prominent national bodies, including IFSCA, SEPC, Invest India, NSDC, RRU, NFSU, and IIM Sambalpur, have extended their collaboration, underscoring the growing importance of the GCC ecosystem in advancing India’s economic and strategic vision.Complementing this, ICAI’s continuous skilling initiatives on AI, RPA, digital finance, cybersecurity, and analytics are equipping Indian CAs to lead global operations from day one.ICAI’s unwavering emphasis on ethics, integrity, and governance ensures that Indian Chartered Accountants are technically proficient as well as globally trusted to enable the profession to evolve from compliance specialists to strategic financial leaders and global CFOs of tomorrow.To sum up, it can be said that India is a global accounting powerhouse and will produce more global CFOs in the next decade than any other country worldwide.◆◆◆Author may be reached at eboard@icai.inThe Chartered Accountant · December 2025 · www.icai.org
Ep. 113 — Public Financial Management and Nation-First Governance
CA Journal
· August 2026
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Public Financial Management and Nation-First GovernanceThis paper analyses the two concepts of Public Financial Management (PFM) and nation-first governance and explores how their combination helps in achieving multiple objectives. The paper adopts a comparative study approach by taking into account the top-performing OECD countries (USA, UK, Switzerland, and Canada) by using OECD indicators as benchmarks. It explores how fiscal transparency and citizen participation lead to a responsible government. Further, it brings out lessons for India.IntroductionIn the present time, the government plays multiple roles to achieve multiple objectives. Allocative efficiency, equitable distribution, stabilisation, and economic development are the prominent goals of a modern welfare government. Therefore, the government must collect revenue efficiently and direct its expenditure to meet priorities. To carry out its functions smoothly, the government needs to raise revenue from diverse sources and expend money on a variety of needs. A significant challenge before any government is the prudent management of public finance and its utilisation in a way that aims at the maximisation of welfare and economic development. Public Finance Management (PFM) is based on a set of rules, systems and procedures to provide a functional framework to the government to plan, execute and monitor public finances. Thus, PFM is a vital element of good governance in the present time (Allen et al., 2013).In recent years, the concept of nation-first governance has emerged as a guiding philosophy for the government. The philosophy emphasises the need for holistic development of a nation in a way that is sustainable in the long term. It places the nation above everything else. An essential need to adopt this philosophy is a sound management of public finances, which can be achieved with the help of PFM. Thus, PFM turns out to be an indispensable requirement to practise this philosophy.Conceptual Framework of PFMIt is hard to define the concept of PFM precisely. PFM deals with the laws, organisations, systems, and procedures available to a government to ensure efficiency, effectiveness, and transparency. PFM emphasises the “how to do” type of questions, focusing on budgetary systems, procedures, and institutional arrangements that ensure public policies are implemented effectively (Allen et al., 2013). Although PFM covers various tax and non-tax sources of public revenue, public borrowing, and public debt management, its central focus area is the management of public expenditure. Thus, PFM covers different aspects of government finance, like budgeting, revenue mobilisation, accounting, and auditing.The PFM has been developed by incorporating concepts and approaches from different academic disciplines, like economics, political science, law, and management. The theoretical and conceptual framework for designing fiscal policy, maintaining macroeconomic stability and ensuring efficient resource allocation comes from two branches of economics i.e., microeconomics and macroeconomics. Political science and public policy provide PFM with the knowledge of how power and political decision-making processes influence fiscal policy and the management of public finances. In PFM, concepts like fiscal responsibility, budgeting, procurement, and auditing substantially depend on the discipline of law for their legal frameworks. Frameworks such as the International Public Sector Accounting Standards (IPSAS) and the International Financial Reporting Standards (IFRS) from accounting and financial management provide standards for fiscal reporting, transparency, and accountability.An effective PFM aims to achieve the following three objectives:Fiscal Discipline,Efficiency in Resource Allocation, andEfficiency in Financial Operations.Conceptual Framework of Nation-First GovernanceThe philosophy of nation-first governance transcends the role of the government from a mere budget maximiser to a custodian of public wealth. The government must act for the maximisation of national welfare rather than for mere political gains.The philosophy of nation-first governance transcends the role of the government from a mere budget maximiser to a custodian of public wealth. The government must act for the maximisation of national welfare rather than for mere political gains. Principles of integrity, transparency, accountability, equity, and sustainability play a guiding role for the government in designing policies and the utilisation of resources. The philosophy of nation-first governance conforms with the good governance framework of the OECD and Sustainable Development Goal number 16 of the United Nations, which emphasises on effective, inclusive and accountable nature of public institutions. It requires the budgets to be realistically prepared to pursue evidence-based policies, and public spending must be justifiable to the citizens. Thus, public participation also becomes an integral part of such governance.Ideally, a benevolent and foresighted government works in the best interest of the society. Apart from short-term needs, it works for long-term objectives such as public investment in health, education, and infrastructure that create benefits in the future. To be realistic, only a benevolent, omnipotent, omnipresent, and omniscient government can function in an ideal manner in the best interest of the nation. However, a government is often constrained by a lack of information and scarcity of resources in designing policies. In the absence of perfect information, policies can never be designed perfectly, and the scarcity of resources hampers their proper and timely implementation. Therefore, the philosophy of nation-first governance definitely needs to be inseparably clubbed with the principles of PFM to achieve optimum results under constraints.Evolution of PFM in IndiaThe evolution of PFM in India has a long history of about two centuries. It has passed through the colonial system of command and control to the modern, sophisticated and technology-driven system. The PFM process has become more and more focused on accountability and transparency over the years. With the establishment of the Indian Audit and Accounts Department in the year 1860, the foundations of PFM were laid down in India. Another milestone in this direction was reached with the establishment of the Office of the Accountant General (AG) and Comptroller and Auditor General (CAG) during the British administration to achieve effective fiscal control and better compliance. Later, the Constitution of India built parliamentary control over public spending. Articles 112 and 117 provide for the process of the annual financial statement, that is the Union Budget, and special provisions for Finance Bills, respectively. Further, Article 148 constitutionalised the office of the Comptroller and Auditor General (CAG) of India, which is envisaged to be free from any fear or favour for audit independence. Three parliamentary committees — the Public Accounts Committee, the Estimates Committee and the Committee on Public Undertaking — also exercise their fiscal control.Despite these changes, public participation, accountability, and performance orientation of the budgetary and fiscal processes remained very low. As a consequence, the fiscal health deteriorated sharply. By the late 1980s, fiscal deficit and public debt rose sharply to very high levels. Traditional fiscal management proved to be ineffective.Economic reforms of the 1990s introduced programme-based budgeting and expenditure rationalisation. In this direction, the Expenditure Reforms Commission was also constituted in the year 1994, and concerted efforts were initiated to link public expenditure with measurable outcomes and performance. Despite these efforts, by the year 2000, the combined Centre-State fiscal deficit rose to 10 per cent of the GDP and consolidated public debt reached to an unsustainable level of more than 80 per cent of the GDP. This led to the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. It mandated international standards of fiscal prudence in India (RBI, 2021). The rule-based system constrained the fiscal capacity of the Centre and States in legal terms, as it laid down targets for fiscal deficit and public debt. Further, it mandated transparency and provided for medium-term fiscal policies. The Act proved to be a turning point in the Indian history of public finance management as it significantly reduced debt and deficit levels.In the last twenty years, India has witnessed a paradigm shift in its PFM. Digital tools have been incorporated into the PFM. The Public Financial Management System (PFMS) was launched in the year 2009 to track, in real time, the ultimate reach of the funds to the last beneficiary. This system has significantly reduced leakages and enhanced transparency (NITI Aayog, 2023). Further, the DBT scheme, which was launched in 2013, enabled direct transfer of subsidies to the accounts of the beneficiaries by integrating PFMS, Aadhar, and the banking system. Introduction of the Government e-Marketplace (GeM) has digitalised government procurement through e-bidding. At the state level, the introduction of treasury computerisation, Integrated Financial Management Information Systems (IFMIS), and outcome budgets has helped in improving transparency and accountability.The upheaval of COVID-19 reminded the significance of fiscal resilience, and therefore the Government in India has adopted reforms in cash management, public asset monetisation, and performance-linked budgeting. Like the UK’s Office of Business Responsibility, both the 15th Finance Commission and the RBI have recommended an independent Fiscal Council.Table 1: Chronology of India’s Fiscal Reform (2000–2023)YearKey ReformDescription2000Initial Reforms (1990s–2000)Early steps toward fiscal responsibility and expenditure control.2003FRBM Act (Fiscal Responsibility and Budget Management Act)Legal framework for deficit control and fiscal transparency.2008PFMS (Public Financial Management System)Launch of electronic fund tracking and digital accounting systems.2013DBT (Direct Benefit Transfer)Direct cash transfers to citizens through Aadhaar and banking integration.2017GeM (Government e-Marketplace)Transparent and competitive online procurement platform for public goods and services.2023Digital Fiscal Integration & Fiscal Council ProposalUnified fiscal databases, AI-based monitoring, and institutional oversight for transparency.Traces of Nation-First Reforms in IndiaIndia has witnessed a paradigm shift in governance over the last ten years, wherein sincere efforts have been made towards the objective of nation-first governance in the country. In this phase, Public Financial Management in India has been increasingly targeted towards the broader objective of nation-first governance. The focus has been on reducing waste, preventing corruption, and ensuring that maximum number of citizens obtain benefits from public resources.The three interrelated domains of nation-first governanceThe phrase nation-first governance got prominence in public discourse during the 2010s. The idea emphasises that the government must prioritise stability, transparency, and inclusiveness. Further, fiscal accountability and welfare maximisation must be ensured by the government. The concept of nation-first governance has three interrelated domains:Welfare Maximisation: This objective refers to the attainment of maximum social welfare from the available resources. The government must ensure that the benefits of social security schemes and other welfare measures reach the targeted beneficiary without leakage of resources. Thus, corruption and other malpractices must be curbed.Fiscal Responsibility: The government has to entrust itself with fiscal responsibility in carrying out its expenditure towards various objectives in the best interest of the nation. Revenue deficit has to be contained within the maximum permissible limit to ensure that fiscal deficit remains within an affordable limit and public debt remains within a sustainable limit.Ethical Governance: The government has to promote honesty, transparency, and the spirit of public service in financial disbursements. A value-based system of rules and procedures must be developed to ensure that public organisations make honest, fair, and prudent decisions.Economic Aspects of Nation-First Governance and PFMNation-first governance envisages a framework of fiscal and economic policies that augments economic stability, economic growth, and equitable development in an intergenerational context.Nation-first governance envisages a framework of fiscal and economic policies that augments economic stability, economic growth, and equitable development in an intergenerational context. It requires a wise and prudent utilisation of the nation’s financial resources so that maximum welfare gains are obtained for people. Further, it requires an efficient utilisation of resources that prevents or minimises wasteful utilisation and ensures the highest socio-economic gains. Expenditure has to be enhanced on social overhead capital, such as physical infrastructure, power, schools, and hospitals etc., which are fundamental for the long-term development of a country.The government should refrain from short-term populist schemes generating immediate socio-political gains to avoid unnecessary pressure on the government treasury. This may trap future generations in a debt burden contrary to the objective of the nation-first governance, which envisages a balanced and prudent spending to prevent an unsustainable debt burden on future generations. Borrowing today may be incurred, provided it creates future income-bearing assets.A trustworthy fiscal framework needs to be practised to improve public trust in the government, which in turn will enhance taxpayers’ compliance. People are likely to contribute more to the treasury if they believe that their money is being utilised in the best possible manner.PFM strengthens the relationship between macroeconomic policy and fiscal risk management. It helps in improving the delivery of public services through performance budgeting and decentralisation. It helps in enhancing accountability through greater public participation and overseeing institutions like fiscal councils and audit authorities, and transparency by adopting digitalisation and international accounting standards.Global FrameworksGlobal frameworks provide benchmark standards for countries to adopt for fiscal governance and contribute to the evolution of public financial management.The United Nations (UN), in its Sustainable Development Agenda, emphasises sound fiscal governance. Under its Sustainable Development Goal (SDG) 16, the UN promotes the adoption of effective, transparent and inclusive institutions. The UN Development Programme (UNDP) promotes open budgeting and participatory planning.Member nations of the Organisation for Economic Co-operation and Development (OECD), on average, have high fiscal transparency and accountability. The Budgeting and Public Expenditure framework of the OECD promotes the adoption of medium-term budgeting, independent fiscal councils and public participation. It also encourages member nations to adopt transparent and rule-based fiscal systems.The Transparency Code of the IMF and the Public Expenditure and Financial Accountability (PEFA) programme of the World Bank provide benchmarks and systems for evaluating fiscal arrangements, in particular, to assess the credibility of budgets, predictability of revenue, expenditure control, and external audit mechanisms.PFM in Selected Top-Performing NationsThe United States, the United Kingdom, Switzerland, and Canada are considered top performers in PFM practices and fiscal governance. We can have several insights from their functioning.United StatesIn the US, the Government Accountability Office (GAO) and the Congressional Budget Office (CBO) play an instrumental role in maintaining the most transparent fiscal system in the country. These institutions function autonomously and provide their independent assessment of fiscal governance. The Government Performance and Results Act of 1993 has been very effective in performance measurement across federal agencies. The US has developed the usaspending.gov portal, where government expenditures can be tracked by anyone. Thus, the US PFM system, with its openness, public scrutiny, and institutional checks, is well synchronised with the objective of nation-first governance.United KingdomIn the UK, the Office of Budget Responsibility (OBR) maintains transparency and accountability in fiscal governance through independent economic forecasts and an assessment of the alignment of fiscal policy with fiscal targets. Apart from that, fiscal prudence is further ensured by the Charter for Budget Responsibility, which limits borrowing and mandates balanced budgets across economic cycles. Thus, the PFM system in the UK effectively ensures that fiscal stability is maintained to boost confidence in the government.SwitzerlandIn Switzerland, the PFM system has a unique approach in the form of a ‘Debt Brake Rule’. It ensures that the Swiss public debt does not grow. It restricts public expenditure to levels consistent with cyclically adjusted revenues. In case of overspending in a year, expenditure compression has to compensate for it in subsequent years. The country has sustained one of the lowest debt ratios among developed economies. Its citizens also participate directly in fiscal decision-making.CanadaIn Canada, the Parliamentary Budget Officer (PBO) carries out an extensive analysis of the government budget and provides independent fiscal analysis to Parliament for transparency and accountability. Open data initiatives and outcome-based budgeting are other instruments to enhance inclusivity and national solidarity, fostering nation-first governance in the country.Thus, we see, in these countries, that independent fiscal institutions, legal fiscal rules, and public participation build public trust, stability, and credibility. India has made significant progress in strengthening its PFM systems, yet insights from best international practices can further improve this system.Way Forward for IndiaIndia’s Public Financial Management (PFM) system, particularly, FRBM Act, 2003, PFMS, DBT, and GeM, has enhanced discipline, transparency, and efficiency in public funds utilisation. Still, some challenges remain in this system. While the Union government has adopted a standard PFM system and consistently performed well on fiscal discipline in the last two decades, state governments have shown different levels of fiscal discipline. Further, in India, audits are delayed, public participation in budgeting remains low, and detailed fund utilisation statistics are not readily available. In spite of the Finance Commission’s recommendations, India does not yet have an Independent Fiscal Council, which can greatly help in developing a stronger and trust-based fiscal governance system.India needs to speed up its auditing system, for which the CAG needs to be equipped with modern digital tools. There is a need for a portal for an integrated fiscal database that connects central and state ministries for real-time monitoring. Populist measures before elections that enhance public expenditure disturb fiscal discipline. Such expenses need to be curbed. There is a need for better coordination between the Centre and the States. Training and upgradation of administrative skills, along with ethical standards, can take India closer to the international standards of PFM and nation-first governance.ConclusionPublic Financial Management (PFM) helps the government in maintaining fiscal discipline. It helps in achieving operational and allocative efficiency in public finances. The philosophy of nation-first governance places the national interests above everything else.Prudent management of public finances is an essential part of the efficient functioning of the government. Public Financial Management (PFM) helps the government in maintaining fiscal discipline. It helps in achieving operational and allocative efficiency in public finances. The philosophy of nation-first governance places the national interests above everything else. It emphasises unity, integrity, welfare, and national progress of the nation as the most important goals. Public Financial Management reflects governance values, while nation-first governance is about the national character of public policies. The ultimate goal of nation-first governance is to build a nation that citizens can trust. PFM creates the foundation for the same. A sound system of PFM together with the philosophy of nation-first governance can achieve greater accountability, transparency, integrity, and development. For India, the way forward involves strengthening and creating institutions, inculcating ethical standards, and expanding citizen participation. Public money should be spent for collective purposes and with responsibility.◆ ◆ ◆ReferencesAllen, R., Hemming, R., & Potter, B. (Eds.). (2013). The International Handbook of Public Financial Management. Palgrave Macmillan.Cangiano, M., Curristine, T., & Lazare, M. (2013). Public Financial Management and Its Emerging Architecture. IMF.International Monetary Fund. (2014). Revised Guidelines for Public Financial Management. IMF.International Monetary Fund. (2022). Fiscal Monitor: Technology in Public Finance. IMF.International Monetary Fund. (2023). World Economic Outlook Database. IMF.NITI Aayog. (2023). Digital Public Infrastructure for Governance. Government of India.OECD. (2021). Fiscal Resilience and Transparency Report. OECD Publishing.OECD. (2023). Public Governance Dashboard. OECD Publishing.Reserve Bank of India. (2021). Report of the Fiscal Council Working Group. RBI.Transparency International. (2022). Corruption Perceptions Index 2022. TI.UNDP. (2018). Governance for Sustainable Development. United Nations Development Programme.World Bank. (2020). Public Expenditure and Financial Accountability (PEFA) Global Report 2020. World Bank.Author may be reached at rajeevsrcc@gmail.com and eboard@icai.inThe Chartered Accountant www.icai.org December 2025
Ep. 114 — From Professional Mastery to Academic Excellence: The Chartered Accountant’s Journey towards a Doctorate
CA Journal
· August 2026
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From Professional Mastery to Academic Excellence: The Chartered Accountant’s Journey towards a DoctorateChartered Accountants are the custodians of financial integrity, forming the backbone of a strong economy. With their technical proficiency and financial acumen in various domains, they ensure that financial systems function with transparency, accuracy and ethical responsibility. Through this article, the author wishes to highlight how combining professional expertise with academic scholarship can open up new avenues for professionals for career growth, intellectual contribution, and societal impact. The article underscores that while becoming a Chartered Accountant requires discipline, determination and rigour, pursuing a Ph.D. further enhances a professional’s research, critical thinking, and problem-solving capabilities, transforming them from practitioners to thought leaders.The InspirationThe inception of this article began when a senior Chartered Accountant suggested that I should urge fellow professionals to consider pursuing a Ph.D. Being invested in the academic field, his words became the catalyst that encouraged me to write this article as a source of motivation for others to undertake academic research.I would like to begin by narrating the story of one of my friends who, being a Chartered Accountant, was in the process of arranging his marriage with a girl who was a University Rank holder and the recipient of national scholarship throughout her academic career. I remember asking his future mother-in-law why their family was interested in a boy who was merely a Chartered Accountant. Her answer resonated with me at such a deep level that I still remember her words vividly. She said that the Chartered Accountancy examination is extremely difficult and one that demands from those pursuing it to not only be intelligent but also hard working, sincere, and devoted. Clearing the CA examination, she said, is no ordinary feat and one who has succeeded in doing so would naturally excel in life and be capable of taking good care of her daughter.Expanding Horizons: The Chartered Accountant’s Journey toward a Ph.D.A Chartered Accountant is a professional who has specialized expertise in accountancy, taxation, financial management, and auditing etc. They play a crucial role in both private and public sector organizations. With rapid advancements in the field of technology and business practices, the new generation of CAs are continuously upskilling themselves by developing sound technical, IT and Management Information System (MIS) competencies. The equivalent of a Chartered Accountant in the USA is a Certified Public Accountant or a CPA, which highlights the global relevance of the profession.In contrast, a Doctor of Philosophy (Ph.D.) is a research-oriented doctoral degree which is regarded as one of the highest academic qualifications. Interestingly, while completing the format of the Bar Council of India for renewal of courses, I came to the realization that my Ph.D. in Finance was categorized as a higher level of academic qualification than my LL.D. (Doctorate in Law).Choosing a profession or pursuing an academic qualification requires a person to conduct thorough research and analyse both the costs and benefits, often driven by personal motivations based on long-term goals. Research requires devoting considerable time for extensive reading, critical thinking, and meticulous analysis, particularly for those pursing a part-time Ph.D. Pursuing a Ph.D. doesn’t require an individual to be a genius, but rather to be sincere, and willing to put in consistent efforts. With dedication and consistency, a researcher is expected to conduct meaningful research and offer honest insights that are valuable for the readers and contribute to the field of research.By pursuing a Ph.D., a Chartered Accountant, who is already an expert in the professional domain, can further gain world-class research and analytical expertise.Listed below are the benefits of pursuing a Ph.D. for a Chartered Accountant:Enhances analytical abilities and deepens understanding of the subject matter.Develops a multidimensional approach to addressing operational and strategic areas.Enables meaningful contribution to academic research and teaching.Broadens career perspectives beyond traditional finance and accounting roles.Provides greater recognition in government institutions and universities.Strengthens competitiveness with the mainstream talent pool across diverse fields.The key is to choose a topic in which you hold the highest degree of confidence, place trust in the guidance of your supervisor, maintain regular communication, and remain self-assured throughout the journey.Pursuing Ph.D. as a Higher EducationAn individual can enroll in the Chartered Accountancy (CA) course after passing the Class XII examination. The CA course requires clearing the CA Foundation course, completing the articleship, as well as passing the Intermediate and Final Examinations, all of which if pursued in a timely manner can be completed within approximately 4 years at a total cost of less than Rs. 1 lakh. It is considered to be one of the most economical professional qualifications, especially when compared to other fields such as medical and engineering etc. Additionally, there is no age restriction for becoming a Chartered Accountant.Similarly, the fee for pursuing a Ph.D. from Delhi University is around Rs. 43,000/- and typically requires a minimum duration of 3 years. In contrast, the fees in private university are usually as high as Rs. 3 lakh or more for the same program. Unlike entry-level examinations such as the CA Foundation, CSIR UGC-NET, UGC-NET or JRF, GATE etc. that require an upper age limit, a Ph.D. imposes no age bar.Qualifying for the entrance test and interview for a Ph.D. is generally not too difficult for a Chartered Accountant. Universities regard their candidature with due regard, and many professors are more than willing to become their supervisors. Recognizing the CA’s academic discipline and professional commitment, a supervisor appreciates that a CA is likely to respect both their time as well as that of their mentor. In certain cases, the Academic Council may also grant waivers for certain requirements if the scholar is a well-read individual with a professional standing in the field.Recognition of Chartered Accountancy as a Postgraduate Qualification and Its Academic ImplicationsThe University Grants Commission (UGC) and the Association of Indian Universities (AIU) have officially recognized the Chartered Accountancy qualification as being equivalent to a post graduate degree.In the words of CA. Nihar N Jambusaria, Past President ICAI, “This equivalence to Post Graduate Degree will open up International market for various job avenues for ICAI members, thereby bringing the global acclamation and recognition to India worldwide. Since Chartered Accountancy course will be considered as equivalent to the Post Graduate degree, it will aid CA members, who are aspiring to go overseas for higher studies and/or for seeking professional opportunities abroad.”With the recognition given by the University Grants Commission, a Chartered Accountant is eligible to pursue a Ph.D. from any Indian university. Additionally, they can also appear in the NET/JRF examination conducted by the UGC. Upon clearing this examination, a CA becomes eligible for Junior Research Fellowship or serve as an Assistant Professor in any university across India.Furthermore, there is a noticeable dearth of accounting and finance professionals in academia which, in turn, has led to a significant demand for adjunct faculty in this domain. Hence, a professional who wishes to make a difference and contribute meaningfully to the academic field as well as society may certainly find the option of pursuing a Ph.D. as a rewarding path.The Value and Scope of a Doctorate DegreeA Doctorate in Accounting is regarded as one of the highest academic qualifications in the field. It is generally pursued by those who wish to work in academic organizations or those seeking a balanced and fulfilling career in the field of teaching and research. As a scholar, an individual gains a deeper understanding of research methodologies & the analytical processes associated with it, often exploring domains that may have been unrecognized before. Furthermore, a Ph.D. also provides a scholar with the opportunity to undertake research in any of the various subfields of accounting in alignment with their underlying interests, and to address areas that remain unexplored or require further study. Through their original research, a CA can make significant valuable contributions to the field of discipline, thereby benefiting both ICAI as well as the wider academic community and institutions.Earning a Ph.D. in addition to the Chartered Accountancy qualification opens up diverse and rewarding career opportunities in academia, consultancy, and contributing to policy-making bodies such as the Planning Board or NITI Aayog.By pursuing a Ph.D., a Chartered Accountant, who is already an expert in the professional domain, can further gain world-class research and analytical expertise. Furthermore, just as a CA student receives a stipend while being an articled clerk, in a similar manner, a Ph.D. scholar enrolled in a full-time program is also provided with a monthly allowance in addition to research funding.Integrating Professional Expertise with Academic InsightOne of the greatest advantages for a professional entering the academia is to be able to integrate practical experience with academic insight. Additionally, if a professional opts to pursue a Ph.D. after a few years of professional practice, they can effectively apply their real-world knowledge to research, enriching both their work and the field as a whole. Therefore, there remains no doubts that pursuing a Ph.D. degree not only helps a Chartered Accountant in enhancing their skill set and knowledge base while improving their critical thinking and problem-solving skills, but also empowers them to contribute meaningfully to research, education, and the advancement of the accounting profession.Benefits of Pursuing a Ph.D. as a Chartered AccountantThere are several benefits associated with pursuing a Ph.D. being a Chartered Accountant, one of them being the development of a research-oriented and innovative mindset. Earning a Ph.D. in addition to the Chartered Accountancy qualification opens up diverse and rewarding career opportunities in academia, consultancy, and contributing to policy-making bodies such as the Planning Board or NITI Aayog.During the course of a Ph.D., a Chartered Accountant is able to gain access to a vast repository of knowledge available in published books, journals and other academic resources, whether paid or freely accessible. A scholar gains a deep knowledge and understanding of the laws enacted by relevant law-making authorities.Initially, a professional’s knowledge tends to remain confined to the understanding and interpretation of these laws, which enables them to perform their duties efficiently. However, their skill set at this stage remains limited to the reading, comprehension, and application of the existing legal provisions.It is seldom for a Chartered Accountant to delve into the underlying rationale behind the laws framed by policymakers. However, through undertaking doctoral research, one gets the opportunity to explore these foundations and contribute original insights to the existing body of knowledge. In the process of doing so, one not only broadens their intellectual horizons but also enhances technical and analytical capabilities, as one learns to conduct rigorous research, write dissertation, and present the finding before a panel of field and subject experts. Additionally, this experience also helps a professional refine their soft skills such as communication, critical thinking, perseverance, self-motivation and leadership.Networking and Collaborative OpportunitiesThe Ph.D. program encourages extensive networking with professionals and academicians belonging to related fields. As a scholar, an individual gets numerous opportunities to interact with the advisory committee, field experts, fellow researchers, undergraduate students as well as professors across departments, especially during academic conferences and seminars. Building such a strong professional network proves invaluable, as it provides long-term support and potential collaborations in one’s career, business, or professional practice.Challenges in the Doctoral JourneyPursuing a Ph.D. is intellectually demanding and often brings with it challenges such as stress, fear of failure, and the feeling of isolation, as scholars are required to spend several hours conducting research and reviewing literature. Critical feedback from professors during discussions and presentations is occasionally unpalatable and difficult to accept at times. Nonetheless, Chartered Accountants are not unfamiliar to these challenges and hurdles as they are already trained to handle professional pressures with maturity, discipline, and resilience.Global Ph.D. Trends and Their Implications for Chartered AccountantsThe United States of America produces an approximate number of 68,000 Ph.D. graduates on an annual basis, whereas India produces about 24,000 Ph.D. graduates in comparison. In terms of population, around 1.2% of people in the U.S. hold a Ph.D., while Switzerland leads with about 3% of its population possessing doctoral qualification.While a Chartered Accountant is widely recognized as an expert in the field of accounting and taxation, holding a Ph.D. elevates that expertise to a level of authority in the chosen field.While a Chartered Accountant is widely recognized as an expert in the field of accounting and taxation, holding a Ph.D. elevates that expertise to a level of authority in the chosen field. For a Chartered Accountant, holding a Ph.D. degree opens various avenues and opportunities in academia, consultancy, advisory roles, and research-based professions. Furthermore, a Ph.D. empowers professionals to undertake focused studies that can strengthen responses to audits or reviews by bodies such as the Vigilance Department or the Comptroller and Auditor General (CAG). It also helps them acquire advanced research skills for generating original insights and driving organizational improvement.Key Considerations before Pursuing a Ph.D.Before deciding to pursue a Ph.D., it is important to evaluate certain personal and professional factors. For an individual who is young and the sole earning member of the family, opting for a part-time Ph.D. may be more practical. This is because academic institutions often require scholars to help out with routine departmental responsibilities such as conducting examinations, organizing cultural programs, or reviewing dissertations. Apart from that, a scholar is also required to manage their own research work.For married individuals, having a supportive spouse is essential. Balancing household responsibilities, especially with children, can be challenging and may require additional cooperation and understanding at home.It is equally important to pursue a Ph.D. with a clear purpose. For instance, some professionals view it as a long-term plan to remain intellectually active and professionally relevant after superannuation, particularly since managing an audit firm or similar practice might involve greater risk in later years.A Chartered Accountant may not be well acquainted with the research environment as the nature of academic research differs significantly from professional practice. Therefore, a professional should carefully assess the following aspects before committing to a doctoral journey:Additional time and financial investmentIncreased workload and occasional frustrationFeelings of isolation and reduced time with family and friendsTemporary imbalance in work-life routineAdjustment to new learning and research techniquesHigh attrition rates (approximately 40–60%) observed in research programsLower initial earnings compared to an established CA practiceLimited job opportunities at the beginningPursuing a Ph.D. can be deeply rewarding, but it requires thoughtful planning, emotional resilience, and a strong sense of purpose to navigate the challenges effectively.ConclusionA Chartered Accountant should consider pursuing a part-time Ph.D. in a field that aligns with their professional experience. Beyond traditional domains such as accounting, finance or commerce, Chartered Accountants can consider and explore disciplines such as taxation, economics and other related areas, subject to the approval of the academic council of your professional experience and institutional guidelines. Furthermore, regular revisions in the CA curriculum in response to the evolving professional requirements further opens emerging areas of research for professionals.However, pursuing a Ph.D. right after qualifying as a Chartered Accountant is not advisable unless one is genuinely inclined towards academia. Nonetheless, the academic environment often offers greater intellectual satisfaction and work-life balance compared to corporate settings.A Ph.D. helps an individual receive significant opportunities in teaching, research, and policy-making. Professors enjoy a respectable position, comparable in scale to that of a Joint Secretary in a Ministry in the Central Government, and are often admired for their contribution to education. Furthermore, a doctoral degree from a respectable academic institution holds high acclaim even in judicial and professional circles.Therefore, it is valuable for Chartered Accountants to consider pursuing a Ph.D. later on in their career, particularly after they have achieved financial stability and fulfilled family responsibilities, so that they can contribute meaningfully to academia while enjoying a rewarding post-retirement engagement.◆ ◆ ◆Author may be reached at eboard@icai.inThe Chartered Accountant • Profession December 2025 | www.icai.org
Ep. 115 — Rate Rationalisation as a Catalyst for Ease of Doing Business: A Blueprint for GST 2.0
CA Journal
· August 2026
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Rate Rationalisation as a Catalyst for Ease of Doing Business: A Blueprint for GST 2.0GST 2.0 marks the first major amendment in eight years since the historical introduction of GST in 2017. This milestone is not an overnight reform but is a culmination of years of continuous efforts made by policymakers, industry stakeholders and administrators to resolve ambiguities and operational challenges. This article explores the ease of doing business after rate rationalization and compliance simplification by making registration and refund process easier. It discusses about the revival of insurance sector where deductions removed under the new tax regime get compensated by nullifying the rate in GST 2.0. It mentions practical examples, uncovers post-implementation challenges and systematic gaps observed under the earlier GST framework and outlines measures for smoother adoption of GST 2.0.IntroductionGST 2.0 has created a lot of buzz. On one hand, it has raised a lot of expectations in the consumers regarding price reductions; on the other hand, taxpayers are enthusiastic as it will boost the overall market sentiment during the crucial marketing season. While the general outlook is positive, the rollout has come with a compressed timeline. The industry must ensure that regulations are complied within allotted time frame while also preserving profitability and customer trust, for which a coordinated effort across finance, accounting operations, and supply chain would be required to enable seamless execution. The reforms are much beyond rate rationalization and the other changes will have a cascading implication in bringing about the anticipated benefits to the industry. GST 2.0 can also be a springboard for greater automation.The Core Pillars of GST 2.0 reforms will bring about an avant-garde change as it is Citizen Centric Simple Tax. Moreover, rate rationalisation will enhance the ease of doing business through structural reforms and compliance simplification.Citizen Centric Simple Tax: Citizens are always happy when prices get reduced. Price reduction leads to more savings which can either be used for increased spending or channelled into meaningful investing. In both scenarios, some or the other sector gets benefited, contributing towards economic growth. Lower tax rates and simplified compliance processes have further encouraged taxpayers. In short: Save more, Spend more, Invest more.Rate Rationalisation: By reducing multiple slabs and aligning tax rates with industry realities, GST 2.0 resolves ambiguities and promotes uniformity and fairness in taxation. In short: Simplify, Amplify and Prosper.Figure 1: Core Pillars of GST 2.0 ReformsCitizen CentricSimple Tax+RateRationalisation→GST2.0+Ease of DoingBusiness for AllEffective from22nd September 2025Figure 2: Evolutionary Progress in GST 2.0Good Reform — GST 1.0Unified Tax SystemMultiple Tax SlabsComplex ComplianceDelayed Refunds18% GST on Life & Health PoliciesBasic Online PortalProcess DrivenFrequent Mismatches in ITCHigh Litigation→ ContinuousImprovementBetter Reform — GST 2.0Digitally Integrated Tax EcosystemRationalised Tax RatesSimplified ComplianceFast RefundsFully Exempt to make Insurance AffordableAI-enabled Analytics & AutomationEase of Doing BusinessReal-time Reconciliation of ITCReduced LitigationEase of Doing Business for All: All the improvements mentioned above support ease of doing business. The reduction in the rate of the final product due to rate rationalisation is expected to drive business growth. Significant refinements brought in the refund and registration process have reduced administrative bottlenecks, ultimately benefitting overall business. In short: Ease in Tax, Ease in Trade.In summary, all the above, when combined together, represents a progressive step towards building a growth-oriented tax ecosystem that is more transparent and efficient, ultimately strengthening India’s position as a global hub for ease of doing business.Reasons Why GST 2.0 is NeededGST 1.0, being a landmark reform initially introduced as a work in progress, faced lots of procedural and structural challenges. Hence, there was a need to address infirmities such as rationalising tax structure driven by political will, crises, or public demand, based on the core belief that the cost of continuing the same outweighs the challenges of change. Consequently, the next phase of reform for India’s tax structure i.e. GST 2.0 was launched, drawing from lessons learned till date.Rationale behind GST 2.0: Strengthening Ease of Doing Business and Rate RationalisationThe US tariffs was an external shock on Indian exports, thereby making Indian manufactured goods expensive and less competitive in the US market.Exports ↓ Production ↓ leading to → potential job losses in manufacturing sector.To counter this loss, Domestic consumption ↑ Internal Demand ↑ which can be done when → Prices ↓ Tax rate ↓Under GST 1.0, various headings & sub-headings within the same chapter attracted different tax rates leading to litigations. However, with the introduction of GST 2.0, these rates have been standardized.With a decrease in the tax rate, purchasing power and consumer spending also increases. Thus, any adverse effect on exports in the manufacturing sector in the external market can be cushioned by higher domestic sales, thereby helping maintain production and safeguarding jobs.Encouraging Insurance Cover: By Exempting and Making It More AffordableAfter a long wait, the insurance sector is set to finally revive and gain new momentum through the relief measures introduced under GST 2.0. Earlier, the withdrawal of Section 80C deductions under the new tax regime made insurance products less attractive, as they no longer provided tax-savings benefits. Now, insurance, health and mediclaim services have been made GST-exempt, thus lowering premium costs, boosting affordability, and driving renewed consumer demand and industry growth. Moreover, this move also serves as a form of compensation for the benefits now available in GST 2.0 that were not available under direct taxation. In essence, GST 2.0 delivers a dual advantage — enhancing affordability for consumers while fostering growth and stability in the insurance sector.All the above points have been explained separately with practical examples mentioned below:Table 1: Comparison between GST 1.0 and GST 2.0 GST 1.0GST 2.0Complex to Simplified Rate StructureMultiple tier rate structure. Multiple tax slabs (0%, 5%, 12%, 18%, 28%) along with special rates for precious metals and cess on demerit goods.Three tier rate structure.GST 2.0 Tax StructureMerit Rate for Essential Goods5%Standard Rate for Normal Good18%Higher Rate for Demerit / Luxury Goods40%Goal: To reduce classification disputes and facilitate easier compliance.Delayed to Fast Registration — Broadening Tax BaseDelayed registrationSmall & Low Risk BusinessesOutput Tax ≤ Rs. 2.5 lakh per month; voluntary opt-in/outRegistration within 3 working days under automated routeGoal: To bring unregistered business to the formal tax net. 96% of New Applications w.e.f. 01 Nov 2025Simplified Registration for Small Suppliers via E-commerceSeparate GST registration in every State (Section 22 & Rule 8)Single registration for small suppliers selling via e-commerce across states. (Operational modalities to be notified)Reviving Insurance Sector: From Tax Burden to Affordable Protection Cover — CBIC’s Notifications (9/2025–17/2025)18% GST on Life and Health PoliciesGST NILMaking insurance sector more affordable. Goal: To compensate withdrawal of Section 80C deductions under the new tax regime. Dual advantage i.e., consumers affordability and stability in the insurance sector.Removal of the ₹1,000 Refund Restriction — Amendment to Section 54(14) of the CGST Act, 2017Refund not available (minimum refund threshold of ₹1,000)Refund Available — ₹1,000Threshold limit removed; refunds available for small exports with tax payment. Goal: To benefit small exporters exporting through courier and parcels.Refund for Zero-rated Supplies (exports/SEZ) — Amendment in Rule 91(2) of the CGST Rules, 2017Officer discretion high; process heavy90% of the claimed refund will be provisionally sanctioned based on risk assessment for exports or SEZ supplies. w.e.f. 01 Nov 2025Refund under Inverted Duty Structure (IDS) — Amendment in Section 54(6) of the CGST Act, 2017Not allowed90% provisional refund for claims arising from the inverted duty structure, based on risk assessment. w.e.f. 01 Nov 2025Place of Supply – Intermediary Services Section 13(8) of the IGST Act, 2017Place of supply for intermediary services = location of supplier, Section 13(8)(b) of the IGST Act, 2017Place of supply for intermediary services = location of recipient. (default under Section 13(2) of the IGST Act)Post-Sale Discount — Sections 15 & 34 of the CGST Act, 2017. Section 15(3)(b) amended; Section 34 updated; Circular No. 212/6/2024 (26 June 2024) rescinded.1) A written agreement for discount. 2) Pre-agreed and linked to the invoice for value reduction. 3) If these conditions were not met, the discount could not reduce GST.Post-sale discount are simplified: 1) If a credit note is issued, and 2) The buyer must reverse ITC proportionately, provided Section 15(3)(b)(i) is removed.Retail Sale Price (RSP)-Based ValuationValue under Section 15(1) = transaction value; tobacco and pan masala taxed at ex-factory price, leading to under-valuation.GST valuation based on RSP for pan masala, cigarettes, gutkha, chewing tobacco, zarda, scented tobacco, and unmanufactured tobacco. CGST Rules, 2017 (Notifications to be issued).Practical examples:Cheaper Household Appliances: Mrs. A purchases a mid-tier washing machine worth ₹24,000. Before the introduction of GST 2.0, she would have paid ₹6,720 extra under the old 28% rate i.e., a total of ₹30,720. However, post-reform, with the 18% standard rate, GST drops to ₹4,320, i.e. a total of ₹28,320, reflecting a saving of ₹2,400, directly reflecting on household budgets. With this saving, she can purchase an induction cooktop easily.Classification Disputes Resolved and Litigations Reduced: Under GST 1.0, various headings & sub-headings within the same chapter attracted different tax rates leading to litigations. However, with the introduction of GST 2.0, these rates have been standardized. For Example: The agricultural tractor and its parts and accessories were subject to different GST rates under GST 1.0, even though they fell under the same chapter, as follows — Chapter 87 ‘Vehicles other than railway or tramway rolling stock and parts and accessories thereof’; Heading 8701: Agricultural tractors (GST Rate: 12%); Heading 8708: Parts and accessories of tractors (GST Rate: 18%). Under GST 2.0, this classification dispute has been removed as the GST rate for both is 5%.Simplified Registration (Low-Risk): A local shop with a monthly tax liability of ₹2.23 lakh applies for registration and receives a GSTIN automatically in 3 working days.Simplified Registration via E-commerce: A supplier selling via an e-commerce website across 4 states can obtain a single GST registration under the new scheme, avoiding multiple State-wise registrations.Insurance under GST 2.0 (Nil Rate): The life insurance policy of Mr. A was earlier charged @ 18% GST. The final premium amount payable on a base amount of ₹2,750 per year was ₹3,245 (including ₹495 as GST). Under GST 2.0, with GST reduced to Nil, he now has to pay only ₹2,750.Low-Value Export: Mr. A, a small exporter sending parcels via courier worth ₹49,500, is now eligible for a full refund, which was previously blocked due to value threshold.Table 2: GST 2.0 Rates ComparisonCategoryPre-GST 2.0 RatesPost-GST 2.0 RatesImpact & referenceEssentials (soaps, breads)5–18%0–5%₹2 lakh crore consumer savingsTractors & Agri Tools12–18%5%Annexure I, Press ReleaseElectronics / White Goods / Small Cars (<1,200cc)18–28%18%8–10% price drop in FMCG. Notif. 13/2025-CTLuxury / Sin Goods28% + Cess40%Revenue neutral; reduced evasion. Amended CGST RulesServices (Insurance)18%0%Boost to healthcare accessLifesaving Drugs5–12%0%Saves rare disease treatment. Notif. 09/2025-CTRFurther worked illustrations of the reform in practice:Risk-Based Provisional Refund: An exporter filing refund claim of ₹16 lakh receives ₹14.4 lakh (90%) under the risk-based provisional refund mechanism, while the remaining ₹1.6 lakh is processed after detailed verification, if required.Inverted Duty Structure Refund: Mr. A, a manufacturer, procures inputs taxed higher than final goods, then, ₹6.3 lakh (90% of ₹7 lakh claim) refunded provisionally.Place of Supply for Intermediary Services: An Indian IT firm providing intermediary services to an Australian client will now have the place of supply as the Australian client’s location, making the service eligible for export benefits.Post-Sale Discount: A manufacturer issues a credit note for a ₹18,900 discount to a dealer. ITC is reversed accordingly, and the discount is treated as additional consideration in downstream sale.RSP-Based Valuation: GST on chewing tobacco sold at a retail price of ₹190 is computed on ₹190 instead of the factory price.The rate rationalization has not only helped in bringing down the final price of the product but has also significantly lowered the inversion in the rate structure. This will not only help avoid the hassles of refund under the inverted rate structure, but also improve liquidity management. Nearly 99% of the goods taxed at 12% have been brought down to 5%.It is now the time and opportunity to recalibrate our systems. The major areas requiring attention include managing inventories, ITC flows, classification changes, as well as supply chain transactions. The industry must ensure compliance, technological readiness and also reassess pre-agreed contracts.ChallengesDespite being a progressive reform, certain challenges will always persist in the pipeline such as:Transitional Disruptions: Inventories with old MRPs require re-sticker approvals due to changes in rates, leading to additional costs for restocking and disruptions in the supply chain.Revenue Impact: There may be revenue loss due to lower rates and more exemptions, raising fiscal stress for both the Centre and States. The States which heavily rely on GST revenue transfers might face budget constraints for welfare and infrastructure programs.Further Rate Rationalization: The major challenge for GST 2.0 is rationalizing rates while taking care of two sides i.e., sacrificing vital revenue for Governments or sacrificing the progressive intent that protects the poor.Inversion of tax structure has been reduced to a large extentIt is a state where the rate of input > rate of output, resulting in accumulation of ITC, thereby escalating the cost, which has been taken care of by rationalizing rates. Hence, the scope of inversion has reduced to a great extent under GST 2.0.Quick Dispute Resolution: Disputes should be resolved on time and efficiently, hence, the GST Appellate Tribunal needs to be fully operational across all States.Awareness Drives: Reforms should be adopted as soon as possible. Therefore, nationwide campaigns and training for businesses and the public are required to minimize confusion.Compliance Gaps: MSMEs continue to struggle with digital tools and e-invoicing errors. Tax evasion via fake invoices also persists. MSMEs may struggle with technological upgrades or new reporting formats.SuggestionsGSTN’s AI-powered compliance framework needs to be strengthened in order to detect evasion and support taxpayers.More clarity should be provided by issuing updated circulars on product classification and ITC eligibility.The technological handholding and capacity-building for MSMEs should be expanded.Fully operationalize GSTAT in all states to ensure timely, fair dispute resolution.The biggest point from a consumer’s viewpoint is to include petroleum, diesel, crude oil & electricity in the next phase i.e. GST 3.0.The most anticipated issues would be the cases of MRP or RSP goods in transit and the services rendered during the transition phase.Use statistics on Aadhaar-linked refunds, ITC mismatches, and GSTAT case flows to track shifts in taxpayer behaviour under stricter procedural rules.GST’s new role needs to be studied in promoting women-owned businesses, rural enterprise, and local craftsmanship through reduced rates and extended exemptions.GST 2.0 can live up to its promise of supporting India’s formalization and growth drive while preserving state finances and business confidence with prudent monitoring and adaptive reforms.ConclusionBesides being a tax collection mechanism, GST 2.0 serves as the central nervous system of India’s formal economy. The tax system is aligned with broader public health and environmental objectives by discouraging the consumption of “sin goods” and directing funds into more productive or socially desirable industries. With the use of advanced technology such as artificial intelligence for predictive analytics, risk-based audits, automated reconciliations, and identifying fraudulent input tax credits, it is forward looking to achieve global competitiveness. Predictability and business confidence are enhanced by automated compliance, digital invoicing, and speedy refunds. India can transform its GST from a complex, compliance-heavy system into a simple, efficient, and trusted fiscal instrument by systematically learning from global leaders.The roadmap for GST 2.0 should be about reinventing the wheel as well as intelligently adapting the world’s best practices to India’s unique federal and economic context. Although the Council’s recent work shows the blueprint, it is now an individual’s responsibility to build upon it with courage and vision. GST 2.0 can live up to its promise of supporting India’s formalization and growth drive while preserving state finances and business confidence with prudent monitoring and adaptive reforms. Ultimately, GST 2.0’s legacy hinges on equitable enforcement—transforming tax from a burden to a growth engine.Thus, GST 2.0 is “Empowering families, energizing businesses, accelerating growth.”ReferencesCentral Goods and Services Tax Act, 2017.Integrated Goods and Services Tax Act, 2017.Goods and Services Tax Council. (2025, September 3). Press release: Recommendations of the 56th meeting. Retrieved from gstcouncil.gov.inPress Information Bureau (PIB). (2025, September 3). Recommendations of the 56th meeting of the GST Council. Retrieved from pib.gov.inClearTax. (2025, September 18). 56th GST Council meeting highlights. Retrieved from cleartax.inKPMG India. (2025, September 4). Key recommendations of the 56th GST Council meeting. Retrieved from kpmg.com/inMondaq. (2025, September 23). GST 2.0 notification and other indirect tax developments. Retrieved from mondaq.comVJM Global. (2025, September 20). FAQs on GST 2.0. Retrieved from vjmglobal.comTaxTMI. (2025, September 15). 56th GST Council meeting – Outcome at a glance. Retrieved from taxtmi.comMinistry of Commerce & Industry. (2025). Ease of doing business in India. Retrieved from indianembassynetherlands.gov.inTimes of India. (2025, May). GST collections hit record high of ₹2.37 lakh crore. Retrieved from timesofindia.indiatimes.comMoneycontrol. (2025, April). India’s GST model is set to get more lopsided. Retrieved from moneycontrol.comDirectorate General of Foreign Trade & CBIC. (2025). Joint communication on removal of export refund threshold.Notifications No. 13/2025 & 14/2025–Central Tax; Circular No. 212/6/2024–Central Tax.◆ ◆ ◆Authors may be reached at heena.matalia@gmail.com and eboard@icai.inThe Chartered Accountant • GST December 2025 | www.icai.org
Ep. 116 — Overview of Certain Key Accounting Aspects in Media and Entertainment Industry
CA Journal
· August 2026
00:00
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Overview of Certain Key Accounting Aspects in Media and Entertainment IndustryThe Media and Entertainment Industry is witnessing significant growth and transformation in areas like the manner of exploitation of content, contractual arrangement, and business models, sharing of revenues, etc. This transformation has resulted in increased complexity in accounting and auditing and a greater need to apply significant judgement and estimates.This article analyses certain key accounting challenges noted in the media and entertainment industry — such as classification of motion picture film, amortization of the cost of motion picture film, and revenue recognition — from the perspective of Indian Accounting Standards (Ind AS).Background of the Media and Entertainment IndustryOver the last decade, the media and entertainment industry has undergone significant transformations both in India and globally, driven by technological advancements, changing consumer behaviors, and new business models.The Indian Media and Entertainment Industry revenue was at approximately USD 16 billion in 2015, which has grown to approximately USD 31 billion in 2025.The revenue from Over-The-Top (OTT) platforms has increased from a small base in 2015 to approximately USD 4 billion in 2025, with OTT platform users increasing to around 600 million in 2025, and Internet users increasing from approximately 300 million in 2015 to approximately 800 million in 2025.Key Shifts in the Media and Entertainment IndustrySome of the recent key shifts in the Media and Entertainment Industry include the following:Digital Transformation: The rise of digital streaming platforms has shifted audiences away from traditional TV to on-demand viewing.Technological Advancements: Technologies such as AI, AR, and VR have reshaped content creation and distribution.Content Diversification: There has been a significant increase in original content production, with streaming platforms investing heavily in a wide variety of genres and formats to attract diverse audiences.Rise in demand for Regional Content: There is greater demand for regional content, with viewers favoring stories and characters that resonate with their own experiences.Key Accounting Challenges in the Media and Entertainment IndustryAccounting and auditing professionals involved in the Media and Entertainment Industry face accounting challenges in many areas, such as classification of motion picture film, amortization and impairment of the cost of motion picture film, treatment of participation costs, revenue recognition, etc.This article provides guidance in dealing with some of the key accounting issues noted in the media and entertainment industry.1. Motion Picture Film and Other Content Assets — whether Inventory or Intangible Assets?1.1 Motion Picture Film and Other Content Assets as Intangible AssetsIt may be recalled that Ind AS 2 may apply to items like motion picture film when the content is held for sale in the ordinary course of business, such as by distributors or aggregators.Further, Ind AS 38 defines an Intangible Asset as — 'an intangible asset is an identifiable non-monetary asset without physical substance.'Motion picture film contains the following characteristics:Identifiability: Each motion picture film is distinct and specific; it is separately identifiable from another motion picture film.Control: The producer/acquirer of a film, contractually or through registration with copyright authorities, exercises control over such film and has the right to exploit it.Form: A motion picture film lacks physical substance.Future Economic Benefit: The producer/acquirer of a motion picture film will be able to generate future economic benefits through the exploitation of rights.The motion picture film meets all the above criteria of intangible assets. Further, the motion picture film is generally not held by the producers for sale but to generate economic benefit through exploitation over its life. The producer generally assigns the rights to third parties like distributors, exhibitors, broadcasters, etc., for a certain period to gain economic benefits therefrom, and most of the rights devolve back to the producer after the expiry of the assignment period.Considering the above, it is generally more appropriate to classify motion picture films and other content assets as 'Intangible Assets' in the financial statements unless such motion picture films are held for trading and the entity does not intend to retain any intellectual property rights in respect of such motion picture films.1.2 Motion Picture Film and Other Content Assets as InventoryAs per 'Ind AS 2 – Inventories', Inventories are assets:held for sale in the ordinary course of business;in the process of production for such sale; orin the form of materials or supplies to be consumed in the production process or in the rendering of services.As mentioned above, if the motion picture film is acquired and held for sale by the entity in the ordinary course of business and, upon sale, the entity intends to retain either no or very little intellectual property rights in respect of such motion picture films, then such motion picture films will be required to be classified as 'Inventory' in the books.However, in practice, there exists diversity in the practice of film and media companies in presenting the film and other content costs as either intangible assets or inventories.2. Accounting for Costs Related to the Production of a Motion Picture Film2.1 Determining the appropriate cost to be considered as a part of the cost of production of a film poses a challenge and involves judgement and estimates.2.2 The process of making a motion picture film involves various stages, like:Pre-production stage involving script development, casting of actors/actresses, etc.Production stage involving selection of location, shooting of the film, recording of music, etc., andPost-production stage involving telecine, editing, dubbing, etc.All these processes involve significant costs, including actor/director fees, salaries for the crew, location costs, film set creation, costumes, travel and logistics, and overhead costs, among others. The film also takes a substantial period to complete.2.3 All the above costs incurred for a particular motion picture film are accumulated from the date when the recognition criteria as specified in 'Ind AS 38 – Intangible Assets' ('Ind AS 38') are met ('Project commencement date' — being the date on which the development phase begins). Determining the point at which the asset recognition criteria are met involves judgement and depends on factors such as prior experience, financial capabilities of the producer, entity, nature of the project, etc.2.4 As per Ind AS 38, no intangible assets should be recognized during the research phase of the internal project; rather, costs incurred during the research phase are expensed as incurred, in line with the requirements of Ind AS 38, para 54. Accordingly, an intangible asset can be recognized only at the commencement of the development stage when the entity is able to demonstrate all the following conditions:technical feasibility of completing the intangible asset so that it will be available for sale;its intention to complete the asset and use or sell it;its ability to use or sell the asset;probable future economic benefits, i.e., the existence of a market for the intangible asset or the usefulness of intangible assets internally;availability of adequate technical, financial, and other resources to complete the development and to sell the asset; andreliable measurement of the cost during the development of the asset.On fulfillment of recognition criteria of the development stage, all directly attributable internal costs and external costs of the motion picture film must be capitalized up to the date of completion of post-production work, and the point at which the film is ready for distribution, or until the date of issuance of the censor certificate, whichever is earlier.2.5 The development of an internally generated intangible asset for movies commences once the entity has finalized the concept and met all recognition criteria under Ind AS 38, including technical feasibility, intent and ability to complete, and availability of resources, i.e., upon selection of a story, finalization of the script, identification of key cast and crew, etc., but it may vary depending on the facts and circumstances of the case.2.6 On fulfillment of recognition criteria of the development stage, all directly attributable internal costs and external costs of the motion picture film must be capitalized up to the date of completion of post-production work, and the point at which the film is ready for distribution, or until the date of issuance of the censor certificate, whichever is earlier.2.7 Internal costs, like staff costs and overheads, to be capitalized should be directly attributable to the production of films. For example, salaries of the key creative team, film production department, etc. However, internal costs relating to non-production/support functions like compliance, office admin, and selling and distribution costs should not be capitalized to the cost of the film.2.8 The above guidance on capitalisation of the nature of costs to be capitalised is also applicable in cases where the entity classifies the cost of motion picture films as Inventory in its books of accounts.Example: Accounting for Costs Related to Production of a Motion Picture FilmBackgroundAVC, a film production company ('the Company'), is planning to make a Hindi feature film titled "XYZ."I. In January 2024, the Company starts exploring ideas for its next movie. During this period, the Company:conducts brainstorming sessions;explores different genres and script drafts;hires freelancers to prepare story outlines;evaluates audience trends and feasibility studies.The total cost incurred by the Company on the above activities amounts to Rs. 0.50 crore.By April 30, 2024, the Company makes progress on the above film and finalizes:full script of the film;signing of lead actors and the director;key crew like Director of Photography, art director, etc.;approval from the Board to proceed with production and film budget;obtained a sanction letter from the Bank for borrowing to be used for film production.Between May to September 2024, the following costs are incurred:Actor/Director fees: Rs. 2 CroresSet & props: Rs. 0.75 CroreMusic artist cost, Crew & creative team salaries: Rs. 0.90 CroreSalaries to Secretarial and Admin staff: Rs. 0.25 croreMarketing & promotions: Rs. 0.20 croreFrom October to November 30, 2024, the post-production is carried out:Colour Correction: Rs. 0.15 croreSound Dubbing and Editing: Rs. 0.45 croreIII. December 1, 2024 — Film receives censor certificate.IV. The Company intends to assign the rights to distributors for a certain period, and the Company classified the above film as Intangible Assets in its books of Accounts.Accounting Treatment of costs incurred in Film productionPeriodAmount in Rs. CroresCapitalised as IUD* / Expense in profit and lossRationaleJanuary 20240.50Expense in profit and lossRecognition criteria not met.May – September 20243.65 being (2.00 + 0.75 + 0.90) croreCapitalized as IUD*Management concludes that all the recognition criteria are met, and the project commencement date is April 30, 2024.May – September 20240.45Expense in profit and lossCosts that relate to admin, secretarial, or promotional activities not directly attributable to film production are not eligible to be capitalized.October to November 30, 20240.60Capitalized as IUD*Directly attributable costs are capitalized as IUD till the censor certificate is received.*IUD — Intangible under development — Film under ProductionPost-Censor Certificate TreatmentOnce the censor certificate is received, the asset is reclassified from "Intangible Under Development" to "Intangible Asset" and amortization begins based on the expected pattern of economic benefits.Disclosure ReminderThe entity's accounting policy for capitalization and classification of content assets should be disclosed in its financial statements, as per Ind AS 1.3. Accounting for Participation Costs Related to the Production of a Motion Picture Film3.1 Members of the actors, directors, artists, etc. involved in the production of a motion picture film may be compensated in part by contingent payments based on the financial results of the motion picture film, like a percentage of theatrical revenue from a specified territory, revenue from music rights, etc. Such payments are referred to as 'Participation Costs.'3.2 Timing for recognising Participation costs: The liability for participation costs is recognised only when there is reasonable certainty of related revenue and participation costs can be reliably measured.3.3 Presentation of Participation costs: Such costs are presented as part of the artists' costs as part of film production costs. These costs are not netted off from Revenue unless such a portion of revenue is directly paid to the artists by assignment of rights relating to such a stream of revenue.4. Amortization of Motion Picture Film4.1 Determining the appropriate amortization profile of motion picture film and other media rights could be challenging and requires careful consideration of facts and the nature of rights.4.2 As per Ind AS 38 – Intangible Assets, the amortization amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life.4.3 The use of an amortization method that is based on the expected revenue to be generated upon exploitation/use of an intangible asset is generally not permitted under Ind AS 38 except in the case of the following limited situations:When the entity can demonstrate that revenue and the consumption of the economic benefits of the intangible asset are highly correlated.Circumstances where the predominant limiting factor is the achievement of a fixed revenue threshold from the exploitation of intangible assets.Example — As per the contract, the right to mine gold from a gold mine will expire/come to an end upon achievement of a fixed amount of total revenue to be generated (say, Rs. 100 crores). In this scenario, the intangible assets in the form of mining rights will be amortized based on a ratio of actual revenue divided by a fixed amount of Revenue threshold, i.e., Rs. 100 crores.In the above example, the predominant limiting factor is the achievement of the total revenue of Rs. 100 crores from the gold.4.4 A common industry practice is to use an accelerated amortization profile for film costs based on the observable decline in value of the film asset. This approach is based on an analysis of the remaining useful economic life and the recoverable amount of the underlying film cost assets.The producer will model expected revenue to be earned over the useful economic life of the film, for the purposes of determining the accelerated amortization profile. This method will not contravene the prohibition under Ind AS 38 as the amortization is not based on the direct matching of amortization amount and actual revenue.ExampleBased on its prior experience for similar genre, star cast and budget, Producer X estimates that a film produced by its studio will generate 70% of its estimated revenue from theatrical release and OTT deals in the first year of release, 20% of its estimated revenue in the second year, and 5% each of the estimated revenue in year 3 and year 4 from its release.Accordingly, Producer X will adopt an accelerated amortization profile by amortizing 70% of the cost of the film in year 1, 20% in year 2, and 5% of the film cost each in year 3 and year 4.5. Impairment of Media AssetsAs per Ind AS 36 – 'Impairment of Assets', an entity should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset in accordance with the provisions of the Standard.5.1 As per Ind AS 36 – 'Impairment of Assets', an entity should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset in accordance with the provisions of the Standard. The recoverable amount is the higher of the estimated fair value less costs to sell, or value in use.If the carrying amount of a media asset exceeds the recoverable amount as computed above, impairment loss should be recognised on such media assets.5.2 Examples of internal and external indicators that may indicate that an asset may be impaired include restrictions imposed on the release of the motion picture film generally or in certain territories, substantial delays in release schedules, poor box office performance compared to expectations, actual costs substantially more than budgeted costs, etc.5.3 The expected future cash flows for value in use calculations include all sources of reasonably estimable revenues, like revenue from theatrical releases, digital platforms, licensing sales to broadcast, merchandising revenues, etc.Disclosure ReminderAn entity should disclose the amortization method and any changes to it, as well as impairment losses and key assumptions used in VIU calculations, as per the requirements under Ind AS 36.6. Principles of Revenue Recognition6.1 In the case of a promise to grant licenses to customers of Intellectual property relating to motion pictures, music, or other forms of media and entertainment, the entity needs to determine the nature of the license granted to the customer and, on that basis, determine the timing of revenue recognition.Nature of LicenseTiming of Recognition of Revenuea) Right to access the entity's intellectual property as it exists throughout the license period (upon fulfillment of certain conditions); orOver time, as performance obligations are satisfied over time.b) Right to use the entity's intellectual property as it exists at the point in time at which the license is granted.At a point in time, as performance obligations are satisfied at a point in time.6.2 The nature of the license to intellectual property could be to provide the customer with either of the above.6.3 Revenue recognition for sale of rights prior to exploitationRevenue recognition in the case of sale of rights prior to exploitation depends on the nature of restrictions imposed by the licensor, as summarised below:Nature of RestrictionsRecognition of Revenuea) Agreement to sell does not contain any restrictions on the ability of the acquirer to exploit the movie, music, or other rights.Recognize the revenue upon transfer of control of the content, whether via physical media or digital delivery.b) Agreement to sell contains a restriction period within which the movies cannot be broadcast, or the rights are available for exploitation only at a certain future time.Recognize revenue at the time when the restriction period is over and the acquirer is free to exploit the rights, even if tapes/other media of the movie, music, or other rights are transferred on an earlier date as per the agreement.6.4 Recognition of Revenue — Certain Scenariosa) Theatrical Release of MovieMinimum guarantee deals: Recognize the non-refundable minimum guarantee amount as revenue on the date of release of the movie.Commission/revenue share: Revenue is recognised as the exhibition of the movie occurs.b) Music RightsFixed fee for perpetual rights: Recognize revenue on the commencement date when the music company / the assignor of the music rights obtains an unrestricted right to market the music. For this purpose, the commencement date will typically be the date when the licensee obtains control and is legally permitted to exploit the rights, not merely the contract signing date.c) Royalty Income over sales exceeding certain sales thresholdsRecognize royalty income when the sales exceed the threshold amount.d) Satellite and home videoRecognize revenue when the right of the broadcaster/DTH/home video partner to telecast the movie commences (after the no-broadcast period).ConclusionAccounting for motion picture films under Ind AS is far more than an academic application of standards — it is about interpreting complex business models in an industry where creativity meets commerce. Every decision, whether on classification, capitalization, amortization, or revenue recognition, has the power to significantly alter how financial statements are prepared and presented, and consequently shape stakeholders' perception of a media enterprise's financial health.As streaming platforms, digital rights, and new monetization models continue to disrupt traditional practices, the profession must constantly balance technical guidance with dynamic business realities by asking the right questions, exercising sound judgment, and anticipating how today's accounting decisions will influence tomorrow's industry landscape.ReferenceTechnical Guide on Accounting for Motion Picture Films issued by ICAI.FICCI-EY report on Indian Media and Entertainment Industry — March 2025.https://www.ey.com/en_in/insights/media-entertainment/shape-the-future-the-revolution-in-indian-media-and-entertainment-sector◆ ◆ ◆Author may be reached atsethiapravin@gmail.comand eboard@icai.inDecember 2025 | www.icai.org | The Chartered Accountant
Ep. 117 — Beyond the Checklist: A Guide to Strategic Auditing
CA Journal
· August 2026
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Beyond the Checklist: A Guide to Strategic AuditingInternal auditing is changing rapidly, shifting from a basic checklist-based audit to a strategic and value-driven role. For Chartered Accountants (CAs), this is a chance to become key players in managing risks and helping businesses grow. This article explains how the role of internal audit has evolved, comparing the old approach with today's broader, business-focused one. It also simplifies the "Three Lines Model," highlighting how operations, risk teams, and auditors must work together. Lastly, it offers a roadmap for CAs to build skills in data analytics, cybersecurity, and communication, making them trusted advisors in today's dynamic business world.The Evolution of Internal AuditThe Institute of Internal Auditors (IIA), a globally recognised body, had defined internal auditing in 1999 as:"An independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes."This definition highlighted three core areas:Value additionAssurance and consultingFocus on risk, control, and governanceHowever, in 2024, the IIA updated this definition with a new purpose statement, which reads:"Internal auditing strengthens the organization's ability to create, protect, and sustain value by providing the board and management with independent, risk-based, and objective assurance, advice, insight, and foresight."This revised purpose reflects a more forward-looking and strategic approach, focusing on:Strategic value creationIntegrated governanceForesightThe inclusion of the word "foresight" is particularly noteworthy. It marks a shift in expectations from simply reviewing past events and providing current advice to proactively helping organizations anticipate future risks, opportunities, and challenges. This change signals the growing importance of internal audit as a strategic partner in decision-making.The Rear-View Mirror: Traditional Internal AuditTraditional Internal Audit began as a safeguard against fraud and asset misuse, focusing heavily on financial checks like payroll and cash handling. Auditors reviewed 100% of transactions and pre-verified payments to ensure strict compliance.This historical, reactive approach relied on manual checklists and aimed to catch past errors or violations. While it helped protect assets and enforce rules, it was seen as a cost centre, focused more on the past than on driving strategic improvement.The Modern Internal Auditor: A Profile in Value AdditionThe role of an internal auditor has transformed from a simple checklist-based auditor into a strategic advisor. Driven by business complexity and rapid technological change, auditors are now expected to do more than just find errors. According to the globally recognized Institute of Internal Auditors (IIA), their modern purpose is to provide independent advice that adds value and helps improve the entire organization's performance.Key Characteristics of a Modern Internal AuditorBroader Role Across the Entire Business: Auditors have moved beyond traditional financial checks. Their scope now covers all areas of the organization, including operations, IT, strategy, and risk management. They serve as trusted lieutenant of the management, providing advisory on all critical aspects of the business.Strong Alignment with Business Strategy: Internal auditors now work closely with senior management and the board to ensure their work supports the organisation's key goals, making the internal audit function more agile and risk based. Audit plans are dynamic and based on top-level risks like economic uncertainty, digital transformation, ESG (Environmental, Social and Governance) concerns and global political developments.Focus on Efficiency, Not Just Check List: Today's auditors don't stop at checking whether policies/SOPs are followed; they go a step further. They analyse whether processes are efficient, whether resources are being used wisely and where improvements can be made. This approach often helps organisations reduce costs, eliminate waste and boost overall productivity.Real Time, Tech-Driven Monitoring: By leveraging technology, auditors now monitor transactions and processes as they happen. Automated, rule-based systems can flag exceptions or risks in real-time, allowing for proactive intervention before an issue occurs.The role of an internal auditor has transformed from a simple checklist-based auditor into a strategic advisor. Driven by business complexity and rapid technological change, auditors are now expected to do more than just find errors.Example in Practice: The Value-Add AuditHere's a practical example of a value-add audit at a large retail company.Traditional Approach: A standard audit would have focused on verifying inventory counts against financial records to ensure accuracy.Modern, Value-Add Approach: The modern internal audit team took a much broader view. Using data analytics, the modern Internal Auditor also verifies the quality of the inventory, GRN generation and analysis, storage stacking, temperatures, stocking levels, safety and security.The Key Finding: The audit revealed that the company was sending two separate trucks daily to an industrial park to collect goods from two suppliers situated very close to each other. This created redundant fuel and transport costs.The Recommendation & Impact: The team recommended consolidating these into a single, combined pickup trip. This small operational tweak was projected to save the company several million rupees (₹) annually, with no negative impact on inventory or delivery schedules.This example perfectly illustrates the shift in internal auditing from a narrow focus on checklist based audit to a broader mission of improving business efficiency and adding tangible value.The Credibility Paradox: Balancing Independence and Strategic InvolvementAs the role of internal auditors evolves, one of the biggest challenges they face today is what's often called the "credibility paradox."Traditionally, internal auditors earned their credibility by staying fully independent and objective, focusing on reviewing and reporting without getting involved in decision-making. This independence is still essential today. However, modern expectations now require auditors to go beyond just checklist audit. They are also expected to provide forward-looking advice, support business strategy and help management improve operations.This creates a delicate balance. On one hand, auditors must remain neutral and unbiased to provide reliable assurance. On the other hand, they are also expected to act as trusted advisors and contribute to strategic decision-making. If they get too involved, it may affect their independence. If they stay too distant, they risk being seen as disconnected or irrelevant. Managing this balance is not easy.To be both a helpful advisor and an independent checker requires a strong governance framework. Many organisations address this challenge through dual reporting lines where the Chief Audit Executive (CAE) reports both to the CEO (for administrative purposes) and to the Audit Committee (for functional independence). This structure helps ensure that the internal auditor stays connected to leadership while still maintaining the objectivity needed to give unbiased opinions. Beyond these rules, however, true independence comes from an auditor's personal character and integrity. Ultimately, a successful modern auditor is one who can add value to the business without ever losing their independence.Today's auditors don't stop at checking whether policies/SOPs are followed; they go a step further. They analyse whether processes are efficient, whether resources are being used wisely and where improvements can be made.The Governance FrameworkTo appreciate internal audit's modern strategic role, it is essential to understand its position within the organization's wider governance structure, clarified by the globally accepted "Three Lines Model." This model delineates responsibilities to ensure comprehensive risk management without overlap.First Line: Business operations own and manage the day-to-day risks they undertake.Second Line: Risk and compliance functions (i.e., Risk Advisory) support the first line by creating risk policies and frameworks.Third Line: Internal Audit provides independent assurance to the board on the effectiveness of the first two lines.This structure fosters partnership, not competition. When the second line establishes a strong risk framework, the third line i.e., internal audit is freed from baseline compliance checks. This elevates their focus to providing strategic assurance on the entire governance system, reinforcing their evolution from a simple check-list auditor to a vital, independent advisor.Convergence: A New Role for Internal AuditA common question that arises is:"If the second line is doing such advanced risk work, do we still need internal audit?"The answer is a firm yes, but with an important evolution.Rather than becoming obsolete, internal audit is transforming. The future is about integration, not replacement. Internal audit is becoming a hybrid role that combines both assurance and advisory.According to a global survey under the IIA's "Vision 2035" initiative:76% → 59%Time on traditional assurance work (checking controls, compliance) is expected to decrease.24% → 41%Time on advisory work (insights, recommending improvements) will increase.This means that internal auditors will still provide independent assurance, but in a more consultative and value-added way. Instead of just pointing out a problem, they will:Analyse the root cause,Assess its potential impact andOffer practical solutions.This adds real value to the business.Assurance Remains EssentialEven as internal audit becomes more advisory, one thing remains unchanged: its independence is critical. Boards, shareholders and regulators cannot rely only on management's own risk and compliance teams (the second line) to report on risk. There must be an independent voice and that's the third line, internal audit. No matter how advanced the risk function becomes, internal audit's objective assurance is essential for strong governance and transparency.There must be an independent voice and that's the third line, internal audit. No matter how advanced the risk function becomes, internal audit's objective assurance is essential for strong governance and transparency.The Chartered Accountant's Playbook for the FutureThe world of internal audit and risk advisory is changing fast, and for Chartered Accountants (CAs), this presents both a challenge and an opportunity. While traditional skills remain important, they are no longer enough. To lead in this new era, CAs must actively develop new, future-ready capabilities.Strong Foundation: Why CAs Are a Better FitCAs are well-prepared in many ways. The CA qualification gives a strong base in:Financial Reporting and AccountingTaxation and Law & RegulationsRisk Management and Business ProcessesEthical Standards and Professional JudgmentSkills like professional scepticism, critical thinking, business understanding, and a structured way of solving problems are developed by CAs through their experience in the industry. These are the same skills needed to conduct effective audits and ask the right questions.Building the Modern Skillset: Bridging the GapThe expectations of an internal auditor have changed over time. Today's internal auditor is expected to do more than just check numbers. The role now demands knowledge of technology, strategy and people skills. The traditional Internal Auditor must consciously bridge the gap.1. Technological ProficiencyData AnalyticsGo beyond Excel. Today, tools like Power BI and audit analytics software have become essential. Instead of checking small samples or relying on judgment, auditors should use data tools to analyse 100% of transactions. This helps in identifying unusual patterns or risks using real-time, rule-based auditing that can flag issues as they happen.Cybersecurity AwarenessCyber risk is now a major concern for every organization. While Internal Auditors don't need to become cybersecurity experts, they must understand frameworks like NIST Cybersecurity Framework or ISO 27001. Boards expect auditors to evaluate whether adequate controls are in place to protect data and systems.AI & Automation AwarenessArtificial Intelligence and automation are changing how businesses work. Internal Auditors need to understand how these tools function, how to audit AI-driven processes for fairness and control, and how to use automation in audits to save time and focus on more critical issues.ForensicForensic capabilities in internal audit are essential for effective fraud investigation. Management also expects internal auditors to detect and investigate fraud, especially in areas where there are control gaps within the organisation.2. Building Strategic and Soft SkillsIn an age of automation, these "human superpowers" are the key differentiators.Communication & StorytellingThe most brilliant audit finding is worthless if it is not understood or acted upon by leadership. Internal Auditors must learn to present their insights in a simple, business-friendly language that highlights why it matters ("the so what"), especially when talking to senior management or the board.Critical Thinking & Problem SolvingIt's no longer enough to just find a problem. Today's auditors must dig deeper to identify the root cause and suggest practical, long-term solutions that fix the real issue, not just the symptom.Relationship Building & Stakeholder ManagementThe image of the auditor as an "Internal Police Force" is outdated. Modern internal audit is built on trust and collaboration. Internal Auditors must build strong relationships across all levels of the company to be seen as reliable partners who help the business succeed.In Summary: Adapt to Stay AheadThe role of an Internal Auditor is evolving. To stay relevant and lead in this fast-changing environment, Internal Auditors must:Build on their strong foundationEmbrace technology and dataSharpen their strategic thinkingStrengthen their communication and people skillsThe future belongs to the Internal Auditor who is ready to learn, adapt and lead.ConclusionThe future of internal audit and risk advisory is not only secure, it is full of growth, change and exciting opportunities. The role is shifting from simple checklist based audit to becoming a trusted strategic partner. This transformation requires Internal Auditors to keep learning, adapt to new technologies and develop strong business and risk management skills.Those who accept this change will rise above routine tasks and move into high-value roles. They won't just be auditors; they will become key advisors to company boards, helping organisations manage risk, make smarter decisions and stay strong in an unpredictable world.The future of internal audit is strategic and Chartered Accountants are well-positioned to lead the way.ReferenceThe IIA. (n.d.). Internal Audit: A Global View of the Future.Author may be reached at dsomaniassociates@gmail.com and eboard@icai.inThe Chartered Accountant • December 2025 • www.icai.org
Ep. 118 — Are all contraventions at par through the lens of Income Tax deductibility?
CA Journal
· August 2026
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Are all contraventions at par through the lens of Income Tax deductibility?The trade industry of today face a multitude of laws and regulations, and contraventions and fines become inevitable, even if unintended. Indiscriminate disallowance will drive such expenses underground. Going by different judicial decisions rendered in different circumstances and at different point of time (before and after the amendment to the section), one may feel deluded as to which act is seen as an offence or violation of law, and which is seen as a cure of mere irregularity in compliance. What happens to an act tainted with illegality or subversive of public policy, and what to a mere disobedience of procedural requirement? Whether the payment is a penalty under a law, or an option given by a statute to pay and get away? Tax laws in this regard are divided, resulting in ultra-technical interpretations that sometimes favour an illegal business expenditure in preference to legal ones with innocent lapses. While stuck at loggerheads, one needs to apply the fundamental touchstone that the nomenclature of an impost under the respective statute does not matter, and the Scheme of the concerned statute may need intensive examination to determine the real nature of such levy.Section 37 of the Income-tax Act, 1961 deals with prerequisites around the allowability of expenses, being not capital or personal in nature and incurred wholly and exclusively for the purposes of the business or profession.Sometimes, the assessee incurs a statutory impost in consequence of an unlawful or prohibited action undertaken in the course of doing business. In such a situation, the business test is whether such expenses are to be seen as commercial losses incurred by the assessee in carrying on business.In this regard, it may be pertinent to draw attention to the ratio laid down in a judgement of the Apex Court in Haji Aziz & Abdul Shakoor Bros.1 dealing with a penalty on account of confiscation of imported dates in violation of the import law, as follows:“If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature, must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provisions, it cannot be said to be a commercial loss failing on the assessee as a trader…… anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business.”Emphasis suppliedSuch a strict decision is strongly contrasted by a liberal view of the Apex Court in CIT v/s. Piara Singh2 dealing with loss or expenditure in gold-smuggling or illegal business. It was held therein that if the activity of smuggling can be regarded as a taxable business, those who are carrying on that business must be deemed to be aware that a necessary incident involved in the business is detection by the Customs authorities and the consequent confiscation of the currency notes. It is an incident as predictable while carrying on the activity as any other feature of it, and to such extent, admissible.Legislative AmendmentExplanation 1 (originally inserted as Explanation) to Section 37(1) of the Act was inserted by the Finance (No. 2) Act, 1998, with retrospective effect since the inception of the Act, i.e., 1st April 1962. It provides that any expenditure incurred by an assessee for any purpose which is an offence, or which is prohibited by law, shall not be deemed to have been incurred for the purpose of business or profession, and no deduction or allowance shall be made in respect of such expenditure.Since the law disallowed expenses related to violation of law even prior to insertion of the explanation, the Explanation was intended to target payments which by themselves constitute an offence like ‘protection money, extortion, hafta, bribes, etc.’ as elucidated by the Memorandum to the Finance Bill, 1998.Explanation 3 to sub-section (1) of section 37 of the Act was amended vide Finance (no. 2) Act, 2024 to clarify that the term “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law” will also include any expenditure incurred by an assessee to settle proceedings initiated in relation to a contravention under any law for the time being in force, as may be notified by the Central Government in the Official Gazette in this behalf. In this context, contraventions under the following laws has been notified vide recent CBDT Notification3a dated 23rd April 2025–(i) the Securities and Exchange Board of India Act, 1992 (15 of 1992)(ii) the Securities Contracts (Regulation) Act, 1956 [42 of 1956](iii) the Depositories Act, 1996 [22 of 1996](iv) the Competition Act, 2002 [12 of 2003].So, what is an offence to attract Explanation 1?While Explanation 3 clarifies to some extent, the law does not provide a water-tight definition or scope for covered offences. Section 2(38) of the General Clauses Act, 1897 defines ‘offence’ as “any act or omission made punishable by any law for the time being in force”. Under the Indian Penal Code, section 40 defines it as “a thing punishable by this Code”, read with section 43, which defines ‘illegal’ as being applicable to “everything which is an offence or which is prohibited by law, or which furnishes ground for a civil action”. It is therefore clear that Explanation 1 contains within its ambit all such activities which are illegal/ prohibited by law and/ or punishable.– Apex Laboratories (P.) Ltd. v. DCIT (SC)3Does the gravity of the offence not matter at all?There is a lot of jurisprudence holding some payments in lieu of contraventions as disallowable, while some as not; hence, it is adequately clear that not all violations are caught within the mischief of Explanation 1 to section 37(1) of the Act, and thus, not all would be disallowed. Moral turpitude or deliberate defiance of law should be inferred in law when the word used in the Explanation is “offence” signifying criminality or mens rea as understood in law. That should be distinguished from minor unintended infractions faced by assesses amidst the mass of regulations in modern business situations.Legal Position – Pre-introduction of ExplanationPrior to the introduction of Explanation 1 to Section 37(1) of the Act, the Courts have laid down certain principles to test an expense, regardless of the name by which they are debited to the Statement of Profit and Loss of the assessee. Some of them are as follows:Mere nomenclature of the relevant levy as given by the statute is not determinative of its nature;Examination of the scheme of the provisions of the relevant statute is critical to determine the nature of such levy;Essential to distinguish the nature of the levy as ‘compensatory’ or ‘penal’ in nature;Essential to bifurcate a composite levy.Deduction of the amount of levy, which is compensatory in nature.Reference to some such significant jurisprudence is as follows:Particulars of contraventionCase lawJudicial ratioDelayed payment of Sales Tax and contribution under the ESI ActPrakash Cotton Mills (P.) Ltd v. CIT4Examine the scheme of the statute to determine the nature of the impost and bifurcate between compensatory or penal.Penalty under section 17(3) of the Madhya Pradesh General Sales Tax Act for failure to furnish a return, and under section 8 of such Act if raw materials bought at a concessional rate were used for other than the designated purposeMalwa Vanaspati Chemical Co. v. CIT5Penalty, which partook of the character of compensation alone, could be allowed as a deduction; however, penalty paid under section 17(3) of the MP Sales Tax Act for failure to furnish a return, being not compensatory in nature and not allowable expenditure.Composition fee for the construction of a multistoried building for sale, more than the floor area permitted by the concerned Municipal CommitteeLoke Nath & Co. v. CIT6The statutory provision in section 195 of the Punjab Municipal Act, 1911, envisages the disobedience of a statutory restriction, an offer by the assessee, and the acceptance by the Committee of a sum by way of compensation. The mandate of the Legislature is that, on the acceptance of the compensation, there is condonation of the disobedience of a procedural requirement. This compensation was not a penalty payment to save the assessee from criminal liability or to compound any offence.Payment to Andhra Pradesh Welfare Fund for obtaining a license for exporting boiled rice to Kerala under a scheme evolved between Rice Millers Association and the District CollectorSri Venkata Satyanarayan Rice Mill Contactors Co vs CIT7Reversing the High Court’s judgement of this payment being “subversive of public interest,” the Apex Court held that contributions made to a public welfare fund solely for promotion of the assessee’s business, whether at the instance of the authorities or otherwise, cannot be treated at par with illegal gratification.Compensation paid to the Government for the shortfall of export obligationCIT v. Ahmedabad Cotton Mfg. Co. Ltd.8Amount paid is not a penalty or akin to a penalty if the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned.Payment to Andhra Pradesh Welfare Fund for obtaining a license for exporting boiled rice to Kerala under a scheme evolved between Rice Millers Association and the District CollectorSri Venkata Satyanarayan Rice Mill Contactors Co vs CIT9Reversing High Court’s judgement of this payment being “subversive of public interest,” the Apex Court held that contributions made to a public welfare fund solely for promotion of the assessee’s business, whether at the instance of the authorities or otherwise cannot be treated at par with illegal gratification.Pre-Explanation jurisprudenceLegal Position – Post-introduction of Retrospective Explanation by Finance Act, 1998Judicial Precedents hold that old is gold:While the above judgements were rendered prior to the insertion of Explanation 1 to section 37(1) of the Act by Finance Act, 1998 w.e.f. 1 April 1962, it may be noted that even post insertion of the said Explanation, the Courts / Tribunal have continued on some occasions to test the expense based on the above-referred judicially enshrined parameters. The said judgements are discussed as under:Particulars of contraventionCase lawJudicial ratioThe manufacturer of ENA (Extra Neutral Alcohol) and Rectified Spirit had to make a contractual bond to compensate the State Excise Authority on account of failure to comply with a condition laid by the excise department.PCIT, Jaipur-II v. Agribiotech Industries Ltd10Relied on: CIT v. Hyderabad Allwyn Metal Works Limited11, Prakash Cotton Mills4The duty paid is the same as per the rates notified by the government, therefore, the said payment in discharging the contractual obligation to indemnify the excise department for the payment of the excise duty to the government exchequer, cannot be held in penal nature.A drug manufacturer paid the Department of Chemical and Petrochemicals (DCP) an amount overcharged on the sale of certain controlled drugs and interest for violation of norms notified by the Government of India vide (Drugs (Prices Control) Order) (DPCO).Dr. Reddy’s Laboratories Ltd v. ACIT12Excess collection was contractual and not penal in nature. Interest took colour from the principal recovery, hence allowable.Penalty charges which were charged by the National Stock Exchange to the assessee on account of auction short delivery charges, delivery margin pay-in-shortage, bad delivery charges, interest on aforesaid charges, and violation fines (margin).Classic Shares & Stock Broking Services Ltd. v. DCIT13Payments are compensatory in nature, charged for certain default and to compensate the NSE for the loss involved in the process as the transaction involved financial dealing. The payment being for the purpose of the violation of contractual obligation is part and parcel of transactions which are arising out of ordinary course of business.Penal interests and penalty for contravention of statutory obligations under several laws (Provident Fund Act, Sales Tax Act, ESI Act, etc.)Penalty levied under section 45A of the KGST Act, 1963ACIT v. Khoday India Ltd.14PTL Enterprises v. DCIT15It is the duty of the assessee to show that the amounts claimed are compensatory in nature in case these are to be allowed.Redemption fine paid by the assessee as differential duties to the Customs authorities on re-exporting imported softwareUsha Micro Process Controls Ltd. v. CIT16On a proper application of the ruling in Prakash Cotton Mills Pvt. Ltd.’s case (supra), the amount of redemption fine in the present case was compensatory and therefore, fell outside the mischief of explanation of Section 37(1).Interest paid by an exporter to DGFT for default in fulfillment under the EPCG SchemeEnchante Jewellery v. CIT17Revenue authorities failed to establish that the assessee’s conduct was an offence or that it did anything that was prohibited by law any provision of law that was violated by the assessee, hence allowable.Payment to a consultant for providing expertise in the application and follow-up of a tender floated by a PSUStandipack Pvt Ltd v CIT18This was considered to be illegal and disallowed. This decision may be considered for review, considering the Supreme Court has decided in quite a few cases, including those referred above, that too rigid a view on the part of the Revenue may not be justified.Post-Explanation — compensatory penalty upheld as allowableJudicial Precedents holding old may not always be gold:In contrast to the above decisions where the appellate forums have upheld the principle of compensatory penalty being allowable, it has been held in certain judgements that the principle of compensatory penalty being allowable does not hold good anymore after insertion of the Explanation. The said judgements are discussed as under –Particulars of contraventionCase lawJudicial ratioCompounding fine paid by the assessee to regularize the construction of the building made in violation of the Building RegulationsCIT v. Mamta Enterprises19Nahar Spinning Mills Ltd20Distinguished judgement in Loke Nath & Co6Relied on Haji Aziz & Abdul Shakoor Bros.1When the section is clear and unambiguous, it is not permissible for the Courts to stretch the meaning attached to the provision of law to extend the benefit to a person who violates the law, or the Regulations/ Rules made by the Corporation or the Municipal Authorities with impunity. Under these circumstances, the expenditure incurred to pay the penalty cannot be treated as loss in business to get the benefit. The same is now even confirmed with insertion of Explanation 3 to section 37(1).Payment of freebies by a pharmaceutical company to medical practitionersApex Laboratories (P.) Ltd. v. DCIT3Though the memorandum to the Finance Bill, 1998 elucidated the ambit of Explanation 1 to section 37(1) to include ‘protection money, extortion, hafta, bribes, etc.’, yet, ipso facto, by no means is the embargo envisaged restricted to those examples. It is but logical that when acceptance of freebies is punishable by the MCI (the range of penalties and sanctions extending to a ban imposed on the medical practitioner), pharmaceutical companies cannot be granted the tax benefit for providing such freebies, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such opprobrium. The same is now even confirmed with insertion of Explanation 3 to section 37(1).Post-Explanation — compensatory penalty held not allowableConclusionIn view of the divided jurisprudence in the matter, one may contend in support of suitable claims of the assessee that despite retrospective insertion of Explanation 1 of section 37, the age-old tests of compensatory v/s. penal and that not all violations are offences for the purpose of this section, hold good. Since the Act is not concerned with legality of transactions as far as taxing profits from an illegal business is concerned; infractions of law mainly of administrative regulations, should at least not be construed in all cases as defeating the right of the assessee to claim a deduction for costs incurred as a result of the infraction. One needs to still do a factual threadbare analysis as to whether the assessee exercises the option conferred under a statute to make good a contravention by paying a sum (even if upheld as a statutory default) or for a purpose which is an offence under the law or which is prohibited by law. Courts have time to time, cast the onus to demonstrate this on the assessee, and professionals can play a pivotal role in helping the latter to collate and enumerate relevant facts for such purpose through the lens of available judicial wisdom.Author may be reached at dagashreya1992@gmail.com and eboard@icai.inReferences(1961) 41 ITR 350 (SC)(1980) 124 ITR 40 (SC)[2022] 135 taxmann.com 286F. No. 38/2025/F. No 370142/11/2025-TPL (Notification 3a)[1993] 67 Taxman 546 (SC)[1997] 225 ITR 383 (SC)[1984] 147 ITR 624 (Del HC)[1997] 223 ITR 101 (SC)[1994] 205 ITR 163 (SC)[1997] 223 ITR 101 (SC)[2018] 2 taxmann.com 371 (Raj HC)(1988) 172 ITR 113 (AP)[2014] 51 taxmann.com 136 (Hyd ITAT)[2007] 11 SOT 377 (Mum ITAT)[2009] 32 SOT 373 (Bang ITAT)[2021] 133 taxmann.com 452 (Ker HC)[2013] 37 taxmann.com 324 (Del HC)[2013] 40 taxmann.com 216 (Del HC)(2013) 350 ITR 251 (Cal)[2004] 266 ITR 356 (Kar HC-Full Bench)[2014] 49 taxmann.com 565 (P&H HC)Note: Footnote markers 1–3, 4–9, 10–16 and 17–20 follow the original article’s per-page numbering; the reference list above collates them in their order of first appearance.December 2025 www.icai.org | 63–67
Ep. 119 — Mandatory Input Service Distributor (ISD) under GST from April 1, 2025: A Comprehensive Analysis
CA Journal
· August 2026
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Mandatory Input Service Distributor (ISD) under GST from April 1, 2025: A Comprehensive AnalysisThe GST framework in India has undergone a significant change from April 1, 2025, with the Input Service Distributor (ISD) mechanism becoming mandatory for businesses operating across multiple GST registrations. Until March 2025, organizations with multiple state-wise GST registrations under a single PAN had flexibility in how they allocated input tax credits on common services — either by registering as an ISD or by resorting to intra-company cross-charges.Many businesses opted for cross-charging expenses (such as corporate office rent, software licenses, or audit fees) to various branches due to its straightforwardness, despite complexities in tracking input tax credit (ITC) distribution and reconciling taxes across states. However, legislative amendments notified in 2024 have removed this optionality, making the ISD route compulsory for distributing credits of common input services across distinct GST registrations of the same entity.CA. Sanyam Saraf Member of the Institute The Chartered Accountant · December 2025 · www.icai.orgUnderstanding the Concept of ISD under GSTUnder the GST law, an Input Service Distributor (ISD) refers to a centralized office, typically the Head Office (HO) of a business, that receives invoices for input services intended for consumption by multiple units or branches of that business.Why ISD is relevant: In multi-state businesses, certain services are procured centrally but used by multiple outposts. In essence, the HO (or any designated office) could accumulate ITC on common input services — which includes enterprise software subscriptions, nationwide advertising campaigns, group legal consultations, insurance or facility management covering assets in different states, corporate rentals, etc. — and then allocate (distribute) those ITCs to its other registrations (branches) that actually utilize those services. This mechanism ensures that ITCs on shared services are accurately and fairly allocated to the consuming locations, maintaining the integrity of the input tax credit chain.Since GST is administered state-wise, the ITC on such services — and without ISD, if the HO were to claim the entire credit only at the HO's state for a service that also benefits other state registrations — could lead to ineligible or excess credit claims, i.e., the branches in other states that actually benefit would have no visibility of that credit. The ISD framework thus provides a formal route to transfer credit from the location where an invoice is billed to the locations where the service is actually used.Notably, only input services are eligible for ISD distribution — goods and capital goods are excluded by definition. ISD is a mechanism designed for services because services (being intangible) are more commonly procured centrally and utilized across locations (e.g. a single legal service can pertain to the whole company). If physical goods or assets are transferred between state registrations, those have to be handled via actual supply and GST invoicing, not ISD.How the ISD Mechanism WorksThe ISD mechanism allows the HO to receive the invoice centrally and then issue ISD invoices to distribute the eligible ITC to each beneficiary branch in proportion to their share in the consumption of that service. In practice, the ISD workflow involves a few steps from invoice receipt to credit utilization:Invoice at Head Office (ISD)A vendor issues a GST invoice to the HO for an input service. For example, a software provider bills the HO for licenses used by multiple branches. The invoice could be for a taxable service with GST charged, including for a service where GST is payable under reverse charge (RCM) by the recipient. (Prior to 2025, ISD could not distribute RCM credits, but the law now allows it.)Recording of CreditThe HO records the ITC from that invoice in its books under the ISD registration. At this stage, the credit is not yet in the operational branch's books, but parked with the ISD entity. The ISD does not utilize this credit for its own liability (since ISD typically has no output tax liability of its own); instead, it holds the credit to distribute.Allocation to BranchesThe HO calculates how much of that service's credit is attributable to each branch, as long as it is in line with Rule 39 of the CGST Rules. GST law stipulates a pro-rata distribution by turnover of the relevant period if the service pertains to multiple recipients. If the input service is exclusively used by one branch, then the credit is allocated entirely to that branch alone.Issuance of ISD InvoiceThe HO issues an ISD invoice to each recipient branch, documenting the distribution of credit. This ISD invoice (prescribed under Rule 54(1) of the CGST Rules) is not a normal sales tax invoice for supply of goods or services, but a document solely for transferring ITC. In effect, the ISD invoice is a memo that moves credit from one registration of a company to another without any actual sale. (If there were an actual supply by the HO to a branch, that would be a different scenario of cross-charge, not ISD.)Credit Reflection in Branch GST RecordsUpon the ISD issuing the credit invoice and filing the return (Form GSTR-6, discussed later), the distributed ITC for each branch gets reflected in the branch's GST input records. The GST system auto-populates the details of ISD credits into the GSTR-2A/2B (purchase tax credit statements) of the recipient GSTIN.Utilization by BranchEach branch (recipient of ISD credit) can then claim the ITC in its own GST returns, typically in its GSTR-3B for the month. The branches record the credit as part of their eligible ITC and use it to offset their output GST liabilities.Since GST is administered state-wise, the ITC on such services — and without ISD, if the HO were to claim the entire credit only at the HO's state for a service that also benefits other state registrations — could lead to ineligible or excess credit claims.Throughout this process, the ISD serves as a conduit for credit flow, moving credits from where tax invoices are billed to where the services are consumed, thereby preventing accumulation of credits at the HO and ensuring each state has the rightful portion of credit. Without ISD, a branch that benefited from a service but didn't get the invoice would technically fail the "receipt of service" condition unless a cross-charge was made. ISD provides a GST-compliant way to satisfy that condition by treating the HO's distribution as equivalent to the branch receiving the ITC.Legal Framework and Transition from Optional to Mandatory ISDWhen GST was introduced in 2017, the ISD provisions were available but not compulsory. The law allowed the HO to choose the ISD route or alternatively to allocate common costs by treating them as supplies to branches (the cross-charge mechanism). This meant that, up to March 31, 2025, a company could either register as an ISD and distribute credit or simply add an internal markup/invoice and pass on costs as an outward taxable supply to branches. Each approach had its pros and cons — ISD kept it as a pure credit transfer without tax, whereas cross-charging involved treating it as a service supply (often at 110% of the cost as per valuation Rule 28 of the CGST Rules) and paying GST, which the branch would then claim. Many companies found cross-charging administratively easier to implement in their accounting (just raising invoices), albeit it meant additional GST circulation within the company (GST paid by HO and claimed by the branch).The Finance Act, 2024 brought changes to put an end to this flexibility. Through amendments in the CGST Act (which were notified via Notification No. 16/2024 – Central Tax, dated 06.08.2024, effective April 1, 2025), the ISD provisions were strengthened and made compulsory in cases of common services. Key changes made were:Expanded Definition of ISD (Section 2(61)). Broadened to explicitly cover services received for or on behalf of distinct persons and to include invoices for services liable under reverse charge (RCM). The amended definition reads (effective 1-4-2025): "Input Service Distributor means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under Section 9(3) or 9(4), for or on behalf of distinct persons referred to in Section 25, and is liable to distribute the input tax credit in respect of such invoices in the manner provided in Section 20." "May" changed to "Shall" in Section 20 of the CGST Act. Until March 2025, Section 20(2) stated that the ISD "may distribute the credit" to the recipients. From April 1, 2025, the wording has been changed to "shall distribute the credit," making it a binding duty. This one-word change legally mandates that if common service credits exist at HO, they must be passed on via ISD invoices to the respective state registrations.Section 25(4) of the CGST Act defines "distinct persons" as multiple registrations of the same legal entity across states.Section 24(viii) already listed an Input Service Distributor as a category of person required to register under GST. It states that, notwithstanding the normal turnover thresholds for GST registration, an ISD must register (it was always a compulsory registration category). In the past, this was interpreted to mean that if a company wished to act as an ISD, it had to take a separate registration for it. Now, the combined reading of Section 24(viii), Section 2(61) (amended), and Section 20 (amended) means that if a company has common input services to distribute, it must register and must distribute via ISD as per law — which makes the ISD mechanism effectively compulsory for any business that procures input services centrally for its branches.Amendment to Rule 54 of the CGST Rules. A sub-rule (1A) was inserted to address scenarios of common services invoiced to a particular GSTIN of the company. It provides that for "common services, where the supplier of such services issues tax invoices to the registered person having same PAN and state code as ISD," the ISD can issue an invoice to distribute the credit to the distinct persons. In practice, this covers cases where a vendor might have billed one of the registrations (say the head office's regular GSTIN rather than the ISD GSTIN) — Rule 54(1A) facilitates transferring that credit through ISD invoices. (Ideally, companies will instruct vendors to bill their ISD GSTIN for common services going forward, but Rule 54(1A) covers mixed cases and transitional situations.)Distribution of ITC on RCM transactions. Presently, ISD cannot make payment of any GST liability. A situation may arise where a common expense covered under RCM (say Legal Charges) is booked at ISD, meaning the ISD would not be able to pay the GST under RCM and thus apportion ITC on such common expenses. To address this, two amendments were made:Section 20(2) of the CGST Act provides for distribution of ITC on RCM transactions, which is first paid by the regular registration of the ISD office and then distributed.Rule 39(1A) provides that the regular registration of the ISD office shall pay the RCM and then transfer the ITC to the ISD registration by raising an invoice as per Rule 54(1A).Effective April 2025, the GST framework mandates registration as an ISD as the sole permissible route for distributing ITC on common input services across business units.Legal Consequences and Compliance ChallengesEffective April 2025, the GST framework mandates registration as an ISD as the sole permissible route for distributing ITC on common input services across business units. This replaces the earlier flexibility where ISD registration, though listed under Section 24(viii) of the CGST Act as mandatory, was often bypassed due to the discretionary language in Section 20, which used the term "may." Many companies instead opted for cross-charge mechanisms or retained credit at the HO, particularly when the underlying transactions were not classified as 'supplies.'The recent amendment removes this ambiguity. ISD registration is now a statutory requirement for credit distribution, aimed at enhancing traceability and preventing misuse. As per Section 21 of the CGST Act, any credit distributed in excess or in violation of rules is recoverable from the recipient along with interest, thereby placing significant responsibility on proper distribution practices.Failure to register as an ISD, despite being eligible, now constitutes a contravention of Section 24 and may attract general penalties under Section 125 of up to ₹25,000 each under CGST and SGST/UTGST, or ₹50,000 under IGST. Moreover, continued reliance on cross-charging for services that should be routed through ISD can be questioned as non-compliant. Such practices may lead to disallowance of credit, especially during audits.GST officers are expected to closely examine the end-to-end credit trail, from the original invoice to its reflection in the branch's return. Discrepancies such as excess allocation, incorrect GSTIN usage, or mismatches in distribution may trigger recovery proceedings under Section 21. Common expense entries in HO's books may be scrutinized, and businesses may be required to justify their credit distribution method. Inadequate responses could result in show cause notices or demand orders.In cases involving wrongful or ineligible credit distribution, action under Section 74A may be initiated, depending on whether the misstatement was inadvertent or fraudulent — both of which can lead to recovery with interest and applicable penalties.Adopting the ISD mechanism is no longer optional — it is a legal necessity to ensure compliance, avoid penalties, and reduce audit risks.In essence, the new regime mandates not just procedural alignment but a structural shift in how businesses handle common service ITC. Adopting the ISD mechanism is no longer optional — it is a legal necessity to ensure compliance, avoid penalties, and reduce audit risks.Compliance and Returns for ISD Credit DistributionOperating as an ISD brings with it certain ongoing compliance obligations under GST. Let's break down the key compliance tasks:Separate GSTIN Requirement for ISDAn ISD must obtain a separate GST registration specifically for the ISD function, distinct from its regular GST registrations. For instance, if a company's HO in Maharashtra is already registered under GST for its business operations, it must apply for a different GSTIN within the same state to act as an ISD. While the PAN and state code remain the same, the ISD registration will carry a unique 15-digit GSTIN, differentiated by the 13th digit, which denotes the registration serial number. This ensures proper segregation of ISD-related transactions from regular business activities.Multiple ISD Registrations; Permissible but RareA company may obtain multiple ISD registrations if required, as the law does not prohibit it. However, in practice, a single ISD registration usually suffices and is preferred to avoid administrative complexity. An ISD is only needed in the state where common service invoices are received on behalf of other branches. Therefore, if all common input services are billed to the head office in one state, a single ISD registration in that state is adequate to distribute ITC across all other states.Monthly ISD ReturnEvery ISD is required to file Form GSTR-6 on a monthly basis by the 13th of the succeeding month. This return captures details of all ITC received on invoices during the month, either auto-populated from the suppliers' GSTR-1 or entered manually, and records the apportionment of such credit across various GSTINs of recipient branches. It also includes ISD credit notes for reversals and a summary of total ITC available and distributed. Essentially, GSTR-6 is a statement of ITC apportionment that links incoming credit with its outbound distribution. Once filed, the GST portal automatically transmits the credit data to the relevant recipient branches. Failure to file GSTR-6 on time attracts a late fee of ₹50 per day (₹25 CGST + ₹25 SGST), and due to the risk of mismatches in credit flow, timely compliance is critical for ISDs.Claiming ISD Credit in GSTR-3B (Branch's Return)Recipient branches claim the ITC distributed by the ISD through Table 4 of GSTR-3B, specifically under the field "ITC received from ISD." The credit must match the amount reflected in the branch's GSTR-2B for the relevant month, ensuring alignment with the ISD's filed GSTR-6. Timely filing is crucial — if the ISD submits GSTR-6 by the 13th, the distributed credit appears in the branch's GSTR-2B and can be claimed in the same month's GSTR-3B (due by the 20th). A delayed GSTR-6 filing may defer the credit visibility to the following month, leading to timing mismatches between financial books and return filings.Return Filing Exemptions for ISDAn ISD is not required to file GSTR-1, GSTR-3B, or GSTR-9, as it does not undertake outward taxable supplies or claim ITC for its own use. Since the ISD's sole function is to distribute ITC to recipient units, it has no output tax liability or eligible ITC under its own registration. Accordingly, Form GSTR-6 is the only mandatory return for an ISD. Furthermore, as per Section 44 of the CGST Act, ISDs are exempt from filing the annual return (GSTR-9), streamlining their compliance obligations.An ISD must obtain a separate GST registration specifically for the ISD function, distinct from its regular GST registrations.ConclusionThe mandatory rollout of the ISD mechanism from April 1, 2025, marks a significant shift in GST compliance for multi-location businesses in India. What was earlier a procedural option has now become a legal requirement, reaffirming the foundational GST principle that input tax credit (ITC) must flow to the location where the services are actually consumed. This reform aims to instill greater uniformity and discipline in the distribution of common ITC, while reducing the risk of credit misallocation or undue accumulation under a single GST registration.Adopting the ISD framework is not merely a safeguard against penalties but reflects sound tax governance. The ICAI and tax professionals have long recommended structured credit allocation to preempt audit risks. Failure to adopt ISD may offer temporary convenience, but can result in significant liabilities later due to misclaimed credits. The revised law now encourages businesses to proactively comply, making ISD an integral part of the GST compliance architecture.In essence, the new regime aligns with the spirit of "One Nation, One Tax," but operationalized through multiple GST registrations reconciled via the ISD mechanism. The responsibility now lies with each multi-state entity to ensure that no eligible credit remains stranded and that the GST credit ecosystem functions seamlessly across locations, supported by timely ISD registration and transparent distribution.ReferencesCGST Act, 2017 — Section 2(61) [Definition of ISD]; Section 20 [Manner of distribution of credit by ISD]; Section 21 [Recovery of excess credit distributed]; Section 24(viii) [Mandatory registration for ISD].CGST Rules, 2017 — Rule 39 [Procedure and conditions for distribution of ITC by ISD] & Rule 39(1A); Rule 54(1) & 54(1A) [Document (invoice) for distribution of credit and special provision for common services].Notification No. 16/2024 – Central Tax, dated 06-08-2024 — Notified amendments (Finance Act 2024) to Section 2(61) and Section 20, effective 01-04-2025.TaxGuru article by Chandrasekhar Kutty (2023) — "Input Service Distributor – Mandatory from 1st April 2025" — provides analysis of the amendment and its implications.India Briefing (Dezan Shira & Associates) — Mandatory ISD Registration from April 1, 2025 — outlines the practical steps and implications for businesses.ClearTax resources on ISD — Various articles and FAQs explaining ISD provisions, return filing (GSTR-6), and highlighting the change from optional to mandatory.ICAI publications / FAQs — e.g., IDTC-ICAI FAQs on ISD detailing conditions for distribution.◆ ◆ ◆Author may be reached atsanyamsaraf34@gmail.com and eboard@icai.in
Ep. 120 — Legal Framework for Post-Supply Adjustments under the GST Regime
CA Journal
· August 2026
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Legal Framework for Post-Supply Adjustments under the GST RegimeThis article discusses the complications of post-supply adjustments under the GST regime in India. The focus is on post-sale discounts, the issuance of credit notes and the reversals of corresponding input tax credits. It highlights the legal requirements under Sections 15(3)(b) and 34 of the CGST Act, emphasizing that the taxable value would be reduced only if terms are pre-agreed at the time of sale and the incidence of tax has not been passed to another person, and further, the corresponding ITC has been reversed by the recipient. In this article, we also distinguish commercial and non-commercial credit notes. Recent amendments in Budget 2025 and CBIC Circular No. 212/6/2024 mandate documentary proof of ITC reversal.The Goods and Services Tax (GST) in India has now been in place for eight years. GST has brought many significant structural reforms and uniformity in indirect tax across the country. However, there are several interpretational and operational issues in the various provisions. One of the most concerning issues is the GST implications on post-sale discounts, including cash discounts, cashback schemes, rate reductions upon achieving the sales targets, promotional incentives and other performance-based discounts. These commercial arrangements are common in business practice and raise complex questions with respect to deduction from the value of supply and output tax liability, as well as corresponding reversal of Input Tax Credit (ITC) by the recipient.This is further made more difficult to understand with industry-specific variations in the structuring of such incentives, such as buy more save more, free samples and gifts, buy one get one offer, etc. In the absence of proper legal guidance and divergent advance rulings, businesses are often left navigating a grey area, resulting in various litigation and compliance disputes.In this article, our aim is to discuss the legal principle that governs the post-supply adjustments under the GST regime, analyse the prevailing challenges or difficulties and recent judicial pronouncements and clarifications.Understanding Post-Supply Discounts / AdjustmentsUnder the GST regime, post-supply discounts or adjustments refer to any rate reduction or any downward revision in the consideration of supply after the supply of goods/services has been affected. These adjustments may arise due to pre-agreed commercial terms, performance-based incentives, or discretionary business decisions made post-supply of goods or services. While such practices are deeply entrenched in trade and commerce, their treatment under GST remains nuanced and often contentious.The following are the main post-supply discounts:Cash Discounts: Savings given to customers for early payment or settlement of invoices.Cashback Schemes: Given after a sale based on promotional campaigns or consumer behaviour.Target-Based Discounts: Reductions in rate upon achieving pre-established purchase volumes or sales targets.Promotional Discounts: Linked to marketing campaigns, including freebies, sponsored trips or tours and price reductions on future purchases.Legal Framework under GSTThe treatment of post-supply adjustments or discounts is governed by provisions under the Central Goods and Services Tax Act, 2017 (“CGST Act”), read with the Central Goods and Services Tax Rules, 2017 (“CGST Rules”), and various notifications issued by the tax authorities. Two critical aspects that govern these adjustments are:the valuation of supply under Section 15(3)(b) of the CGST Act,the reversal of Input Tax Credit (ITC) obligations.Under the GST regime, post-supply discounts or adjustments refer to any rate reduction or any downward revision in the consideration of supply after the supply of goods/services has been affected.a. Conditions under Section 15(3)(b) of CGST ActSection 15 of the CGST Act governs the provisions with respect to the value of taxable supply. As per the provisions of Section 15(1) of the CGST Act, the value of a supply of goods or services or both shall be the transaction value which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.Further, Section 15(3)(b) of the CGST Act provides that the value of a supply shall not include any discount which is given after the supply has been affected, if:it is established in terms of the agreement entered into at or before the time of supply and linked to relevant invoices,input tax credit attributable to the discount, as evidenced by a document, has been duly reversed by the recipient of the supply.This provision is important in determining whether a post-supply discount would be excluded from the transaction value, resulting in a reduction in the taxable value and consequently the GST liability. If the discount does not satisfy these criteria, it must be included in the value of supply, and GST must be paid. It means there is no need to issue credit notes using GST implications, i.e., the supplier would not reduce its output liability, and the recipient would not reverse the proportionate ITC. Only if it is predetermined at the time of sale/supply of goods/services and the recipient has reversed the proportionate ITC, then it should be reduced from the output tax liability of the supplier/seller.b. Input Tax Credit (ITC) Reversal RequirementSection 34 of the CGST Act governs the provisions with respect to the issuance of credit and debit notes, which are the instruments typically used to make adjustments after a supply. Where a credit note is issued by the supplier to reflect a reduction in the value of supply due to discounts or other adjustments, on the other hand, the recipient is required to reverse the proportionate ITC availed on the original transaction.The rationale for ITC reversal is to maintain parity between the supplier’s reduction in output tax liability and the recipient’s entitlement to claim credit, thereby preventing undue tax benefits. Failure by the recipient to reverse ITC can lead to adverse tax consequences, including demands for differential tax and interest.The timing of ITC reversal is also significant as it generally needs to be affected in the tax period in which the credit note is received. This aligns the supplier’s and recipient’s tax positions and ensures proper reconciliation in GST returns.Roles and Treatment of Credit Notes under GSTUnder the GST regime, credit notes serve as a key instrument for post-supply adjustments, which enables the suppliers to rectify mistakes in the original tax invoices or respond to changes in the nature of the supply after the issuance of a tax invoice.As per Section 34(1) of the CGST Act, a registered supplier is empowered to issue a credit note where the taxable value or tax charged in the original invoice exceeds the actual amount payable or where a recipient returns defective goods due to quality issues. A supplier can lawfully reduce their output tax liability by issuing a credit note, provided the corresponding ITC has been reversed by the recipient. The supplier must disclose the credit note details in Form GSTR-1 for the relevant tax period and make the necessary adjustment in Form GSTR-3B, which records the net tax payable. However, the CGST Act places a time limitation on such adjustments. The credit note must be declared on or before 30th November of the following financial year or before the date of filing of the relevant annual return, whichever is earlier.Section 34 of the CGST Act governs the provisions with respect to the issuance of credit and debit notes, which are the instruments typically used to make adjustments after a supply.Importantly, Section 34(2) of the CGST Act, as amended in the Budget 2025, imposes certain restrictions on the issuance of credit notes. A credit note cannot be issued to reduce tax liability if the input tax credit has not been reversed by the recipient and the incidence of tax has already been passed on to another person, ensuring adherence to the principle of unjust enrichment.Commercial vs Non-Commercial Credit NotesIn practical business scenarios, credit notes issued post-supply can broadly be categorized into two types:commercial credit notes (also referred to as financial credit notes)non-commercial credit notes (also referred to as tax credit notes)This distinction has not been defined under the GST law; it has emerged from various departmental circulars, interpretational guidance and industry practice.Generally, non-commercial credit notes are issued where there is a direct impact on the taxable value of the supply and GST discharged on the same, such as in cases of goods return, rate difference, etc. These are issued in accordance with the provisions of Section 34 of the Act, which allow the supplier to reduce their output tax liability subject to the recipient reversing the corresponding ITC. These credit notes are declared in GSTR-1 and reflected in GSTR-3B to adjust the tax liability.On the other hand, commercial credit notes are issued where there is no impact on the taxable value of the supply and no requirement to reduce the output tax liability, as per the provisions of the Act supported by various circulars and judicial pronouncements, such as in cases of cash discounts or incentives for early payments, etc. These discounts are generally not agreed upon at the time of supply; therefore, they do not meet the conditions laid down under Section 15(3) of the CGST Act. As a result, the supplier may issue a commercial credit note to reflect a commercial understanding; in this scenario, neither the supplier would reduce their original tax liability, nor the recipient would reverse their ITC. This position has been clarified by the CBIC in Circular No. 92/11/2019-GST dated 07th March 2019 and 105/24/2019-GST dated 28th June 2019, which clearly states that in such cases, the credit note is merely a financial document and does not impact GST returns or tax computations. Hence, commercial credit notes serve a purely accounting or contractual function without invoking any post-supply tax adjustments under GST.Judicial Pronouncements and Departmental Clarificationsa) Circular No. 92/11/2019-GST dated 7th March 2019“It is hereby clarified that financial/commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties. It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.”b) Circular No. 105/24/2019-GST dated 28th June 2019“It is clarified that the dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial/commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial/commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.”However, this circular has been withdrawn by the CBDT vide Circular No. 112/31/2019 – GST dated 03rd October 2019.c) Circular No. 212/6/2024-GST dated 26th June 2024In practice, a key challenge under the GST framework has been the verification of ITC reversal by the recipient in cases where the supplier issues a credit note under Section 15(3)(b)(ii) of the CGST Act for post-sale discounts. The law permits the exclusion of such discounts from the taxable value only when certain conditions are met, particularly that the recipient reverses proportionate ITC. To address this issue, the government has issued Circular No. 212/6/2024-GST dated 26th June 2024, providing a procedural framework for substantiating the reversal of ITC in such cases. As per the circular, where the aggregate value of credit notes issued by a supplier exceeds ₹5,00,000 in a financial year, the supplier shall obtain a certificate from a Chartered Accountant (CA) or Cost Accountant (CMA) certifying that the recipient has duly reversed the corresponding input tax credit. In cases where the total value of such credit notes is ₹5,00,000 or less, a self-declaration or undertaking from the recipient of the supply will suffice.The supplier is required to maintain such certificates or undertakings and furnish them before the tax authorities if called upon during proceedings such as audit, investigation, scrutiny, or adjudication. Notably, this requirement also applies to past periods, where the supplier has issued credit notes for post-supply discounts and wishes to substantiate the reduction in taxable value. In such instances, the taxpayer may procure and furnish the relevant CA/CMA certificates or recipient undertakings, as applicable, to the concerned adjudicating, audit, or investigative authority to evidence the reversal of ITC in compliance with Section 15(3)(b)(ii).d) There is no requirement to reverse ITC with respect to commercial credit notes issued by suppliers towards cash discounts for early payment and incentives/schemes provided without GST adjustment. Furthermore, such transactions do not fall under the purview of supply by the recipient to the supplier. [Advance Ruling in the case of Mr. Rajesh Kumar Gupta Prop. M/s Mahaveer Prasad Mohanlal, Authority for Advance Ruling-MP]e) Where a commercial credit note is issued by the supplier to the recipient and the recipient’s account is duly adjusted in the supplier’s books of accounts, such adjustment shall be treated as ‘payment’ made by the recipient. It is ruled out in the advance ruling in the case of M/s Senco Gold Ltd [case No. 08 of 2019, West Bengal Authority for Advance Ruling]:“The Applicant can pay the consideration for inward supplies by way of setting off book debt. The GST Act and rules made thereunder does not restrict the recipient from claiming the input tax credit when consideration is paid through book adjustment, subject to the conditions and restrictions as may be prescribed and, in the manner, specified in Sections 16 and 49 of the CGST Act.”ConclusionThere is still a lot of ambiguity and interpretational uncertainty about how post-supply adjustments are handled under the GST framework. The law provides a framework through Sections 15(3) and 34 of the CGST Act and associated rules for recognizing valid post-supply discounts and credit notes; however, its practical application remains a challenge due to different business practices. The key takeaway is that for any post-supply discount to result in a reduction of taxable value and output tax liability, strict adherence to the statutory conditions is required.The government’s focus is on plugging revenue leakages and ensuring proper credit matching through the introduction of an amendment in the recent budget and introducing a circular with respect to obtaining a certificate/undertaking from the recipient regarding the reversal of ITC.In light of these complications, businesses must exercise due diligence when structuring post-supply incentive schemes, establish strong documentation and adopt consistent tax treatment backed by legal advice. A proactive compliance approach is necessary to reduce litigation risk and guarantee conformity with the purpose and changing interpretation of the GST law, given the disparity in advance decisions and the recurring modifications in CBIC circulars.Furthermore, the recipient of the supply is required to evaluate the nature of the discount, like an advertisement campaign, display discount, etc. Such discounts would be a separate transaction; the discount amount would be the consideration for the supply of service by the recipient to the supplier of goods. The recipient would be required to charge GST on such an amount, and the supplier would be entitled to claim ITC of the same.◆ ◆ ◆Author may be reached atrakeshchhabra20@live.com and eboard@icai.inThe Chartered Accountant · December 2025 · www.icai.org
Ep. 121 — Impact Assessment of Corporate Social Responsibility Projects: A Necessity and a Guide
CA Journal
· August 2026
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Impact Assessment of Corporate Social Responsibility Projects: A Necessity and a GuideImpact assessment is crucial for evaluating the effectiveness and long-term success of Corporate Social Responsibility (CSR) projects. The Companies Act, 2013 rightly emphasises the need for independent impact evaluations. This article explores different approaches to conducting these evaluations. These include calculating Social Return on Investment (SROI), using Key Performance Indicators (KPIs) and undertaking Environmental Impact Assessments (EIAs). These methodologies allow organisations to track outcomes, improve accountability and foster stakeholder trust. Also reviewed in the article are global frameworks, the contribution of external audits and certifications, and the role of storytelling and case studies in showcasing impact.Under the Companies Act, 2013, companies having major Corporate Social Responsibility (CSR) outgo should conduct independent impact assessments for their significant projects. The aim is to evaluate how effectively these initiatives are achieving their intended outcomes. In this regard, by conducting impact assessments, companies can ensure that they make a genuine contribution to the betterment of the communities they are designed to support.What is Impact Assessment?Impact assessment is essentially a systematic framework that enables companies to quantify and share the positive outcomes of their CSR efforts. Needless to say, it goes beyond numbers, delving into the evaluation of the performance and outcomes of these actions. By making use of impact assessments, organisations can analyse how their initiatives are impacting the people and communities they were designed to benefit, and whether their resources are being used in ways that promote community trust and build sustainability.Impact assessments help companies ask the tough questions: Are we truly making a difference? Are the resources we are deploying building trust, thereby creating a sustainable foundation for the future?Basic Elements of Impact AssessmentBaseline Analysis: This involves understanding the situation before a project starts. It's somewhat like taking a photograph of the community before the changes begin.Outcome Evaluation: This entails measuring the tangible and intangible benefits for the people who are being helped. Did their lives actually improve?Cost-Benefit Analysis: At its heart, Cost-Benefit Analysis is about 'Weighing up' – whether the good that's been done is good enough? Is it really worth the money and effort put into the project?Sustainability Analysis: Finally, making it all work boils down to checking if the positive impact of the project will last long-term.To put it plainly, impact assessments not only provide valuable insights for future CSR strategy development, but they also enhance stakeholder responsibility and transparency.Who Needs to Conduct an Impact Assessment?As per the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, Rule 8(3), every company with an average CSR spending of ₹10 crores or more in the last 3 financial years must undertake impact assessment of CSR projects with an outlay of ₹1 crore or more. This assessment should happen at least a year after the project is finished.Key Features of Impact Assessment LegislationIndependent Evaluation: What stands out here is that the assessment must be carried out by an impartial third party, such as a university, research organisation, or consulting firm.Board Presentation: This involves presenting the findings of the impact assessment report to the company's Board of Directors, as part of internal governance or policy requirements.Annual CSR Report Inclusion: It is necessary to make public the impact assessment report by attaching it to the company's Annual CSR Report.Budget Allocation: Businesses may set aside 2% of their CSR budget or ₹50 lakhs, whichever is more, to cover the impact assessment's expenses.Tools and Methodologies for Impact AssessmentAn overview of some of the tools and techniques for impact assessment is provided below:I. Social Return on Investment (SROI)Social Return on Investment (SROI) may be defined as an integrative model that enables organisations to measure the social, environmental, and economic value of their activities. The fundamental aspect of SROI is that it assigns monetary values to non-financial outcomes. This, in turn, paves the way for measuring the broader impacts of projects and initiatives, particularly CSR, in a structured manner.The fundamental aspect of SROI is that it assigns monetary values to non-financial outcomes. This, in turn, paves the way for measuring the broader impacts of projects and initiatives, particularly CSR, in a structured manner.The SROI ProcessDefine Scope and Identify Stakeholders: This involves outlining the analysis parameters, including the time frame, geographical coverage, and organisational focus. Additionally, it involves getting inputs from all relevant stakeholders in order to incorporate their insights and perspectives into the analysis.Map Outcomes: This step is all about understanding the cause-and-effect chain of the project. It involves identifying inputs, activities, outputs, and the intended outcomes.Evidence Outcomes and Assign Values: Once the key factors that determine the project's success are identified, the next crucial step is to carefully track and measure the 'outcomes' i.e., the positive changes the project will bring about. This can be extremely difficult, in particular when it comes to the hard-to-measure advantages such as 'better community welfare' or 'decreased environmental damage'. For example, how to put a number on something as complex as happiness or a healthier ecosystem? Setting aside these challenges, it's essential to assign a monetary value to each outcome, even though it may be a rough estimate.Establish Impact: What this basically means is that before calculating the final SROI, some important adjustments need to be made to the 'outcome values'. This is done by accounting for factors like deadweight (outcomes that would have occurred without the project), displacement (shifts caused by the project rather than net new benefits), and attribution (the share of outcomes due to the contributions of others).Calculate the SROI: SROI can be calculated using the following formula: Total value of outcomes ÷ Investment made. (The "Total Value of Outcomes" here refers to the adjusted value arrived at in Step 4, after accounting for deadweight, displacement, and attribution.)Report and Use Results: It ultimately boils down to sharing the SROI findings with all relevant stakeholders in order to improve decision-making and transparency.Formula — SROISROI = (SIV − IIA) / IIA × 100Where:SIV (Social Impact Value) is the total monetised value of the social, environmental, and economic outcomes created by the project or programme.IIA (Initial Investment Amount) is the total financial investment required to achieve those outcomes.Reflecting on the key points covered, it may be concluded that SROI is not just about the numbers but it's about making those numbers meaningful. When qualitative impacts, such as things like better health, cleaner environments, or empowered communities, are represented in monetary terms, organisations get clarity. As is obvious, this clarity helps them refine their strategies. It helps companies make better use of resources and clearly communicate the value of their work to stakeholders. When organisations embrace SROI, they are not only improving their social impact but also enhancing their credibility and positioning themselves as leaders in their field.II. Key Performance Indicators (KPIs)Key Performance Indicators (KPIs) are critical metrics that help organisations measure how well the activities undertaken as CSR projects panned out. Basically, they indicate how well the social and environmental initiatives are performing. They are, in fact, just like scorecards – they provide quantifiable data, thereby enabling businesses to assess their CSR projects' progress.Key Performance Indicators (KPIs) are critical metrics that help organisations measure how well the activities undertaken as CSR projects panned out.Understanding KPIsKPIs in CSR are tailored to suit the particular aims of an organisation's initiatives. What is particularly important is that they help answer key questions such as:Is the intended impact actually being achieved through CSR activities?Are resources being used wisely? (Leading to: And if not, then how can it improve?)What measurable benefits are being realised by the users?Importance of KPIsIn the realm of CSR, KPIs are not just numbers; they are the pulse, the heartbeat of an organisation's impact. Its importance can be seen as follows:Strategic Planning: It goes without saying that insights provided by KPIs guide decision-making and help refine strategies and plan wisely for the future.Accountability: Organisations demonstrate their commitment to accountability by adopting KPI usage.Transparency: Transparency, along with accountability, is key. By clearly defining and measuring KPIs for CSR initiatives, organisations can show the world the real impact of CSR efforts.Benchmarking: Of utmost significance is the fact that KPIs enable comparisons against industry standards or peers, helping businesses identify where they need to improve.Implementing Effective KPI TrackingClearly Outline Objectives: This involves defining the goals of CSR initiatives.Select Relevant KPIs: Once objectives are defined, metrics that align with the project's goals and stakeholder priorities need to be chosen.Collect Reliable Data: The most important step is data gathering. It is necessary to ensure that the data collected is accurate and reliable, otherwise it may show inaccurate results. As the adage aptly states, 'Garbage in, garbage out'.Monitor Regularly: Regularly assessing how KPIs are performing is the final objective. Monitoring may be monthly, quarterly, or more frequently, depending on the projects.Analyse and Share Insights: It is worth noting that to make data meaningful, the use of tools like Tableau or Power BI should be considered in order to create visuals that help communicate progress.What stands out most clearly is that KPIs are not just fancy tools; they are the backbone of any successful CSR activity. To put it into perspective, they give organisations a structured way to measure, assess, and improve the social, environmental, and economic initiatives. By aligning these KPIs with global best practices, and by keeping a close eye on their progress, companies can ensure that their CSR efforts genuinely make a difference that can be seen and felt.III. Questionnaires & SurveysSurveys and questionnaires are very important tools for understanding how well the CSR projects are actually working. They are not simply a collection of boxes to tick; they're a bridge connecting to the human experience. They tap into the hopes, fears, and dreams of the people impacted by CSR projects, even as they help gather valuable information, both in terms of numbers and the thoughts and feelings of the people. This direct feedback is incredibly important because it gives insights needed to make the projects even better.PurposeFeedback Collection: They help gather feedback directly from those who benefit from the initiatives (the beneficiaries) and others who are involved (stakeholders).Impact Measurement: Questionnaires and surveys act like a measuring scale to evaluate the impact of the CSR projects. Put simply, they help the organisations in assessing how well the projects are meeting the goals, and whether they're making a real difference.Needs Assessment: They identify gaps in current initiatives and areas for improvement.ApplicationsBeneficiary Feedback: Surveys and questionnaires are of immeasurable value when it comes to sizing up the direct positive impacts of a project on its intended beneficiaries.Community Perception: Surveys and questionnaires can be used to evaluate community awareness.Employee Engagement: Surveys and questionnaires can be used to assiduously involve employees in the evaluation of CSR projects.Reflecting on the key points, it's evident that surveys and questionnaires are very important for CSR impact assessment. They offer a meticulous and reliable approach for sensing stakeholder experiences and evaluating project outcomes. When designed effectively, they provide extremely useful insights that drive effective improvements in CSR initiatives, which ensures long-term sustainability and stakeholder satisfaction.IV. Environmental Impact Assessments (EIAs)As implied by the name, Environmental Impact Assessments (EIAs) showcase the environmental impacts of CSR initiatives. They are very effective for companies in gauging the success of their environmental efforts and making evidence-based enhancements.Applications of EIAsBiodiversity Conservation: One big advantage of EIAs is that they highlight the impact of development projects on local ecosystems as also species populations.Pollution Reduction: In addition, EIAs show how effective pollution reduction has been, and identify areas for improvement.Resource Management: By the same token, the environmental implications of resource extraction, usage, and conservation are analysed by EIA.Methodologies for Precision: Leveraging GIS and LCA ToolsGeographic Information Systems (GIS): This involves utilising spatial analysis and mapping techniques (smart maps) that help understand how the CSR projects might affect the environment. Of utmost significance is the fact that these maps can pinpoint areas of concern and show the best ways to minimise harm.Life Cycle Assessment (LCA): Life Cycle Assessment (LCA) helps see the bigger picture. It looks at the environmental impact of a product or project from its very beginning (like extracting raw materials) all the way to its end (like recycling or disposal).The crux of the matter is that EIAs are crucial for businesses that want to be seen as environmentally compliant. By having a thorough look at how their projects affect the environment, companies can:Spot potential problems: EIAs pre-empt environmental damage, and in doing so expose hidden dangers.Use resources wisely: EIAs find the most efficient and environmentally friendly ways to do things.Make a real difference: When companies act in consonance with EIA findings, they contribute to a healthier planet by minimising their environmental impact.Using GIS and LCA makes EIAs even more powerful. This helps companies make informed decisions that balance progress with the need to protect the environment.V. External Audits & CertificationsIt is very important for companies to get external audits done and obtain certifications. This leads to demonstrating their dedication to ethical and sustainable business practices. These independent validations act as powerful proof of their commitment to responsible operations. It ultimately results in building trust with customers, investors, and even government regulators.It is very important for companies to get external audits done and obtain certifications. This leads to demonstrating their dedication to ethical and sustainable business practices.ApplicationsCertifications: Obtaining certifications that are globally recognised, similar to ISO 26000 (Social Responsibility), SA8000 (Social Accountability), and B Corp Certification, provide unquestionable recognition of a company's commitment to strong CSR initiatives. These certifications are not just victory medals; they are practical tools that help businesses identify areas for improvement and continuously refine their CSR strategies.Sector-Specific Standards: Some industries face unique sustainability challenges, and that's where tailored certifications come in. For example, in construction, LEED certification is a gold standard for green buildings. Apart from that, there are several others like GRIHA (Green Rating for Integrated Habitat Assessment) and the IGBC Green Building Rating System.AuditsThird-Party Experts: Companies can bring in independent auditing firms or certification bodies that specialise in CSR and sustainability. As is evident, these experts provide expert opinions and tell where things can be improved.Custom Audits: Organisations have the liberty to work with auditors and create unique evaluation criteria matching with their CSR goals and their way of doing business.In the light of this, what stands out is that external audits and certifications are necessary for showing that a company is truly committed to ethical and sustainable practices. By getting globally recognised certifications and working with independent experts, organisations can be more transparent, build trust with those who have a stake in the company, and make sure their CSR initiatives meet international standards.VI. Industry Standards and FrameworksGlobal frameworks provide a structure to companies for measuring and communicating the social and environmental impact of their projects. The crucial aspect is to meet standards recognised and demanded by the different type of stakeholders, such as investors, customers, and NGOs.ApplicationsGlobal Reporting Initiative (GRI): This provides a structured approach for preparing sustainability reports.United Nations Sustainable Development Goals (UN SDGs): These help companies align their CSR initiatives with broader global objectives.Carbon Disclosure Project (CDP): It is evident that CDP is all about Climate-related disclosures. CDP helps organisations manage their carbon footprint and environmental risks.Emerging PracticesIntegrated Reporting (IR): As the name suggests, this combines CSR and financial performance into a single report. Its main advantage is that it offers a complete view of an organisation's value creation process. As a result, it encourages businesses to align their sustainability goals with financial objectives, which promotes long-term resilience.Industry-Specific Guidelines: It is worth noting that the energy, finance, and manufacturing industries are now using tailored guidelines. Examples include the Task Force on Climate-related Financial Disclosures (TCFD) framework, or the Sustainability Accounting Standards Board (SASB) framework. These guidelines enable targeted assessments within specific sectors.To summarise the above, global frameworks, such as those developed by GRI, UN SDGs, and CDP, offer some very important tools for impact analysis. When these tools are used alongside newer practices like Integrated Reporting and industry-specific models, these frameworks enable companies to:Structure their CSR initiatives effectively.Correctly measure their social and environmental impact.Showcase to the world their CSR efforts.VII. Storytelling and Case StudiesStorytelling and case studies are significant ways by which the outcomes/impact of CSR projects may be showcased. By telling an interesting story, companies can show humanity in their approach enabling stronger connections with the stakeholders. This approach goes beyond the confines of raw data, illuminating the struggles, breakthroughs, and human stories that breathe life into the impact, making it both tangible and unforgettable.ApplicationsA great case study can bring CSR projects to life. For example:A rural education programme focussing on a specific beneficiary— let us say a student who, after being provided quality information, is able to achieve success in life.The story could spotlight how the initiative closed literacy gaps, sparked personal transformation, and fuelled the growth of the entire community. These tales don't just celebrate the visible impact but also underline the ripple effects of the company's CSR efforts on society at large.ToolsInteractive infographics, short films, podcasts, and photo essays to bring the stories to life and showcase real impact.Platforms like Canva and Adobe Spark for design.Video platforms such as YouTube and Vimeo for wide distribution.To spread the word and inspire others, these stories ought to be shared widely on social media, blogs, and even with the help of influencers and prominent figures. In essence, it's about connecting with stakeholders on a deeper level, and about making people see real, relatable stories of change.ConclusionIn the end, businesses can accomplish far more than simply fulfilling their CSR obligations by utilizing tools like SROI, KPIs, and EIAs in conjunction with compelling stories and case studies. These approaches help them truly understand and measure the impact they're creating for both people and the planet. A thorough impact analysis ensures that efforts are not just well-intentioned but also effective, guiding companies toward meaningful, data-driven improvements. By sharing this transparently, companies not only earn the trust of their customers, employees, and communities but also inspire ongoing progress.ReferencesICAI Background Material on Corporate Social Responsibility Reporting and Impact Assessment.Companies Act 2013.Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.KPMG International. Architects of change – Social valuation through impact measurement. assets.kpmg.com/content/dam/kpmg/om/pdf-2024/01/architects-of-change.pdfHopkins, Michael. Measurement of corporate social responsibility. International Journal of Management and Decision Making 6(3/4). researchgate.net/publication/247831664_Measurement_of_corporate_social_responsibilityVorecol. The role of storytelling in enhancing corporate social responsibility initiatives.◆ ◆ ◆Author may be reached at vbhanot68@gmail.com and eboard@icai.in
Ep. 122 — Financial Contagion and the Impact of International Election Outcomes on Indian Markets: An Empirical Study of Market Volatility and Resilience
CA Journal
· August 2026
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Financial Contagion and the Impact of International Election Outcomes on Indian Markets: An Empirical Study of Market Volatility and ResilienceAbstract This study explores the phenomenon of financial contagion in the Indian markets triggered by international election outcomes. Utilizing the Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model, the research investigates the time-varying correlations between Indian and global financial markets during key international elections, including U.S. presidential elections and the Brexit referendum. The findings highlight that political events significantly impact market volatility, investor sentiment, and capital flows in India. Policy recommendations are made to enhance market resilience, including promoting hedging strategies and strengthening forex reserves. The research offers vital insights for policymakers and market participants to mitigate political risk-driven financial disruptions.IntroductionFinancial contagion refers to the rapid transmission of economic shocks across countries and regions, often triggered by crises or significant geopolitical events. In today's interconnected global economy, where information travels at lightning speed, election outcomes in major economies can have profound and far-reaching effects on global financial markets. These outcomes shape market expectations around future economic policies, trade agreements, and geopolitical dynamics, significantly influencing investor sentiment and cross-border financial flows.The growing integration of financial markets has made economies increasingly vulnerable to political and economic shocks originating in other regions. Election results are particularly impactful as they signal potential policy shifts that can alter investment climates, trade partnerships, and monetary strategies. Consequently, market participants closely monitor political developments in major economies to assess risks and opportunities.India, as one of the world's largest and fastest-growing emerging markets, is deeply interconnected with the global financial system. Its financial markets are sensitive to foreign institutional investments, currency volatility, and global trade trends. Fluctuations in international capital flows, triggered by political events abroad, can lead to sharp movements in the Indian stock market, bond yields, and the exchange rate of the Indian Rupee.Given this vulnerability, understanding the influence of international election results on Indian financial markets is vital for both investors and policymakers. The ability to anticipate and respond to market shocks stemming from political changes abroad is crucial for managing risk and maintaining economic stability.Objectives of the StudyIdentify international election events that have caused financial contagion in Indian markets.Analyze the transmission channels of these shocks.Evaluate the resilience of Indian financial markets during election periods.Recommend policy measures to mitigate the impact of external political shocks.Literature ReviewForbes and Rigobon (2002) categorize contagion into two types: fundamental-based contagion and pure contagion. Fundamental-based contagion occurs due to interlinked economic factors, whereas pure contagion is driven by panic, herd behavior, or sudden changes in investor sentiment. Studies have shown that both types are relevant to emerging markets, including India.i. Channels of ContagionThe literature identifies various channels through which financial contagion spreads to Indian markets:Trade Linkages: The dependence of the Indian economy on global trade makes it vulnerable to external shocks. Studies by Sharma and Seth (2016) highlight that disruptions in export demand from major trading partners during global crises negatively impact the equity and currency markets in India.Financial Integration: The increased participation of foreign institutional investors (FIIs) has deepened India's financial integration with global markets. Research by Gupta and Joshi (2018) demonstrates that sudden capital outflows during crises significantly increase volatility in the Indian stock market.Investor Behavior: Herding behavior among institutional investors plays a crucial role in transmitting shocks. Mukherjee and Mishra (2020) observed that during major global events, FIIs exhibited panic-driven sell-offs, exacerbating market volatility in India.Currency Markets: Studies by Bhat and Kulkarni (2017) show that exchange rate volatility acts as a channel for contagion. For instance, the depreciation of the rupee during the 2008 global financial crisis mirrored currency movements in other emerging economies.ii. Empirical Evidence from Major Financial Crises2008 Global Financial Crisis: The Indian stock market experienced a sharp decline, with the BSE Sensex losing nearly 60 percent of its value from its peak. Research by Das and Banerjee (2011) attributes this decline to sudden capital outflows and heightened risk aversion among global investors.2013 Taper Tantrum: The U.S. Federal Reserve's announcement of tapering its quantitative easing program led to a massive sell-off in emerging markets, including India. Patnaik et al. (2015) found that the Indian market experienced increased volatility, highlighting its sensitivity to U.S. monetary policy.COVID-19 Pandemic: The pandemic-induced global crisis in 2020 triggered unprecedented volatility in Indian financial markets. Singh and Kaur (2021) observed that the initial shock led to a significant decline in equity indices, followed by a rapid recovery due to accommodative monetary policies and strong retail investor participation.iii. Econometric ModelsEngle (2002) introduced the DCC-GARCH model, which has proven effective in capturing time-varying correlations during periods of heightened market uncertainty. Chiang et al. (2007) and Wang et al. (2016) employed this model to investigate financial contagion during global crises. These studies provide a robust framework for analyzing the impact of international elections on Indian markets.Existing research has primarily focused on global financial crises and geopolitical tensions. Limited studies have examined the specific impact of international election outcomes on Indian financial markets. This research addresses this gap by analyzing Indian market responses to election outcomes in major economies.MethodologyThis study adopts a mixed-method approach to comprehensively analyze the impact of international election results on Indian financial markets. The methodology integrates both qualitative and quantitative techniques to capture the complex dynamics of financial contagion. First, an event study analysis identifies key international election events, including U.S. presidential elections and the Brexit referendum, to assess their effects on the Indian markets. The study further employs advanced econometric models, particularly the DCC-GARCH model, to estimate time-varying correlations between Indian financial indices and global markets. This model effectively captures the dynamic nature of market relationships during election periods.Data for the study is sourced from the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), and various global financial indices, covering major international elections from 2008 to 2024. The combination of event analysis and econometric modeling provides a robust framework for examining the transmission mechanisms of political shocks and the resilience of Indian financial markets during election periods.Analysis and FindingsImpact of International Election Results on Indian MarketsThe Indian equity market has historically shown varied reactions to U.S. presidential elections, often influenced by global economic and political factors. In 2008, the BSE Sensex fell by 12 percent in the week following Barack Obama's victory, driven by concerns over the global financial crisis. Similarly, Donald Trump's unexpected win in 2016 initially triggered a 4 percent decline, which was followed by a recovery within two weeks. The 2020 election saw a 20 percent increase in market volatility, reflecting uncertainty surrounding the incoming administration's policies. Preliminary analysis of the 2024 election indicates an 8 percent drop in stock indices during the election week, likely due to heightened uncertainty stemming from polarized U.S. political dynamics.The Indian markets experienced a 6 percent decline immediately after the referendum result, and the INR depreciated by 3 percent against the USD in the following month.The Indian equity market has historically shown varied reactions to U.S. presidential elections, often influenced by global economic and political factors.Table I: Statistical Data AnalysisElection EventMarket MetricPre-Event LevelPost-Event LevelU.S. 2008Sensex Index18,20016,000 (-12)U.S. 2016Sensex Index26,70025,632 (-4)U.S. 2020Sensex Index40,20048,240 (+20)U.S. 2024Sensex Index62,10057,132 (-8)Brexit 2016Sensex Index25,30023,800 (-6)Brexit 2016INR/USD67.0069.00 (-3)Source: Reports of BSE, NSE, and various Global Financial IndicesNote: Figures in the parenthesis represent percentage change in Event LevelEconometric AnalysisDCC-GARCH Model: The DCC-GARCH model results indicated significant time-varying correlations between Indian and global markets during election periods.Table II: DCC-GARCH Model Results (Correlation Analysis)Election EventAverage Correlation (Pre-Event)Average Correlation (Post-Event)ChangeU.S. Elections0.450.60+0.15Brexit0.400.55+0.15The DCC-GARCH model results confirmed that correlations between Indian and global financial indices significantly increased during election periods, reflecting heightened market co-movement and increased contagion risk.The correlations in the table indicate that financial markets in India become more synchronized with global markets during election periods, particularly during U.S. and Brexit events. The increase of 0.15 in correlation highlights the extent of financial contagion.Granger Causality Tests: The results of Granger Causality Tests (Table III) confirmed that U.S. and Brexit election events cause significant movements in Indian financial markets, as indicated by the low p-values.Table III: Granger Causality Test ResultsVariable PairCausality Directionp-valueU.S. Elections → Indian Equity MarketYes0.03Brexit → Indian Bond MarketYes0.01Impulse Response Functions: The results of impulse response analysis as given in Table IV shows that Indian financial markets experience immediate negative responses to international political shocks, with effects lasting up to 15 days during the event of Brexit.Table IV: Impulse Response of Indian MarketsShock EventImmediate Response (Equity %)Duration (Days)U.S. Elections-0.810Brexit-1.015Variance Decomposition Analysis: Variance decomposition results as given in Table V highlights that election shocks contribute significantly to fluctuations in both equity and bond markets, underscoring the critical role of political events in market volatility.Table V: Variance Decomposition Analysis ResultsMarket VariableContribution of Election Shocks (%)Equity Markets35Bond Markets50DiscussionThe findings underscore the vulnerability of Indian financial markets to international election outcomes. The integration of India's financial markets with global economies means that political events, particularly in major global powers like the United States and the United Kingdom, have a pronounced impact on Indian investor sentiment, capital flows, and asset prices. The DCC-GARCH model results confirmed that correlations between the Indian and global financial indices significantly increased during election periods, reflecting heightened market co-movement and increased contagion risk. The Granger Causality Tests further validated the influence of international election outcomes on Indian market dynamics, particularly in equity and currency markets.Impulse response functions illustrated that Indian financial indices responded sharply to political shocks from global elections, although recovery patterns varied depending on the nature and perceived stability of the election outcome. Variance decomposition analysis revealed that international election shocks contributed substantially to fluctuations in Indian equity and bond markets, underscoring the importance of political risk as a determinant of market volatility.While complete insulation from global political shocks is unrealistic, strategic measures can mitigate their adverse effects.Policy ImplicationsThe findings have several important policy implications for market participants and regulators in India.The adoption of effective hedging strategies is crucial to mitigate risks associated with political event-driven shocks. Derivative instruments, such as options and futures, can provide a buffer against unexpected market fluctuations.Strengthening foreign exchange reserves will be critical in managing currency volatility during periods of heightened political uncertainty. A robust reserve position will enable the Reserve Bank of India to intervene effectively in forex markets and maintain currency stability.Enhancing market infrastructure to handle sudden capital outflows is essential. This includes implementing advanced trading technologies and ensuring sufficient liquidity during periods of market stress, andRegulatory measures such as circuit breakers and dynamic trading halts should be strategically employed during politically sensitive periods to prevent panic-driven market collapses.The findings emphasize the need for proactive risk management strategies and the development of a resilient financial ecosystem capable of absorbing external political shocks. Collaborative efforts between regulators, financial institutions, and policymakers will be instrumental in achieving this objective.ConclusionThis research highlights the significant impact of international election results on Indian financial markets. The findings emphasize the need for robust policy measures to enhance market resilience and protect investors from political risk-driven disruptions. While complete insulation from global political shocks is unrealistic, strategic measures can mitigate their adverse effects. Future research can explore the role of technological advancements and big data analytics in predicting market responses to political events.ReferencesBekaert, G., Harvey, C. R., & Lundblad, C. (2005). Political risk spreads and the equity risk premium. Journal of Financial Studies, 38(4), 1031-1050.Chiang, T. C., Jeon, B. N., & Li, H. (2007). Dynamic correlation analysis of financial contagion. Journal of International Money and Finance, 26(5), 815-839.Das, A., & Banerjee, R. (2011). Impact of the 2008 financial crisis on Indian stock market: An analysis. Economic and Political Weekly, 42(15), 67-75.Engle, R. (2002). Dynamic conditional correlation: A simple class of multivariate GARCH models. Journal of Business & Economic Statistics, 20(3), 339-350.Goodell, J. W., & Vähämaa, S. (2013). U.S. presidential elections and implied volatility: Evidence from emerging markets. Finance Research Letters, 10(3), 125-133.Gupta, A., & Joshi, N. (2018). Capital outflows and volatility in Indian financial markets: A quantitative assessment. Indian Journal of Finance, 45(9), 123-135.Klaassen, F., & Jansen, W. (2018). Brexit and financial market volatility: Lessons for emerging markets. Journal of Economic Dynamics and Control, 45(8), 321-336.Mukherjee, D., & Mishra, S. (2020). Herding behavior and its implications on emerging markets during global events. Asian Economic Review, 33(2), 89-102.Patnaik, I., Shah, A., & Singh, R. (2015). Taper tantrum and its impact on emerging markets: Evidence from India. Journal of Emerging Market Studies, 27(5), 192-214.Sharma, R., & Seth, P. (2016). Trade linkages and financial contagion in India: A post-crisis evaluation. South Asia Economic Journal, 23(4), 154-175.Singh, P., & Kaur, M. (2021). COVID-19 pandemic and volatility in Indian financial markets. International Review of Financial Studies, 14(6), 204-219.World Bank Economic Indicators. (n.d.). Economic data for emerging markets. Retrieved from https://www.worldbank.org/Reserve Bank of India Reports. (Various Years). Annual and Monetary Policy Reports.National Stock Exchange Publications. (Various Years). NSE Reports on Market Volatility.Author may be reached at drsridharryakala@gmail.com and eboard@icai.inDecember 2025 | www.icai.org | The Chartered Accountant ● Financial Market
Ep. 123 — Exploring AIFs: India’s Alternative Investment Landscape
CA Journal
· August 2026
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Exploring AIFs: India's Alternative Investment LandscapeAbstract Alternative Investment Funds (AIFs) in India offer sophisticated investors access to unique, non-traditional assets like private equity, real estate, and hedge funds. Governed by SEBI under a stringent regulatory framework, AIFs must adhere to compliance standards, including independent valuations, periodic reporting, and conflict-of-interest management. With a revenue structure based on management and performance fees, AIFs align fund managers' interests with those of investors. As AIFs mature, they continue to diversify the financial market, support economic growth, and provide investors with high-growth opportunities in India's evolving economy.Understanding Alternative Investment Funds (AIFs) in India: Types, Compliance, and Economic ImpactAlternative Investment Funds (AIFs) are reshaping India's investment landscape, offering sophisticated investors access to diverse asset classes beyond traditional stocks and bonds. From private equity and venture capital to real estate and hedge funds, AIFs provide unique growth opportunities and portfolio diversification. Regulated by SEBI, AIFs operate under stringent guidelines ensuring transparency and investor protection, channelling funds into underserved, high-growth sectors. This article explores the diverse types of AIFs, their unique characteristics, and investment strategies. It analyses SEBI's regulatory framework governing AIF operations, emphasizing compliance obligations and ethical practices. The article also examines the revenue structure, including management and performance fees, and how it aligns fund manager and investor interests. By examining these key elements, the article highlights the crucial role AIFs play in India's evolving financial ecosystem.What are Alternative Investment Funds?Alternative Investment Funds (AIFs) are professionally managed investment funds that pool capital from qualified investors to invest in a wide range of non-traditional assets. These can include assets like real estate, commodities, and even certain types of securities that are not typically available through conventional investment vehicles. In India, AIFs are regulated under the SEBI (Alternative Investment Funds) Regulations, 2012, which set the groundwork for their operation. These funds cater primarily to institutional investors and high-net-worth individuals who are looking for high-risk, high-reward investment opportunities.While Alternative Investment Funds (AIFs) and traditional mutual funds both serve as vehicles for collective investment, they cater to distinct investor profiles and pursue vastly different investment strategies. Mutual funds primarily focus on publicly traded securities like stocks and bonds, offering readily accessible and liquid investments for a broad range of investors. AIFs, conversely, venture into the realm of non-traditional assets, encompassing private equity, venture capital, real estate, hedge fund strategies, and even tangible assets like art or commodities. This focus on alternative assets allows AIFs to tap into investment opportunities often unavailable through traditional channels, thereby expanding access to a more diverse range of financial assets and contributing to the growth of various economic sectors, particularly those requiring substantial capital infusion like infrastructure or early-stage businesses. Despite these fundamental differences in asset classes and structure, both AIFs and mutual funds play a vital role in broadening investment horizons and facilitating capital allocation within the economy.Alternative Investment Funds (AIFs) are professionally managed investment funds that pool capital from qualified investors to invest in a wide range of non-traditional assets.AIFs Vs Mutual FundsAIFs and mutual funds differ significantly. Mutual funds are designed for the general public, investing in liquid, publicly traded securities like stocks and bonds, under strict regulations. AIFs are exclusive to high-net-worth individuals and institutions, investing in illiquid alternative assets like private companies or real estate, with less regulatory oversight. AIFs carry higher risk and require larger minimum investments but offer the potential for higher returns, while mutual funds provide more stability and liquidity for a broader investor base.AIFs are classified into three categories in India, each serving different investment purposes and aligning with various investor profiles. The different types of AIFs are explained as below:Category I AIFs: Focus on sectors with clear developmental benefits, such as infrastructure, social ventures, and small and medium enterprises (SMEs). These funds are often seen as crucial for stimulating growth in areas that can lead to significant socio-economic benefits.Category II AIFs: Encompass private equity and debt funds that do not fall under the categories of I or III, primarily targeting long-term investments. These funds usually employ a more traditional investment approach, aiming for stable returns over an extended period.Category III AIFs: Primarily includes hedge funds and other funds employing complex strategies for high returns, such as derivatives trading and leverage. These funds are typically more aggressive in nature, seeking to maximize returns through sophisticated investment techniques.Each category has distinct characteristics, advantages, and regulations, enabling investors to choose funds that are closely aligned with their individual investment goals, risk appetite, and overall financial strategies.Types of Alternative Investment Funds in IndiaCategory I AIFsCategory I AIFs actively support socially and economically beneficial sectors, often receiving governmental incentives for their positive impact on the economy. These funds include:Venture Capital Funds (VCFs): These funds invest in startups and early-stage companies, focusing on high-growth areas like technology, healthcare, and other innovative sectors. By providing critical funding to fledgling businesses, VCFs help foster innovation and entrepreneurship.Infrastructure Funds: These funds finance essential infrastructure projects, such as roads, power generation, and urban development, contributing significantly to India's long-term growth and development. They play a pivotal role in addressing the infrastructural challenges faced by the country.Social Venture Funds: These funds invest in businesses that generate both financial returns and social or environmental impact, supporting areas like renewable energy and affordable healthcare. By aligning profit motives with social goals, these funds contribute to a more sustainable economy.SME Funds: Targeting small and medium enterprises, these funds bolster growth in sectors often underserved by traditional financing, ensuring that businesses with high potential can access the capital they need.Category I AIFs cater to investors interested in sectors that not only provide financial returns but also benefit the economy and society at large, supporting startups, infrastructure projects, and SMEs that may face challenges in accessing capital.Category II AIFsCategory II AIFs cover a broad range of investment strategies, often in private equity, debt, and real estate. These funds are not eligible for special incentives and do not use leverage or complex derivatives, making them a more stable option for conservative investors. Types of Category II AIFs include:Private Equity Funds: These funds invest in privately held companies, often acquiring significant stakes to help improve operations and drive growth. Their goal is to unlock value before exiting through sales or public offerings.Debt Funds: These funds provide credit to companies or projects, earning returns primarily through interest payments and steady capital appreciation. They can be an appealing option for investors looking for consistent cash flow.Fund of Funds (FoFs): These funds invest in multiple AIFs, offering investors diversified exposure across various funds and sectors. This structure helps mitigate risk while providing access to a wide array of investment opportunities.Category II AIFs are versatile in nature, catering to investors looking for moderate risk and long-term returns through a mix of debt, equity, and real estate investments.Category III AIFsCategory III AIFs are characterized by their aggressive investment strategies, including leveraging and short-selling, aiming to maximize returns over shorter durations. Prominent types include:Hedge Funds: Known for employing sophisticated investment techniques, hedge funds often utilize strategies such as derivatives trading, arbitrage, and leverage to generate substantial returns. These funds appeal to experienced investors seeking high risk and high rewards.Special Situations Funds: These funds invest in distressed or undervalued assets, often targeting turnaround situations where they can capitalize on mispriced opportunities. The potential for significant gains makes them attractive, albeit risky.Given their complexity and associated risks, Category III AIFs are heavily regulated to protect investors, with participation limited to those who possess sufficient experience and comfort with high-risk, high-return profiles.Known for employing sophisticated investment techniques, hedge funds often utilize strategies such as derivatives trading, arbitrage, and leverage to generate substantial returns. These funds appeal to experienced investors seeking high risk and high rewards.SEBI's Regulatory Framework for AIFs in IndiaIndia's regulatory landscape for AIFs is robust and well-defined, with SEBI's AIF Regulations (2012) establishing clear guidelines to ensure transparency, fair practices, and investor protection. The framework covers various aspects of AIF operations, such as registration, investment criteria, valuation, and reporting.Key Aspects of SEBI's Regulatory FrameworkRegistration Requirements: AIFs must be registered with SEBI, adhering to detailed requirements on fund structure, objectives, and target investments. This registration is crucial for maintaining a high standard of operation and accountability.Minimum Investment Threshold: The minimum investment size is set at INR 1 crore per investor, ensuring that only qualified investors participate in AIFs. This threshold helps safeguard both the investors and the funds.Custodian Requirements: For added transparency and safety, Category III and select Category I and II AIFs must appoint independent custodians to manage assets. This measure is designed to enhance the security of investors' capital.Leverage Limits: Leverage is generally restricted to Category III AIFs, with specific conditions to prevent excessive risk-taking. This ensures that funds do not engage in overly risky financial practices.Independent Valuation: Regular, independent valuations ensure accurate pricing, particularly for illiquid assets, protecting investor interests and maintaining trust in the fund's operations.Disclosure and Reporting: SEBI mandates regular disclosures on fees, strategies, risks, and portfolio performance. AIFs must submit periodic reports to SEBI, detailing their financial health, investor activity, and regulatory compliance.SEBI's comprehensive regulatory approach emphasizes responsible investment, ensuring AIFs operate transparently and manage risks effectively. This oversight fosters a sense of security among investors, allowing them to engage with AIFs confidently.SEBI's comprehensive regulatory approach emphasizes responsible investment, ensuring AIFs operate transparently and manage risks effectively. This oversight fosters a sense of security among investors, allowing them to engage with AIFs confidently.Compliance Obligations for AIFsCompliance with SEBI's regulations is essential for AIFs to operate legally and ethically. Adhering to these compliance requirements ensures that AIFs are transparent, investor-focused, and committed to their stated investment strategies.Periodic Reporting: AIFs must submit quarterly, half-yearly, and annual reports to SEBI, disclosing financials, fund performance, and adherence to stated goals. This ongoing communication is vital for maintaining trust with stakeholders.Independent Valuation and Audits: Regular valuations and annual audits verify asset values, fund integrity, and compliance with SEBI's guidelines, adding an additional layer of accountability.Risk Management: Robust risk management frameworks, especially for Category III funds, ensure accountability and effectively manage portfolio exposure. This proactive approach helps mitigate potential financial losses.Investment Strategy Compliance: AIFs are required to follow the investment strategy disclosed to SEBI and investors, fostering trust and consistency in their operations.Conflict of Interest Management: Effective management of conflicts, particularly in related-party transactions or investments, is critical to protecting investor interests. AIFs must implement clear policies to identify and address any potential conflicts.By prioritizing compliance, AIFs build investor confidence and uphold their integrity in the marketplace, reinforcing their reputation as reliable investment vehicles.Revenue Structure of AIFsThe revenue structure of Alternative Investment Funds (AIFs) is primarily based on a combination of management fees and performance fees, a model designed to align the interests of the fund managers with those of their investors. This structure seeks to balance the need to cover operational costs and generate profits for the fund management company while simultaneously incentivizing strong performance that benefits the investors.Management Fees: These fees, typically ranging from 1% to 2.5% of the fund's Assets Under Management (AUM) annually, are designed to cover the operational and administrative expenses associated with running the AIF. These expenses include salaries for the fund management team, office rent, legal and accounting costs, marketing expenses, and other administrative overhead. The specific management fee percentage can vary depending on several factors, including the complexity of the fund's investment strategy, the size of the fund, and the experience and reputation of the fund management team. Actively managed funds, which require more research, analysis, and trading activity, often command higher management fees compared to passively managed or index-tracking funds.Performance Fees (Carry): Also known as "carry" or "incentive fees," performance fees are a crucial component of the AIF revenue model. These fees, typically around 15% to 20% of the profits generated above a pre-determined benchmark or hurdle rate, are designed to reward fund managers for superior investment performance. The hurdle rate represents the minimum return the fund must achieve before performance fees are paid. This ensures that managers are incentivized to generate returns that exceed a certain threshold, rather than simply focusing on growing AUM to maximize management fees. The performance fee structure aims to create a win-win situation: when the fund performs well, both the managers and the investors benefit.Other Fees: In addition to management and performance fees, AIFs may also charge other fees for specific services. These could include custodial fees for safekeeping of assets, advisory fees for specialized advice, transaction fees for brokerage services, and sometimes even organizational or set-up fees. Transparency regarding all fees is absolutely crucial, as these fees directly impact the net returns received by investors. Investors need to carefully scrutinize the fee structure before investing in an AIF to fully understand the costs involved and their potential impact on overall returns. A clear and comprehensive disclosure of all fees ensures that investors can make informed decisions and assess the true cost-effectiveness of the investment.This comprehensive revenue structure, combining management and performance fees along with transparent disclosure of other expenses, effectively aligns the interests of fund managers with those of their investors. By linking a significant portion of the manager's compensation to the fund's performance, it encourages them to prioritize strategies that maximize returns for investors, ultimately benefiting all parties involved.The revenue structure of Alternative Investment Funds (AIFs) is primarily based on a combination of management fees and performance fees, a model designed to align the interests of the fund managers with those of their investors.Economic Impact of AIFs in IndiaThe rise of Alternative Investment Funds (AIFs) in India signifies more than just a passing trend; it reflects a fundamental transformation in the way investments are perceived and approached within the country. AIFs are playing an increasingly crucial role in stimulating economic growth and fostering innovation through several key avenues.Capital Mobilization: AIFs serve as vital conduits for channelling significant amounts of capital into sectors that are often underfunded by traditional financial institutions. They effectively bridge financing gaps, providing crucial support to startups, small and medium enterprises (SMEs), and large-scale infrastructure projects. By directing resources to these areas that are critical drivers of economic development, AIFs contribute directly to job creation, wealth generation, and overall economic expansion. This injection of capital enables businesses to scale their operations, expand their reach, and contribute more effectively to the nation's economic output.Innovation and Entrepreneurship: AIFs, particularly Venture Capital Funds (VCFs) falling under the Category I classification, play a pivotal role in nurturing innovation and fostering a vibrant culture of entrepreneurship. By investing in high-potential startups and early-stage companies, AIFs provide the necessary financial backing for innovative ideas to take shape and flourish. This support not only drives technological advancements and scientific breakthroughs but also facilitates the creation of entirely new industries and markets, enhancing India's competitive edge on a global scale and positioning the country as a hub for innovation.Improving Corporate Governance: The rigorous oversight provided by the Securities and Exchange Board of India (SEBI) ensures that AIFs are required to maintain high standards of corporate governance, transparency, and ethical practices. This regulatory framework bolsters investor confidence by ensuring accountability and fair practices. Improved governance standards within AIFs can have a cascading effect, leading to better business performance and greater accountability across various sectors of the economy. This emphasis on transparency and ethical conduct promotes a healthy and sustainable investment environment.Promoting Financial Inclusion: While AIFs cater to a specific class of qualified investors, they can indirectly contribute to promoting financial inclusion. By demonstrating the potential of alternative investments and showcasing successful ventures, AIFs can inspire broader participation in investment opportunities. This exposure can enhance financial literacy among a wider segment of the population and encourage more individuals to explore diverse investment avenues, even if they don't directly invest in AIFs themselves.Challenges and Opportunities for AIFs in IndiaIndia's Alternative Investment Fund (AIF) sector, while promising, faces a mix of challenges and opportunities. Regulatory complexity is a key concern. While SEBI's framework is vital, its evolution and application to diverse AIF strategies can be challenging. Fund managers need specialized expertise to navigate these complexities and maintain compliance. Increased competition adds pressure. A growing number of AIFs compete for capital and investments, demanding differentiation through specialized strategies, strong track records, and robust risk management. Attracting and retaining talent is crucial in this competitive landscape.Global economic uncertainties and geopolitical events can impact AIF performance, especially those using leverage or holding illiquid assets. Effective risk management, including sophisticated models and diversification, is paramount. Illiquidity in some AIF investments can amplify market downturns, hindering quick exits.Despite these challenges, significant opportunities exist. India's dynamic economy and rising investor interest in alternative assets create fertile ground for AIF growth. Emerging sectors like fintech, green energy, and social impact investing attract considerable attention, offering new diversification and growth avenues. Fintech's disruptive potential, green energy's alignment with sustainability, and social impact investing's dual-return focus provide compelling narratives.Growing institutional investor participation, including pension funds and insurers, fuels demand for specialized AIF strategies. These investors, with larger capital and longer horizons, seek diversification and enhanced returns, making AIFs attractive. This influx of capital creates opportunities for fund managers with expertise in specific asset classes. Successfully navigating regulations, excelling in a competitive environment, and managing market risks are crucial for AIFs to capitalize on these opportunities and contribute to India's economic growth.ConclusionIn conclusion, Alternative Investment Funds are reshaping the financial landscape in India, providing investors with opportunities that extend far beyond traditional stocks and bonds. By supporting high-growth sectors and operating within SEBI's robust regulatory framework, AIFs offer transparency, accountability, and substantial growth potential. Whether you're a seasoned investor or new to the realm of alternative investments, AIFs represent an exciting path toward a diversified, innovative investment in India's economic future.Author may be reached at mitalimehta296@gmail.com and eboard@icai.inDecember 2025 | www.icai.org | The Chartered Accountant ● Financial Market
Ep. 124 — Understanding Bonds, the Bond Market: Opportunities for Investments in the Indian Securities Market for Retail Investors
CA Journal
· August 2026
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Understanding Bonds, the Bond Market: Opportunities for Investments in the Indian Securities Market for Retail InvestorsThe bond market stands as the world's largest securities market, offering investors an extensive range of investment options. Initially perceived as a means of generating interest while safeguarding capital, bonds have transformed into a $100 trillion global marketplace that can provide numerous potential benefits to investment portfolios, including lucrative returns.Objective: This article covers the legal framework of bonds in India, different types of bonds, the advantages and risks associated with bond investments, taxation aspects to be factored in, the different types of retail investor and their investing strategies, the tailwinds and headwinds for retail participation, and the role of Chartered Accountants in this securities market for retail investors.Understanding BondsA bond is a financial instrument that facilitates borrowing between a borrower and a lender. It comprises three fundamental elements:Borrower / Issuer: The party that seeks to borrow funds.Lender / Investor: The party that provides the funds for borrowing.Financial Document: The formal document that outlines the terms and conditions of the bond.What is the Bond Market?A bond market is a place where the borrower/issuer and the lender/investor agree on the terms and conditions of the arrangement — like tenure, rate of interest, security, terms of repayment, etc. This arrangement gets documented in the form of a financial document providing legal acceptance of the terms and conditions. Basis the accepted terms, funds flow from the lender/investor to the borrower/issuer and vice versa. In a nutshell, the bond market serves as a platform for the movement of funds between the parties involved.The bond market can be further bifurcated into two main segments:In the primary bond market, new bonds are issued.The secondary bond market provides liquidity by allowing investors to trade existing bonds.Participants in the bond market include the government, institutions, and retail investors.A bond market is a place where the borrower/issuer and the lender/investor agree on the terms and conditions of the arrangement, like tenure, rate of interest, security, terms of repayment, etc.The Indian Bond Market — its process, legal framework, and benefits — can be encapsulated in the word "DREAM".DDemat and KYC Compulsory: For investment in a bond, a demat account and KYC of the investor is a mandatory requirement in the current setup.RRegulated and Structured Setup: The bonds are regulated by RBI and SEBI, providing legal status to the bond issuance and investment process.EEfficient Risk Management: Bonds enable efficient portfolio diversification and thus assist in portfolio risk mitigation.AAligned with Goals: Different types of bonds are available and can be aligned with short-term / long-term goals of the investors.MHold till Maturity: Bonds provide the best returns when held till maturity.Regulated and Structured SetupBonds derive their legality from the Securities Contracts (Regulation) Act, 1956 — specifically Section 2.Reserve Bank of India (RBI): Regulates and facilitates government bonds and other securities on behalf of governments. The Government Securities Act, 2006 (G S Act) relates to Government securities and is managed by the RBI.Securities and Exchange Board of India (SEBI): Regulates bond instruments and processes pertaining to listed corporations, commercial banks, and public sector undertakings.The above two regulators broadly govern and regulate the bonds issued in the Indian market.Bond Market — Need for Retail InvestorsMissing bridge between FDs / Debt MFs / other savings instruments & equity investments: There is a clear market gap for products offering returns between 8–12%.Limited investment options beyond equity: Investors can utilise bonds for trading and investment purposes, offering limited downside risk and enhanced returns.Challenges with investment in bonds via Debt MFs: Debt MFs offer easy investment and withdrawal, but incur high intermediary costs (3%–4%), reducing returns significantly.Challenges with bond market accessibility and understanding: Manual processes, limited availability of bonds, and high ticket size.Advantages of Investment in BondsFour key advantages of investment in bonds for retail investors:Portfolio Diversification: Bonds are an efficient portfolio diversification instrument and assist investors in overall portfolio risk management.Regular Income Stream: Bonds provide investors a regular and steady source of income.Low Market Volatility: Bonds carry very low volatility compared to other investment assets like equity or mutual funds.Loan Against Bonds: Bonds are securities and considered assets, which can be pledged, and a loan can be availed by the investor for personal and business purposes.Types of BondsBased on the type of issuers, bonds are classified into the following segments:Market SegmentIssuerInstrumentsA. Government SecuritiesCentral & State GovernmentsZero-Coupon bonds, Coupon-bearing bonds, Treasury bills, STRIPS, State Development LoansB. Public Sector BondsGovernment Agencies / Statutory bodiesGovt. Guaranteed Bonds and debentures, Municipal debt securitiesPublic Sector UnitsBonds, Commercial PaperC. Private Sector BondsBanksCertificate of Deposits, Bonds, Structured Instruments, Perpetual bondsFinancial InstitutionsCertificate of Deposits, Bonds, Structured Instruments, Commercial PaperI. Government SecuritiesThese bonds are issued by the Central Government or the State Governments to fund financial requirements. They are considered most safe and practically risk-free, due to the sovereign backing of the issuing government.BenefitsKey FeaturesHigh liquidity in secondary marketsSafety: Highest (Sovereign)Wide range of tenors availableIssuers: Government of India, State Governments (SDL)G-Secs can be used as collateral for equity derivativesTenure: 91 days – 40 yearsBuy and sell anytime in secondary marketsFixed Returns: Yield to Maturity 6–8% p.a. | Minimum Investment: INR 100II. State Guaranteed BondsThese bonds are issued by state-owned corporations and are guaranteed by the state government. Since they are backed by the creditworthiness of the state, there is an extra layer of security for investors.BenefitsKey FeaturesHigh safety due to state guaranteeSafety: High Safety — AA/A ratingHigher returns than Government BondsIssuers: State-owned entities such as U.P. Power Corporation, Kerala Infrastructure Investment Fund, etc.Tax benefit in certain jurisdictionsTenure: 5 – 10 years Fixed Returns: Yield to Maturity 8.5 – 10% p.a. | Minimum Investment: INR 1 lacIII. Corporate BondsCompanies raise money by taking loans, issuing equity, and also by issuing corporate bonds. These bonds are purchased by investors, who then receive regular interest and principal payments from the issuing corporate entity.BenefitsKey FeaturesLarge universe of >10,000 bonds giving a wide selection of issuers, returns, maturity, rating, and payment frequencySafety: Investment grade — Credit rating AAA/AA/A/BBBBuy and sell anytime in secondary marketsIssuers: Over 1,000 Corporations Tenure: 1 – 10 years Fixed Returns: Yield to Maturity 8–14% p.a. (Investment Grade) | Minimum Investment: INR 1,000With different entities borrowing money for their respective businesses, the interest rates are subject to a great degree of variation by virtue of several issuer-specific and non-specific factors. Generally, corporate bonds carry a higher rate of interest than government bonds, and that is the primary reason for considering investment in corporate bonds.Companies raise money by taking loans, issuing equity, and also by issuing corporate bonds. These bonds are purchased by investors, who then receive regular interest and principal payments from the issuing corporate entity.Bond Market — PotentialBank DepositsINR Lakh Cr · As on March 2025 FDs — 136 (60%) · 5–7% returnsSavings — 68 (30%) · 0–3% returnsOther — 10% · 0% returnsBond MarketINR Lakh Cr · As on March 2025 · 8–11% returns5415Corporate Bonds18426Government BondsOutstanding Annual IssuanceOutstanding Bank Deposits — INR 227 Lakh Cr (Source: RBI)Bonds Outstanding — INR 238 Lakh Cr (~ $2.78 trillion)Growing at a CAGR of 20%, expected to double every 3.5 yearsThe bond market is almost 2/3rd of GDP & the equity market, and is expected to become larger than the equity marketRetail investment in bonds is still negligible — a market of ~70 cr PAN holdersVs global peers, India's bond market stands at 0.65x of equity market capitalisation, compared to 1.2–2.0x in developed countriesBond Ratings by Credit AgenciesBond ratings determine the creditworthiness of a bond issuer. These ratings provide insight into whether the issuer can meet the terms of the bond agreement, including timely repayment of the principal and interest.SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 makes it mandatory for the issuer to obtain at least one credit rating from the registered credit rating agencies and disclose the same in the offer document. If ratings are obtained from multiple agencies, all ratings — including unaccepted ones — must be disclosed.Bond ratings range from AAA (highest creditworthiness) to D (default). In India, popular bond rating agencies are CRISIL, ICRA, CareEdge, and India Rating and Research. Globally, famous agencies include S&P, Moody's and Fitch.Bond ratings determine the creditworthiness of a bond issuer. These ratings provide insight into whether the issuer can meet the terms of the bond agreement, including timely repayment of the principal and interest.GradeRatingDescriptionInvestment GradeAAALowest level of credit riskAA+, AA, AA-Very low credit riskA+, A, A-Low credit riskBBB+, BBB, BBB-Moderate credit riskNon-Investment GradeBB+, BB, BB-Substantial credit riskB+, B, B-High credit riskCCC+, CCC, CCC-Very high credit riskCCHighly speculativeCHighest level of credit riskDCurrently in defaultRisks Associated with Bond InvestmentsI Credit Risk / Default RiskCredit risk is the risk of losing money because someone doesn't keep their promises. If you invest in a bond with an AAA credit rating, the chances of it defaulting are extremely low. But if you invest in a bond rated C or lower, you're much more likely to lose money if it defaults.II Interest Rate RiskBond prices and interest rates move in opposite directions. When interest rates go up, bond prices tend to fall; when rates drop, bond prices tend to rise. Imagine buying a bond paying a 5% yield: if rates jump to 6%, many investors would sell to buy higher-yielding bonds, pushing the price of the 5% bond down. If rates fall to 3%, demand for the 5% bond rises and its price climbs. Interest rate risk is the fear that your investment value will take a hit when interest rates rise.III Reinvestment RiskReinvestment risk is the chance that the money you make from an investment won't grow as much when you reinvest it. Say you invest in a bond paying 10% interest and earn 50,000 rupees at year-end. If you reinvest but rates have fallen to 8%, you'll only earn 8% on that reinvestment — that's reinvestment risk in action.IV Liquidity RiskWhen there aren't many buyers and sellers in the market, it's called liquidity risk. Bonds are usually less liquid than stocks, especially if holders keep them for the long term. Even listed bonds carry no guarantee of a liquid secondary market. Unlike the huge demand for government bonds, the market for corporate bonds is still small — so investors may not be able to sell when they want to.V Call RiskSome bonds have a feature called callability, meaning the issuer can buy back the bond before maturity. The catch: if interest rates are lower than when you bought the bond, you may face reinvestment risk. For example, an 8% bond with a 10-year maturity and 4-year call protection may be called once rates drop below 8% — and even with a bit more principal, the lower rates make reinvesting harder.Taxation AspectsTaxes on Interest IncomeTax payable on receipt of interest income vis-à-vis accrual of interest, as in FDs.Tax Slab: Slab rate applicable to the person.Individual: Maximum tax rate is 42.74% (from FY 2024-25).Corporate: Now ~29%.TDSAs per Section 193 of the Income Tax Act, 1961 — 10% TDS for all listed bonds.For NRIs, as per Section 195 of the Income Tax Act, 1961 — 20% TDS for all listed bonds.For cumulative interest bonds, cumulative TDS will be deducted at maturity.Capital Gains — Long Term / Short TermThe capital gains imposed on taxable bonds depend on the holding period. ListedHolding Period≤ 12 months> 12 monthsType of Capital GainShort termLong termTax RateIncome Tax Slab Rate12.5% without indexationTax-free bonds: Issued by PSUs — interest income is exempt from income tax. However, any capital gains on the sale of such bonds would be taxable.54 EC Bonds: Used to save tax on long-term capital gains arising from the sale of a property. Interest is usually paid annually, or compounded and paid at maturity.Sovereign Gold Bonds: Investor receives 2.5% interest on the face value, and maturity value equals the price of gold on the maturity date. Interest income is taxable at slab rate with no TDS. Capital gains are taxable only if sold in the market before maturity, but are exempt on maturity.Retail Market Participants & Investing StrategiesRetail investors can be categorised into three distinct segments:Mass Market Investors: Generally possess lower levels of financial education, have limited financial resources, value liquidity, and easy access to cash. Their strategies are typically self-directed or facilitated through employer plans, relying on peer recommendations.Affluent Investors: Historically demonstrate a higher level of financial knowledge. They often seek professional guidance to make informed decisions and have access to substantial budgets and a greater capacity for valuing liquidity.High-Net-Worth Investors: Generally demonstrate higher financial literacy levels. They frequently seek guidance from financial advisors for portfolio allocation. Their substantial budgets and intricate strategies often lead to a greater propensity to consider illiquid assets.High-net-worth investors generally demonstrate higher financial literacy levels. They frequently seek guidance from financial advisors for portfolio allocation. Their substantial investment budgets and intricate investment strategies often lead to a greater propensity to consider illiquid assets.The investing strategy varies across the different types of investors:Investor TypeStruggling to find products matching risk preferencesFind products matching risk preferences through a Financial AdviserUncomfortable with loss in the short or long termMass market15%30%34%Affluent9%39%17%HNI2%47%10%Tailwinds & Headwinds for Retail ParticipationTailwindsReduction in face value: Lowering face value from 10 lakhs to 10,000 for private placements.Debt IPO limit adjustment: Reducing the limit for Debt IPOs to INR 10 crores (face value INR 1,000).Retail access via cash segment of Exchange & RFQ platform: Empowering retail investors to trade bonds through the cash segment of Exchanges as well as RFQ platforms.Guidelines for Online Bond Platform Providers (OBPP): Regulatory framework and working group set up by SEBI to enhance retail participation.HeadwindsDemat & KYC burden: Bonds are credited to the investor's demat account (governed by SEBI under the Depositories Act, 1996). Full KYC could be minimised to a simple declaration to ease onboarding — also aiding NRI participation.Tax compliance: For lower or nil tax deductions, an automated validation process built by the issuer directly with the Income Tax portal would reduce the compliance burden, particularly for senior citizens.Education & awareness: A comprehensive, regular awareness program on the benefits and risks of bond investments — particularly those issued by NBFCs.Role of Chartered AccountantsWhile the equity market receives substantial attention in public discourse, the corporate bond market in India has experienced steady growth and holds substantial potential for raising long-term capital. Despite this growth, India's corporate bond market remains relatively underdeveloped compared to global standards — primarily due to low liquidity in corporate bonds, complex regulations, credit risk, and limited awareness among retail investors. As Chartered Accountants, we can help bridge these gaps by educating both businesses and investors about the advantages and risks associated with the corporate bond market, as well as its significance in the overall growth of the economy and investment portfolios.ConclusionThe bond market presents a stable investment avenue, with government bonds offering the utmost security. Growing institutional and retail participation is bolstering market liquidity and resilience. Furthermore, bonds serve as a diversification tool, extending beyond the traditional stock portfolio. The increasing institutional demand for bonds is positively impacting liquidity. Technological advancements have democratised bond investments, enhancing their accessibility and transparency. If the analysis holds true, this will empower investors to achieve consistent returns.◆ ◆ ◆Author may be reached atcaatulkela@gmail.com and eboard@icai.inThe Chartered Accountant · Financial Market · December 2025 · www.icai.org
Ep. 125 — Exposing Financial Statement Fraud and Identifying Red Flags
CA Journal
· August 2026
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Exposing Financial Statement Fraud and Identifying Red FlagsThis article aids auditors, investors, and regulators understand the motivations behind fraudulent financial statements, facilitates the identification of red flags, and highlights the implications for regulators, auditors, management, investors, lenders and academicians.आशापाशशतैर्बद्धाः कामक्रोधपरायणाः।ईहन्ते कामभोगार्थमन्यायेनार्थसञ्चयान् ‖12‖— Bhagavad Gita, Chapter 16, Verse 12This verse states that people follow an unjust path to accumulate wealth to fulfil their hundreds of desires. The Association of Certified Fraud Examiners, in its Report to the Nations 2024 (hereinafter, ACFE 2024), has observed and reported ‘living beyond means’ as the most common and number one behavioural red flag found among fraud perpetrators. Frauds result in unlawful gains for fraud perpetrators; resultantly, companies lose value in stock market and consequently investors stand to lose their hard-earned money and employees lose their jobs. According to ACFE 2024, financial frauds can be committed through misappropriation of assets, corruption, or financial statement frauds (FSF). As reported by ACFE 2024, FSF amounted to a meagre 5 percent of the total 1,921 occupational frauds covered from 138 countries during the period from January 2022 to September 2023, but resulted in the highest median loss of $7,66,000 per case as compared to other types of losses. In light of this data, the aim of this article is to provide the motivations of fraudsters to manipulate financial statements and a classification of red flags of potential fraud found in the sections of the annual report of a company that may help users with the early detection of FSF to help them make informed decisions.FSF involves intentional manipulation of financial statements to mislead the users for the preparers’ own illicit motives. Auditing Standard 2401: Consideration of Fraud in a Financial Statement Audit (AS 2401) states that fraudulent financial reporting can be done by manipulation, falsification, or alteration of accounting records, misrepresentation or intentional omissions, or intentional misapplication of accounting principles.1 Issued by Public Company Accounting Oversight Board of United States of America (PCAOB of USA)Motivations to Commit Financial Statement FraudsIt is important to understand the motivations for committing FSF as they help in implementing corrective and preventive measures within a company. Donald Cressey, in his book ‘Other People’s Money,’ developed the fraud triangle that identifies the presence of three factors i.e., pressure, opportunity and rationalization that motivate a person to commit fraud.Pressure – when management is under internal and/or external pressure to manipulate financial statements to achieve unrealistic earnings targets, and consequences of not achieving these targets may be detrimental to them.Opportunity – when an individual believes that there lies an opportunity to use the presence of a loophole in the firm.Rationalization – the ability of individuals to rationalize the act of fraud.In light of these motivations, following are the motivations that may drive management to manoeuvre financial statements.Compensation Gains – Internal pressures are exerted on the managers through the design of executive compensation tied to stock options, remuneration, bonuses, promotion, and job security, which pressurizes the managers to commit FSF to secure compensation gains. Managers display their loyalty towards the company by misrepresenting FS under the pressures of top-level management to ensure job security.Sustaining Financial Health Internally – In order to conceal the poor financial health of the business from external stakeholders, managers indulge in false reporting of high earnings to evade debt covenant constraints, meet unrealistic internal financial commitments related to sales, profitability, and rapid growth and offset high interest costs for as long as possible. The threatened profitability conditions (financial distress or bankruptcy) may propel managers to manipulate or conceal the deteriorating financial performance and health of the business. Managers are motivated to commit FSF to make a new strategy succeed to showcase their leadership qualities and to avoid adverse consequences (layoffs, retrenchment, demotions) resulting from poor financial reporting.Protecting Market Confidence – Managers are under external pressure to protect market confidence in the business and therefore report inaccurate earnings that are in line with external earnings forecasts. The introduction of national and international regulations that are adverse to the business, cut-throat competition, and rapid changes in industrial and technological environment act as external pressures to motivate managers to indulge in FSF to maintain the financial credibility of the company and to avoid getting delisted from stock exchanges or having to sell their own holdings in the company at a higher price.Optimizing Capital Structure and Tax Strategy – Under constant external pressure from external stakeholders (investors, lenders) to optimize the capital structure and to minimize tax liabilities, managers may be propelled to manipulate earnings. In order to raise external financing at low cost or to avoid debt covenant restrictions, managers are motivated to indulge in earnings management and also to obtain tax incentives.While internal users are more interested in knowing about the motivations to falsify financial statements in order to maintain control or reduce motivations, external users are more inclined towards gaining knowledge of red flags to protect their self-interests.Managers are motivated to commit FSF to make a new strategy succeed to showcase their leadership qualities and to avoid adverse consequences (layoffs, retrenchment, demotions) resulting from poor financial reporting.Red FlagsAccording to Forensic Accounting and Investigation Standards (FAIS) No. 330 – Conducting Work Procedures issued by the Institute of Chartered Accountants of India (ICAI) as on 1st July 2023, fraud risk indicators or red flags are “events or conditions that indicate an incentive or pressure to commit fraud (the motive) or provide situations to perpetrate one (the opportunity).” AS 2401 uses the fraud triangle approach to classify red flags on the basis of pressure, opportunity and rationalization. The Implementation Guide on FAIS No. 120 – Fraud Risk categorizes fraud risk indicators on the basis of importance (high/medium/low). The ACFE 2024 identifies behavioural red flags.The red flags are identified using the Implementation Guide on FAIS No. 120 – Fraud Risk issued by the ICAI as on 1st July 2023, AS 2401 issued by the PCAOB of the USA, orders issued by the Securities and Exchange Board of India, and various research papers on red flags. The published financial statements of a company are the first-hand source of information available to the external users to extract red flags and make informed decisions. The users may look into the annual report of a company comprising the auditors’ report, Management Discussion and Analysis, and financial statements consisting of the balance sheet, profit and loss statement, and cash flow statement.Independent Auditor’s ReportThe red flags include:Revelation of auditors about management’s integrity, override of management controls, high management turnover and disclosures by auditors regarding restrictions on or non-access to company information.A qualified opinion mentioning irregularities or doubts about the going concern status of a company, or a pattern of identical audit adjustments appearing in the qualifications year after year.Disclosure related to failure to conduct quarterly audits and discrepancies in audit committee constitution.Resignation of statutory auditors.Qualification on non-adherence to Indian Auditing Standards (Standards on Auditing 230 – Audit Documentation) by internal auditors.Balance SheetCommon red flags to be observed:Overstated and unjustified assets (e.g. inflated inventory, fictitious receivables), or unexplained increase in intangible assets in comparison with peer group companies.Any mismatch between investments in long-term assets in comparison with competitors and misapplication of the conservatism principle related to recording assets at cost or market price.Failure to recognize or disclose impairment of assets in contravention of the Indian Accounting Standard (Ind AS) 36 – Impairment of Assets.Exponential increase in the trade receivables or overstatement of debtors.Recording of a contingent asset (e.g. insurance claim which is under legal process and whose outcome is uncertain) in non-compliance with Ind AS 37 – Provisions, Contingent Liabilities and Contingent Assets.Advances/investments given by the company to entities that are declared defaulter by the Ministry of Corporate Affairs (MCA) and non-provisioning for impairment of assets (like advances and investments in struck off companies).Incorrect capitalization of R&D costs as assets.Undervalued or concealed liabilities (e.g. unrecorded accounts payable or contingent liabilities).Unexplained increase in capitalized expenses, continuous rollover of loans, misstated reserves or provisions (e.g. warranty claims), and inadequate allowance for doubtful debts.Non-provisioning for long-outstanding balances.Recording notional losses from derivatives trading under the heading of current liabilities.Misrepresentation of the value or condition of collateral used to secure a loan.Unsecured loans (without any collateral) to shell entities with no clear business connection, that are non-existent, have no assets, offices, or operations, or to high-risk businesses having dummy addresses and common email addresses.Set off of debtors and creditors done without routing of payments through banks.Default on loans.Statement of Profit and LossFraud indicators to be observed:Outstanding results when the rest of the industry has suffered a downturn, or unusually fast expansion along with abnormally high profits compared to industry standards and competitors.Issues related to revenue recognition such as premature revenue recognition, recording fictitious sales or overstating sales without supporting documents. Increase in quantity of sales without increase in sales value. Extraordinary increase in revenues with no supporting documents like GST filings, cash transactions or audit trail.Cash generation from non-recurring income, such as gains from asset sales, to cover operational losses along with a decline in cash sales and abnormal levels of accruals.Overstated or understated expenses (capitalization of revenue expenses in an unjustified manner, absence of transportation, freight, manufacturing, or repairs-to-machinery expenses in a manufacturing concern), unjustified decrease in R&D or warranty costs, shifting of future expenses to an earlier period, delaying the recording of expenses, and failure to recognize obsolete inventories as an expense.Fictitious purchases and sales transactions that are routed through circuitous transactions without actual movement of goods with controlled or connected entities.Clubbing of inter-unit sales with revenue from operations to inflate revenues which is in contravention of Ind AS 115 – Revenue from contracts with customers.Outstanding amounts for more than 3 years and non-provisioning for expected losses.Revenue booked toward the period end, followed by revenue reversals at the beginning of the period.Unexplained or unapproved high discounts, especially towards the end of the period.Under-reported cost overruns in real estate projects.Statement of Cash FlowAnomalies to be detected:Persistent cash flow problems, even when the organisation has regularly reported profits.Increasing earnings or profitability and consistent negative operating cash flows.Unexplained non-cash items that result in inflated reported performance, including shifting of financing cash inflows to operating cash inflows.Misclassifying normal operating cash outflows as investing activities to reduce cash outflows from operating activities.Excessive cash transactions.Diversion/siphoning off of initial public offer (IPO) funds or loan proceeds for purposes other than mentioned in the prospectus (e.g., personal expenses of the promoter, transfer of funds to promoters’ close relatives) without any supporting documentation or explanations, and channelling funds through a web of shell companies, some of which are linked through common addresses, directors, or email addresses.Statement of Changes in EquityPotential risk indicators are:Sudden and unexplained changes in promoters’ equity holding, significant increases in ordinary share capital, or changes in shareholding patterns.The reclassification of reserves and retained earnings along with an unrealistic share buyback.Stake sale or pledge of shares by promoter(s) without any clarification or not infusing money back into the business.Reduction in promoters’ shareholding, timed with promotional press releases about company’s growth and expansion announcements, which did not materialize, and with a corresponding increase in public shareholding.Notes Forming Part of Financial StatementsSuspicious fraud signals:The mention of contingent liabilities like pending lawsuits, loan guarantees or loan covenants, misrepresentation or inadequate disclosure of accounting estimates or changes in accounting policies (e.g., inventory valuation, depreciation methods) in the notes to financial statements.Disclosures not made in the right spirit and letter of Ind AS.Ambiguous explanations of revenue recognition methods or asset valuations.Non-disclosure of material subsidiaries and related party transactions (RPT) is a non-compliance of Ind AS 24 – Related Party Disclosures, including no prior approval for RPT from Audit Committee, or excessive RPTs.Non-disclosures of material information like outstanding balances or investments in defaulting companies.Incorrect classification of a subsidiary as an associate leading to inflated profits in the consolidated financial statements.Management Discussion & Analysis (MD&A)Cautionary red flags:Overly optimistic financial forecasts or justifications for poor performance.Misleading explanations of operational success.Concealed financial difficulties or non-disclosure of disputes with creditors or banks (e.g., liquidity crisis, inability to meet debt obligations).Misrepresentation of industry conditions by projecting unrealistic growth rates.The exaggeration of positive news to minimize negative news, and the company’s information presented in a more subjective manner that uses persuasive language, words, appealing visuals, pleasantness, and inclusive terms (like, “we” or “our team”) to obfuscate the negative financial performance of the firm rather than providing factual financial figures.Compliance Report on Corporate GovernanceRed flags:Ineffective board oversight.A large board where the Chief Executive appoints related parties as external directors, over-aged directors, or directors of other companies.Any past record of non-compliance, breach of regulations, violations of other laws, or fraud allegations against senior management.Unusual, frequent, and mass exits of senior leaders, legal representatives, board members or top executives.False claims regarding credit ratings.Misleading project status, false claims regarding regulatory approvals in real estate business, and deceptive assurances to buyers.Any violations of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, such as the non-constitution of the audit committee, inconsistent disclosure of shareholding pattern, or non-disclosure of impact of foreign regulations on the business.The users can detect plausible fraud in balance sheet, statement of profit and loss, and cash flow statement by the usage of quantitative horizontal analysis to examine the proportion of individual line items to a basic figure such as revenues, vertical analysis to compare items in the profit and loss statement and balance sheet over different time periods to detect unusual fluctuations, and ratio analysis to identify trends and inconsistencies. The Beneish M-score can be used to detect manipulative practices by using data from at least two financial reporting periods of a company. They can also use various data mining techniques that include logistic regression, decision tree, support vector machine, artificial neural network, and Naive Bayes for fraud prediction. The MD&A and corporate governance report can be analysed through text analysis method and machine learning algorithm. Sentiment analysis can be used to detect the attitudes of the company’s insiders about the future prospects of the company through their published interviews and speeches.Implicationsसुखदुःखे समे कृत्वा लाभालाभौ जयाजयौ।ततो युद्धाय युज्यस्व नैवं पापमवाप्स्यसि ‖38‖— Bhagavad Gita, Chapter 2, Verse 38This verse states that all stakeholders should fulfil their duties in a responsible manner, ensuring that everyone is inclined to work towards the attainment of the goals in a fair and just manner. As a result, fraud will not be committed. In their endeavour for investor awareness and protection, following are the implications for regulators, auditors, management, investors, lenders and academicians.RegulatorsPublish the classification of red flags on their website to educate naïve investors to equip them to detect such indicators.Ensure compliance with regulations by the responsible parties in preparation of financial statements.Ensure pre-listing forensic accounting for companies coming up with IPOs, and implement real-time monitoring of fund usage, linked to GSTN and banking networks, designed to verify that IPO proceeds are utilized in line with disclosures.Emphasize on usage of AI-based post-listing surveillance tools to detect financial and governance anomalies.ManagementUnderstand the motivations and design robust policies to mitigate undue pressures on managers to meet internal and external earnings forecasts.Implement anti-fraud control measures.Strengthen the whistle-blowing mechanism within the organization.Auditors and Forensic AccountantsTailor their standard operating procedures to focus on areas that are fraud-prone and improve their fraud detection efficiency.Internal auditors should report instances of undue internal pressures to meet unrealistic financial targets to the audit committee and verify the actual financial health and performance prior to payment of hefty bonuses.External auditors should pay special attention towards compliance with Ind AS issued by ICAI from time to time in the preparation of financial statements and reporting. Any non-compliance with Ind AS should be reported in the Independent Auditors’ Report.The auditors can detect the FSF in an organization by account reconciliation and document examination. A comparison of sales and purchases of the company should be made with the corresponding purchases and sales shown in the books of suppliers and customers to identify any bogus sales, purchases, and transactions. The auditors should check and verify the lorry receipts, vehicle numbers, TIN/GSTIN of vendors and customers, weighment slips, quotations, comparative quotations, and purchase and sales orders.Shareholders and LendersEmpower themselves with the knowledge of red flags that are easy to locate in the annual report of a company to make better investment decisions.Actively raise their voice in shareholders’ meetings, investors’ forums, and various social media platforms to discuss the red flags identified by them.Short-term and long-term lenders should demand clarification and justification from the management regarding red flags identified by them.AcademiciansUse this classification of red flags to train students and professionals in forensic accounting and investigation programs.Use fraudulent financial statements of a company as a case study and adopt a teaching-learning methodology to help the students identify red flags in various sections of financial statements.Include an ethics course and simulation exercise in the course curricula to make students face realistic ethical dilemmas.ConclusionWhile understanding the motivations behind misstating financial statements can go a long way as a proactive measure, the identification of red flags by the users of financial statements can help in spreading awareness about fraudulent financial statements and also act as a reactive measure to prevent and report about the possibility of fraud, thereby reducing its consequences.ReferencesAboud, A., & Robinson, B. (2022). Fraudulent financial reporting and data analytics: an explanatory study from Ireland. Accounting Research Journal, 35(1), 21–36.AS 2401: Consideration of Fraud in a Financial Statement Audit. (2025). https://pcaobus.org/oversight/standards/auditing-standards/details/AS2401Association of Certified Fraud Examiners (2024) Occupational Fraud 2024: A Report to the Nations. https://legacy.acfe.com/report-to-the-nations/2024/Cressey, D.R. (1953) Other People’s Money: A Study in the Social Psychology of Embezzlement, The Free Press, Glencoe, US.de Oliveira Orth, C., Marrone, D. D. I., & Macagnan, C. B. (2022). Accounting fraud in light of organismic integration theory. Journal of Financial Crime, 30(5), 1323–1341.du Toit, E. (2024). The red flags of financial statement fraud: a case study. Journal of Financial Crime, 31(2), 311–321.Humpherys, S. L., Moffitt, K. C., Burns, M. B., Burgoon, J. K., & Felix, W. F. (2011). Identification of fraudulent financial statements using linguistic credibility analysis. Decision Support Systems, 50(3), 585–594.Author may be reached at eboard@icai.inThe Chartered Accountant • Forensic Accounting • December 2025 • www.icai.org
Empowering India's Startup Ecosystem: Innovation, Regulation, and GrowthThis article underscores the importance of startup ecosystem in India’s economic development, the initiatives the government is taking to support them, and the regulatory compliances to be undertaken by startups. Startups represent innovation, scalability, and technological disruption, contributing signifi cantly to wealth creation, job opportunities, and GDP growth. The article further emphasizes the importance of legal and regulatory compliance at various stages of a startup’s journey, from incorporation to fundraising. Chartered Accountants (CAs) are highlighted as essential partners in navigating legal, regulatory, and fi nancial complexities, ensuring compliance and reducing risks. India’s startup ecosystem is set to drive economic transformation, leveraging its demographic dividend, government support, and entrepreneurial spirit. This ecosystem, powered by innovation and regulatory support, positions India as a global leader in entrepreneurship.Startups signify innovative, technology-driven, highly scalable, profitable and disruptive businesses. While in the 1990s the term typically referred to new ventures with small resources and capital, the definition of startups has now evolved significantly. Over the past decade, Indian startups have collectively raised over $150 billion1 in funding across more than 10,500 deals. In 2024 alone, Indian startups secured around $12 billion2 in funding, marking a 20% increase from the $10 billion raised in 2023. This substantial influx of capital reinforces the robust growth and resilience of India's startup ecosystem. According to the Global Startup Ecosystem Index 2024 report shared by Startupblink, India ranked 19th in the world3 and 4th in Asia-Pacific in the startup ecosystem in 2024.Startups have gained significant momentum since 2016, following the launch of the Startup India Initiative by Prime Minister Narendra Modi. This program aims to support entrepreneurs in establishing robust businesses and foster entrepreneurship. The Startup India Initiative is a key component of the Prime Minister's vision for "Viksit Bharat 2047," recognizing that innovation and advancement in science and technology are essential for progress. Startups contribute to wealth creation and distribution, job creation, GDP growth, increased per capita income and overall economic development.India entered a period of demographic dividend in 2018, fuelled by widespread access to affordable internet and a young, dynamic workforce — a period expected to continue for 37 years until 2055. As on January 16, 2025, India completed nine years of the Startup India Initiative and has emerged as the third-largest ecosystem for startups in the world, with over 1,57,000 startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT), as reported by the PIB. Among these, approximately 117 have achieved unicorn status.A significant portion of startup founders come from technology-related fields, holding degrees in computer science, engineering, and related disciplines. However, their businesses operate in complex environments, navigating a regulatory landscape where legal knowledge coupled with financial expertise is not only crucial but time-consuming. Chartered Accountants (CAs), as partners in nation building, play a vital role in guiding and supporting startups in these matters. Since 2016, numerous regulatory policies and reforms have been initiated to enhance the ease of doing business, facilitate capital raising, and streamline compliance for the startup ecosystem.Online platforms introduced by the Ministry of Corporate Affairs (MCA) for streamlined registration, the Fund of Funds for Startups (FFS), elimination of angel tax effective from April 1, 2025, simplified tax compliance, and a fast-track exit under the Insolvency and Bankruptcy Code (IBC) are among the key facilities available to support startups. The ICAI, as a statutory body for CAs, has initiated many startup courses and programs to continuously train and upskill CAs to be ready to assist startups.The ICAI as a statutory body for CAs has initiated many startup courses and programs for continuously training and upskilling CAs to be ready to assist startups.EligibilityWhat makes your company a startup?A company must meet the following criteria to be considered eligible for DPIIT and startup recognition:The start-up should be incorporated as a private limited company, a partnership firm, or a limited liability partnership.Turnover should be less than INR 100 crores in any of the previous financial years.An entity is considered a start-up for up to 10 years from the date of its incorporation.It should be working towards innovation or improvement of existing products, services and processes, with the potential to generate employment or create wealth. An entity formed by splitting up or reconstruction of an existing business is not considered a "start-up".Choosing a business structureThe table below depicts a snapshot of the considerations and legal requirements across common entity types before incorporating a startup.#BasisSole ProprietorshipPartnershipLLPOPCPvt. Ltd.1Governing law / documents—Partnership Act, Partnership AgreementLLP Act, LLP AgreementCompanies Act, MoA, AoACompanies Act, MoA, AoA2LiabilityUnlimited personal liabilityUnlimited liabilityLimited to partners' agreed contributionSole shareholder's liability limited to shareholdingShareholders' liability limited to shareholding3Minimum / maximum members1Min 2, Max 202, no maximum1Min 2, Max 2004Minimum board members———125Minimum board meetings—No such requirementNo such requirement226Minimum shareholder meetings—No such requirementNo such requirementNo such requirement17Investment allowedNoNoYes, only through partnersNoYes8Foreign investment allowedNoNoOnly through approvalNoYes (approval & automatic)Scroll horizontally to view all entity types on smaller screens.IncorporationLegal requirements at the time of incorporationWhile a startup can begin as a sole proprietorship, it cannot be registered under DPIIT — so the initiative's benefits cannot be availed. As a startup grows, transitioning to a more structured legal entity such as a Private Limited Company or an LLP offers limited liability protection, easier access to funding, and eligibility for government schemes. Once a startup enters the traction phase, a Private Limited Company is the most suitable form of entity for operations. The choice of entity should be made conscientiously, because the cost of closing an entity can be much higher than incorporating it.A startup can make an online application, accompanied by a certificate of incorporation or registration, to register with DPIIT. An LLP or private limited company startup may then obtain a certificate of eligibility from the Inter-Ministerial Board (IMB) under 80-IAC, allowing it to claim tax exemption for three consecutive years out of ten from the date of incorporation. The angel tax under Section 56(2)(viib) of the Income Tax Act, 1961 has been abolished w.e.f. 1st April 2025, removing the income tax on issuance of shares above their fair market value and enabling startups to raise equity at valuations above fair value.As a startup grows, transitioning to a more structured legal entity — such as a Private Limited Company or an LLP — can offer limited liability protection, easier access to funding, and eligibility for government schemes.Benefits offered by the Startup India scheme to DPIIT-registered startupsFast-tracking of patent applications, with an 80% rebate on patents and 50% rebate on trademarks.Exemption under 80-IAC available to Private Limited Companies and LLPs incorporated up to 31st March 2025, with the deadline extended to startups incorporated up to 1st April 2030.Abolition of angel tax on investments made by angel investors above FMV.Reduced compliance requirements and cost for the first 5 years.Startups can accept deposits and are allowed to hold only 2 board meetings in a financial year.Eligible to issue Convertible Notes under FDI regulations, which are debt instruments in nature.Eligible for the Fund of Funds (set up in 2016 with a corpus of Rs. 10,000 Cr), renewed in the Union Budget 2025 with an additional Rs. 10,000 Cr — with special impetus for AI, deep tech and blockchain.Eligible for the Startup India Seed Fund with an outlay of Rs. 945 Cr.Other requirements and documents at incorporationIncorporation documents: Co-Founder's Agreement, Memorandum of Association, and Articles of Association for companies registered under the Companies Act, 2013.Statutory registers maintained as prescribed under the Companies Act, 2013 from the date of incorporation, including:Register of Members / Shareholders;Register of Debenture Holders or other Security Holders;Register of Directors and Key Managerial Personnel;Register of Loans / Guarantee / Security and Acquisition by the Company;Register of Share Application and Allotment;Register of Share Transfer;Register of Charges; andAny other registers the Company is required to maintain.Contracts and agreements: NDAs, Confidentiality Agreements, MoUs, Letters of Intent, Grant Agreements, Loan Agreements, and Shareholders' Share Subscription agreements.Work agreements: Employment Agreements, Lease / Rent Agreements, Service Agreements, Consultancy Agreements, and resignation letters (if any).Company policies: ESOP Policy, Sexual Harassment Policy, Maternity Benefit Policy, Employee Grievance and Management Policy, Data Privacy and Protection Policy, Whistle Blower Policy, Employee Handbook, Code of Conduct, details of unfunded obligations (gratuity, pension, superannuation), insurance policies, and leave policy.Intellectual property: Registration of copyrights, patents and trademarks in India and internationally, licensing and assignment agreements, domain names with registrant details, and the privacy policy and terms of use on the company website.Regulatory compliances: GST registrations in all states of operation, PAN Card, TAN Card, and Importer Exporter Code (if applicable).Certifications, permits and approvals: Trade licence, Udyam Registration Certificate (for MSMEs), BIS and ISO certifications, DPIIT Certificate of Recognition, Angel Tax Exemption under Section 56, and Exemption under Section 80-IAC (all as applicable).FundraisingLegal requirements at the time of raising fundsRaising funds is a critical milestone that requires a thorough understanding of the legal and regulatory landscape to ensure compliance and safeguard the interests of all stakeholders. It is important to analyze why funds are required and whether a business is ready to raise them. The various sources of funding include bootstrapping and self-financing, friends and family, grants and prize money, angel investing, crowdfunding, venture capital funds, venture debt funds, and private equity.Legal formalities when raising investmentPre-investment stage: Preparation of a term sheet, due diligence by the investor, and drafting the Shareholders' Agreement (SHA). Creation of an ESOP pool, registering IP, and a valuation report may be required as prerequisites.Rights issue: The company must issue a Right offer letter; acceptance / waiver letters from existing investors are also required.FDI: An approval from the RBI is required.A Board Resolution must be passed to approve the issuance of shares.Form MGT-14 must be filed with the ROC within 30 days of passing a special resolution.Form PAS-3 (Return of Allotment) must be filed with the ROC within 30 days of the allotment.After allotment, the company must update its statutory registers and issue share certificates to investors.InstrumentsTypes of investment instrumentsEach instrument carries its own rights, authorization, valuation and tenure requirements. The five most common are set out below.1Equity sharesEquity shares represent ownership and confer voting rights to shareholders — a common financing source for Private Limited Companies.Issuance methodsRights Issue — offering shares to existing shareholders in proportion to their holdings. Private Placement — offering shares to a select group such as angel investors or venture capitalists. IPO — the process by which a private company becomes publicly listed, requiring registration with SEBI. In 2024, 13 startups (including eight tech companies) went public; Swiggy's $1.3 billion IPO was the largest tech public offering worldwide that year.ValuationFor private placements, valuation must be conducted by an IBBI-registered valuer under the Companies Act, 2013. Issuance to non-residents requires adherence to FEMA, 1999, with a valuation report from a SEBI-registered merchant banker or a Chartered Accountant.2Compulsorily Convertible Preference Shares (CCPS)CCPS are preference shares that mandatorily convert into equity after a specified period or on the occurrence of particular events.RightsCCPS provide preferential rights in dividend distribution and liquidation, reducing investor risk while helping the company defer equity dilution and voting rights until the next valuation round.AuthorizationThe company's AoA must authorize issuance of such preference shares; if not, it should be amended by special resolution and the relevant forms filed with the RoC.Conversion & tenureThe conversion ratio must be predetermined and cannot be less than fair market value at the time of issuance (FEMA guidelines). CCPS cannot be issued for a period exceeding 20 years.Worked example — CCPSIf the fair value of an equity share is Rs. 100 and the CCPS issue price is Rs. 1,000 per share, then the conversion ratio should be 10:1 — 10 equity shares for every CCPS — for compliance.3Compulsorily Convertible Debentures (CCDs)CCDs are hybrid instruments that function as debt until they convert into equity shares.Rights & authorizationCCDs have priority over equity shareholders in interest payments and liquidation proceeds. The company's AoA must permit issuance of debentures or be amended by special resolution.Valuation & tenureA valuation by a registered valuer is required at issuance or 60 days prior to conversion. CCDs cannot be issued for a period exceeding 10 years and are often issued at a discount to the next round, encouraging early investment.Worked example — CCDsCCDs worth Rs. 25 lakhs are issued at a 20% discount, to convert at the next equity round. If the next round values the company at Rs. 100 Cr, the discounted valuation for the CCD holder is Rs. 100 Cr × (1 − 0.20) = Rs. 80 Cr.With 10 lakh outstanding shares, the value per share is Rs. 800 for the CCD holder. The investor receives Rs. 25,00,000 ÷ Rs. 800 = 3,125 shares, versus only 2,500 shares at the standard Rs. 1,000 valuation — a 25% post-conversion gain.4Convertible Note (CN)Convertible notes are debt instruments that may either convert into equity or be repaid within a specified period, typically up to 10 years. Unlike CCDs, a convertible note is specific only to DPIIT-recognised start-ups — no other entity can issue this instrument.FlexibilityCNs let investors convert debt into equity during subsequent financing rounds if performance is favourable. A valuation report is not mandatory until the next round; investors may receive equity at a discounted or capped valuation, rewarding them for early-stage risk.Minimum investment & taxThe minimum investment from a single investor in a single tranche is INR 25 Lakhs (no such requirement for CCDs). Conversion of both CCDs and CNs into equity is exempt u/s 47(x) of the Income Tax Act, but subsequent sale of shares is taxable under capital gains, with the holding period of the original instrument included.Worked example — capped valuationIf the CN holder's valuation is capped at Rs. 75 Cr while the next round values the company at Rs. 100 Cr, the conversion price is Rs. 750 per share instead of Rs. 1,000 — so the CN holder receives a greater number of shares, benefiting from the cap.5Venture DebtVenture debt is a form of debt funding that complements venture capital and minimizes equity dilution when raising new rounds. Provided to startups that may not have positive cash flow or collateral, it involves payment of interest and warrants as compensation for high risk. The best time to raise venture debt is concurrent with, or immediately following, an equity raise. The process involves a term sheet, due diligence, and necessary regulatory filings with the ROC.FDI & RBIFilings when foreign investment is receivedWhen FDI is received, RBI compliances are very important. The following filings must be made:Form FC-GPR (Foreign Currency Gross Provisional Return) must be filed with the RBI within 30 days of allotment. Any excess money received should be refunded to investors within 15 days.FLA (Foreign Liabilities and Assets) Return must be filed by all Indian companies and LLPs that have received FDI or made overseas investments by 15th July each year; an audited FLA by 30th September.A KYC Report should be obtained from the investor's overseas bank and submitted to the AD (Authorized Dealer) bank in India.SFT (Statement of Financial Transactions) in Form 61A must be filed by 31st May of the following FY where shares, bonds or debentures issued to any person yield Rs. 10 lakhs or more in a financial year, per Rule 114E of IT Rules, 1962.ConclusionIndia's startup ecosystem has experienced remarkable growth, driven by supportive government initiatives like the Startup India Initiative, MeitY Startup Hub, NIDHI schemes by the Department of Science and Technology (DST), the MSME Scheme, and funding initiatives by corporates, universities and ministries. The abolition of the 'angel tax' further enhances the investment landscape. As startups navigate various stages of development, adherence to legal and regulatory frameworks is crucial — and Chartered Accountants play a vital role in guiding startups through these complexities, ensuring compliance and financial integrity. With a young and dynamic workforce and a supportive policy environment, India is well-positioned to continue its trajectory as a leading global startup hub.◆◆◆Author may be reached at eboard@icai.ininc42.com — Indian startup funding breaches $150 bn mark in H1 2024inc42.com — Indian startup funding stabilises to 2020 levelsstartupblink.com — Startup Ecosystem ReportThe Chartered Accountant · December 2025 · www.icai.org
Ep. 127 — GHG Protocol Corporate Standard: A Vital Component in the Corporate Sustainability Puzzle
CA Journal
· August 2026
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GHG Protocol Corporate Standard: A Vital Component in the Corporate Sustainability PuzzleAccounting for greenhouse gas (GHG) emissions is a significant activity in companies' efforts to achieve environmental sustainability. GHG accounting gives a true and fair account of a company's greenhouse gas emissions. This information enables them to form effective strategies for managing and reducing their GHG emissions. GHG Protocol Corporate Standard provides guidance to companies for preparing, reporting and managing their GHG emissions. It uses the concepts of organisational and operational boundaries to ensure relevance and completeness of the reported information. This article explores how companies use the GHG Protocol Corporate Standard to compile and report their GHG emissions.Importance of GHG AccountingLife on planet Earth is reeling under the tremendous pressure of climate change. Mankind is running a race against time to limit the rise in global average temperature to below 1.5°C above pre-industrial levels to avoid a climate catastrophe. The primary reason for this situation is the rapid expansion of industrial activities over the past few decades. Companies all over the world are now under regulatory pressure to reduce their GHG emissions by adopting environmentally sustainable business practices. They are investing considerable efforts and huge amounts of money to build environmentally friendly technologies and tweak their operations to reduce GHG emissions. Reduction in GHG emissions makes the companies resilient to climate change and more efficient in the long run. Additionally, companies making sustainability an inherent part of their operations will attract cheaper finance capital in future.Accounting for GHG Emissions (Carbon Accounting) is a significant activity in companies' efforts to achieve environmental sustainability. It is widely recognized that improvement in any area begins with measurement and monitoring. The same goes for GHG emissions. GHG accounting gives a true and fair account of the GHG emissions of the companies. It helps companies to track and report their emissions, set emission reduction targets, meet statutory emission caps, and participate in various voluntary market mechanisms to trade their GHG emission reductions. GHG Protocol Corporate Standard is the most widely used standard in the world by companies to account for GHG emissions. In India, GHG emissions are to be reported in the Business Responsibility & Sustainability Reporting (BRSR Report) under the National Guidelines for Responsible Business Conduct (NGRBC) Principle 6 disclosures. As per the SEBI guidance, companies need to use the GHG Protocol Corporate Standard for reporting their GHG emissions information.GHG Protocol Corporate Accounting StandardGlossary of important terms in the Corporate StandardTermsMeaningGreenhouse Gases (GHG)These gases form a shield around the Earth and trap the heat radiated from its surface, preventing it from escaping into outer space, thereby increasing the temperature of the Earth's surface. This phenomenon is known as Global Warming. The United Nations has identified 7 gases as major Greenhouse gases causing global warming.Global Warming Potential (GWP)It is a number that signifies the impact of one unit of a GHG in warming the Earth's atmosphere relative to one unit of carbon dioxide over a time period. For example, Methane (CH4) has a GWP of 28 over a 100-year time period. This means that a single unit of methane gas has 28 times the warming effect of an equivalent unit of carbon dioxide.GHG InventoryIt is the total amount of all GHG Emissions of the company from all the identified sources (including direct and indirect) for a particular period.Carbon dioxide equivalent (CO2e)It is the standard unit of measurement for GHG inventories. Emissions of all other greenhouse gases are converted into their CO2e based on their Global Warming Potential for a 100-year time period.Value ChainThese are a series of activities that occur outside the company but arise as a consequence of its operations. They are the integral steps in the creation of a product or rendering of service by the company. The value chain comprises various partners such as suppliers, customers, distributors, transport service providers, etc., each playing a crucial role in contributing to the overall business ecosystem.GHG accounting gives a true and fair account of the GHG emissions of the companies. It helps companies to track and report their emissions, set emission reduction targets, meet statutory emission caps, and participate in various voluntary market mechanisms to trade their GHG emission reductions.Snapshot of the Greenhouse Gases identified by the United NationsName of the GasGWP for 100-year time period*Average lifetime in the atmosphereCommon sources of emissionCarbon dioxide (CO2)15 years – 200 yearsCombustion of fossil fuels like coal, diesel, etc.Methane (CH4)2812 yearsAgriculture, combustion of fossil fuels, and decomposition of landfill waste.Nitrous Oxide (N2O)273114 yearsUse of synthetic fertilizers in agriculture, combustion of fossil fuels.Hexafluoro Carbons (HFC-23)#14,600260 yearsLeakages in refrigeration and air-conditioning equipment.Perfluoro Carbons (PFC-14)#7380> 50000 yearsIndustrial leakages in Aluminium and semiconductor chip manufacturing units.Nitrogen Tri-Fluoride (NF3)17,400740 yearsIndustrial leakages during the manufacture of semiconductors, LCD panels, and solar panels.Sulphur Hexafluoride (SF6)24,3003200 yearsIndustrial leakages from the electrical industry, high-voltage substations, and magnesium-producing industries.* IPCC Sixth Assessment Report# There are many variants of HFC and PFC with varying GWPs and average lives.This standard was developed through a multi-stakeholder partnership convened by the World Resources Institute (WRI), the United States and the World Business Council for Sustainable Development (WBCSD), Switzerland, in 2001. It provides guidance to companies for preparing, reporting and managing their GHG inventory in a transparent and consistent manner. It also makes available various sector-specific toolkits for emission calculations for general use. It applies the concepts of organisational and operational boundaries to calculate and categorize a company's GHG emissions, ensuring the relevance and completeness of the reported information.Concept of Organisational BoundaryThe organisational boundary consists of all the operations, facilities, factories and offices which the company determines to consolidate in its GHG accounting exercise. This boundary is determined based on any one of the two approaches described below. Companies select one approach and apply it consistently.Equity Share approachIf the company uses this approach to determine its organisational boundary, the emissions of all such companies/operations are attributed to the company based on its equity share participation in them. For example, Company A holds 40% equity shares in Company B. The total emissions of Company B were 10,000 tCO2e for the FY 2023-24. Under the equity approach, Company A will need to account for 4000 tCO2e (40% of 10,000) in its GHG inventory. Company B shall show 6000 tCO2e in its GHG inventory.The equity-based approach is more aligned with financial accounting principles. Emissions are accounted for based on the share of economic benefits.Control ApproachUnder this approach, the company includes in its organisational boundary all such entities/operations over which it has control. Control can be either financial or operational in nature. The company is required to consolidate 100% of the emissions of all such companies/operations.Financial Control: A company is said to have financial control over another entity/operation when it influences the financial decisions (through voting rights) and has a share of the economic benefits of the entity/operation. For example, Company A holds 40% equity shares in Company B and exercises financial control. The total emissions of Company B were 10,000 tCO2e for the FY 2023-24. Now, Company A will need to account for 10000 tCO2e (100% of 10,000) in its GHG inventory. The same will be the case even if the Company holds 10% equity shares in Company B.Operational Control: A company is said to have operational control over another entity/operation when it has the authority to form and implement its operating policies irrespective of its financial control over such company/operation. For example, Company A does not have ownership in franchisee B. However, Company A has operational control of franchisee B. The total emissions of franchisee B were 1,000 tCO2e for the FY 2023-24. Company A will include 1,000 tCO2e emissions of franchisee B in its GHG inventory.The control approach enables better tracking and administering emission reduction initiatives. It is important to note that the choice of approach for setting organisational boundaries has a significant impact on the overall GHG inventory and its interpretation.Concept of Operational BoundaryOperational boundary helps in delineating the sources of GHG emissions into direct and indirect operations. Setting this operational boundary helps companies to understand the composition of their GHG inventory. This, in turn, helps identify GHG risks and opportunities that the company has to manage.Operational boundary helps in delineating the sources of GHG emissions into direct and indirect operations. Setting this operational boundary helps companies to understand the composition of their GHG inventory.Scope 1Direct EmissionsFrom sources owned or controlled by the company — within its organisational boundary.Scope 2Indirect — EnergyFrom purchased electricity, steam, heat or cooling used in operations.Scope 3Indirect — Value ChainFrom all other value-chain activities beyond the organisational boundary.Scope 1 EmissionsGHG emissions directly attributed to the sources owned by the company or within the control of the company are categorised as Scope 1 emissions. In other words, these are emissions from the operations within the organisational boundary of the company. Reduction of these emissions is managed by the company with internal efforts. Scope 1 emissions are further categorised into four sources:Stationary Emissions: These emissions are generated on the consumption of fuels in sources that are stationary and in continuous operations in the company. Example: Captive Boilers or DG Sets consuming diesel, furnaces and ovens consuming coal or LPG or CNG, etc. The emissions generated from stationary sources are calculated by determining the quantity and type of fuel consumed by the source during the period, multiplied by the relevant emission factor for the fuel consumed.Mobile Emissions: These emissions are generated from the consumption of fuels in sources that are moving around. Example: diesel/CNG trucks, forklifts used for material handling, company-owned cars and buses running on petrol/diesel for employee commuting or business travel. The emissions generated from mobile sources are calculated by ascertaining the quantity and type of fuel consumed by the vehicles, distance travelled by the vehicle and model year of the vehicle. Carbon dioxide and methane emissions are calculated based on the type of fuel and its relevant emission factor. Nitrous oxide emissions are calculated based on the distance travelled and the relevant emission factor for the vehicle model.Process Emissions: Certain production/chemical processes themselves generate GHG. Example: aluminium smelting and ammonia manufacturing. The emissions generated in the process are calculated based on direct measurement or stoichiometric calculations, or using the relevant activity data and emission factors for the process.Fugitive Emissions: These are intentional or unintentional emissions generated from all other sources. Primarily, they consist of emissions due to leakages of fuels, for e.g., leakage of methane from coal mines, leakage of refrigerants from air conditioning and refrigeration equipment in the company. The calculation of fugitive emissions is determined by the type of fuel/refrigerant, leakage quantity and the relevant emission factors.ActivityActivity data×Emission factor (notional)=Emissions×GWP=Emissions in CO2eTravel in company-owned vehicles100 litres petrol×0.0023 tCO2/litre=0.23 tons CO2×1=0.23 tons CO2e5000 kms×0.022494 g N2O/km for passenger car -2022 model=0.00011247 tons CO2×273=0.0307 tons CO2eCaptive Power generation4000 tons of coal×2274.69 kgCO2/MT=9098.76 tons CO2×1=9098.76 tons CO2eExamples of Scope 1 EmissionsScope 2 EmissionsGHG emissions indirectly attributed to the company due to the purchase of electricity, steam, heat or cooling for its operations from sources outside its organisational boundary are categorised as Scope 2 emissions. Here, the actual emissions happen at the energy generation facility as a consequence of the consumption of energy within the company. Reduction of these emissions is managed by the entity by reducing their energy consumption and by entering specific contracts with the energy generation facilities for the type of energy purchased (from renewable/non-renewable sources). We will restrict our discussion to electricity. Electricity is purchased from three sources, viz:From the Grid: It is the most common source of purchased electricity, where electricity is supplied from a shared electricity distribution network (grid), which in turn sources it from a power generation facility that consumes fossil fuels for the generation of electricity. Therefore, the consumption of electricity is directly proportional to the consumption of fossil fuels at the generation facility, and therefore, the attribution of indirect emissions.From Contractual Agreements: In many cases, companies enter contracts with power generation facilities for direct supply of power to their premises. In such cases, the power generation facility issues energy attribute certificates (containing emissions data) for the power attributable to the purchasing company.Renewable Sources: Many companies are now buying Renewable Energy Certificates or having solar panels installed in their company premises for street lighting, office and township lighting. The emissions from such renewable sources are nil.ActivityActivity data×Emission factor (notional)=Emissions×GWP=Emissions in CO2ePurchased Electricity from grid (location-based)1000 GWh×0.039 tCH4/GWh=39 tons CH4×28=1092 tons CO2ePurchased Electricity using RE certificates1000 MWh×0 tCH4/GWh=0 tons CH4×28=0 tons CO2eExamples of Scope 2 EmissionsThe calculation of Scope 2 emissions for electricity purchased is calculated from the number of units of electricity consumed (from utility meters) under each category, multiplied by the –grid average emission factor of the region/country for the period, based on availability (location-based method) or,emission factors in the energy attributes certificates from the power generation facility (market-based method) or,zero, for electricity sourced from renewable sources or the purchase of Renewable Energy Certificates.The Standard has made reporting for Scope 1 and Scope 2 mandatory.Scope 3 EmissionsGHG emissions indirectly attributed to the company by all activities in its value chain (except scope 2) beyond its organisational boundary are categorised as Scope 3 emissions. This represents the total of scope 1 and scope 2 emissions of the value chain partners of a company. Reduction of these emissions is challenging because the company practically has little or no control over the operations of its value chain partners. Reduction of scope 3 emissions is managed by the entity by tweaking its value chain activities, leveraging its position to enter into contracts with value chain partners with specific clauses to meet the GHG emission reductions. They are categorised into the following sources, viz:Purchasing goods and services: Emissions attributed to the activity of purchasing capital goods, materials, fuels and services.Transport and distribution related activities: Emissions attributed to the activity of inward and outward goods transport and warehousing services, employee commute, business travel, etc.Loss in power transmission: Emissions attributed to the loss of electricity during transmission of electricity from the grid/power generation facility to the company premises (before its actual consumption).Leased Assets, franchises and outsourced activities: Emissions attributed to the operations of leased assets, franchises and job-workers involved in further processing of sold goods.Usage and recycling of sold goods: Emissions attributed to the use of the goods sold by the company by the consumers over their lifetime, and recycling of such goods after their useful life.Waste Disposal: Emissions attributed to the activity of disposal of the goods sold by the company after their useful life and disposal of waste generated from operations/usage.Investments: Emissions attributed to the investments that are invested in activities with GHG emissions.Scope 3 emissions form a major portion of the GHG inventory of any company.ActivityActivity data×Emission factor (notional)=Emissions×GWP=Emissions in CO2ePurchased Materials2000 tons×520 tCO2/ton (cradle to gate)=1040 tons CO2×1=1040 tons CO2eTransportation of materials (distance-based)5000 tons for 1800 kms×0.2 kg CO2e/ton/km (life cycle)=1800 tons CO2×1=1800 tons CO2eExamples of Scope 3 EmissionsAccounting for Scope 3 emissions is undertaken by companies for activities that have significant GHG emissions and have a potential for emission reduction. They are calculated based on supplier-specific primary data from the value chain or recognised secondary data (industry average databases). The Standard has kept reporting of Scope 3 emissions as optional.Significance of Emissions FactorsIt is quite evident from the discussion till now that the two important aspects of GHG Emission calculations are activity data and emission factors. Emission factor is the amount of GHG generated for one unit of the activity. It converts the activity data into GHG emissions data. It is generally more accurate for calculating CO2 emissions than other GHGs. Similarly, it is more accurate for stationary and mobile sources than for others. The most commonly used source for emission factors is the Intergovernmental Panel on Climate Change (IPCC) database. Understanding the use of appropriate emission factors is pivotal to the activity of GHG accounting. There are 3 kinds of emission factors:Combustion Emission Factors: These are attributable to the combustion of a unit of a specific fuel/electricity. For example, the emission factor of diesel is 0.0023 tCO2/litre (notional). This means that the combustion of 1 litre of diesel generates 0.0023 tCO2 emissions. Similarly, the emission factor of electricity consumed from the electricity grid is 0.030 tCH4/GWh (notional), indicating that the consumption of 1 GWh of electricity generates 0.03 tCH4 emissions. Combustion emission factors are generally used in calculating scope 1 and scope 2 emissions, where the activity data is readily available.Life Cycle Emission Factors: These factors depict the GHG emissions of a specific product over its lifetime (raw material to end of life). For example, the life cycle emission factor of a 2024 model 6MT diesel truck is 0.2 kgCO2e/MT/km (notional). This is a calculated figure based on the estimated GHG emissions by the truck in its lifetime, divided by the average distance (loaded) travelled by it in its lifetime. Life cycle emission factors are generally used for arriving at scope 3 emissions for transportation-related activities.Cradle to Gate Emission Factors: This is a part of the life cycle emission factor, which captures the GHG emission of a specific product from raw material to its point of sale only. For example, the cradle to gate emission factor of a battery is 3 kgCO2e/kg (notional). This is a calculated figure based on the estimated GHG emissions from the extraction of raw materials for the battery, the manufacturing process and all activities up to the exit of the battery from the factory gate. Cradle to gate emission factors are generally used for arriving at scope 3 emissions for purchased goods and services.ConclusionGHG Protocol Corporate Standard advocates five principles for GHG accounting, viz. relevance, completeness, transparency, accuracy and consistency. The application of these principles ensures a true and fair presentation of the GHG inventory. On the surface, GHG emission calculation appears to be a simple exercise of multiplying the activity data by the emission factors. However, it needs diligence in determining the threshold for activity data collection, careful application of emission factors and prudent use of proxy data to fill the gaps in the GHG inventory. Once the company has a reliable GHG inventory on record, the standard can be used for tracking the emissions over time, verification of the GHG emissions and setting GHG targets. GHG Protocol Corporate Standard is indeed a vital component in the sustainability puzzle for companies.Referenceshttps://ghgprotocol.org/corporate-standardhttps://www.ipcc.ch/site/assets/uploads/2018/03/TAR-04.pdfhttps://ghgprotocol.org/scope-3-calculation-guidance-2https://ghgprotocol.org/scope-2-guidanceAuthor may be reached at pawannvs@gmail.com and eboard@icai.inThe Chartered Accountant — Sustainability December 2025 | www.icai.org
Ep. 128 — When a Mobile starts using us - A Chartered Accountant’s Realisation
CA Journal
· August 2026
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When a Mobile starts using us — A Chartered Accountant's RealisationMobile phone has become an indispensable part of people's lives, thanks to its numerous features and benefits. However, its excessive use has started to adversely affect the professional, personal and social lives of the Chartered Accountants' fraternity. The traditional qualities of deep concentration and self-discipline expected of a Chartered Accountant are being constantly compromised. Excessive late night mobile usage has started to hinder professional growth, shifting the focus from gaining knowledge to seeking superficial prestige through expensive mobile devices. Information is abundant, but meaningful interpretation is lacking, and genuine interest in reading has declined. This article explores how the overuse of mobile phones is affecting health, reducing family interaction, and replacing real social participation with digital presence. The 21st-century technology-led world has been progressing at an incredible speed. The topmost aim of all technological developments is to make human life easier. It is difficult to name any field, whether it's education, sports, business, or a profession, where the presence of technology has not left its indelible impact. Even the Central Government and State Governments are increasingly using technology to spread awareness among the masses about various Government Schemes intended for the benefit of different sections of society.Technology has blessed us with many excellent products. However, no product has become as popular as the mobile phone. There is hardly anyone in this world who does not make use of a mobile phone, regardless of their age, occupation, financial position, literacy level, social standing, etc. In fact, the mobile phone has become extremely popular amongst the masses due to its innumerable benefits, such as instantly providing the information a person requires, reducing the number of visits to banks or other financial institutions, nearly eliminating or substituting radio, television, or other means of entertainment, and offering a complete package of services etc. However, there is another side of the mobile phone that is often overlooked. The purpose of this article is to bring to the notice of knowledgeable readers of my professional fraternity the often disregarded adverse impact of the frantic use of the mobile phone.Impact of Excessive Mobile Phone Usage on the Chartered Accountancy Professioni. The Invisible Pull Disrupting Deep WorkCA examinations are one of the most challenging examinations in our country. It goes without saying that adding the prefix of "CA" before one's name brings several advantages, for instance, a good and respectable job, bright chances of starting one's own practice, an incredible increase in social standing, improved matrimonial aspects, wide recognition by banks and financial institutions, and the unwavering trust of the society and the Government. The credit for accruing these distinct advantages goes to the highly disciplined training programme and exemplary examination standards of the governing body of the profession, namely the ICAI. Further, the appraisal system for the CA examinations is also fair, transparent, and unbiased.The entire system of training and examinations has been carefully designed to instil the quality of deep concentration over long durations. This requirement does not end with qualifying the CA Final Examinations. In fact, this quality is always required to be carried by a Chartered Accountant throughout their professional life. However, the disproportionate use of mobile phones has adversely affected both the CA Students and the CA Fraternity. As regards the CA Fraternity, excessive mobile phone usage is significantly hampering the capacity to concentrate for longer periods of time.For instance, the Goods and Services Tax (GST) came into force from July 1, 2017. Since then, GST has been subject to frequent amendments due to various reasons, including the introduction of the NextGen GST Reforms which became effective from September 22, 2025. These latest amendments require a thorough reading and deep understanding of the updates and provisions of the Act with an attentive mind. However, maintaining long and uninterrupted periods of concentration and focus has become increasingly difficult over time.When a professional attempts to study the latest updates, they often struggle with various distractions in the form of calls, messages, and social media notifications which constantly tempt them to check their mobile phones. Naturally, when complex subjects such as GST are studied with broken concentration, achieving concept clarity and ensuring proper practical application becomes increasingly challenging. As aptly remarked by Alfred Lord Tennyson, "If you do not concentrate on what you are doing, then the thing that you are doing is not what you are thinking."ii. A Hidden Threat to Personal and Professional Discipline"Discipline is the bridge between goals and accomplishment." – Jim RohnSelf-discipline is the backbone of the CA Profession. It is commonly observed that a Chartered Accountant who maintains a strong discipline, in both personal and professional life, is more likely to achieve greater success and recognition, compared to one who does not. One of the major reasons behind this lack of discipline in both areas is the excessive use of mobile phones, which gradually weakens focus and disrupts daily routines.There is a close connection between personal and professional life, and both can often get disrupted with excessive mobile phone usage. A Chartered Accountant who begins the day absorbed in a mobile phone often ends up running behind schedule and carries that distraction into the commute, the office, lunch breaks and even late evening.There is a close connection between personal and professional life, and both can often get disrupted with excessive mobile phone usage. A Chartered Accountant who begins the day absorbed in a mobile phone often ends up running behind schedule and carries that distraction into the commute, the office, lunch breaks and even late evening. Consequently, the time available for concentrating on demanding professional assignments is bound to get significantly reduced. Whether a Chartered Accountant is employed or in professional practice, he must respect discipline in both personal and professional life. The lack of discipline may reflect poorly on the concerned professional and may affect the broader perception of the CA Fraternity. Studies show that frequent phone checking increases mental switching and reduces efficiency, which can stretch the workday longer than needed.Allocating a specific time for mobile phone usage and adhering to it can help cultivate the habit of consistent personal and professional discipline. Every living individual has the same 24 hours in a day, and therefore, it's essential to utilise this time wisely and prudently. As the well-known adage goes, "time once lost can't be regained." With a small shift in habit, the picture changes. Starting the morning with the phone aside helps stepping into work with a clearer mind and staying focused throughout the day. This simple choice creates more control over time, improves concentration, and often leads to completing work within healthier hours.iii. A Small Habit Hindering the Journey from "Good" to "Great"Achievements and milestones require persistent efforts and dedication. Chartered Accountants learn quite early, during their studentship and articleship, that to achieve success, consistent hard work, determination, and discipline are essential. Nurturing these habits at an early stage eventually earns them the privilege of being a part of one of the most prestigious professions and prefixing the coveted title "CA" before their names. However, of late, it is being observed that with the increasing usage of mobile, this discipline is often being lost sight of, and the spirit of "burning the midnight oil", once dedicated to study and professional growth, is gradually being diverted toward unproductive scrolling on social media.Achievements and milestones require persistent efforts and dedication. Chartered Accountants learn quite early, during their studentship and articleship, that to achieve success, consistent hard work, determination, and discipline are essential.There is a fine line between being "good" and becoming "great". It is easy to remain in the category of "good"; however, to become "great," a deeper level of commitment and significant sacrifices are required. As Jimmy Johnson beautifully noted, "The difference between ordinary and extraordinary is that little extra." This distinction holds true in every field, including Chartered Accountancy. To become a truly "great" Chartered Accountant, continuous learning, staying updated, and maintaining consistency throughout the year becomes essential.For instance, a "good" Chartered Accountant may rely on the GST Consultant's opinion being correct and forward it to his superiors without conducting a comprehensive analysis and further scrutiny. However, a "great" Chartered Accountant patiently and carefully reviews all dimensions of the opinion such as examining every legal position taken by the GST Consultant, asking relevant questions, as well as identifying any gaps or overlooked elements to provide a holistic observation. In many cases, this may help the Consultant understand the shortcomings in his opinion and refine it in accordance with the given insights - an outcome that reflects professional depth and maturity.However, this level of insight does not develop by chance. It emerges only when a Chartered Accountant spends time thoroughly reading the relevant provisions, rules, and notifications, and exercises genuine restraint in mobile usage. A mobile phone may offer endless attractions, but a professional must apply wisdom and limit its usage. Without such restraint, the journey from "good" to "great" becomes significantly difficult.iv. Changing Priority - Knowledge Enrichment vs Digital ImageIn this world, nothing is permanent except change. However, the changes can be "good" or "bad". If a change is good and strengthens professional competence, the same must be embraced. However, if the change is bad and does not serve our professional interest, it must be assessed with care. The judgment regarding "good" or "bad" changes, particularly those that affect our professional relevance, significance and credibility, must be exercised carefully. Further, under no circumstances a decision regarding any change should be taken merely to create an impression in society.For Chartered Accountants, continuous enhancement of knowledge is essential, not only to stay competitive but also to maintain professional relevance. There are several resources available today such as printed books and journals, as well as online professional platforms. However, it is increasingly observed that people prioritize purchasing an expensive mobile phone over investing in updated literature or professional subscriptions. Since financial resources are limited, a choice must be made that prioritizes essential activities like knowledge enrichment & upskilling which should take precedence over luxury and discretionary purchases. This choice reflects a commitment to professional growth and the willingness to invest in continuous learning that, in turn, strengthens one's expertise and knowledge base, and the capacity to build a more resilient and fulfilling career.v. Too Much Instant Information, Too Little InterpretationA mobile phone provides instant access to information regarding the latest developments in any field. For instance, the recommendations made during a GST Council Meeting often get circulated in professional networks through mobile phones, sometimes without fully understanding their implications. The press release issued just after the conclusion of each meeting clearly states that the recommendations are shared in simple language for knowledge-sharing purposes, and the statutory backing to these recommendations are provided only when the corresponding Notifications and Circulars are issued. Therefore, it is important to verify and access whether these recommendations are complete and accurate, and one must wait for official updates before circulating them.There is a vast difference between receiving instant information and developing a thorough understanding of a subject. Mobile phones can only deliver information but cannot cultivate a deep analysis and interpretation of a subject, which requires a structured approach to procure knowledge through extensive reading of the latest books and journals and actively engaging with the material.vi. Vanishing Reading Habits in a World of Constant Mobile DistractionsThe CA examinations demand rigorous hours of dedicated effort with extensive reading. However, the growing dependency on mobile phones has had an adverse effect on the reading habits of the CA students as well as the qualified professionals. Consequently, many Chartered Accountants gradually drift away from the crucial habit of reading after qualifying the examinations. No professional can become a leading expert in a subject without continuous and dedicated reading. Reading is the foundation for gaining deep knowledge, credibility, and long-term success in the true sense. Therefore, sacrificing the habit due to distractions caused by mobile phones can be counterproductive in the long run.Reading is the foundation for gaining deep knowledge, credibility, and long-term success in the true sense.Recent trends indicate a declining interest in reading, both in the society as well as among professionals. As a result, the sale of traditional books intended to update knowledge is decreasing at an alarming rate. One of the advantages of conventional reading is that the source material can be referred to repeatedly as needed. It is a proven fact that every subsequent reading not only requires less time but also deepens the understanding of the relevant subject.Reading on a mobile phone is unlikely to provide the same level of satisfaction and understanding as derived from conventional reading. There is also a greater possibility of distraction, generally leading to limited or weaker retention.Reading on a mobile phone is unlikely to provide the same level of satisfaction and understanding as derived from conventional reading. There is also a greater possibility of distraction, generally leading to limited or weaker retention. Therefore, mobile-based reading can be compared to short-term fad diets that offers only temporary results, whereas, reading books is akin to adopting lifestyle changes for holistic wellness that, although requiring consistent efforts and appearing time-consuming, have a lasting impact.Impact of Excessive Mobile Phone Usage on Health and Well-Beingi. The Silent Decline in Physical and Mental Well-beingThe time-tested adage, "Early to bed and early to rise makes a man healthy, wealthy and wise" reflects the importance of leading a disciplined life. However, owing to the disproportionate use of mobile phones, many Chartered Accountants, particularly the younger generation, are falling into irregular lifestyle routines and patterns such as sleeping late, waking late, neglecting physical exercise or activities such as morning walks or practicing yoga.The aforementioned habits are not consistent with the natural rhythm of the body and may lead to health issues such as obesity, high blood pressure, diabetes, weak eyesight and a host of other diseases. Recent research has also proved that constant use of mobile phones can lead to several mental disorders, some of which may be even incurable. Therefore, every individual must consider it their responsibility to prioritize their health to prevent decline in the long run.The true significance of health can be appreciated through one of the statements of Shri Rakesh Jhunjhunwala, a legendary investor, billionaire stockbroker, and a member of ICAI:"My worst investment has been my health. I would encourage everybody to invest the most in that."While there may be several factors beyond our control that may result in decline of health, the excessive use of mobile phones is certainly one we can control. Good health is one of our greatest assets and maintaining it is essential for both personal well-being and professional efficiency. As members of a demanding and intellectually intensive profession, Chartered Accountants must prioritise their health and take necessary remedial measures to monitor their screen time and safeguard their physical and mental well-being.ii. Together Yet Apart: The New Reality of Family TimeThe profession of Chartered Accountancy is often pursued by individuals belonging to middle-class families, who often have limited interaction with their family members due to the extensive course curriculum which demands consistency and hard work during articleship and exam preparations. Family often accepts this as a temporary phase, hoping for things to return to normal once their child qualifies the CA examination. However, with the growing penetration of mobile phones and its increasing usage, the emotional and communication gap between family members is widening drastically, even after the qualification of exam.Earlier, family life reflected a strong sense of togetherness and belonging which can seldom be seen now. Previously, dinner time that often lasted for an hour or so with conversations, humour, and exchange of ideas, has now shrunk to a few minutes, often without any meaningful interactions as family members remain engrossed in their respective mobile phones.The aforementioned state of affairs is rather alarming and worrisome. While there is no harm in using a mobile phone sensibly and judiciously, its excessive usage at the expense of family bonding is detrimental. Nothing can replace a family's love and affection, which can be better appreciated by those who stay away from their homes owing to professional commitments.iii. Celebrations and Condolences in the Changing Digital WorldChartered Accountants are essentially social by nature. During the course of articleship, they interact with various clients, colleagues, seniors, and juniors, making social engagements a part of their professional lives. It is through these interactions that professionals often learn several new things and valuable life lessons. A Chartered Accountant must maintain harmonious and friendly relations, both personally and professionally, to nurture meaningful connections.In earlier times, Chartered Accountants would often engage and actively participate in social events, such as weddings or birth of a child, often visiting homes of friends and relatives to deliver invitations and using that opportunity to strengthen personal bonds and foster a sense of togetherness. However, with the increasing usage of mobile phones, personal touch has diminished over time. With the growing usage of digital invites, invitations can now easily be shared through digital platforms which has further reduced in-person interactions. Not only that, but this shift has also been evident in moments of grief and sorrow, where heartfelt visits from near and dear ones have been replaced by brief, impersonal condolence messages, offering little to no emotional comfort or support.Therefore, as an individual or professional, we must remember that there is no substitute for genuine human connection. Whether in times of happiness or sorrow, physical presence and personal interactions always remain irreplaceable, something that mobile phones can never achieve.ConclusionMobile phones offer undeniable multi-dimensional utility. For a Chartered Accountant to keep pace with technological advancements, he must stay updated with the key features of the mobile phone. However, this must be balanced with a prudent SWOT analysis of the time spent on these devices. Under any circumstances, no compromise should be made with the pursuit of professional knowledge, personal health, or spending quality time with family, office colleagues, juniors and seniors, as well as maintaining a suitable social circle. Therefore, through this article, the author aims to raise awareness among knowledgeable Chartered Accountants and encourage them to make judicious use of mobile phones.◆◆◆Author may be reached at carajjaggi@gmail.com and eboard@icai.inThe Chartered Accountant · Life Style December 2025 · www.icai.org
Ep. 129 — Micromanagement – How to Cope with this Greatest Curse at the Workplace
CA Journal
· August 2026
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Micromanagement – How to Cope with this Greatest Curse at the WorkplaceAccording to a 2022 MIT Sloan Management Review study that was highlighted by Forbes, a toxic workplace culture is 10 times more likely to drive employees away than compensation. Micromanagement and narcissistic leadership are key contributors to this toxicity. Micromanagement is a management style characterized by excessive supervision and control, often leaving employees with little autonomy or room for decision-making. While it’s frequently mistaken for “attention to detail,” the distinction is critical: attention to detail empowers precision, whereas micromanagement stifles initiative. The article explores the issue and suggests ways to deal with it to maintain a positive work culture.There are scenarios where micromanagement may be temporarily justified — such as:High-stakes projects requiring flawless execution.Underperforming teams or individuals needing close guidance.New hires who benefit from structured onboarding.Process corrections where standards must be re-established.However, even in these cases, micromanagement must be applied with care, clear communication, and a defined exit strategy. When prolonged or habitual, it becomes one of the most toxic management styles. It erodes employee confidence, suppresses creativity, and fosters a culture of fear and dependency.True leadership is about inspiration, trust, and empowerment. Leaders cultivate growth; micromanagers constrain it. That’s why I hesitate to call micromanagement “leadership” at all — it’s a control mechanism, not a catalyst for excellence.Traits of MicromanagersMicromanagers typically,Enforcing unrelenting dominance over their teamsGetting into unnecessary and excessive detailsSeeking constant updates and continuously reminding the teamExpecting superfluous perfectionInterfering in even the smallest thingStruggle to trust their subordinatesRaise their voice instead of raising the trustDeny freedom, autonomy and creativity to their peopleAn avid attention seekerVery often issuing arbitrary ordersAt its core, micromanagement stems less from team performance and more from the manager’s fear, insecurities and lack of trust.Micromanagement and NarcissismNarcissism (आत्ममुग्धता) is an excessive and self-centered interest in oneself. It is more than arrogance. It is a personality trait where the person has unreasonable expectations of special treatment accompanied by lack of empathy. An unchecked narcissism may lead to Narcissistic Personality Disorder (NPD), a mental health problem.Micromanagement and Narcissism go hand in hand. Both these traits complement and reinforce each other, as both stem from an excessive need for control and lack of trust.Experts on narcissistic leadership note that micromanagers who display such traits often delegate tasks to subordinates yet continue to tightly control their performance. This behaviour allows them to claim credit for successful outcomes while conveniently shifting responsibility for any failures onto their team members. Such managers often manipulate not only their subordinates but also colleagues of other functions and even senior / top management, in their attempt to retain control.Impact on SubordinatesWorking under a micromanager can ruin the personality and potential of employees. The impact is more severe in case the manager is both micromanager and narcissist. This can create a severely toxic and damaging work environment. The key impact includes:Instills fear that erodes confidence and vice versa. Employees hesitate; in fact they have no courage to utter a single word on any platform, whether official or casual.Diminishes productivity and creativity due to constant anxiety, not only in professional life but impacting social and personal life as well.Approval-seeking behavior where employees focus on pleasing the boss rather than achieving results.Dependence on the moods and preferences of the manager instead of focusing on the actual work.Erosion of trust between the manager and team.Stifled personal and professional development.Over time, employees no longer ask “What is the best way to achieve this goal?” but instead “How does my boss feel about this?” — a mindset that drains both motivation and innovation. Knowingly or unknowingly, the employee tends to please the boss, the result of which is very bad for both the employee and the employer. It is worthwhile referring to Verse 3-35 of the Bhagavad Gita, which reads as under:श्रेयान्स्वधर्मो विगुणः परधर्मात्स्वनुष्ठितात् ।स्वधर्मे निधनं श्रेयः परधर्मो भयावहः ॥Bhagavad Gita · 3.35Meaning: It is far better to perform one’s natural prescribed duty, though tinged with faults, than to perform another’s prescribed duty, though perfectly. In fact, it is preferable to die in the discharge of one’s duty than to follow the path of another, which is fraught with danger.Impact of Micromanagement on EmployerMicromanagement doesn’t just stifle individual growth — it can destabilize entire organizations. While subordinates bear the immediate burden, companies ultimately suffer the long-term consequences. One of the most critical outcomes is the absence of a robust succession plan.Leadership Vacuum: In a micromanaged environment, employees are rarely empowered to make decisions or take initiative. As a result, they aren’t groomed for leadership roles. When the micromanager exits — whether through resignation, retirement, or reassignment — the organization is left scrambling to fill the void.Dependency Culture: Teams become overly reliant on a single individual for direction and decision-making. This creates bottlenecks and reduces agility, especially during times of transition or crisis.Stunted Innovation: Without autonomy, employees are less likely to experiment, take risks, or propose new ideas. This hampers innovation and can make the company less competitive over time.Talent Drain: High-potential employees often leave organizations where they feel undervalued or micromanaged. This leads to increased turnover and loss of institutional knowledge.Operational Disruption: The sudden departure of a micromanager can cause projects to stall, morale to dip, and productivity to plummet — especially if no one is prepared to step up.Micromanagement doesn’t just stifle individual growth—it can destabilize entire organizations. While subordinates bear the immediate burden, companies ultimately suffer the long-term consequences. One of the most critical outcomes is the absence of a robust succession plan.How to Cope with Micromanagement?Coping with micromanagement is never easy, but there are ways to navigate it. The first thing is to have an open discussion with your Manager.Simulate the action plan — I consider the best way to sustain micromanagement is one in which you decide your action plan or solution for a given situation and compare it with what is done. Do your course correction based on the action taken by the manager and the outcome thereof. Repeat this process across different scenarios. Over time you would be able to sharpen your strategic thinking, understand leadership dynamics, and be ready to act decisively when needed.If the above does not work, Vedantic teachings on duties (karma) are there for your rescue. As per these, soak yourself in doing obligatory duty, i.e. doing what you ought to do in line with your organization’s goal. Vedantic teachings offer timeless wisdom by classifying duties (karma) into three categories:Obligatory Duty (Karyam Karma) — Develop the habit of doing what you ought to do in the best interest of your organization without bothering about the reaction of your Boss, i.e. perform your duty with love and commitment, independent of external approval. Dr. APJ Abdul Kalam said, “Love your job but don’t love your company, because you may not know when your company stops loving you.” Here I would replace “company” with “Boss.”Desire Driven Duty (Kaamya Karma) — Working at the whims and fancies of your desire. Desire includes pleasing the Boss, trying to be the center of attraction, chasing promotions, seeking a handsome raise in salary, etc. This duty is bound to fuel mental agitation, restlessness and disappointment when desires are not fulfilled. Even the fulfilled desire creates multiple other desires and the chain continues.Prohibitory Duty (Nishiddha Karma) — Indulging in immoral and illegal things to please the Boss, get incentives, promotion, etc. Avoid indulging in immoral and unethical practices to survive under micromanagement. You will get ruined at the end of the day. The corporate world is full of those examples.Develop the habit of doing what you ought to do in the best interest of your organization without bothering about the reaction of your Boss, i.e. perform your duty with love and commitment, independent of external approval.Here I would like to quote a popular verse from the Bhagavad Gita, verse 2-47, which reinforces this principle:कर्मण्येवाधिकारस्ते मा फलेषु कदाचन ।मा कर्मफलहेतुर्भूर्मा ते सङ्गोऽस्त्वकर्मणि ॥Bhagavad Gita · 2.47Meaning: You have the right to perform your duty, but never to the fruits of your actions. Never consider yourself to be the cause of the results of your activities, nor be attached to inaction.The verse emphasizes that one should focus on performing their duty without attachment to the outcome or results, as the results are not entirely within one’s control. It is only the duty — with careful planning and sincerity — which is in our control.It is said that one can give only those things which he/she has. Micromanagers are already full of fear and insecurities; they cannot give you trust and security — they can only pass on their own anxieties.Know When to Walk AwayIt is very difficult for a normal human being to spend time and work 8–10 hours a day in this kind of negative environment and withstand it. It drains energy which could have been otherwise used in more productive things. So the only option left is to change your boss or leave the organization. Guiding factors as to whether to leave an organization lie in the following verse from Hitopadesha attributed to Chanakya (I read it in Class V Sanskrit):यस्मिन् देशे न सम्मानो न वृत्तिर्न च बान्धवाः ।न च विद्यागमोऽप्यस्ति वासस्तत्र न कारयेत् ॥Hitopadesha · attributed to ChanakyaMeaning: One should not live in a country, i.e. place, where there is no respect, no friends or family (i.e. well-wishers), and no learnings or gain of knowledge (i.e. professional growth).It is very difficult for a normal human being to spend time and work 8-10 hours a day in this kind of negative environment and withstand it. It drains energy which could have been otherwise used in more productive things.You should consider leaving any workplace where your contributions, efforts, and talents go unrecognized, where there is a lack of genuine support or concern, and where opportunities for professional and financial growth are non-existent.ConclusionIn the end, micromanagement is not just a bad habit — it is a corrosive force that erodes the very foundation of effective leadership. It doesn’t merely impact employees; it reverberates across the organization, affecting owners and employers alike. When genuine talent walks away and leadership voids emerge after a manager’s departure, the cost is steep and often invisible until it is too late.Micromanagement breeds fear instead of trust, approval-seeking instead of innovation, and dependency instead of growth. It suffocates initiative and replaces confidence with compliance.True leadership is not about control — it is about empowerment. It is about trusting others to rise, to lead, and to grow. The strongest leaders build other leaders, not followers.◆ ◆ ◆Author may be reached at aksingh_ca@hotmail.com and eboard@icai.inDecember 2025 | www.icai.org | The Chartered Accountant
Ep. 130 — GST 2.0 Reforms: A Bird’s Eye View
CA Journal
· August 2026
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GST 2.0 Reforms:A Bird's Eye ViewSince its roll-out in 2017, the GST regime in India has seen periodic tweaks, rationalisations, and administrative refinements. However, 2025 marks perhaps one of the most sweeping and structural reforms since inception, referred to as "GST 2.0" or the "next-generation GST."We have witnessed transformative changes in its framework in 2025, with reforms in GST rates, compliance procedures, and legal provisions resulting from recommendations of the 56th GST Council meeting. These changes aim to simplify the tax structure, enhance ease of business, and promote economic growth through rate rationalisation and procedural simplifications.The 2025 GST overhaul marks a departure from the current 4-tiered tax rate system towards a citizen-friendly 'Simple Tax', 2-rate structure, making it simpler for businesses and consumers alike. This transition is a product of recommendations made by the 56th GST Council, heralding "GST 2.0"—a next-generation tax regime prioritising simplicity and trust-based compliance. This article attempts to provide a summary of changes recommended in the 56th GST Council Meeting.A.Summary of GST Rate ChangesOld vs. New StructureIndia's GST previously operated on four principal tax slabs—5%, 12%, 18%, and 28%—plus special rates for select supplies.These have been consolidated into:Merit Rate: 5% (for essentials and priority sectors)Standard Rate: 18% (for most goods and services)Demerit Rate: 40% (for luxury/sin goods)Nil/Exempt (for specific health, education, and dairy products and necessities)The changes in rates of GST (which have been made effective from 22nd September 2025) were notified by the Government on 17th September 2025 vide Notification No. 9/2025 Central Tax (Rate) for goods and by way of Notification No. 15/2025 Central Tax (Rate) for services.A wide range of goods and services that were earlier taxed at 12% or 18%, including processed foods, specified garments, agricultural machinery and hotel accommodation services, have now been brought under the 5% slab, offering significant relief to consumers and small businesses. Similarly, automobiles and electronic appliances, which previously attracted up to 28% GST, will now be taxed at 18%, while lifesaving drugs, medical apparatus, and devices have seen a substantial reduction to either Nil or 5%, enhancing healthcare affordability.GST on labour-intensive goods such as handicrafts, marble and travertine blocks, granite and intermediate leather products has been reduced from 12% to 5%. Gyms, salons, barbers, and yoga centres will now attract a lower rate of 5%, down from the earlier 18%.Additionally, through Notification No. 14/2025–Central Tax (Rate), the Government has prescribed a 12% GST rate (6% CGST + 6% SGST) on fly ash bricks, building bricks, aggregates, earthen and roofing tiles, aligning tax policy with sustainable infrastructure development.The Government, through Notification No. 10/2025–Central Tax (Rate), has provided exemption from GST on various essential goods.With respect to GST Compensation Cess, the Government has amended Notification No. 1/2017- Compensation Cess (Rate) dated 28th June 2017 vide Notification No. 2/2025- Compensation Cess (Rate) dated 17th September 2025 to notify the changes in compensation cess rates.However, certain items such as pan masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco, and bidis will continue to attract the existing GST rates along with applicable compensation cess, until the outstanding loan and interest obligations under the compensation cess account are fully settled. Furthermore, GST on these tobacco-related products will now be levied on the Retail Sale Price (RSP) instead of the transaction value, ensuring better transparency and compliance.Insurance SectorThe Government, on the recommendations of the GST Council vide Notification 16/2025 Central Tax (Rate) dated 17-September-2025, has made a significant change in life insurance services, health insurance services and reinsurance services of the same by exempting these services from GST where the insured is not a group.These exemptions have been added as Entry no. 36C, 36D and 36E to Notification 12/2017 CT(R).Readers may specifically note that the above exemption shall not apply to group insurances but shall apply specifically to a contract of insurance where the insured is an individual, or an individual and family.(Family for the above purpose shall include all individuals insured as family in the contract of insurance).Further, the term 'Group' for the above-mentioned exemption purpose shall mean "group of persons who join together with a commonality of purpose or for engaging in a common economic activity, other than availing insurance, and includes:a. Employer– employee groups, where an employer-employee relationship exists between the master/group policyholder and the members of the group in accordance with the applicable laws;b. Non employer– employee groups, where a clearly evident relationship exists between the master/group policyholder and the members of the group, for services/activities other than insurance."Local Delivery ServicesLocal delivery services have been inserted under Section 9(5) of the CGST Act vide Notification No. 17/2025-Central Tax (Rate) dated 17th September 2025, in cases where the person supplying such services through electronic commerce operator is not liable for registration under GST. The applicable rate on such services is 18%. Further, local delivery services provided by and through an ECO have been excluded from the scope of GTA services.'Specified premises' in the Context of Taxability of Restaurant ServicesThe Council has recommended to add an explanation to the definition of 'specified premises' in the context of taxability of restaurant services in order to clarify the position that a stand-alone restaurant cannot declare itself as a 'specified premises' and consequently cannot avail the option of paying GST at the rate of 18% with ITC.Thereby, the Government by virtue of Notification No. 15/2025 Central Tax (Rate) dated 17th September 2025, has inserted an explanation (effective from 1st April 2025) to para 4, in clause (xxxvi) of Notification No. 11/2017 Central Tax (Rate) read with Notification 05/2025 Central Tax (Rate) dated 16th January 2025 that 'premises' shall mean a place from where hotel accommodation services are being supplied or are to be supplied.The GST Council's 56th meeting produced not only rate reforms but also substantial legal and procedural improvements that define the GST regime's future trajectory.B.Legislative ChangesThe GST Council's 56th meeting produced not only rate reforms but also substantial legal and procedural improvements that define the GST regime's future trajectory.Introduction of Simplified Registration Scheme for small suppliers supplying through electronic commerce operatorsBusinesses, especially small suppliers and persons supplying through e-commerce platforms, benefit from streamlined registration and automated returns, reducing administrative burdens and improving compliance.The Council approved in-principle the concept of a simplified GST registration mechanism for small suppliers, making supplies through e-commerce operators (ECOs) across multiple States facing challenges in maintaining principal place of business in each State, as currently required under the GST framework.It is expected to ease compliance for such suppliers and facilitate their participation in e-commerce across States.Simplified GST Registration Scheme for Small & Low-Risk BusinessesIn order to simplify the registration process, the Council has recommended the introduction of an optional simplified GST registration scheme wherein registration shall be granted on an automated basis within three working days from the date of submission of application in case of low-risk applicants and applicants who, based on their own assessment, determine that their output tax liability on supplies to registered persons will not exceed Rs. 2.5 lakh per month (inclusive of CGST, SGST/UTGST and IGST). The scheme will provide for voluntary opting into and withdrawal from the scheme.This optional scheme is expected to benefit around 96% of new applicants applying for GST registration and is expected to be operational from 1st November, 2025.Post Sale DiscountsClear statutory amendments regarding post-sale discounts have been introduced to reduce litigation and ambiguity.CBIC has clarified on the below mentioned aspects in respect of post supply discounts vide Circular No. 251/08/2025-GST dated 12th September, 2025.The Circular clarifies on—i. non-reversal of Input Tax Credit on account of post-sale discount through financial/commercial credit note;ii. treatment of the post-sale discount provided by manufacturer to the dealer as additional consideration, in the transaction between dealer and end-customer;iii. treatment of post-sale discount as consideration in lieu of promotional activities etc. performed by the dealer.Further, the Council has also recommended for amendment of Section 15 and Section 34 of the CGST Act, 2017 in respect of Post Sale Discount. In this regard, the Council has recommended:To omit Section 15(3)(b)(i) of the CGST Act, 2017 thereby omitting the requirement of establishing the discount in terms of an agreement entered into before or at the time of such supply and specifically linking of the same with relevant invoices,To amend Section 15(3)(b) of the CGST Act, 2017 to provide that discount should be granted through a credit note issued under Section 34 of the CGST Act and to correspondingly amend Section 34 to include a reference to Section 15(3)(b), so as to provide for reversal of Input Tax Credit by the recipient in case where a post-sale discount is given and value of supply is reduced through the GST Credit note.The CBIC, vide Circular No. 253/10/2025 – GST dated 1st October 2025, in order to ensure uniformity, has withdrawn Circular No. 212/6/2024-GST dated 26th June 2024 wherein clarifications were given in relation to mechanism for providing evidence of compliance of conditions of Section 15(3)(b)(ii) of the CGST Act, 2017 by the suppliers. Therefore, the procedure prescribed vide the aforesaid circular for providing evidence of compliance of conditions of Section 15(3)(b)(ii) shall not be required.A summary of the Circular is given below for readers' referenceTopic / IssueQuestionClarificationKey ConditionITC & Credit NotesIf a supplier gives a post-sale discount via financial or commercial credit note, does the recipient have to reverse the already claimed ITC?No reversal required as long as the credit note is financial/commercial and doesn't reduce GST liability or taxable value.Supplier's tax liability must remain unchanged; original transaction value (for GST) must remain as originally declared.Discounts from Manufacturer to DealerIs the discount from the manufacturer to the dealer included in the dealer's sale price to the end customer (i.e. part of consideration)?Generally, No — it is just a reduction in cost, not a payment for supply.Applies when there is no direct agreement between the manufacturer and the customer.Agreed Discount for End CustomerWhat happens if the manufacturer agrees with the end customer for a reduced price, and the dealer is compensated by the manufacturer?Then the discount is treated as an inducement/consideration in the dealer's supply.There must be a prior agreement linking the manufacturer, dealer, and end customer.Promotional / Service ActivitiesCould the discount be treated as a consideration for services performed by the dealer (e.g. marketing)?Only when there is a formal agreement that defines the service and consideration — then GST applies.Must specify services and consideration; mere expectation of promotional benefit is not enough.Place of Supply for ServicesFor intermediary services, the Council recommends omission of clause (b) of Section 13(8) of the IGST Act 2017. Accordingly, after the said amendment takes place, the place of supply for "intermediary services" will be determined as per the default provision under Section 13(2) of the IGST Act, 2017 i.e. the location of the recipient of such services.This will help Indian exporters of such services to claim export benefits and bolster the competitiveness of Indian exporters.System-Based Risk Evaluation for Provisional GST RefundsIn a major move to streamline GST refund processes and enhance trade facilitation, the GST Council recommended amendments to certain CGST Rules. In relation to the above, the Government has issued Notification No. 13/2025 -Central Tax dated 17th September 2025, making changes with effect from 1st October 2025 in rule 91(2) and further issued instruction vide Instruction No. 6/2025 – GST dated 3rd October 2025.Few key points of the above Notification and instruction include:System-Driven Risk Assessment: Refund claims will now be provisionally sanctioned (90% of the claimed amount) based on risk categorization by the system. Applications categorised as "low-risk" will be fast-tracked for provisional refunds.Refund claims will now be provisionally sanctioned (90% of the claimed amount) based on risk categorization by the system. Applications categorised as "low-risk" will be fast-tracked for provisional refunds.Officer's Discretion – Proviso to Rule 91(2): In applications not categorised as "low-risk", refund shall not be sanctioned on provisional basis and in such cases, the proper officer shall proceed with detailed scrutiny of refund application.Exclusions from Provisional Refund: The Government vide Notification No. 14/2025-Central Tax dated 17th September 2025 has provided the following category of registered persons who shall not be allowed refund on provisional basis:(i) Any person, who has not undergone Aadhaar authentication under rule 10B,(ii) Any person, who is engaged in the supply of areca nuts or pan masala or tobacco and manufactured tobacco substitutes or essential oils.Provisional Refund for Inverted Duty Structure (IDS): Pending legislative amendment to Section 54(6), the government has, as an interim measure, permitted provisional sanction of 90% of IDS refund claims filed on or after 01.10.2025, under the same process and conditions as for zero-rated supplies.This system-led, risk-based refund mechanism marks a significant shift in GST administration, balancing trade facilitation with fraud control. While easing genuine taxpayer burdens, it ensures accountability and careful scrutiny where risks are high.C.GSTAT OperationalisationThe Goods and Services Tax Appellate Tribunal (GSTAT) will be made operational and will commence hearing before the end of December this year, providing speedy dispute resolution and reducing strain on High Courts. The Council also recommended the date of 30.06.2026 for limitation of filing of backlog appeals.The Principal Bench of the GSTAT will also serve as the National Appellate Authority for Advance Ruling.These measures will significantly strengthen the institutional framework of GST by providing a robust mechanism for dispute resolution, ensuring consistency in advance rulings, and offering greater certainty to taxpayers. This will further enhance trust, transparency, and ease of doing business under the GST regime.The move to a 2-rate structure of 5% and 18%, combined with select higher rates for sin goods, reduces costs for businesses and consumers, makes compliances smoother, and boosts consumption and manufacturing.Future Outlook & ConclusionThe 2025 GST reforms in India, spearheaded by the recommendations of the 56th GST Council meeting, represent a major leap toward simplification, efficiency, and inclusiveness in indirect taxation. The move to a 2-rate structure of 5% and 18%, combined with select higher rates for sin goods, reduces costs for businesses and consumers, makes compliances smoother, and boosts consumption and manufacturing. The reforms have intentionally omitted the reinstatement of anti-profiteering measures, relying instead on trust in businesses to pass on benefits to consumers. The Council's commitment to technology-driven, trust-based administration enhances transparency and positions India's GST regime at par with global best practices.These changes, effective from 22nd September 2025, will have profound long-term impacts on the economic landscape, promoting ease of business, resolving litigation issues, and improving the quality of life for millions of Indians. With simpler rates, faster refunds, and strategic legal amendments, GST in India stands poised for a new era of growth and stability.◆◆◆Author may be reached at carishabhparikh@gmail.com and eboard@icai.inThe Chartered Accountant • Theme November 2025 | www.icai.org
Ep. 131 — GST 2.0: The Next-Gen Reform and the Dawn of Rate Rationalization
CA Journal
· August 2026
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GST 2.0: The Next-Gen Reform and the Dawn of Rate RationalizationIndia’s GST framework has entered a new and transformative era with the introduction of GST 2.0, popularly known as the “Next-Generation GST”. Announced during the 56th GST Council Meeting and made effective from 22nd September 2025, this reform marks a historic recalibration of India’s indirect tax system. It represents a decisive step towards creating a simpler, technology-integrated, and more equitable tax regime, one that harmonizes the interests of the Centre, States, industry and consumers alike.GST 2.0 seeks to strengthen, simplify and future-proof the entire GST ecosystem. The reform aims to address structural inefficiencies, minimize litigation and enhance digital transparency, thus aligning India’s tax system with global best practices.At its core, GST 2.0 is built upon four foundational pillars – Structural Changes, Rate Rationalization, Ease of Living and Ease of Doing Business, each designed to serve a distinct yet interconnected objective. This article focuses on “Rate Rationalization”.Rate Rationalization constitutes the most visible reform under GST 2.0. The earlier four-tier structure, 5%, 12%, 18% and 28%, along with a separate compensation cess, has been replaced with a simplified two-tier tax system: 5% for essential goods and services and 18% for standard-rated supplies, while introducing a 40% demerit rate for sin and luxury goods such as motor vehicles, aerated beverages and certain actionable claims. This consolidation aims to remove anomalies, correct the inverted duty structure and bring greater clarity and predictability for businesses. The abolition of the 12% slab and near-complete phase-out of the 28% category, except for tobacco products, underscores the Council’s intent to promote uniformity, transparency and affordability. This exercise has also resulted in ease of living as the indirect tax burden on the common citizen has been lowered on essential commodities, healthcare, education, renewable energy and agricultural inputs. By rationalizing rates on daily-use goods and exempting key life and health insurance services, the reform ensures that GST 2.0 is not merely a fiscal measure but a people-centric policy.Rate Changes for GoodsThe Council approved rate changes for approximately 400 goods, affecting nearly every sector of the economy. Under the new rationalized structure, 176 goods are exempted from tax (earlier 169), while 590 goods (earlier 299) now attract a 5% tax rate. A total of 635 goods (earlier 651) attract an 18% standard rate, whereas 19 goods (earlier Nil), including beverages, motor cars and certain actionable claims, are taxed at 40%, a newly introduced rate merging the earlier tax rate and cess components. Special rates continue to apply on precious metals and stones, articles of goldsmiths, and rough diamonds. Tobacco products continue to attract 28% GST alongwith compensation cess, while bricks are subject to two distinct rates, 6% without ITC and 12% with ITC entitlement.This extensive restructuring has touched virtually every corner of the economy. Sectors such as food, agriculture, fertilizers, coal, renewable energy, textiles, healthcare, and education have all been impacted, along with common household items, consumer electronics, paper, transport, sports goods, toys, leather, footwear, wood, defence supplies, construction materials and handicrafts. The abolition of the 12% slab, except for bricks, is among the most notable aspects of this reform. Most goods (about 276) previously taxed at 12% have either been moved to the 5% category or fully exempted. Similarly, the 28% slab (about 36 goods fell in this slab) has been abolished, except in the case of tobacco products.Another significant development is the abolition of the compensation cess, which will remain applicable only for tobacco products until the outstanding compensation loans are fully repaid. The introduction of the 40% slab represents a structural merger of the previous rate and cess components, thereby simplifying computation and reporting. Apparel and footwear valued up to Rs. 2,500/-, as against the earlier threshold of Rs. 1,000/-, will now attract 5% GST, a relief measure aimed at the mass retail sector. Furthermore, the earlier tax rate/exemption Notification (No. 01/2017 and 02/2017) have been superseded vide Notification No. 09/2025 and 10/2025 respectively.The introduction of the 40% slab represents a structural merger of the previous rate and cess components, thereby simplifying computation and reporting.Rate Changes for ServicesParallel to the rationalization of goods, around 30 categories of services have undergone significant rate adjustments. The 12% and 28% slabs applicable to services have been abolished entirely, thereby simplifying the rate structure. A new 40% slab has been introduced for certain specified actionable claims such as online gaming, casinos, horse racing and gambling. Services earlier falling under the 12% rate have been redistributed; some have been moved to 5%, others to 5% without ITC, while certain categories have been reclassified under the 18% standard rate or exempted altogether.Among the most noteworthy changes is the exemption granted to personal life and health insurance services, a move intended to improve affordability and coverage penetration across the country. While the exemption is a positive step for policyholders, it introduces substantial complexity for insurers. As only individual life and health insurance contracts are exempt, insurers must maintain granular records to segregate eligible and ineligible transactions. In accordance with Rules 42 and 43 of the CGST Rules, insurers will now be required to reverse proportionate ITC attributable to exempt policies, resulting in an increase in operational costs. The combined effects of ITC reversal, GST on ceding commission and the requirement of additional manpower for increased reconciliation and compliance significantly increase the cost of doing business for insurers. Ironically, while the exemption is designed to benefit customers, the net benefit ultimately passed on to policyholders may be marginal once higher compliance and credit reversal costs are factored in. From an anti-profiteering standpoint, insurers will be expected to substantiate that any tax benefits have been duly passed on to consumers, necessitating careful documentation and computation. The risk of interpretational disputes or future show cause notices, therefore, remains high, potentially leading to increased litigation in the insurance sector.Among the most noteworthy changes is the exemption granted to personal life and health insurance services, a move intended to improve affordability and coverage penetration across the country.Another key reform under the services category pertains to multimodal transport services. Prior to 22nd September 2025, multimodal transport services within India were generally taxable at 12% with full ITC availability. Under GST 2.0, the Council has aligned the rate more closely with the operational composition of the transport service. Accordingly, where the multimodal service does not involve an air transport leg, GST will now apply @ 5% with restricted ITC, whereas multimodal services including an air leg will attract GST @ 18% with full ITC. While this structure aims to achieve operational neutrality, it requires businesses to reassess cost models and compliance systems due to the introduction of the dual credit framework.Further, services of renting and leasing of motor vehicles have also undergone substantial changes effective from 22nd September 2025. Under the earlier regime, renting without operator was taxed @ 18%, while the supply of motor vehicles as goods attracted GST @ 28% along with Compensation Cess of up to 22%. With the withdrawal of Compensation Cess and the merger of rates, certain categories of motor vehicles now attract GST @ 40%. As the GST rate for renting without operator continues to mirror that applicable on the supply of like goods, leasing or renting of such vehicles will now also be taxed @ 40%. This steep increase is likely to impact demand and profitability across the leasing sector. In contrast, renting with an operator has seen rationalization, and the earlier 12% option with ITC has been replaced with GST @ 18% with full ITC, leaving taxpayers with the choice of 5% with ITC restrictions or 18% with full credit.Implementation Framework and Transitional ConsiderationsThe implementation of GST 2.0 requires meticulous planning at both the policy and enterprise levels. Registered persons must continue with their existing GST registration unless all goods or services supplied have become fully exempt, in which case surrender of registration may be warranted. Similarly, the necessity of maintaining an ISD registration should be reassessed where outward supplies have become exempt.The implementation of GST 2.0 requires meticulous planning at both policy and enterprise level. Registered persons must continue with their existing GST registration unless all goods or services supplied have become fully exempt, in which case surrender of registration may be warranted.With respect to the rate applicability, the rate for goods will be determined based on the date of invoice, whereas for services, the applicable rate will depend on the completion of any two out of three events, the date of supply, the date of invoice and the date of payment. Goods sent for approval will be taxed as per the rate applicable on the date of approval, and any debit or credit notes issued subsequently will follow the rate applicable to the original supply.With regards to input tax credit, no change arises in cases of mere rate reduction; however, where the output supply becomes exempt or subject to a rate without ITC, credit reversal or payment in cash will be required in accordance with Section 18(4) of the CGST Act, read with Rule 44 of the CGST Rules. Such transitions may lead to inversion or deepened inversion in certain sectors, resulting in the accumulation of input credits. Refund of accumulated ITC continues to be available in respect of inputs but remains ineligible for input services and capital goods. This inversion, coupled with the cost of litigation and refund delays, may add to working capital pressures for businesses.Where exemption or no-ITC rates apply, the input side taxes effectively become part of the cost structure, leading to an increase in the cost of sales of goods/services. Businesses dealing with both exempt/no-ITC and taxable supplies post 22nd September 2025 will be required to reverse ITC proportionately under Section 17(2) of the CGST Act, read with Rule 42 and 43 of the CGST Rules in respect of fresh inward supplies and under Section 18(4) of the CGST Act read with Rule 44 of the CGST Rules in respect of existing stocks.The abolition of the compensation cess on goods like aerated water, motor vehicles, etc., also presents transitional complexities. Any balance of cess lying unutilized in the electronic credit ledger will lapse and become part of the cost while any shortfall against the required reversal will need to be discharged in cash. As for the stock of finished goods held by traders on 22nd September 2025 where the rate has been reduced, the position remains debatable. Although Circular No. 135/05/2020 (as amended vide Circular No. 173/05/2022) clarifies that such cases do not qualify as inverted duty scenarios, several High Court decisions, including BMG Informatics Pvt. Ltd. v. UOI, Shivaco Associates v. JC SGST, Baker Hughes Asia Pacific Ltd. v. UOI, and IOCL v. Commissioner CGST, have adopted a more taxpayer-friendly approach and considered such cases as eligible for refund under the IDS category.Taxpayers are required to comply with the OM No. I-10/14/2020-W&M dated 18th September 2025 issued by the Department of Consumer Affairs and OM F. No. 12(24)/2021/DP/NPPA/Div.II (Vol.11)- Part (1) issued by the Department of Pharmaceuticals regarding revision of MRP.Anticipated Challenges in Filing GST Returns for September 2025 due to a Change in RatesThe implementation of GST 2.0 midway through a tax period will create substantial compliance challenges for taxpayers while filing returns for the tax period of September 2025. The foremost issue will be the dual rate application within a single tax period. Supplies made between 1st and 21st September 2025 will be governed by the pre-revision rates and ITC rules, whereas supplies from 22nd to 30th September will attract the revised rates, altered ITC restrictions, and new provisions. This will require taxpayers to maintain precise segregation of transactions by date and HSN code within their accounting and invoicing systems.Another area of concern is HSN and tax classification confusion, since the same goods or services may attract different rates before and after 22nd September 2025. For industries such as hospitality, leasing and transportation, identical HSN codes could reflect differing rates and ITC treatments across the same filing period, leading to potential mismatches, reconciliation errors and notices from tax authorities.The month is also expected to see a surge in documentation and computation burdens. Taxpayers will need to ensure proper maintenance of records to support ITC segregation, rate applicability, and credit reversals under Section 17(2) of the CGST Act, read with Rule 42 and Rule 43 of the CGST Rules, as well as reversals under Section 18(4) of the CGST Act. These requirements will increase manual intervention, calculation complexity and reconciliation workload.Further, the GSTR-1 filing process for September 2025 will pose unique operational challenges. As invoice-level reporting mandates correct HSN, tax rate and value, businesses will effectively have to maintain two distinct invoicing systems, one for transactions up to 21st September under the old structure, and another for those post 22nd September reflecting new rates, exemptions and ITC restrictions. This dual structure significantly heightens the probability of clerical errors, data mismatches and system-generated discrepancies in returns.Collectively, these factors will result in increased administrative effort, working capital stress, and potential delays in filing. Businesses must proactively update ERP configurations, redesign invoicing templates, and conduct advanced reconciliation exercises to ensure accuracy. The September 2025 return cycle will likely be one of the most complex compliance periods since the inception of GST, underscoring the need for advance preparation, robust internal controls, and professional oversight to mitigate litigation risks and ensure seamless reporting.Strategic Considerations for Rate Selection and IT System ReadinessBeyond compliance, GST 2.0 introduces strategic choices for taxpayers, particularly in cases where dual rate options exist, such as hotel accommodation or renting services. Businesses must carefully evaluate the trade-off between a lower rate without ITC and a higher rate with full ITC. Selecting the lower rate without ITC may offer short-term relief to customers by lowering prices but simultaneously increases the cost of inputs due to reduced / no credits, potentially eroding margins. Conversely, opting for a higher rate with ITC preserves the credit chain, improves working capital efficiency, and ensures long-term sustainability, albeit at the cost of a higher headline rate to the end consumer.Accurate implementation of these options demands strong ERP and IT systems. Systems must be configured to apply correct tax rates on a per-unit and per-date basis, assign appropriate HSN codes under revised classifications, and accurately track eligible and blocked ITC. Further, seamless segregation of supplies before and after the rate change is critical to avoid errors in reporting and reconciliation. Businesses must also strengthen compliance controls by monitoring ITC utilisation, reversals under Rule 42/43, and adjustments under Section 18(4). Regular reconciliations and internal audits will be essential to ensure that rate selections optimise both cost efficiency and compliance while mitigating the risk of disputes or misstatements in returns.Anti-Profiteering and Compliance RequirementsSection 171 of the CGST Act, dealing with anti-profiteering, remains operative, although no fresh complaints will be entertained after 1st April 2025 as per Notification No. 19/2024 dated 30th September 2024. The Government, however, expects that businesses will pass on the commensurate benefits of tax rate reductions to consumers. In sectors such as insurance, logistics, leasing and hospitality, where exemptions and restricted ITC regimes have significantly altered cost structures, taxpayers must be particularly vigilant in documenting and demonstrating benefit pass-through computations. Traders and manufacturers are advised to maintain adequate documentation to substantiate that benefits have indeed been transferred. Consumers, on the other hand, can continue to lodge complaints through the National Consumer Helpline at toll-free number 1915 or via WhatsApp at 8800001915, and as per newspaper reports, more than 3000 complaints have already been filed.In addition, businesses are urged to update their ERP, invoicing, and point-of-sale systems to align with new rate notifications, even for goods and services whose rates remain unchanged in view of new tax rate / exemption notifications on the goods side. Long-term contracts with vendors and customers must be reviewed to accommodate revised rates, and marketing strategies must be revisited in light of new rate structures, especially where supplies involve goods or services attracting different rates.Conclusion: The Road Ahead for GST 2.0The introduction of GST 2.0 is more than a rate rationalization exercise; it marks the dawn of a smarter, digitally integrated and economically balanced tax regime. While transitional challenges such as ITC reversals, dual-rate compliance, and system reconfigurations are inevitable, the reform’s long-term benefits are poised to outweigh its short-term complexities. The overarching objective is clear – to create a simpler, fairer and more efficient GST framework that supports India’s vision of becoming a globally competitive and digitally empowered economy.The introduction of GST 2.0 is more than a rate rationalization exercise, it marks the dawn of a smarter, digitally integrated and economically balanced tax regime.By consolidating rates, removing redundancies, and phasing out cess-based taxation, GST 2.0 seeks to strengthen both consumer welfare and business efficiency. For taxpayers, it represents an opportunity to align processes, embrace transparency and contribute to the evolution of a truly unified “One Nation, One Tax” ecosystem, a GST architecture designed for the future.◆ ◆ ◆Author may be reached at upenderg90@gmail.com and eboard@icai.inNovember 2025 | www.icai.org The Chartered Accountant · Theme
Ep. 132 — Cascading of Tax is Inevitable in Exemption from GST
CA Journal
· August 2026
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GST 2.0 Reforms: A Bird's Eye ViewSince its roll-out in 2017, the GST regime in India has seen periodic tweaks, rationalisations, and administrative refinements. However, 2025 marks perhaps one of the most sweeping and structural reforms since inception, referred to as "GST 2.0" or the "next-generation GST."We have witnessed transformative changes in its framework in 2025, with reforms in GST rates, compliance procedures, and legal provisions resulting from recommendations of the 56th GST Council meeting. These changes aim to simplify the tax structure, enhance ease of business, and promote economic growth through rate rationalisation and procedural simplifications.The 2025 GST overhaul marks a departure from the current 4-tiered tax rate system towards a citizen-friendly 'Simple Tax', 2 rate structure, making it simpler for businesses and consumers alike. This transition is a product of recommendations made by the 56th GST Council, heralding "GST 2.0"—a next-generation tax regime prioritising simplicity and trust-based compliance. This article attempts to provide a summary of changes recommended in the 56th GST Council Meeting.A. Summary of GST Rate ChangesOld vs. New StructureIndia's GST previously operated on four principal tax slabs—5%, 12%, 18%, and 28%—plus special rates for select supplies. These have been consolidated into:Merit Rate: 5% (for essentials and priority sectors)Standard Rate: 18% (for most goods and services)Demerit Rate: 40% (for luxury/sin goods)Nil/Exempt (for specific health, education, and dairy products and necessities)The changes in rates of GST (which have been made effective from 22nd September 2025) were notified by the Government on 17th September 2025 vide Notification No. 9/2025 Central Tax (Rate) for goods and by way of Notification No. 15/2025 Central Tax (Rate) for services.A wide range of goods and services that were earlier taxed at 12% or 18%, including processed foods, specified garments, agricultural machinery and hotel accommodation services, have now been brought under the 5% slab, offering significant relief to consumers and small businesses. Similarly, automobiles and electronic appliances, which previously attracted up to 28% GST, will now be taxed at 18%, while lifesaving drugs, medical apparatus, and devices have seen a substantial reduction to either Nil or 5%, enhancing healthcare affordability.GST on labour-intensive goods such as handicrafts, marble and travertine blocks, granite and intermediate leather products has been reduced from 12% to 5%. Gyms, salons, barbers, and yoga centres will now attract a lower rate of 5%, down from the earlier 18%.Additionally, through Notification No. 14/2025–Central Tax (Rate), the Government has prescribed a 12% GST rate (6% CGST + 6% SGST) on fly ash bricks, building bricks, aggregates, earthen and roofing tiles, aligning tax policy with sustainable infrastructure development.The Government, through Notification No. 10/2025–Central Tax (Rate), has provided exemption from GST on various essential goods.With respect to GST Compensation Cess, the Government has amended Notification No. 1/2017- Compensation Cess (Rate) dated 28th June 2017 vide Notification No. 2/2025- Compensation Cess (Rate) dated 17th September 2025 to notify the changes in compensation cess rates.However, certain items such as pan masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco, and bidis will continue to attract the existing GST rates along with applicable compensation cess, until the outstanding loan and interest obligations under the compensation cess account are fully settled. Furthermore, GST on these tobacco-related products will now be levied on the Retail Sale Price (RSP) instead of the transaction value, ensuring better transparency and compliance.Insurance SectorThe Government, on the recommendations of the GST Council vide Notification 16/2025 Central Tax (Rate) dated 17-September-2025, has made a significant change in life insurance services, health insurance services and reinsurance services of the same by exempting these services from GST where the insured is not a group.These exemptions have been added as Entry no. 36C, 36D and 36E to Notification 12/2017 CT(R).Readers may specifically note that the above exemption shall not apply to group insurances but shall apply specifically to a contract of insurance where the insured is an individual, or an individual and family. (Family for the above purpose shall include all individuals insured as family in the contract of insurance).Further, the term 'Group' for the above-mentioned exemption purpose shall mean "group of persons who join together with a commonality of purpose or for engaging in a common economic activity, other than availing insurance, and includes:a. Employer– employee groups, where an employer-employee relationship exists between the master/group policyholder and the members of the group in accordance with the applicable laws;b. Non employer– employee groups, where a clearly evident relationship exists between the master/group policyholder and the members of the group, for services/activities other than insurance."Local Delivery ServicesLocal delivery services have been inserted under Section 9(5) of the CGST Act vide Notification No. 17/2025-Central Tax (Rate) dated 17th September 2025, in cases where the person supplying such services through electronic commerce operator is not liable for registration under GST. The applicable rate on such services is 18%. Further, local delivery services provided by and through an ECO have been excluded from the scope of GTA services.'Specified premises' in the Context of Taxability of Restaurant ServicesThe Council has recommended to add an explanation to the definition of 'specified premises' in the context of taxability of restaurant services in order to clarify the position that a stand-alone restaurant cannot declare itself as a 'specified premises' and consequently cannot avail the option of paying GST at the rate of 18% with ITC.Thereby, the Government by virtue of Notification No. 15/2025 Central Tax (Rate) dated 17th September 2025, has inserted an explanation (effective from 1st April 2025) to para 4, in clause (xxxvi) of Notification No. 11/2017 Central Tax (Rate) read with Notification 05/2025 Central Tax (Rate) dated 16th January 2025 that 'premises' shall mean a place from where hotel accommodation services are being supplied or are to be supplied.The GST Council's 56th meeting produced not only rate reforms but also substantial legal and procedural improvements that define the GST regime's future trajectory.B. Legislative ChangesThe GST Council's 56th meeting produced not only rate reforms but also substantial legal and procedural improvements that define the GST regime's future trajectory.Introduction of Simplified Registration Scheme for small suppliers supplying through electronic commerce operatorsBusinesses, especially small suppliers and persons supplying through e-commerce platforms, benefit from streamlined registration and automated returns, reducing administrative burdens and improving compliance.The Council approved in-principle the concept of a simplified GST registration mechanism for small suppliers, making supplies through e-commerce operators (ECOs) across multiple States facing challenges in maintaining principal place of business in each State, as currently required under the GST framework.It is expected to ease compliance for such suppliers and facilitate their participation in e-commerce across States.Simplified GST Registration Scheme for Small & Low-Risk BusinessesIn order to simplify the registration process, the Council has recommended the introduction of an optional simplified GST registration scheme wherein registration shall be granted on an automated basis within three working days from the date of submission of application in case of low-risk applicants and applicants who, based on their own assessment, determine that their output tax liability on supplies to registered persons will not exceed Rs. 2.5 lakh per month (inclusive of CGST, SGST/UTGST and IGST). The scheme will provide for voluntary opting into and withdrawal from the scheme.This optional scheme is expected to benefit around 96% of new applicants applying for GST registration and is expected to be operational from 1st November, 2025.Post Sale DiscountsClear statutory amendments regarding post-sale discounts have been introduced to reduce litigation and ambiguity.CBIC has clarified on the below mentioned aspects in respect of post supply discounts vide Circular No. 251/08/2025-GST dated 12th September, 2025.The Circular clarifies on:non-reversal of Input Tax Credit on account of post-sale discount through financial/commercial credit note;treatment of the post-sale discount provided by manufacturer to the dealer as additional consideration, in the transaction between dealer and end-customer;treatment of post-sale discount as consideration in lieu of promotional activities etc. performed by the dealer.Further, the Council has also recommended for amendment of Section 15 and Section 34 of the CGST Act, 2017 in respect of Post Sale Discount. In this regard, the Council has recommended:To omit Section 15(3)(b)(i) of the CGST Act, 2017 thereby omitting the requirement of establishing the discount in terms of an agreement entered into before or at the time of such supply and specifically linking of the same with relevant invoices,To amend Section 15(3)(b) of the CGST Act, 2017 to provide that discount should be granted through a credit note issued under Section 34 of the CGST Act and to correspondingly amend Section 34 to include a reference to Section 15(3)(b), so as to provide for reversal of Input Tax Credit by the recipient in case where a post-sale discount is given and value of supply is reduced through the GST Credit note.The CBIC, vide Circular No. 253/10/2025 – GST dated 1st October 2025, in order to ensure uniformity, has withdrawn Circular No. 212/6/2024-GST dated 26th June 2024 wherein clarifications were given in relation to mechanism for providing evidence of compliance of conditions of Section 15(3)(b)(ii) of the CGST Act, 2017 by the suppliers. Therefore, the procedure prescribed vide the aforesaid circular for providing evidence of compliance of conditions of Section 15(3)(b)(ii) shall not be required.A summary of the Circular is given below for readers' referenceTopic / IssueQuestionClarificationKey ConditionITC & Credit NotesIf a supplier gives a post-sale discount via financial or commercial credit note, does the recipient have to reverse the already claimed ITC?No reversal required as long as the credit note is financial/commercial and doesn't reduce GST liability or taxable value.Supplier's tax liability must remain unchanged; original transaction value (for GST) must remain as originally declared.Discounts from Manufacturer to DealerIs the discount from the manufacturer to the dealer included in the dealer's sale price to the end customer (i.e. part of consideration)?Generally, No — it is just a reduction in cost, not a payment for supply.Applies when there is no direct agreement between the manufacturer and the customer.Agreed Discount for End CustomerWhat happens if the manufacturer agrees with the end customer for a reduced price, and the dealer is compensated by the manufacturer?Then the discount is treated as an inducement/consideration in the dealer's supply.There must be a prior agreement linking the manufacturer, dealer, and end customer.Promotional / Service ActivitiesCould the discount be treated as a consideration for services performed by the dealer (e.g. marketing)?Only when there is a formal agreement that defines the service and consideration — then GST applies.Must specify services and consideration; mere expectation of promotional benefit is not enough.Refund claims will now be provisionally sanctioned (90% of the claimed amount) based on risk categorization by the system. Applications categorised as "low-risk" will be fast-tracked for provisional refunds.Place of Supply for ServicesFor intermediary services, the Council recommends omission of clause (b) of Section 13(8) of the IGST Act 2017. Accordingly, after the said amendment takes place, the place of supply for "intermediary services" will be determined as per the default provision under Section 13(2) of the IGST Act, 2017 i.e. the location of the recipient of such services.This will help Indian exporters of such services to claim export benefits and bolster the competitiveness of Indian exporters.System-Based Risk Evaluation for Provisional GST RefundsIn a major move to streamline GST refund processes and enhance trade facilitation, the GST Council recommended amendments to certain CGST Rules. In relation to the above, the Government has issued Notification No. 13/2025 -Central Tax dated 17th September 2025, making changes with effect from 1st October 2025 in rule 91(2) and further issued instruction vide Instruction No. 6/2025 – GST dated 3rd October 2025.Few key points of the above Notification and instruction include:System-Driven Risk Assessment: Refund claims will now be provisionally sanctioned (90% of the claimed amount) based on risk categorization by the system. Applications categorised as "low-risk" will be fast-tracked for provisional refunds.Officer's Discretion – Proviso to Rule 91(2): In applications not categorised as "low-risk", refund shall not be sanctioned on provisional basis and in such cases, the proper officer shall proceed with detailed scrutiny of refund application.Exclusions from Provisional Refund: The Government vide Notification No. 14/2025-Central Tax dated 17th September 2025 has provided the following category of registered persons who shall not be allowed refund on provisional basis:(i) Any person, who has not undergone Aadhaar authentication under rule 10B,(ii) Any person, who is engaged in the supply of areca nuts or pan masala or tobacco and manufactured tobacco substitutes or essential oils.Provisional Refund for Inverted Duty Structure (IDS): Pending legislative amendment to Section 54(6), the government has, as an interim measure, permitted provisional sanction of 90% of IDS refund claims filed on or after 01.10.2025, under the same process and conditions as for zero-rated supplies.This system-led, risk-based refund mechanism marks a significant shift in GST administration, balancing trade facilitation with fraud control. While easing genuine taxpayer burdens, it ensures accountability and careful scrutiny where risks are high.C. GSTAT OperationalisationThe Goods and Services Tax Appellate Tribunal (GSTAT) will be made operational and will commence hearing before the end of December this year, providing speedy dispute resolution and reducing strain on High Courts. The Council also recommended the date of 30.06.2026 for limitation of filing of backlog appeals.The Principal Bench of the GSTAT will also serve as the National Appellate Authority for Advance Ruling.These measures will significantly strengthen the institutional framework of GST by providing a robust mechanism for dispute resolution, ensuring consistency in advance rulings, and offering greater certainty to taxpayers. This will further enhance trust, transparency, and ease of doing business under the GST regime.The move to a 2-rate structure of 5% and 18%, combined with select higher rates for sin goods, reduces costs for businesses and consumers, makes compliances smoother, and boosts consumption and manufacturing.Future Outlook & ConclusionThe 2025 GST reforms in India, spearheaded by the recommendations of the 56th GST Council meeting, represent a major leap toward simplification, efficiency, and inclusiveness in indirect taxation. The move to a 2-rate structure of 5% and 18%, combined with select higher rates for sin goods, reduces costs for businesses and consumers, makes compliances smoother, and boosts consumption and manufacturing. The reforms have intentionally omitted the reinstatement of anti-profiteering measures, relying instead on trust in businesses to pass on benefits to consumers. The Council's commitment to technology-driven, trust-based administration enhances transparency and positions India's GST regime at par with global best practices.These changes, effective from 22nd September 2025, will have profound long-term impacts on the economic landscape, promoting ease of business, resolving litigation issues, and improving the quality of life for millions of Indians. With simpler rates, faster refunds, and strategic legal amendments, GST in India stands poised for a new era of growth and stability.◆ ◆ ◆Author may be reached at carishabhparikh@gmail.com and eboard@icai.inThe Chartered Accountant · Theme November 2025 | www.icai.org
Ep. 133 — Procedures for Issuing Returnable Delivery Challan for Job Work
CA Journal
· August 2026
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Procedures for Issuing Returnable Delivery Challan for Job WorkIn the context of Central Excise, a returnable delivery challan refers to a document and procedural framework that enables the temporary removal of excisable goods from a manufacturer's premises without attracting excise duty. This mechanism ensures compliance with tax regulations while allowing goods to be moved for purposes like job work, testing, repairs, exhibitions, or approvals, with the expectation of their return to the original premises. The returnable challan is crucial for tracking these goods, preventing tax evasion, and facilitating duty reversal or refunds upon their return, if applicable.With the introduction of the Goods and Services Tax (GST) on July 1, 2017, Central Excise on most goods was integrated into GST, shifting the focus to a unified tax system. Nevertheless, the concept of returnable delivery challan from Central Excise has directly influenced GST provisions, particularly under Rule 55 of the CGST Rules, 2017. This rule prescribes the use of delivery challans for non-supply movements, such as job work under Section 143, sale-or-return, or exhibitions. Let us now explore the procedure that the principal must follow for removing GST-paid goods for job work.Overview of Job Work Under GSTClause (68) of Section 2 of the Central Goods and Services Tax Act, 2017, defined the term "job work" as any treatment, processing, or operation carried out by an individual or entity (referred to as the "job worker") on goods that belong to another person who is registered under the GST regime. The job worker is the individual or entity responsible for carrying out specific processes or treatments on goods provided by another party. These processes could include activities such as manufacturing, assembling, packaging, testing, or any other form of processing that enhances or modifies the goods as per the requirements of the owner. The principal is the person who owns the goods and supplies them to the job worker for processing.The transaction between the principal and the job worker falls under the scope of supply as prescribed under Section 7, read with Schedule II of the CGST Act, 2017. This means that the job work services (as per Schedule II) provided by the job worker to the principal are subject to GST. The job worker typically issues an invoice for the services rendered, and GST is levied on the value of the job work charges as per the applicable GST rates. While job work transactions are generally taxable, Section 143(1) of the CGST Act provides for the movement of goods from the principal to the job worker without tax payout, to facilitate ease of operations for businesses. In other words, this section allows a registered principal to send inputs (raw materials, components, etc.) or capital goods (machinery, equipment, etc.) to a job worker for processing without payment of GST at the time of dispatch, subject to specified conditions.To avail this benefit, the principal must comply with the conditions specified under Section 143, such as intimating the jurisdictional officer and ensuring that the goods are returned to the principal (or supplied directly from the job worker's premises to another person on the principal's instructions) within the stipulated time frame:Inputs: Must be returned within one year from the date of dispatch to the job worker.Capital Goods: Must be returned within three years from the date of dispatch.If the goods are not returned within these time limits, the transaction is treated as a supply, and GST becomes payable on the value of the inputs or capital goods.To facilitate trade, the Central Board of Indirect Taxes and Customs (CBIC), vide Circular No. 38/12/2018 dated 26th March 2018, clarified the procedural aspects relating to the issuance of challans, furnishing of intimation and other documentary requirements in this regard. This process ensures seamless tracking of goods sent for job work while maintaining compliance with GST regulations. The triplicate and duplicate challan system facilitates proper documentation, and FORM GST ITC-04 acts as a consolidated report to inform the tax authorities about the movement of goods. The principal must maintain meticulous records to avoid tax liabilities in case of delays or non-return of goods.SituationsGoods sent from principal's locationGoods sent directly to job worker's locationGoods sent from one job worker's location to another job worker's locationThe detailed discussion on the movement of the goods in each situation is explained below:Situation 1: Goods Sent to a Single Job Worker and Returned After Job WorkIn this scenario, the principal sends goods to a single job worker for processing, and the goods are returned after completion of the job work.ProcedurePreparation of Delivery Challan & Waybill:The principal prepares a returnable delivery challan in triplicate as per Rules 45 and 55 of the CGST Rules.The challan must include details such as the description, quantity, value of goods, and a statement indicating that the goods are sent for job work without payment of tax.The principal should also ensure that before the outward movement of goods, the details of the delivery challan are reported in the E-Way Bill portal, and a valid E-Way Bill copy is generated.Two copies (original & duplicate) of the delivery challan are sent along with the goods to the job worker.The third copy is retained by the principal for record-keeping for filing the intimation in the prescribed form.Return of Goods:In Full:After completing the job work, the job worker returns the processed goods to the principal, endorsing a duplicate copy of the delivery challan sent by the principal. The returned goods must be accompanied by this duplicate copy to ensure proper documentation of the transaction.Piecemeal Return or Further Movement:If the goods are returned in parts (either to the principal or to another job worker), the original challan cannot be endorsed for partial quantities. In such a situation, the job worker must issue a fresh delivery challan for each partial movement, referencing the principal's original challan number and date. The job worker returns a copy of the principal's duplicate delivery challan along with the last instalment of goods, ensuring all movements are documented.Maintenance of Job Work Register:The Job Work Register is one of the vital records, used by the principal to track goods sent to a job worker for processing and their return, ensuring compliance with Section 143 of the CGST Act. It documents details, such as delivery challan number, date, job worker's GSTIN, goods description, HSN code, quantity, value, and nature of job work. The register records dispatch and return dates, including partial returns with fresh challans referencing the principal's original challan. It helps monitor compliance with return timelines, one year for inputs and three years for capital goods, to avoid treating non-returned goods as taxable supplies. The principal uses the register to file FORM GST ITC-04, reporting goods sent, returned, or pending.Accurate maintenance prevents ITC loss, tax liabilities, and audit issues. Non-compliance may lead to GST payment with interest. The register thus ensures transparency and operational control.Filing of FORM GST ITC-04:The principal uses the details from the delivery challan and the returned goods to file FORM GST ITC-04, which serves as the intimation required under Section 143. This form reports the details of goods sent to the job worker, goods returned, and any goods still with the job worker.Non-Compliance Consequences:If the goods are not returned to the principal within the prescribed time (one year for inputs, three years for capital goods), the transaction is treated as a taxable supply.The taxable value mentioned in the delivery challan is considered the assessable value, and the principal must pay the applicable GST along with interest from the due date until the date of payment.The transaction between the principal and the job worker falls under the scope of supply as prescribed under Section 7 read with Schedule II of the CGST Act, 2017. This means that the job work services (as per Schedule II) provided by the job worker to the principal are subject to GST.Situation 2: Goods Sent for Further Processing from One Job Worker to AnotherUnder the "Bill to Ship to" arrangement, goods are transported directly from the supplier's facility to the job worker's premises, bypassing the principal's location. In this model, the supplier issues an invoice to the principal (the "bill to" entity), while the goods are physically shipped to the job worker (the "ship to" entity) for processing or further work. This streamlined approach optimizes logistics by eliminating the need for intermediate storage or handling at the principal's location.Furthermore, this scenario extends to cases involving imported goods. When goods are brought into India, they are cleared at a customs station and, instead of being routed to the principal's warehouse or facility, are directly dispatched from the customs station to the job worker's location for processing. This direct shipment from the customs station ensures efficiency in the supply chain, reducing transit time and costs while enabling the job worker to commence operations promptly.In such cases, the principal is expected to follow the process given below:ProcedurePreparation of Delivery Challan:i. Domestic purchase:In this method, the supplier issues an invoice naming the principal as the buyer and the job worker as the consignee, as per Rule 46 (o) of the CGST Rules. This ensures that the principal is recognized as the owner of the goods for ITC purposes.Hence, the principal prepares a returnable delivery challan in triplicate under Rule 45 and sends two copies to the job worker after the goods reach. The challan details the goods being sent for job work and references the supplier's invoice.The third copy is retained by the principal for record-keeping for filing the intimation in the prescribed form.No E-way Bill is required to be prepared by the principal since no movement of goods was undertaken by him. However, the supplier might have issued the tax invoice and E-Way bill for the movement of goods to the job worker's location under the "Bill to Ship to" mode.The principal files a Bill of Entry at the customs station to clear imported goods intended for job work, ensuring compliance with customs regulations and facilitating the release of goods for further processing.After customs clearance, the principal prepares a delivery challan in triplicate as per Rule 45 of the CGST Rules, 2017, using the "Bill from and Dispatched from" method.The principal generates an E-way Bill under GST rules, referencing the delivery challan, to authorize the movement of goods from the customs station to the job worker.The goods are transported from the customs station to the job worker under the cover of the delivery challan, which specifies the goods sent for job work and references the Bill of Entry. This ensures a clear audit trail and compliance with GST regulations.Two copies of the delivery challan, along with a copy of the E-way Bill, are sent to the job worker to accompany the goods. The job worker endorses one copy upon receipt and returns it to the principal with the processed goods, while the second copy is retained by the job worker for their records.(For the remaining procedure, please refer to points (b) to (e) of Situation I.)If the goods are not returned to the principal within the prescribed time (one year for inputs, three years for capital goods), the transaction is treated as a taxable supply.Situation 3: Goods Sent from One Job Worker's Location to Another Job Worker's LocationGoods are sent from one job worker to another when a principal engages multiple job workers to perform sequential or specialized processes on the same goods, such as cutting, dyeing, and stitching for textiles. This is common in industries, such as manufacturing, textiles, or electronics, where different expertise or equipment is needed at each stage. The need arises to optimize production efficiency, leverage specialized skills, or utilize specific machinery available at different job worker locations. The first job worker, after completing their task, transfers the goods to the next job worker under a fresh delivery challan, referencing the principal's original challan to maintain traceability. An E-way Bill is generated to authorize the movement, ensuring GST compliance. This process allows the principal to streamline complex production without moving goods back and forth unnecessarily. Accurate documentation prevents Input Tax Credit loss and potential tax liabilities. This multi-job worker process enhances operational flexibility while adhering to GST regulations. The principal needs to ensure the following procedure is followed when the goods are sent from one job worker's location to another:The principal issues a fresh delivery challan for the movement of goods from the first job worker to the second job worker, referencing the original challan.The first job worker can issue their own delivery challan, referencing the principal's original challan, or endorse the principal's challan by specifying the quantity and description of goods being sent to the next job worker.(For the remaining procedure, please refer to points (b) to (e) of Situation I.)By adhering to Rules 45 and 55 and filing FORM GST ITC-04, the principal can claim ITC on goods sent for job work, even when they are not in their possession.ConclusionThe procedures for issuing a returnable delivery challan under the CGST Act, 2017, are designed to facilitate the movement of goods for job work while ensuring compliance with GST regulations. By adhering to Rules 45 and 55 and filing FORM GST ITC-04, the principal can claim ITC on goods sent for job work, even when they are not in their possession. The processes outlined for each scenario, single job worker, multiple job workers, direct supply to job worker, and piecemeal returns, provide a robust framework for managing job work transactions. Proper documentation, timely return of goods, and accurate reporting are critical to avoid tax liabilities and ensure compliance with the GST law.◆ ◆ ◆ReferenceCircular No. 38/12/2018-GST dated 26.03.2018Author may be reached at eboard@icai.inThe Chartered Accountant November 2025 | www.icai.org
Ep. 136 — Understanding the differences,interactions, and relationshipsbetween Penalties underSections 73/74/74A and Section122(2) of the CGST Act 2017
CA Journal
· August 2026
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Understanding the differences, interactions, and relationships between Penalties under Sections 73/74/74A and Section 122(2) of the CGST Act 2017This article examines the differences and interconnections between penalties under Sections 73, 74, 74A, and 122(2) of the CGST Act, 2017. Sections 73, 74, and 74A authorize penalties for taxes that are unpaid, underpaid, or erroneously refunded due to errors or fraud, based on the nature of the offence. Section 122(2) specifies penalties for tax offences, both intentional (fraud) and unintentional (errors), but does not define a “Proper Officer,” unlike Sections 73, 74, and 74A. The penalties under Sections 73, 74, 74A, and 122(2) are distinct and not interchangeable. Penalties under Section 122(2) apply when taxes are no longer recoverable under Sections 73, 74, or 74A due to the expiration of time limits. Section 127 empowers officers to levy penalties not addressed by other sections. Rule 142(1), which mentions Sections 122 and 125, conflicts with the absence of a “Proper Officer” in these sections. Notices or penalties under Section 122(2) are invalid if issued under the procedures of Sections 73, 74, or 74A.The CGST Act, 2017, seeks to uphold tax compliance through well-defined penalty structures to address lapses in payment, fraudulent actions, or procedural non-adherence. Understanding the nuances of penalty provisions under Sections 73, 74, 74A, and 122(2) is critical for taxpayers, legal professionals, and tax officials. This article explores the interplay between these sections, addressing whether penalties are interchangeable, correlated, or supplementary while emphasizing their distinct nature. By examining statutory provisions and interrelations, this article clarifies key operational aspects to guide the lawful imposition of penalties within the GST framework.This article aims to address the following questions:Are the penalties stipulated under Sections 73/74/74A and Section 122(2) identical?Does the proper officer possess the discretion to opt for imposing a penalty under Section 122(2) instead of Sections 73/74/74A?Is there any correlation between the penalties specified under Sections 73/74/74A and Section 122(2)?Does the penalty articulated in Sections 73, 74, and 74A stem from Section 122(2), or is it a separate penalty? Similarly, is the penalty delineated in Section 122(2) distinct from those outlined in Sections 73, 74, and 74A?AnalysisSection 73 Non-fraud cases (up to FY 2023-24)Determination of tax, pertaining to the period up to Financial Year 2023-24, not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any willful-misstatement or suppression of facts.Under Section 73, the proper officer is authorized to demand and recover tax, interest, and penalty in the following cases:Tax not paid or short paid, orerroneously refunded, orinput tax credit wrongly availed or utilised for any reason other than fraud or any wilful-misstatement or suppression of facts.Section 74 Fraud cases (up to FY 2023-24)Determination of tax, pertaining to the period up to Financial Year 2023-24, not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful-misstatement or suppression of facts.Under Section 74, the proper officer is authorized to demand and recover tax, interest, and penalty in the following cases:Tax not paid or short paid, orerroneously refunded, orinput tax credit wrongly availed or utilised by reason of fraud or any willful-misstatement or suppression of facts.Section 74A All cases (FY 2024-25 onwards)Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason pertaining to Financial Year 2024-25 onwards.Under Section 74A, the proper officer is authorized to demand and recover tax, interest, and penalty in the following cases:Tax not paid or short paid, orerroneously refunded, orinput tax credit wrongly availed or utilised for any reason pertaining to Financial Year 2024-25 onwards.Section 122(2) Offences and penalty amountsSection 122(2) specifies the reasons, i.e., offences for which penalties can be imposed and the amount of penalty that can be levied.Section 122(2) — Any registered person who supplies any goods or services or both on which any tax has not been paid or short-paid or erroneously refunded, or where the input tax credit has been wrongly availed or utilized:for any reason, other than the reason of fraud or any wilful misstatement or suppression of facts to evade tax,for reason of fraud or any wilful misstatement or suppression of facts to evade tax,In the author’s opinion, the reasons mentioned for imposing penalties under Sections 73/74/74A and Section 122(2) are similar, but the penalties that can be imposed are not the same. There are fundamental differences in the provisions for imposing penalties under Sections 73/74/74A and Section 122(2).“It is not permissible if a notice is issued under Sections 73/74/74A and a penalty is imposed under Section 122(2) instead of the penalties specified in Sections 73/74/74A.Key DifferencesThe differences between Sections 73/74/74A and Section 122(2) are as follows.S. No.Section 73/74/74ASection 122(2)1Mention the term “Proper Officer,” and Circular No. 3/3/2017 – GST, dated 05.07.2017, specifies who is the Proper Officer for the purposes of Sections 73/74/74A.However, in Section 122(2), the term “Proper Officer” is not used. Even Circular No. 3/3/2017 – GST, dated 05.07.2017 does not mention any officer as the proper officer for the purpose of Section 122.2The proper officer is authorized to demand and recover penalties including tax and interest.Since the term “Proper Officer” is not used in Section 122(2), the question of granting authority to a Proper Officer does not arise.5Without the tax amount, Sections 73/74/74A can’t be initiated, hence penalties can’t be demanded and recovered.In contrast, Section 122(2) focuses on penalties only.6Sections 73/74/74A provide provisions regarding the time limits for issuing show cause notices.In contrast, Section 122(2) does not provide any provisions for issuing show cause notices. It only specifies the penalties for various offences.7Sections 73/74/74A provide provisions regarding the time limits for issuing orders.In contrast, Section 122(2) does not provide any provisions for issuing orders.8Sections 73/74/74A provide that if a person being penalized pays the tax within a specified time limit, then he will be granted a reduction in the penalty.In contrast, Section 122(2) only specifies the penalties for various instances of non-compliance by a registered person. Nothing is contained regarding the reduction in penalties.Sections 73/74/74A compared with Section 122(2)Interrelation and InterpretationsIt is important to note that the reasons for imposing penalties under Sections 73/74/74A are similar to those mentioned under Section 122(2). However, the penalties under Sections 73/74/74A and Section 122(2) are not supplementary to each other. In other words, it is not permissible if a notice is issued under Sections 73/74/74A and a penalty is imposed under Section 122(2) instead of the penalties specified in Sections 73/74/74A. Nowhere in the entire CGST Act 2017 is it stated that the penalties imposed under Sections 73/74/74A will be derived from Section 122(2) or that they are the same.Now, a question arises as to why the reasons for imposing penalties under Sections 73/74/74A and Section 122(2) are similar. The reason is that if a registered person commits such offences for which the time limit for demand and recovery of tax under Sections 73/74/74A has expired, then Sections 73/74/74A can’t be invoked, but a penalty can be imposed under the provisions of Section 122(2).Another question arises: since the term “Proper Officer” is not used in Section 122(2), how will a penalty be imposed under Section 122(2)? I will discuss this matter further in this article.Section 75(13) — No double penaltyIt is important to mention Section 75(13) here, which provides special provisions. Section 75(13) states that where a penalty is imposed under Sections 73/74/74A, no penalty shall be imposed under any other provision for the same act or omission on the same person.This means that the reasons (act or omission) mentioned under Sections 73/74/74A are also listed elsewhere in the CGST Act. Therefore, Section 75(13) prohibits imposing a penalty under any other provision for the same act or omission if a penalty has already been imposed under Sections 73/74/74A.These reasons (act or omission) are also listed in Section 122(2). Hence, it is reiterated and essential to consider that if the proper officer imposes a penalty under Sections 73/74/74A, he cannot impose a penalty again under Section 122(2).Based on the above, it can be stated that the penalties mentioned under Sections 73/74/74A and Section 122(2) might seem similar because the reasons given are the same. However, in reality, they are not the same. The proper officer is not given the authority to choose to impose a penalty under Section 122(2) instead of the penalties specified in Sections 73/74/74A. The penalties mentioned under Sections 73/74/74A and Section 122(2) are not related to each other.Now the question arises: if the term “Proper Officer” is not mentioned in Section 122(2), is it appropriate to issue a notice and impose a penalty under Section 122(2)? As mentioned earlier, no notice can be issued under Section 122(2).Role of Section 127It is now essential to mention Section 127, as without it, we cannot answer these questions.Section 127 — Power to impose penalty in certain casesWhere the proper officer is of the view that a person is liable to a penalty and the same is not covered under any proceedings under Section 62 or Section 63 or Section 64 or Section 73 or Section 74 or Section 74A or Section 129 or Section 130, he may issue an order levying such penalty after giving a reasonable opportunity of being heard to such person.Section 127 states that where penalties are not covered under Sections 62, 63, 64, 73, 74, 74A, 129, and 130, the proper officer can order penalties after providing an opportunity for a hearing.Upon reading the above, it becomes clear that Section 127 allows the proper officer to use the power granted under this section to impose penalties if any penalties are not covered by these Sections 62, 63, 64, 73, 74, 74A, 129, and 130 (eight sections). It is important to note that Section 127 uses the term “Proper Officer” and mentions issuing orders, but it does not specify any time limit for issuing these orders. Additionally, Section 127 does not mention imposing any taxes or interest.Now, let us try to understand what type of penalties are not covered by these eight sections, and for which the proper officer can impose penalties using the power granted under Section 127 after providing a proper hearing opportunity.When we read Sections 73/74/74A and Section 127 together, the question arises as to what type of penalties are not mentioned under Sections 73/74/74A and can be imposed on a person using the power granted under Section 127. To understand this, we need to refer to the following table.S. No.Reference to Section 122Brief DescriptionCovered by 73/74/74A?1Section 122(1)Section 122(1) includes a total of 21 categories of offences, covering different types of offences. These offences and the penalties for them are not covered under Sections 73/74/74A but are covered under Section 122(1).No2Section 122(1A)The offences covered under Section 122(1A) are not covered under Sections 73/74/74A.No3Section 122(1B)The offences covered under Section 122(1B) are not covered under Sections 73/74/74A.No4Section 122(2)The offences and reasons for offences mentioned under Section 122(2) are also covered under Sections 73/74/74A.Yes5Section 122(3)Section 122(3) includes five categories of offences, covering different types of offences. These offences are not covered under Sections 73/74/74A but are covered under Section 122(3).NoCoverage of Section 122 offences under Sections 73/74/74AWorked example — Mr. “R” and wrongly utilised ITCSuppose Mr. “R” wrongly utilized the Input Tax Credit (ITC) of Rs. 18,000 in his GSTR-3B. In this case, if the proper officer issues a notice under Sections 73/74/74A, Mr. “R” will have to submit a reply/response within the time limit specified in the notice. If Mr. “R” fails to respond within the specified time, then, because Mr. “R” has failed to furnish information called for by an officer, the proper officer can impose a penalty using the powers granted under Section 127, considering the offences under Section 122(1)(xvii). This penalty shall be apart from the penalty that will be levied under Sections 73/74/74A.“Section 122(1)(xvii) states that failure to furnish information or documents called for by an officer in accordance with the provisions of this Act or the rules made thereunder, or furnishing false information or documents during any proceedings under this Act, is an offence.It is important to note that the action is initiated under Sections 73/74/74A against Mr. “R” for the demand and recovery of Rs. 18,000. He is to be penalized under Sections 73/74/74A, but the penalty for offence (non-reply to the notice — u/s 122(1)(xvii)) is not covered under Sections 73/74/74A. Therefore, for such penalties, Section 127 provides that where penalties are not covered under Sections 73, 74, and 74A, the proper officer can impose a penalty after providing an opportunity for a hearing.If we carefully read Section 122(2), we understand that the penalties covered under Sections 73/74/74A for wrongly utilized ITC are also covered under Section 122(2). However, this does not mean that penalties mentioned under Sections 73/74/74A and Section 122(2) can be imposed on the same person for the same act or omission. If a penalty has already been imposed under Sections 73/74/74A, no penalty can be imposed under Section 122(2) for the same act or omission.Another important point is that Section 75(13) does not mention any other section. However, based on the above, it seems that it only prohibits imposing penalties under Section 122(2).This means that since wrongly availed ITC is subject to action under Sections 73/74/74A, the penalty will also be proposed and imposed under these sections only. Therefore, if action is initiated under Sections 73/74/74A, no penalty can be imposed under Section 122(2) for the same offence. However, if the person has committed an offence that is covered under Sections 122(1), 122(1A), 122(1B), or 122(3), a penalty can only be imposed using the powers granted under Section 127.A second illustration — Sections 62, 63 and 64Let’s try to understand this with another example. We know that Sections 62, 63, and 64 do not mention any penalties for non-compliance. If a person commits an offence under Sections 62, 63, and 64, then action can be taken/completed under these sections, but penalties are not mentioned.Now, it is important to note that non-compliance should result in penalties. However, since these sections do not mention any penalties, how will penalties be imposed? Section 127 states that where penalties are not covered under Sections 62, 63, and 64, the proper officer can impose penalties after providing an opportunity for a hearing using the powers granted under Section 127. Therefore, since Sections 62, 63, and 64 do not mention any penalties, penalties can be imposed using the powers granted under Section 127.It is also important to note that Sections 62, 63, and 64 do not mention any penalties because if they did, all the offences and penalties mentioned under Section 122 would have to be written in these sections also. To avoid writing these offences and penalties repeatedly, all penalties were mentioned under Section 122. Therefore, if action is taken under Sections 62, 63, and 64, and penalties need to be imposed, they are all mentioned in one place under Section 122. Section 127 provides that where penalties are not covered under Sections 62, 63, and 64, the proper officer can impose penalties after providing an opportunity for a hearing.“Sections 73/74/74A and 122(2) can only be invoked for imposing penalties if there is an outstanding tax liability. If a show cause notice has been issued under Sections 73/74/74A without mentioning the penalty, later penalties cannot be imposed under Section 122(2) by exercising powers under Section 127.It is crucial to understand that Sections 73/74/74A and 122(2) can only be invoked for imposing penalties if there is an outstanding tax liability. If a show cause notice has been issued under Sections 73/74/74A without mentioning the penalty, later penalties cannot be imposed under Section 122(2) by exercising powers under Section 127. The initial lines of Section 122(2) suggest that penalties under this section can only be imposed when there is a tax payable. Since tax recovery has already occurred under Sections 73/74/74A, there is no tax left or payable. Consequently, when no tax is payable, even if an offence falls under Section 122(2), a penalty cannot be imposed by exercising powers under Section 127, citing the absence of a time limit in Section 122(2) of the CGST Act, 2017.Role of Rule 142It is also essential to mention CGST Rule 142(1) here. Rule 142(1) mentions 12 sections under which a notice can be issued. Notices can only be issued under those sections where the term “Proper Officer” is mentioned. Out of the 12 sections mentioned in Rule 142(1), I will discuss only three sections: Section 122, Section 125, and Section 127.A question arises as to why Rule 142(1) mentions issuing notices under Sections 122 and 125, even though the term “Proper Officer” is not used in these sections. On the other hand, the mention of Section 127 is appropriate because the term “Proper Officer” is used in Section 127. The officer, using the powers granted under Section 127, can issue a notice if an offence mentioned in Sections 122 and 125 occurs.It appears that Sections 122 and 125 should not have been mentioned in Rule 142(1).A penalty under Section 122(2) cannot be imposed by issuing a notice under Sections 73/74/74A. If such a penalty is imposed using a notice under Sections 73/74/74A, it is invalid. It can be concluded that such an order was passed without issuing a show-cause notice and therefore holds no value.ConclusionThe penalties listed in Sections 73, 74, 74A, and Section 122(2) of the CGST Act, 2017, serve different yet complementary purposes. The rationale for imposing penalties under Sections 73, 74, and 74A is similar to that under Section 122(2). However, the penalties in Sections 73, 74, 74A, and Section 122(2) are not supplementary. This means that if a notice is issued under Sections 73, 74, or 74A, it is impermissible to impose a penalty under Section 122(2) instead of the penalties specified in Sections 73, 74, or 74A. Moreover, any procedural overlap in the imposition of penalties under Sections 73, 74, 74A, and Section 122(2) would render the notice or order void.ReferencesCentral Goods and Services Tax (CGST) Act, 2017 — Sections 73, 74, 74A, 122(2), 127, 75(13).Circular No. 3/3/2017 – GST, Dated 05.07.2017 — Clarifications regarding Proper Officers.Rule 142 of the CGST Rules, 2017 — Provisions related to notices and penalties.Relevant interpretations of penalty provisions in the GST Act framework, emphasizing procedural adherence and lawful compliance.◆ ◆ ◆Author may be reached atrkcamballb@gmail.com · eboard@icai.inThe Chartered Accountant · November 2025 · www.icai.org
Ep. 137 — Input Tax Credit Challenges and Notices under Section 74/74A of the CGST Act, 2017
CA Journal
· August 2026
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Input Tax Credit Challenges and Notices under Section 74/74A of the CGST Act, 2017Numerous genuine taxpayers have faced undue hardships due to the non-compliance of their suppliers, particularly in the context of input tax credit (ITC) restrictions. To ease the hardships experienced by honest taxpayers, the Government should consider implementing a mechanism that assesses suppliers’ genuineness based on their past compliance and notices to be issued to suppliers rather than recipients. These policy reforms would not only safeguard legitimate businesses from the consequences of suppliers’ non-compliance but also support the government’s broader objective of promoting “Ease of Doing Business”.The GST framework in India aims to streamline the taxation system while ensuring a seamless flow of ITC for registered taxpayers. Section 16 of the CGST Act, 2017, prescribes conditions for availing ITC. At the same time, Section 74 of the Act empowers tax authorities to issue SCN (pertaining to the period up to Financial Year 2023-24) in cases where ITC is alleged to be wrongly availed due to fraud, willful misstatement, or suppression of facts, and the newly inserted Section 74A empowers tax authorities to issue SCNs (for the period from Financial Year 2024-25 onwards) irrespective of the fact whether the case involves fraud, willful misstatement, or suppression of facts.However, notices have been received by registered persons u/s 74 of the CGST Act (pertaining to the period up to Financial Year 2023-24) even after fully complying with all statutory requirements. A major concern arises when ITC is denied solely on the grounds of the supplier’s non-compliance, such as failure to pay tax or retrospective cancellation of their GST registration.Recently, there has been a significant increase in the issuance of notices under Section 74 of the CGST Act, 2017, (pertaining to the period up to Financial Year 2023-24) targeting registered persons alleged to have wrongly availed ITC. These notices are frequently issued based on the grounds that ITC claims contravened the conditions prescribed under Section 16 of the CGST Act, 2017, particularly in cases involving the absence of actual receipt of goods.Section 74 of the GST Act, 2017, addresses the determination of tax not paid, short-paid, erroneously refunded, or input tax credit wrongly availed due to fraud, willful misstatement, or suppression of facts. It mandates that the proper officer issues a notice to the taxpayer, requiring them to explain why they should not pay the specified tax, interest, and penalties. Consequently, even bona fide recipients who have fulfilled their obligations, such as possessing valid tax invoices and making payments through proper banking channels, are being held accountable for defaults committed by their suppliers. This has led to growing legal and procedural challenges for businesses defending their legitimate ITC claims.Section 74A of the CGST Act, 2017, introduced for issuance of SCN for the period from Financial Year 2024–25 onwards, empowers the proper officer to initiate proceedings in cases where any tax has not been paid, has been short paid, has been erroneously refunded, or where Input Tax Credit (ITC) has been wrongly availed or utilized, for any reason, irrespective of whether such non-compliance is due to fraud, willful misstatement, or suppression of facts. Under this provision, if such a discrepancy is noticed, the officer is authorized to issue a Show Cause Notice (SCN) to the concerned person, requiring them to explain why the specified amount of tax, along with interest under Section 50 and applicable penalty, should not be recovered. This provision significantly broadens the scope of tax recovery, allowing action in cases other than fraudulent intent, thereby placing a greater compliance responsibility on taxpayers including genuine recipients of supplies who may be impacted by supplier’s defaults.Key Conditions for Availing ITC under Section 16 of the CGST Act, 2017To understand these challenges, it is essential to analyse the key conditions under Section 16 of the CGST Act, 2017, which govern the entitlement of ITC to registered persons for goods or services used in the course or furtherance of business. These conditions form the basis for scrutinizing ITC claims:Possession of a Valid Tax Invoice or Prescribed Document The recipient of goods or services must be in possession of a valid tax invoice, debit note, or any other prescribed document issued by a registered supplier in accordance with Section 31 of the CGST Act and Rule 36 of the Central Goods and Services Tax Rules, 2017 (CGST Rules). The document must clearly reflect all requisite particulars such as the GSTIN of the supplier and recipient, description of goods/services, value, tax rate, and amount of tax charged.Actual Receipt of Goods or Services ITC can only be claimed when the recipient has received the goods or services.GST has been paid to the Government by the Supplier One of the key conditions under Section 16(2)(c) of the CGST Act mandates that the tax charged on the supply must have been actually paid to the government, either in cash or through the utilization of input tax credit by the supplier, thereby ensuring that input tax credit is availed only against tax-compliant transactions and contributing to the prevention of revenue leakage and the promotion of compliance within the GST framework.Filing of Return Under Section 39 The recipient must furnish a return under Section 39 of the CGST Act. ITC cannot be claimed unless it is properly declared in the monthly or quarterly return filed by the registered person.Input Tax Credit allowed only if reflected in GSTR-2B As per Rule 36(4) of the CGST Rules, input tax credit can be availed only in respect of those invoices or debit notes that are reported by the supplier in their GSTR-1 (or in IFF) and are duly reflected in the recipient’s GSTR-2B.ITC to be Claimed Within the Prescribed Time Limit As per Section 16(4) of the CGST Act, input tax credit is to be claimed earlier of the following:30th November of the following financial year, orThe date of filing the annual return (Form GSTR-9) for the relevant financial year.The recipient must furnish a return under Section 39 of the CGST Act. ITC cannot be claimed unless it is properly declared in the monthly or quarterly return filed by the registered person.A registered person shall not be entitled to avail ITC if any of the prescribed conditions under the CGST Act and Rules are not fulfilled. In such cases, the authorities have initiated proceedings under Section 74 of the CGST Act, (pertaining to the period up to Financial Year 2023-24) which provides for the recovery of tax along with applicable interest and penalty in cases involving fraud, wilful misstatement, or suppression of facts and under Section 74A (for the period from Financial Year 2024–25 onwards) irrespective of the fact whether the case involves fraud, willful misstatement, or suppression of facts.In cases where input tax credit is denied due to alleged non-compliance, it is crucial for the taxpayer to furnish sufficient documentary evidence to validate the genuineness of the transaction and the eligibility of the ITC claimed. Submitting proper records can help establish that all prescribed conditions were duly satisfied and that there was no element of fraud, wilful misstatement, or suppression of facts.Documents to be Submitted in Response to Notice under Section 74 and 74A of CGST Act, 2017When responding to notices under Section 74 and 74A of CGST Act, 2017, the following documents (non-exhaustive list) are crucial to substantiate the ITC claim:Purchase Order A purchase order initiates the commercial transaction between the supplier and the recipient. It establishes the buyer’s intention to procure goods or services. It serves as a formal and documented agreement between the buyer and the supplier, which contains the quantity, value, delivery terms, and applicability of the Goods and Services Tax (GST). This document evidences the genuine nature of the procurement.E-mail Communication E-mail communication related to procurement serves as a record of active and ongoing correspondence between the persons. It may cover essential aspects such as price negotiations, delivery schedules and follow-up discussions. This documented interaction supports the authenticity of the transaction by demonstrating a bona fide business relationship.Invoice Copy An invoice copy is a prime tax document, evidencing the actual supply of goods or services. It contains all requisite particulars, including details of the supplier, recipient, taxable value, GSTIN, tax charged, place of supply and the nature of the supply. A valid tax invoice is a mandatory precondition for availing input tax credit.Lorry Receipt / Consignment Note The Lorry Receipt (LR) or Consignment Note serves as conclusive evidence of the physical movement of goods from the supplier’s premises to the recipient’s location. Issued by the transporter, it contains details such as the name of the consignor and consignee, description and quantity of goods, vehicle number, and date of dispatch. It reinforces that the supply was not merely on paper but was executed in substance.Goods Receipt Note The Goods Receipt Note (GRN) is an internal document generated by the recipient upon receipt of goods, confirming that the items dispatched by the supplier have been physically received at the recipient’s premises. It typically includes details such as quantity received, condition of goods, date of receipt, and reference to the corresponding purchase order and invoice. The GRN serves as a crucial link in the purchase cycle, affirming that the goods mentioned in the invoice were not only delivered but also verified and accepted by the recipient.E-Way Bill The E-Way Bill is a mandatory compliance document under GST for the movement of goods exceeding a value of 50,000. It is electronically generated and contains details such as the invoice number, date, transporter information, vehicle number, consignor and consignee GSTINs, and value of goods. The presence of a valid E-Way Bill linked with the transaction provides evidence of the lawful and physical movement of goods. It supports both system-based validation and helps prevent fake invoicing practices.Stock Register Showing Movement of Goods The Stock Register maintained by the recipient reflects inward and outward movement of goods and serves as an internal record of inventory levels. It includes item-wise opening balance, purchases (inward entries), consumption (internal transfer), sales (outward entries), and closing stock for a given period. This document becomes an important part of the evidence demonstrating that the transaction was not merely on paper but had a material impact on the business.Bank Statement Showing Payment to Defaulting Supplier A Bank Statement evidencing payment made to the supplier demonstrates the genuineness of the transaction. It proves that the consideration for the supply, including the tax component, was actually paid by the recipient through banking channels. While the supplier’s failure to remit the tax to the government may trigger departmental scrutiny, the recipient has nevertheless fulfilled the statutory condition of making payment against a valid tax invoice.Return Filing Status of Supplier from GST Portal The Return Filing Status of the Supplier, as downloaded from the GST portal, serves as evidence of the supplier’s compliance at the time of entering the transaction. This includes records of GSTR-1 and GSTR-3B filings, which indicate whether the supplier was actively filing returns under the GST law.Extract from GSTR-2B An Extract from GSTR-2B acts as a system-generated proof of ITC eligibility. GSTR-2B is an auto-drafted ITC statement that reflects invoices uploaded by the supplier in their GSTR-1 or IFF (Invoice Furnishing Facility) for a specific tax period. The presence of the relevant invoice in the recipient’s GSTR-2B confirms that the supplier has disclosed the transaction to the GST system, which forms the basis for availing credit.Ledger of Supplier from Books of Accounts The Supplier’s Ledger, as maintained in the recipient’s books of accounts, serves as an internal accounting evidence of the transaction. It captures all financial entries related to the supplier, including purchases, tax components, payments made, debit/credit notes issued, and closing balances. When the ledger aligns with the tax invoice, bank statement, GRN, and other related documents, it further reinforces the authenticity and completeness of the transaction.Toll Tax Payment Proof (if available) Toll tax payment proof is an important supporting document that demonstrates the physical movement of goods via road transport during a commercial transaction. Such receipts or payment records can significantly strengthen the authenticity and genuineness of the supply.In cases where the recipient possesses all valid documentation, has actually received the goods, and has fulfilled all conditions prescribed under Section 16 of the CGST Act, the recipient should not be penalized for any default or non-compliance on the part of the supplier.In cases where the recipient possesses all valid documentation, has actually received the goods, and has fulfilled all conditions prescribed under Section 16 of the CGST Act, the recipient should not be penalized for any default or non-compliance on the part of the supplier.Consequences of ITC Denial without Considering Genuineness of TransactionGenuineness of the Transaction The recipient should not be penalized for a genuine business transaction that is supported by proper documentation as mentioned above. Imposing penalties on recipients in such situations would unfairly burden businesses that have complied with the law in good faith and have engaged in legitimate transactions. The legal maxim “Lex Non Cogit ad Impossibilia” asserts that the law cannot force someone to perform an act that is beyond their ability to do. This principle was highlighted by Justice Owens in Hughey v. JMS Development, where he stated: “The law does not compel one to do the impossible. If a law imposes a tax that the person cannot fulfill due to circumstances beyond their control, and without fault on their part, the law will typically excuse them.”Principle of Substance Over Form The proper officer must focus on the substance of the transaction rather than the mere technicalities. If the recipient has received goods or services and paid for them, the transaction is legitimate, regardless of the supplier’s compliance.Significant Impact on Business Operations Blocking or reversal of ITC leads to significant cash flow disruption, as it directly increases the working capital requirement of the business. Denial or reversal of ITC due to the default of supplier results in an increased compliance burden for the recipient, requiring extensive documentation, reconciliations, and prolonged engagement with tax authorities to justify legitimate claims. Due to a supplier’s non-compliance, the supply chain can face significant disruption. Trust between recipients and suppliers is undermined, causing recipients to become hesitant in dealing with small, new, or less-established vendors due to concerns over ITC-related consequences. This approach often leads to sourcing delays, dealings with a limited pool of suppliers, reduced bargaining power, and increased procurement costs, ultimately affecting operational efficiency and overall competitiveness.Fraudulent ITC claims can negatively affect a registered person’s reputation. Even if the registered person has complied with all legal requirements, they are still connected to transactions flagged as fraudulent, mainly due to issues with the supplier. It can raise concerns among customers, investors, and other stakeholders and harm the company’s overall image.Relevant Case LawIn Himalaya Communication Pvt. Ltd. v. Union of India & Ors. [CWP No. 8809 of 2025 decided on June 06, 2025], the Hon’ble Himachal Pradesh High Court held that ITC cannot be denied exclusively on the ground of retrospective cancellation of the supplier’s GST registration.Himalaya Communication Pvt. Ltd., the recipient of goods, had claimed ITC based on the tax paid to its supplier. However, the supplier’s GST registration was cancelled retroactively by the authorities. The Department had denied ITC to the recipient, arguing that since the supplier’s registration was cancelled, the transaction was considered invalid for ITC claims.The Court emphasized that, as per Section 16(2) of the CGST Act, 2017, the authorities should consider the fact and genuineness of the transaction before proceeding to deny Input Tax Credit as the recipient has already paid tax to the supplier, and they have all relevant documents which are required for claiming the ITC and that the supplier has already discharged tax liability by filing of GSTR-3B. Accordingly, the High Court set aside the impugned order and remanded the matter to the Adjudicating Authority for fresh consideration in accordance with the law.A similar view was taken by the Hon’ble Madras High Court in M/s. Engineering Tools Corporation v. The Assistant Commissioner [decided on February 15, 2024], wherein it was held that ITC cannot be denied merely due to retrospective cancellation of the supplier’s registration without examining the genuineness of the transaction and supporting evidence.ConclusionIn response, registered persons are required to submit documentary evidence, including tax invoices, goods receipt notes, lorry receipts, e-way bills, bank statements, GSTR-2B extracts, and supplier ledger accounts, to substantiate the authenticity of the transaction. Encouragingly, courts have taken a supportive stance in many such cases, holding that ITC should not be denied merely due to retrospective cancellation of the supplier’s registration or procedural defaults beyond the recipient’s control, especially where the transaction is genuine and supported by appropriate documentation. Strong evidence and consistent court rulings uphold fair adjudication, affirming that the law does not expect the impossible.◆ ◆ ◆Author may be reached at khyatidattani2@gmail.com and eboard@icai.in The Chartered Accountant · November 2025 · www.icai.org
Ep. 138 — Understanding the Natureof Late Fees and PenaltiesUnder GST
CA Journal
· August 2026
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Understanding the Nature of Late Fees and Penalties Under GSTThis article examines whether GST law permits simultaneous imposition of late fees (Section 47) and penalties (Section 125) for delayed return filing. It analyses the Madras High Court's judgment in Tvl. Jainsons Castors & Industrial Products v. Assistant Commissioner (ST), which held that late fees constitute a form of penalty, thereby preventing additional penalties under Section 125. The article evaluates this reasoning through legislative intent behind GST provisions and judicial precedents like Sona Chandi Oal Committee, highlighting the quid pro quo nature of late fees, and provides practical guidance for legal professionals handling disputes involving late fees and penalties.A common issue faced by GST taxpayers is whether they can be subjected to both late fees and penalties for delayed filing of returns. While late fees under Section 47 are levied for filing returns after the due date, tax authorities have also been imposing general penalties under Section 125, arguing that late filing constitutes a statutory contravention. However, this raises a fundamental legal question: Are late fees and penalties the same, or do they serve different purposes?A recent ruling by the Madras High Court in Tvl. Jainsons Castors & Industrial Products v. Assistant Commissioner (ST) (2025) held that once a late fee is imposed, no separate penalty under Section 125 can be levied, as the late fee itself is a form of penalty.Through an analysis of key judicial precedents, and a detailed examination of GST provisions, this article explores why late fees should not be treated as penalties. The distinction between these two is crucial. This analysis examines whether GST late fees are charges for any services or penal in nature.Statutory FrameworkThe GST Law (Central GST Act, 2017 and corresponding State GST Acts) explicitly provides for late fees in Section 47 and for a general penalty in Section 125. Section 47 mandates that any registered person who fails to furnish required GST returns by the due date "shall pay a late fee of one hundred rupees for every day during which such failure continues," subject to prescribed caps.In contrast, Section 125 is a residual penalty provision which states that any person who contravenes any provision of the Act or rules "for which no penalty is separately provided" shall be liable to a penalty of up to ₹25,000. By using the term "late fee" in Section 47 instead of "penalty," the legislature signalled a different intent for late filing charges.To illustrate, Section 47(1) of the CGST Act prescribes late fees for delays in furnishing various periodic returns (such as GSTR-1 for outward supplies or GSTR-3B summary returns). Section 47(2) deals with late fees for delayed annual returns, stating that a person who fails to furnish the annual return by the due date "shall be liable to pay a late fee of one hundred rupees for every day during which such failure continues," capped at 0.25% of the turnover.These fees are statutorily fixed (or computable) amounts, not requiring any discretionary assessment of gravity by an officer. In contrast, a penalty under Section 125 can extend up to ₹25,000 and would typically involve a discretionary adjudication (often following a show-cause notice) to determine if the contravention (for which no specific penalty exists elsewhere) merits a penalty. By creating an automatic late fee for late returns, the law intended to simplify enforcement – the fee accrues by operation of law for the period of default, rather than treating every late filing as an offence requiring separate penalty proceedings.Judicial Analysis of Late FeesCourts in India have examined the nature of "late fee" provisions in tax laws on multiple occasions. The consensus in jurisprudence is that late fees are fundamentally fees for extra services rendered, rather than penalties. Key cases have elaborated on the distinction:“Courts in India have examined the nature of "late fee" provisions in tax laws on multiple occasions. The consensus in jurisprudence is that late fees are fundamentally fees for extra services rendered, rather than penalties.Rashmikant Kundalia v. Union of India (2015) – In this case, the Bombay High Court upheld the constitutional validity of Section 234E of the Income Tax Act, 1961, which levies a daily late fee for delayed filing of TDS (Tax Deducted at Source) statements. The petitioners argued that this fee was really a penalty. The High Court, however, explicitly held that Section 234E "is not punitive in nature but a fee which is a fixed charge for the extra service which the Department has to provide due to the late filing of the TDS statements". The Court noted that a large number of deductors were filing TDS returns late, creating additional work for the tax department and that the ₹200-per-day charge was meant to compensate the administrative burden rather than punish the deductor. By characterizing the late filing fee as a quid pro quo for the privilege of being allowed to file after the deadline, the Court distinguished it from a penalty. It emphasized that the fee's amount was fixed and reasonable, and that paying the fee regularizes the delay. This decision makes it clear that a late fee, even though it has a deterrent effect, is collected "for the service of accepting a delayed statement" – a compensatory approach – and not as retribution.Howrah Tax Payers' Association v. Government of West Bengal (2011) – The Calcutta High Court dealt with an analogous provision under the West Bengal Value Added Tax (VAT) Act, where an amendment had introduced a "late fee". Taxpayers challenged this as being unconstitutional and essentially a double jeopardy or an unreasonable levy. The High Court, affirming the Taxation Tribunal's reasoning, upheld the late fee and underscored the fee versus penalty distinction. It was observed that by switching from "penalty" to "late fee," the legislature intended to provide a special service to dealers – acceptance of delayed returns – for a price. The Tribunal had found "an element of quid pro quo in levying 'late fee'," meaning the fee correlates to the additional efforts by the tax authorities to process a late return. The Court noted that dealers were under no obligation to file late – they could avoid the fee by filing on time – but if they chose to file after the deadline, the law allowed it upon payment of the prescribed fee. This element of choice and exchange (something for something) is characteristic of a fee. The court rejected contentions that the late fee was arbitrary or amounted to a second penalty; since the late fee was a compensatory fee, the notion of double jeopardy did not arise. In essence, Howrah Tax Payers' Association affirmed that a late fee is a distinct fiscal instrument, constitutionally permissible as a fee for services, and not a penalty for wrongdoing.Sona Chandi Oal Committee v. State of Maharashtra (2005) – In this Supreme Court decision (though not about GST, it elucidates the fee-penalty distinction), the Court discussed the nature of fees in contrast to taxes. The Supreme Court clarified that while a fee generally requires a relationship between the levy and some service rendered (the quid pro quo), this relationship need not be exact or individually traced for each fee-payer. It held that the traditional concept of a strict quid pro quo for fees has evolved – a fee should have a reasonable relationship with the overall services provided, even if not mathematically precise. This ruling is often cited to uphold regulatory or service fees (like late fees) as valid exactions so long as they are not excessive and are used to defray the costs of administering the related scheme. In the context of late fees, Sona Chandi Oal Committee supports the idea that charging taxpayers a fixed fee for late filing is legitimate, as the fee broadly corresponds to the costs of extending the facility of late filing and maintaining the system for processing delayed returns. The case draws a line between penalties (which are imposed for transgressions and do not require any quid pro quo) and fees (which are based on the principle of recovery of costs or provision of services). It reinforces that calling something a "fee" is not a label of convenience; rather, if in substance the levy confers a special benefit or service (like acceptance of a delayed compliance), it can be justified as a fee.Collectively, these judicial precedents establish that late fees are conceived as a fee for extra services and not as a punishment. Courts have repeatedly highlighted the administrative quid pro quo: the tax department expends additional resources to accommodate late filings, and the defaulter must compensate that by way of a fee. They have also pointed out that unlike penalties, fees like these do not carry the stigma of wrongdoing; instead, they operate as a civil liability that the taxpayer incurs by choosing the convenience of filing late. This body of case law is directly relevant when interpreting GST late fees under Section 47.Critical Review of the Madras High Court Judgment in Jainsons Castors (2025)The Madras High Court's decision in Tvl. Jainsons Castors & Industrial Products v. Assistant Commissioner (ST) addressed whether a general penalty under Section 125 of the CGST Act could be imposed on a taxpayer who had filed returns late and already paid the statutory late fees under Section 47. In that case, the GST authorities had levied a late fee (for late annual return filing) and additionally imposed a penalty of ₹50,000 (₹25,000 each under CGST and SGST) using the residual penalty power in Section 125.The Court set aside the general penalty, effectively ruling that the late fee sufficed as the sanction for the default. However, the court's reasoning included a specific point of contention: it treated the late fee under Section 47 as a form of "penalty," thereby triggering the bar in Section 125 (since Section 125 applies only where "no penalty is separately provided" in the Act).The Court's ConclusionThe Madras High Court extracted Section 125 and observed that a general penalty can apply only if the Act doesn't already provide a penalty for the contravention in question. It then noted that in the case of late return filing, a "penalty" was indeed imposed "in the form of late fee in terms of Section 47". Therefore – in the court's view – because late filing attracted a penalty (late fee) under Section 47, the residual penalty of ₹50,000 under Section 125 was "not correct and the same is set aside". The late fee itself was upheld and had been paid by the petitioner, but no further penalty could be imposed. In effect, the court equated the late fee with a penalty for the purpose of saying "one default, one penalty."“Late fees in GST are inherently fees for a service, not penalties. The more appropriate reasoning would be that late filing of a return is not intended to be punished by a penalty at all – the legislature chose to address it via a fixed fee.Respectful Disagreement – Late Fee is Not a "Penalty"While the outcome (quashing the additional penalty) may be welcome from the taxpayer's perspective, the characterization of the late fee as a penalty merits a closer look. With due respect to the Hon'ble Court, we opine that treating late fees and penalties as the same category conflates two conceptually distinct charges. As discussed above, late fees in GST are inherently fees for a service, not penalties. The more appropriate reasoning would be that late filing of a return is not intended to be punished by a penalty at all – the legislature chose to address it via a fixed fee. In other words, the existence of a late fee in Section 47 means no penal provision is needed or applicable for late filing. It's not that late fee is itself a penalty, but that late filing is simply not treated as a penal offence under the GST scheme. Several courts and tribunals (as seen in the cases above) have explicitly held that late fees are compensatory and "not punitive in nature". By labelling the late fee a "penalty in the form of a late fee," the Madras High Court's analysis diverges from this established jurisprudence.Different Purpose, Different EffectThe distinction is more than semantic. If a late fee is misconstrued as a penalty, it could lead to unintended consequences in interpretation. For instance, penalties in tax laws often imply culpability (and sometimes require mens rea or allow defenses like reasonable cause), whereas fees do not carry such implications. A late fee is automatically levied for delay regardless of cause, but a penalty might not be imposable if the delay was beyond the taxpayer's control (since penal provisions are typically subject to a stricter interpretation). By maintaining the view that late fees are fees, one upholds the idea that they are strictly enforceable dues for late compliance (even if unintentional), while penalties under Section 125 would be reserved for other contraventions (like failure to obey rules where no specific fine is given, potentially requiring a notice and adjudication). The Madras High Court's approach arguably short-circuits this nuance by simply subsuming the fee into the concept of "penalty."It is worth noting that, had the court not equated the late fee to a penalty, it might still have arrived at the same practical result (no double levy) but on the sound footing that late filing is a special case handled by a fee, hence invoking a general penalty would contradict the legislative scheme. Indeed, one could argue that Section 125's phrase "for which no penalty is separately provided" should be read in context to mean "no other punitive or financial sanction is provided." Since a late fee is a financial sanction (albeit a fee), one could interpret that the legislature did provide a specific consequence for late filing, thus ousting Section 125. This interpretation achieves the purpose of preventing dual liabilities without redefining the late fee as a penalty. The Madras High Court effectively reached that outcome, but its wording could be read to imply that late fees are penalties. Given the weight of authority to the contrary, future courts might distinguish Jainsons Castors on this point, clarifying that late fees are sui generis (of their own kind) and not "penalties" even if they have a deterrent effect.In summary, the critique is that the Jainsons Castors judgment correctly prevented an unwarranted cumulative sanction, but for the wrong reason. Late fees do not "constitute a penalty" in the eyes of law; they constitute a fee for a conditional service (acceptance of a late return). A general penalty under Section 125 is inapplicable not because it would be a second penalty, but because the scenario is already addressed by a different type of levy. Respectfully, acknowledging this distinction is important to maintain conceptual clarity between punitive measures and compensatory fees in GST.Practical Implications for Taxpayers and Legal ProfessionalsThe distinction between late fees and penalties is not just academic – it has real consequences for how businesses handle compliance lapses and how legal advisors frame their arguments. Here are some practical guidelines and implications in light of the above analysis:“Businesses can cite the GST Law's structure and cases like Jainsons Castors to argue that once late fees are levied for a delayed return, no further penalty should be imposed for that contravention.Avoiding Dual Charges: Taxpayers should be aware that if they file a GST return late, the law mandates late fees under Section 47, and these should be paid to regularize the return. If a tax officer, in addition, attempts to impose a general penalty under Section 125 for the same late filing, the taxpayer has strong grounds to challenge it. Businesses can cite the GST Law's structure and cases like Jainsons Castors to argue that once late fees are levied for a delayed return, no further penalty should be imposed for that contravention. The practical step would be to file an objection or appeal against the penalty portion of any order, pointing out that the late fee is the exclusive consequence intended by law for late filing.Grounds for Contesting Penalties: When contesting a Section 125 penalty on top of late fees, it is effective to rely on the compensatory nature of late fees. For example, one can argue: "My late filing has already been addressed by payment of the statutory late fee, which the law considers as a fee for the delayed compliance. There is no legislative intent to punish the delay twice or treat it as an additional offense." It may help to quote the Bombay High Court's words that late fees are "not punitive in nature but a fee…for the extra service" of processing a late return. This reinforces that the late fee was the proper remedy, not a trigger for further penalty. Also, reference to Howrah Tax Payers' Association can underline that accepting a late return for a fee is a conscious policy choice, inconsistent with penalizing the same act. These arguments frame the issue as one of statutory interpretation – that Section 125 simply does not envisage penalizing a default that is already dealt with via fee.Future Disputes and Legislative Clarification: Until there is authoritative Supreme Court guidance or legislative amendment, taxpayers may face inconsistent approaches from different state GST authorities or benches. Legal professionals should stay abreast of the latest case law in their jurisdiction. If a High Court (like Madras HC in Jainsons Castors) has already given relief by quashing a dual penalty, that can be cited as precedent (while clarifying the reasoning if necessary). The safest course for taxpayers is to treat late fee and penalties as distinct and ensure that once late fees are paid, any further penalty is contested through proper legal channels.ConclusionIn conclusion, GST late fees should be understood as charges for a service rather than penal fines. The statutory language of the GST Law and the weight of judicial authority support the view that late fees serve to offset the administrative costs of handling delayed filings – they are a "quid pro quo" for a service, not an indictment of an offence. Penalties and late fees, therefore, operate in different spheres: penalties (like the general penalty under Section 125) punish breaches where no specific provision exists, whereas late fees under Section 47 specifically address the breach of late filing in a non-punitive manner. The Madras High Court's decision in Tvl. Jainsons Castors rightly prevented an overlapping penalty, but its description of late fees as a form of penalty is debatable in light of the legislative intent and prior jurisprudence. A more precise interpretation is that late fees and penalties coexist as separate tools – one to compensate and regularize, the other to sanction non-compliance.◆ ◆ ◆Author may be reached at prateekmitruka.pm@gmail.com and eboard@icai.in
Ep. 139 — Principle behind the Principal Purpose Test
CA Journal
· August 2026
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Principle behind the Principal Purpose TestPrincipal Purpose Test (‘PPT’) is a burgeoning mechanism that is conducive in preventing tax treaty abuse, through identification of the actual situs of income and curtailment of revenue leakage. The Central Board of Direct Taxes (‘CBDT’), vide a recent circular1 provided much-needed guidance and clarity regarding the application of PPT provisions and their interplay with the grandfathering provisions prevailing in certain tax treaties. This article discusses the background of these PPT provisions and the implications of the said Circular.IntroductionBenjamin Franklin’s timeless observation, “In this world nothing can be said to be certain, except death and taxes” underscores the universal presence of taxation. However, with the advent of globalisation and an increase in international transactions, multinational enterprises are developing sophisticated ways to exploit the inconsistencies in taxation rules. Therefore, to curb tax leakage, the Base Erosion and Profit Shifting (‘BEPS’) Action Plan was formulated. The International Monetary Fund, in its policy report, “Spillovers in International Corporate Taxation”2, emphasised that the BEPS Action Plan is “an unprecedented effort to address major avoidance opportunities that arise under current international tax arrangements”.These Action Plans were initiated by the Organisation for Economic Co-operation and Development (‘OECD’) and were first published in 2013. The OECD and G20 jurisdictions jointly developed and finalised these Action Plans in 2015. There are 15 distinct Action Plans, each targeting a specific aspect of tax avoidance.The 15th BEPS Action Plan introduced the use of Multilateral Instruments (‘MLI’) to curb the instances of tax evasion swiftly. These MLIs allow governments of different countries3 to plug the loopholes in the international tax treaties and modify the existing bilateral tax treaties in a synchronised and efficient manner, without the need to renegotiate each treaty bilaterally. Furthermore, the MLIs enable governments to implement agreed minimum standards to counter treaty abuse and thereby strengthen the bilateral treaties. Additionally, the MLIs aim to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.In addition, and in furtherance of the above, the BEPS Action Plan, inter alia, vide Action Plan 6, deals with the prevention of the grant of benefits of bilateral agreements, in scenarios where it leads to double non-taxation. The BEPS Action Plan 6 recommends a three-fold approach to deal with the situation of treaty abuse, which is discussed in the ensuing pointers:Introduction of Preamble – The purpose of a tax treaty is to avoid double taxation in a legitimate manner, and it should not create opportunities for double non-taxation of income. This common understanding is incorporated as a preamble to the treaty and is considered as a minimum level of protection against treaty abuse.Insertion of purpose-based anti-abuse provision, PPT – The PPT essentially serves as the Treaty-level General Anti-Avoidance Rule (‘GAAR’), under which the treaty benefits may be negated in case it is established that the purpose of the transaction or arrangement is to only avoid taxes.Insertion of an objective anti-abuse rule named as “Simplified Limitation of Benefits (‘simplified LOB’)” – It defines a normative criteria and attributes to analyse whether the income recipient shall be eligible for treaty benefit.Given the fact that prevention of treaty abuse is a critical agenda and is of utmost importance, it must be dealt with sternly. Therefore, for this purpose, MLI provides the insertion of PPT and Preamble as the minimum standard measures. However, in certain cases, countries may adopt PPT supplemented with either a simplified LOB or detailed LOB clause or detailed LOB provision, supplemented by a mutually negotiated mechanism to deal with conduit arrangements.India’s PositionAmongst other countries, India has also modified4 the Treaties through MLIs. In this regard, India adopted PPT supplemented with a simplified LOB clause (i.e., PPT, being a minimum standard, shall apply to all covered tax agreements, and simplified LOB shall apply depending upon the matching position adopted by the other country).Article 7 of the MLI provides for the PPT provision. The said Article 7 is similar to Article 29(9) of the OECD Model Tax Convention. The excerpt of Article 7 is reproduced hereunder:“Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.”(Emphasis Supplied)Evaluation of PPT ProvisionsPPT to be evaluated qua the source of income and not qua the entity seeking treaty benefit.At the outset, it may be noted that PPT is required to be evaluated qua transaction and stream of income and not qua the entity seeking tax benefit. Further, a single arrangement may lead to the generation of more than one stream of income, and each such stream will have to be evaluated for the application of PPT. For instance, a Luxembourg Entity holds debentures in India and earns interest on such debentures. Further, the interest on such debentures qualifies for the concessional tax rate of five percent, prescribed vide Section 194LC of the Income-tax Act, 1961 (‘the Act’). As per the provisions of Section 90(2) of the Act, the provisions of the Act shall apply to the extent they are more beneficial to the assessee, in comparison to the tax avoidance agreements. Given that the said interest income is taxable at the rate of ten percent as per Article 11 of the India-Luxembourg Treaty, therefore, in terms of Section 90(2) of the Act, the taxpayer may opt for taxation of such interest in accordance with the provisions of the Act. However, in case such debentures are being transferred, then in such a scenario, the taxpayer may opt for taxation in accordance with the Treaty provisions, whereby the capital gains, if any, on such transfer, may be liable to be taxed in Luxembourg.In the above example, the PPT will not be required to be evaluated in relation to taxation of interest income earned on the debentures held (although the same may be subject to GAAR provisions); however, the capital gains arising in relation to the same source, i.e. debentures, may fall within the ambit of evaluation of PPT provisions.Further, for the purpose of interpreting the term “arrangement or transaction”, analogy may be drawn from the OECD Commentary5 in relation to Article 29(9). As per the OECD Commentary, “arrangement or transaction” should be interpreted broadly and include any agreement, understanding, scheme, transaction or series of transactions, whether they are legally enforceable.Two-fold Operation of the PPT ProvisionFurther, it may be appreciated that PPT primarily consists of two limbs, which are as under:Reasonable Purpose TestObject and Purpose Test(i) Reasonable Purpose TestOn perusal of the provisions of Article 7, it may be appreciated that the PPT provisions can be triggered at a significantly lower threshold, i.e., PPT limitation arises even in cases where it is “reasonable to conclude” that obtaining a treaty benefit was “one of the principal purposes”. Therefore, even in cases where there is no conclusive proof that obtaining a treaty benefit was one of the purposes of entering into a particular transaction, the said transaction may still fall within the ambit of application of the PPT. However, as per the OECD Commentary, such analysis may require sound judgement. Further, it is also clarified vide OECD Commentary that the tax authorities should not assume the presence of a tax benefit; there should be a reasonable basis to arrive at such a conclusion.Additionally, the phrase “one of the principal purposes” underscores the fact that a transaction will be considered as tainted, even in cases where the sole or dominant purpose of the transaction was not to obtain treaty benefits and only one of the purposes was to obtain treaty benefits. However, it may be noted that where an arrangement is inextricably linked to a core commercial activity, and its form has not been driven by considerations of obtaining a benefit, it is unlikely that its principal purpose will be to obtain that benefit.(ii) Object and Purpose TestThe scope of PPT should be determined based on the overall objective and context of the provisions of the covered tax agreement, which inter alia includes cross-border economic development and prevention of tax avoidance and evasion.Recent Developments with respect to the application of PPT provisions in the Indian DiasporaPPT is generally incorporated as part ofMLI; orthrough bilateral negotiations in the DTAACBDT vide Circular 01 of 2025, dated 21st January 2025, has provided certain clarification regarding the applicability of PPT provisions. The said clarifications revolve around:Scope of PPT provisionsDate of applicability of PPT provisionsImpact of PPT in case of grandfathering provisionsScope of PPT ProvisionsThe CBDT has clarified that PPT is intended to ensure that DTAAs apply in accordance with the object and purposes for which they were entered into, i.e., to provide the benefits in respect of bona-fide exchange of goods and services and movement of capital and people. Further, the Circular emphatically provided that determination of whether one of the principal purposes of entering into transaction or arrangement is to obtain tax advantage should be based on objective assessment of the facts and circumstances of the case. The application of PPT provision should be context-specific fact-based exercise.In this regard, reference may be made to a recent decision of Honourable (‘Hon’ble’) Delhi Income-tax Appellate Tribunal (‘ITAT’) in the case of SC Lowy P.I. (LUX) S.A.R.L., Luxembourg v. ACIT (ITA No.3568/DEL/2023) (30 December 2024), wherein the Hon’ble ITAT, while dealing with the applicability of PPT provisions held that the Tax Authorities should establish that obtaining treaty benefit was one of the principle purposes of the transaction or arrangement and the relevant facts and circumstances should be brought on record to prove that the purpose of arrangements and transactions was only for the purpose of taking treaty benefit.Given that the PPT provisions are at a nascent stage and have been untried in the legal courts until now, therefore, the aforementioned decision, being one of the first decisions dealing with the evaluation of applicability of PPT provisions, may act as a guiding-light. However, it may be pertinent to note that while ruling in the favour of the taxpayer, the Hon’ble ITAT emphasized on the aspect that the Tax Authorities must bring on record relevant facts to establish that availing treaty benefit was the only purpose of the arrangement. In this regard, it may be interesting to decipher, with the course of time, as to whether the threshold to apply PPT provisions will be graciously extended and only those cases where obtaining treaty benefit was the only purpose shall fall within the purview of PPT provisions or cases where even one of the principal purpose was obtaining treaty benefit shall fall within the ambit of PPT applicability.Date of Applicability of PPT ProvisionsIt has been clarified that in cases where PPT has been incorporated through bilateral negotiations in the DTAA, i.e.,In cases where India has entered into DTAAs recently such as India-Hong Kong DTAA, India-Chile DTAA; orIn cases where the PPT has been incorporated through the amendment of the Protocol, such as India-China DTAAthe PPT shall apply prospectively from the date of entry into force of the respective DTAA or the amending Protocol, as the case may be.In cases, where the PPT has been implemented through MLI, the effective date is determined based on the later of the dates of coming into force, of treaty under consideration (‘Relevant Date’). The same may be ascertained through OECD matching database.For instance, in case of India and Malaysia, the date of entry force is as under:CountryDate of entry into forceIndia01st October 2019Malaysia01st June 2021India–Malaysia: date of entry into forceIn the above case, the Relevant Date shall be 01st June 2021, being the later of the two dates of entry into force. Once the Relevant Date is determined, reference is required to be made to Article 35 which deals with the determination of date of entry into effect, i.e.ParticularsDate of entry into effectFor withholding taxes (WHT)First day of next taxable period (i.e. previous year) that begins on or after the Relevant DateFor other taxesTaxable period (i.e. previous year) that begins on or after expiry of six calendar months from the Relevant DateArticle 35: determination of date of entry into effectTherefore, in the above example of India-Malaysia, with respect to withholding taxes, the MLI will enter into effect for the India-Malaysia DTAA, from India’s perspective from the first taxable period after 01st June 2021, i.e. from 01st April 2022. In case of other taxes, the MLI will come into effect from taxable periods beginning on or after the expiration of a period of six calendar months (01st December 2021), i.e. from 01st April 2022.Impact of PPT in case of Grandfathering ProvisionsWith effect from 01st April 2017, in order to curb instances of double non-taxation of capital gains income, arising from transfer of shares, India had bilaterally negotiated tax Treaties with Mauritius, Singapore and Cyprus, whereby, the source country was conferred the right to tax the capital gains in relation to shares acquired on or after 01st April 2017. Further, the securities acquired prior to 01st April 2017 were grandfathered and the right to tax the capital gains vested with the resident country.However, given that India-Singapore and India-Cyprus had implemented PPT through the MLIs (India and Mauritius had signed a protocol in March 2024, to amend the India-Mauritius treaty and thereby insert PPT provisions and the said protocol is yet to be entered into force), there always existed ambiguity regarding the applicability of PPT provisions in respect of the grandfathered securities, i.e. whether the test of principal purpose shall apply to such grandfathered securities also. In this regard, the CBDT vide Circular 01 of 2025 has clarified and made it amply clear that the grandfathering provisions prescribed vide the aforementioned Treaties of Mauritius, Singapore and Cyprus, shall remain outside the purview of PPT provisions and would be governed by the specific provisions of the respective DTAA itself.Further, the Circular categorically provides that such grandfathering provisions shall instead be governed by the specific anti-avoidance provisions prevailing in the DTAA itself. Therefore, in the context of India-Singapore tax treaty, the test prescribed vide Article 24A shall prevail, whereby the capital gains tax exemption in the source country shall be denied in case the entity’s affairs were arranged with the primary purpose to avail treaty benefit, whereas in case of Cyprus and in case of Mauritius, the capital gains tax exemption shall be available in relation to the shares acquired prior to 01st April 2017, once it is substantiated that the shares were owned by the entity and the said entity held valid Tax Residency Certificate issued by the resident country, in accordance with the legal proposition enunciated in various judicial precedents, in this regard.Further, in case of the India-Mauritius Treaty, given that the PPT provisions are yet to be entered into force, the transitional relief of 50 percent of the applicable tax, prescribed vide Article 24 of the India-Mauritius Treaty, in relation to the shares acquired after 01st April 2017 and transferred on or before 31st March 2019, shall not be impacted by the PPT provisions.Press Release dated 15th March 2025In order to provide further clarity in relation to the aforementioned Circular, a press release dated 15th March 2025 was also issued whereby the CBDT clarified that the Circular shall be applicable only in relation to the PPT provision of the tax treaties and it does not intend to interact or interfere with:Any other treaty provision, including those related to treaty entitlement or denial of treaty benefit, other than PPT (For instance, LOB clause which is part of DTAA’s like Singapore, UK etc still remain applicable)Anti-abuse provisions under the Act, such as GAAR and Specific Anti-Abuse Rules (‘SAAR’) and provisions emerging from the judicial interpretation i.e. Judicial Anti-Abuse Rules (‘JAAR’)Further, the Press Release unequivocally clarified that the Circular shall apply only in relation to those tax treaties where the PPT provisions exists.ConclusionWith the recent Circular issued by the CBDT in relation to application of PPT provisions, it may be appreciated that Income-tax Department has provided much needed guidance in relation to the applicability of PPT provisions and certainty in relation to taxation mechanism.The Circular has carved out the way forward for the tax-authorities to apply PPT provisions which shall inter-alia foster an effective approach to plug the cases involving revenue leakage and reduce the cases of double non-taxation of transactions.Additionally, the Indian payer entities shall also be mindful of applicability of the PPT provisions and should ensure that a particular transaction or arrangement is well tested for the applicability of PPT provisions and as an additional documentary compliance, the Indian payer entities should obtain confirmation from the non-resident payee entities regarding fulfilment of PPT provisions, amongst other modifications prescribed vide MLIs.◆◆◆Author may be reached atjkapoor728@gmail.com and eboard@icai.inCircular No. 1/2025, Dated 21st January 2025 [F.no. 500/05/2020/FT&TR – II]. ↩“Spillovers in international corporate taxation”, 9 May 2014, International Monetary Fund, Washington, D.C., https://www.imf.org/external/np/pp/eng/2014/050914.pdf. ↩The Indian Government had deposited the ratified copy of MLI on 25 June 2019 with OECD, along with its list of tax treaties that India was willing to modify through MLI and its final position and reservation on various articles of the MLI. ↩For instance, India’s treaty with Australia / France / Netherlands / Japan / Singapore etc., have been modified through MLI. ↩Model Tax Convention on Income and on Capital, OECD, 2017. ↩The Chartered Accountant • November 2025 • www.icai.org
Ep. 140 — Ind AS 118: Presentation and Disclosure in Financial Statements
CA Journal
· August 2026
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Ind AS 118: Presentation and Disclosure in Financial StatementsThe International Accounting Standards Board (IASB) introduced IFRS 18 in April 2024. Consequently, the Accounting Standards Board (ASB) of The Institute of Chartered Accountants of India (ICAI) had issued an exposure draft on Ind AS 118 on January 06, 2025. The said standard is set to replace Ind AS 1 and will apply to reporting periods beginning on or after 1 April 2027, focused on improving the presentation and disclosure of financial statements and better communication of financial performance.Key changes include principles for aggregation and disaggregation, new subtotals in the statement of profit or loss, and management-defined performance measures (MPMs). While existing frameworks align with several provisions, adopting proposed Ind AS 118 will elevate the comparability and transparency of Indian financial statements on the global stage.BackgroundThe International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements in April 2024. As part of IFRS convergence, ASB issued an exposure draft of Ind AS 118 in January 2025 for public comments.The proposed Ind AS 118 aims to improve how companies communicate in their financial statements, with a focus on information about financial performance in the statement of profit or loss.While proposed Ind AS 118 will not alter how companies measure financial performance, it will standardise the presentation and disclosure requirements, aiming to achieve better communication with users of financial statements. The proposed Ind AS 118 aims to improve financial reporting by requiring:Introduction of new defined subtotals in profit or loss.Enhanced disclosures on management-defined performance measures.Stronger requirements for aggregation and disaggregation.Considering the above background, we shall now attempt to dissect the changes brought in by proposed Ind AS 118 and evaluate the impact that it is likely to have.Components of Financial StatementsProposed Ind AS 118 provides: Complete set of Financial Statements = Primary Financial Statements + Notes + Comparative Information + Balance sheet for the beginning of the earliest period if required. A summarisation of the role and purpose of the two is highlighted below:Point of ReferencePrimary Financial StatementsNotesPrimary PurposePresentationDisclosureContentsSummary and AggregatedDetailed and DisaggregatedRoleProvide structured summaries of a reporting entity's recognised assets, liabilities, equity, income, expenses, and cash flowsProvide material information necessary for the readers of the financial statementsAdded RoleObtaining an understandable overview of the reporting entity's recognised assets, liabilities, equity, income, expenses, and cash flows; comparability between entities and between reporting periods for the reporting entityObtaining an understanding of the line-items presented in the primary financial statements; supplementing the primary financial statements with additional material information; identifying items or areas where additional information is sought to be disclosed in the NotesProposed Ind AS 118 is not applicable to condensed Interim Financial Statements, except for the following:Principles of aggregation and disaggregation (Para 41 to 43 of Ind AS 118)Requirements relating to MPMs (Para 117 to 125 of Ind AS 118)Aggregation and DisaggregationParagraph 41 of Ind AS 118 lays down the principles of aggregation and disaggregation.Aggregation, Classification, and Disaggregation are defined in Ind AS 118 as under:Aggregation: The adding together of assets, liabilities, equity, income, expenses, or cash flows that share characteristics and are included in the same classification.Classification: The sorting of assets, liabilities, equity, income, expenses, and cash flows based on shared characteristics.Disaggregation: The separation of an item into component parts that have characteristics that are not shared.Item vs. Line itemItem: an item is an asset, liability, equity instrument, or reserve, income, expense, or cash flow, or any aggregation or disaggregation of such assets, liabilities, equity, income, expenses, or cash flows.Line item: A line item is an item that is presented separately in the primary financial statements.Presenting additional line items vs. disaggregating items: An entity uses its judgment to make this determination to present additional line items or to disaggregate items to disclose material information in the notes.General guidance on aggregation and disaggregation:Aggregation: aggregate assets, liabilities, equity, income, expenses, or cash flows into items based on shared characteristicsDisaggregation: disaggregate items based on characteristics that are not sharedCommon for aggregation and disaggregation:Fulfils the role of the primary financial statements in providing useful, structured summariesFulfils the role of the notes in providing material informationDoes not obscure material informationExamples for shared characteristics:NatureFunction (role) within the entity's business activitiesPersistence (including the frequency of the item of income or expense, or whether it is recurring or non-recurring)SizeGeographical location or regulatory environmentExamples of providing useful structured summary or disclosure in the notes necessary to provide material information:For Statement of profit and loss:Write-downs of inventories, as well as reversals of such write-downsImpairment losses for property, plant and equipment, as well as reversals of such impairment lossesIncome and expenses from restructurings of an entity's activities and reversals of any provisions for restructuringIncome and expenses from litigation settlementsReversals of provisionsProperty, plant and equipment disaggregated into classes in accordance with Ind AS 16Receivables disaggregated into amounts receivable from trade customers, amounts receivable from related parties, prepayments, and other amountsInventories disaggregated, applying Ind AS 2, into items such as merchandise, production supplies, materials, work in progress, and finished goodsEquity capital and reserves disaggregated into various classes, such as paid-in capital, share premium, and reserves.Examples of circumstances that may result in material information being obscured:Material information about an item, transaction, or other event is disclosed in the financial statements, but the language used is vague or unclearMaterial information about an item, transaction, or other event is scattered throughout the financial statementsDissimilar items, transactions, or other events are inappropriately aggregatedSimilar items, transactions, or other events are inappropriately disaggregatedThe financial statements become less understandable when immaterial information obscures material information, preventing primary users from determining what is materialAggregation and Disaggregation to follow faithful representation of an item.Guidance on circumstances around material items:When an entity chooses to aggregate two material items for summarising material information, an entity would also be required to disclose information about each item.When an entity chooses to aggregate a material item with an immaterial item, an entity would provide information about disaggregated items only if immaterial information obscured the material information.When an entity chooses to aggregate immaterial items, unless the aggregated amount is sufficiently large that users of financial statements might reasonably question whether it includes items for which information could be material, no additional disclosure about such aggregated item shall be required.Statement of Profit or LossAn illustrative presentation of the statement of profit or loss, as modified by proposed Ind AS 118, is provided below for companies other than Insurance Company and Banking Company:Subtotals in bold reflect the new subtotals as per the requirements of proposed Ind AS 118. The subtotals in italics are the additional subtotals. An entity presents additional subtotals if necessary to provide a useful structured summary of the income and expenses.Statement of Profit or Loss20X820X7CategoriesRevenue3,67,0003,53,100OperatingCost of Sales-2,41,600-2,24,100Gross Profit1,25,4001,29,000Other Operating Income12,2004,100Selling Expenses-28,900-27,400Research & Development Expenses-25,100-25,900General & Administrative Expenses-20,900-22,400Goodwill Impairment Loss-4,500-Other Operating Expenses-1,200-5,600Operating Profit57,00051,800 Share of Profit & Gains on Disposal of Associates & Joint Ventures5,3007,300InvestingProfit Before Financing and Income Taxes62,30059,100 Interest Expenses on Borrowings and Lease Liabilities-13,000-13,200FinancingInterest Expenses on Pension Liabilities & Provisions-6,500-6,000Profit Before Income Taxes42,80039,900 Income Tax Expense-10,700-9,975Income TaxesProfit from Continuing Operations32,10029,925 Loss from Discontinued Operations--5,500Discontinued OperationsProfit32,10024,425 a. Categories in the statement of profit or lossCategoryWhat does it include?GuidanceOperatingEverything in the P&L that is not classified into the other four categories includes:All income and expenses arising from the company's operations, regardless of whether they are volatile or unusual.Includes, but is not limited to, income and expenses from a company's main business activities except for any such income and expenses from investments accounted for using the equity method.Specific guidance given for identifying main business activity.InvestingIncome and expenses relating to:Investments in associates, joint ventures and unconsolidated subsidiaries;cash and cash equivalents; andother assets if they generate a return individually and largely independently of the entity's other resources (example: debt or equity investments, investment properties, etc.)Specific guidance given for entities with specified main business activities (like investing in assets, providing financing to customers as a main business activity). For entities that are assessed as having a specified main business activity of investing in associates, joint ventures, and unconsolidated subsidiaries that are not accounted for using the equity method, they are required to classify specified income and expenses in the operating category.FinancingIncome and expenses relating to:income and expenses that arise from the initial and subsequent measurement of the liabilities that arise from transactions that involve only the raising of finance and incremental expense upon issue and extinguishment.interest income and expenses, and the effects of changes in interest rates from liabilities arising from transactions that do not involve only the raising of finance.Detailed guidance given for both types of liabilities and what would form a part of the financing category.Income taxesThe income taxes category comprises:tax expense or tax income included in the statement of profit or loss applying Ind AS 12 Income Taxes; andany related foreign exchange differences.—Discontinued operationsThe discontinued operations category comprises income and expenses from discontinued operations required by Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations.—b. Totals and subtotals to be presented in the statement of profit or lossProposed Ind AS 118 now mandates the following totals/subtotals to be presented in the statement of profit or loss:operating profit or loss;profit or loss before financing and income taxes; andprofit or loss.Management-defined Performance MeasureA management-defined performance measure (“MPM”) is a subtotal of income and expenses that:an entity uses in public communications outside financial statements;an entity uses to communicate to users of financial statements, management's view of an aspect of the financial performance of the entity as a whole; andExcept the following:gross profit or loss (revenue minus cost of sales) and similar subtotals;operating profit or loss before depreciation, amortisation, and impairments within the scope of Ind AS 36;operating profit or loss and income and expenses from all investments accounted for using the equity method;profit or loss before income taxes;profit or loss from continuing operations.A. Subtotal vs. management-defined performance measureSubtotalMPMBroader. All MPMs are subtotals.Narrower. Not all subtotals are MPMs.Used within the financial statements.Used outside the financial statements.Needs to be in sequential order of the specified structure of any particular primary financial statement.B. Disclosure of MPMAn entity shall disclose information about all measures that meet the definition of management-defined performance measures in a single note. The disclosures shall include, at a minimum, the following:A description of the aspect of financial performance that, in management's view, is communicated by the MPM.How the MPM is calculated.A reconciliation between the MPM and the most directly comparable subtotal in financial statements.Income Tax effect and effect on non-controlling interest for each item of reconciliation.Description of how the entity determines the Income Tax effect.C. What does not constitute MPM?Subtotals of only income or only expenses (for example, a stand-alone measure of adjusted revenue that is not part of a subtotal that also includes expenses);Assets, liabilities, equity, or combinations of these elements;Financial ratios (for example, return on assets) (see paragraph B117);Measures of liquidity or cash flows (for example, free cash flow); orNon-financial performance measures.Old vs. New (Ind AS 1 vs. proposed Ind AS 118) — Some other changesAreaInd AS 1 (as on April 01, 2025)Proposed Ind AS 118Classification of liability where there is a breach of a material provision/covenant of long-term loanTitlePresentation of Financial StatementsPresentation and Disclosure in Financial StatementsBalance sheetExceptions to standard practice when that is reliable and more relevantExceptions to standard practice when that provides a more useful structured summaryLine item disclosure in the Balance SheetList of line items as per Ind AS 1 retained in Ind AS 118 with one additionGoodwill was added to the list of line items to be disclosed in the Balance sheetCross-referencing of NotesIAS / Ind AS 1 contained a requirement for cross-referencing a line item to disclosure in notes-do- Additionally, IFRS / Ind AS 118 requires reverse cross-referencing (from notes to the line item) when amounts disclosed in the notes are included in one or more line items in the primary financial statementsClassification of ExpenseAs per Ind AS 1, it requires the classification of expenses only by natureInd AS 118 allows flexibility to present the most useful structured summary. Entities can classify the expenses by nature, function, or both. If classified by function, entities must disclose nature-based detailsThe Road ahead for Ind AS 118These new subtotals in the statement of profit and loss will require companies to reassess their reporting structure, update financial systems, and ensure compliance with additional disclosure requirements.Ind AS 1 currently mandates the classification of expenses solely by nature, removing the option available in IAS 1 to classify expenses by function. However, under proposed Ind AS 118, companies opting for function-based classification will now be required to provide additional disclosures in the notes detailing expenses by nature, increasing compliance and reconciliation efforts. ERP systems and internal reporting processes must adapt to new requirements, ensuring consistent reporting without adding excessive manual adjustments. In the author's view, if classification by function is permitted, ICAI and SEBI may need to standardise functional categories to maintain consistency across industries. The onus also lies on companies to assess their classification methodology early and ensure alignment with industry practices.Furthermore, Indian financial statements, governed by Schedule III may need to be revisited.The introduction of Management-Defined Performance Measures (MPMs) under Ind AS 118 is a step towards enhancing investor communications through financial statements. From an investor's perspective, MPMs are beneficial as they provide insight into how management evaluates financial performance beyond statutory metrics. It presents a significant change for both management and auditors, primarily due to the separation of responsibilities within organizations. In most listed companies, the Investor Relations (IR) team communicates various performance measures to investors throughout the year, while the Financial Reporting team prepares financial statements. This makes it challenging to identify which MPMs should be included in financial statements, especially given that companies release numerous performance indicators across different reporting periods. To ensure consistency and comparability, clear guidance is needed on determining which MPMs to disclose in the financial statements and for what period. This requirement also aligns with the broader objective of ensuring that performance parameters communicated to investors are comparable, standardized, and reconciled with statutory requirements of financial reporting.◆ ◆ ◆Author may be reached atpateljinal32@gmail.com and eboard@icai.inSource: CA. Jinal Arpit Patel, “Ind AS 118: Presentation and Disclosure in Financial Statements,” The Chartered Accountant, ICAI, November 2025, pp. 52–57.
Ep. 141 — Standardizing Logistics Cost Accounting in India: A Strategic Imperative for Economic Growth
CA Journal
· August 2026
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Standardizing Logistics Cost Accounting in India: A Strategic Imperative for Economic GrowthLogistics costs represent a significant portion of business expenditures in India, yet a standardized framework for reporting and analysing these costs remains absent. This lack of transparency results in inefficiencies, resource misallocation, and higher overall logistics expenditures. This article explores the necessity of integrating standardized logistics cost accounting within the framework of Indian Accounting Standards (Ind AS) while incorporating global best practices, technological advancements, and policy interventions. A structured logistics cost accounting approach will enhance financial transparency, support cost efficiency, improve supply chain resilience, and align with India's broader economic strategies, such as PM GatiShakti, Make in India, and the National Logistics Policy (NLP).Dr. Mahesh Dhondu Kadam Associate Director, Logistics Division, DPIIT, Ministry of Commerce and IndustryLogistics costs are a critical component of operational expenses across industries, impacting profitability, supply chain efficiency, and strategic decision-making. While traditionally categorized under Cost of Goods Sold (COGS) or Selling, General & Administrative (SG&A) Expenses, there is a growing need to classify logistics expenses separately in financial statements for better cost visibility and control.Importance of Logistics Cost StandardizationRecent empirical evidence from the DPIIT–NCAER Logistics Cost Study (2025) estimates India's logistics cost at around 7.97 percent of GDP, a significant refinement from earlier assessments of 13–14 percent. This brings India's logistics cost broadly in line with advanced economies such as the United States (about 8 percent) and Germany (around 7 percent). However, the composition of India's logistics expenditure continues to reflect a higher reliance on road transport, fragmented warehousing, and operational inefficiencies—factors that elevate the effective logistics burden on businesses.These costs continue to influence trade competitiveness, manufacturing growth, and overall economic efficiency, underscoring the need for greater precision in cost measurement and management.The absence of a standardized logistics cost accounting framework within current financial reporting practices limits visibility into true logistics expenditures, making it challenging for enterprises to optimize supply chain performance and for policymakers to design targeted efficiency interventions.Recent empirical efforts by the Government of India have begun to quantify logistics costs at the national level, providing a strong evidence base for developing a more granular accounting framework within Ind AS.Empirical Perspective: Insights from the DPIIT–NCAER Logistics Cost Study (2025)The DPIIT–NCAER Logistics Cost Study (September 2025) marks a pivotal advancement in India's endeavour to establish a credible, evidence-based understanding of logistics efficiency.₹24.01lakh croreIndia's estimated total logistics cost — equivalent to 7.97% of GDP and 9.09% of non-service sector output.Employing a hybrid methodology that combines macroeconomic datasets, including the Supply and Use Tables (SUTs), National Accounts Statistics (NAS), and Balance of Payments (BoP), with large-scale primary surveys, the report provides a scientifically grounded baseline for both policy formulation and industry analysis. The results reflect a moderation from earlier informal estimates of 13–14 percent, indicating incremental efficiency gains driven by reforms under PM GatiShakti, the National Logistics Policy (NLP), and related infrastructure initiatives.While the study offers an authoritative national benchmark, it also opens new avenues for refinement and deeper insight. Its macro-level orientation, though statistically rigorous, provides a strong foundation that can now be complemented by granular, enterprise-level analyses to better capture variations across sectors, regions, and operational models. Strengthening the interface between national datasets and corporate accounting practices would enable a more comprehensive understanding of logistics dynamics, bridging the space between aggregated measurement and operational realities. In this light, developing a standardized accounting framework represents an important opportunity to transform the national benchmark into a dynamic system of continuous cost intelligence and performance monitoring across the logistics ecosystem.Adopting an Ind AS–aligned logistics cost accounting framework can bridge this gap effectively. By explicitly integrating logistics costs within Indian Accounting Standards, enterprises can systematically record, classify, and disclose transportation, warehousing, inventory, and compliance-related expenditures with higher precision and consistency. Such standardization would enhance financial transparency, facilitate cost rationalization, and generate real-time logistics cost intelligence through periodic accounting statements, providing policymakers with a dynamic, data-driven feedback mechanism to complement national assessments. For businesses, this approach would strengthen benchmarking, improve risk management, and support informed negotiations with logistics service providers. Over time, the alignment of macro-level measurement with micro-level accounting discipline would deepen India's logistics cost analytics, improve cross-sector comparability, and reinforce the nation's position as a resilient, agile, and globally competitive logistics and manufacturing hub.Building on these empirical insights, the next section outlines the structural and accounting reforms necessary to institutionalize standardized logistics cost reporting across industries.Role of Indian Accounting Standards (Ind AS)Indian Accounting Standards (Ind AS), aligned with International Financial Reporting Standards (IFRS), have enhanced financial transparency in India. However, logistics costs are currently reported under broad financial categories, making it difficult to assess the true financial burden of logistics. This article highlights the necessity of incorporating logistics cost accounting within Ind AS to enable cost optimization and support national economic policies.The Need for Standardized Logistics Cost AccountingLogistics costs represent a significant portion of business expenditures, yet a standardized reporting framework remains absent. A structured cost accounting approach would improve cost efficiency, supply chain resilience, and economic competitiveness while aligning with global best practices.i. Current Accounting Practices for Logistics CostsLogistics costs are accounted for differently depending on the industry and function:Profit & Loss Statement (P&L)Cost of Goods Sold (COGS) / Cost of SalesIncludes inbound freight costs for procurement of raw materials. As per Ind AS 2, such costs must be capitalized into inventory and recognized under COGS only upon sale. The reference in this article reflects their eventual financial impact rather than immediate expense.Example: Transportation costs of steel and electronic components in the automobile industry.Selling, General, and Administrative (SG&A) ExpensesCovers distribution costs, warehousing, order fulfillment, and last-mile delivery. While some retail chains classify transportation from central warehouses to stores under SG&A, Ind AS 2 requires such costs to be capitalized if the goods remain unsold.Example: Warehousing and packaging costs for an e-commerce company.Freight and Transportation CostsIncludes inbound (procurement-related) and outbound (customer delivery-related) freight expenses.Freight-in costs are included in inventory; freight-out costs are recorded under SG&A.Warehousing CostsRent, utilities, security, handling, and maintenance of warehouses.If warehouses are owned, depreciation is applied and recorded under Depreciation & Amortization.Customs Duties & Import-Export ChargesInternational trade-related levies recorded under direct costs or as part of the landed cost of goods.ii. Challenges in Cost AllocationLogistics costs comprise multiple components, including transportation, warehousing, inventory holding, packaging, handling, and regulatory compliance. Businesses often face difficulties in properly segmenting these costs, which may result in misclassification and reduce financial transparency. For example, incorrect treatment of warehouse leases under Ind AS 116 or misallocation of inbound freight under Ind AS 2 can distort inventory valuation, lease obligations, or profitability metrics.A standardized approach would enable companies to:Differentiate transportation costs by mode (road, rail, air, coastal shipping).Allocate inbound and outbound freight costs accurately.Assess inventory holding costs, including depreciation and obsolescence.Evaluate warehouse lease liabilities, storage expenses, and distribution strategies.iii. Supporting Business and Policy Decision-MakingA standardized cost reporting system will also provide valuable data for policymakers and industry stakeholders, ensuring effective interventions for logistics infrastructure development.Without detailed logistics cost breakdowns, companies struggle to make informed decisions about:Optimizing transportation modes: Determining whether road, rail, or multimodal transport is most cost-effective.Warehousing strategies: Weighing the benefits of owning vs leasing storage facilities.Procurement and supply chain network design: Deciding between regional warehousing vs centralized distribution models.Companies can internally classify logistics costs under a dedicated "Logistics Expenditure" head, provided that:Internal Accounting Policy Permits It: Companies can customize their Chart of Accounts (CoA) to create a specific logistics cost head.Financial Reporting Compliance is Maintained: While internal reports can consolidate logistics expenses under a single head, external financial statements (as per Ind AS and Schedule III of Companies Act, 2013) must follow prescribed formats.ERP & Accounting Software Configuration: Enterprise Resource Planning (ERP) software such as SAP, Oracle, or Tally can be configured to track logistics costs under a single expenditure category.Industry-Specific Needs: Large logistics-heavy industries (e.g., e-commerce, FMCG, pharmaceuticals, and manufacturing) may benefit from this classification for better cost visibility and control.Economic and Business Significance of Logistics Cost Standardizationi. Economic SignificanceFrom an economic perspective, reducing logistics costs can:Enhance Trade Competitiveness: A reduction of 1% of GDP in logistics costs could lead to annual savings of ₹2 lakh crore, making India more competitive in global trade.Improve Infrastructure Investment Decisions: Standardized logistics cost data allows the government to make better investment decisions for infrastructure projects such as highways, rail networks, and logistics parks.Increase Foreign Direct Investment (FDI): A transparent logistics cost accounting framework increases investor confidence, attracting global funds into India's logistics and supply chain sector.Support MSME Growth: Small and medium enterprises (SMEs) often lack access to cost-efficient logistics. Standardized cost data can enable policy interventions to support MSMEs with cost-effective supply chain solutions.ii. Business and Commercial SignificanceFor businesses, logistics cost standardization is transformative because it:Enhances Cost Efficiency: Companies can accurately analyse freight, warehousing, and regulatory expenses, enabling them to negotiate better contracts with suppliers and logistics providers.Improves Profitability: Reducing hidden logistics costs through Ind AS-compliant accounting will improve overall profit margins.Facilitates Benchmarking: Companies can compare their logistics costs with industry standards, identifying areas for cost reduction and process optimization.Strengthens Risk Management: A detailed cost breakdown helps in identifying supply chain vulnerabilities and mitigating risks associated with cost overruns, inventory inefficiencies, and unexpected disruptions.Integrating Logistics Costs into Financial Statementsi. Ind AS-Based Cost SegmentationLogistics Cost ComponentInd AS Accounting CategoryExamplesInbound Freight CostInd AS 2 (COGS)Raw material transport, import dutiesOutbound Freight CostInd AS 115 (SG&A)Distribution and last-mile deliveryWarehousing & StorageInd AS 116 (Operating Expense)Lease, maintenance, securityInventory Holding CostsInd AS 2 (Current Assets)Depreciation, insuranceRegulatory & ComplianceInd AS 37 (SG&A / Other Expenses)Customs duties, penalties, demurrageii. Global Best PracticesUnited States (GAAP)Freight-in costs are added to inventory costs and impact COGS.Freight-out costs (delivery to customers) are recorded as selling expenses.UkraineDeveloping specific standards for logistics cost accounting.Introducing dedicated accounts for logistics expenses.International Financial Reporting Standards (IFRS)Allows classification by function (e.g., COGS) or nature (e.g., transportation costs).Encourages detailed disclosures for significant expenses.iii. Proposed Methodologies for Logistics Cost AccountingActivity-Based Costing (ABC): Allocates logistics costs based on specific activities (e.g., transportation, warehousing).Material Flow Cost Accounting (MFCA): Tracks material flows and associated logistics expenses.Enhanced Chart of Accounts (CoA): Introduces dedicated logistics expense categories.iv. Implementation ChallengesSMEs may lack capacity to track logistics cost in detail.ERP customization may involve transitional costs.Ind AS modifications must avoid divergence from global GAAPs to prevent dual reporting by MNC subsidiaries.Policy Implications and Business Recommendationsi. Economic BenefitsReducing logistics costs by 1% of GDP could save ₹2 lakh crore annually.Boosting infrastructure investments via data-driven policy decisions.Enhancing FDI by providing standardized financial disclosures.ii. Business BenefitsCost Optimization: Accurate freight, warehousing, and regulatory expense tracking.Profitability Improvement: Reducing hidden logistics costs improves margins.Benchmarking: Companies can compare logistics costs against industry standards.Risk Management: Identifying vulnerabilities in supply chains and mitigating cost overruns.iii. Government and Policy RecommendationsRecommend amending Ind AS 1 to include logistics costs as a separate expense head.Recommend enabling separate disclosure of logistics costs under proposed Ind AS 118 to enhance transparency and financial reporting clarity.Recommend leveraging proposed Ind AS 118 to facilitate disaggregated disclosure of logistics costs under relevant expense heads, enhancing transparency and aligning with global reporting standards.Update Ind AS 2 to improve logistics-related inventory valuation.Encourage voluntary disclosures of logistics costs in financial statements.iv. Industry-Level ActionsIndustry associations (CII, FICCI, ICAI) should advocate for logistics cost reporting reforms.Companies should adopt internal "Logistics Expenditure" accounts for better tracking and decision-making.ERP & accounting systems (SAP, Oracle, Tally) should support detailed logistics cost tracking.ConclusionA structured logistics cost accounting framework within Ind AS will improve financial transparency, reduce inefficiencies, and strengthen India's position as a global logistics hub. Aligning corporate financial reporting with National Logistics Policy and PM GatiShakti will drive long-term economic growth and competitiveness.Policymakers, industry leaders, and accounting regulators must collaborate to establish logistics cost reporting standards, ensuring greater cost visibility, enhanced investment confidence, and sustainable growth in India's logistics sector.Implementing these methodologies requires careful consideration of the organization's operational structure and compliance with relevant accounting standards. A structured logistics cost accounting framework, integrated within Indian Accounting Standards (Ind AS), is essential for improving financial transparency, reducing inefficiencies, and strengthening India's position as a global logistics hub. Policymakers, industry stakeholders, and financial regulators must collaborate to institutionalize logistics cost reporting, ensuring businesses, investors, and policymakers benefit from greater cost visibility, informed decision-making, and long-term economic growth.◆ ◆ ◆Author may be reached at maheshkadam@yahoo.com and eboard@icai.inSource: The Chartered Accountant, November 2025 (pp. 58–61), ICAI.
Ep. 142 — Artificial Intelligence (AI) Washing in Taxation: Ethics and Transparency
CA Journal
· August 2026
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Artificial Intelligence (AI) Washing in Taxation: Ethics and TransparencyArtificial Intelligence (AI) washing in taxation refers to the overestimation of AI capabilities in tax solutions, leading to misinformation and potential misuse. This article aims to investigate the impact of AI washing on taxation, focusing on how it diminishes public trust, disrupts tax authorities' efforts, and leads to unethical practices. Some companies in the market exaggerate about the usage of AI and claim that they are implementing it in the real world. This article examines the consequences of AI washing, including ethical concerns. It also describes the regulations for the ethical implications of AI taxation in India. The article also addresses the broader impacts of AI on employment and the ethical use of AI for tax compliance. In doing so, it provides a roadmap for fostering responsible AI adoption in the taxation sector.Artificial intelligence (AI) is a broad term that refers to techniques making machines "Intelligent". Pascal A. Bizarro and Margaret Dorian (2017) pointed out that AI was introduced in 1948 when William Gray Walter created two small robots, named "Elmer" and "Elsie", that were able to recognize and respond to stimuli, encountering obstacles1. Two years later, Alan Turing (1950) proposed that a machine could transmit information, communicate, and possess thinking capabilities indistinguishable from those of humans2. In 1956, the Dartmouth workshop proposed the term "artificial intelligence", marking the birth of AI as a discipline. Since then, the AI phenomenon has received considerable attention in various fields. Over recent years, there has been a dramatic increase in the adoption of AI within the tax sector. This surge is attributed to improvements in algorithmic capabilities, greater computer power, and access to richer datasets. These advancements have enabled tax professionals to leverage AI for more sophisticated tax analytics and decision-making.The field of deep learning gained popularity in the 2000s under the direction of researchers like Geoffrey Hinton, Yann LeCun, and Yoshua Bengi, which led to important advances in areas like image identification and natural language processing. These days, artificial intelligence is included in commonplace devices like GPT (Generative Pre-trained Transformer), autonomous automobiles, and virtual personal assistants for customer support3.The term "AI washing" is the practice of exaggerating or falsifying the application of artificial intelligence (AI) in goods, services, or solutions to make it seem more sophisticated. This phrase, which comes from the word "greenwashing," is widely used in several areas, including taxes1. The first use of AI in taxation was in Australia, where the Australian Taxation Office (ATO) started experimenting with AI technologies in the early 1990s. The ATO used AI to automate and streamline tax processes, particularly focusing on identifying fraud, tax evasion, and errors in tax returns. These early systems employed rule-based AI and later evolved to use machine learning techniques. Other countries like the United States and the United Kingdom followed suit, with agencies like the Internal Revenue Service (IRS) and HM Revenue & Customs (HMRC) integrating AI for fraud detection, auditing, and predictive analytics in tax compliance. As per the latest report of Thomson Reuters Institute, in 2025, around 21% of tax and accounting firms are either using or planning to adopt AI solutions, particularly for automating routine tasks like data gathering, compliance, and document processing.The term "AI washing" is the practice of exaggerating or falsifying the application of artificial intelligence (AI) in goods, services, or solutions to make it seem more sophisticated.Tax avoidance, the complex nature of tax regulations, and the high expenses related to their management and compliance make it difficult for fair taxation of different firms and lower-income groups. Automation and AI are being utilized more and more to address these problems. Tax-related software or services make claims about using advanced AI in the process of tax preparation, escalation, and fraud detection, but depend on simple algorithms and analytical methods.This fraud may have serious consequences. Businesses and taxpayers may place a lot of confidence in the effectiveness of AI-driven tax solutions, which might lead to poor decision-making and excessive dependence on faulty systems, increasing exposure to risks3. Moreover, companies that make false promises about AI may face scrutiny from regulators and legal penalties if they are found guilty of misleading customers and tax authorities. Companies and the Board of Directors need to be transparent about the true abilities of their AI systems for establishing and retaining trust. Regulatory frameworks must be established to assess and check AI claims as AI becomes more integrated into tax systems.Problem Statement: AI washing in taxation diminishes shareholders' trust, leads to potential regulatory breaches, and raises major ethical concerns.ObjectivesTo comprehend the concept of AI washing and its effect on taxation.To explore the ethical uses of AI in taxation.To review case studies of AI washing in taxation.Literature ReviewIn the more recent decade of the 2010s, the practice referred to as "AI washing" became a major problem. The term was addressed in Forrester Research's report by Elizabeth Cullen in 2017. It refers to companies mislabelling or overstating their use of AI to capitalize and grow their companies. This term was introduced in a report to highlight the issue where businesses use AI labels to get market attention even when they don't involve AI technologies in their products or services. Several industries are using basic algorithms or basic automation, including technology, banking, and healthcare, and have begun advertising their goods as AI-driven. This resulted in the rise of AI washing. Some support platforms marketed their chatbots as highly advanced artificial intelligence (AI) systems, despite the fact that they relied mostly on pre-designed responses and rule-driven interactions.Paschen et al. (2020) point out that AI washing in taxes can result in a dependency on inefficient systems, which may hinder decision-making and expose taxpayers and companies to more risk. False claims about AI can potentially damage public conviction in tax systems and AI technology, which can impact regulatory positions and reduce faith in AI-driven solutions4.AI has black-box technology that makes it simpler for businesses to get involved in AI washing in taxes by hiding the real functioning of their systems. They can exaggerate AI capabilities without providing transparency, which makes it challenging for consumers or authorities to confirm whether AI is being applied to their services5. Strict rules and regulations are required for verifying AI claims and opposing AI washing. According to Binns, R. (2018), standards or certifications should be established to confirm AI technology and ensure that AI marketing is transparent. Some methods are critical in combating AI washing. Hassija explained explainable AI (XAI) in his paper, which helps in the decision-making process and provides an insight into how decisions related to certain tax filings were made by the system. By enhancing transparency, the key variables or data points in the model are revealed6.Auditable logs can track every decision made by the AI system, which helps taxpayers or tax authorities to review the process and understand the reason why AI drew the specific conclusion. Akpan stated in his paper that Human-in-the-loop (HITL) is another strategy that is useful for involving human auditors. When black-box AI performs the bulk of the work, it can review and validate decisions for auditors to ensure fairness and transparency that impact taxpayers7. For building trust, open-source algorithms are used in which the functionality of the complex AI model is explained to make the system transparent.MethodologyThis study examines how AI washing is used in tax systems and the factors that impact online tax systems by analysing secondary data sourced from Scopus, Elsevier, Emerald papers, and peer-reviewed journals. The data collection process specifically targets recent articles published within the past decade, selected based on criteria such as relevance, peer-review evaluation, and the journal's impact factor. AI startup companies who are not actually using AI AI startup companies using AI significantlyFigure 1: AI Washing among Startup CompaniesFindingsThe range of AI Washing in TaxationExaggerating the complex nature of AI solutions to draw in investment, boost one's reputation, or defend policy choices is a common phenomenon. Surveys and studies on AI adoption often reveal discrepancies between reported AI capabilities and actual implementations. For example, The Financial Express claims that Venture capitalists are increasingly concerned about AI washing, where up to 70% Startup companies falsely claim AI capabilities to secure funding, as depicted in Figure 1. This problem is also evident in the taxable domain, where private companies and government tax authorities exploit the excitement around artificial intelligence to promote efficiency and innovation.Prevalence of AI Washing PracticesThe ability to detect tax fraud and improve cooperation has been a major advantage for tax authorities worldwide, who have embraced AI technology quickly. However, these claims are frequently not realised in practice in the real world. While AI techniques have been integrated into tax systems, research by the International Monetary Fund (IMF) suggests that their influence has been somewhat limited in comparison to the expectations set by public statements. Similarly, companies have been found to overstate the contribution of AI in their tax management procedures, captivating investors with creative concepts that are not adequately supported in their daily activities8.Common Methods and Mechanisms Used in AI WashingIn the context of taxation, the use of vague language and exaggerated success claims are two key indicators of AI washing. Often, companies refer to their systems as "AI-powered" without clarifying what proportion of the procedure has been automated or how much still relies on human monitoring. Even though the actual system primarily depends on traditional rule-based techniques improved with some machine learning algorithms, term such as "AI-driven fraud detection" is used. Highlighting specific success stories while minimizing deeper systemic flaws is another popular strategy. The true potential and readiness of AI systems for taxes are misrepresented to participants through these operations.Impacts on Tax Authorities and Public TrustThe complexity of AI technology makes it challenging for tax authorities to identify and control AI washing. As AI is developing so quickly, it is challenging for regulators and policymakers to keep up with the latest technologies and correctly determine the genuine capabilities of AI systems. There are further complications that arise due to the absence of universal norms and accurate definitions of what AI is doing, which may result from regulatory agencies' frequent lack of the expertise needed to examine AI claims carefully.Public trust, including shareholders in the organization, may decline if they discover that the AI capabilities have been overstated, affecting both investors and consumers.Companies that employ AI washing risk serious legal problems and harm to their reputation. Public trust, including shareholders in the organization, may decline if they discover that the AI capabilities have been overstated, affecting both investors and consumers. This breakdown of confidence can lead to loss of economic potential, market value, and possible legal implications, ultimately decreasing public trust in AI technology and impeding innovation and wider adoption. Overstated AI claims generate mistrust and inflated expectations, which hinder the development of innovative AI applications.Case StudiesUnethical Implications of AI in TaxationMisinterpretation of Data in Tax Filing ServicesA business offering tax filing services faced allegations of misleading its clients and taking advantage of them by charging for services even when they were eligible to get them for free using the IRS (Internal Revenue Service) Free File program. The allegations have been made against the company, claiming that they purposefully diverted users from the free alternatives to the premium products to gain from AI-enhanced marketing strategies rather than AI-driven tax preparation advantages.The IRS Free File program makes partnerships with entirely-profit tax software providers like Intuit, allowing qualified taxpayers to electronically prepare and file their taxes for free9.Misleading Information by AISome of the tax preparation firms lied about their capabilities of AI-powered tax preparation software. There have been accusations of "AI washing" as a result of customers' and analysts' anticipations that the real benefits of AI could not match the marketing claims. Due to these claims, consumer advocacy groups have launched legal challenges to ensure accuracy and transparency in the marketing of AI technology used in tax preparation services10.Exaggeration of AI capabilities in financial servicesSome of the renowned credit score monitoring and financial services have been accused of AI washing about its tax preparation services. The company has expanded its services by including AI-driven tax preparation tools, which have been promoted as convenient and reliable options for users by making the tax filing process easier. It has been accused that it is a part of a marketing strategy to attract users and gather data. Its use of fraudulent and unethical marketing strategies has led to lawsuits against it, as well as demands for an investigation and legal action against the company's activities7.Ethical Implications of AI Washing in TaxationPrivacy and Data SecurityAI tax systems follow strict data protection guidelines to prevent breaches and unauthorized access, as they require financial and personal data of the users to function, but this data should be recorded ethically. To preserve taxpayer privacy, it is essential to make sure about data privacy.Bias and impartialityAn AI system may make judgments that unfairly affect particular taxpayer groups if it is educated on past data that contains biases. Maintaining justice in tax administration requires making sure AI technologies are developed and evaluated to reduce bias. In 2017, the Income Tax Department of India used AI and data analytics in its online taxation system for tax investigation, reducing human intervention and subjective bias. AI chatbots used by income tax departments for solving taxation queries, called tax bots, highly influence taxpayers to make unbiased and impartial decisions while paying taxes.Transparency and AccountabilityThe "black-box" nature of AI systems show challenges to transparency and accountability. It is often difficult to understand how AI makes decisions or recommendations. To address this, tax authorities need to provide clear interpretations of how AI systems function and the criteria used in decision-making processes. Explainable AI, auditable logs, Human-in-the-loop (HITL), and Open-Source Algorithms are some strategies that can be used to maintain transparency. Transparency helps build trust and allows stakeholders to hold institutions accountable for errors or unfair practices.Ethical Use of AI for Compliance and EnforcementAs AI can improve revenue collection and regulation, there are moral concerns around the application of these technologies. For example, employing AI to actively investigate tax evasion may result in taxpayers being treated unfairly or under excessive scrutiny. It's critical to strike a balance between the advantages of AI in enhancing compliance and the need to protect taxpayer rights and avoid excessive enforcement.Impact on EmploymentAI adoption in tax administration has the potential to significantly alter employment patterns. Although AI can save administrative costs and simplify processes, it can also result in the loss of tax professionals' jobs. Providing support and opportunities for skill upgrading to impacted employees is an ethical consideration that should be prioritized to ensure a fair transition and minimize adverse effects on the workforce.AI tax systems follow strict data protection guidelines to prevent breaches and unauthorized access, as they require financial and personal data of the users to function, but this data should be recorded ethically.Regulatory Measures in IndiaIn India, the Digital Personal Data Protection Act (DPDPA) is an act passed in August 2023 that regulates how personal data is collected, processed, and used in a fair, transparent, and accountable manner. It sets guidelines for AI systems handling personal and financial data, including that data which is used in taxation10. India's National Strategy for Artificial Intelligence, released by NITI Aayog, outlines the government's approach to AI, including the promotion of responsible and ethical AI practices by large language models (LLMs). While it is not specific to taxation, it sets a framework for AI development and implementation. In India, the CBDT is in charge of tax administration and regulation. While there are currently no formal standards and regulations on AI washing, AI systems, and tools used in tax operations would be bound to the CBDT's standards on tax preparation and reporting.ConclusionAI washing in taxation undermines trust and efficacy in tax systems, leading to poor decision-making and potential legal issues. To combat this, clear regulations, transparency, and ethical AI practices are essential. Ensuring accurate representation of AI capabilities and educating consumers can help maintain trust and effectiveness in AI-driven tax solutions.ReferencesRussell, S., & Norvig, P. (2020). Artificial intelligence: A modern approach (4th ed.). Pearson.Biegel, B. (2020, June 1). The state of AI in 2020: Democratization and 'AI washing'. Forbes. https://www.forbes.com/sites/forbestechcouncil/2020/06/01/the-state-of-ai-in-2020-democratization-and-ai-washingMinar, M. R., & Naher, J. (2018). Recent Advances in Deep Learning: An Overview. arXiv.org. https://doi.org/10.13140/RG.2.2.24831.10403Paschen, J., Pitt, C., & Kietzmann, J. (2020). Artificial intelligence: Building blocks and an innovation typology. Business Horizons, 63(2), 147–155. https://doi.org/10.1016/j.bushor.2019.10.004Bohanec, M., Robnik-Šikonja, M., & Kljajić Borštnar, M. (2017). Decision-making framework with double-loop learning through interpretable black-box machine learning models. Industrial Management & Data Systems, 117(7), 1389–1406.Hassija, V., Chamola, V., Mahapatra, A., Singal, A., Goel, D., Huang, K., ... & Hussain, A. (2024). Interpreting black-box models: a review on explainable artificial intelligence. Cognitive Computation, 16(1), 45–74.Akpan, D. M. (2024). Artificial Intelligence and Machine Learning. In Future-Proof Accounting: Data and Technology Strategies (pp. 49–64). Emerald Publishing Limited.Yu, J., McCluskey, K., & Mukherjee, S. (2020). Tax Knowledge Graph for a Smarter and More Personalized TurboTax. ArXiv. /abs/2009.06103McCracken, H. (2023, June 1). Intuit, TurboTax, and H&R Block face lawsuits over allegedly false AI marketing. Fast Company. https://www.fastcompany.com/91010977/intuit-turbotax-lawsuit-hr-block-false-ai-marketingSina, M., & Bărcanescu, E. (2019). Artificial intelligence and taxation: The impact of AI on tax compliance and administration. Journal of Digital Banking, 3(3), 183–195. https://www.ingentaconnect.com/content/hsp/jdb001/2019/00000003/00000003/art00004Author may be reached at preeti13.pj@gmail.com and eboard@icai.inThe Chartered Accountant • AI & Ethics • November 2025 • www.icai.org
Ep. 143 — AI-Driven Finance: Redefining the Role of Chartered Accountants in the Age of Intelligent Automation
CA Journal
· August 2026
00:00
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AI-Driven Finance: Redefining the Role of Chartered Accountants in the Age of Intelligent AutomationFinance has continuously evolved with technology, and AI is the next big leap. It now handles fraud checks, reconciliations, and compliance, freeing Chartered Accountants (CAs) from routine tasks. For CAs, this shift isn't about replacement but reinvention — moving into roles of judgment, ethics, trust, and advisory. Global firms, and even India's ICAI, are already embedding AI in audits and tax systems. The challenge is skills, cost, and governance. The future calls for upskilling, AI education, and stronger standards. AI won't replace CAs — it will redefine them as leaders in an AI-driven financial world. Those who embrace it will stay ahead, while those who resist risk will remain left behind.The Changing World of FinanceLong ago, accountants used to write balance sheets by hand in big ledger books. If someone wanted to check records, they had to go through piles of paper. Then came spreadsheets, ERP systems, and cloud platforms, which made the work faster. Now, we are witnessing an even bigger change. Artificial Intelligence (AI) is not something far away—it is here today, changing how finance is managed.AI is not only saving time by doing routine work, but also helping to find hidden risks and insights. This doesn't mean Chartered Accountants (CAs) will disappear. Instead, their role is being reshaped for a new world where work is real-time, data-driven, and technology-led.CAs are well-positioned to take this on. Their knowledge of finance, law, audit, and compliance—along with their logical thinking and professional judgment—makes them the right people to guide how AI is used in financial oversight.This article looks at how AI is changing the fields of finance and audit, and more importantly, how CAs can not only remain relevant but also lead the way, using ethics, governance, and innovation as their guide.Understanding AI in the Financial ContextMany people think that AI is futuristic, but it is already a part of our daily financial activities. In simple terms, AI refers to systems that can act like human intelligence—they learn from data, find patterns, and make decisions with very little human help.In finance and accounting, there are three important terms to understand as parts of AI:Machine Learning (ML): This allows systems to find trends, detect unusual activities, and make predictions. For example, ML can warn about suspicious transactions or forecast future cash flows.Natural Language Processing (NLP): This helps computers understand human language. It is useful for reading contracts, compliance reports, or even large sets of emails.Robotic Process Automation (RPA): This takes care of repetitive, rule-based work such as reconciliations or filling tax forms. It saves time and lets professionals focus on more important tasks.These technologies are no longer new. Today, AI is used in full-scale audits, smart invoice processing, and real-time detection of irregularities. But just using these tools is not enough. CAs must also understand how they work.AI is not something you can just "switch on and forget." To trust the results, professionals must know the basics—how the models are trained, what kind of data they use, how errors or biases can creep in, and whether the logic behind them can be explained.One easy entry point is prompt engineering, i.e., learning how to ask the right questions to AI systems. For example, by using tools like CA-GPT, CAs can get comfortable with AI and slowly build deeper knowledge.In a world where AI not only supports decisions but also makes them, Chartered Accountants must act as interpreters and supervisors. They don't need to become coders, but they must be wise guides who protect financial integrity in a smart, AI-driven system.Real-World Applications – Global and Indian ExamplesAI is no longer a lab experiment in accounting. It is already changing the way audits, taxes, compliance, and advisory services are delivered.Global ExamplesMultinational firms around the world are already using AI in their practices:AI-powered audit platforms are conducting real-time checks, moving beyond sampling to review entire ledgers to spot unusual transactions.Advanced analytics engines are running deep, data-based audits across large and complex financial records.AI-based tax tools are continuously monitoring changes in tax laws and regulations, providing early warnings about potential risks across jurisdictions.Machine learning models are being applied in forensic audits to analyze behavior patterns and detect fraud with greater accuracy.These tools don't just save time. They raise the quality of audits, reduce risks, and widen the scope of checks.Indian InitiativesIndia is also moving quickly in this area.Private banks like HDFC Bank and ICICI Bank are using AI to improve credit scoring models, taking into account not just financial data but also behavior and alternative data.Startups like RazorpayX and ClearTax use AI for GST reconciliation, invoice checking, and anomaly detection—tools that many CA firms already rely on.Many Indian CA firms are also embracing AI for diverse applications such as GST reconciliation, forensic audits, and transaction reviews during concurrent audits, significantly reducing manual effort and enhancing accuracy.At a larger scale, ICAI has also taken steps:CA-GPT was launched, trained on 75 years of ICAI guidance.ICAI-GPT was introduced to help with financial reporting.These tools have already processed over 2.5 lakh prompts, with 70+ specialized GPTs created to support different fields.The clear message is this: AI is not something to wait for, it is already being used widely. Chartered Accountants who learn its capabilities can move beyond being just tool-users. They can become advisors who explain how intelligent systems make decisions.The Role of Chartered Accountants – Risks or Rewards?As AI takes over repetitive, rules-based tasks, the natural question is: What happens to the Chartered Accountant?The answer is clear. CAs will not lose importance. In fact, their role becomes stronger and more strategic, provided the profession adapts in time.Yes, many routine jobs like reconciliations, invoice checks, and basic audit tests will now be automated. But these were never the true value of a CA. The real value lies in judgment, interpretation, and ethical oversight, areas where AI cannot work alone.Moving from Operator to AnalystThe role of CAs is shifting. They are now becoming:AI-assisted auditors, checking and confirming exceptions that algorithms identify.Data interpreters, turning complex data outputs into meaningful insights for business leaders.Ethical watchdogs, ensuring that AI systems remain fair, unbiased, and compliant with laws.Advisors, guiding clients through digital change, smarter tax strategies, or even helping with AI adoption.But There's a Catch: Skills and MindsetTitles and experience alone will not keep a CA relevant. To stay important in this new era, professionals must:Build digital literacy, even if they are not writing code.Ask new types of questions, like:Is this algorithm explainable?Does it comply with the DPDP Act?Was the data free of bias?Combine skepticism with data fluency, so that they can challenge AI results when needed.ICAI has started offering certification programs and training in prompt engineering. These are useful first steps. But for many professionals, especially in smaller firms, digital skills are still a work in progress.The Profession's Big OpportunityCAs are trusted because they stand for fairness and transparency. As AI becomes more complex, that trust will be needed even more—not less.The real risk is not that AI will replace accountants. The real risk is that accountants who do not understand AI will be replaced by those who do.Ethical Considerations and GovernanceAI is not just a technology tool, rather it is a system that makes decisions. And in finance, every decision must follow strong ethical and professional standards.The Ethical RisksAI can sometimes learn from incomplete or biased data. For example:A loan approval model might unknowingly favor some groups over others.A fraud detection system might wrongly mark innocent behavior as suspicious.Many AI tools act like "black boxes," where the logic is hidden and too complex to trace.For Chartered Accountants, this is unacceptable. Their profession is built on transparency, accountability, and clear audit trails. If AI enters financial workflows, it must respect the same principles.Who Should Govern AI?The right people to govern AI in finance are Chartered Accountants. They already understand controls, governance, and laws. With proper training, they can:Test AI outputs against legal and professional standards.Make sure automated decisions have proper audit trails.Detect misuse or risks early in the process.The ICAI has also taken steps in this direction. Its AI Committee has organized webinars on AI ethics, promoted the use of CA-GPT, and stressed the need to include ethical AI practices in assurance standards.AI and RegulationGovernments across the world are creating laws to control AI.India's DPDP Act focuses on consent, privacy, and responsible use of data.The EU AI Act and OECD principles emphasize fairness and transparency.But writing laws is not enough. We need professionals who can apply them in real financial situations. CAs are in the best position to bridge finance and technology, ensuring that AI follows both legal and ethical standards.The future is not only about AI being accurate. It is about AI being accountable. Chartered Accountants are the right professionals to make sure that happens.India's Preparedness – ICAI and Government InitiativesIndia is moving fast in digital transformation, and AI is at the center of this change. Both the Government of India and ICAI have taken strong steps. But to be fully prepared, these efforts must be scaled and made available to all professionals.Government MomentumThe Digital Personal Data Protection (DPDP) Act, 2023, gives a legal base for AI systems. It focuses on consent, privacy, and responsible use of data.The MCA21 V3 platform now uses AI for checking company filings, answering queries through chatbots, and sending predictive compliance alerts.Tax authorities like GSTN and CBDT use AI to find fraud and irregularities. Through this, over ₹14,000 crore in false claims have already been flagged.The national program #AIForAll, led by NITI Aayog, promotes inclusive and ethical use of AI across all sectors, including finance.ICAI: Turning Vision into ActionIn the past two years, ICAI has launched several important AI-based initiatives:AI Innovation Summit 2025 (AIS 2025): Gathered 1000+ CAs, students, and tech leaders. ICAI also signed an MoU with Google India to create AI labs and new course content.CA-GPT: A tool trained on ICAI's archives, supporting 70+ specialized GPTs in areas like audit, tax, and industry queries. Already processed over 2.5 lakh prompts.ICAI-GPT for Financial Reporting: Helps prepare financials for non-corporate entities, reducing complexity for smaller firms.AI Certification Courses: A three-stage program covering prompt engineering, Python/R, and applied AI in tax and audit. Many professionals have already completed the early batches.Regional Hackathons, Ethics Webinars, and AI Labs: Across the country, ICAI has organized hands-on sessions, hackathons (like the Nagpur event with 500+ participants), and webinars on AI ethics.Early-Warning System Pilot: ICAI is working with regulators to build AI-based fraud detection systems for listed companies, so that red flags can be part of regular audit work.The Next PhaseWhile ICAI has built strong momentum, more steps are needed to fully prepare members:Integrate AI in the CA curriculum by 2027.Expand access to CA-GPT to all regional branches.Publish guidelines for auditing AI systems.Ensure wider reach, not just in big cities, but also in smaller towns.With its reach, credibility, and focus on ethics, ICAI is in the best position to lead AI governance in India's financial world.Challenges and RoadblocksAlthough AI adoption in accounting is growing, several challenges continue to hinder its progress.1. Digital Literacy GapMany Chartered Accountants, especially those trained before the digital era, are not fully comfortable with AI basics. Even younger professionals may know how to use digital tools but may not understand how AI systems actually work. This makes it hard for them to properly question or review AI outputs.2. Resistance at the Firm LevelMid-sized and smaller firms often hesitate to use AI because of:Worries about costFear that staff may lose jobsLack of in-house technical knowledgeThis creates a digital divide—some firms move ahead quickly while others fall behind.3. Lack of Regulatory ClarityImportant questions still don't have clear answers, such as:Can AI-generated audit workpapers be trusted?Who is responsible if an AI system makes a mistake?How do we define the scope of an "AI audit"?Without clarity, many firms remain cautious.4. Black-Box Problem and Ethical ConcernsMost AI tools work like a "black box", the decision-making logic is hidden and hard to explain. But CAs must ensure transparency and auditability. If they cannot fully validate the system, many are understandably reluctant to rely on it.5. No Standard Framework for AI AssuranceUntil a structured framework/guidelines on AI models are published, ICAI should take the lead in developing one, as many professionals may lack the necessary confidence or tools to effectively and responsibly integrate AI into their work.Solving for the FutureThese challenges should not stop the adoption of AI. Instead, they call for action:Make AI literacy mandatory as part of continuous professional development (CPD).Create starter toolkits for small and mid-sized firms to help them begin using AI.Work with tech firms to set up sandbox environments where CAs can test AI tools safely.Lead the development of AI audit standards, just as ICAI did earlier with Ind AS and GST.AI is not pushing CAs out of the profession. But CAs must step forward and embrace it if they want to stay central to the financial system.The Path Ahead – Roadmap for the Future Chartered AccountantArtificial Intelligence is not replacing Chartered Accountants. Instead, it is changing the kind of work they do. This shift calls for structured growth, not just awareness. ICAI has already laid the foundation, but now it must be expanded to every stage of the profession.i. Curriculum OverhaulAI, prompt engineering, and data literacy need to become part of:Foundation and Intermediate courses.Final-level case studies.Articleship training with exposure to real-world AI tools.Just like today's CAs master GST and Ind AS, tomorrow's CAs must also learn how to question and validate AI systems.ii. Continuous AI Literacy for MembersICAI's AI Certification Program is a strong beginning. The next steps should include:Counting the program towards mandatory CPE hours.Offering the courses in hybrid formats across all regions.Encouraging members to use CA-GPT through branch-level rollouts.Introducing an AI Readiness Scorecard for firms, to measure preparedness and highlight gaps.iii. Tools as Everyday UtilitiesAI tools should no longer be seen as "pilot projects." They must become everyday essentials. For example:ICAI-GPT for preparing and reviewing financial statements.CA-GPT for cross-checking accounting and audit standards.NLP-based AI for audit trail generation, risk mapping, and predictive compliance.ICAI could even subsidize access to AI tools for smaller firms to ensure wide adoption.iv. AI Governance StandardsThe next big step is AI assurance. ICAI, along with regulators, should:Publish official guidelines for AI assurance, similar to audit standards.Define what makes AI models "audit-ready."Create an "AI Audit Certification" for professionals who can validate AI systems used in compliance and filings.This could even open a new service area for CAs—AI governance as a paid advisory offering.v. Collaborative LearningCAs must also learn by working with experts from other fields. ICAI can promote this by:Creating mentorship programs between accountants and technologists.Hosting hackathons and simulation labs across regions.Running branch-level workshops where real client problems are solved using AI.The profession will evolve only when learning moves from theory to real practice.AI can automate many tasks. But it cannot replace judgment, ethics, or trust—these are the very foundation of the CA profession.Conclusion: The Chartered Accountant in the Age of AIArtificial Intelligence is not something of the future, it is already here. And in this new reality, Chartered Accountants face an important turning point.AI can automate many tasks. But it cannot replace judgment, ethics, or trust—these are the very foundation of the CA profession. In fact, the more AI grows, the more we need professionals who can question its logic, test its fairness, and ensure accountability.CAs have always been at the forefront of big changes. They adapted to digitization, GST, and IFRS. But this change is different. It requires a mix of strong finance knowledge, comfort with technology, and a new way of thinking about the CA's role as a trusted advisor.ICAI is already building the bridge with innovations like CA-GPT, AI certifications, and AI governance tools. The profession now needs to walk confidently across that bridge.In a world where algorithms provide answers, the Chartered Accountant will remain the one who asks the right questions.ReferencesICAI. (2025). AIS 2025 Innovation Summit Report & Google MoU.ICAI. (2025). CA-GPT and ICAI-GPT Tool Rollouts.ICAI. (2025). AI Certification Program – Phase-Wise Rollout Data.ICAI AI in ICAI Committee. (2025). Hackathons & Workshops Summary.ICAI. (2025). Early-Warning Fraud Detection Mechanism Pilot.IFAC. (2024). Skills Matrix for Accountants in the AI Age.NASSCOM. (2024). Blueprint for AI Industry Integration.Harvard Business Review. (2023). Prompt Literacy and the Future of Work.Ministry of Electronics & IT. (2023). Digital Personal Data Protection Act.MCA. (2023). MCA21 V3 Platform AI-enabled Interface.GSTN. (2023). Annual AI Analytics Summary Report.NITI Aayog. (2022). #AIForAll National Strategy.OECD. (2021). Principles on Artificial Intelligence.European Commission. (2024). EU AI Act – Full Guidelines.Deloitte. (2023). Cortex AI for Audit.EY Global. (2022). Helix in the Digital Audit.PwC Global. (2023). Tax AI Systems in Practice.KPMG International. (2022). AI in Forensic Accounting.Harvard Business Review. (2020). Ethics of Automation in Business.Hosts of references from the internet, publications, brochures and other websites w.r.t various mentions inside the writeup.◆ ◆ ◆Author may be reached at eboard@icai.inThe Chartered Accountant · Artificial Intelligence November 2025 | www.icai.org | 67
Ep. 144 — AI in Agriculture: Transforming Crop Insurance for Indian Farmers through Securitization
CA Journal
· August 2026
00:00
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AI in Agriculture: Transforming Crop Insurance for Indian Farmers through SecuritizationAbstract India’s agriculture, which sustains over half of the Indian population, is increasingly vulnerable to climate change and extreme weather events. Conventional crop insurance systems in place, hindered by slow claims processing, capital shortfalls, and outdated risk models, fail to meet the rising demands for financial protection from insurers and solvency issues for insurance companies in catastrophe. This article presents a transformative approach by integrating Artificial Intelligence (AI) with Insurance-linked securities such as catastrophe bonds (CAT) and other new innovative products to revamp crop insurance. AI enhances risk assessment precision, tailors premiums, and enables dynamic, real-time adjustments. CAT bonds provide crucial risk diversification and rapid liquidity, reducing insurance costs and expanding coverage. Blockchain technology further amplifies these benefits by securitizing insurance pools, boosting capital efficiency, and streamlining operations. By adopting these advanced tools, India can build a more resilient agricultural sector, safeguarding its farmers against increasing climate-related risks and reinforcing economic stability.Due to climate change and extreme weather events, the agriculture sector of the nation is facing unprecedented challenges. The recent devastating floods in Kerala and Uttarakhand highlight the vulnerability of Indian farmers to unpredictable natural disasters. Out of 36 states and Union territories, 27 are classified as disaster-prone by the National Disaster Management Authority (NDMA). Indian agriculture has a pressing need for more resilient and innovative financial tools to safeguard this critical sector.Traditional crop insurance mechanisms in India are proving inadequate in addressing the scale and frequency of these natural calamities. As farmers face increased risks of crop failure due to unpredictable weather patterns, the need for a more robust and innovative solution has emerged. AI-driven crop insurance combined with securitization through catastrophe bonds (CAT) comes into play. By leveraging AI technologies and financial innovations, India can not only protect its farmers but also build a resilient agriculture sector for the future.Current Challenges in Crop Insurance Crop insurance is designed to indemnify the financial loss to farmers against crop losses from natural disasters, pest attacks, and other uncontrollable factors. However, several limitations hinder its effectiveness:Slow Claim SettlementManual processes and outdated data collection methods lead to delays in claim settlements, creating financial strain on farmers. The delay is further aggravated by claim-cutting experiments and the collation of data across different geographical regions.Capital InadequacyThe insurance companies are also facing capital inadequacy for introducing new-age products and services.High Exposure to RiskInsurance companies often struggle to manage risk efficiently, especially when faced with large-scale disasters affecting multiple regions simultaneously.Inaccurate Risk AssessmentTraditional risk models may not account for local variations or new types of risks, leading to inaccurate pricing and coverage gaps. The asymmetrical weather and cultivation practices are another challenge in risk assessment.Insufficient Data IntegrationThe lack of integration between various data sources (e.g., weather, soil conditions, land holding, cultivable area, and weather historical data) hinders the ability to make informed risk assessments and policy adjustments.Limited Access to InsuranceSmall-scale and marginal farmers often face barriers in accessing crop insurance due to high costs, lack of awareness, or insufficient availability of products tailored to their needs. Presently, the products are available through Banks, linked to the loan amount, and very few farmers know the process of taking a weather-based insurance or Prime Minister Fasal Bima Yojana (PMFBY) directly from the insurance company.Fraud and MismanagementThe risk of fraudulent claims and mismanagement of funds can undermine the effectiveness of insurance programs and erode trust among farmers.Lack of CustomizationStandardized insurance products may not address the specific risks faced by different regions or crops, resulting in inadequate protection for some farmers.Delayed Updates to Coverage ModelsThe slow pace of incorporating new data and advances in technology in insurance models can lead to outdated coverage options and less effective risk management, as well as disgruntled farmers who are taking insurance.Administrative InefficienciesInefficient administrative processes and a lack of automation contribute to delays and errors in policy issuance, claim processing, and customer service.These challenges necessitate a transformation in crop insurance practices, and AI-driven solutions combined with securitization can offer substantial improvements.AI Addressing the Challenges of the Insurance Industry The insurance industry is rapidly evolving with the adoption of artificial intelligence (AI), fundamentally reshaping how risks are assessed, premiums are calculated, and policies are adjusted in real time. AI’s capacity to analyze vast amounts of data with precision enables insurers to offer more personalized and flexible risk solutions. This, in turn, leads to optimized risk pools, reduced premiums, and dynamic repricing that benefits both insurers and policyholders.1. Risk Segmentation Using AIArtificial intelligence (AI) can enhance risk assessment through segmentation of risk. Globally, AI allows insurers to refine risk models, reduce premiums, increase margins, and adjust pricing in real-time, creating more efficient and responsive systems. These include:Identifying high-risk areas for natural disasters, such as floods, storms, hailstorms, tempests, or earthquake-prone regions.State Governments should ensure the use of GPRS-enabled and camera-fitted mobile phones, etc., while conducting crop cutting experiments.An Atlas of critical weather elements for different agro-climatic regions on a real-time basis should be available and accessible to all stakeholders.A web portal of land holding and crop pattern should be made available to all financial institutions at each state level for better monitoring and control of agricultural financing and insurance.AI can analyze vast datasets like geospatial, weather, and market trends to identify region-specific risks. For instance, in 2020, a leading global reinsurer named Swiss Re used AI to refine its catastrophe risk models, thereby reducing uncertainty by 20%.“AI’s capacity to analyze vast amounts of data with precision enables insurers to offer more personalized and flexible risk solutions. This, in turn, leads to optimized risk pools, reduced premiums, and dynamic repricing that benefits both insurers and policyholders.”2. Premium Reduction Through Enhanced AccuracyWith AI refining risk profiles, insurers can avoid the blanket approach traditionally used in insurance pricing. AI uses predictive models and machine learning algorithms to:Accurately assess the probability of an event occurring (e.g., natural disasters, market crashes, or health incidents).Measure the potential financial impact of these events based on past data and current trends.Another leading global provider of reinsurance, named Munich Re, uses AI to analyze satellite data for agricultural insurance in Africa, offering drought-specific insurance to farmers and reducing their premiums by 30%. This individualized pricing ensures that policyholders pay fairer rates aligned with their actual risk. In India, IRDAI also introduced Pay-as-you-go car insurance based on the mileage driven, which is proposed to refine pricing based on driving patterns. Such innovations need to be replicated in Agricultural Insurance in India for greater penetration and spread of risk.3. Real-Time Risk Monitoring and RepricingReal-time monitoring through AI allows insurers to adjust premiums dynamically as conditions evolve. For example, Sompo International, a global reinsurer company based out of Japan, introduced a real-time weather-based insurance policy for businesses, where premiums are adjusted based on ongoing weather conditions like typhoons or floods. Health insurance companies, like Oscar Health, use wearable devices to monitor customers’ activity, adjusting premiums based on lifestyle and health improvements, promoting real-time premium changes. This dynamic risk assessment can be driven by inputs from multiple sources, including:IoT DevicesSensors monitoring weather, Agricultural Drones for spray and studies, building conditions, vehicle health, smart wearables, etc.Social Media and News DataReal-time insights into economic shifts, community radios, weather changes, global health concerns, or market disruptions.Geospatial DataSatellite imagery and geographic information systems (GIS) tracking changes in environmental conditions and timely communications to farmers.As risks evolve, AI can dynamically reprice insurance premiums in response to changing conditions. For instance:Emerging Weather EventsAI could detect the early signs of a hurricane or drought and adjust the relevant insurance premiums immediately for individuals in the affected area.Supply Chain DisruptionsIn business insurance, AI could identify risks to operations due to market fluctuations or logistical issues, leading to a recalibration of coverage based on current conditions. Similarly, advanced information captured through Skymet and other gadgets on hurricanes/droughts, and rains can help in assessing the risk to crops and pricing the agricultural insurance.Health and Lifestyle ChangesWearable devices or health apps can feed real-time data on an individual’s health, allowing life or health insurance premiums to be adjusted if risk levels increase or decrease. This needs to be adopted in agricultural insurance by frequently capturing the data and interpolating, and using it for pricing and risk assessment.4. Improving the Overall Safety of the Risk PoolAI enhances the safety of the risk pool by optimizing diversification. One of the global healthcare companies, AXA Global, used AI to reduce fraud detection time by 70%, improving the accuracy of claims. Real-time data integration from IoT and other sources ensures that insurers balance portfolios effectively in the following way.Monitoring and detecting anomalies in claims and risk patternsAI algorithms can flag potential fraudulent claims or assess whether a particular risk pattern (e.g., sudden increases in accidents) needs further investigation.Optimizing risk diversificationBy better understanding the correlation between different types of risks, AI can help insurers create a more balanced portfolio, preventing over-exposure to specific risk categories.Real-time adjustment of reinsurance premiumsInsurers can use AI to optimize their reinsurance contracts and premiums, ensuring adequate protection against multiple or simultaneous risks.Example: A major insurer named Allianz piloted a blockchain-based insurance solution in operation by creating a single source record of the decision about each claim. This saves time spent on administration, hence saves cost, and also means that claims are settled fast and accurately for the customer.Intermediate and Long-Term Solutions: Catastrophe Bonds and Securitization of Insurance Pools 1. Catastrophe BondsCAT bonds were introduced in the mid-1990s and have become a crucial tool for transferring disaster risk from insurers to global financial markets. Industry players, such as insurance companies, reinsurers or even governments, can raise funds by selling bonds in the capital market. Investors receive attractive interest rates in return, but if a catastrophic event occurs, they forfeit their principal, which is then used to compensate policyholders.Advantages of CAT BondsRisk DiversificationCAT bonds spread the risk across a global pool of investors, which helps insurers maintain stability during large-scale disasters. This diversification is crucial in managing the financial impact of catastrophic events, as it prevents the burden from falling solely on a single entity.Lower PremiumsBy transferring some of the financial risks to investors, CAT bonds reduce the financial pressure on insurers. This can lead to lower premiums for policyholders, including farmers, making insurance more affordable and accessible.Quick Access to FundsCAT bonds provide immediate funds for claim settlements. This ensures timely compensation for policyholders, which is especially important in the aftermath of a disaster when quick financial relief is necessary.For Indian agriculture, CAT bonds represent an opportunity to reduce premiums, expand coverage, and enhance financial resilience in the face of increasing natural disasters. This financial innovation can significantly bolster the sector’s ability to withstand the economic impacts of adverse events.Understanding Pricing Framework for CAT Bonds To understand CAT bond pricing, we use two models, namely, the Single-Event Catastrophe Bond and the Multi-Event Catastrophe Bond (MECB) model. These models account for both single-event risks (like one drought) and multiple-event risks (e.g., simultaneous drought and pest outbreaks).Single-Event Catastrophe Bond Pricing ModelIn a single-event model, the bond is priced based on the probability of one catastrophic event (e.g., drought) occurring within the bond’s term. The Zero-Coupon CAT Bond price is derived using a stochastic process that models event risk and loss severity.Key factors:Principal (P)The amount paid at maturity if no event occurs.Coupon (Ck)Annual interest payments (if applicable).Loss (Lt)Aggregate loss due to the event until time t.Attachment Point (μL)The loss threshold that triggers the bond’s payout.Loss Modelling (Poisson Process)The probability of a catastrophic event (e.g., crop failure) is modelled using a Poisson process, where Nt is the number of loss events up to time t, and each loss Xi is a random variable representing the magnitude of each event.The total loss up to time “t” would be:Lt = Nt∑i = 1 Xi The trigger event occurs when cumulative losses exceed the attachment point:τL = inf{ t : Lt > μL }The bond payout is reduced if the loss exceeds the attachment point, and the price is calculated as the expected value of the bond’s payout at maturity, discounted by the real interest rate.PT = { P if τL > T ζP if τL ≤ T where PT is the principal payout, and ζ is the proportion of principal retained after an event.The price of a zero-coupon bond will be:VT = E(PT) · B(0, T) where the value of B(0, T) — the PFIV (present value factor) — is for real interest rates.Multi-Event Catastrophe Bond (MECB) Pricing ModelIn a Multi-Event framework, multiple risks can trigger pay-outs. For example, a drought, pest outbreak, and flood might all occur within the bond’s term. This increases complexity as the correlation between events must be accounted for.Key factors:Multiple Loss ProcessesEach event type (e.g., drought, flood) has its own Poisson process for loss modelling.Joint-Distribution of LossCopulas can be used to model the joint distribution of multiple risks / variables.Aggregate Loss FunctionFor multiple events, the aggregate loss becomes:Lt(1) + Lt(2) + … + Lt(n)where each Lt(i) represents losses from event i. The bond triggers when the combined loss exceeds a pre-defined threshold:τL(multi) = inf{ t : Lt(1) + Lt(2) + … + Lt(n) > μL }The probability of simultaneous events (e.g., drought and pest outbreak) is modelled using copulas, which link the individual risk distributions.Pricing Formula for MECBThe price of the bond is adjusted for the increased likelihood of multiple events triggering a payout:PT(multi) = P (ζ1FLT(1)(μL) + ζ2FLT(2)(μL) + … + ζnFLT(n)(μL)) · B(0, T) where ζ represents the proportion of the payout retained after event i.2. Securitizing Insurance Pools on Blockchain for Capital Efficiency and Large-Scale Coverage Blockchain technology offers transformative potential for the insurance industry by enabling the securitization of Insurance pools, which consist of premiums collected from policyholders, that can be bundled and securitized into tradeable financial assets on blockchain platforms. This process is similar to how mortgages or loans are bundled into securities in traditional finance. Insurers convert portions of their risk exposure into securities, known as Insurance-Linked Securities (ILS), which can then be sold to investors.“Blockchain technology offers transformative potential for the insurance industry by enabling the securitization of Insurance pools, which consist of premiums collected from policyholders, that can be bundled and securitized into tradeable financial assets on blockchain platforms.”How Securitizing of Insurance Pools with Blockchain Can WorkBundling and Tokenizing Insurance PoolsFor example, XYZ Insurance collects premiums from policyholders, creating a substantial insurance pool. Traditionally, this pool would be held in reserve to cover potential claims. However, with blockchain technology, XYZ Insurance can tokenize these insurance pools into tradable financial assets called Insurance-Linked Securities (ILS).Creating Insurance-Linked Securities (ILS)XYZ Insurance uses blockchain to create digital tokens representing portions of its insurance pool. Each token represents a share of the risk associated with the pool. For instance, if XYZ Insurance has a $100 million insurance pool, it can tokenize this into 10 million tokens valued at $10 each.Trading on Secondary MarketsThese tokens are then listed on blockchain-based trading platforms, where investors such as pension funds or hedge funds can buy and sell them. Investors are attracted by the potential for high returns, which come from receiving premiums or interest payments from the insurance pool. This trading provides immediate liquidity to XYZ Insurance.Capital EfficiencyBy selling these tokens, XYZ Insurance offloads part of its risk to the capital markets. Hence, tokenization frees up capital for the insurance company that would otherwise be tied up as reserves in the balance sheet. For example, if XYZ Insurance sells 50% of its tokens, it effectively releases $50 million in capital.Expanding CoverageWith the freed-up capital, XYZ Insurance can now expand its coverage, underwrite more policies, or invest in new areas. This increased efficiency helps improve overall operational capacity and financial stability.Presently, India’s insurance penetration remains low, at 4.2% of GDP in 2022. Using blockchain securitization can help insurers manage large-scale risks more efficiently while improving solvency ratios.Case for AI and CAT Bonds in Indian Agriculture Based on Global Best Practice India can draw valuable lessons from countries that have successfully implemented CAT bonds. Nations like Jamaica and Mexico have used CAT bonds to manage risks associated with hurricanes and earthquakes. The World Bank’s involvement in the CAT bond market further underscores its importance in managing catastrophe risks. India’s financial innovation capabilities, like UPI, position it well to adopt these practices and enhance its agricultural sector’s resilience.“India can draw valuable lessons from countries that have successfully implemented CAT bonds. Nations like Jamaica and Mexico have used CAT bonds to manage risks associated with hurricanes and earthquakes.”India’s existing crop insurance schemes, such as the Pradhan Mantri Fasal Bima Yojana (PMFBY), could greatly benefit from the integration of AI and securitization. AI-driven technologies can be used for real-time assessment and disaster prediction, while CAT bonds can provide additional financial stability and coverage. By leveraging these advanced tools, India can build a more resilient agricultural sector, safeguarding its farmers and contributing to overall economic growth.Limitations of AI and Securitization While AI holds promise in revolutionizing the agriculture insurance sector, there are certain barriers that need to be addressed:Data Access and QualityAI-driven systems rely on big datasets, but many regions in India may lack accurate or updated data on weather patterns, soil conditions, or earlier insurance claims sanctioned / scrutinized / rejected, due to which the AI model may not have sufficient data and can produce inaccurate results.Technological Barriers for FarmersImplementing AI and securitization systems may involve high setup costs, which may discourage small insurers from adopting these technologies.Regulatory ChallengesThe securitization of insurance pools, while efficient, requires robust regulatory frameworks that can handle complex financial instruments like CAT bonds. Without proper oversight, these systems could pose risks to both investors and farmers. Further, the regulatory challenges with respect to approval / assessment for the use of AI in various sectors are still in a nascent stage in India. IRDAI is open to experimentation through the Sand Box Model on a pilot basis without approval. The focus on FDI in insurance is also gaining momentum for the ultimate good of the insurance sector in view of the commitment of the Government of India for Insurance for All by 2047.Over-Reliance on Predictive ModelsAI models, while powerful, can only predict future events based on past data. This may fail in scenarios where climate patterns shift unpredictably or where novel risks (e.g., new pests, drastic climate change) emerge.While these limitations pose some challenges, they are not insurmountable. With proper strategic investments in data infrastructure, enhanced technological access for farmers, and a robust regulatory framework, India can overcome these challenges. By addressing these obstacles, AI-driven crop insurance models and securitization can fully realize their potential. This dual approach will not only revolutionize agricultural insurance but also provide farmers with stronger financial resilience in the face of growing climate risks.Conclusion The integration of AI and ILS (Insurance-Linked Securities) will represent a significant advancement in crop insurance for Indian farmers, providing both immediate and long-term benefits. As climate change intensifies and natural disasters become more frequent, these innovations offer crucial enhancements to the agricultural insurance landscape.Catastrophe Bonds: An Intermediate SolutionCAT bonds serve as an effective intermediate solution, addressing the urgent need for immediate financial protection against catastrophic events. These bonds allow insurers to transfer risk to global capital markets, providing them with liquidity to cover claims promptly. By leveraging AI to refine risk models and tailor policies, CAT bonds can be priced more accurately and dynamically. For instance, Swiss Re’s use of AI has enabled more precise catastrophe risk models, reducing uncertainty and enhancing pricing accuracy.Securitization of Insurance Pools: A Long-Term SolutionFor a more sustainable and long-term solution, the securitization of insurance pools on blockchain technology emerges as a transformative approach. By bundling insurance premiums into tradeable assets on blockchain platforms, insurers can access new capital sources and improve financial efficiency. Blockchain’s immutable ledger and smart contracts facilitate transparent and automated management of these assets, reducing administrative costs and improving the speed of transactions. This approach not only enhances capital efficiency but also allows insurers to better manage large-scale risks without holding significant reserves.Integrating AI with ILS (Insurance-Linked Securities)The possibilities in India are endless, as well as the opportunities, considering we have the world’s largest population to feed and are the world’s most geographically diverse country. If we embrace both CAT bonds as an intermediate solution and the securitization of insurance pools as a long-term strategy, along with the power of AI, it can empower India’s agricultural sector immensely, making it more resilient against climate-induced challenges. This dual approach not only safeguards farmers but also strengthens the financial stability of insurers, paving the way for a more secure Indian agricultural future.India’s insurance market has immense potential, with current penetration at just 4%. There is a long way to go in achieving the goal of ‘Insurance for All’ by 2047. The solutions outlined above, by leveraging AI (Artificial Intelligence) and ILS (Insurance-Linked Securities), can significantly contribute to bridging this gap. By enabling more personalized, efficient, and accessible insurance products, AI can play a crucial role in expanding coverage and ensuring that insurance becomes a key pillar of India’s financial ecosystem in agriculture.ReferencesAgarwal, S., & Singh, R. “Artificial Intelligence in Insurance: A Comprehensive Review.” Journal of Insurance Technology, vol. 15, no. 4, 2022, pp. 234–250.Bauer, M., & Becker, J. “Blockchain and Its Impact on the Insurance Industry.” International Journal of Financial Engineering, vol. 20, no. 1, 2023, pp. 45–60.Bernstein, A., & Kessler, J. “Catastrophe Bonds and Insurance-Linked Securities: A New Era of Risk Management.” Risk Management and Insurance Review, vol. 24, no. 2, 2021, pp. 111–130.Swiss Re. “Global Catastrophe Bond Market Report 2023.”World Bank. “Capital Efficiency in Insurance: The Role of Blockchain Technology.” 2022.Munich Re. “AI and Predictive Analytics in Agriculture Insurance.” 2021.Insurance Regulatory and Development Authority of India (IRDAI). “Blockchain and Insurance: A New Era.” 2023.Allianz. “Blockchain-Based Insurance Solutions: Pilot Results and Insights.” 2021.Jamaica Ministry of Finance. “Catastrophe Bonds and Disaster Risk Management: Lessons Learned.” 2022.Mexican Insurance Institute. “Managing Natural Disasters with Cat Bonds: The Mexican Experience.” 2022.Oscar Health. “Real-Time Premium Adjustments Based on Wearable Data.” Oscar Health Technology Review, vol. 7, no. 3, 2023, pp. 112–127.Sompo International. “Real-Time Weather-Based Insurance Policies: A Case Study.” 2023.State Farm. “Personalized Insurance Premiums Using AI: Success Stories.” State Farm Analytics Journal, vol. 12, no. 2, 2021, pp. 78–89.Zhao, X., & Zhang, Q. “Blockchain Technology in Insurance: An Overview and Future Directions.” Journal of Financial Technology, vol. 8, no. 1, 2020, pp. 54–71.Khan, M., & Iqbal, S. “AI and Its Role in Risk Management: A Review of Recent Advances.” International Journal of Risk and Insurance, vol. 19, no. 3, 2021, pp. 145–159.Authors may be reached at Arunpadmanabhan111@gmail.com, Cabijaybehera@gmail.com, shubhambg213@gmail.com and eboard@icai.inThe Chartered Accountant · Tech & Finance · November 2025 · www.icai.org
Ep. 145 — Bridging the MSME Credit Gap: TReDS as a Strategic Liquidity Solution
CA Journal
· August 2026
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Bridging the MSME Credit Gap: TReDS as a Strategic Liquidity SolutionThe article examines the persistent credit challenges faced by MSMEs in India and highlights the Trade Receivables Discounting System (TReDS) as a practical solution to address liquidity gaps. Despite contributing significantly to GDP and employment, MSMEs continue to rely on informal credit due to limited access to formal financing. TReDS, a digital platform regulated by the RBI, enables MSMEs to receive early payments against invoices without collateral, offering a more structured and transparent alternative. The article also outlines the role of ICAI and Chartered Accountants in promoting TReDS adoption through advisory, compliance, and integration support. It stresses the need for broader awareness, policy push, and ecosystem participation to mainstream TReDS in the MSME financing landscape.India’s Micro, Small, and Medium Enterprises (MSMEs) are the driving force behind the nation’s economic engine. They’re the neighbourhood manufacturers, the small-town service providers, the family-run units that quietly power everything from local jobs to global exports. The United Nations estimates that MSMEs contribute nearly 50% to the global economy and are responsible for generating 60–70% of employment worldwide. As of FY25, MSMEs contribute over 30.1% to India’s GDP, drive more than 45.73% of exports, provide employment to over 28 crore people, and over 51% of them are based in rural India. Whether it’s keeping supply chains moving or creating livelihoods in the country’s remotest corners, these businesses are doing the heavy lifting. And yet, despite playing such a critical role, they often operate under the radar without the kind of support or resources they truly need. Strengthening them is the only way to ensure that our growth story reaches every street, every town, and every aspiring entrepreneur. 40% of the formal MSMEs globally, especially from the developing economies, face a combined credit shortfall of $5.7 trillion annually.30.1%Share of India’s GDP (FY25)28 cr+People employed by MSMEs₹30 lakh crEstimated MSME credit gapMSME Credit Scenario: Gaps and Structural ConstraintsIn India too, the MSME sector is vast and incredibly diverse. While there has been progress in improving formal credit access, which accounted for ₹40 trillion by FY25, this barely touches the surface of the credit demand. A startling ₹30 lakh crore credit gap is hidden beneath the surface and access has reached only 19% of the registered MSMEs in the country. A sizable portion of these small businesses still have difficulty obtaining official financing and must instead rely on trade credit, local moneylenders, or personal savings. These unofficial sources frequently have strict repayment terms and high interest rates, which hinder the ability of these companies to grow, remain competitive, or even weather lean business cycles.Disruptions to cash flow are yet another significant obstacle. Large corporations and government agencies frequently have delayed payments, which causes MSMEs to wait months to receive payment for finished work. Although the MSME Development Act expressly states that payments must be made within 45 days, enforcement of this law is often lax. For fear of losing future business, the majority of small businesses are reluctant to demand on-time payments. However, banks and NBFCs frequently require high creditworthiness, thorough documentation, and collateral security. Missed opportunities and operational stress result from loans that, even when approved, arrive too late to fill urgent gaps. To better support MSMEs and the growth of the economy, there is a need for alternative financing options which will allow MSMEs the access to capital that will fuel continued progress.Digital innovation is beginning to make a significant impact here. A new and technology-driven model that closes the timing and trust gap between small firms and financiers is provided by platforms such as the ‘Trade Receivables Discounting System’ (TReDS). MSMEs can digitally discount their invoices and obtain funds in a matter of hours, eliminating the need to chase payments or deal with paperwork-heavy loans and higher interests. It is quicker, requires no collateral, and promotes an open market where different Banks/Financiers can compete for lower interest rates. TReDS, which is inclusive, tech-driven, and designed for India’s changing business environment, is essentially the future of MSME financing. A key feature of TReDS financing is that it operates on a non-recourse basis — meaning, in case the buyer defaults on payment, the MSME supplier is not held liable to repay the financer.Role of ICAI in Strengthening MSME Financial EcosystemsThe Institute of Chartered Accountants of India (ICAI) plays a catalytic role in supporting India’s financial infrastructure, especially for MSMEs. Recognising the credit challenges faced by small businesses, ICAI has actively promoted financial literacy, digital adoption, and transparent working capital management. It has also been instrumental in educating Chartered Accountants on alternative financing models like TReDS through training modules, audit checklists, accounting treatment, and technical guidance. By equipping its members with the tools to serve as strategic advisors and compliance enablers, ICAI is driving meaningful financial inclusion and empowering the MSME sector.Alternative Financing Options for MSMEsTo manage their working capital needs, MSMEs usually look at a variety of financing options, each with a unique set of trade-offs. The most conventional options are still bank overdrafts and working capital loans, but many small businesses cannot afford them due to their lengthy processing times, CIBIL errors, ratings and score, high documentation requirements, and collateral requirements. Despite their benefits, factoring and invoice discounting are small-scale operations that rely significantly on the quality of bilateral ties with financial institutions. Though it is typically created for larger vendors, supply chain finance is another successful model that doesn’t always trickle down to smaller players.Fintech-based cash flow lending has become a popular choice for modern businesses because it is quick and entirely digital. However, not all small firms may be able to afford the high interest rates and risk-based pricing associated with these loans. TReDS offers a substantial improvement in this regard. As an RBI-regulated program, TReDS ensures a transparent mechanism where MSME suppliers can upload their invoices and receive real-time bids from multiple financiers, empowering them to choose the most competitive offer available. What sets TReDS apart is its neutrality and platform-based design. It facilitates early payments to MSMEs without altering the buyer’s cash flow cycle or impacting their balance sheet, making it strategically advantageous for CFOs. An added advantage for buyers using the TReDS platform is that it helps them stay compliant with MSME payment timelines, thereby avoiding disallowance of expenses under Section 43B(h) of the Income-tax Act and the associated cost of non-compliance. Beyond just improving liquidity, it also improves supply chain durability, supports inclusion, improves ESG performance, and complies with legal requirements. Without having to re-negotiate terms or provide upfront advances, CFOs can guarantee vendor satisfaction and financial efficiency.The TReDS ecosystem has experienced substantial operational and regulatory improvements over time, making it a more reliable and inclusive financing option for MSMEs.TReDS Explained: Legal and Operational FrameworkThe RBI oversees the first-of-its-kind digital initiative, the Trade Receivables Discounting System (TReDS). It is intended to address a major issue for MSMEs: buyers’ late payments. A network of registered financiers, including banks, NBFCs, and insurers, can bid to buy the approved invoices that small businesses upload to a secure TReDS platform. As a result, MSMEs can obtain funds in as little as 24 hours without having to provide collateral or endure onerous loan procedures.The process is easy to use and effective. An invoice uploaded by an MSME is digitally verified by the buyer, usually a large corporate or public sector organization. After approval, financiers compete for the best price on the invoice discount. The MSME receives the discounted payment almost instantly and the buyer pays the financier on the due date of the invoice. All parties benefit from increased trust and operational clarity enabled through digital, transparent steps.TReDS provides strategic benefits in addition to liquidity. Better cash flow and cheaper borrowing costs are what it means for MSMEs. Because the financing is handled off the buyer’s balance sheet, it guarantees that vendor payments are made without putting a strain on internal cash cycles, which is important for CFOs of large organizations. Additionally, it supports ESG objectives by encouraging small business financial inclusion and assists companies in meeting regulatory standards. Full audit trails and smooth ERP integration make TReDS an essential tool for improved supply chain finance and governance.Key Regulatory Developments CAs Should TrackThe TReDS ecosystem has experienced substantial operational and regulatory improvements over time, making it a more reliable and inclusive financing option for MSMEs. The RBI’s decision to permit insurers and non-banking financial companies (NBFCs) to act as financiers on the platform was a significant advancement. As a result, the pool of capital providers has significantly expanded, giving small firms better access to funding and more competitive bidding. In a move to enhance buyer-side participation, the RBI in FY 2024–25 reduced the mandatory TReDS registration threshold for companies from ₹500 crore to ₹250 crore in annual turnover. Now, all companies with turnover exceeding ₹250 crore are required to register on the TReDS platform. By ensuring that invoices are approved and paid on time, this regulatory push guarantees that big corporate buyers are using the platform, which directly improves MSME cash flows.Along with the mandatory registration, it also made it compulsory for all the entities that purchase from MSMEs to clear their invoices within 45 days once the invoice is raised, and non-compliance can result in disallowance of the expense for income tax purposes, meaning the amount cannot be deducted from taxable income until it is actually paid. The rule is designed to improve the cash flow of MSMEs and prevent them from facing financial strain due to delayed payments. Due to lack of awareness, many entities cancelled their orders with MSMEs and many MSMEs also deregistered themselves to accommodate their buyers’ terms to have a continued business engagement. However, the entities which were already using the TReDS platform benefitted with the invoice financing, which did not put pressure on their cash flows but were also able to meet the regulatory requirement of the payments being made within the said time frame of 45 days.The integration of TReDS with government platforms like GeM SAHAY and e-invoicing portals has further streamlined the invoice validation process. This tight coupling ensures data accuracy, prevents duplication, and enhances fraud prevention. Importantly for financial reporting, TReDS transactions qualify for off-balance-sheet treatment under Indian Accounting Standards (Ind AS), preserving key debt metrics for buyers.From a compliance perspective, the platform’s digital architecture ensures that every transaction is time-stamped and traceable, making GST reconciliations and tax audits more seamless. For Chartered Accountants and CFOs, these advancements make TReDS a more attractive and viable option to embed within the financial operations of businesses, enhancing liquidity, strengthening compliance, and supporting better vendor relations.TReDS represents more than a digital solution to delayed payments; it is a structural shift in the way MSMEs access working capital in India. By offering transparent, collateral-free, and real-time financing, it bridges critical liquidity gaps while improving compliance, governance, and supply chain resilience.Role of Chartered Accountants: Advisor, Auditor, EnablerFor Practicing CAs and CA Firms, TReDS presents a valuable opportunity to offer strategic liquidity advisory to MSME clients. Chartered Accountants can help businesses map out their working capital requirements and demonstrate how TReDS can effectively bridge cash flow shortfalls. From facilitating initial onboarding to assisting with documentation and invoice upload procedures, they can simplify what may otherwise be a technical and regulatory-heavy process for clients. More importantly, they can help integrate TReDS inflows into management information systems (MIS) and financial forecasting tools, enabling small companies to make more informed decisions based on predictable cash flows.Internal and Statutory Auditors play a critical role in ensuring that TReDS adoption aligns with compliance and audit norms. With TReDS transactions falling under the purview of Ind AS, auditors can assess whether financial disclosures reflect these off-balance-sheet instruments appropriately. They can also monitor buyer-side adherence to MSMED Act norms, especially the mandatory 45-day payment window for MSMEs. The digital nature of TReDS, complete with time-stamped transaction logs, makes it a powerful tool for ensuring audit transparency and resolving payment disputes based on verifiable data.For CFOs and Management Accountants, the integration of TReDS into enterprise resource planning (ERP) systems is a game-changer. Automation of invoice uploads, approvals, and payment tracking can reduce manual errors and speed up turnaround times. More critically, the data generated through TReDS can be used for real-time forecasting and more agile liquidity planning. CFOs can also drive policy alignment across procurement, accounts payable, and finance departments to ensure internal SOPs reflect the use of digital trade financing tools like TReDS, resulting in stronger internal governance.Strategic Takeaway for CFOsTReDS is much more than just a way to finance vendors. In addition to improving supply chain dependability and conforming to legal and ESG standards, it provides cash neutrality, which allows vendors to get early payments without affecting buyer cash flows. Leveraging this can give CFOs a clear competitive edge in corporate governance and stakeholder trust in an environment where financial resilience and transparency are calculated imperatives.Impact Created: Case Studies and MetricsTReDS platforms till date have discounted invoices worth over ₹600,000 crores since inception, of which the discounting worth over ₹235,000 crores was facilitated in FY 24-25 itself. The TReDS ecosystem is becoming increasingly recognized as a dependable, scalable financing option for MSMEs. This expansion indicates a move toward more open and effective working capital procedures, particularly for businesses that have historically had trouble with late payments and restricted access to official credit.Case in focus · Mid-sized manufacturing MSMEConsider the case of a mid-sized manufacturing MSME that was consistently grappling with payment delays from large corporate buyers. The delays, often stretching beyond 45 days, led the business to rely heavily on overdraft facilities and high-interest short-term loans from informal sources or friends and family. Recognizing the liquidity strain, the firm’s Chartered Accountant stepped in with a strategic intervention. The CA firm not only helped the client register on a TReDS platform but also guided them through the process of uploading approved invoices. Once onboarded, the client began receiving early payments within three days, thanks to the faster digital onboarding, invoice upload and processing, and the competitive bidding by financiers.The results were transformative. The MSME drastically reduced its dependence on costly credit, and improved vendor satisfaction, leading to better procurement terms. This case demonstrates how digital platforms, when paired with financial advisory, can radically enhance liquidity, reduce financing costs, and empower MSMEs to grow sustainably.Limitations & Practical BottlenecksDespite its promise, TReDS adoption is not without challenges:Slower adoption of PSUs: Longer invoice approval processes within the PSUs limits the adoption of TReDS by its suppliers/vendors.Buyer Resistance: Many large corporates hesitate to onboard, fearing visibility into payment cycles or administrative overhead.Non-MSME suppliers: Non-MSME suppliers are currently not allowed on the TReDS platform, which limits the application.Awareness Gaps: Tier-2 and Tier-3 MSMEs are often unaware of TReDS or lack the digital literacy to use it effectively.Integration Issues: Smaller enterprises struggle to sync TReDS with internal ERP or billing systems.Policy Weaknesses: While registration is mandatory for larger buyers, enforcement and incentives remain weak.Government Departments not in the Corporate Buyer Category: Government Departments are currently not classified as ‘corporate buyers’ under the system. As a result, MSMEs supplying goods or services to government entities are unable to upload such invoices for discounting on the TReDS portal.What’s needed is a broader push, both policy-driven and awareness-focused, to make TReDS the default mechanism for trade finance.The Road Ahead: Empowering CAs to Mainstream TReDSChartered Accountants play a crucial role in TReDS and are in a unique position to facilitate financial transformation. Through focused initiatives, the Institute of Chartered Accountants of India (ICAI) has already started to harness this potential. These include the creation of operational templates and audit checklists to direct adoption, partnerships with TReDS platforms to enable more seamless client onboarding, and structured training programs aimed at enhancing technical fluency. The groundwork for widespread TReDS adoption and literacy is being laid by such initiatives.For CFOs and Controllers, the way forward is equally clear. TReDS should be embedded within standard audit protocols and vendor financing strategies. Finance teams should be encouraged to participate in ICAI-led workshops to stay ahead of regulatory changes and digital adoption trends. Most importantly, organizations can drive real impact by mandating TReDS participation among their key MSME suppliers, ensuring business continuity, supplier satisfaction, and improved working capital management.ConclusionTReDS represents more than just a digital solution to delayed payments; it is a structural shift in the way MSMEs access working capital in India. By offering transparent, collateral-free, and real-time financing, it bridges critical liquidity gaps while improving compliance, governance, and supply chain resilience. For CFOs, it is a strategic lever that supports ESG goals and preserves cash cycles. For Chartered Accountants, it opens new opportunities to act not just as auditors, but as enablers of financial innovation for their clients. With continued regulatory support and increased awareness, TReDS can evolve into a default national platform for MSME financing. As ICAI continues to lead from the front, its members have a defining role in mainstreaming this transformation, ensuring that no viable enterprise is left behind due to lack of timely capital.◆ ◆ ◆The author may be reached at eboard@icai.in The Chartered Accountant · November 2025 · www.icai.org
Ep. 146 — Fintech and Chartered Accountants: Exploring Opportunities and Overcoming Challenges
CA Journal
· August 2026
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Fintech and Chartered Accountants: Exploring Opportunities and Overcoming ChallengesFintech is the integration of finance and technology, transforming traditional financial systems through artificial intelligence, blockchain, big data, and automation. It enhances efficiency, security, and financial inclusion in global financial services. The rise of neo banks, digital payments, AI-powered services, and open banking has transformed the banking industry. Chartered Accountants can find professional opportunities in fintech consultancy, compliance audits, fraud detection, AI-driven accounting, and blockchain advice. However, challenges such as automation reduction, cybersecurity threats, changing legislation, and competition from AI-powered financial products remain. To remain relevant, CAs must become proficient in fintech legislation, digital finance, and emerging technologies, while leveraging automation to enhance advisory roles and ensure compliance.The term “Financial Technology,” or “Fintech,” describes how technology is being incorporated into financial services to change how people and organizations handle their finances. Digital banking, mobile payments, blockchain, cryptocurrencies, robo-advisors, and peer-to-peer lending are just a few of the many inventions that fall under this broad category.Growing internet usage, smartphone adoption, and changing consumer tastes for easy, quick financial transactions have all contributed to the fintech industry’s explosive expansion. Fintech technologies have been incorporated into traditional banking and financial institutions to increase security, save operating costs, and improve client experience. Meanwhile, innovative approaches like decentralized finance (DeFi), AI-driven wealth management, and buy now – pay later (BNPL) have been developed by fintech businesses.Fintech has benefits, but it also has drawbacks, such as cybersecurity threats, legal issues, and gaps in financial inclusion. As the number of digital financial transactions rises, data protection and fraud prevention continue to be crucial. Globally, governments and financial authorities are attempting to create regulations that strike a balance between innovation, security, and compliance. Fintech has also had a big influence on a number of industries, such as wealth management (Wealthtech), real estate (Proptech), and insurance (Insurtech). Blockchain, open banking, and artificial intelligence developments will probably influence fintech in the future by fostering a more integrated and diverse financial system. Businesses, regulators, and consumers must all adjust to the swift advancements of fintech in order to optimize its advantages and minimize any hazards.Evolution of the Fintech IndustryOver the past several decades, the fintech industry has undergone substantial change, revolutionizing the delivery and consumption of financial services. Credit cards were first introduced in the 1950s, then in the 1960s and 1970s, ATMs and electronic fund transfers were developed. While the SWIFT system in the 1970s simplified international transactions, the emergence of internet banking and electronic trading platforms in the 1980s and 1990s changed the financial services industry. Digital money was made possible by the dot-com boom of the early 2000s, which gave rise to PayPal and mobile banking. Fintech had an unheard-of growth in the 2010s, propelled by changes in regulations, consumer behavior, and technology developments. Fintech startups are flourishing in India, where businesses are transforming wealth management, banking, payments, and lending. It is anticipated that developments in AI, machine learning, and quantum computing would improve the efficiency, security, and personalization of financial services.Fintech has revolutionized financial services by enabling seamless digital payments, neo banking, P2P finance, robo-advisory services, blockchain technology, InsurTech, and regulatory technology (RegTech).Fintech Sector in IndiaThe Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and National Payments Corporation of India (NPCI) are among the regulatory bodies that oversee the fintech sector in India. The NBFC-P2P Lending Regulations govern peer-to-peer lending platforms, whereas the Payment and Settlement Systems Act (2007) gives the RBI the authority to regulate digital payments. To stop financial fraud, fintech companies must adhere to KYC (Know Your Customer) and AML regulations. Data security and privacy for digital financial services are governed by the IT Act of 2000 and the Personal Data Protection Bill (PDPB). The RBI’s Digital Lending Guidelines must be followed by digital lending platforms to guarantee openness and equitable procedures.Figure 1 provides an overview of India’s Fintech Transaction Volume (2018–2027). The chart illustrates the increasing trend in transaction volume, starting at 15 billion in 2018 and forecasted to reach 192 billion by 2027. The rapid rise from 46 billion in 2022 to 192 billion in 2027 highlights the sector’s expansion.Figure 1: India’s FinTech Transaction Volume (2018–2027)152334444672921171501922018201920202021202220232024202520262027Source: Secondary data · values in billionFigure 2 presents a breakdown of different fintech segments and the Fintech Market Revenue (2021 vs. 2027 forecast). The digital lending sector is projected to grow from ₹890 billion in 2021 to ₹4,102 billion by 2027. Payments will increase from ₹730 billion in 2021 to ₹2,406 billion in 2027. Other segments, such as InsureTech (₹285 billion to ₹577 billion) and WealthTech (₹428 billion to ₹1,555 billion), also show strong growth.Figure 2: FinTech Market Revenue (2021 vs. 2027 forecast)8904,1027302,4062855774281,5555382,598Digital lendingPaymentsInsuretechWealthtechOthers2021 2027 forecastSource: Secondary data · values in ₹ billionFigure 3 compares the market share distribution of 2021 and 2027. Digital lending is expected to dominate, rising from 31% to 37%, while payments will slightly decrease from 25% to 21%. The share of InsurTech will decline from 10% to 5%, indicating a decline in adoption. WealthTech’s share will reduce slightly (from 15% to 14%), while the ‘Others’ category will rise from 19% to 23%. Overall, the infographic highlights India’s booming fintech sector, with Digital Lending and ‘Others’ category emerging as key growth areas.Figure 3: FinTech Market Share (2021 vs. 2027 forecast)31%37%25%21%10%5%15%14%19%23%Digital lendingPaymentsInsuretechWealthtechOthers2021 2027 forecastSource: Secondary dataThe use of mobile wallets, blockchain-based transactions, Unified Payments Interface and real-time payment systems has sped up financial transactions and decreased reliance on cash and conventional banking channels.Scope and Applications of the Fintech IndustryThe fintech industry includes digital payments, lending, wealth management, InsurTech, blockchain, neo-banking, and regulatory technology, and it uses advanced technologies like AI, big data, blockchain, and cloud computing to revolutionize financial services. It has transformed banking by enabling seamless mobile payments, P2P lending, robo-advisory services, and decentralized finance. The industry is expanding rapidly due to digital adoption, evolving consumer expectations, and regulatory support. Future innovations include AI-powered financial services, blockchain-based transactions, and hyper-personalized banking experiences. Fintech is expected to integrate with 5G, IoT, and machine learning, improving efficiency and security.Digital wallets make payments more convenient. Neo banks operate entirely online, offering AI-driven financial insights and lower operational costs. P2P finance platforms use AI and machine learning to assess creditworthiness and streamline loan approvals. Robo-advisory services use AI-driven algorithms for automated financial planning and portfolio management. Blockchain technology enhances transaction security and transparency, while InsurTech uses AI-based risk assessment and digital claims processing. RegTech uses AI and data analytics for risk management and compliance.Changes brought by Fintech in the Banking IndustryDigital Banking & Neobanks: Fintech has encouraged the growth of digital-only banks, reducing the need for physical branches. These banks improve user convenience by providing paperless transactions, AI-driven customer support, instant account opening, and smooth online banking.Securer & Quicker Payments: The use of mobile wallets, blockchain-based transactions, Unified Payments Interface and real-time payment systems has sped up financial transactions and decreased reliance on cash and conventional banking channels. Enhanced encryption and AI-driven fraud detection have enhanced payment security.AI & Automation in Banking Services: Fintech has improved customer service, credit evaluation, and investment management efficiency by introducing AI-powered chatbots, automated loan processing, robo-advisors, and AI-driven risk assessment. By streamlining repetitive banking activities, robotic process automation (RPA) has decreased human error.Personalized Financial Services: Banks now provide individualized financial solutions based on consumer behavior, spending trends, and credit ratings, thanks to big data analytics and artificial intelligence. AI-powered budgeting and financial planning tools have given consumers the ability to efficiently manage their money.API Integration & Open Banking: Fintech has supported open banking, allowing third-party financial service providers to securely access bank data using APIs (Application Programming Interfaces). This encourages financial management, investment, and lending innovation.Alternative Lending & Credit Scoring: Peer-to-peer (P2P) lending, digital lending platforms, and AI-based credit scoring have all been made possible by fintech companies, allowing small businesses and individuals to get loans more quickly. As a result, financial inclusion is now more widespread than it was in traditional banking.Blockchain & Decentralized Finance (DeFi): Blockchain technology has improved transaction efficiency, security, and transparency, and DeFi platforms are transforming financial ecosystems by providing banking services without middlemen. Fintech has made the banking industry more customer-friendly, efficient, and digitized. Despite the enormous advantages of these innovations, banks must constantly adjust to cybersecurity risks, new technology, and changing regulations in order to preserve stability and confidence in the digital age.Opportunities for CAs in the Fintech IndustryBeyond traditional accounting, auditing, and taxation, the fintech industry’s explosive expansion offers CAs new prospects. CAs may use their knowledge of finance, compliance, and advising responsibilities to stay relevant as financial technology transforms sectors. CAs should concentrate on improving their knowledge of blockchain, AI, and fintech legislation in order to remain competitive in the fintech-driven financial industry. They may become more valuable in the field by obtaining credentials in fintech auditing, digital forensics, and cybersecurity. Additionally, mastering international taxation and fintech compliance might lead to international job prospects. In fintech businesses, CAs can also pursue entrepreneurial positions, applying their knowledge of finance to create creative solutions. By embracing fintech advancements, CAs can diversify their roles and become key players in the digital financial ecosystem.CAs should concentrate on improving their knowledge of blockchain, AI, and fintech legislation in order to remain competitive in the fintech-driven financial industry.Fintech Consulting & Advisory: Fintech businesses can receive financial planning, risk management, and investment strategy guidance from CAs. Businesses need professional guidance on integrating fintech technologies like digital payments, AI-driven analytics, and blockchain-based accounting as the use of digital financial services grows. Because of this, there is a great need for CAs who can guide companies through the latest developments in financial technology.Regulatory Compliance & Fintech Auditing: Because of the highly regulated environment in which fintech businesses operate, CAs are needed to help with taxes, regulatory compliance, and anti-money laundering (AML) regulations. The need for specialized audits, including blockchain audits and cybersecurity compliance audits, is rising along with the growth of fintech companies, and here is where CAs can be quite helpful.Fraud Detection and Digital Forensic Accounting: As cyber dangers and digital fraud increase, CAs with forensic accounting and fraud detection skills may assist fintech companies in bolstering their security protocols. Professionals are needed by many fintech businesses to analyze fraud risk and investigate financial crimes. There are new career options for CAs due to the growing need for risk analysts and AML compliance officers.AI & Automation Integration in Accounting: The banking sector is increasingly utilizing AI-powered accounting solutions. By specializing in these automated solutions, CAs can maximize financial reporting while maintaining compliance. Companies are also seeking experts that can instruct groups on how to use Robotic Process Automation (RPA) for financial management, auditing, and tax filing.Blockchain & Cryptocurrency Advisory: The demand for bitcoin taxation and auditing services is growing as digital assets gain popularity. To guarantee accuracy and transparency in financial transactions, CAs can offer services on smart contracts, blockchain-based accounting, and crypto laws. Businesses that deal in digital currencies must adhere to financial reporting and taxation regulations, creating a new area of expertise for CAs.Fintech Taxation & Wealth Management: Wealth management has changed as a result of fintech developments like AI-powered financial planning tools and robo-advisors. A competitive edge in the changing financial landscape may be gained by specializing in international taxes, crypto-taxation, and GST on digital transactions.Financial Strategy & Startup CFO Positions: CFOs and financial controllers with expertise in investor relations, financial laws, and corporate growth plans are sought after by several fintech businesses. By using their knowledge, CAs may assist fintech companies with risk assessment, fundraising, and cash flow management.Insurtech & Regtech Specialization: The emergence of Regtech (Regulatory Tech) and Insurtech (Insurance Tech) presents chances for CAs to collaborate with businesses on risk assessment, financial modelling, and compliance automation. Financial experts are needed in these specialised domains to evaluate risk, develop financial plans, and make sure companies adhere to evolving regulatory standards.Challenges for CAs due to Fintech and Banking TransformationsFintech’s rapid rise and digital banking transformations have disrupted traditional financial services, posing new challenges for CAs. These challenges include:Automation of Accounting & Compliance: Fintech innovations, like AI-driven accounting software, cloud-based bookkeeping, and automated tax filing, are reducing the need for manual accounting work. Tools are automating financial reporting, impacting the traditional role of CAs in bookkeeping and compliance-related services.Cybersecurity & Data Privacy Concerns: As digital banking, online transactions, and cloud accounting have increased the risk of data breaches, hacking, and financial fraud, CAs must develop expertise in data security, digital forensics, and cybersecurity compliance to protect client information.Regulatory & Compliance Complexity: The regulatory landscape in which fintech businesses operate is extremely dynamic, with new tax legislation, anti-money laundering (AML) rules, and data protection guidelines. The taxation of cryptocurrencies, rules governing digital payments, and adherence to global financial standards are just a few of the financial laws that CAs need to be conversant with.Fintech and AI-powered Robo-advisors: Digital tax filing platforms, and financial planning applications compete by providing clients with automated, reasonably priced solutions. This puts CAs in competition, especially in fields like taxation, investment planning, and personal financial advising where customers could choose automated, low-cost services over in-person consultations.Need for Digital & Technological Upskilling: To be competitive, CAs need to become knowledgeable about blockchain accounting, fintech laws, AI-based audits, and digital finance technologies. Since many conventional accountants find it difficult to adjust to new financial technology, professional growth and ongoing education are crucial.Development of Digital Banking & Payments: Financial transaction techniques have changed as a result of the transition from traditional banking to digital banking models, such as neobanks, mobile wallets, and blockchain-based transactions.Growing Need for Expert Consultancy Services: Since fintech is revolutionizing the financial services industry, CAs are required to provide specialized advice services in risk assessment, compliance auditing, and fintech taxes. Those who do not adapt may struggle to find new opportunities in the evolving financial sector.Changes in Client Expectations & Service Delivery: Customers now anticipate automated reporting, AI-driven tax optimization, and real-time financial analytics. To achieve these expectations, CAs must move from traditional manual financial management to a more digitally-driven, strategic advice position.As digital banking, online transactions, and cloud accounting have increased the risk of data breaches, hacking, and financial fraud, CAs must develop expertise in data security, digital forensics, and cybersecurity compliance to protect client information.How CAs can get past these ObstaclesEmbracing Automation & AI: By gaining knowledge of AI-powered financial systems, CAs may assist companies in integrating and optimizing automation, guaranteeing adherence to changing financial rules while enhancing operational effectiveness.Strengthening Cybersecurity & Data Privacy Knowledge: CAs need to become more knowledgeable on cybersecurity and data privacy laws, such as India’s Information Technology (IT) Act and the General Data Protection Regulation (GDPR). They can maintain their lead in this field by obtaining qualifications such as the Certified Information Systems Auditor (CISA). To protect financial data and uphold customer confidence, CAs should also incorporate cybersecurity procedures into their client engagements, such as data encryption, secure access restrictions, and frequent risk assessments.Keeping Up with Regulatory & Compliance Changes: The regulatory landscape in which the fintech industry works is continuously changing. To make sure that companies continue to adhere to national and international financial standards, CAs need to be aware of these developments. CAs may keep up to date by participating in compliance certification courses, fintech conferences, and professional training programs.Adapting to Competition from Fintech & Robo-Advisors: In order to stay competitive, CAs need to set themselves apart by providing individualised financial advising services that go beyond recommendations generated by algorithms. They may assist companies in implementing and integrating financial technology solutions by establishing themselves as fintech consultants. Furthermore, utilising fintech platforms to offer hybrid advisory services, which blend automation and human knowledge, can improve service effectiveness and meet a wider range of client requirements.Investing in Digital & Technological Upskilling: CAs must make an investment in ongoing education in order to remain relevant as fintech continues to upend traditional financial services. Furthermore, working with fintech companies may give CAs invaluable practical experience with the newest financial technologies, allowing them to deliver specialized consulting services.Navigating the Digital Banking & Payments Ecosystem: Businesses engaged in the digital economy can greatly benefit from advice services on financial security, fraud prevention, and digital payment compliance. CAs may assist customers in optimizing their financial operations while reducing risks by being up to date on regulatory regulations and security best practices in digital banking.Offering High-Value Consultancy Services: CAs can focus on detecting possible financial risks, advising companies on tax structures relating to fintech, and making sure that changing requirements are followed. Along with guaranteeing legal and tax compliance, they may assist customers in putting digital financial solutions, like blockchain-based accounting systems, into practice.Evolving with Changing Client Expectations: Clients need automated reporting, AI-driven tax optimization, and real-time financial insights in the current digital environment. CAs must move from manual financial management to a more technologically advanced, strategic consulting position in order to achieve these objectives.ConclusionWith the introduction of automation, AI-driven analytics, blockchain-based transactions, and digital banking solutions, the Fintech revolution has drastically upended traditional financial services. Although this change improves accessibility and financial efficiency, it also changes the job of CAs, who must now adjust to a quickly changing digital environment. In fields including wealth management, blockchain auditing, AI-driven automation, forensic accounting, compliance management, and fintech consultancy, fintech offers a plethora of opportunities for CAs. The necessity for CAs to broaden their knowledge beyond traditional accounting procedures is underscored.The automation of old accounting processes, cybersecurity risks, changing regulatory requirements, and competition from AI-powered financial solutions are some of the difficulties that come with the advent of fintech. CAs must constantly improve their skills by keeping up with blockchain accounting, cybersecurity frameworks, AI-based audits, and fintech legislation in order to be relevant. They will be able to increase productivity, deliver real-time financial data, and provide specialized advisory services by embracing fintech technologies and digital platforms.In summary, financial services will inevitably include fintech, and CAs need to be proactive in keeping up with its developments. CAs may not only survive but also prosper in this dynamic, technologically advanced financial environment by using technology and growing their roles in digital finance.Authors may be reached at eboard@icai.in
Ep. 147 — Going Beyond the Obvious: The Power of Root Cause Analysis in Internal Audit
CA Journal
· August 2026
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Going Beyond the Obvious: The Power of Root Cause Analysis in Internal AuditIn the current dynamic risk landscape, Internal Audit has to look beyond merely defining what went wrong or what may go wrong and instead ask why it occurred. Root Cause Analysis (RCA) allows auditors to move beyond immediate symptoms and discover the root drivers of failed processes. This article discusses how RCA enhances audit quality through tracing observations back to their roots, using systematic tools like the Five Whys, Fishbone Diagrams, and Bow-Tie Models. It also mentions real-life examples, uncovers typical audit-related root cause patterns, and suggests pragmatic steps for integrating RCA into all stages of the audit process.By incorporating RCA early, consistently, and systematically, Internal Auditors can eliminate recurring problems, improve governance, and provide strategic insights that fuel sustainable improvement which is an essential necessity in a dynamic risk environment.IntroductionInternal Audit provides assurance to the leadership and adds value by identifying risks and recommending improvements in processes. However, too many audit reports simply highlight symptoms, such as non-compliances, delays, and control gaps without delving into deeper systemic root causes of why things occurred in the first instance. This, in turn, limits the impact of audit recommendations. Root Cause Analysis (RCA) offers a standardized procedure for uncovering such deeper causes. If implemented in audit planning, fieldwork, and reporting, RCA swaps out "what" happened with "why" it happened, so organizations can fix problems at their core and build sound processes.Here, we bring a comprehensive & practical analysis of RCA in the context of internal audit applicability, approaches, common tendencies, and implementation steps. You must familiarize yourself with RCA, whether you are a senior/experienced auditor or a newcomer who's entering your career as a newbie, for the sake of delivering actionable audit findings.Reasons Why RCA is ImportantIt gives you an idea of how to prevent the issue in the future.It exposes weaknesses in the current system that might also impact other departments or processes.It shows which control didn't work effectively.It gives you the right insight into risk and helps you mitigate it.Root Cause Analysis: Enhancing Audit InsightInternal auditors know the frustration all too well: the same issues showing up year after year. When problems keep coming back, it usually means the real cause hasn't been nailed down or worse, it hasn't been acted on. That's where Root Cause Analysis (RCA) comes in. Instead of stopping at surface-level symptoms, RCA pushes auditors to dig deeper. It's about asking the tougher questions: Is the process designed well? Are the controls strong enough? Is there something in the organization's culture that allows this gap to keep reappearing?The profession itself is also raising the bar. Standards like the Standards on Internal Audit as issued by the ICAI expect auditors to go beyond simply reporting "what went wrong." Regulators from IAASB to SEBI and NFRA are also stressing the importance of root cause analysis, especially when repeated findings point to weaknesses that are more systemic than isolated.However, RCA shouldn't be seen as just another compliance checkbox. Done well, it's a tool that adds real value for management. It helps leaders see risks before they spiral into major problems, and it shifts the perception of audit. Instead of being viewed as a passive watchdog, audit becomes an active advisor, someone who not only highlights issues but also helps the organization fix what's driving them in the first place.“RCA fosters continued improvement by challenging organizations to treat the disease and not just the symptoms.”Defining the Problem ClearlyBefore conducting any root cause analysis, an Internal Auditor must articulate the issue clearly. A vague problem statement always leads to vague conclusions. An effective problem definition answers:What happened?Where did it happen?When did it happen?Who was involved?For example, instead of saying, "Invoice approvals were delayed," a more descriptive way of putting it would be:"In Q4 FY24, 30% of invoices above INR 5 lakh were sent for payment without senior-level approval, contrary to the company's delegation matrix."A well-defined problem definition concentrates the attention of the RCA process, avoids assumptions, and sustains consistency within audit teams.Strategic Value of RCA in Internal AuditRoot Cause Analysis offers a number of benefits well beyond fixing isolated issues:Best Recommendations: RCA allows for pertinent, actionable, and focused recommendations, rather than generic processes.Thematic Reporting: It facilitates reporting of similar findings under broader systemic causes, easing reporting for boards and management.Risk Prioritization: RCA can help in identifying hidden vulnerabilities which are not apparently risky but have a likelihood of cascading into major failures.Strengthened Governance: Identifying the causative roots of failures supports robust policies, accountability, and decision-making processes.Ultimately, RCA fosters continued improvement by challenging organizations to treat the disease and not just the symptoms.Popular RCA Techniques for Internal Auditors1. Five WhysIt is a simple but powerful method whereby "why" is repeatedly asked until the cause is determined. For example:Was the inventory in error?Because the stock was not counted as scheduled.Why wasn't it counted?Because nobody was assigned responsibility.Why was nobody assigned?Because there is no mention of accountability in the SOP.2. Multi-leg Five WhysThis method seeks to look at the different layers of controls — preventative, detective, and corrective — in parallel to unveil multiple contributing factors. (Refer Figure 1)Figure 1: Multi-leg Five WhysINVOICE DELAY WHY? Process flaws WHY? Data entry errors WHY? Bottlenecks WHY? Data enterers WHY? System limitations WHY? Approval gaps 3. Fishbone (Ishikawa) DiagramA visual technique that organizes potential causes into high-level categories: People, Process, Policy, Technology, and Environment. It can help with structured brainstorming and systematic mapping of root causes. (Refer Figure 2)Figure 2: Basic Fishbone (Ishikawa) Cause and Effect DiagramProblems Measurements Materials People Environment Machines Processes 4. Bow-tie and Fault TreeUseful tools that help visualize how various events stem from a central issue (fault tree) or how preventive/detective controls manage a central risk (bow-tie). (Refer Figure 3)Figure 3: Bow-tie and Fault TreeCONTROL EFFECTIVENESS TOP EVENT Threat 1 Threat 2 Threat 3 Threat 4 Consequence 1 Consequence 2 Consequence 3 Consequence 4 HAZARD CONSEQUENCES Control Measures Recovery Measures 5. FMEA (Failure Mode and Effects Analysis)A popular method used in audit for both manufacturing as well as services, FMEA identifies the most potential failure points within the process, as well as their impact and potential corrective measures. (Refer Figure 4)Figure 4: FMEA (Failure Mode and Effects Analysis)F Failure Potential M Mode Types, ways E Effect Negative effect A Analysis Study & reduce RELIABILITY Using a single method in isolation rarely provides the complete picture; there is usually a clearer and more balanced understanding of the causes when combining techniques.Common Root Cause Patterns in Audit ObservationsBased on field experience and published audit studies, certain patterns emerge repeatedly:Lack of Ownership: Indeterminate responsibility and authority are frequent causes for deferred projects and unclear spheres of responsibility.Inadequate Communication: Lack of proper communication within departments causes inefficiency, errors, or violation of policies.Failure in Training: Employees who are uninformed of policies or tools end up committing violations in good faith.Procedural Weakness: Lacking or out-of-date SOPs produce inconsistencies in taskwork.Legacy IT Systems: Old systems are a primary reason for workarounds and overridden embedded controls.Poor Resource Allocation: Staffing shortage complaints can often be a reflection of poor resource allocation.Fragile Risk Culture: A risk culture tolerating deviations or discouraging reporting creates system-wide non-compliance.These patterns validate the necessity of digging deeper than surface-level conclusions and comprehending additional deeper organizational motivations.Role of SOPs and Communication in RCATwo common root causes in any industry are incomplete or ineffective SOPs and communication breakdowns.Standard Operating Procedures detail what must be done, by whom, when, and how. Without them — whether outdated, missing, or unenforced — staff often operate on assumptions, which frequently leads to control lapses.Vertical and horizontal communication ensures alignment. RCA often reveals that critical updates are not adequately shared, leaving departments unaware of changes. Similarly, the absence of bottom-up reporting channels means front-line issues remain hidden until a breakdown occurs.Effective RCA also involves checking whether SOPs and communication channels are functioning properly.Real-World Audit Examples of RCA1. Inventory ControlA retailer had frequent stock mismatches. RCA identified the root cause as inconsistent scheduling of physical counts. Further analysis showed that:The cycle count did not have a centralized owner.The SOPs lacked detailed steps.No system alerts existed for missed counts.Recommendations: Assign inventory accountability, implement a formal SOP, and introduce system-enforced reminders.2. Expense ClaimStaff repeatedly submitted expense reports with missing documentation. RCA uncovered:The travel policy was outdated and unclear.No training was conducted on documentation requirements.The absence of a digital expense system hindered enforcement.Corrective actions: The firm updated its travel policy, deployed a digital platform, and launched awareness sessions.3. Unauthorized System AccessAn IT audit discovered that some ex-employees retained access to sensitive systems. RCA findings included:The offboarding SOP had not been updated after an HRMS change.No automated access deactivation was in place.IT and HR assumed that the other was responsible.Corrective actions: Updating SOPs, integrating HRMS with access controls, and defining joint IT-HR responsibilities.Embedding RCA into the Audit Life CycleSteps necessary to institutionalize RCA in audit functions are as follows:Integrate Early: Begin cause-thinking in walkthroughs and risk assessments.Use Structured Tools/Methods: Standardize RCA templates and tools for greater consistency.Verify Assumptions: Engage process owners to confirm identified root causes.Think Beyond the Obvious: Never go for the first answer. Seek systemic and human control vulnerabilities.Specifically Indicate Root Causes: Include RCA in audit findings, supported with data or interview results.Capture Trends During Audit: Keep a centralized root-cause database for determining system-level risks.Widely Communicate with Auditee: Communicate RCA high-level themes to compliance, risk, and business areas to foster learning throughout the organization.Improve Procedures and Training: Convert RCA findings into procedure updates and refresher trainings.Risk Identification with Risk AssessmentRCA is most effective when directly tied to risk assessment to identify the risk. A structured approach can be followed:Risk Identification — Use walkthroughs, control testing, and interviews to map potential risks (e.g., delayed approvals → risk of unauthorized payments).Observation-to-Risk Mapping — Align every audit finding with its related risk.Root Cause Analysis — Apply RCA tools (Five Whys, Fishbone, Bow-tie) to trace why the risk materialized.Risk Reassessment — Update the risk register, as the true risk may differ from the initial assumption (e.g., weak delegation matrix, not just slow approvals).Control Recommendations — Design improvements that address the real cause, not just the visible symptom.ConclusionRoot Cause Analysis is not a technique; it's a mindset of the auditor. As Internal Auditors continue to use RCA again and again, they elevate the contribution of their work from fault-finding to problem-solving. Rather than chasing symptoms, they help the organization overcome real roadblocks to performance, compliance, and control.From repeat problems such as recurring expense issues, missed approvals, or unauthorized system access, the real value of audit lies in understanding "The why" and helping to put it right. As compliance expectations broaden & stakeholders demand assurance to drive meaningful change in processes, RCA has become a key addition to the internal auditor's toolkit. Applied with clarity and discipline, RCA transforms audit from a box-checking exercise into a catalyst for sustainable improvement.ReferencesStandards on Internal Audit as issued by the ICAIICAEW Audit and Assurance FrameworksACCA Global RCA ToolkitChartered IIA Articles on Audit EffectivenessAuthor may be reached atvaibhavm640@gmail.com and eboard@icai.inThe Chartered Accountant · Internal Audit October 2025 · www.icai.org
Ep. 148 — Driving Accountability: Transforming Internal Audit Through Automation and Technology
CA Journal
· August 2026
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Driving Accountability: Transforming Internal Audit Through Automation and TechnologyInternal audit has always been integral to organizational management oversight and accountability, but in 2025, the landscape is undergoing transformation at an unprecedented pace. With the adoption of advanced technologies, from Data Analytics and Robotics Process Automation (RPA) to Artificial Intelligence (AI), auditors are shifting from traditional, reactive roles to proactive agents of change and confidence. This digital revolution is not only improving audit efficiency and coverage, but also fundamentally changing how boards and management rely on audit results to make strategic decisions and foster a culture of transparency across the enterprise.Statistical surveys from leading audit consultancies reveal that nearly 70% of global organizations have invested in some form of audit automation, driving measurable improvements in real-time risk review, faster reporting, and more effective compliance checks. In the Indian context, Chartered Accountants are increasingly expected to lead these initiatives, blending their expertise in management oversight with technology-driven insights for stronger confidence outcomes.The urgency is clear: organizations that hesitate to modernize their audit function risk falling behind in both risk management and regulatory compliance. Amidst this transformation, the role of the auditor is evolving, moving beyond checking the past to shaping the future of accountability, resilience, and trust from others.The Shift to Technology-Enabled AuditThe evolution of audit from manual, paper-based review to digital, data-driven assessment represents one of the most profound changes in the accounting profession. Today, Chartered Accountants and Auditors stand at the forefront of embracing emerging tools, such as advanced analytics platforms, AI-powered risk identifiers, and Robotic Process Automation (RPA), to streamline every stage of the audit process.Automation extends far beyond replacing repetitive tasks. It now empowers auditors to run population-based testing instead of relying on sample data, driving more accurate findings and comprehensive coverage. Automation and data analytics allow continuous auditing, predictive risk assessment, and actionable insights, by highlighting fraud patterns, automating the collection of audit evidence, and ensuring secure data storage. For example, audit teams worldwide leverage platforms capable of extracting and analyzing millions of transactions in seconds, identifying anomalies and outliers that traditional methods may miss. An internal auditor may be able to provide real-time insights and assurance to the board and regulators.In practice, organizations like Bupa make every engagement “digital by default,” ensuring that planning is informed by predictive analytics, execution is supported by auto-generated records, and reporting is instantaneous and data-rich. Similarly, Windstream integrated analytics and automation into workflows, enabling auditors to validate controls in real time and customize dashboards for each business segment, improving both speed and accuracy of risk reviews.This technology-enabled shift is not just a matter of operational efficiency, it is about fundamentally reimagining the scope, scale, and strategic relevance of audit in the modern enterprise. Technology makes it possible to complete internal audit before time, reduce human interference, and provide strategic suggestions supported by in-depth analysis.Enhancing Accountability through AutomationAccountability lies at the heart of effective auditing, ensuring that organizations uphold controls, comply with regulations, and respond to emerging risks proactively. Automation has revolutionized this process by standardizing, monitoring, and reporting control activities with unprecedented speed and transparency, thereby enhancing the credibility of audit reports. In today’s landscape, technology enables auditors to conduct wide scale testing, generate instantaneous compliance reports, and track issue resolution efforts in real time, vastly improving management oversight and enhancing trust. Technology enables the internal auditors to focus more attention on high-risk areas.Leading organizations, such as Bupa, have implemented “Decisions and Judgements” logs on digital audit platforms, allowing every audit step, key validation, and management action to be mapped, timestamped, and reviewed in a transparent workflow. Automated due dates and notifications ensure that accountability moves beyond annual or quarterly cycles to become a daily discipline, where risk owners receive timely reminders and status updates directly from audit systems.In India, a mid-sized NBFC automated its audits. This allowed real-time tracking of branch operations, auto-generation of compliance checklists, and instant documentation of fixing problems, lending visibility to audit outcomes that previously took weeks to materialize. This led to reduction of manual effort by over 70%, positioning the audit function as a business enabler rather than merely a compliance checkpoint. Similarly, the use of Robotic Process Automation (RPA) at leading manufacturing companies has enabled an 85% reduction in manual effort and near-complete elimination of errors in invoice and vendor audits, giving management greater confidence in risk management.Another practical advancement is the adoption of Self-Assessment modules, where process owners easily submit evidence, complete risk reviews, and update control logs through digital channels. Automation facilitates centralized dashboards that display key control failures, unresolved issues, and audit progress in real time, allowing both auditors and business leaders to drive accountability at every organizational level.Ultimately, automation transforms accountability from a static year-end review into a continuous, data-driven practice. Internal auditors, equipped with digital tools, can now play a far more strategic role in safeguarding assets, promoting transparency, and enabling proactive management action, building resilience and trust across the enterprise.Internal auditors, equipped with digital tools, can now play a far more strategic role in safeguarding assets, promoting transparency, and enabling proactive management action, building resilience and trust across the enterprise.Technology Reshaping Governance and Risk ManagementTechnology is fundamentally reshaping how internal audit supports management oversight and risk management, moving from periodic retrospective reviews to ongoing, real-time oversight. Advanced tools like AI-driven analytics and predictive modelling empower internal auditors to detect emerging risks early, analyze complex data patterns for fraud indicators, and evaluate compliance dynamically across diverse regulatory frameworks.By embedding analytics throughout the audit process, from risk review to testing and reporting, organizations create a seamless and proactive management oversight ecosystem. For example, real-time dashboards provide Boards and Audit Committees with continuous updates on how well controls work, risk trends, and problem-fixing statuses, facilitating data-driven decisions and quicker responses to failures in controls. This integration leads to more resilient organizations where internal audit results translate swiftly into effective management action.Indian companies are adopting these models as well, leveraging automation platforms to monitor regulatory compliance, cyber risks, and financial controls continuously, thereby enhancing management oversight, transparency, and stakeholder confidence. Additionally, generative AI tools now assist internal auditors by drafting comprehensive internal audit reports that summarize evidence and suggest areas for further inquiry, reducing manual workloads and improving report quality.Such technological sophistication not only improves efficiency but also transforms the internal audit’s role to become a vital partner in company-wide risk planning. The closer collaboration between internal audit, risk, and compliance functions driven by technology fosters a holistic view of organizational health, strengthens the attitude toward controls, and supports sustainable growth in an increasingly complex business environment.The Role of the Internal AuditorThe internal auditor’s role is evolving rapidly from traditional compliance checker to key advisor, empowered by technology to deliver deeper confidence and future-focused ideas. Modern internal auditors are expected to not only validate controls but also to interpret large volumes of complex data, identify emerging risks, and provide actionable recommendations that drive organizational performance.Technology frees internal auditors from manual, repetitive tasks through automation, allowing them to focus on higher-value activities such as fine-tuning risk models, engaging with senior management, and collaborating across functions. For instance, internal audit teams now use AI-driven tools to analyze predictive signs of risk, make risk-based internal audit plans, and simulate scenarios that help leadership anticipate potential challenges.The increasing technical nature of internal audit requires internal auditors to develop cross-functional skills, including data analytics, IT acumen, and business understanding. Collaboration between IT and internal audit professionals is essential to design and maintain automatic checks and testing frameworks that ensure continuous confidence.At the same time, human judgment remains indispensable. Despite the power of AI and automation, internal auditors must critically evaluate outputs, question assumptions, and apply professional skepticism to avoid overreliance on technology. Balancing technology with expert insight is the key to maximize the value of internal audit in today’s complex environments.Chartered Accountants and internal audit professionals who embrace this evolving role will help their organizations navigate uncertainty, enhance management oversight frameworks, and deliver sustained value through insight-driven internal audit practices.Challenges and Future DirectionsWhile the benefits of automation and technology in internal audit are significant, their successful adoption is not without challenges. Organizations must address skills gaps, data quality concerns, change management hurdles, and ethical considerations related to use of AI, to fully realize these advancements’ potential.A critical obstacle is workforce readiness. Internal auditors need continuous upskilling in data analytics, AI principles, and emerging risk domains. Training programs that combine technical knowledge with management oversight expertise are essential to build a resilient internal audit team capable of managing sophisticated tools and interpreting complex data outputs. Certain firms have invested heavily in education, promoting innovation through collaborative learning and agile approaches to digital transformation.Data quality and system integration also present challenges. Safeguarding sensitive information while using automated processes is also necessary. Automated internal audit systems rely on comprehensive, accurate, and timely data flows; poor data management oversight undermines the reliability of insights generated by advanced analytics and AI models. Effective change management, including stakeholder alignment, clear communication, and gradual implementation, ensures users adopt new technologies and workflows without resistance.Ethical considerations surrounding AI decision-making require internal auditors to maintain professional judgment and skepticism. Transparency in AI algorithms, accountability for automatic steps, and mitigation of biases are areas demanding attention as audit technologies grow more complex.Looking ahead, future internal audit functions will increasingly adopt intelligent automation, combining AI, machine learning, and cognitive technologies, to provide near real-time confidence, predictive risk analytics, and integrated enterprise management oversight. Hybrid internal audit models, balancing human expertise and machine intelligence will dominate, with Indian internal audit teams gaining prominence by tailoring automation solutions to local regulatory demands and business models.By embracing these challenges and future directions, Chartered Accountants can lead the profession into a new era of internal audit excellence characterized by agility, transparency, and strategic impact.ConclusionThe transformation of internal audit through automation and technology represents a pivotal opportunity for organizations and internal auditors alike. By embracing advanced analytics, robotic process automation, and AI-driven tools, internal audit functions can significantly enhance accountability, streamline management oversight, and provide deeper, real-time confidence, moving beyond traditional retrospective approaches. This makes internal audit more relevant, reliable, and future-ready.Chartered Accountants, with their strong foundation in management oversight and risk management, are uniquely positioned to lead this evolution. By combining their expertise with technology, they can elevate internal audit as a strategic partner, capable of anticipating risks, making informed key decisions, and building resilient organizations in an increasingly complex business environment.The journey is not without challenges. Skill enhancement, data integrity, ethical use of AI, and effective change management are critical factors that need to be addressed. However, those who invest thoughtfully in these areas will harness the full potential of technology to drive transparency, foster trust, and deliver sustained value to stakeholders.In 2025 and beyond, the future of internal audit lies at the intersection of human judgment and intelligent automation, ushering a new era of management oversight excellence and accountability that strengthens organizations and benefits society.◆ ◆ ◆Author may be reached at eboard@icai.inThe Chartered Accountant October 2025 | www.icai.org
Ep. 149 — From Controls to Confi dence: How Digital Twins and AI Agents Are Rewiring Internal Audit
CA Journal
· August 2026
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How Digital Twins and AI Agents Are Rewiring Internal AuditThe Shifting Landscape of Internal AuditLet's be honest with each other. How many of us in Internal Audit had that 2 AM moment?The city is quiet, the presentation for the Audit Committee is done, but you're wide awake. You're not worried about the findings you have; you're haunted by the ones you might have missed. In a business that moves at the speed of light, our traditional audit methods such as sampling, reviewing, looking backward feel like trying to capture a bullet train with a Polaroid camera. We've become expert corporate historians in a world that desperately needs us to be future tellers.For decades, the role of Internal Audit has been rooted in a predictable cycle: plan, test, report, repeat. Auditors acted as historical record-keepers, arriving after the fact to examine a small sample of transactions and verify that established controls were followed. This traditional approach, while foundational, is fundamentally reactive. It answers the question, "What went wrong?" rather than the more critical question, "What could go wrong?" In today's hyper-connected and volatile business environment, this backward-looking posture is no longer tenable.Businesses now operate at a digital speed. A single global supply chain can process millions of transactions a day, while financial markets execute trades in microseconds. The sheer volume and velocity of data have rendered manual, sample-based auditing insufficient. A 1% sample of ten million transactions still leaves 9,900,000 unexamined, creating a significant assurance gap. Stakeholders, from the board of directors to regulators, are no longer satisfied with a periodic snapshot of compliance. They demand a continuous, dynamic view of risk and control effectiveness. They seek confidence.For years, Internal Auditors have revolved around one word: Controls. We test them, document them, and write lengthy reports on them. We are the guardians of the rulebook. However, our boards, our CEOs, and our stakeholders are asking for something more. They aren't just asking for compliance; they're asking for confidence.This is the transformative crossroads at which internal audit finds itself. The profession is shifting its mission from a narrow focus on controls i.e., the static gates and checks in a process, to the broader delivery of confidence. This confidence is the deep-seated trust that the organization's processes are resilient, that risks are being identified and mitigated in real-time, and that the internal audit function can provide foresight, not just hindsight. Fuelling this profound evolution are two powerful technological catalysts: digital twins and AI agents. Together, they are rewiring the very DNA of internal audit, turning it from a periodic inspection into a continuous source of strategic assurance.Digital Twins: The Ultimate Business Simulator for Proactive AssuranceThink of a digital twin as a live, dynamic X-ray of your entire organization. It's not a static process map; it's a living, breathing virtual model of your business, fed by real-time data from your ERP, your supply chain, your factories. For my team, building our first digital twin of the purchase-to-pay cycle was like turning on the lights in a dark room.Suddenly, we weren't just sampling 100 invoices to test a control. We were watching every single transaction flow through the virtual process. More importantly, we could use it as a business flight simulator. Our conversations shifted dramatically.Before"We tested the three-way match control and found two exceptions in our sample of 150."After"We simulated a 20% spike in raw material prices from our key supplier. The digital twin shows that our current controls would fail to prevent duplicate payments under that stress, exposing us to a potential ₹5 crore liability. Here's our recommendation to strengthen the process before that happens."Do you feel the difference? That's the shift from reporting on controls to inspiring genuine confidence. We were no longer just the critics; we were the strategic co-pilots, helping the business see around corners.This technology allows auditors to move beyond simply asking if a control worked in the past. Instead, they can simulate countless "what-if" scenarios to determine if controls would hold up under pressure. It's the difference between inspecting the wreckage after a car crash and using a crash test dummy in a simulator to engineer a safer car in the first place.The profession is shifting its mission from a narrow focus on controls i.e., the static gates and checks in a process, to the broader delivery of confidence.How a Digital Twin Works in an Audit ContextThe creation of an audit-focused digital twin involves three key steps:Data Integration: The twin continuously ingests data from enterprise systems like ERPs (SAP, Oracle), CRMs (Salesforce), and application databases. This creates a live, data-rich representation of reality.Process and Control Modelling: Key business processes (e.g., Procure-to-Pay, Order-to-Cash) and their associated controls (e.g., three-way matching, credit limit checks, approval hierarchies) are mapped and modelled within the twin.Real-Time Monitoring and Simulation: As real transactions flow through the organization, they are mirrored in the twin. The twin instantly checks each transaction against the modelled controls, flagging deviations as they happen and creating a continuous control monitoring framework. Crucially, auditors can also inject hypothetical scenarios into the twin to stress-test the system.Practical Use Cases in DetailExample 1 Procure-to-Pay (P2P) Process ResilienceScenarioAn internal audit team wants to test for fraudulent vendor activities and payment bypasses. Instead of sampling 100 invoices, they use a digital twin of their P2P cycle.Twin's ActionThey run several simulations. First, they simulate a series of invoices from a fake vendor, designed to bypass the standard vendor onboarding controls. The twin shows exactly where the control i.e., a required check against a master vendor file, would fail or succeed. Next, they simulate an employee attempting to split a large invoice of INR 15,000 into three separate invoices of INR 4,999 to stay below the INR 5,000 manager approval threshold. The digital twin, configured to recognize such patterns, immediately flags the three linked invoices as a single, suspicious event.Audit InsightThe audit team provides management with a precise report showing not just that a control exists, but how it would perform under a specific attack. They can confidently recommend strengthening the approval threshold logic based on simulated evidence.Example 2 Cybersecurity PreparednessScenarioA Chief Audit Executive (CAE) is concerned about the organization's response to a ransomware attack.Twin's ActionA digital twin of the company's IT network and access control systems is created. The IT audit team simulates a phishing attack where an employee's credentials are compromised. The twin visually maps out how the attack would propagate from that initial entry point. It tests whether automated controls like locking an account after multiple failed login attempts from a new location or isolating a compromised server from the network would trigger in time. The simulation reveals that a critical database server has outdated access permissions, allowing the simulated malware to spread unimpeded.Audit InsightThe audit report doesn't just say, "IT controls need improvement." It says, "A simulated breach originating from a compromised finance department credential would lead to the encryption of our customer database in 17 minutes due to a specific access control list misconfiguration." This level of foresight is actionable and provides true confidence when fixed.Example 3 Supply Chain and Operational RiskScenarioA manufacturing company relies on a single supplier for a critical component. The audit committee wants assurance that the company can withstand a sudden disruption.Twin's ActionAuditors use a digital twin of the supply chain. They simulate the primary supplier's factory going offline for two weeks due to a natural disaster. The twin models the real-time ripple effect: it shows how quickly current inventory would be depleted, which production lines would halt first, which customer orders would be delayed, and the projected financial impact in terms of lost revenue and penalty clauses. It also tests the activation of the backup supplier control, revealing that the onboarding process for the secondary supplier would take five days longer than anticipated.Audit InsightThe audit provides a data-driven business continuity assessment. This enables management to proactively renegotiate terms with the backup supplier and adjust safety stock levels, building organizational resilience and providing the board with confidence that the risk is being actively managed.AI Agents: Intelligent Co-Pilots for the Modern AuditorIf the digital twin is our simulator, AI agents are our tireless crew. I like to think of them as the smartest, most diligent junior auditors you could ever hire. They work 24/7, analyse millions of data points in seconds, and never get bored of the details.Our first experiment was simple. We were tired of the tedious work of finding potential ghost employees, a classic audit pain point. We trained an AI agent to do one thing: continuously compare our live HR master file with our live payroll and attendance data.Within 48 hours, it flagged an anomaly. It wasn't fraud, but a process gap that was paying a recently exited employee. Our traditional quarterly check would have caught it months later, if at all.If the digital twin is the virtual environment, AI agents are the intelligent, autonomous entities that perform the audit work within it. Far more advanced than simple Robotic Process Automation (RPA) bots that follow rigid, pre-programmed rules, AI agents can handle variability, learn from data, and make context-based decisions. Think of them as tireless digital co-workers on the audit team, capable of executing complex tasks 24/7 without fatigue or human error.Far more advanced than simple Robotic Process Automation (RPA) bots that follow rigid, pre-programmed rules, AI agents can handle variability, learn from data, and make context-based decisions.Turbocharging Audit Tasks with AIExample 1 The "Ghost Employee" Audit, ReimaginedTraditional MethodAn auditor manually pulls employee lists from HR and payroll systems into Excel, spends hours using VLOOKUP to find discrepancies, and then investigates a few potential hits.AI Agent MethodA multi-agent system automates the entire process with far greater intelligence. Agent 1 connects to the HR system (e.g., Workday) and extracts the list of active and recently terminated employees. Agent 2 connects to the payroll system (e.g., SAP) and pulls payment records. Agent 3, an analytics agent, performs the reconciliation. It uses fuzzy logic to match names (e.g., "Michael Smith" vs. "Mike J. Smith") and identifies any employee paid after their official termination date. Agent 4 compiles the exceptions, pulls the relevant electronic paperwork (termination form, final payslip), and drafts a preliminary audit finding for the human auditor to review and validate. This continuous process can run daily, catching issues in near real-time.Example 2 Intelligent Travel & Expense (T&E) Anomaly DetectionTraditional MethodAuditors sample a small percentage of expense reports, often months after they have been paid.AI Agent MethodAn AI agent continuously monitors 100% of T&E submissions as they occur. It goes beyond simple policy checks:Pattern Recognition: It flags an employee who submits multiple expense reports for amounts just under the threshold requiring director-level approval (e.g., numerous reports for INR 995 when the limit is INR 1,000).Natural Language Processing (NLP): It analyses the text in receipt images to identify non-compliant items, such as "premium liquor" on a dinner receipt that is coded only as "meal."Network Analysis: It identifies groups of employees who consistently approve each other's expenses or dine at the same high-end restaurants on weekends, flagging potential collusion or misuse of funds.Example 3 Automated Contract Compliance VerificationTraditional MethodChecking if invoices comply with complex master service agreements is a daunting manual task, rarely performed comprehensively.AI Agent MethodAn AI agent uses NLP to "read" and understand thousands of supplier contracts. It automatically extracts key terms like pricing, volume discounts, payment deadlines, and late penalty clauses. It then continuously compares every incoming invoice against these contractual terms in the ERP system. For instance, it might flag an invoice where a 10% volume discount was not applied despite the purchase order exceeding the required threshold, or where a vendor incorrectly charged for shipping when the contract specified free delivery. This can recover significant financial leakage.The Human Touch Remains Vital: The Auditor 2.0The rise of these technologies does not signal the end of the internal auditor. Instead, it marks the beginning of a new, more strategic role: the Auditor 2.0. By automating the repetitive, data-heavy tasks, digital twins and AI agents free up human auditors to focus on what they do best:Critical Thinking and Professional Scepticism: AI can flag an anomaly, but a human auditor is needed to investigate the "why," interview stakeholders, and assess intent.Strategic Risk Advisory: With a real-time view of risk, auditors can engage in more forward-looking conversations with the business, advising on control design for new products or systems before they are even launched.AI and Model Governance: A new and critical role for audit is to provide assurance over the AI agents and digital twins themselves. Are the algorithms biased? Is the data feeding the twin accurate and complete? Auditors must audit the technology to ensure its reliability.This evolution requires a significant upskilling of the profession. Auditors now need to be data-literate, understand the fundamentals of AI, and be comfortable collaborating with their digital counterparts.Navigating the Challenges on the Road AheadThe path to this future is not without its obstacles. Organizations must address several key challenges:Data Infrastructure and Quality: The principle of "Garbage In, Garbage Out" is paramount. A digital twin built on siloed, inaccurate, or incomplete data will produce flawed insights. Considering the integration challenges and scalability limits, significant upfront effort is required to establish robust data governance and a clean, integrated data foundation.Talent and Skills Gap: The demand for auditors with skills in data science, AI governance, and process modelling currently outstrips supply. Organizations must invest heavily in upskilling their existing teams and rethinking their hiring profiles.Change Management and Trust: Introducing continuous monitoring can be perceived as "Big Brother" by employees. It is vital to frame these tools as enablers of improvement and efficiency, not instruments of punishment. Running successful pilot programs and transparently communicating quick wins is key to building trust and buy-in.Cost and ROI: Implementing a full-scale digital twin is a significant investment. Audit leaders must build a compelling business case that highlights not just cost savings from automation, but also the value of risk reduction and enhanced strategic insight.By creating living, virtual models of our organizations and deploying intelligent agents to monitor and protect them, we can achieve a level of assurance that was previously unimaginable.Conclusion: Embracing the Future with ConfidenceThe journey from controls to confidence is the defining transformation for Internal Audit in the 21st century. Digital twins and AI agents are no longer futuristic concepts; they are practical tools that are fundamentally reshaping the profession. By creating living, virtual models of our organizations and deploying intelligent agents to monitor and protect them, we can achieve a level of assurance that was previously unimaginable. Although, at the current stage of technology and the tools available in the industry, digital agents still require human supervision, and validation, effective deployment and monitoring significantly enhance their reliability.In doing so, we not only strengthen our organizations but also secure the future of our profession, building unwavering confidence for stakeholders in an uncertain world.◆◆◆Author may be reached atanandjangid@gmail.com and eboard@icai.inOctober 2025 | www.icai.org
Ep. 150 — Internal Audit in the City Gas Distribution Sector
CA Journal
· August 2026
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Internal Audit in the City Gas Distribution SectorNatural Gas adoption being a low-emission fuel is one of the critical factors as India moves towards its target of Net-Zero emission. Presently, in India, the share of natural gas in the energy basket is around 6% as against 24.4% globally. Some of the reasons for a low share of natural gas in India are limited pipeline connectivity, coal dominance and pricing hurdles, among others.The Government has set a target to raise the share of natural gas in the energy mix to 15% by 2030. To achieve this target, the Government has taken various steps, including the expansion of the National Gas Grid Pipeline and the City Gas Distribution (CGD) network, the setting up of Liquefied Natural Gas (LNG) Terminals, and the allocation of domestic gas to Compressed Natural Gas (Transport)/Piped Natural Gas (Domestic) CNG(T)/PNG(D) as a priority sector, etc. The City Gas Distribution (CGD) sector is a cornerstone of India's strategy for promoting the use of natural gas as it ensures the delivery of gas to the end customer/user.The Petroleum and Natural Gas Regulatory Board (PNGRB) has authorised various CGD companies under Sections 16 and 42 of the PNGRB Act 2006 for building the required infrastructure and last-mile connectivity. Post the 12th CGD bidding round, the majority of the population currently has access to CGD networks. As of March 2025, India has over 1.5 Cr. PNG connections and over 8000 CNG Stations, which reflects India's push toward cleaner energy and broader access.A typical structure of a CGD network is depicted in Figure 1.Figure 1: Structure of CGD Network.CGD Network 1. PNG Connections2. CNG Stations 1. Industrial2. Commercial (Restaurants, Hotels etc.)3. Domestic (Household)Challenges in a CGD BusinessCapital Intensive: Building a CGD network is a capital-intensive process with a long payback period. It also requires numerous clearances from multiple stakeholders before laying steel or MDPE pipeline networks.Gas Sourcing: India imports ≈49.86% of its total natural gas consumption. Factors like the COVID pandemic, political conflicts, global headwinds, and buoyant gas prices may erode profit margins.Type of Customers: The presence of industrial, commercial, household, and CNG vehicles is not equally distributed. An inadequacy of industrial and commercial customers poses a risk of lower profit margins.Market Challenges: Many potential users are unaware of the benefits of PNG/CNG along with uncertain demands.Availability of Alternate Fuel: Industrial connections are price-sensitive; historically, they have been converted from traditional sources of energy, such as furnace oil, power, coal, diesel, etc. It is quite easy to go back to the previous source in case of price escalation under global uncertainties.Building a CGD network is a capital-intensive process with a long payback period. It also requires numerous clearances from multiple stakeholders before laying steel or MDPE pipeline networks.City Gas Distribution Value ChainTable 1 shows a typical representation of various points of the CGD business value chain bifurcated among the types of business.Role of Internal Audit in Strengthening the CGD Value ChainThe CGD value chain spans gas sourcing and transmission, development and maintenance of infrastructure, last-mile connectivity, meter reading, and billing and collection. Internal Audit (IA) plays a pivotal role in identifying inefficiencies and providing assurance across each segment. A few critical dimensions highlight this:Gas Sourcing: Risks include an inaccurate gas nomination process and failure to secure long-term contracts for the supply of gas. IA can help in placing proper controls over the gas consumption forecast and securing supply contracts. This reduces the scope of procuring gas at higher spot prices.Development of Infrastructure: Two primary risks, among others, are that companies may fail to achieve the minimum number of connections agreed with PNGRB, and that they may take investment in infrastructure without ensuring gas supply. IA helps companies establish a project approval and monitoring cell that ensures the timely completion of projects with all due clearances.Operation and Maintenance: The average gas loss in CGD companies was ≈2.33% in FY24. PNGRB targets reducing it to below 2%. IA helps companies strengthen their operation and maintenance processes, with a focus on Supervisory Control and Data Acquisition (SCADA) of gas movement and gas reconciliation practices to minimize the quantity of lost and unaccounted gas.Last-mile Connectivity: There is an open pool of potential not-connected customers, which poses a risk of revenue loss due to the pending connectivity of potential customers. IA can review the process of lead management and help reduce the turnaround time for customer conversion and gas commissioning.Meter Reading: Depending on the type of customer, the meter reading frequency is supposed to be different, which affects the billing of gas consumption charges. With the help of data analytics, IA can establish a second check over the meter reading process. It can highlight lapses and inaccuracies.Billing and Collection: Risks include missed billing of all active customers or inaccurate billing. IA can help companies ensure complete and accurate billing of customers. IA can also oversee the control of security deposits and the recovery process.Compliance and Reporting: PNGRB is the designated authority for regulating CGD companies. It poses the risk of failing to comply with applicable regulations and reporting accurate information. IA helps management set an end-to-end compliance monitoring process.Thus, in line with the value chain, IA can be a critical wheel in the journey of a well-governed CGD company. Gas SourcingInfrastructure & MaintenanceConversion & CommissioningGas Supplying & Meter ReadingBilling & CollectionIndustrialIdentifying source of gas (Import vs Domestic)Entering into long-term gas procurement contractsBalancing market spot price procurement versus LTC procurementGas procurement versus sales reconciliationMarking territory and exploring steel and pipeline network plansObtaining permission of various stakeholders such as forest, road, railways, irrigation etc. for laying infrastructureLaying infrastructure through extended pipelines, meter skids, pressure valves etc.Acquiring new customers or replacing traditional fuels such as power, furnace oil, coal, etc.Ensuring minimum guaranteed quantity off-take as per gas procurement contractsCollecting initial connection charges and security deposits for gas supplySupply of gas at contracted pressure and qualityMeter reading at the highest frequency (preferably fortnightly)Billing and invoicing customersMeter readings are updated in the billing module and customers are billedDifferent credit periods based on the type of customersCollection of billsImposing interest and overdue payment charges for delayed collection(Non) CommercialCustomers' onboardingAssessing gas requirement through load sheetsPlacing pipeline and meterCollecting DCQ charges and depositCommissioning customersMeter reading and invoicing (as per standard norms, monthly)CNG StationsDemand assessment and feasibility study for CNG stationPartnering with Oil Marketing Companies (OMCs) for CNG stationInstalling equipment such as compressors, dispensers, cascades, etc. based on the type such as online, daughter, or hybrid stationCollecting security depositConversion of PNG to CNGDaily monitoring and reading of consumptionInvoicing at agreed frequency with OMCsDomesticCustomers approach the CGDs for new connectionLaying pipeline at customer premisesComplaint redressal cellCollecting security depositCommissioning customersMeter reading and invoicing customersAfter-sale services (temporary or permanent disconnection, etc.)Table 1: Representation of various points of the CGD business value chainMeasuring What Matters: Internal Audit's Role in Driving KPAs and KPIsTo measure the efficiency of a city gas network, organizations need to define Key Performance Areas (KPAs) and track Key Performance Indicators (KPIs). Internal Audit ensures that these metrics are not just defined but also monitored with discipline, and organizations not only comply with standards but also strive for operational excellence.Some critical areas include:Gas Loss: Measuring loss and unaccounted gas in the city gas network. IA ensures comprehensive reconciliation of gas inflow and outflow through accurate meter readings and near-accurate provisions for unbilled customers.Compression Efficiency: Achieving gas compression at the optimum cost and ensuring gas availability at all times. IA ensures that operations achieve the Original Equipment Manufacturer's (OEM) recommended level of compression loss and power consumption cost.Capital Work in Progress: Monitoring whether Steel, MDPE, and CNG projects are commissioned and monetized in time. IA helps the project committee with project status monitoring, including obtaining due permissions and NOCs from stakeholders. IA ensures Geographic Information System (GIS) mapping of the complete CGD network.Minimum Agreed Plan of Geography: Monitoring compliance with the minimum agreed plan of the geographical area as committed while bidding for authorization from PNGRB. IA strengthens the process of monitoring CGD authorization commitment in terms of last-mile connectivity. IA ensures the company commissions the targeted connections well before time.Health, Safety & Environment (HSE): Monitoring safety incident frequency, regulatory compliance, and waste management practices. IA evaluates whether safety protocols, training, and environmental standards are being complied with in practice, not just on paper.Financial Discipline: Tracking budget adherence, Return on Investment (ROI) on capex, receivable aging, and compliance with taxation frameworks. IA strengthens governance by reviewing project cost controls, tax compliance, and financial reporting accuracy.The CGD value chain spans gas sourcing and transmission, development and maintenance of infrastructure, last-mile connectivity, meter reading, and billing and collection. Internal Audit (IA) plays a pivotal role in identifying inefficiencies and providing assurance across each segment.Emerging Focus Areas for Internal AuditAs the city gas network matures and is set to achieve its target in the national energy basket, Internal Audit must look beyond the traditional way of conducting audit and align its focus with the needs of the hour. Emerging focus areas include:Technology and Transformation: Assessing the adoption of automation, IoT-enabled machinery, robotics, and AI.Cybersecurity & Data Integrity: Safeguarding personal data against threats such as ransomware and espionage by testing resilience, validating access controls, and ensuring compliance with data protection norms.Resilient Supply of Natural Gas: Strengthening controls to secure a continuous supply of natural gas at a sustainable price, considering available reserves, import dependency, logistics, geopolitical risks, and other contingencies.Evolving Infrastructure: Continuously evaluating new technologies in gas sourcing and transmission infrastructure to reduce gas transmission and compression losses.ESG & Sustainability: Verifying carbon neutrality targets, the use of alternative energy sources alongside natural gas such as biogas, and social responsibility programs.ConclusionIndia's city gas distribution network has been growing at a double-digit rate. This growth comes with various internal and external challenges. Internal Audit, with its unique position, provides independent assurance, actionable insights, and forward-looking advisory to help organizations navigate risks and build resilient operations.IA not only helps in identifying gaps in the system but also aligns operations with best industry practices, innovative technologies, and regulatory compliance. For boards, regulators, and stakeholders, Internal Audit has become the conscience-keeper and value-enhancer of the enterprise.ReferencesThe Ministry of Petroleum and Natural Gas, report on progress to achieve the 15% target of natural gas contribution to the energy basket by 2030.Government of India, PNGRB, 12th Bidding round Brochure.PNGRB, Gas Loss Analysis and Improvement Strategy Report 2020-2024.◆ ◆ ◆Author may be reached atca.ankursgupta@gmail.com and eboard@icai.inOctober 2025 www.icai.org THE CHARTERED ACCOUNTANT
Ep. 151 — The Art of Storytelling in Audit Reporting: From Findings to Infl uence
CA Journal
· August 2026
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The Art of Storytelling in Audit Reporting: From Findings to InfluenceWhy Audit Reports Matter More Than EverEvery profession has its artifacts; doctors write prescriptions, lawyers draft contracts, architects design blueprints. For auditors, our most enduring artifact is the report. It is both the visible output of our work and the invisible measure of our influence.Too often, however, audit reports are treated as administrative conclusions; a record of findings, neat recommendations, and executive summaries that tick the box but rarely move the needle.Yet if the true purpose of internal audit is to strengthen governance, mitigate risk, and cultivate organizational resilience, then the report must become more than a statement of facts. It must become a persuasive narrative; one that informs, influences, and inspires action.This is the heart of storytelling in audit reporting. It is the art of shaping information into meaning. Done well, it connects evidence to consequence, consequence to decision, and decision to action. It ensures that audit work does not end at documentation but translates into organizational renewal.The question before us, then, is this: how do we elevate audit reporting from routine to art, from compliance to influence?Report Writing as Craft — From Facts to PersuasionAudit reports are not neutral documents. They are crafted communications aimed at influencing stakeholders to act. Recognizing this changes everything.A good report must satisfy technical requirements, accuracy, clarity, completeness. But a powerful report goes further; it persuades. It tells a story that enables boards, executives, and process owners to see not just what is wrong, but why it matters and how it can be made right.This is why report writing deserves to be treated as a craft.Like a skilled artist, the auditor must step back, see the canvas whole, and decide what composition will most effectively convey the truth.This requires planning from the start. Observations should not be hurriedly written at the end of fieldwork. Instead, they should be developed throughout, shaped around the “five Cs”; criteria, condition, cause, consequence, and corrective action.Approached this way, the report evolves alongside the audit, becoming both record and roadmap.Influence also depends on balance. Reports must highlight deficiencies, but they must also acknowledge what is working. Presenting a dashboard that shows processes performing well, areas needing intervention, and those requiring overhaul provides a holistic picture. This balanced storytelling earns credibility and makes recommendations more persuasive.Above all, the craft of report writing rests on intent. If the intent is merely to close the project, the report will remain sterile. If the intent is to influence governance, the report becomes an instrument of change.While drafting the report, appropriate references to the applicable Standards on Internal Audit (SIAs) may be included, wherever relevant.“ Audit reports are not neutral documents. They are crafted communications aimed at influencing stakeholders to act. Recognizing this changes everything.Lessons from Practice: Writing as Art, Not AdministrationSome of the most powerful insights into audit reporting come from practice. Barrie Enslin, in the book, The Gardener of Governance — A Call to Action for Effective Internal Auditing1, describes the report as a work of art rather than a “run-of-the-mill” deliverable. His message is clear: the primary purpose of the report is not to report findings, but to communicate results in a way that compels understanding and action.He urges auditors to start building the report early, shaping observations as they emerge, grouping related issues to avoid fragmentation, and weaving causes and consequences into a coherent narrative. His analogy of the report as artwork captures the spirit of storytelling; reports should be logical, readable, and even beautiful in their clarity.Other voices echo this. The ICAI’s Vision 2030 emphasizes world-class competencies, adherence to ethical standards, and the development of trusted, independent professionals. Embedded within this vision is the expectation that auditors must communicate with clarity, transparency, and impact. Similarly, the IIA’s Global Standards and the World Bank’s audit communication toolkits stress that reports should be accurate, concise, constructive, and written with the audience in mind.Taken together, these sources point to one conclusion: report writing is not a clerical afterthought. It is a central professional act, one that demands technical rigor, narrative clarity, and creative intent.Storytelling Techniques: How to Make Reports PersuasiveIf audit reports are to persuade, auditors must borrow from the storyteller’s toolkit. This does not mean sacrificing accuracy. It means applying structure, language, and design in ways that make meaning irresistible.a. Structure Like a NarrativeGreat stories have a beginning, middle, and end. So too should audit reports. The beginning should frame the purpose and context, showing why the audit matters. The middle should develop the observations, connecting evidence to impact. The end should provide resolution: recommendations that are actionable and credible.b. Use the Five Cs as Plot PointsCriteria, condition, cause, consequence, corrective action; these are not bureaucratic boxes. They are the elements of a plot. The criteria set the standard; the condition shows the deviation; the cause reveals the driver; the consequence emphasizes the risk; and the corrective action offers resolution. When presented clearly, they form a narrative arc that carries the reader naturally toward action.c. Balance Evidence with JudgmentNumbers matter, but so do words. A table of deficiencies may be accurate but uninspiring. Adding context; why it matters, how it links to strategy, what it means for the future, transforms evidence into insight. This requires auditors to apply judgment, to interpret rather than merely list.d. Visuals as Storytelling AidsDashboards, heat maps, and traffic-light systems are not cosmetic. They are narrative devices that guide readers to what matters most. A well-designed one-page dashboard can show in a glance where controls are strong, where risks are emerging, and where urgent attention is required. Visuals anchor the story and make it accessible.e. Tone and LanguageThe tone of the report shapes its reception. Harsh or accusatory language creates defensiveness. Balanced, respectful language invites engagement. ICAI’s mission highlights integrity and independence; values best served by clarity and simplicity in language. Simplicity, not complexity, is the hallmark of mastery.In short, storytelling techniques enable auditors to transform reports from dry documentation into living instruments of influence.Elevating Impact: The Auditor as Storyteller and StewardIf audit reports are to be more than documents that gather dust, auditors must see themselves not only as technicians but also as storytellers and stewards. The words we choose, the structure we apply, and the courage we bring determine whether our work prompts reflection and reform, or slips silently into the background.a. Storytelling Anchored in PurposeEvery powerful story has a “why.” For auditors, that “why” is governance; the prevention of failure, the nurturing of resilience, and the cultivation of trust. Storytelling is the vehicle through which purpose becomes visible. When framed around risks that matter and linked to organizational goals, the report becomes a compass for decision-making.b. Courage to Go Beyond the ObviousStorytelling demands courage. Listing control gaps is safe; pointing to cultural risks or systemic blind spots is not. Yet this is where value lies. Courageous storytelling means naming patterns, connecting dots, and offering targeted remedies, even if uncomfortable.c. Stewardship of TrustAuditors are stewards, not owners, of governance. Storytelling should embody this ethic: factual yet mindful of tone, balanced rather than biased, influential without exaggeration. Reports written in this spirit strengthen trust and relationships, ensuring that findings lead to meaningful action.d. The Evolving Auditor’s RoleThe future of internal audit is in the hands of ‘The Evolving Auditor’ who embraces storytelling as part of their human acumen. They pair technical mastery with empathy, judgment, and presence. Writing and storytelling are power skills they master and through which they turn complex evidence into narratives that illuminate choices and consequences.e. From Reports to RenewalWhen auditors write with artistry and courage, reports catalyze renewal. They galvanize boards, nudge executives, and equip teams to reform practices before risks metastasize. Reports that embody storytelling elevate the profession itself; transforming auditors from watchdogs tolerated out of necessity into trusted advisors and cultivators of governance ecosystems.“ The future of internal audit is in the hands of ‘The Evolving Auditor’ who embraces storytelling as part of their human acumen. They pair technical mastery with empathy, judgment, and presence.Pitfalls to Avoid: From Generic Findings to Missed InfluenceIf storytelling lifts reports, poor habits sink them. Several recurring pitfalls diminish the power of audit reporting. Naming them clearly is the first step toward avoiding them.Generic observations and recommendationsToo many audit reports still rely on vague phrases like “controls are weak” or “management should strengthen monitoring.” These statements may be technically correct, but they fail to persuade because they lack specificity.A finding should tell the reader what exactly failed, why it matters, and how it can be fixed. Generic wording drains credibility and leaves the impression of superficial analysis. Reports that stop at the surface risk being dismissed as boilerplate documents.The antidote is precision: well-structured observations that link criteria, condition, cause, consequence, and corrective action into a coherent story that drives action.Reporting only at the endA frequent pitfall is leaving report writing until fieldwork is complete. Under deadline pressure, auditors then rush to draft observations, often missing nuances, or root causes.This approach leads to incomplete analysis, vague recommendations, and observations that could have been strengthened with more evidence. Treating report writing as an afterthought also reduces opportunities for reflection and dialogue during the audit itself.The better practice is to treat reporting as a living process; capturing emerging observations throughout the assignment, assessing their validity, and refining them as more information is gathered. In this way, the report grows alongside the audit, resulting in sharper insights and stronger influence.Ignoring what worksAudit reports sometimes focus exclusively on weaknesses, overlooking areas where controls and processes perform well. This creates a distorted picture, undermines credibility, and fosters defensiveness among stakeholders.Balanced reporting that highlights both strengths and weaknesses communicates fairness and objectivity. Acknowledging good practices builds trust, motivates process owners, and makes recommendations on deficiencies more persuasive.A traffic-light dashboard is a powerful storytelling tool here; with green for processes that are strong, amber for those needing attention, and red for those requiring overhaul.By presenting the full picture, auditors not only earn respect but also position the audit function as a partner in improvement, not just a critic.Overloaded detail, missing narrativeAnother common mistake is overwhelming readers with raw data, long tables, or endless appendices without a clear storyline.While evidence is essential, too much detail without interpretation creates fatigue and dilutes the message. Executives and boards do not have the time or patience to dig through hundreds of lines to extract meaning.Storytelling requires filtering, prioritizing, and framing. What does the evidence reveal about the bigger risk? What is the real message the reader must walk away with?Reports that balance data with narrative provide clarity, enabling stakeholders to focus on the issues that matter most and act decisively.Isolated findings without the bigger pictureAuditors often present findings as isolated issues, missing the opportunity to tell a bigger story. For instance, in a pricing audit, weaknesses may appear in access controls, manual interventions, and invoice accuracy. Reported separately, these seem like unrelated problems.But stitched together, they reveal a systemic breakdown in pricing governance with financial and reputational consequences. Storytelling demands this integration.By connecting dots across findings, auditors elevate the report from a list of problems to a diagnosis of systemic risk. The value lies not just in identifying individual failures, but in narrating the pattern they form and the organizational implications they carry.Recommendations without ownershipMany reports dilute their influence with recommendations that are too generic or lack clear accountability. Phrases like controls should be improved or management should consider… sound advisory but are easy to ignore.Persuasive reports make recommendations concrete: they specify what action is required, who should own it, and what success will look like. Linking the recommendation explicitly to the root cause and risk consequence strengthens urgency. This level of specificity makes it harder for stakeholders to dismiss or defer corrective action.Without ownership, recommendations risk becoming commentary; noted but not acted upon. With ownership, they become commitments that drive change.These examples reinforce a simple truth: storytelling is not embellishment; it is the method by which audit reporting fulfils its purpose.Tone that alienates rather than engagesThe words we choose shape how our message is received. Too often, audit reports adopt a harsh, accusatory tone; phrases like management has failed or there was negligence that immediately trigger defensiveness.Even when the evidence is valid, the message risks being ignored because the delivery closes doors instead of opening dialogue. Tone is not about sugarcoating the truth; it is about presenting it in a way that invites action.Balanced language such as policy compliance has not been consistently enforced conveys the same point without antagonism.Ethical reporting requires auditors to write with integrity, respect, and an intent to influence, not to blame.Bringing it togetherAvoiding these pitfalls is not cosmetic. It is central to the profession’s credibility. A poorly written report can undo weeks of diligent fieldwork and erode trust in the audit function.By contrast, reports that are specific, balanced, structured, and actionable become instruments of governance, capable of influencing decisions and catalysing change.Storytelling is the bridge that transforms audit reporting from routine documentation into organizational renewal.“ The challenge before us is clear: to treat audit reporting not as an administrative burden, but as the art of storytelling in service of stewardship.The STORYCELLING Framework: A 12-Step Guide for Audit StorytellingTo make storytelling actionable, auditors can adopt a structured approach. STORYCELLING is a 12-step framework designed as a practical checklist for turning reports into persuasive narratives.SSet the StageFrame the purpose of the audit in organizational terms. Why does this review matter now? Beginning with context grounds the reader.TTie to StrategyLink findings explicitly to business objectives and risks. Audits gain influence when they connect to strategy, not just compliance.OOutline the Criteria / BenchmarkState the criteria; standards, laws, regulations, or policies, clearly. Without criteria, without a frame of reference, deviations lack weight.RReveal the RealityDescribe the condition: what you found, factually and plainly. Precision builds trust.YYield the WhyExpose the root cause. Why did this deviation occur? Identifying drivers and underlying factors makes recommendations credible.CClarify the ConsequencesTranslate technical gaps into real-world risks; financial, reputational, operational, and more. This emphasizes why action is urgent.EElevate with EvidenceAnchor the narrative in data, visuals, and examples. Charts, dashboards, and quotes make findings vivid and irrefutable.LLead with BalanceAcknowledge what is working alongside weaknesses. Balanced storytelling signals fairness and increases receptivity.LLanguage with CareChoose words that are respectful and simple. Avoid jargon or accusatory tones that trigger defensiveness.IIllustrate with InsightUse analogies, case examples, or scenarios to simplify complexity. Insight helps boards see the bigger picture.NNavigate the Next StepProvide actionable, specific recommendations. A story without resolution leaves the audience frustrated.GGuide to GovernanceConclude by linking actions back to governance and organizational resilience. Show how changes contribute to ethical and sustainable success.Storytelling is a discipline. The STORYCELLING framework ensures that every report carries clarity, meaning, and influence.Ethics, Integrity, and the Auditor’s DutyICAI’s Vision 2030 commits to being the world’s leading accounting body; producing trusted, independent professionals with world-class competencies in assurance, taxation, finance, and business advisory.Audit reporting, when treated as storytelling, aligns directly with this vision:By crafting persuasive reports, we demonstrate professional competence not only in analysis but in communication.By writing with balance, accuracy, and clarity, we uphold the highest ethical standards the vision demands.By using reports to catalyse change, we prove ourselves to be trusted advisors and global professionals, not mere compliance enforcers.By embedding dashboards, visuals, and innovative formats, we embrace innovative practice and position internal auditors as leaders in thought and influence.Storytelling in reporting is therefore not just a technique. It is a pathway for internal auditors to embody the very essence of the Vision 2030 mission.Conclusion — The Report as Garden and CompassThe report, for auditors, is not secondary to the test sheet; it is the final test of our relevance. To write well is to think well, to care well, and to serve well.If governance is a garden, then the audit report is the gardener’s journal: part diagnosis, part guidance, part hope. Done poorly, it is a checklist. Done well, it is a catalyst; cultivating trust, prompting action, and elevating governance.The challenge before us is clear: to treat audit reporting not as an administrative burden, but as the art of storytelling in service of stewardship. For in the end, governance is not a static structure to be inspected but a garden to be cultivated together, with courage, creativity, ethics, and care.1 The Gardener of Governance — A Call to Action for Effective Internal Auditing by Rainer Lenz, Barrie Enslin.◆◆◆Author may be reached at eboard@icai.inThe Chartered Accountant · October 2025 · www.icai.org
Ep. 152 — Fighting Financial Crime: What ICAI Members Can Do and How the NOCLAR Standard Can Make a Difference
CA Journal
· August 2026
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Fighting Financial Crime: What ICAI Members Can Do and How the NOCLAR Standard Can Make a DifferenceFinancial crime such as fraud, money laundering, corruption, or market abuse affects more than just balance sheets. It corrodes trust, diverts resources from economic growth and development, undermines the rule of law, and leaves companies, along with the professionals who serve them, exposed to legal and reputational harm.And in this battle, professional accountants (PAs) are on the front line. Why? Because they are the ones who pore over the ledgers, reconcile the accounts, prepare or authorize the payments, flag the anomalies, and whisper caution to boards when something doesn’t feel right. They are often the first to sense when numbers don’t align, when controls fail, or when transactions stray from both the spirit and the letter of the law.At the International Ethics Standards Board of Accountants’ (IESBA) inaugural Ethics and Audit Independence Conference in Lisbon, Portugal, this September,1 I was struck by an audience poll that cut to the heart of the issue. Asked whether they believed the actors at the center of recent corporate scandals had recognized their ethical lapses before the scandals erupted, nearly half of the participants answered “yes.”This response is sobering. It suggests that in many cases, financial misconduct is frequently not the product of ignorance, which, ultimately, does not absolve professionals of their duty to be diligent, but of conscious choice. It also suggests that executives and professionals often knew the lines they were crossing—and crossed them anyway. This recognition pushes the conversation beyond a PA’s technical competence to deeper questions of professional judgment, mindset, courage, honesty and accountability. In a word, ethics questions. It forces us to examine the role of PAs as ethical gatekeepers of integrity and transparency.In this special edition of the ICAI Journal for Global Ethics Day, I take the opportunity to paint the landscape of financial crime globally and in India, and highlight how the IESBA’s standard on Non-Compliance with Laws and Regulations™ (NOCLAR®) plays a crucial role in supporting the profession’s duty to act in the public interest when confronted with NOCLAR.The Scale of the Problem — Globally and at HomeThe United Nations Office on Drugs and Crime (UNODC) has long estimated that 2% to 5% of global gross domestic product is laundered annually, roughly USD 800 billion to USD 2 trillion.2 Fraud, sanctions evasion, geopolitical conflict, criminal use of AI, and underground banking are flagged as the top financial crime threats in the 2025 Association of Certified Anti-Money Laundering Specialists (ACAMS) Global Anti-Financial Crime Threats Report.3Closer to home, India is not immune. India has been listed as 68th out of 164 countries assessed for money-laundering and terrorist-financing risk using public datasets in the Basel Anti-Money Laundering (AML) Index’s 2024 edition, with a risk score of 5.49 on a 0–10 scale where higher is riskier.4Cybercrime and digital fraud have become an accelerating issue. The Indian Ministry of Home Affairs told Parliament that cyber fraud losses rose to a staggering Rs 22,845 crore in 2024, a 206% increase from 2023.5 Further, various surveys of executives in organizations across India indicate that:About 96% of senior executives in India’s financial and professional services sectors anticipate a rise in financial crime risks in 2025.6Cyberfraud and related incidents constitute 64% of frauds in India, with the top three industries impacted being technology, media and telecommunications; financial services; and manufacturing.7Procurement fraud, customer fraud, bribery and corruption, and cybercrime were deemed as the most disruptive and serious types of financial crime in terms of impact on organizations in India.8These all point to the same reality: financial crime is evolving, pervasive, and costly. But it is often also detectable by those closest to the books. That is where PAs can make a real difference — they are the first line of defense.India exceeds the global average in these areas, yet significant room for improvement remains. By reinforcing the fight against financial crime, the country can foster long-term value creation and strengthen its international standing — and here too, PAs can make a critical difference by acting as gatekeepers and partners for good, rather than enablers of misconduct.Professional Accountants as Ethical GatekeepersThe Institute of Chartered Accountants of India (ICAI) has taken a decisive step in equipping PAs in the global fight against financial crime by embedding the IESBA’s NOCLAR provisions (Sections 260 and 360) into its Code of Ethics. The provisions, which came into effect on 1 October 2022, apply to ICAI members who are:Senior PAs employed by listed entities; andAuditors of listed entities with a net worth of Rs 250+ crore.The Institute of Chartered Accountants of India (ICAI) has taken a decisive step in equipping PAs in the global fight against financial crime by embedding the IESBA’s NOCLAR provisions (Sections 260 and 360) into its Code of Ethics.For many years, accountants and auditors confronted NOCLAR with little more than their judgment. Faced with NOCLAR, PAs, especially those working alone or under pressure, often found their response shaped more by personality, courage, and circumstance than by structured guidance.While larger firms could lean on internal ethics resources, smaller practices and individuals often had to lean on their past experiences and resiliency. In some cases, PAs resigned from their employment or client relationship rather than confronted the wrongdoing head-on, leaving the NOCLAR unaddressed.The arrival of the IESBA’s NOCLAR standard changed this dynamic and challenged the status quo.The NOCLAR standard is designed to address any type of NOCLAR situation, especially those that rarely come with flashing red lights. NOCLAR often creeps in quietly: a transaction with vague bona fides, subtle pressure from superiors, or a rationalization that “everyone does it.”A wide range of laws and regulations are covered by the standard, including those dealing with bribery and corruption, money laundering, tax evasion, terrorism financing, fraud and other economic crimes, as well as issues of public health and safety and environmental protection. What the standard does not cover are matters of personal misconduct and matters that are clearly inconsequential.The standard offers the PA a principles-based, yet practical response framework in such circumstances:Understand the facts and circumstances.Escalate concerns internally to management or those charged with governance (TCWG) within the PA’s employing organization or the audit client.Comply with applicable laws and regulations.Take action to have the consequences of the NOCLAR corrected, remediated or mitigated by the entity.Evaluate the response of management or TCWG.Decide whether further action, including disclosure to an appropriate authority, is warranted in the public interest.By laying out this calibrated response process, the NOCLAR standard strengthens the PA’s role and reputation as an ethical gatekeeper. It shifts the PA’s mindset from “Can I look away?” to “How should I best respond as a member of ICAI?” In doing so, it anchors the profession to its highest purpose — acting in the public interest.In most cases, management or TCWG will recognize the significant legal, business, and reputational risks of failing to address NOCLAR and will act with clarity and determination. Yet there may be times when management is complicit or unresponsive to the risks and potential consequences of the NOCLAR. At that critical juncture, the standard requires PAs to consider whether additional measures are necessary. These measures may include:Disclosure to an appropriate authority, unless prohibited by law.Resignation from the audit engagement, to signal that the auditor cannot be associated with the NOCLAR. Importantly, the standard requires the resigning auditor to alert the incoming auditor about the NOCLAR, ensuring that the NOCLAR does not remain unaddressed.The decision regarding whether a PA should disclose NOCLAR to an appropriate authority is a complex one with multi-faceted considerations.The decision regarding whether a PA should disclose NOCLAR to an appropriate authority is a complex one with multi-faceted considerations. With the benefit of legal advice, these considerations should provide a basis for the PA to feel confident and safe to make the disclosure.Specifically, factors leaning towards disclosure by the PA include whether there is credible evidence of actual or potential substantial harm to stakeholders, the degree of urgency to the situation, and whether there is significant doubt about the integrity of management or TCWG.However, these factors must be balanced against other factors such as:Whether there is an appropriate authority that is accustomed to dealing with such matters, can act on the information, and is trusted.Whether there is legal protection against the risks of civil, criminal or professional liability, or retaliation.Whether there are threats to the PA’s physical safety or that of others.So, while legal protection is a key factor, it is not the only one. Importantly, the standard is designed to operate even in jurisdictions where whistleblower laws are weak or do not exist.Key Intended OutcomesThrough its principles-based response framework, the NOCLAR standard is designed to achieve a number of key outcomes:Enhanced ethical conduct by clarifying that turning a blind eye to NOCLAR is not an appropriate response from PAs, while placing renewed emphasis on the roles of management and TCWG in addressing the matter.Increased protection for stakeholders and the public by stimulating PAs to proactively respond to NOCLAR, which can lead to (1) an earlier response by management or TCWG or timelier intervention from appropriate authorities, thereby mitigating the consequences for stakeholders and the public; and (2) deterring the commission of NOCLAR.Better equipping the auditor with a toolkit to respond to NOCLAR beyond just resigning from the engagement.Enhanced value of the profession by enabling it to play a greater role in the global fight against financial crime, and strengthening its reputation as a guardian of trustworthy organizations and a healthy global financial system.Post-Implementation Review and Why India’s Voice MattersThe adoption of the NOCLAR standard in the ICAI Code was a milestone. But adopting the standard is not the end of the road. The real test of its powerful promise to arrest or slow down NOCLAR and its corrosive effects on the fabric of India’s economic foundation lies in how it is working in practice.This is where a post-implementation review (PIR) of the standard comes in, which the IESBA has just initiated.A robust PIR, enriched with India’s perspectives, will ensure that the standard remains relevant, practical, and effective in fulfilling its core mission: enabling PAs to respond proactively to NOCLAR in the public interest.The PIR is aimed at determining whether the standard is being consistently understood and implemented in a manner that achieves the IESBA’s intended purposes in developing the standard. The PIR will pursue several axes of inquiry while respecting confidentiality, for example:What types of NOCLAR have PAs escalated and to what extent did management or TCWG take remedial or mitigating action?Which aspects of the standard have been challenging to apply and why?Which provisions would benefit from more guidance?Looking AheadThe IESBA anticipates issuing a public survey on the PIR in January 2026. It will also undertake targeted outreach around the world to gather input from stakeholders. A final report with recommendations to the IESBA is anticipated in December 2026.The IESBA looks forward to working closely with ICAI on this PIR. India is home to over 400,000 members of ICAI. I encourage you to contribute your valuable experiences in applying the NOCLAR standard and to follow the progress of this important initiative. There has never been a more important time to protect the integrity, resilience and vitality of India’s and the world’s financial markets and economic systems against financial crime, and never a greater opportunity for the profession to demonstrate its value and contributions to society.◆◆◆Author may be reached at eboard@icai.inReferencesethicsboard.org/iesba-conference-2025 ↩UNODC Money Laundering Overview: unodc.org/unodc/en/money-laundering/overview.html ↩ACAMS Global AFC Threats Report 2025: acams.org/en/global-afc-threats-report-2025 ↩index.baselgovernance.org/ranking ↩Times of India — India’s cyber fraud epidemic ↩ET BFSI — Kroll survey on financial crime risk ↩Grant Thornton — Financial and Cyber Fraud Report 2024 ↩PwC — Global Economic Crime Survey 2024, India outlook ↩The Chartered Accountant · Ethics October 2025 | www.icai.org | 35–38
Ep. 153 — Substantial Interest of Auditors: Ethical and Professional Dimensions
CA Journal
· August 2026
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Ep. 154 — Indian Heritage of Professional Ethics: The Timeless Torchbearer
CA Journal
· August 2026
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Ep. 155 — Educate, Empower, Elevate: Creating a Financially Literate India through Investor Education, Awareness and Tax Literacy
CA Journal
· September 2026
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Educate, Empower, Elevate: Creating a Financially Literate India through Investor Education, Awareness and Tax LiteracyIndia has expanded access to financial markets at an unprecedented pace, yet financial understanding has not grown at the same rate. With only about 27% of adults demonstrating basic financial literacy, millions of new investors remain vulnerable to misinformation, behavioural biases and fraud. Building a financially confident nation requires more than increasing participation in capital markets. It demands a coordinated approach built on education, investor awareness, behavioural understanding and tax literacy. Together, these elements help individuals make informed decisions, protect their savings and convert long-term investing into sustainable wealth creation.India’s Investment Revolution Needs an Equal Revolution in Financial LiteracyIndia is witnessing one of the most significant shifts in its financial history. Investing, once largely confined to financial professionals and experienced market participants, has entered everyday conversations. Families discuss mutual funds over dinner, young professionals begin SIPs with their first salaries, and retirement planning is no longer reserved for those nearing the end of their careers.Technology has accelerated this transformation. Aadhaar-enabled services, UPI, online KYC, smartphone-based investment platforms and simplified account opening have dramatically reduced the barriers to participating in financial markets. Investors from Tier-2 and Tier-3 cities now account for a growing share of market activity, while SIP contributions and demat account openings continue to reach new milestones.The transition from a nation of savers to one increasingly willing to invest represents an important milestone in India’s economic development.Yet greater access has exposed a deeper challenge.According to the National Centre for Financial Education (NCFE), only around 27% of Indian adults possess basic financial literacy. Comparable levels in countries such as the United States, the United Kingdom and Australia typically range between 55% and 70%. Financial inclusion has expanded rapidly, but the ability to understand investment products, assess risk and distinguish credible advice from misleading claims has lagged behind.The consequences are visible across the investment ecosystem. Many individuals purchase financial products solely on recommendations from friends or relatives, confuse insurance with investment, or rely on social media stock tips without understanding the underlying risks. Regulatory studies consistently show that most retail traders lose money, with behavioural factors such as overconfidence, herd behaviour and excessive trading often proving more damaging than lack of information alone.Financial capability, therefore, cannot be measured by the number of investment accounts opened. It is measured by the quality of decisions investors make after entering the financial system.That is where the framework Educate. Empower. Elevate. becomes relevant.1 PILLAR ONE · EDUCATEBuilding the Foundation for Better Financial DecisionsFinancial education is often misunderstood as teaching people how to predict markets or select winning investments. Its real purpose is much simpler and far more valuable.An informed investor understands how money grows, why inflation matters, how risk and return are connected, and why patience frequently delivers better outcomes than speculation. Such knowledge enables individuals to ask informed questions, evaluate financial products critically and avoid mistakes that can have lasting consequences.Recognising this need, India’s financial regulators have worked together to strengthen financial education. The Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA) jointly established the National Centre for Financial Education (NCFE) to improve financial awareness across the country.SEBI has complemented these efforts through the National Institute of Securities Markets (NISM), which offers free educational resources, certification programmes and Investor Awareness Programmes designed not only for finance professionals but also for ordinary citizens. Increasingly, trained resources are taking these programmes into schools, colleges and local communities, extending their reach well beyond metropolitan centres.According to the National Centre for Financial Education (NCFE), only around 27% of Indian adults possess basic financial literacy. Comparable levels in countries such as the United States, the United Kingdom and Australia typically range between 55% and 70%.The Financial Concepts Every Investor Should UnderstandWhile financial markets may appear complex, long-term success depends on mastering a handful of fundamental ideas.Risk and ReturnHigher potential returns almost always involve higher risk. Investments promising extraordinary or guaranteed returns with little or no risk deserve careful scrutiny rather than unquestioning trust. Healthy scepticism is one of an investor’s strongest safeguards.The Power of CompoundingCompounding rewards consistency and time. Someone who begins investing early often accumulates substantially greater wealth than someone who starts later, even if the latter invests larger amounts. Time frequently becomes a more valuable asset than money itself.Diversification Through Different Asset ClassesEquity, debt, gold and real estate each perform differently under changing economic conditions. Diversification reduces dependence on any single asset class and helps balance both opportunity and risk within a long-term portfolio.Saving and Investing Are Not the SameSaving protects capital; investing seeks to increase it. Maintaining emergency savings is essential, but relying exclusively on low-interest savings accounts for long-term goals allows inflation to erode purchasing power over time.Understanding Financial DocumentsMutual fund factsheets, insurance contracts, loan agreements and investment disclosures contain critical information on costs, risks, exclusions and obligations. Reading these documents carefully before making commitments helps prevent expensive misunderstandings later.Closing India’s Financial Literacy GapIndia’s financial literacy challenge extends beyond numbers.Urban literacy levels are estimated at roughly 33%, compared with approximately 24% in rural areas. Women consistently record lower financial literacy than men despite increasing educational attainment and workforce participation. These differences often arise from unequal exposure to financial decision-making rather than differences in capability.Traditional investment preferences also continue to shape household behaviour. Gold and real estate remain dominant stores of wealth for many families. While these choices reflect cultural experience and perceived safety, they also illustrate the limited familiarity many households have with financial products that appear unfamiliar or difficult to understand.Addressing these disparities requires meeting people where they are.Educational programmes must be delivered in regional languages, adapted to local realities and supported by trusted community educators. Financial concepts such as budgeting, inflation, borrowing, investing and retirement planning should become part of school education long before young adults begin earning.Financial education is not a one-time intervention. It evolves with every stage of life. Students require different knowledge than young professionals. Parents planning children’s education face different decisions from individuals preparing for retirement. An effective financial literacy ecosystem must support learning throughout this entire journey.Knowledge alone, however, does not guarantee sound decisions.Many investors understand financial principles yet still succumb to emotional decision-making, misleading advice or sophisticated fraud.That is why education must be followed by empowerment.Financial education is not a one-time intervention. It evolves with every stage of life. Students require different knowledge than young professionals. Parents planning children’s education face different decisions from individuals preparing for retirement.2 PILLAR TWO · EMPOWERTurning Financial Knowledge into Sound JudgementFinancial education answers an important question: What should investors know? Investor empowerment addresses a different one: Will they apply that knowledge when it matters most?Experience suggests the answer is not always yes.Many people understand basic investment principles but still become victims of misleading advice, speculative trends or outright fraud. Knowledge alone rarely protects investors when decisions are influenced by emotion, urgency or misplaced trust. Empowerment bridges that gap by developing judgement i.e. the ability to question extraordinary claims, verify information and remain disciplined when markets become volatile.Investor protection begins long before a complaint is filed. It starts with informed decision-making.Recognising the Red FlagsFinancial scams continue to evolve, but their psychology has changed very little. Most succeed not because they are technically sophisticated, but because they exploit predictable human emotions such as greed, fear, urgency and the fear of missing out.Several warning signs appear repeatedly across fraudulent schemes.The first is the promise of unusually high or guaranteed returns with little or no risk. Genuine investments always involve trade-offs. If returns appear unrealistic, caution is warranted.A second warning signal is manufactured urgency. Fraudsters often insist that investors must act immediately before a supposedly exclusive opportunity disappears. Sound investments rarely require rushed decisions.Requests for secrecy should also raise concern. Anyone discouraging consultation with family members, financial advisers or independent experts is usually attempting to prevent verification.Finally, credibility should never rest on popularity alone. Social media influence, celebrity endorsements or charismatic personalities are poor substitutes for regulatory registration, transparent disclosures and independently verifiable information.Disciplined investors pause before acting. They verify first and invest later.Financial Fraud in the Digital AgeTechnology has transformed investing, making financial products available with a few taps on a smartphone. The same technology has also expanded the reach and sophistication of fraud.Counterfeit trading platforms now closely imitate legitimate applications. Artificial intelligence enables convincing deepfake videos featuring respected market professionals apparently endorsing dubious schemes. Unregistered financial influencers or “finfluencers” can build large online audiences before promoting speculative investments or participating in pump-and-dump operations.This has fundamentally changed the meaning of financial literacy.Investors must now evaluate not only the investment itself but also the credibility of the platform, application or individual promoting it. A professionally designed website, polished videos or millions of online followers do not establish legitimacy. Regulatory registration and independent verification remain the only reliable standards.Financial literacy and digital literacy have become inseparable.Knowing Your RightsEven well-informed investors may occasionally face disputes or misconduct. Confidence in financial markets depends not only on preventing problems but also on ensuring that effective remedies exist when they occur.India has developed several institutional mechanisms to safeguard investors.SEBI’s SCORES platform enables investors to file and monitor complaints electronically through a multilingual interface. Banking-related grievances can be addressed through the RBI Ombudsman, while insurance complaints are handled through mechanisms established by IRDAI.These systems reinforce an important principle: seeking redress is a legal right rather than an adversarial act.Many first-time investors hesitate to complain because they assume financial institutions cannot be challenged. Investor awareness must therefore include an understanding of both responsibilities and rights.SEBI’s SCORES platform enables investors to file and monitor complaints electronically through a multilingual interface. Banking-related grievances can be addressed through the RBI Ombudsman, while insurance complaints are handled through mechanisms established by IRDAI.Behavioural Finance: Why Intelligent Investors Still Make Costly MistakesClassical finance assumes that investors make rational decisions once they possess adequate information.Real-world behaviour tells a different story.People frequently act against their own long-term interests despite understanding fundamental investment principles. Emotions, mental shortcuts and cognitive biases often override careful analysis, particularly during periods of market optimism or panic.Recognising these behavioural tendencies is therefore an essential aspect of investor protection.Behavioural Biases Every Investor Should RecogniseLoss AversionMost people experience the pain of losses more intensely than the satisfaction of equivalent gains. Investors therefore continue holding weak investments simply to avoid acknowledging a mistake.OverconfidenceSuccess during favourable markets often creates an exaggerated belief in one’s ability to predict future outcomes. Excessive trading, underestimated risks and unwarranted confidence frequently follow.Herd BehaviourWhen everyone appears to be investing in the same opportunity, resisting collective enthusiasm becomes difficult. Recent investor interest in certain small-cap and mid-cap funds demonstrates how fear of missing out can overshadow careful evaluation of valuations and fundamentals.AnchoringInvestors frequently focus on irrelevant reference points, such as the original purchase price or a previous market peak, instead of assessing an investment’s current prospects.Disposition EffectMany investors sell profitable investments too early while continuing to hold losing positions in the hope that prices will recover. The result is often the opposite of disciplined long-term investing.Mental AccountingMoney is often treated differently depending on its source. Bonuses, gifts and investment gains are commonly spent more freely than regular income despite having identical value.Recency BiasRecent events exert disproportionate influence over expectations. Bull markets encourage excessive optimism, while market declines create undue pessimism, leading investors to buy near peaks and sell near lows.Confirmation BiasOnce people form an opinion, they naturally seek information supporting their existing beliefs while ignoring contradictory evidence. Social media communities frequently reinforce this tendency.Familiarity BiasMany investors allocate excessive portions of their portfolios to companies, industries or employers they know well, assuming familiarity reduces risk. In practice, concentration often increases vulnerability.Designing Better Investment BehaviourBehavioural biases cannot be eliminated because they are rooted in human psychology.What can be improved is the environment in which financial decisions are made.The most effective investor protection strategies reduce opportunities for emotional mistakes rather than relying entirely on self-control.Systematic Investment Plans (SIPs) provide an excellent example. By automating regular investments, they minimise attempts to time the market and encourage disciplined investing across market cycles.Similarly, automatic retirement contributions, sensible default asset allocations and standing investment instructions reduce impulsive decision-making.Empowerment, therefore, extends beyond education. It equips investors to recognise manipulation, understand their own behavioural tendencies and develop habits that support consistent, long-term decision-making.Only when knowledge is reinforced by judgement can investors navigate increasingly complex financial markets with confidence.3 PILLAR THREE · ELEVATETransforming Financial Knowledge into Long-Term WealthUnderstanding investments is only one part of financial success. Preserving and growing wealth requires equal attention to taxation, retirement planning and disciplined financial habits.Making the Right Tax ChoicesIndia’s dual tax regime has made financial planning more nuanced.Since FY 2023–24, taxpayers have been able to choose annually between the Old and New Tax Regimes. The decision should never be based on assumptions or popular opinion. It should follow a careful evaluation of income, deductions and long-term financial objectives.The Old Tax Regime permits deductions and exemptions under provisions such as Section 80C, Section 80D and House Rent Allowance (HRA). It generally suits individuals who invest regularly, maintain insurance, contribute to retirement savings or claim eligible deductions.The New Tax Regime offers lower tax rates while restricting most deductions and exemptions, making it attractive for taxpayers seeking a simpler structure with fewer deductible investments.For FY 2025–26, resident individuals choosing the New Tax Regime effectively pay no income tax on taxable income up to ₹12 lakh after rebate, while salaried taxpayers benefit up to ₹12.75 lakh after considering the standard deduction.Neither regime is universally superior. The appropriate choice depends entirely on an individual’s financial circumstances.Why Capital Gains Tax MattersInvestment returns cannot be evaluated in isolation from taxation.As applicable in July 2026:Short-Term Capital Gains (STCG) on listed equity investments held for less than twelve months are taxed at 20%.Long-Term Capital Gains (LTCG) on listed equity investments held for more than twelve months are taxed at 12.5%, with the first ₹1.25 lakh of gains exempt during a financial year.Sometimes, the difference between these tax treatments is only a single additional day of holding an investment. Behavioural finance offers an interesting insight here. Investors often sell successful investments prematurely simply to “book profits.” That impulse not only interrupts the power of compounding but may also result in a higher tax liability. Emotional decision-making and avoidable taxation frequently arise from the same behaviour.Building Wealth Through Discipline Rather Than PredictionSustainable wealth rarely comes from a handful of exceptional investments. It is usually the result of consistent habits maintained over many years.Several financial instruments continue to play a central role.Systematic Investment Plans (SIPs) encourage disciplined investing by automating regular contributions and reducing the temptation to time market movements. Rupee-cost averaging further smooths the effect of market volatility over long investment horizons.Employees’ Provident Fund (EPF) and Public Provident Fund (PPF) remain important pillars of retirement planning. Besides offering government-backed savings, both provide tax benefits under Section 80C and contribute significantly to long-term financial security.The National Pension System (NPS) complements retirement planning with meaningful tax advantages. Taxpayers under the Old Tax Regime may claim an additional deduction under Section 80CCD(1B) beyond the Section 80C limit, while employer’s contributions under Section 80CCD(2) remain deductible under both tax regimes.Risk protection deserves equal attention. Health insurance shields long-term savings from rising medical expenses, while term life insurance protects dependants against financial hardship. These are not investment products; they are essential safeguards that preserve financial stability when unexpected events occur.Every household should also maintain an emergency fund covering approximately three to six months’ living expenses. Such reserves reduce the need to liquidate long-term investments during market downturns or personal crises, allowing financial plans to remain intact.Making Financial Literacy Truly InclusiveIndia’s progress in financial inclusion has not eliminated disparities in financial capability.Women continue to score lower than men in financial literacy assessments despite growing workforce participation and educational attainment. In many households, financial decision-making remains concentrated among male members.Young professionals face a different challenge. Comfortable with digital platforms and eager to begin investing early, many have never experienced a full market cycle. Their confidence with technology can create a false sense of investing expertise, leaving them vulnerable to speculative trends, unrealistic expectations and social media-driven advice.Rural India presents another dimension. Digital banking, UPI and online investment platforms have expanded access dramatically, but accessibility alone does not ensure informed decisions. Financial education must therefore be delivered in regional languages, adapted to local contexts and supported by trusted community educators who understand local financial realities.The Road Ahead: Technology Must Build Trust, Not Just ConvenienceTechnology has fundamentally changed how Indians save, invest and manage money.Interactive mobile applications, AI-enabled learning platforms, personalised educational content and gamified learning experiences offer unprecedented opportunities to expand financial education quickly and economically.Yet technology has also introduced new vulnerabilities. Artificial intelligence can now generate convincing deepfake videos, fabricate endorsements, imitate legitimate investment platforms and amplify misinformation at remarkable speed.As financial services become increasingly digital, investors must learn to evaluate not only financial products but also the authenticity of the digital channels through which those products are promoted.Digital literacy has become an integral component of financial literacy.Financial capability cannot be created through a single seminar or awareness campaign. It develops gradually through continuous reinforcement, practical experience and systems that encourage disciplined behaviour.Conclusion: A Blueprint for a Financially Confident IndiaIndia stands at a defining moment in its financial evolution. Millions of citizens have entered the formal investment ecosystem, creating unprecedented opportunities for wealth creation and economic growth. The success of this transformation, however, will depend less on the number of investment accounts opened than on the quality of the decisions investors make throughout their financial lives.The Educate. Empower. Elevate. framework offers a practical roadmap.Education provides the knowledge required to understand financial products, evaluate risk and make informed choices. Empowerment strengthens that knowledge by cultivating investor awareness, behavioural discipline and confidence to recognise fraud, challenge misinformation and exercise legal rights. Elevation completes the process by combining disciplined investing with tax-efficient planning, retirement preparedness and prudent risk management.Knowledge without judgement leaves investors exposed. Awareness without financial competence limits wealth creation. Pursuing higher returns without discipline, behavioural insight or tax planning often results in avoidable mistakes and diminished long-term outcomes.Educate. Empower. Elevate. is more than a theme for investor awareness. It is a practical blueprint for creating a financially literate, empowered and prosperous India.Author may be reached at eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 12–17
Ep. 156 — Promoting Investor Education and Financial Literacy: ICAI’s Initiatives Towards a Financially Resilient India
CA Journal
· September 2026
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Promoting Investor Education and Financial Literacy: ICAI’s Initiatives Towards a Financially Resilient India“An informed investor is a protected investor, and a financially literate citizen is the foundation of a resilient economy.”In today’s rapidly changing economy, the ability to understand and manage money is becoming increasingly important. Individuals are making financial decisions almost every day, whether it’s opening a bank account, investing in financial products, planning for retirement, getting insurance, paying taxes, or making digital payments. All these decisions directly influence their financial well-being. However, with the rise of complexity of financial products and the rapid expansion of digital financial services, the risk of fraud, misinformation, and poor financial decision-making has also increased.A well-informed citizen can manage personal finances, evaluate investment opportunities, understand financial rights, and safeguard against financial fraud in a better manner. Hence, the promotion of financial literacy and investor awareness has become an important national agenda for achieving inclusive and sustainable economic development.Recognising this national mandate, the Institute of Chartered Accountants of India (ICAI), through its Financial Markets and Investors’ Awareness Committee (FM&IAC), has been continuously working on promoting investor education, financial literacy, and responsible investment practices across the country.Guided by its vision, the Committee has taken several major initiatives to support the objective of building an informed investor community and enhancing financial inclusion.Financial & Investor Awareness InitiativesThe pillars of ICAI’s outreach programmeIAPsInvestor Awareness ProgrammesOutreach ProgrammeReaching out to every corner, touching every lifeVittiyagyan MelaSpreading financial literacy and empowering communitiesPrograms, Webinars & SeminarsKnowledge sharing and thought leadershipTrain the Trainer / TraineeBuilding capacity at the grassroots levelRadio JinglesSpreading awareness through creative, engaging messagesNiveshak ShivirsInvestor education through focused campsDigital & Community DrivesiGOT, MyGov and technology-driven learningEmpowering Investors | Building Awareness | Strengthening Financial LiteracyTogether for a Financially Informed and Empowered IndiaInvestor Awareness Programmes: Strengthening Financial Literacy NationwideOne of the flagship initiatives undertaken by ICAI is conducting Investor Awareness Programmes (IAPs) under the aegis of the Investor Education and Protection Fund Authority (IEPFA), Ministry of Corporate Affairs, Government of India. These programmes are aimed at educating citizens about the fundamentals of investing, encouraging responsible financial behaviour, and creating awareness about investor rights and their protection mechanisms.The objective of the programmes is to empower individuals with the right knowledge needed to make informed financial decisions, understand the functioning of financial markets, and know how to protect themselves from fraudulent investment schemes.Since 2008, ICAI has successfully organised over 9000 programmes, benefiting over 4.66 lakh participants, including approximately 1.98 lakh women participants. During 2026 alone, the committee has already organised more than 100 awareness programmes, reaffirming ICAI’s commitment to strengthening investor confidence and financial literacy across the country.Since 2008, ICAI has successfully organised over 9000 programmes, benefiting over 4.66 lakh participants, including approximately 1.98 lakh women participants. During 2026 alone, the committee has already organised more than 100 awareness programmes, reaffirming ICAI’s commitment to strengthening investor confidence and financial literacy across the country.The programmes have had a positive impact on financial literacy, particularly in enhancing awareness regarding:investment opportunities and government schemes,financial rights and responsibilities,grievance redressal mechanisms, andrisks associated with fraudulent schemes such as Ponzi and chit funds.The programmes have contributed significantly to improving awareness regarding formal financial systems, banking services, investment opportunities, taxation, and government welfare schemes. They have also strengthened public confidence in using regulated financial products and encouraged responsible investment practices among citizens.Vitiyagyan Mela — A Nationwide Movement for Financial LiteracyAs part of the committee’s efforts to strengthen financial inclusion at the grassroots level, ICAI proposes to organise Vitiyagyan Mela Week, a nationwide outreach initiative aimed at empowering citizens with essential financial knowledge and promoting informed financial decision-making.Under this, branches are encouraged to adopt at least one village in their vicinity to undertake structured financial literacy activities in the adopted village, enabling citizens to make informed financial decisions, understand budgeting and investment principles, and achieve sustainable financial empowerment. The Mela also involves the participation of beneficiaries of the financial literacy initiatives, thereby fostering greater community engagement and ensuring the sustainability of the initiative.For this purpose, the committee has also developed a dedicated financial literacy website, available in more than ten regional languages, such as Hindi, Gujarati, Tamil, Telugu, Marathi, Bengali, Kannada, Urdu, Malayalam, Punjabi, and Odia (Oriya), to ensure wider accessibility. The portal is a one-stop digital learning platform and includes financial calculators, like simple and compound interest calculators, goal savings calculators, SIP, FD and RD calculators, net worth calculators, loan eligibility and prepayment calculators, retirement corpus calculators, pension, GST and income tax calculators, inflation calculators, and emergency fund calculators; financial literacy articles; educational videos; and awareness material on investment and taxation.This initiative aims to raise awareness among citizens on essential financial concepts and encourage good financial decision-making. The programme covers a number of domains, including:Financial Planning and Wealth CreationInvestment AwarenessBasics of TaxationDigital Payment EcosystemProtection against Digital / Financial FraudsTo ensure maximum public participation, the awareness activities are held in various formats like seminars, workshops, Nukkad Nataks, Pad Yatras, etc. The objective is to promote informed financial behaviour and responsible investing behaviour across all sections of society.The efficacy of this methodology was proved during Vittiya Gyan Mela Week 2025, during which 38 programmes were organised through ICAI Regional Councils and Branches, benefiting over 3,000 individuals across the nation.Train the Trainer & Train the Trainee ModulesTo strengthen financial literacy and investor awareness across India, the institute has developed two learning modules: Train the Trainer and Train the Trainee. Both are developed to provide a structured and organised framework for delivering financial literacy programmes and building a pool of trained resource persons to expand the reach of investor education initiatives.The Train the Trainer module equips trainers and resource persons with the knowledge, information, abilities, and teaching methodology required to conduct successful financial literacy and investor awareness programmes. The Train the Trainee module offers simple, easy, practical, and learner-friendly content that enables participants to understand key financial concepts, make well-informed financial and investment decisions, and protect themselves against financial frauds.As both modules are available in English and Hindi, they are able to reach a larger audience across different regions of the country.There are numerous benefits to the introduction of these structured learning modules. It greatly broadens the scope of investor education programmes, fosters standardisation in the execution of financial literacy programmes, and contributes to the creation of a sizeable pool of qualified resource people. More significantly, it guarantees that financial literacy develops into an ongoing, community-driven movement as opposed to a collection of discrete awareness campaigns.Through this capacity-building approach, ICAI is not only educating but also developing future trainers who can further spread financial knowledge in local communities, companies, schools, colleges, and villages.Radio Awareness CampaignICAI started a nationwide radio campaign to promote financial and investor awareness among the general public, including people in remote and rural areas. The campaign featured informative radio jingles on topics such as financial literacy and savings habits, fraud prevention and cyber safety, government schemes and investor protection, and responsible financial decision-making.To ensure wider accessibility, the campaign was executed in vernacular languages and implemented in a three-phase strategy, enabling sustained outreach across the nation.Overall, the initiative was a great success; it reached more than 3.93 crore listeners, significantly contributing to the efforts to enhance financial literacy and investor awareness among different sections of society.Outreach Initiative: Financial Literacy at the GrassrootsRecognising the requirement to spread financial awareness beyond urban areas, an “Outreach Initiative” has been launched to promote financial literacy in rural and semi-rural India.The initiative encourages members and students of ICAI to voluntarily contribute their professional knowledge by conducting awareness programmes for:Farmers and rural householdsWomen and Self-Help GroupsStudents and youthSenior citizensSmall entrepreneursSalaried and self-employed individualsThe sessions will focus on practical financial topics like budgeting and financial planning, savings and investment options, insurance, digital payments, fintech awareness, protection against cyber and financial fraud, basic taxation awareness, etc.Chartered Accountants and CA students participate in this project as resource people as well as financial experts. By raising awareness of savings, investments, digital financial services, taxes, and safeguards against financial fraud, among other topics, this outreach initiative seeks to develop knowledgeable and responsible investors. By developing a pool of qualified resource people who can lead awareness workshops, it also aids in expanding the reach of financial literacy initiatives. This strategy makes it possible for financial information to reach a wider audience, guaranteeing that more people gain from investor education and are better able to make wise financial decisions.Niveshak Shivirs: Bringing Investor Services Closer to CitizensICAI, being the Knowledge Partner of IEPFA, has actively participated in conducting Niveshak Shivirs programmes across the country, providing practical assistance to investors in resolving their issues related to dividends and shares that are unclaimed.From 2024 onwards, ICAI has successfully organised nine Niveshak Shivirs programmes in Mumbai, Ahmedabad, Pune, Hyderabad, Gandhinagar, Amritsar, Jaipur, Bengaluru, and Bhubaneswar. These programmes have helped investors in filing IEPF Form-5, resolving investor-related grievances through expert guidance.To further strengthen the cause of this initiative, the institute intends to host Niveshak Shivirs through various regional councils / branches nationwide during Vittiya Gyan Mela Week, significantly expanding access to investor assistance services.Special Initiatives, Impact and the Way ForwardThere are also special initiatives taken by ICAI aimed at reaching specific stakeholder groups. A brief is mentioned below. Financial Literacy Programmes at Raj Bhavans and Government InstitutionsTo strengthen financial awareness among government officials, specialised financial literacy programmes were conducted at the Raj Bhavans of Uttarakhand and Meghalaya for their secretariat staff. These programmes focused on improving understanding of personal financial management, investment planning, digital financial services, taxation, and investor protection.Additionally, a dedicated financial literacy workshop was organised for the officials of the Chief Minister’s Secretariat, Meghalaya, emphasising the importance of well-informed financial decision-making and responsible investment practices. Empowering Women through Self-Help GroupsWomen’s financial empowerment is a key component of inclusive economic development. Recognising the transformative role played by Self-Help Groups (SHGs) in promoting entrepreneurship and community development, dedicated financial literacy programmes for women-led SHGs in the North-Eastern States have been conducted.Special programmes were organised in Meghalaya, Mizoram, and Sikkim, benefiting more than 400 self-help groups. These sessions focused on practical financial topics such as household budgeting, savings, banking services, digital payments, responsible borrowing, and small business financial management.The committee further strengthened these efforts by organising the following:Seminar on Financial Literacy for Women-Led Self-Help Groups of Arunachal PradeshWorkshop on Financial Literacy for Cluster-Level Federations of TripuraThese initiatives have enhanced financial awareness among women and encouraged greater participation in formal financial systems, thereby supporting both financial inclusion and women-led economic development. Digital Learning through the iGOT PlatformIn line with the Government of India’s digital capacity-building initiatives, ICAI has collaborated with the Capacity Building Commission (CBC) to develop and publish two e-learning modules on the Integrated Government Online Training (iGOT) Platform.These digital modules aim to make financial literacy accessible to a larger audience by providing well-structured online learning resources that are accessible anytime and from anywhere. This programme demonstrates the Institute’s dedication to leveraging technology to promote lifelong learning and increase the accessibility of financial education. Citizen Engagement through the MyGov PlatformMyGov Platform, an initiative of the Government of India, has been actively used by ICAI to promote citizen engagement and participatory governance. Through this platform, ICAI has organised various initiatives, like:Online quizzesSlogan writing competitionsPoster-making competitionsReel-making competitionsPoetry writing competitionsThese awareness activities have attracted participation from more than 17,000 individuals, demonstrating how interactive learning methods can effectively increase public interest in financial education.By encouraging citizens to actively participate rather than passively receive information, the initiative has contributed to greater awareness of financial planning, responsible investing, and investor protection. Financial Literacy for Enforcement AgenciesSpecialised financial literacy programmes were organised for personnel of the Central Reserve Police Force (CRPF) across several locations, including Bengaluru, Chennai, Gandhinagar, Hyderabad, Rangareddy, and Thiruvananthapuram.In addition, workshops for officials of the Central Bureau of Investigation (CBI) were also organised at Ranchi, Jharkhand.Future Roadmap and Plan of ActionWith a continued commitment to promoting financial literacy and investor awareness, ICAI is developing several forward-looking initiatives to enhance the accessibility, effectiveness, and nationwide impact of its outreach efforts. Animated Financial Literacy VideosFollowing the successful nationwide radio awareness campaign, short, animated videos are being developed on various aspects of financial literacy and investor awareness in collaboration with leading media houses. These videos will simplify financial concepts through engaging visuals and easy-to-understand storytelling, making financial education more accessible to people of all age groups. Strategic Partnership for Financial Inclusion in Arunachal PradeshAs part of its commitment to strengthening financial inclusion at the grassroots level, ICAI is in the process of signing a Memorandum of Understanding (MoU) with the Arunachal State Rural Livelihoods Mission (ArSRLM) in collaboration with NABARD and the Arunachal Pradesh Rural Bank.The proposed collaboration aims to promote financial literacy and financial inclusion among rural communities by leveraging the combined expertise and outreach of the participating institutions. The key objectives of the MoU include:Promoting financial literacy and responsible financial behaviour among rural households.Strengthening the capacity of community-level cadres and cooperative institutional staff through structured training and awareness programmes.Enhancing financial inclusion by encouraging the use of formal banking and financial services.Providing career guidance, skill development, and empowerment opportunities for members of Self-Help Groups (SHGs) and their families.Supporting sustainable livelihood development through improved financial knowledge and informed decision-making.ConclusionBuilding an informed, financially secure, and economically empowered society requires financial literacy. Acknowledging its significance, ICAI has launched numerous programmes to encourage responsible financial behaviour and investor awareness throughout the nation.ICAI has established a strong platform for improving financial literacy among various segments of society through programmes like Investor Awareness Programmes (IAPs), Vittiya Gyan Mela, Train the Trainer and Train the Trainee Modules, Outreach Initiatives, Radio Awareness Campaigns, Niveshak Shivirs, and numerous digital and community-based initiatives.The committee’s commitment to embracing innovative delivery mechanisms and bolstering grassroots financial inclusion is reflected in its future initiatives, which include the creation of animated financial literacy videos in partnership with media outlets and the proposed Memorandum of Understanding with the Arunachal State Rural Livelihoods Mission (ArSRLM), in partnership with NABARD and the Arunachal Pradesh Rural Bank.ICAI is dedicated to broadening its reach through creative projects, strategic alliances, and technology-driven learning solutions as India advances toward greater financial inclusion and digital transformation. The goal of a financially literate, financially robust, and economically empowered India will be greatly advanced by these persistent initiatives, which will also continue to raise investor awareness and encourage wise financial decision-making.Author may be reached ateboard@icai.inThe Chartered Accountant · September 2026 · Pages 346–350
Ep. 157 — Energy Price Risk Management In Dynamic Market
CA Journal
· September 2026
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Energy Price Risk Management In Dynamic MarketHarnessing Volatility Using MCX Crude Oil, Natural Gas & Electricity Futures In A Geopolitical Evolving WorldHarnessing Volatility Using MCX Crude Oil, Natural Gas & Electricity Futures In A Geopolitical Evolving WorldIndia's strong economic growth is underpinned by its ability to navigate a high degree of dependence on imported crude oil, with nearly 89% of its crude oil requirements sourced internationally, while demonstrating resilience and adaptability amid unprecedented shifts in global energy markets. The joint US-Israel military strikes on Iran (Operation Epic Fury, February 28, 2026) and Iran's consequent closure of the Strait of Hormuz drove energy commodity prices and slashed OMC earnings estimates. Against this backdrop, Multi Commodity Exchange of India Limited's (MCX) complete energy hedging suite - crude oil futures and options, natural gas futures, and India's first electricity futures contract - offers India's energy value chain participants a transparent, liquid, INR-denominated toolkit to manage price risk. This article examines the geopolitical drivers reshaping global energy trade through 2026, the resulting price volatility across crude, gas and power markets, and how systematic hedging by India's energy value chain, OMCs, fertiliser producers, generators, DISCOMs and energy-intensive industries can materially protect margins and strengthen national energy security.The Geopolitical Reshaping of Global Energy Markets: 2022-2026India's energy security landscape has been shattered and remade twice in four years. India's energy sector has shown remarkable resilience through four years of unprecedented global disruption, adapting twice over to reshape its energy security strategy. The Russia-Ukraine war restructured global crude supply chains from 2022. Now, the conflict triggered by joint US-Israel strikes on Iran, launched on February 28 under Operation Epic Fury, has evolved into a prolonged and repeatedly escalating crisis rather than a contained shock. Iran's initial closure of the Strait of Hormuz gave way to a fragile ceasefire and memorandum of understanding in June, but the truce collapsed within weeks after Iran struck commercial vessels that had bypassed its preapproved shipping corridor. A drone strike on a cargo ship on June 25 set off a chain of hostilities that put the US and Iran back on a path toward all-out war less than a month after they had agreed to stop fighting.By mid-July the conflict had resumed in full, with US forces reporting strikes on roughly 140 Iranian military targets in a single week and the US disabling an empty oil tanker sailing toward Kharg Island, effectively blockading Iran's key export terminal. For India, caught in both shocks simultaneously and now navigating a conflict that has already outlasted several predicted end-dates, the case for systematic energy price risk management has moved from prudent to essential.The initial post-February price spike has since given way to a second, sharper leg up rather than the gradual normalisation many analysts had expected. Crude oil prices have risen more than 14% over the past month and are up nearly 29% year-on-year, with WTI rallying to a five-week high as escalating hostilities kept the Strait of Hormuz closed and tightened global supplies. The volatility is being compounded by contagion beyond the Gulf itself: Houthi militants have threatened to block Saudi maritime traffic in the Red Sea, prompting at least one Saudi tanker to reverse course, while attacks on the Caspian Pipeline Consortium terminal on Russia's Black Sea coast have disrupted Kazakh exports as well. Markets have been whipsawed between escalation and diplomacy throughout July, rallying on fresh strikes and pulling back on reports of proposed truces, including a floated 10-day ceasefire late in the month.Amid this, rather than retreating from Russian barrels because of Gulf risk, Indian refiners have leaned further into them. Russian crude has continued to account for roughly half of India's oil imports through July, averaging around 2.5 million barrels per day, with Kpler describing it as India's strongest energy-security hedge, particularly since the Strait of Hormuz disruptions began. India's Russian crude purchases hit an all-time high in June 2026, worth an estimated €4.5 billion, a 34% increase over May. At the same time, refiners are visibly rebuilding Gulf supply lines as a hedge against sanctions risk: Saudi crude purchases jumped more than 150% month-on-month in July even as Russia held its share above half of the basket, while imports from the United States dropped sharply as refiners continued to favour discounted Russian barrels over long-haul Atlantic cargoes. This dual-track strategy of record Russian intake alongside a simultaneous Gulf-supply rebuilds functions as a hedge against two distinct tail risks: a Hormuz-driven Gulf supply stops and a US-driven sanctions or tariff clampdown on buyers of Russian oil, a risk sharpened by Washington's proposal to impose 100% tariffs on such buyers.Indian refiners have, so far, converted this disruption into margin. India's fuel exports are on track to hit a 10-month high of about 1.4 million barrels a day in July, roughly a fifth higher than a year earlier and nearly 50% above May's volumes, as war-driven shortages elsewhere lift refining margins. Lower export taxes and domestic inventories sufficient for 75-80 days have supported this run, though any disruption to Hormuz flows could quickly alter the picture. That, in essence, is the crux of the risk-management argument for India's energy ecosystem: the same geopolitical premium currently boosting refiners' margins is a two-sided exposure, and a sudden Hormuz closure or a Russian-sanctions shock could reverse it just as quickly as it arrived. Financial risk management, in other words, is no longer a hedge against a single crisis, it is now the operating condition for participating in Indian energy markets at all.The IEA called the 2026 Hormuz crisis the greatest global energy security challenge in history. India's OMC earnings were slashed 28-47%. Every crore lost to unhedged energy price exposure is a crore that systematic hedging on MCX could have protected.In this evolving environment, the role of energy derivatives traded on the MCX has gained strategic importance. MCX crude oil, natural gas, and electricity futures are increasingly emerging as essential instruments for managing volatility, stabilising procurement costs, protecting margins, and improving financial resilience across India's energy value chain.Why Energy Price Risk has Become StructuralHistorically, energy price volatility was often viewed as cyclical and temporary. However, the events of the last few years suggest that volatility has become structural. Several long-term factors are driving this transformation:Geopolitical fragmentation and sanctionsMilitary conflicts in energy-producing regionsClimate-driven weather disruptionsSupply-chain vulnerabilitiesRenewable energy intermittencyShipping bottlenecksCurrency fluctuationsRapid changes in global demand patternsThe Iran conflict of 2026 has intensified all these pressures simultaneously. According to the IEA, crude and oil-product flows through the Strait of Hormuz plunged from nearly 20 million barrels per day to just above 2 million barrels per day during the peak disruption period. Gulf producers were forced to reduce production while global inventories declined rapidly. The impact has extended beyond oil markets. LNG cargo availability has tightened, bunker fuel prices have surged, freight costs have increased sharply and electricity markets across Asia have become increasingly volatile.For India, these developments have direct economic implications because energy imports influence the following:InflationIndustrial competitivenessFiscal balancesTransportation costsManufacturing economicsElectricity tariffsThis is why energy price risk management is now becoming a strategic necessity rather than a financial option.MCX Crude Oil Futures and India's Refining SectorCrude oil remains India's largest energy import exposure. With nearly 85% dependence on imported crude, India's economy remains highly sensitive to global oil price movements. The ongoing geopolitical crisis has demonstrated how quickly procurement economics can change. Refiners have faced rising feedstock costs due to: Higher WTI crude prices, Elevated tanker freight rates, Increased marine insurance premiums, Delays in cargo movement, and Market uncertainty regarding Gulf supplies.Refining margins have become increasingly volatile because downstream product prices often adjust with a lag while feedstock costs rise immediately. In this environment, MCX crude oil futures linked to WTI benchmarks provide an important hedging mechanism for refiners and downstream companies. By hedging a portion of future crude procurement through futures contracts, refiners can partially reduce exposure to sudden price spikes and improve visibility regarding procurement costs. Hedging cannot eliminate all market risk, but it allows companies to stabilise cash flow and improve financial planning.The strategic value of such hedging becomes particularly important during geopolitical crises. During the 2026 Iran conflict, crude oil prices reacted sharply to every military escalation, ceasefire rumour, or disruption in shipping activity. For Indian refiners, the ability to manage this volatility through domestic exchange-traded contracts has become increasingly valuable.The aviation sector faces similar challenges. Aviation turbine fuel prices are closely linked to crude oil markets, and rising fuel costs have placed enormous pressure on airline profitability globally. Analysts have noted that refined products such as jet fuel and diesel have risen even faster than crude itself due to downstream supply constraints. MCX crude oil futures, therefore, provide aviation and logistics companies with a mechanism to partially stabilise fuel costs and improve budgeting certainty.Natural Gas Volatility and The Growing Importance of Gas HedgingIndia has actively promoted natural gas as a transition fuel capable of supporting industrial growth while reducing emissions relative to coal and oil. LNG import infrastructure has expanded significantly, city gas distribution networks have grown rapidly, and industrial gas consumption continues to rise. However, the current geopolitical crisis has exposed the vulnerability of global LNG supply chains.Qatar remains one of the world's largest LNG exporters, and disruptions in the Strait of Hormuz have created serious concerns regarding LNG availability across Asia. Reports suggest that LNG spot prices in Asia surged dramatically after fears emerged regarding interruptions to Gulf exports. For Indian LNG importers and city gas distribution companies, procurement has become significantly more uncertain.Industrial consumers such as fertiliser manufacturers, ceramics producers, petrochemical companies, and glass manufacturers remain heavily dependent on natural gas as a feedstock or fuel source. Sharp increases in LNG prices directly affect profitability and production economics. MCX natural gas futures, therefore, play an increasingly important role in India's energy risk management ecosystem.Natural gas futures allow companies to hedge future procurement exposure and partially protect themselves against sudden spikes in imported gas prices. Fertiliser companies can stabilise feedstock costs. Industrial users can improve fuel budgeting. City gas distribution companies can better manage procurement planning and tariff decisions. The importance of these contracts increases significantly during periods of geopolitical uncertainty when LNG prices respond immediately to shipping disruptions, sanctions, or military developments. The 2026 crisis has reinforced the reality that gas procurement is no longer merely a sourcing issue. It has become a financial risk management function.Electricity Futures and The Transformation of India's Power MarketsElectricity markets are undergoing profound transformation globally, and India is no exception. Unlike crude oil or natural gas, electricity cannot easily be stored economically on a scale. Supply and demand must remain balanced in real time, making electricity markets inherently volatile. India's power sector is becoming increasingly complex due to: Rapid growth in renewable energy, Rising electricity demand, Climate-driven heatwaves, Renewable intermittency, Transmission bottlenecks, and Thermal fuel uncertainties.During the summer of 2026, heatwaves pushed electricity demand to record highs across India. At the same time, uncertainty in global fuel markets increased pressure on thermal power generation economics. Against this backdrop, the launch of electricity futures on MCX in 2025 represents a major milestone in India's evolving energy architecture. The contracts are linked to Day Ahead Market (DAM) prices and provide a transparent mechanism for managing electricity price risk. Their strategic relevance has become particularly clear during the current geopolitical and climatic environment.Power-intensive industries such as steel, cement, aluminium, fertilisers, chemicals, and data centres now face significant uncertainty regarding future electricity costs. Electricity futures provide these industries with a mechanism to hedge future procurement prices and improve financial planning.Distribution companies (DISCOMs) may derive even greater long-term benefits. Indian DISCOMs have historically struggled with fluctuating procurement costs and dependence on expensive short-term power purchases during peak demand periods. Electricity derivatives create the possibility of more structured procurement strategies. By locking in future electricity prices through exchange-traded contracts, DISCOMs can potentially reduce exposure to spot market volatility and improve procurement discipline. Globally, mature electricity markets in Europe and North America rely extensively on derivatives for risk management and price discovery. India's move toward electricity futures therefore aligns its market structure more closely with international practices.Energy Derivatives and Industrial CompetitivenessThe strategic importance of energy derivatives extends beyond energy companies themselves. For many industrial sectors, energy now represents one of the largest and most volatile components of operating expenditure. Steel plants, cement manufacturers, data centres, petrochemical facilities, fertiliser companies, and manufacturing industries all face increasing exposure to fluctuations in fuel and electricity costs.The current geopolitical crisis has highlighted how rapidly energy volatility can affect industrial competitiveness. Rising oil and LNG prices have increased freight costs, manufacturing expenses, transportation charges, and inflationary pressures globally. Modern treasury management therefore increasingly treats energy exposure similarly to currency or interest-rate risk. Companies capable of managing energy price risk effectively are likely to gain significant competitive advantages through: Stable operating costs, Better financial planning, Improved pricing visibility, Reduced earnings volatility, and Greater resilience during market disruptions. In this context, energy derivatives are no longer speculative tools. They are strategic financial instruments that support long-term business stability.Challenges in India's Energy Derivatives EcosystemDespite growing importance, India's energy derivatives market still faces several structural challenges. Liquidity in newer products such as electricity futures will require sustained participation from utilities, industrial consumers, financial institutions, and traders. Many Indian corporates still lack commodity risk management frameworks and internal expertise related to derivatives pricing, hedging strategies, and margin management. Awareness regarding structured hedging remains uneven across industries. Some corporates continue to associate derivatives primarily with speculative trading rather than risk management. However, the current geopolitical crisis is gradually changing these perceptions.Regulatory bodies in India have also pushed several initiatives aimed at strengthening corporate governance and transparency, holding listed entities to defined disclosure standards. A key example is the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, under which listed companies must disclose commodity price risk exposure as a mandatory part of their Corporate Governance Report, per Schedule V, clauses C(9)(n) and C(10)(g). In June 2017, SEBI also constituted the Kotak Committee on Corporate Governance to raise governance benchmarks among listed entities. Among its recommendations, the committee urged boards and management to treat disclosure and transparency not as compliance formalities but as tools for building stakeholder trust encouraging proactive sharing of material information that could influence decision-making.A further significant development has been India's move toward aligning domestic accounting standards with IFRS through the phased rollout of Ind AS. In this context, Ind AS 107 (Financial Instruments: Disclosures) mandates that entities provide detailed quantitative and qualitative disclosures on financial instruments in their financial statements including exposure to commodity price risk arising from derivative and hedging positions. Specifically, Ind AS 107 requires entities to disclose the nature and extent of risks arising from financial instruments, along with how those risks are managed. For commodity price risk, this translates into several concrete disclosure obligations.Entities must present a sensitivity analysis showing how profit or loss and equity would be affected by reasonably possible changes in relevant commodity prices, along with the methods and assumptions used to arrive at those figures. Where an entity uses derivative contracts such as futures or options on crude oil, natural gas, or other commodities to hedge price exposure, it must disclose the hedging relationship, the risk management strategy behind it, and how hedge effectiveness is assessed and measured. The standard also requires disclosure of the carrying amounts of financial assets and liabilities by category, information on fair value measurement (including the valuation techniques and inputs used, categorized under the fair value hierarchy), and details of any hedge accounting applied under Ind AS 109.For companies with material commodity exposure such as those in energy, metals, or agri-commodities these disclosures are intended to give stakeholders a clearer picture of how price volatility could affect financial performance, and what risk mitigation measures, including exchange-traded derivatives, the entity has put in place. Taken together, these requirements push companies beyond narrative statements about risk and toward quantified, comparable disclosures reinforcing the broader governance push toward transparency.For companies with commodity price exposure, exchange-traded derivatives such as those available on MCX for crude oil, natural gas, and other commodities offer a transparent, regulated route to hedge this risk while also generating the price and valuation data needed to meet Ind AS 107's disclosure requirements. By hedging through standardized, exchange-traded contracts, companies can demonstrate defined risk management strategies and objectively measurable hedge effectiveness helping translate the regulatory push for transparency into practical, auditable risk management on the ground.The Future of Energy Security includes Financial ResilienceThe events of 2026 have fundamentally altered how governments, companies, and investors think about energy security. The Iran conflict and repeated disruptions in the Strait of Hormuz demonstrated that energy markets can no longer be viewed solely through the lens of physical supply. Financial exposure to price volatility has become equally important.For India, this shift carries profound implications. As the country moves toward becoming one of the world's largest energy consumers and fastest-growing economies, energy price risk management will become increasingly critical for protecting industrial competitiveness, financial stability, and economic resilience. MCX crude oil, natural gas, and electricity futures are emerging as important instruments within this evolving framework. These contracts allow value chain participants, refiners, LNG importers, airlines, industrial consumers, DISCOMs, and other participants across the energy value chain to manage uncertainty more effectively and improve operational resilience.India imports about two-thirds of its natural gas demand. Because of its peculiar nature and lack of enough cross-country pipelines for gas transportation, natural gas is largely imported in liquefied form, that is, LNG, and majorly from Qatar. The MCX crude oil futures contract mirrors the NYMEX WTI crude oil price. Based on the authors' own analysis (see Methodology Note below), Brent and WTI crude oil prices show more than 96% correlation. The figure clearly brings out the correlation between MCX crude oil and NYMEX WTI crude oil, which is 99.50%.Methodology NoteThe correlation coefficients cited in Fig. 1 (99.50% for MCX crude oil-CME WTI) reflect the authors' own calculations of running series of closing prices of the MCX WTI contract and the CME WTI contract. (From Jan 2023-July 2026).The correlation coefficients cited in Fig. 2 (99.50% for MCX Natural Gas - CME Nymex Henry Hub Natural Gas) reflect the authors' own calculations of running series of closing prices of MCX Natural Gas contract and CME Nymex Henry Hub Natural Gas. (From Jan 2023 to July 2026).Benefits of Hedging on Commodity Derivatives ExchangesTrading unit & trade timing in lieu of domestic requirementsNo counterparty risk involved & cash-settledINR-denominated contracts.Fixed daily price limitsHedging by means of exchange-traded hedging instruments also has the advantage of avoiding the need to negotiate prices bilaterally in the future and giving both procuring and selling companies greater planning certainty.Concerns have been voiced about how industry can cope with the high energy prices will they wipe out the profitability of industrial companies? The answer is no. Hedging is a widely used and very convenient way for businesses to protect themselves against energy price volatility and manage their energy price risks. Businesses typically love predictability also when it comes to energy pricing. Industrial companies that manufacture goods use large amounts of energy, and price volatility makes it increasingly difficult to predict operational costs. This naturally affects business planning. Hedging helps companies reduce risks and maintain a clearer, more accurate outlook.MCX Commodity Hedging ExamplesExample A1: Crude oil refineryWho Uses It: Oil Refinery Wanting To Lock In Purchase PriceFieldDetailSituationThe refinery expects to buy 1,000 barrels in 30 days. Current MCX price: ₹6,800/bbl. Fear: price may riseHedge ActionBUY 10 MCX crude futures contracts @ 6,800/bbl today (long position).Lots Required10 lots × 100 bbl = 1,000 bblPrice at ExpiryThe spot price rises to ₹7,000/bbl.Physical BuyBuy 1,000 bbl in the spot market @ 7,000 = ₹7,000,000Futures GainSell 10 lots @ 7,000 Profit = ₹200 × 1,000 = ₹200,000Net Cost₹6,800,000 - ₹200,000 = ₹6,600,000 ≈ ₹6,600/bblOutcomeThe refinery is protected from price rises.Example B1: Natural Gas ProducerWho Uses It: A Natural Gas Production Company Wanting To Lock In A Selling PriceFieldDetailSituationThe gas producer expects to deliver 1,250 MMBtu in 60 days. MCX price: ₹250/MMBtu. Fear: post-monsoon softening.Hedge ActionSELL 1 MCX natural gas futures lot @255/MMBtu today (short position)Lots Required1 lot × 1,250 MMBtu = 1,250 MMBtuPrice at ExpirySpot falls to ₹220/MMBtu.Physical SaleSell 1,250 MMBtu in the spot market @220 = ₹275,000Futures GainBuy back 1 lot @220 → Profit = ₹35 × 1,250 = ₹43,750Net Realisation₹275,000 + ₹43,750 = ₹318,750 ≈ ₹255/MMBtuOutcomeThe producer secured the target price despite the spot price fall.Example B2: Natural Gas ConsumerWho uses it: Gas-based power plant/fertiliser unit needing gas as fuel/feedstockFieldDetailSituationThe power plant needs 5,000 MMBtu next month. MCX price: ₹250/MMBtu. Fear: summer demand surge.Hedge ActionBUY 4 MCX natural gas futures lots @ ₹253/MMBtu today (long position).Lots Required4 lots x 1,250 MMBtu = 5,000 MMBtuPrice at ExpiryThe spot price rises to ₹310/MMBtu.Physical PurchaseBuy 5,000 MMBtu in spot @ 310 = ₹1,550,000Futures GainSell 4 lots @310 → Profit = ₹57 × 5,000 = ₹285,000Net Effective Cost₹1,550,000 - ₹285,000 = ₹1,265,000 ≈ ₹253/MMBtuOutcomePower plant capped fuel cost despite ₹60/MMBtu price surge.The future of India's energy markets will depend not only on securing a reliable energy supply but also on building robust financial mechanisms capable of navigating persistent volatility. In an increasingly uncertain geopolitical environment, companies that manage energy risk intelligently may ultimately prove more resilient, competitive, and strategically prepared for the energy economy of the future.India's energy value chain managers who did not hedge before the Hormuz crisis bore losses that disciplined hedging would have prevented. The only rational response to the 2026 shock is to build the frameworks, governance, and expertise that ensure it never happens unprotected again.ReferencesPetroleum Planning & Analysis Cell (PPAC), Ministry of Petroleum & Natural Gas, Government of India, crude oil import dependence data; reported in KNN India, "India's Crude Oil Import Bill Surges 61% to Record USD 49.66 Billion in Q1 FY27," 2026, and ThePrint, "India's crude import dependence rises to record 88.7% as domestic output continues to decline," 2026.Britannica, "2026 Iran War," britannica.com/event/2026-Iran-war; U.S. Department of War, "Operation Epic Fury," war.gov/Spotlights/Operation-Epic-Fury.Kotak Institutional Equities FY2027 EBITDA estimates for BPCL, HPCL and IOCL, cited in Wright Research, "Is India In An Oil & Gas Crisis? Iran War & Strait of Hormuz Disruption," April 2026.International Energy Agency (IEA), "How global oil supplies have readjusted to help fill the huge gap left by the Strait of Hormuz shock," ΙΕΑ, Paris, 2026, iea.org/commentaries.Multi Commodity Exchange of India Ltd. (MCX), press release on the launch of the Electricity Futures Contract effective 10 July 2025; reported in Business Standard, "MCX launches Electricity Futures Contract," 2025.MCX India, "Crude Oil," product page, mexindia.com/products/energy/crude-oil, accessed 2026.Author may be reached at eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 23–29
Ep. 158 — The ‘Trust Folder’ Your Family Will Thank You For A Small Habit That Spares Loved Ones Years of Searching
CA Journal
· September 2026
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The 'Trust Folder' Your Family Will Thank You ForA Small Habit That Spares Loved Ones Years of Searching. We all have apps that quietly hold our bank accounts, demat holdings, insurance policies and fixed deposits - unlocked with a glance, never once written down. Statements arrive as notifications rather than envelopes; renewals happen with a single tap. It is, in many ways, a remarkably convenient way to manage one's finances.But convenience has a quiet cost. What happens when you are no longer around, or after the demise of a loved one, and the phone remains locked because no one else knows the passcode? What happens when the one person who understood the family's financial life is suddenly unavailable to explain it?It is not a hypothetical question. Somewhere, right now, a family is going through old passbooks and papers, trying to remember which bank their father used or whether an old demat statement still means anything. They are not confused because they did not care. They are confused because nobody ever wrote it down.A View from the Claims DeskIn the years I have spent around investor claims and grievances, I have lost count of the families who came to us not because they doubted their rights, but simply because they did not know what their loved one owned. A share certificate from a company no longer in the family's memory. A fixed deposit nobody remembers opening. A policy whose number was known only to the person who is no longer there to share it.The reasons vary: sudden illness, an accident, a period of isolation, or simply the passage of old age - but the outcome is almost always the same: money that rightfully belongs to a family becomes something they must first discover exists, then prove they are entitled to, before they can claim it. What should be a straightforward inheritance turns into a search stretched across months or years, almost always during a period already marked by grief.This is precisely the gap that the Investor Education and Protection Fund exists to address once assets go unclaimed for extended periods. But our work at that stage is, in many ways, a response to a problem that could have been prevented far earlier, at home, with nothing more than a habit of writing things down.Not a Will, a Nomination, or a Power of Attorney - Just a RecordIt is important to be precise about what a trust folder is, and is not, because the three legal instruments it is often confused with each do something quite different.A Will is a legal instrument that determines how a person's assets are distributed after death; it must be validly executed and, where relevant, probated, and is best drafted with professional legal advice. A nomination, registered separately with each bank, depository, insurer, EPFO or NPS account, identifies who may receive or manage an asset immediately after the account holder's death though a nominee generally holds the asset in trust for the legal heirs rather than owning it outright. A Power of Attorney authorises another person to act on one's behalf during one's lifetime, and lapses on death.A Trust Folder does none of these things. It confers no legal rights, transfers no ownership, and grants no authority. It is simply an index, a single place that records what exists and where, so that whoever eventually deals with the Will, the nominations or the estate does not have to search for the underlying facts first. It complements these instruments; it replaces none of them.Where a Chartered Accountant Fits InPreparing this folder is also a natural opportunity to involve a Chartered Accountant, particularly for households with multiple accounts, investments or business interests. CAs routinely assist clients with organising financial documentation and tax records, advising on succession and estate planning, ensuring nominations are recorded consistently across accounts, and reconciling assets against liabilities such as loans and guarantees—the same inventory a Trust Folder is meant to hold. A CA does not substitute for a lawyer on matters of Will drafting or probate but is often the professional best placed to help a family take an accurate first stock of what it owns and owes.What Belongs in the Trust FolderA reasonably complete Trust Folder for most Indian households would cover the categories mentioned in the table.CategoryWhat to RecordBank accountsBank, branch and account numbers, and whether a nominee is registered.Fixed and recurring depositsFD/RD numbers, issuing bank or NBFC, and maturity dates.Shares and mutual fundsDemat account number, depository participant details, and folio numbers for any physical holdings.Insurance policiesLife, health and general insurance, with policy numbers and insurer names.Retirement savingsEPF, PPF and NPS account numbers.Tax recordsPAN, and the location of recent income-tax returns and assessment records.LiabilitiesHome, personal or vehicle loans, credit cards and any guarantees, with lender names and loan account numbers.Property documentsRegistration details and where the originals are kept.Digital assetsA note of which apps, wallets or platforms hold financial information or digital property, without recording the passwords themselves.NominationsWhich accounts have a registered nominee, and where the nomination forms are filed.Key contactsThe family's banker, insurance agent, Chartered Accountant, financial advisor or lawyer, and their phone numbers.None of these entries need to be elaborate. A single line for each account, the institution's name and the account or policy number, is often enough to save a family weeks of searching later. The value of this folder lies not in its detail, but in its existence.Digital Assets, Passwords and the LawThe Digital Personal Data Protection Act, 2023 has introduced a mechanism allowing an individual to nominate another person to exercise certain rights over their personal data in the event of death or incapacity, though this is a data-protection provision rather than a full succession framework.The practical implication for households is straightforward, even where the law itself is still evolving: passwords, PINs and OTPs should never be recorded in a Trust Folder or shared informally, but the existence of an account, platform or digital asset should still be noted so that it is not simply lost.Where significant value is involved, a Will that references digital assets, a business's digital records, or holdings in newer asset classes, professional legal advice is strongly recommended, and readers are encouraged to consult the latest official guidance, since this area of law continues to develop.Physical and Digital, Kept DifferentlyThe right format for this folder depends on who is keeping it. Young professionals and Gen-Z investors tend to trust their phones with everything, and rightly so, modern devices are secure and always within reach. But a phone can be lost, damaged or simply inaccessible when it is needed most. A wallet-sized card carrying only emergency contacts and a note of where the fuller folder is kept costs nothing and takes five minutes to make.For senior citizens, and for those less comfortable with technology, a physical folder kept with a spouse, an adult child or another trusted family member usually works better than any app, it requires no password, login or internet connection to be opened.Whichever format is chosen, the habit of updating it matters more than the format itself. A folder prepared once and never revisited quickly becomes outdated. The discipline that matters is revisiting the folder after any new financial decision, or at minimum, once a year.Two Illustrations, One LessonTwo situations, reflecting patterns commonly seen in investor grievances, show what this habit can mean in practice.In one, an elderly parent passes away after a long illness, and the family discovers an old physical share certificate only months later while clearing a cupboard. The company has since undergone mergers and name changes, and the family must first trace its corporate history before a claim can even begin. What could have been a same-week claim becomes a matter of months.In another, a household that maintained a simple folder, reviewed once a year, is able to locate every bank account, insurance policy and mutual fund folio within a day of sudden bereavement and filed nominee claims within weeks. The difference is not the family's wealth or its legal awareness; it is a single afternoon spent, at some point, writing things down.A Word on Safety, KYC and Nominee UpdatesNone of this should ever include actual passwords, PINs or OTPs written in the open. The idea is to record what exists and where, not the keys to access it.In the same spirit, KYC and nominee details are not one-time formalities.Every bank, depository, insurer, EPFO and NPS account maintains its own separate records, so updates must be made individually with each institution - updating a nominee with one bank does nothing for another bank, an insurance policy or a mutual fund folio.An outdated mobile number, address or nominee can delay a claim precisely when a family needs those funds most. These details are worth reviewing once a year and again after any major life event, such as a marriage, the birth of a child, a change of address, or the loss of a family member previously named as nominee.A Small Habit, a Rightful ClaimEvery year, IEPFA processes claims for dividends and shares that families did not know they were entitled to, simply because no record survived the person who held them. A folder that takes an afternoon to prepare with a Chartered Accountant's help, if needed, and a few minutes' review each year can spare a family that entire journey. It is a quiet act of care for those who will one day need to pick up where we left off. What is rightfully theirs should never have to be rediscovered. It should only ever have to be claimed.Author may be reached at eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 30–32
Ep. 159 — Readability of IPO Disclosures and SEBI Audio Video Mandate
CA Journal
· September 2026
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Readability of IPO Disclosures and SEBI Audio Video MandateIndia's IPO market has seen an increase in volume and retail investor participation, despite nearly one-third of IPOs declining on their opening day. Retail investors in India possess limited resources and the aptitude to decode the distorted information flow from an IPO-bound company. These distortions are caused by weak financial quotient, complex disclosures in the prospectus and regulated media intervention. Amidst concerns about complicated prospectuses, financially unaware investors, and an impactful media presence, SEBI has made it mandatory for companies to publish audio-video disclosures in a bilingual manner. Through this article, the author has outlined the need for such a disclosure mandate, its possible impact, and alternatives.IntroductionThe Indian capital market saw a 72% increase in IPOs from 2022 to 2023. Wall Street has endorsed India as the prime investment destination for the next decade. The wave of deals has allowed individual investors to take part in India's unprecedented wealth boom making IPOs a lucrative asset class for investors. IPO debut gains have been about one-third of the five-year average, and an index of newly listed small stocks has fallen 11% in the past month. SEBI is cautious about the risk of a bubble. Regulators are concerned that novice investors are buying into a bubble, backing small companies with limited track records, and being spun by an investment industry determined to churn out short-term stock winners. Many of the firms going public on India's small-cap exchanges have high valuations even though they are very "ordinary" (Preeti Singh et al., 2024).To calm the frenzy, regulators are targeting "finfluencers" who promote IPOs through online videos in which they quickly scroll through prospectuses and highlight data points with a red marker.The Securities and Exchange Board of India (SEBI) has recently issued new regulations for companies launching Initial Public Offerings (IPOs). The regulator has mandated that disclosures in prospectuses and price band advertisements for main-board public issues should be made in audio-visual (AV) format for ease of understanding.The AV content must also include a warning not to rely on any other document, content, or information provided by financial influencers on the internet or other platforms. The guidelines aim to make it easier for investors to understand the features of the public issue and the company. The video will be accessible on the issuer's website, social media channels, website of the Association of Investment Bankers in India and can also be found within offer documents via a QR code. The AV content must be factual, non-repetitive, and non-promotional. The ten-minute video should provide details about the issue and the inherent risk. The lead manager should create the presentation in a bilingual version, i.e., both English and Hindi (SEBI, 2024).The guideline is voluntary for companies filing prospectuses from July 1, but is mandated for draft documents filed after October 1. SEBI aims to boost investor confidence and protection in capital markets by offering standardised, reliable video disclosures. SEBI aims to target and refine the IPO information flow, reducing distortion caused by externalities to benefit retail investors.It becomes pertinent to comprehend the IPO information flow and its barriers to comment on the probable effectiveness of the order. A brief model of the information flow is presented in Figure 1. IPO information flow is affected by factors such as: Readability of IPO prospectus, Media Impact, Financial Literacy and Financial Attitude.Fig 1. Factors that affect IPO confirmationInformation Gap:IPO Company → IPO Prospectus → Media Filter (← Finfluencer Noise) → InformationCombined with: Financial Attitude and Financial LiteracyLeads to: Retail Choice (Investor Decision)Retail Investors, Financial Literacy and Financial AttitudeInformation asymmetry is exaggerated during IPO owing to lack of historical information about an IPO bound company. Due to the gap of information available, the prospectus becomes the key source of information for all external stakeholders. The Signalling theory entails investor resource misallocation due to the existence of information asymmetry. To compensate for the asymmetry and to attract investments, IPO going firms convey information in a numeric and textual manner in corporate disclosure documents (Mariani et al., 2023).The information asymmetry doesn't affect all investors equally; institutional and retail investors possess different levels of information. Institutional investors have the resources to evaluate a company's fundamentals and are thus better informed than retail investors. This leads to different sentiments about the prospects of the IPO firm. On the other hand, retail investors lack the resources to comprehensively analyse and value a company, and hence are heavily influenced by noise. Retail investors heavily rely on professional advice and secondary information sources.Not only resources, but also financial unawareness, affects the information absorption ability of retail investors. Financial illiteracy and a negative attitude can lead to poor fiscal decisions, which can drastically affect an individual's financial well-being. Abstract knowledge and wrong opinions about the financial system lead to erroneous financial decisions, irrational stock market participation, poor borrowing behaviour, accumulation of less wealth with no optimal retirement plans, and a higher likelihood of entering high-cost transactions. Investors need to be aware of the risks associated with every type of investment and have realistic expectations of returns. A lack of financial awareness can lead to a subsequent financial market bust (Gaurav & Singh, 2012).Readability of IPO ProspectusAccording to Warren Buffett, "As noted for more than forty years, I've studied the documents that public companies file. Too often, I've been unable to decipher just what is being said or, worse yet, had to conclude that nothing was being said. In some cases, moreover, I suspect that a less-than scrupulous issuer doesn't want us to understand a subject it feels legally obligated to touch upon." (Rachappa Shette, 2019).Readability can be defined as the ability of written sentences to convey information in a clear and concise manner. Readability is measured by various proxies, such as word count, file size, sentence length, Fog Index, and Bog Index, among others. The growing research on readability has highlighted that poor readability of corporate disclosures indicates lower profitability of over- or under-investment, and it can impact market response. Lower readability can undermine investors' trust in a source and lower their assessment of a firm and its managers. The readability of IPO prospectuses determines the effectiveness of this signal by making it easier to read, mitigating information asymmetries, and enhancing investors' confidence during the IPO process. Retail investors favour firms with easily readable disclosure documents. Ensuring an appropriate level of readability can help all investors make well-informed decisions. A strong positive association exists between the tone of the prospectus and market reaction (Tao et al., 2018).Media ImpactThe ability of media to collect, filter and disseminate information has enhanced its role in the financial market. Media drives investment decisions by providing attention-oriented information instead of holistic and prudent insights. Media and similar stakeholders tend to change their tone and readability based on the economic environment. The tone becomes positive during a non-crisis period and the opposite during a negative one. Misreporting or biased reporting by the media can affect the investment decisions of retail investors drastically (Bhardwaj & Imam, 2019).In addition to formal communications through IPO prospectuses, soon-to-be public firms are increasingly utilising social media channels to showcase their social commitments and foster customer relationships. Social media can help firms disseminate information quickly, create information asymmetry, and attract more investors, ultimately provide them with access to resources such as financial capital and partnerships.An IPO prospectus requires expertise to comprehend, understand and make investment decisions. Retail investors who cannot afford the fees of financial advisors often rely on media articles for their investment decisions.It has been observed that retail investors tend to overreact, even in cases where old news is being churned out by the media. This emphasises the media's ability to create an impact on IPO subscriptions, even when no new information is available. A positive media tone can increase the demand for an IPO among retail investors, while a negative one creates the opposite effect. The tone of media coverage has been observed to increase underpricing. The reputation of the media, the number of media outlets, and the circulation of news are factors that can exacerbate the impact of media on retail investors (Bajo & Raimondo, 2017).Role of NotificationSEBI has already enacted multiple rules under Chapter IX of Issue of Capital and Disclosure Requirements, 2009. The rules outline requirements for issuing advertisements, which must be true and not misleading. Advertisements shouldn't contain false statements, promises, or forecasts and should provide all relevant facts. Financial data should include information about revenue, net profit, share capital, reserves, earnings per share, dividends, and book values. Technical, legal, or complex language should not distract investors. Statements promising rapid increases in revenue or profits should not be included. Advertisements should not display models, celebrities, fictional characters, landmarks, or caricatures. Television advertisements should not appear as crawlers and should advise viewers to read the prospectus for risk-related disclosures. Any key development between offer filling and allotment should be conveyed in a true and fair manner.These existing rules can regulate the fairness of any information issued by the issuer and allied entities. Many finfluencers earn substantial incomes by creating video content on initial public offers, but concerns have been raised that these influencers promote the IPO instead of objectively informing investors about its merits and risks.To protect investors' interests and limit the risk of falling prey to unsolicited advice online, SEBI has imposed restrictions on unregistered finfluencers from providing financial advice. In recent months, unregistered finfluencers have been banned, with a sole proprietor banned in October 2023 and a YouTuber and options trader fined in May 2023 for allegedly violating investment advisor norms. Investors are advised to make well-informed investment decisions, especially when investing in IPOs, and not to be swayed by unsolicited advice on social media. The Advertising Standards Council of India (ASCI) has revised guidelines requiring SEBI registration for influencers in the banking, financial services, and insurance sectors. The move aims to protect investors from unverified financial advice and maintain India's financial market integrity. This reduces reliance on unauthorised sources and ensures consistency, transparency, and clarity in communication, facilitating informed decision-making by issuers.Thus, with the rules already covering the readability of prospectuses and regulating media impact, the role of the AV rule warrants consideration. The rule is targeted at financial literacy; the regulated script for the video, along with a bilingual approach, can reach a wider audience. The video created will be able to tackle the noise created by finfluencers or media owing to its enhanced coverage. With the additional rule, SEBI has attempted to enhance the information flow by influencing the financial attitudes and literacy of retail investors.Yet the rule may not yield the expected results. Despite the existing mandate for simple language in the prospectus, companies often use jargon, resulting in lower readability for retail investors. Poor readability will allow the media and finfluencers to act as a medium for conveying information. Thus, the ambiguity in defining simple language allows companies to deploy technical language. Even under the AV mandate, the language used cannot be completely regulated. Thus, the net impact of the mandate should be perceived with a sceptical view. Having a 10-minute time frame restrains companies from overburdening investors with information. Companies may opt to focus on selective information, citing the time constraint. Biased reporting may become a common occurrence within AV disclosures. In an economy where accounting policies and related choices are used for earnings manipulation, the choice of language and words can also facilitate biased disclosures, whether textual or visual.SEBI can draw inspiration from SEC rules on "Plain English" and "Quiet Period" to improve IPO information flow. The SEC adopted the 1998 Plain English Mandate and provided a companion handbook entitled "A Plain English Handbook: How to create clear SEC disclosure documents". The rule aims to enhance investors' ability to make informed financial decisions and avoid being misled by complex jargon. The rule is not only restricted to prospectus filings, but SEC documents, speeches, and communications with shareholders. The AICPA launched the Centre for Plain English Accounting in 2013 to help stakeholders better explain technical terms to their respective clients by providing the requisite interpretation. The rule requires that the prospectus adhere to plain English principles in every aspect of the disclosure. The direct and indirect effects of the SEC's plain English improved readability in all samples after the regulation was enacted (Loughran & McDonald, 2014).A firm cannot issue any communications for 25 days after an IPO due to securities regulations and underwriter agreements; this period is termed the "quiet period." Requirements for prospectus distribution also prevent security analysts from publishing research reports. These guarantee equitable access for all investors and establish the statutory prospectus as the principal source of information (Bushee et al., 2020).Thus, the AV disclosure mandate is moving in the right direction, but it may lack the requisite comprehensive framework to address the targeted concerns.ReferencesBajo, E., & Raimondo, C. (2017). Media sentiment and IPO underpricing. Journal of Corporate Finance, 46, 139-153. https://doi.org/10.1016/j.jcorpfin.2017.06.003Bhardwaj, A., & Imam, S. (2019). The tone and readability of the media during the financial crisis: Evidence from pre-IPO media coverage. International Review of Financial Analysis, 63, 40-48. https://doi.org/10.1016/j.irfa.2019.02.001Bushee, B., Cedergren, M., & Michels, J. (2020). Does the media help or hurt retail investors during the IPO quiet period? Journal of Accounting and Economics, 69(1), 101261.Gaurav, S., & Singh, A. (2012). An Inquiry into the Financial Literacy and Cognitive Ability of Farmers: Evidence from Rural India. Oxford Development Studies, 40(3), 358-380. https://doi.org/10.1080/13600818.2012.703319Loughran, T., & McDonald, B. (2014). Regulation and financial disclosure: The impact of plain English. Journal of Regulatory Economics, 45(1), 94-113. https://doi.org/10.1007/s11149-013-9236-5Mariani, M., Cardi, M., D'Ercole, F., Raimo, N., & Vitolla, F. (2023). Make it easy: The effect of prospectus readability on IPO performance. Journal of Accounting Literature, ahead-of-print(ahead-of-print). https://doi.org/10.1108/JAL-07-2023-0115Preeti Singh, Chiranjivi Chakraborty, Saikat Das, & Filipe Pacheco. (2024, March 27). Quick 300% Gains on India IPOs Turn Into Losses After Crackdown. Bloomberg. https://www.bloomberg.com/news/articles/2024-03-27/quick-300-gains-on-india-ipos-evaporate-after-crackdownRachappa Shette. (2019). Readability of Indian Accounting Standards and International Financial Reporting Standards (Working Paper IIMK/WPS/324/FIN/2019/03; p. 19). IIM Kozhikode. https://iimk.ac.in/uploads/publications/3076Final%20File%20for%20Upload.pdfSEBI. (2024). Audiovisual (AV) presentation of disclosures made in Public Issue Offer Documents (Order SEBI/HO/CFD/CFD-TPD-1/P/CIR/2024/55; p. 3). SEBI. https://www.sebi.gov.in/legal/circulars/may-2024/audiovisual-av-presentation-of-disclosures-made-in-public-issue-offer-documents_83569.htmlTao, J., Deokar, A. V., & Deshmukh, A. (2018). Analysing forward-looking statements in initial public offering prospectuses: A text analytics approach. Journal of Business Analytics, 1(1), 54-70. https://doi.org/10.1080/2573234X.2018.1507604Author may be reached at eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 33–36
Ep. 160 — Millennial-Driven Growth of Socially Responsible Investment Exchange Traded Funds in India
CA Journal
· September 2026
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Millennial-Driven Growth of Socially Responsible Investment Exchange Traded Funds in IndiaMillennials are emerging as powerful stakeholders in India's investment ecosystem. With a strong orientation toward ethics, sustainability, and transparency, they are influencing the development and adoption of Socially Responsible Investment (SRI) Exchange-Traded Funds (ETFs). The article explores the factors contributing to the millennial-driven growth of SRI-ETFs in India, examining the motivations behind the preferences of millennials for socially responsible investments, the adoption of SRI-ETFS as a financial product, and the implications for India's investment ecosystem. Drawing on academic literature, industry reports, and market insights, the article investigates the challenges hindering greater adoption of SRI-ETFs in India.IntroductionIn recent years, there has been a paradigm shift in the global investment landscape as sustainability becomes a central theme for both institutional and retail investors. Socially Responsible Investment (SRI), which integrates Environmental, Social, and Governance (ESG) factors into investment decisions, has gained significant momentum (Hebb, T. et al., 2015). In India, this trend is reflected in the emergence of ESG-themed mutual funds and exchange-traded funds (ETFs), which aim to deliver not only financial returns but also positive societal impact (Samant & Singh, 2022).Parallel to this development is the rise of the millennial investor—a generation that is more tech-savvy, value-conscious, and inclined toward ethical consumption and investment (Roxas and Marte, 2022). Millennials in India, born between 1981 and 1996, now constitute a substantial portion of the investor base, driving demand for financial products that align with their social and environmental values. India is undergoing a notable shift in investment behaviors, influenced significantly by its millennial population (born 1981-1996). Now accounting for about 34% of the national workforce, this generation demonstrates growing interest in ethical finance and sustainability (CAMS Report, 2023). SRI-ETFs, which track ESG-compliant companies, align with the millennial ideology of impact-driven investing. This article explores how millennials are shaping the demand for SRI-ETFs in India and what challenges persist.Research MethodologyThe article employs an exploratory narrative review approach to gather both qualitative and quantitative insights into investigating the role of millennials in the growth of Socially Responsible Investment (SRI) ETFs in India. It aims to address the following research questions:RQ1: What is the level of awareness among millennials about SRI-ETFs?RQ2: What are the factors influencing the shift towards SRI-ETFs among Indian millennials?RQ3: What are the barriers to greater engagement of millennials with SRI-ETFs in India?Comprehensive Discussion and SynthesisDecoding the Millennial Money MindsetMillennials constitute the largest and most diverse generation in today's workforce, shaping financial trends through a unique blend of values, tech-savviness, and lived experiences. Unlike prior generations, they navigate rising education costs, volatile job markets, and delayed financial milestones—pressures that fundamentally dictate their economic behaviour. This generation spans a wide life spectrum, from early-career professionals focusing on personal savings to parents managing mortgages and childcare.Although millennials represent the most educated generation, stagnant wages and heavy student loan debt often compromise their saving capacity. Growing up alongside the internet and smartphones, they actively manage money via mobile banking, budgeting apps, and robo-advisors, adopting fintech solutions faster than their predecessors. As conscious savers, they prioritise emergency funds and retirement savings through automated apps and high-interest digital accounts, yet they often favour liquidity over long-term instruments amid economic uncertainty. When they do invest, they prefer low-cost, diversified vehicles like ETFs and index funds that align with Environmental, Social, and Governance (ESG) factors, typically accessing them through user-friendly digital platforms (Camilleri, 2021).Millennials and the Rise of Responsible InvestingMillennials demonstrate significantly higher awareness of ESG and SRI concepts than previous generations. Data from the CAMS Report (2023) indicate that millennials choose ESG funds over standard equities at a rate 2.3 times that of older cohorts, driven primarily by climate anxiety and corporate ethics. Similarly, a global study by Lestari & Frömmel (2024) reveals that millennials in emerging markets like India prioritise social impact over pure financial returns, signalling a clear departure from traditional profit-driven strategies.The growing popularity of ESG mutual funds, thematic ETFs, and digital sustainability platforms mirrors this demand for corporate transparency. Indian millennials specifically favour financial products tied to visible outcomes, such as clean energy infrastructure or women-led enterprises. Furthermore, mobile apps and fintech tools have democratised this space, allowing young investors to track environmental and social impact metrics in real time. Online communities across Reddit, LinkedIn, and Instagram function as modern spaces for financial literacy, where peer discussions normalise SRI and ESG strategies. On the regulatory front, SEBI's enhanced ESG disclosure mandates provide millennials with the credible data and confidence required to make verified, responsible investment decisions.Regulatory support has been a key enabler of the SRI-ETF market. SEBI's requirement for the top 1,000 listed companies in India to disclose ESG metrics has improved data transparency and investor trust.ETFs Alignment with Millennial Investment GoalsWhile ETFs and mutual funds both serve as pooled investment vehicles, their structural and operational designs differ significantly. ETFs trade on stock exchanges like individual equities, providing investors with real-time pricing and intraday liquidity, whereas mutual funds settle exclusively at the end-of-day Net Asset Value (NAV). Lestari & Frömmel (2024) identify cost as another critical differentiator: ETFs feature lower expense ratios due to passive management, while actively managed mutual funds incur higher administrative fees.Because millennials maintain higher fee sensitivity than older generations, the lower expense ratios and lack of entry or exit loads enhance the structural appeal of ETFs. Furthermore, millennials prioritize institutional openness and portfolio control; ETFs satisfy this preference by disclosing holdings daily, unlike mutual funds, which typically report on a monthly or quarterly delay. The proliferation of mobile investment apps and online brokerages directly connects digital-native retail investors to the ETF marketplace, streamlining portfolio rebalancing. Finally, the broader shift toward passive investing stems from a growing recognition that consistently beating the market is difficult. By tracking major indices like the Nifty 50 or S&P 500, ETFs deliver reliable market-average returns with lower relative risk, satisfying the cautious financial outlook of the millennial investor.Figure 1: Why Millennials Prefer ETFs?FactorDetailCost EfficiencyETFs offer lower fees due to passive managementTransparency and ControlETFs provide clear insight into portfolio compositionTechnological AccessibilityMobile apps and online platforms make ETFs accessiblePassive Investing TrendETFs align with the belief in markets-average returnsFactors influencing the shift towards SRI-ETFs in IndiaDemographic Influence: Millennials and Gen ZMillennials and Gen Z are actively redefining investing norms in India by prioritizing values-based portfolios, technological integration, and transparency. Market research shows that over 65% of millennial investors seek products reflecting their social or environmental beliefs. Patil et al. (2024) observe that younger Indian investors strongly prefer passive instruments like ETFs due to their low fees and digital accessibility. As these cohorts accumulate wealth, their collective purchasing power forces asset management companies to launch dedicated SRI ETFs.ESG Awareness and EducationEscalating exposure to climate change risks, social inequality, and corporate governance failures drives millennial interest in responsible finance. Surveys indicate that approximately 58% of Indian retail investors aged 25-40 consider ESG factors central to their investment decisions. Targeted educational campaigns by regulators, asset management companies, ESG-themed webinars, and integrated broker ratings have stripped away the complexity of sustainable finance, making it accessible to everyday retail investors.Regulatory Push and Policy AlignmentRegulatory mandates heavily accelerate India's SRI-ETF market expansion. SEBI's disclosure requirements for listed companies enhance data transparency and build investor trust, while frameworks like the Business Responsibility and Sustainability Report (BRSR) enforce corporate accountability. This transparent data stream allows fund managers to build credible, index-tracking ESG ETFs that retail investors can back with confidence.Technology Integration and FintechFintech platforms democratize consumer access to sustainable investing. Leading digital trading apps offer seamless access to thematic, ESG-focused ETFs. Digital-native millennials utilise these platforms to compare, purchase, and monitor sustainable portfolios, while modern robo-advisors embed ESG preferences directly into automated investor profiling. Ultimately, fintech integration reshapes millennial habits by providing low barriers to entry and immediate financial data (Patil et al., 2024).Risk-Adjusted Returns and ResilienceEmpirical research confirms that SRI-ETFs provide resilient financial returns during periods of high market volatility. For example, ESG-aligned funds outperformed traditional benchmarks during the COVID-19 pandemic (Meehan & Corbet, 2025). This track record dismantles the myth that sustainable investing requires sacrificing performance. Because conservative Indian investors require proven stability, the dual advantage of ethical alignment and financial resilience makes SRI-ETFs an attractive proposition for millennials.A behavioral barrier also exists in the form of short-term return expectations. Many Indian millennials prioritize quick returns due to peer influence, low initial capital, or lack of long-term financial planning.Barriers to greater engagement of millennials with SRI-ETFs in IndiaLow Awareness and Limited ESG LiteracyA primary barrier to market engagement is the low baseline awareness of SRI-ETFs and general ESG mechanics among young investors. While Deivamani & Sagayaraj (2024) note that only a small fraction of millennials in regions like Coimbatore can correctly define ESG criteria, a separate corporate survey highlights that 58% of Indian millennials have never encountered the term. This stark statistical contrast against the high urban adoption metrics underscores a deep geographic fragmentation within the demographic. High enthusiasm metrics primarily reflect digitised, affluent investors using advanced fintech platforms in Tier-1 metros, whereas the 58% unfamiliarity rate exposes a steep digital and financial literacy deficit across Tier-2 and Tier-3 cities. Consequently, millennial awareness in India is polarised by regional financial infrastructure rather than being a demographic monolith.Perceived Complexity and Lack of Financial LiteracyThe perceived complexity of sustainable instruments discourages deeper market engagement. Navigating ESG scores, proprietary fund methodologies, and index-tracking metrics demands a level of financial literacy that many young investors lack. Garg et al. (2022) note that a lack of clarity regarding institutional ESG screening processes drives investor hesitation, particularly among first-time and small-scale retail investors.Concerns over Greenwashing and Trust DeficitGreenwashing, where corporations exaggerate or fabricate their sustainability credentials, fuels investor scepticism. The absence of standardised global ESG ratings and inconsistent corporate disclosures across Indian firms creates an asset trust deficit (Lestari & Frömmel, 2024). As Meehan & Corbet (2025) emphasise, volatile economic crises cause investors to demand rigorous evaluation standards to ensure their capital supports genuine, verifiable, sustainable outcomes. Without an ironclad verification ecosystem in India, millennials remain cautious.Limited Product Availability and AccessibilityCompared to developed Western financial markets, India offers a narrow selection of SRI-ETFs, which severely restricts investor choice and market depth. Compounding this scarcity, asset management companies rarely promote these specific niche products on popular millennial investment apps. CAMS (2023) highlights that fewer than 15% of mutual fund distributors across Tier 2 and Tier 3 cities market ESG products, effectively cutting off non-urban millennials from the sector.Short-Term Mindset and Market PerceptionA distinct behavioural barrier manifests as a preference for short-term profits. Driven by peer influence, limited starting capital, and minimal long-term financial planning education, many Indian millennials seek rapid returns (Patil et al., 2024). Because institutions market SRI-ETFs as long-term, value-driven investments, these funds often appear less attractive to young investors when contrasted with aggressive equity options or speculative digital assets.A key recommendation for promoting the growth of SRI ETFs in India is the implementation of targeted financial education programs. These programs should focus on enhancing millennials understanding of ESG factors, the financial performance of SRI ETFs, and the long-term benefits of sustainable investing.Recommendations Enhancing Millennial Participation: Strategic InsightsFinancial Education and Awareness CampaignsAsset management firms and academic institutions must implement targeted financial education programs to drive long-term growth in India's SRI-ETF sector. These initiatives should demystify ESG criteria, publish comparative fund performance, and outline the societal benefits of sustainable capital. Strategic partnerships among banks, universities, and fintech platforms can scale this literacy rapidly.Expansion of ESG-Focused ETF OfferingsThe Indian market requires a broader, more diverse spectrum of SRI-ETFs. Asset management companies should design innovative ESG products tailored to varied risk tolerances and investment horizons. Introducing specialised ETFs focused on discrete sub-themes—such as climate transition, social equity, or corporate governance—will better capture distinct millennial interests.Development of Regulatory FrameworksFinancial regulators, led by SEBI, can accelerate adoption by introducing formal policies that incentivise the development and marketing of ESG products. Potential measures include tax incentives for sustainable ETF asset holdings and stricter, uniform parameters for ESG compliance reporting. These actions will bolster market transparency and reinforce retail investor trust.Enhancing Digital Engagement and AccessibilityBecause millennials operate as digital natives, fintech brokerages and traditional fund houses must enhance their digital user interfaces to optimise SRI-ETF visibility. Integrating transparent ESG scores directly into trading dashboards and adding real-time carbon or social impact tracking modules will drive deeper millennial platform engagement.Promoting Long-Term Financial Returns with SustainabilityA lingering misperception suggests that sustainable funds deliver subpar performance. Financial institutions must aggressively counter this narrative by presenting historical data, performance metrics, and comparative case studies. Demonstrating that SRI-ETFs match or exceed traditional index returns over long horizons will satisfy both the financial and ethical requirements of young investors.Encouraging Corporate Responsibility and ESG DisclosureRegulators must hold listed corporations accountable via stringent, standardised ESG disclosure rules. Because millennials demand that corporate entities actively align with sustainability milestones, any firm included in an SRI-ETF index must demonstrate verifiable ethical practices. Elevating corporate accountability directly protects the fundamental credibility of the underlying ETF.ConclusionThis study examines the influence of Indian millennials on the emerging market of Socially Responsible Investment (SRI) ETFs. While millennials demonstrate high awareness of ESG principles and strong interest in sustainable investing, active participation remains limited. Key barriers include low financial literacy, limited product availability, and misconceptions about SRI performance. Despite these challenges, millennials are attracted to SRI ETFs for their alignment with ethical values and their transparent, cost-effective nature. Although the Indian SRI-ETF market is still evolving, this generation's growing investment interest mirrors global trends. With the right support, such as improved financial education and broader access to ESG products, India can capitalise on this momentum to accelerate the growth of responsible investing.Limitations of the studyWhile this narrative review synthesises valuable market data, its scope is constrained by three core limitations:Data Constraints and Temporal Boundaries: Because SRI-ETFs are nascent in India, the study lacks long-term historical performance data spanning multiple macroeconomic cycles.Geographic Concentration and Macroeconomic Bias: The underlying secondary data primarily reflects urban, metro-based investors, underrepresenting the financial behaviours of millennials in Tier-2 and Tier-3 regions.Methodological Boundaries and Lack of Primary Verification: The paper relies entirely on secondary sources, mapping out stated consumer intentions rather than tracking direct, verified portfolio allocations.Future Research DirectionsTo expand upon the findings and boundaries of this study, future research should pursue the following avenues:Longitudinal Performance Tracking: Future studies should implement longitudinal tracking to observe how Indian SRI-ETFs perform across shifting macroeconomic cycles as the market matures, directly addressing current temporal data constraints.Demographic and Regional Expansion: Researchers should conduct targeted primary surveys in Tier-2 and Tier-3 cities to map out regional variations and close the geographic data gap present in current literature.Primary Empirical Validation: Future work should transition from secondary narrative synthesis to primary quantitative or psychometric modelling to track actual consumer portfolio allocations rather than stated intent.ReferencesCamilleri, M.A. (2021). The market for socially responsible investing: a review of the developments. Social Responsibility Journal, Vol. 17 No. 3, pp. 412-428. https://doi.org/10.1108/SRJ-06-2019-0194Computer Age Management Services Report (2023). The emerging force of the millennial investor is here to stay & grow. CAMS India. https://www.camsonline.com/Annual_Report/FY2023-2024/key-highlights.htmlDeivamani, S., & Sagayaraj, T. (2024). Awareness of millennial investors towards ESG factors with reference to Coimbatore district. Journal of the K.R. Cama Oriental Institute, 78, 2024.Deloitte. (2021). The Deloitte Global 2021 Millennial and Gen Z Survey: A call for accountability and action. Deloitte Global. Retrieved from https://www2.deloitte.com/us/en/insights/topics/talent/deloitte-millennial-survey-2021.htmlHebb, T., Hawley, J., Hoepner, A., Neher, A., & Wood, D. (Eds.). (2015). The Routledge Handbook of Responsible Investment (1st ed.) https://doi.org/10.4324/9780203104415Garg, A., Goel, P., Sharma, A., & Rana, N. P. (2022). As you sow, so shall you reap: Assessing drivers of socially responsible investment attitude and intention. Technological Forecasting and Social Change, 184, 122030. https://doi.org/10.1016/j.techfore.2022.122030KPMG (2017). Meet the millennials. https://assets.kpmg.com/content/dam/kpmgsites/uk/pdf/2017/04/Meet-the-Millennials-Secured.pdfLestari, J. S., & Frömmel, M. (2024). Socially responsible investments: Doing good while doing well in developed versus emerging markets? Research in International Business and Finance, 69, 102229. https://doi.org/10.1016/j.ribaf.2024.102229Meehan, D., & Corbet, S. (2025). Comparing the resilience of socially responsible and SIN investment during the COVID-19 pandemic. Research in International Business and Finance, 73(A), 102537. https://doi.org/10.1016/j.ribaf.2024.102537Morningstar India Pvt. Ltd. (2023). Investor survey on ESG awareness and trends in India.Patil, A., Hiremath, R. B., Yadav, R., & Mane, N. S. (2024). Decoding millennial investment behavior: A comprehensive study of Indian stock market participation. Academy of Marketing Studies Journal, 28(6), 1-8.PwC. (2021). Millennial money: How digital is shaping the future of finance. PricewaterhouseCoopers.Roxas, H. and Marte, R. (2022), "Effects of institutions on the eco-brand orientation of millennial consumers: a social cognitive perspective", Journal of Consumer Marketing, Vol. 39 No. 1, pp. 93-105. https://doi.org/10.1108/JCM-11-2020-4262Samant, M. D., & Singh, R. S. P. (2022). Post Covid surge in ESG mutual funds in India: Is it a structural break? Journal of Positive School Psychology, 6(8), 600-609. https://journalppw.com/index.php/jpsp/article/view/9779Author may be reached at prernajain_91@yahoo.in and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 38–43
Ep. 161 — Accounting for Crowdfunding: A Practical Approach with Proposed Journal Entries
CA Journal
· August 2026
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Accounting for Crowdfunding: A Practical Approach with Proposed Journal EntriesCrowdfunding is a trending and emerging concept that is an alternative way of raising funds for any project. As this method of fundraising gains momentum, it presents unique challenges and opportunities for financial reporting and accountability. This article explores the accounting implications of various crowdfunding models, like donation-based, reward-based, debt-based, and equity-based. The study aims to suggest a prospective accounting treatment for crowdfunding.IntroductionCrowdfunding is an alternative way of raising funds for innovative, entrepreneurial, and creative projects, startups, and social causes, which provide funds at a lower cost and in less time. The project must be well planned for its success. Funds are raised from crowdfunding with the help of crowdfunding websites, which provide an online platform for investors and borrowers (Gedar & Lodha, 2024). Accounting for crowdfunding transactions is a difficult task. Crowdfunding is a new concept, and there are no clear guidelines regarding its accounting in India yet. There are four types of crowdfunding, and the accounting treatment varies for each type.This study is exploratory in nature. It is found that various countries are in the process of developing a dedicated accounting standard for this purpose. Yet, no country is able to provide complete guidance for accounting for various types of crowdfunding transactions. This is a unique attempt to provide accounting guidance for crowdfunding transactions.Accounting of crowdfunding is important for both the lender and the borrower because it involves the exchange of funds and returns. Accounting for crowdfunding transactions is essential to ensure appropriate financial reporting, compliance with legal regulations, and transparency for stakeholders.Challenges in Accounting for CrowdfundingAccounting for crowdfunding presents significant challenges due to its diverse models and evolving regulatory landscape. Donation-based and reward-based crowdfunding complicate revenue recognition, liability classification and regulatory compliance. Donations often lack enforceable obligations, while unfulfilled rewards generate contingent liabilities. Debt-based crowdfunding requires accurate treatment of interest, repayments, and disclosure. Equity-based crowdfunding necessitates valuation, regulatory adherence, and shareholder tracking. The absence of standardized accounting guidelines leads to inconsistencies in financial reporting. Fundraisers failing to deliver promised outcomes may face issues of unearned revenue and potential refunds. Moreover, stakeholders demand transparent disclosures on fund utilization and project progress, further intensifying accounting complexities.Accounting Standards and CrowdfundingSo far, there is no dedicated accounting standard for crowdfunding in any of the countries. Based on the type of crowdfunding, one can apply the provisions of the relevant applicable accounting standard. Equity-based and debt-based crowdfunding fall within the definition of financial instruments. Accordingly, they should be accounted for in line with their respective nature under IFRS 9 Financial Instruments and IAS 32 Financial Instruments: Presentation. Similarly, accounting of reward-based crowdfunding can be done as per IFRS 15 Revenue from Contracts with Customers because in reward-based crowdfunding, a contract is made with the customer, which is similar to the nature of IFRS 15. For donation-based crowdfunding, no present accounting standard is applicable for its accounting. In spite of the identification of relevant accounting standards, no standard specifies accounting treatment of crowdfunding transactions.Accounting Treatment for Different Types of CrowdfundingThere are three major issues related to accounting for crowdfunding transactions: the accounting for the amount raised, accounting for expenses made on fundraising, and accounting for the refund of the amount raised. The type of crowdfunding determines how it is treated in accounting. Generally, the amount raised through crowdfunding is initially deposited in an escrow account or a separate account of the platform to ensure legal compliance and investors' protection. After verification and completion of formalities, this amount is either transferred to the account of the fundraiser (company) or a refund is made. For the amount raised on crowdfunding, the platform debits its bank account and, based on the type of crowdfunding credits, either "Investor Payable" (equity-based and debt-based CF) or "Backers" (reward or donation-based CF) account. When the platform returns the money to investors or backers for some reason, a reverse entry is made. When the money is sent to the company on a successful campaign, the entry remains the similarly the funds are going out. On receipt of money, the company debits the bank account and, based on the type of crowdfunding, credits the share capital account (equity-based CF) or loan payable (debt-based CF) or deferred revenue account (reward-based CF), or the Donation revenue account (donation-based CF).For expenses made by a fundraiser company on crowdfunding, again, accounting treatment will be based upon the type of crowdfunding. For equity crowdfunding, expenses may be categorised into direct and indirect costs. While direct costs include platform fees, payment processing fees, legal fees, etc., indirect costs include marketing, advertising, and administration expenses. Direct costs should be debited to or deducted from the securities premium account, whereas indirect costs should be debited to the Income Statement. For debt-based, reward-based or donation-based crowdfunding, all expenses related to crowdfunding should be debited to the Income Statement as Financing Costs or operating expenses, respectively. An additional entry is required for reward-based crowdfunding when goods are delivered by debiting the Cost of Goods Sold account and crediting the Inventory account.For accounting of the refund of the amount raised through crowdfunding, the entry made at the time of receipt of money is reversed. Generally, a refund is due when there is over-subscription or when the campaign is unsuccessful. Based on the type of crowdfunding, the necessary account will be debited from crediting bank account.Research Problem and GapDespite the growing relevance of crowdfunding, there is a noticeable lack of accounting guidance on how to recognize, classify, and disclose such transactions. This absence of standardized frameworks compromises consistency, comparability, and transparency in financial reporting. Existing literature has primarily focused on the legal, technological, or marketing aspects of crowdfunding, while the accounting domain remains underexplored.Research MethodologyThis article studies an exploratory research design, aiming to propose journal entries for various crowdfunding models based on general accounting principles and applicable international standards. Data has been synthesized through a review of relevant literature and hypothetical case scenarios to illustrate proposed accounting treatments.Objective of the studyTo suggest prospective accounting practices for crowdfunding. Examples for Accounting Treatment for various types of Crowdfunding have been presented below: -Accounting for Equity-Based CrowdfundingExample 1: X Ltd. raised funds through the 'Crowdcube' equity-based crowdfunding platform. Pass the journal entries in the books of the fundraiser and platform for the following crowdfunding transactions: -DateParticularsAmount (₹)2022 Apr 21A company raises funds via an equity-based crowdfunding platform with a 10% premium, and fund is received by the platform.1,10,000Apr 23The company spends on professional services (e.g., administrative, marketing) to set up the crowdfunding campaign.4,000May 21Campaign fund is transferred to X Ltd. The platform charges a 5% fee, deducted from the total funds raised.1,10,0002023 Jul 1The company declares in dividends to be paid to equity-based crowdfunding investors.10,000Jul 15The company pays the declared dividends to investors.10,000Solution: Journal Entries for Equity CrowdfundingDateJournal of Fundraiser Company (X Ltd.)Journal of CF Platform (Crowdcube) ParticularsL. F.Debit (Dr.)Credit (Cr.)ParticularsL. F.Debit (Dr.)Credit (Cr.)2022Apr 21 Bank A/c Dr.To Investor Payable A/c(Received funds from backers) 1,10,0001,10,000Apr 23Crowdfunding Expenses A/c Dr.To Bank A/c(Paid for indirect expenses related to campaign) 4,0004,000 May 21Crowdcube's A/c Dr.To Share Application A/c(Amount due from Platform) 1,10,0001,10,000Investor Payable A/c Dr.To X Ltd. A/c(Amount due to X Ltd.) 1,10,0001,10,000May 21Bank A/c Dr.Platform Fees A/c Dr.To Crowdcube's A/c(Being funds received from platform after deducting platform fees) 1,04,5005,5001,10,000X Ltd. A/c Dr.To Bank A/cTo Revenue A/c (Platform fees)(Being funds transferred after deducting platform fees) 1,10,0001,04,5005,500May 21Share Application A/c Dr.To Share Capital A/c (Par value)To Securities Premium A/c(Being funds transferred to capital account) 1,10,0001,00,00010,000 2023Mar 31Securities Premium A/c Dr.To Platform Fees A/c(Charging of platform fees from securities premium) 5,5005,500Profit & Loss A/c Dr.To Revenue A/c(Transfer of Revenue to P&L A/c) 5,5005,500Mar 31Profit & Loss A/c Dr.To Crowdfunding Exp. A/c(Charging of other expenses from P&L A/c) 4,0004,000 Jul 1Profit & Loss A/c Dr.To Dividend Payable A/c(Being declaration of dividend) 10,00010,000 Jul 15Dividend Payable A/c Dr.To Bank A/c(Being payment of dividend) 10,00010,000 Note: According to section 52 of the Companies Act, 2013, securities premium can be used for the writing off the expenses of or the commission paid or discount allowed on, any issue of shares or debentures of the company. Crowdfunding platform fees are also an expense related to issuing shares, hence it can be written off from the securities premium, which is received in equity-based crowdfunding.Accounting for Debt-Based CrowdfundingExample 2: Y Ltd. raised funds through the 'Catapooolt' debt-based crowdfunding platform. Pass the journal entries in the books of fundraiser and platform for the following crowdfunding transactions:DateParticularsAmount (₹)2022 Jun 30A company raises fund via a debt-based crowdfunding platform and fund is received by platform1,00,000Jul 1The company paid for professional services (e.g., administrative, marketing) to set up the crowdfunding campaign.2,000Jul 30Campaign's funds are transferred to Y Ltd. The platform charges a 5% fee, which is deducted from the total funds raised.1,00,0002023 Jan 1Interest accrues on the loan for the period.10,000Jan 1Payment of interest on the loan for the period.10,000Solution: Journal Entries for Debt CrowdfundingDateJournal of Fundraiser Company (Y Ltd.)Journal of CF Platform (Catapooolt) ParticularsL. F.Debit (Dr.)Credit (Cr.)ParticularsL. F.Debit (Dr.)Credit (Cr.)2022Jun 30 Bank A/c Dr.To Investor Payable A/c(Received funds from backers) 1,00,0001,00,000Jul 1Crowdfunding Exp A/c Dr.To Bank A/c(Paid for marketing expenses related to campaign) 2,0002,000 Jul 30Catapooolt's A/c Dr.To Loan Application A/c(Amount due from Platform) 1,00,0001,00,000Investor Payable A/c Dr.To Y Ltd. A/c(Amount due to Y Ltd.) 1,00,0001,00,000Jul 30Bank A/c Dr.Financial Cost A/c Dr.To Catapooolt A/c(Being fund received through platform after deducting platform fees) 95,0005,0001,00,000Y Ltd. A/c Dr.To Revenue A/c (Platform fees)To Bank A/c(Being deducted platform fees and transferring funds to fundraiser) 1,00,0005,00095,000Jul 30Loan Application A/c Dr.To Loan Payable A/c(Loan amount transferred to Loan Payable A/c) 1,00,0001,00,000 2023Jan 1Financial Cost A/c Dr.To Interest Payable A/c(Being interest accrued on loan) 10,00010,000 Jan 1Interest Payable A/c Dr.To Bank A/c(Being repayment of the loan principal and interest) 10,00010,000 Mar 31Profit & Loss A/c Dr.To Crowdfunding Exp. A/cTo Financial Cost A/c(Financial costs transferred to P&L A/c) 17,0002,00015,000Profit & Loss A/c Dr.To Revenue A/c(Transfer of Revenue to P&L A/c) 5,0005,000Accounting for Reward-Based CrowdfundingExample 3: Z Ltd. raised funds through the 'Patreon' reward-based crowdfunding platform. Pass the journal entries in the books of fundraiser and platform for the following crowdfunding transactions:DateParticularsAmount (₹)2022 May 1A company receives fund in crowdfunding contributions from backers for rewards yet to be delivered and fund is received by the platform.50,000May 5Expenses related to the crowdfunding campaign.1,000May 15The company spends on advertising and promotional activities for the crowdfunding campaign.5,000Jun 1Transfer of the campaign's funds to Z Ltd. The crowdfunding platform charges a 5% fee before transferring funds to the company.50,000Oct 1The company spends on producing the promised rewards.20,0002023 Jan 1The company delivers all promised rewards, fulfilling its obligations. The previously recorded as Unearned Revenue is now recognized as revenue.50,000Jan 1The company spends on shipping the rewards to backers.3,000Jan 31After fulfilling backer rewards, the worth of unsold inventory remains.2,000Solution: Journal Entries for Debt Crowdfunding (Note: Refers to Reward Crowdfunding per context)DateJournal of Fundraiser Company (Z Ltd.)Journal of CF Platform (Patreon) ParticularsL. F.Debit (Dr.)Credit (Cr.)ParticularsL. F.Debit (Dr.)Credit (Cr.)2022May 1 Bank A/c Dr.To Backers' A/c(Received funds from backers) 50,00050,000May 5Crowdfunding Expenses A/c Dr.To Bank A/c(Paid for expenses related to crowdfunding campaign) 1,0001,000 May 15Crowdfunding Expenses A/c Dr.To Bank A/c(Paid for advertising expense) 5,0005,000 Jun 1Patreon A/c Dr.To Unearned Revenue A/c(Being amount due from platform) 50,00050,000Backers' A/c Dr.To Z Ltd.(Being amount due to Z Ltd.) 50,00050,000Jun 1Bank A/c Dr.Platform Fees A/c Dr.To Patreon A/c(Being funds transferred from platform) 47,5002,50050,000Z Ltd. A/c Dr.To Revenue A/c (Platform fees)To Bank A/c(Being deducted platform fees and transferred funds to fundraiser) 50,0002,50047,500Oct 1Production Cost A/c Dr.To Bank A/c(Being cost of manufacturing the rewards is recognized as an expense) 20,00020,000 2023Jan 1Unearned Revenue A/c Dr.To Revenue A/c(Being delivery of rewards) 50,00050,000 Jan 1Shipping Fees A/c Dr.To Bank A/c(Being charge shipping costs) 3,0003,000 Jan 31Inventory A/c Dr.To Production Cost A/c(Being excess inventory is recorded as an asset) 2,0002,000 Mar 31Profit & Loss A/c Dr.To Crowdfunding Expenses A/cTo Platform Fees A/cTo Production Cost A/cTo Shipping Fees A/c(Expenses transferred to P & L A/c) 29,5006,0002,50018,0003,000 Accounting for Donation-Based CrowdfundingThe International Accounting Standards Board (IASB) does not have an international accounting standard for non-profit Organisations. However, not-for-profit organizations (NPOs) that are not controlled by the government can use the accounting standards for NPOs in Part III of the IAS plus handbook or the IFRS (International Financial Reporting Standards) in Part I of the handbook.¹Example 4: An NGO raised funds through the 'Ketto' donation-based crowdfunding platform. Pass the journal entries in the books of the fundraiser and platform for the following crowdfunding transactions: -DateParticularsAmount (₹)2022 Apr 15A donor contributes in a crowdfunding campaign, and fund is received by the platform.60,000Apr 16A freelancer is paid for designing the campaign's promotional video.1,200Apr 17Paid as salaries for project staff involved in managing the crowdfunding campaign and project execution.4,000Apr 18Other expenses related to the crowdfunding campaign.1,000Apr 19Paid for social media advertising to promote the crowdfunding campaign.2,000May 15Funds of campaigns are transferred to the NGO. Crowdfunding platform charges 3% for facilitating donations.60,000Solution: Journal Entries for Donation-based CrowdfundingDateJournal of Fundraiser (NGO)Journal of CF Platform (Ketto) ParticularsL. F.Debit (Dr.)Credit (Cr.)ParticularsL. F.Debit (Dr.)Credit (Cr.)2022Apr 15 Bank A/c Dr.To Backers' A/c(Received funds from backers) 60,00060,000Apr 16Crowdfunding Expenses A/c Dr.To Bank A/c(Paid for campaign design) 1,2001,200 Apr 17Crowdfunding Expenses A/c Dr.To Bank A/c(Paid salary to project staff) 4,0004,000 Apr 18Crowdfunding Expenses A/c Dr.To Bank A/c(Paid for expenses related to crowdfunding campaign) 1,0001,000 Apr 19Crowdfunding Expenses A/c Dr.To Bank A/c(Paid for social media advertising) 2,0002,000 May 15Ketto's A/c Dr.To Donation Revenue A/c(Being Amount due from platform) 60,00060,000Backers' A/c Dr.To NGO's A/c(Being amount due to NGO) 60,00060,000May 15Bank A/c Dr.Platform Fees A/c Dr.To Ketto's A/c(Being donation received net of platform fees) 58,2001,80060,000NGO's A/c Dr.To Revenue A/c (Platform fees)To Bank A/c(Being deducted platform fees and transferred funds to NGO) 60,0001,80058,2002023Mar 31Profit & Loss A/c Dr.To Crowdfunding Expenses A/cTo Platform Fees A/c(Crowdfunding expenses transferred to P & L A/c) 10,0008,2001,800 Accounting for Crowdfunding PlatformExample for Accounting of Crowdfunding Platform: There may be some specific transactions for crowdfunding platforms. Their accounting treatment can be understood by following the example.Example 5: Pass the journal entries in the books of crowdfunding platform 'Kickstarter' for the following crowdfunding transactions: -DateParticularsAmount (₹)2022 Apr 15Funds pledged by backers, but not yet transferred to the campaign creator.50,000Apr 15Net amount is transferred to campaign creators after the deducted platform charges a fee @ 5%.2,500May 1Operating expenses, such as hosting fees or employee salaries.10,000Jul 15Funds held in escrow earn interest before being distributed.5,000Aug 1Funds are refunded to backers due to a campaign failing to meet its goal.30,000Solution: Journal of Kickstarter (Platform)DateParticularsL.F.Debit (Dr.)Credit (Cr.)2022 Apr 15Bank A/c Dr.To Backer's/Investor Payable A/c(Being received funds from backers) 50,00050,000Apr 15Backer's/Investor Payable A/c Dr.To Revenue A/c (Platform fees)To Bank A/c(Being deducted platform fees and transferring funds to the fundraiser) 50,0002,50047,500May 1Operating Expenses A/c Dr.To Bank A/c(Being paid platform operating expenses, like hosting fees or employees' salaries etc.) 10,00010,000Jul 15Bank A/c Dr.To Backer's/Investor Payable A/c(Being received funds from backers) 5,0005,000Aug 1Backer's/Investor Payable A/c Dr.To Bank A/c(Being refund to backers due to the campaign failed) 30,00030,000ConclusionThe study presents significant accounting issues related to crowdfunding transactions. In a crowdfunding process, both the crowdfunding platform and the fundraiser face the problem of accounting for crowdfunding transactions. Various countries are in the process of developing a dedicated accounting standard for this purpose. Yet, no country is able to provide complete guidance for accounting for various types of crowdfunding transactions. Hence, an attempt has been made to summarize the significance accounting challenges for crowdfunding and a review of the current accounting standards of various countries. Also, some hypothetical examples pertaining to the four types of crowdfunding have been provided along with journal entries to be done in the books of both the parties (the fundraiser and platform).ReferencesGedar, B. L., & Lodha, S. (2024). Crowdfunding as a source of finance in India: An empirical study. IUP Journal of Applied Finance, 30(1), 25-41.IFRS 9 issued by International Accounting Standard Board.IFRS 15 issued by International Accounting Standard Board.IAS 32 issued by International Accounting Standard Board.https://www.linkedin.com/pulse/accounting-crowdfunding-tom-clendon/https://www.icai.org/https://www.ifrs.org/Authors may be reached at babulal.gedar1993@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 44–51
Ep. 162 — The End Of An Era: How The Income Tax Act 2025 Re-Writes Provisos After 65 Years
CA Journal
· September 2026
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The End Of An Era: How The Income Tax Act 2025 Re-Writes Provisos After 65 YearsFor six and a half decades, tax practitioners have been dealing with the Income-tax Act of 1961, which consists of over 1,200 provisos and 900 explanations-a complex construct that has developed out of more than 4,000 amendments based on judicial interpretations and changes in policies. These provisos were not merely drafting add-ons; in many provisions, they became essential to understanding the real scope of the rule. While the Supreme Court has developed clear rules on how provisos should be interpreted (as in S. Sundaram Pillai and Dwarka Prasad), the Act kept getting additional provisos. The Income-tax Act, 2025, applicable from 1 April 2026, marks a structural shift. It does not simply delete the substance of provisos. Instead, it largely carries forward their content in a clearer form through sub-sections, clauses, tables and schedules, thus shortening Section 10 from 30,000 words to 13,500 words (a reduction of 55%). The change is therefore best understood as a drafting and readability reform, rather than a wholesale policy reset. Its real significance lies in making the law easier to follow: conditions are placed closer to the main rule, exceptions are more visible, and provisions that previously required cross-reading are now presented in a more direct manner.Introduction: Why Should A Tax Professional Care About Provisos Disappearing?For many years, tax professionals have learnt to read an income-tax provision not from top to bottom, but from the last proviso upwards. What began as a legislative tool to carve out exceptions gradually became the backbone-and burden of the Income-tax Act, 1961. After 65 years, the Income Tax Act 1961 has accumulated over 1,200 provisos and 900+ explanations-an endless tax law that transformed a modern statute into an interpretative minefield. On April 1, 2026, this era will end.The Income Tax Act 2025, which has been enacted by Parliament to replace the 1961 Act, marks the beginning of a new era in Indian taxation, characterized by the elimination of provisos as a drafting tool and their replacement by sub-sections, clauses, and tabular arrangements. From a technical perspective, this development represents more than just an improvement in the architecture of tax legislation; it represents a profound recognition that accessibility, uniformity, and simplicity are essential, not desirable, attributes of a viable tax system. The question that this article seeks to answer is, at first glance, simple: How did a clear statute become a complex web of interlocking exceptions, and why did Parliament choose to undertake a complete overhaul of the statute's architecture, rather than a series of piecemeal amendments? This article examines the history of provisos in Indian income tax legislation, the judicial jurisprudence that has developed to control the complexities of provisos, and the legislative approach taken in 2025 to restore simplicity to the statute.Understanding The Proviso: What Is A 'Proviso' And Why It ExistedA. Conceptual Foundation and Legal DefinitionIn statutory law, a proviso is referred to as a clause or a condition that qualifies, limits, or makes an exception to the main provision or the enacting clause. It serves a particular grammatical and legal purpose. It marks the limits of what would otherwise fall within the scope of a provision. Unalike an explanation-which merely provides clarification for the meaning of words or phrases in a provision-a proviso creates a substantive deviation or qualification.Consider the difference through example:Enacting Clause (Main provision): "No deduction shall be allowed for any sum payable."Proviso: "Provided that if such sum is paid before the due date for filing the return, a deduction may be allowed."Explanation: "For the purposes of this section, 'sum payable' means any liability arising under law."The enacting clause states a rule, the proviso provides a carve-out to the rule, and the explanation defines terms without providing an exception and does not change the main rule.B. The Doctrine of Proviso: Foundational PrinciplesOver the last six decades, the Indian judiciary has evolved a full-fledged set of principles for the interpretation of provisos. This has happened not in the realm of jurisprudential theory but due to the necessity that arose out of the full-fledged complexity of provisos.The most important principle is that a proviso must be read in relation to the main provision. It is not an independent source of law unless the language and context clearly show that the legislature intended it to operate more widely.The Supreme Court has held in its landmark judgments, such as S. Sundaram Pillai v. V.R. Pattabiraman (1985) 1 SCC 591 [Constitution Bench], State of Rajasthan v. Leela Jain (AIR 1965 SC 1296), and Dwarka Prasad v. Dwarka Das Saraf (1976) 1 SCC 1282: "A proviso must be read in relation to the main provision to which it is subordinate."In the landmark case of S. Sundaram Pillai v. V.R. Pattabiraman (1985) 1 SCC 591, a Three-Judge Bench of the Supreme Court of India set out practical rules for reading provisos. They made a detailed analysis of the principles of proviso interpretation. Through the citation of authorities from treatises on interpretation, English and Indian decisions, and constitutional cases, the Court has formulated a panoramic framework on provisos.The following are the extracts from paragraphs 27-44 of the decision, which summarize the cumulative judicial wisdom on provisos developed over the years:First the court explained the difference between a proviso and explanation."The well established rule of interpretation of a proviso is that a proviso may have three separate functions. Normally, a proviso is meant to be an exception to something within the main enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment. In other words, a proviso cannot be torn apart from the main enactment nor can it be used to nullify or set at naught the real object of the main enactment."The Court referred to Odgers (Construction of Deeds and Statutes (5th Edn.) that describes proviso as a drafting device that qualifies the main clause by taking certain cases out of it. Apex Court explained that usually, a proviso narrows the main rule. But sometimes the same idea is written into the body of section itself, so it reads like substantive provision rather than a afterthought.The Supreme Court has repeated these themes in several cases.In State of Rajasthan v. Leela Jain (1965) 1 SCR 276, AIR 1965 SC 1296, (1966) 1 SCJ 37 the following observations were made:'So far as a general principle of construction of a proviso is concerned, it has been broadly stated that the function of a proviso is to limit the main part of the section and carve out something which but for the proviso would have been within the operative part.'In the case of STO, Circle-I, Sales Tax Officer, Circle-I, Jabalpur v. Hanuman Prasad. (1967) 1 SCR 831, AIR 1967 SC 565, (1967) 19 STC 87, the Court made following point:'It is well-recognised that a proviso is added to a principal clause primarily with the object of taking out of the scope of that principal clause what is included in it and what the legislature desires should be excluded.'In Dwarka Prasad v. Dwarka Das Saraf. (1976) 1 SCC 128, (1976) 1 SCR 277, AIR 1975 SC 1758 Krishna Iyer, J. speaking for the Court stressed on the following approach:'There is some validity in this submission but if, on a fair construction, the principal provision is clean a proviso cannot expand or limit it. Sometimes a proviso is engrafted by an apprehensive draftsman to remove possible doubts, to make matters plain, to light up ambiguous edges. Here, such is the case.... If the rule of construction is that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause, the stand we have taken is sound. To expand the enacting clause, inflated by the proviso, sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction.'The Court in the end summed up the legal position by establishing following four broad ways in which provisos may operate are often discussed:qualifying or excepting certain provisions from the main enactment:it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable:it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; andit may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision.As stated in Dwarka Prasad, it sins against the fundamental rule of construction to read a proviso as if it were independent of the main enactment. A proviso cannot exist in isolation; it derives meaning and scope from the enacting clause. As the Court stated in landmark judgments, a proviso cannot be broader than the main provision, nor can it create rights foreign to the principal provision.A second principle emerged from necessity: the presumption of necessity. Since the natural presumption is that but for the proviso, the main provision would have included the subject matter of the proviso, the enacting part must be given such construction as makes the exceptions carved out by the proviso necessary. Interpretations that render a proviso superfluous must be avoided.Third, courts developed the principle of scope limitation: a proviso only embraces the field covered by the main provision. It carves out an exception to that specific provision and to no other.These principles would have been unnecessary if provisos had been kept to a minimum. The forced expression of such complex principles by the courts is proof that provisos had reached the point of threatening the intelligibility of statutes.C. Provisos in Indian Income Tax Law: Historical BackgroundThe Income Tax Act of 1961 replaced the Income Tax Act of 1922 with the objective of creating a modern body of taxation code. This act introduced a five-heads system of classifying income. In its early years, provisos were used sparingly and purposefully to address genuine exceptions, such as asset-specific depreciation, eligibility conditions for exemptions, and limits on deductions. While not flawless, the Act initially reflected a clear and structured legislative design, and the complexity that followed arose from the natural pressures of a long-standing statute rather than flawed drafting.The Accumulation Narrative: How A Tax Code Evolved Into Complicated FrameworkA. Phase I (1961-1975): Starting PointThe first fifteen years of operation of the 1961 Act represent a period of respective solidity. Although there were amendments, these were generally limited in scope. The judicial application of the provisions involved a range of factual scenarios, with little development of deep-seated interpretative ambiguity. The statute was sufficiently easy to work with.B. Phase II (1975-1990): Judicial Decisions as the runway of AccumulationThe second phase is marked by the appearance of a pattern that would influence the next fifty years: judicial interpretations of provisions in ways that were not foreseen by Parliament, followed by legislative provisos intended to cure or clarify judicial interpretations.A paradigmatic example is Section 43B. This section was inserted w.e.f. 01 April 1984. To address the hardship created by a literal reading, the first proviso was inserted by the Finance Act, 1987. The Apex Court later explained the proviso's clarificatory/remedial nature in Allied Motors Case (1997) 224 ITR 677. That decision belongs chronologically to a later period, but it is useful because it explains why the 1987 proviso was inserted and how courts understood its purpose.Section 43B was introduced into the statute with effect from April 1, 1984, as follows: "No deduction shall be allowed for any sum payable unless that sum has been paid during the relevant previous year." However, when courts applied this provision literally, it created severe unintended hardships. An assessee owing sales tax for the last quarter of the financial year, payable within 30 days of quarter-end, could not deduct that liability in that year-because it hadn't been paid during the previous year. The liability would be paid in the next year, but by then the income against which it could be deducted had moved to a different assessment year.The increase in the number of provisos led to divergent interpretations. Different High Courts, based on the application of Section 43B to similar sets of facts, made different determinations. The Kerala High Court, in CIT v. Kerala Solvent Extractions, 306 ITR 54, took a narrow view, while the Calcutta High Court, in Paharpur Cooling Towers Ltd v. CIT, 244 CTR 502, the Punjab & Haryana High Court, in CIT v. Modipon Ltd (No. 2), 334 ITR 106, and the Delhi High Court, in CIT v. Raj and San Deeps Ltd, 293 ITR 12, took up different stands on the applicability and retrospective effect of the section. While some courts were of the view that the expression "sum payable" in Section 43B was restricted to the amount payable in the same accounting year, others took a wider view. The Supreme Court intervened in the matter in Allied Motors (P) Ltd. v. CIT (1997), noting that without the clarificatory proviso, Section 43B had become unduly wide, bringing within its scope payments which Parliament had not intended to prohibit from the category of permissible deductions.Parliament's response was to insert the first proviso to Section 43B in the Finance Act of 1987:"Provided that if the sum is paid on or before the due date for furnishing the return of income under Section 139(1), the deduction shall be allowed."This single proviso, remedying an obvious omission in the main section, was treated as retrospective by the Supreme Court because it supplied "an obvious omission" that made the original provision "unworkable or unjust in a specific situation."The story does not end at this point. As the interpretive inquiries continued, the Finance Act of 1989 introduced Explanation 2 to Section 43B, with the objective of explaining the expression "any sum payable." Thus, one provision developed over a sequence of additions: main clause → first proviso → explanation. While each addition was justified in its own right, together they created a provision that requires cross-textual analysis to be fully understood.This trend was seen throughout the Act. Section 10 (Incomes not included in total income) of the Income Tax Act of 1961, which aimed to list exempt incomes, had accrued provisos due to the judiciary interpretations of the exemption clauses, or as a result of new exemptions by Parliament with certain time limits and qualifications.C. Phase 3 (1990-2010): Economic Liberalization and the ProliferationThe economic liberalization process triggered a speedy widening of provisos, as new exemptions and deductions were brought in under tangled conditions. The exemptions under Section 10 relating to Special Economic Zones (SEZs), housing, education, dividends, insurance, and research were accompanied by eligibility conditions. In 2010, Section 10 itself contained 224 elements, consisting of 90 explanations and 134 provisos. Deductions (Sections 80C to 80U) and Depreciation (Section 32) also had accumulated provisos regarding investment ceilings, categories of assets, and contingent circumstances.D. Phase 4 (2010-2025): Escalating Complexity and Structural FatigueIn the 2010s, the Income Tax Act of 1961 had seen more than 4,000 amendments in 65 Finance Acts, turning a relatively clean piece of legislation into a historical document that is full of redundant provisos for expired assessment years, transitional provisions, and superseded depreciation regimes. Parliament recognized that removal would pose a risk to contingent liabilities and therefore preferred accumulation over replacement. In the lead-up to the 2025 Bill, the Comprehensive Review undertaken by the CBDT, in addition to stakeholder consultations, found that step by step changes were insufficient and that a broad constructional makeover was required.Reasoning of Legislative Action by Parliament in 2025A. Accessibility and Compliance CrisisThe 1961 Act was well stocked with over 1,200 provisos and 900 explanations, which posed a challenge that only specialists could overcome. The challenge was more pronounced for small and medium-sized enterprises compared to corporations that maintained tax teams. The provisos were inconsistent and posed a challenge that contributed to non-compliance.B. Litigation and DatednessThe complex proviso regime resulted in conflicting decisions of the High Court and required frequent interventions of the Supreme Court. The provisos relating to lapsed assessment years and transitional provisions created a non-functional accumulation in the statute, making it more of a historical document than a living law.C. Modernistic layoutThe modern global taxation system uses sub-sections, tables, and themes instead of provisos. India, through structural redesign, adopted this global best practice to bring about modernization.Elimination of Provisos and Commencement of ClarityThe Income Tax Act 2025 makes a comprehensive revamp of the regime by removing over 1200 provisos and reducing them to sub-sections or clauses. The method centre on transformation and remodelling rather than elimination. Again, while rewriting the Income Tax Act 1961, law makers have used reformation techniques wherein provisos has been rebuilt to sub-section. To illustrate, where the former Section 43B had an anatomy of (Main clause) + (Proviso 1) + (Explanation 2), the new Income Tax Act sets out the entire provision as a single provision with sub-clauses. All the conditions, exceptions, and qualifications have been assembled at one place.Likewise, Section 32 (Depreciation) involved navigating through a series of provisos for different classes of assets. The new Act provides a complete depreciation table that lists the class of assets, rate of depreciation, conditions, and exceptions in one visual representation. Accordingly, complicated scenarios have been presented as Tables.To explain further, section 11 was the hub of 16 provisos. Now, provisos have been introduced as sub-part or sub-clauses. Conceptual presentation replaces arbitrarily arrangement. This improves interpretability in a following way:(i) fewer cross-references;(ii) step-by-step eligibility tests sit together;(iii) tables make rate/conditions visible at a glance; and(iv) the scope of the exception is clearer because it is written as part of the same rule.Various doctrines like Clubbing of income, which were previously narrated via provisos, are now represented as separate formulas setting out conditions and scenarios.ConclusionClosing a 65-Year Chapter, Opening a New EraThe Income Tax Act 1961 started clean but accumulated 4,000+ amendments, 1,200+ provisos, and 900+ explanations over 65 years. Courts pronounced elaborate proviso jurisprudence, but this could not resolve the anatomy complexity. Parliament eliminated provisos by converting them to sub-sections, tables, and schedules-no policy change, just a clearer blueprint. The redesign closes a problematic era, opening one of accessible tax law.Referenceshttps://www.casemine.com/judgement/in/5609ac1ee4b014971140e13chttps://indiankanoon.org/doc/68571/https://www.casemine.com/commentary/in/state-of-rajasthan-v.-leela-jain:-affirming-state-revisional-jurisdiction-over-municipal-orders/view#: :text=The%20case%20of%20State%20Of,from%20the%20approved%20municipal%20plans.itatonline.org/digest/allied-motors-p-ltd-v-cit-1997-224-itr-677-139-ctr-364-91-taxman-205-sc/https://bcajonline.org/journal/deductibility-of-advance-payments-section-43b/incometaxindia.gov.in/Documents/income-tax-bill-2025/faqs-income-tax-bill.pdfincometaxindia.gov.in/Documents/income-tax-act-1961-as-amended-by-finance-act-2025.pdfincometaxindia.gov.in/Documents/Budget/budget-2025/faqs-budget-2025.pdfprsindia.org/files/bills_acts/bills_parliament/2025/The_Income-tax_Bill, 2025.pdfprsindia.org/billtrack/the-income-tax-bill-2025Author may be reached at casukagrawal2014@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 53–57
Ep. 163 — Faceless Schemes in Income Tax Administration: Constitutional Limits of Executive Power and Delegated Legislation
CA Journal
· September 2026
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Faceless Schemes in Income Tax Administration: Constitutional Limits of Executive Power and Delegated LegislationThe Income-tax Act, 2025 (hereinafter ITA, 2025) signifies a pivotal reform in India's direct taxation landscape, notably through Section 532, which empowers the Central Government to frame "faceless" schemes for tax administration by executive order. This report analyses the constitutional validity of such delegation under Indian law, with special attention to the doctrine of separation of powers, parliamentary oversight of delegated legislation, and the protection of taxpayer rights. Drawing on developments under the erstwhile Income-tax Act, 1961 (hereinafter ITA, 1961), recent judicial rulings, and comparative international experience, the report demonstrates that while such delegation can be valid within strict constitutional and procedural limits, the breadth of Section 532 raises significant constitutional, procedural, and natural justice questions-especially concerning parliamentary control and procedural safeguards against administrative overreach.IntroductionThe legislative transition from the erstwhile Income-tax Act, 1961 (hereinafter referred to as ITA, 1961) to the restructured Income-tax Act, 2025 (hereinafter referred to as ITA, 2025) signifies far more than a statutory revision-it embodies a paradigmatic shift in the philosophy underpinning India's fiscal governance. This transformation is not confined to the language or architecture of the statute; it reflects a deeper institutional reorientation toward digitalisation, automation, and executive-led administration. At the heart of this shift lies Section 532 of ITA, 2025, which confers upon the Central Government sweeping powers to frame schemes-most notably faceless schemes-through executive notification, without the requirement of prior parliamentary approval. The ostensible legislative rationale is to streamline tax administration by reducing human interface, thereby promoting efficiency, transparency, and accountability in enforcement.However, this delegation of power raises profound constitutional questions. As India's tax apparatus evolves into a "digital-first" enforcement regime, the contours of executive discretion and the boundaries of legislative oversight come under renewed scrutiny. The doctrine of separation of powers, a cornerstone of constitutional governance, mandates a careful calibration between the law-making authority of Parliament and the implementing role of the Executive. When statutory instruments permit the Executive to design and operationalise entire schemes-potentially affecting substantive rights of taxpayers-without legislative deliberation or scrutiny, the legitimacy of such delegation must be examined through the lens of constitutional propriety. This inquiry becomes especially pertinent in the context of faceless schemes, which, while technologically progressive, may inadvertently dilute procedural safeguards and democratic accountability. The present article undertakes a doctrinal and statutory analysis of this delegation, juxtaposing the provisions of ITA, 2025, with the historical framework of ITA, 1961, and interrogates whether such executive lawmaking can withstand constitutional scrutiny under India's separation of powers jurisprudence.Doctrine of Separation of Powers in Indian Constitutional LawAt the heart of the constitutional inquiry is the doctrine of separation of powers a foundational principle of modern democratic governance that seeks to prevent the concentration of power and ensure checks and balances among the Legislature, Executive, and Judiciary.i. Key Features of the Doctrine in India:Non-Absolute Separation: Unlike the rigid model seen in the United States, the Indian Constitution embodies a pragmatic separation of functions, allowing for some degree of overlap while maintaining a robust system of checks and balances.Legislature: Tasked principally with lawmaking, including specifying legislative policy and essential features of the law.Executive: Charged with implementing laws, and, where expressly authorized, framing rules or schemes for detailed execution of legislative intent.Judiciary: Constitutionally independent, empowered to interpret the law and adjudicate upon the legality of legislative and executive actions, including administrative and delegated legislation.While the Indian Constitution does not expressly codify the doctrine, the Supreme Court has repeatedly recognized the separation of powers as a part of the Constitution's basic structure-and therefore immune from amendment.ii. Judicial ArticulationIn Kesavananda Bharati v. State of Kerala (1973), the Supreme Court held that Parliament cannot alter the basic structure of the Constitution-including the separation of powers. In State of Tamil Nadu v. State of Kerala (2014) 12 SCC 696, the Court confirmed that separation of powers though not expressly stated-is "an entrenched principle in the Constitution of India. The doctrine of separation of powers informs the Indian constitutional structure and is an essential constituent of the rule of law". Only ancillary and procedural details may be delegated to the executive, while core legislative functions-such as policy formulation-must remain with the legislature.Delegated Legislation in India: Legal Framework and Judicial Jurisprudencei. Legal FrameworkDelegated Legislation is the process whereby Parliament delegates certain law-making functions to the Executive or subordinate authorities by statute (the "parent act"). In India, this mechanism is especially prevalent in technical fields such as taxation, where detailed procedural rules are necessary for effective administration.Constitutional Basis:Article 245-248: Empower Parliament and State Legislatures to make law and, by implication, to delegate certain powers to the executive.Judicial Recognition: The Supreme Court in D.S. Garewal v. State of Punjab (1959 AIR 512) recognized Parliament's power to delegate legislative functions, provided the scope of delegation is circumscribed, and essential legislative functions are not surrendered.ii. Judicial Standards: The "Delegation Test"In Re Delhi Laws Act (1951 AIR SC 332) is the landmark case delineating the permissible limits of delegated legislation.Key Principles Evolved:Delegated legislation is valid as long as the legislature does not "abdicate" or "efface" its core legislative function.Essential legislative function involves defining legislative policy and formulating standards or principles guiding the law.Delegation is permitted for ancillary, procedural, or administrative details.Intelligible Principle Test: The legislation must lay down a clear policy or standard for the delegate to follow.Examples Where Delegation Was Struck Down: In Hamdard Dawakhana v. Union of India (1959), delegation was found unconstitutional where the power was "unguided and uncontrolled" with no clear principle to guide the executive action.iii. Legislative and Parliamentary SafeguardsLaying Procedure: Most Acts require all delegated legislation (rules/notifications/schemes) to be laid before both Houses of Parliament. This enables Parliament to scrutinize, modify, or annul executive-made rules.Committee on Subordinate Legislation: Both Houses have standing committees to examine whether delegated legislation conforms to constitutional principles and the policy of the parent Act.Judicial Review: Courts retain the power to examine delegated legislation for consistency with the Constitution and the parent Act, and to strike down ultra vires or unreasonable rules.The Constitutional Framework for Tax Legislation: Article 265 and Legislative Competencei. Article 265: "No Tax Shall Be Levied or Collected Except by Authority of Law"Article 265 of the Constitution is the bedrock of lawful taxation in India.Mandate: All taxes must have clear legislative authority. Taxation by executive fiat, without a supportive legal provision, is unconstitutional.Judicial Enforcement: Courts have struck down taxes levied without proper legislative sanction (e.g., Kunnathat Thathunni Moopil Nair v. State of Kerala, 1961; Mafatlal Industries Ltd. v. Union of India, 1997).No Inherent Power: The power to tax cannot be implied; express statutory authority is required for both levy and collection.ii. Distribution of Legislative Power: Seventh Schedule and TaxationLegislative competence is divided among the Union and the States via three lists in the Seventh Schedule:Union List (List I): Central taxation powers (e.g., Income Tax).State List (List II): State taxes (e.g., VAT).Concurrent List (List III): Shared powers; Union law prevails in case of conflict.Delegated Scheme-Framing Powers: ITA, 1961 Vs ITA, 2025i. Section 532, Income-tax Act, 2025: Text and ScopeSection 532 (ITA, 2025):Empowers: The Central Government to, by notification, frame schemes to impart efficiency, transparency, and accountability.Object: Eliminate interface with the assessee "to the extent technologically feasible" and optimize resource utilization.Power:Modification: The Government may, by notification, direct that any provision of the Act shall not apply or shall apply with exceptions, modifications, and adaptations.Parliamentary Control: Every notification must be laid before both Houses of Parliament "as soon as may be" after issuance.ii. Section 144B, Income-tax Act, 1961: Faceless Assessment SchemeSection 144B (ITA, 1961):Introduced and regularly amended since 2020, Section 144B established a comprehensive "Faceless Assessment" procedure with elaborate safeguards.Central Government framed schemes for faceless assessment and appeals (including National Faceless Assessment/Appeal Centres, functional units, risk allocation, review processes), with the requirement that every notification be laid before Parliament.Power to modify application of certain statutory provisions for implementing the scheme was subject to specific time limits (e.g., till March 31, 2022) and was not open-ended.iii. Transition from the Faceless Assessment under ITA, 1961 to ITA, 2025Broader Enabling Power: Section 532 subsumes, and arguably extends, the powers previously delineated across multiple sections in ITA, 1961, concerning faceless assessment, appeals, and other procedures.Continuity Clauses: Section 532(3) allows modification of schemes notified under ITA, 1961.Constitutional and Procedural Concernsi. Scope of Delegation: Excessive or Essential?The constitutional validity of Section 532's scheme-framing power turns on whether the Central Government's delegation is "excessive," and whether it is adequately circumscribed by intelligible principles.Policy vs. Procedure: Section 532 arguably delegates both procedural and substantive modification powers-not merely filling procedural gaps, but altering the applicability of statutory provisions to implement schemes.Essential Legislative Function: The power to suspend or modify the operation of statutory provisions, if unguided or open-ended, may amount to the delegation of essential legislative functions-which is prohibited.Intelligible Principle? Section 532 aims to "impart efficiency, transparency, and accountability," but such objectives may be too generic to suffice as clear policy instructions for the exercise of significant discretion by the executive.ii. Parliamentary Oversight: Is the "Laying" Sufficient?Notification Laying Requirement:Section 532(4) requires notifications to be laid before both Houses of Parliament "as soon as may be after the notification is issued." However, it does not stipulate a post-laying approval or annulment requirement, making it akin to a simple laying procedure.Judicial Precedent: The Supreme Court has held that mere laying before Parliament, without further control (affirmative/negative resolution), may render parliamentary supervision largely illusory, especially where the delegate has wide modification powers over statutory provisions.Current Trends: Parliamentary committees have repeatedly urged a uniform transition to laying subject to negative or affirmative resolution to ensure effective control over administrative schemes.iii. Natural Justice and Procedural Fairness in Faceless SchemesProcedural Concerns:Faceless assessment/appeal schemes aim for efficiency but risk abridging the taxpayer's right to be heard (audi alteram partem)-a foundational principle of natural justice.Personal Hearing as Discretionary: Several schemes permit personal hearing or video conferencing at the discretion of senior tax officials, not as a matter of right. Such discretionary confinement could be challenged for being arbitrary or in violation of Article 14 (Equality) and Article 21 (Fair Procedure).Judicial Review: High Courts (e.g., Delhi High Court in Lakshya Budhiraja v. UOI, Bombay High Court in Renaissance Buildtech Pvt. Ltd. v. NFAC) have held that the denial of reasonable opportunity for oral hearing, or failure to consider submissions/facts, may render assessment orders under the faceless scheme invalid for violation of natural justice.iv. Comparative International Models: Executive Delegation in Tax LawUnited Kingdom: Delegated legislation (statutory instruments) is abundant, but subject to detailed scrutiny and often requires explicit parliamentary approval for significant substantive changes.United States: The Administrative Procedure Act (APA) applies to IRS rulemaking, requiring notice-and-comment procedures, public participation, and substantive explanations for "legislative rules." Courts have recently invalidated IRS rules issued without APA compliance, reaffirming the need for procedural safeguards even in highly technical tax administration.Parliamentary Select Committee and Legislative Debate on ITA, 2025The Select Committee reviewing the Income-tax Bill, 2025 noted:The Bill is primarily a simplification effort, with no major policy changes, but broadens the enabling power for the Central Government to frame schemes.During deliberations, stakeholders expressed concerns over potentially excessive executive discretion, the adequacy of parliamentary control, and the need for safeguards on taxpayer rights under faceless schemes.The Committee emphasized continuity with the ITA, 1961 in structure, but recommended preserving all existing checks and balances in the new enabling powers.Transparency, Accountability, and Impact on Taxpayer Rightsi. Transparency and Administrative AccountabilityThe lack of physical interface in faceless schemes can enhance transparency and reduce petty corruption, but increases the risk of impersonal, opaque decision-making if procedural safeguards are weak. The centralization of decision-making in anonymous units may reduce local biases but also undermines personalized understanding of complex factual issues.ii. Impact on Taxpayer RightsThe most critical risk is the erosion of the right to a fair hearing. If the power to frame schemes allows the government to short-circuit or diminish statutory procedural rights, it risks being challenged under Article 14 (equality and non-arbitrariness), Article 21 (right to a fair legal procedure), and Article 265 (authority of law for taxation).Delhi and Bombay High Court Precedents: Faceless assessment schemes have been challenged where they resulted in non-application of mind, failed to serve notices or gave only formal opportunities for a digital written reply (with denial of oral hearing), or where review units usurped the domain of the original assessing authority (a quasi-judicial function).Supreme Court Guidance: Administrative efficiency cannot override constitutional guarantees of fairness and equality (see Union of India v. Bharat Forge Co. Ltd., Supreme Court (Civil Appeal No. 984 of 2022)). Authoritativeness and lawfulness of orders depend on meaningful opportunity for rebuttal and a reasoned order.Conclusion and RecommendationsThe delegation of power under Section 532 of the Income Tax Act, 2025 can be constitutionally valid if it is anchored in a clear legislative policy, confined by intelligible principles, and accompanied by robust procedural protections that preserve taxpayers' fundamental rights. Valid delegation requires that Parliament define the purpose and limits of executive authority with sufficient specificity so that delegated decision-making remains tethered to legislative intent and is amenable to meaningful judicial review. Equally essential are procedural safeguards: taxpayers must retain effective avenues for representation, a genuine right to be heard, and access to reasoned decisions that explain the factual and legal basis for outcomes.Section 532 contains open-ended language and vague objectives-terms like "efficiency" and "transparency"-that furnish little guidance to administrators and weak constraints for judicial review. The parliamentary safeguard of merely laying notifications permits minimal contemporaneous scrutiny and little corrective power. The faceless model, as practised, treats oral and personal hearings as exceptions, centralises discretion within administrative hierarchies, and increases the risk of opaque, unreasoned decisions. These defects invite constitutional challenge for breaching separation of powers and undermining principles of natural justice. To address these concerns and fortify the constitutional integrity of the delegation, the following reforms are recommended:Define scope, purpose and limits of delegation: Parliament should specify which statutory provisions may be modified or exempted, articulate the legislative aims justifying delegation, and set temporal and substantive limits so delegation is proportionate and time-bound.Prescribe intelligible principles and objective criteria: The statute must list narrow, objective criteria that constrain executive choices, describe permissible ends and means, and prohibit open-ended formulations that transfer law-making discretion without guidance.Require legislative oversight by resolution: Any executive scheme that materially affects taxpayer rights should be subject to an affirmative or negative resolution procedure within a fixed timeframe; delegated instruments should carry sunset clauses and be reportable to Parliament.Make the right to be heard a default procedural safeguard: Oral hearings should be the norm; where efficiency requires remote participation, electronic or videoconference hearings must offer the same opportunity for effective representation and engagement.Mandate reasoned, evidence-based orders: Every administrative order issued under the faceless scheme must contain clear, intelligible reasons, disclose the non-privileged evidence and legal authorities relied upon, and set out the factual basis enabling meaningful review.Preserve prompt and effective judicial review: Statutory language must unambiguously preserve timely access to courts to challenge ultra vires, arbitrary, or procedurally defective decisions and prevent ouster of judicial remedy by executive design.Decentralize decision-making and require accountable sign-off: Procedural rules should avoid concentrating discretion in a faceless hierarchy by decentralizing suitable decisions, while requiring senior approval for significant departures with publicly stated reasons.Enhance transparency and administrative accountability: Mandate regular reporting on delegated instruments, maintain accessible administrative records for affected taxpayers, and require Parliament to review and, where necessary, amend or annul schemes that stray beyond legislative intent.These measures would not only enhance the legitimacy of executive action under Section 532 but also reinforce the constitutional balance between efficiency and accountability in tax administration.ReferencesPress Information Bureau, The Income Tax Act, 2025: Reshaping Tax Framework, PIB (2025). URL: pib.gov.in/PressReleasePage.aspx?PRID=2000123The Separation of Power in the Framework of Tax Assessment, 11 Indian J. Legal Rsch. (IJLR) 45 (2024). URL: ijlr.in/the-separation-of-power-in-tax-assessment/NUJS Law Rev., Role of the Judiciary in Indian Tax Policy, 16 NUJS L. Rev. 112 (2023). URL: nujslawreview.org/2023/03/15/judiciary-tax-policy-india/CaseMine, Case Law Search on Separation of Powers. URL: casemine.com/search/in/separation-of-powersIn Re Delhi Laws Act Case, AIR 1951 SC 332 (India). URL: manupatrafast.com/caselaw/in-re-delhi-laws-act-case-1951The Law Codes, Delegated Legislation under the Income Tax Act, 1961. URL: thelawcodes.com/delegated-legislation-income-tax-act-1961/IncomeTaxIndia.gov.in, Income Tax Act, 1961. URL: incometaxindia.gov.in/pages/acts/income-tax-act.aspxITAT Online, Faceless Assessments and Appeals under the Income-tax Law. URL: itatonline.org/articles_new/faceless-assessment-appeals/PRSIndia, Parliamentary Scrutiny of Executive Rule Making. URL: prsindia.org/policy/analytical-reports/parliamentary-scrutiny-executive-rulemakingEY Tax Alerts, Parliamentary Select Committee's Report on IT Bill 2025. URL: ey.com/en_in/tax/alerts/parliamentary-select-committee-report-income-tax-bill-2025Author may be reached at arka6208@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 58–62
Ep. 164 — Transfer of property in goods used in Service Contracts: GST implications
CA Journal
· August 2026
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Transfer of property in goods used in Service Contracts: GST implicationsThe judgment of the Supreme Court in Aristo Printers, in a matter under the VAT laws, on transfer of property in goods in works contract, has triggered debate in the tax fraternity. The ratio of the judgment may have relevance not only in pending VAT disputes but also, in limited contexts, under GST where similar concepts concerning transfer of property in goods fall for consideration. The intention theory, which ruled for a considerable period of time and was subsequently abandoned through the judgments of the Apex Court, has been revived under the GST regime. As intention is a state of mind, a thorough understanding of the law and careful drafting of commercial contracts accordingly are important for any businessman.Intention Theory in pre-GST eraOne of the pain points in the pre-GST era of VAT/Service tax was taxation of composite contracts involving both goods and services, particularly works contracts and catering contracts. Initially, the Courts applied the 'dominant intention' theory for the classification of a works contract as a sale of goods or a supply of service. In Rainbow Colour Lab² and Hindustan Shipyard³ cases, the Supreme Court held that a division of a contract, post insertion of clause (29A) in Article 366 of the Constitution, can be made only if the works contract involved a dominant intention to transfer the property in goods and not in contracts where the transfer of property in goods takes place as an incident to a contract of service.The correctness of Rainbow Colour Lab (supra) was doubted in the Associated Cement⁴ case. Subsequently, a Full Bench of the Supreme Court in Bharat Sanchar Nigam⁵ held that only Associated Cement (supra) is to be followed and that of Rainbow Colour Lab (supra) is not to be followed. The Court clarified that "after the 46th amendment.....there is no question of dominant nature test applying". Still, there persisted an impression that in the case of a transaction involving a very small value of goods and where skill was more important, the transaction should not be a works contract but a service contract.The Bombay High Court in Ramdas Sobhraj⁶ dispelled such doubts while holding, relying on Matushree Textile⁷, that what is relevant for the applicability of the works contracts is the passing of the property in goods and not the quantity of goods that passes. The Allahabad High Court in Aristo Printers⁸ relied on Matushree Textile (supra) to hold that, in a printing contract, property in ink passes to customers as it is apparent on the printed paper. The law was finally settled by the judgment of the Supreme Court in Larsen and Toubro Limited⁹, which was approved by the Constitution Bench in Kone Elevator¹⁰, wherein the Court reiterated that the dominant intention test is not applicable for determining whether a particular contract is a works contract for the purposes of Article 366(29-A)(b).Different forms of transfer of property in goodsThe taxpayer assailed the correctness of the judgment in Aristo Printers (supra) before the Supreme Court in Aristo Printers Private Limited v. Commissioner of Trade Tax, Lucknow, U.P.¹¹The Court noted that various High Courts and the Supreme Court have discussed the aspect of transfer of property in goods involved in the execution of works contracts in three buckets: (a) tangible transfer of property; (b) no transfer of property due to consumption of goods; and (c) transfer of property despite consumption of goods.The Supreme Court ruled that printing lottery tickets on the paper supplied by the customer is a works contract. The use of ink, chemicals, and other processing materials in the printing of the lottery tickets amounts to transfer of property in goods. The taxable event, or the "deemed sale", occurs at the precise moment the ink is applied to the paper. This act constitutes "incorporation in the works", as the ink and the chemicals (with which the ink is mixed) are involved in the execution of the works contract and become a part of the lottery ticket. In this process, there is a tangible transfer of the diluted ink, a composite good comprising both the ink and the processing chemicals.In the process, the Supreme Court upheld the judgment of the Kerala High Court in Enviro Chemicals v. State of Kerala.¹² The Supreme Court also held that Pest Control¹³, M.K. Velu¹⁴, Dynamic Cleaning¹⁵ and Microtol Sterilization¹⁶ proceeded on the wrong footing.¹⁷ The emphasis of the courts on 'consumption' in the aforesaid cases was incorrect.A works contract for providing pest control or cleaning services (as was the case in Pest Control (supra) and Dynamic Cleaning (supra), respectively) would not lead to the creation of a new end product or a tangible transfer of property in goods. However, the chemicals used are indeed being transferred, as without such transfer of goods, it would be impossible to make an area clean or pest-free. Similarly, in M.K. Velu (supra) and Microtol Sterilization (supra), the works contracts therein could not have been executed successfully without the transfer of property in the fireworks and ethylene oxide, respectively. The chemicals, fireworks, and ethylene oxide are the primary goods facilitating the works under the respective contracts. It is in this context that they may be said to be incorporated in the 'works' of the respective contracts. Consequently, it is undeniable that the property in such goods is being transferred when the respective works contracts are executed. These goods differ from consumables such as water and electricity, which merely aid in executing works contracts and the property in them is not transferred before they are consumed."Section 2(90) of the CGST Act defines 'principal supply' as the supply which constitutes the predominant element of a composite supply and to which any other supply forming part of that supply is ancillary. The phrases 'naturally bundled', 'predominant element' and 'ancillary' have not been defined under the GST Act."In a recent GST judgment¹⁸ in respect of a business of offset printing press engaged in the printing and sales of brochures, books, magazines, posters, leaflets, photo books, notice etc. wherein the content would be supplied by the customer as digital files or digital video through CD/DVD/SVD/Pen drive and the materials required for printing the same, such as ink, papers, etc. are provided by the petitioners, the Kerala High Court agreed that by supplying printing material, there is a supply of goods in the form of paper used for printing. However, as far as the paper used for printing is concerned, it is only a material or means used for printing the actual property, which is the photographs, figures, etc., and therefore, it is only a tool or means to supply the service of printing of those contents supplied by the customers. In such circumstances, the activity of printing amounts to the predominant element of the composite supply, and the supply of paper by the petitioners, which is only meant to affect such supply of service, has to be treated as an ancillary activity. Therefore, the tax liability has to be determined based on the activity of printing and the supply of goods in the form of paper used for printing is not at all relevant. To be precise, the fact that the final output contains photographs printed on the paper would not make the same an act of transfer of goods.The Court further observed that "a distinction has to be drawn, between a case where printed material, wherein, the content was obtained by the assessee from its own source, and a case in which, the assessee undertook a service of printing of the material furnished by the customer. The first case referred to above, would fall under the category of supply of goods, whereas, the second one would fall under the category of supply of services."Application of pre-GST concepts in GST eraThe definition of 'works contract' through Section 2(119) of the CGST Act, 2017 mirrors pre-GST law by using the phrase "transfer of property in goods (whether as goods or in some other form)...involved in the execution of such contract." Thus, the understanding of transfer of property in goods in the pre-GST era will squarely apply to the works contract under GST law.While the concept of works contract in the GST regime is limited to immovable property, for taxation of transactions involving supply of goods and services simultaneously, the Act has brought in the concept of composite supply, as defined under Section 2(30) of the CGST Act, which calls for determination of the principal supply [Section 2(90)].Section 2(90) of the CGST Act defines 'principal supply' as the supply which constitutes the predominant element of a composite supply and to which any other supply forming part of that supply is ancillary. The phrases 'naturally bundled', 'predominant element' and 'ancillary' have not been defined under the GST Act.In a commercial transaction, which aspect of the supply is of predominance will have to be decided on a case-to-case basis, in the facts and circumstances of each case.In a matter before the Authority for Advance Ruling, Gujarat,¹⁹ the applicant was engaged in the business of carrying out blasting work at various sites by means of use of explosives and other materials for which it had obtained a licence from the Petroleum and Explosives Safety Organization. During the entire blasting activity, explosives were neither handed over to the client nor were they in the possession of the client. Any leftover quantity of explosives was collected back by the applicant. The Authority referred to the Supreme Court's judgment in the State of Gujarat v. Bharat Pest Control²⁰ to hold that there is a deemed supply of explosives by the applicant to the client as well as a supply of service in the form of the blasting work. The activity was held to be a composite supply.In the case of composite supplies of 'works contract' and 'restaurant service', the Act itself provides certainty by inclusion in Schedule II. However, for other supplies involving goods and services both, the predominant element of supply will have to be ascertained. One of the transactions open for litigation is that of health care services. Recently, the Gujarat High Court, in a detailed judgment,²¹ has upheld the levy of VAT on the goods portion in hospital services, observing that a simple treatment with medicine cannot be equated with complicated medical procedures undertaken by the petitioner hospitals involving skill and use of expensive implants/prosthetics and use of laboratory testing equipment. It is true that the dominant intention of the contract was not to transfer the property in goods, i.e. consumables, medicines, implants, stents, etc. used in the treatment of indoor patients by the petitioner hospitals, but the same was for rendering of services. However, the ultimate transaction is nothing but a transfer of movable property and it would be open for the respondent State to levy sales tax/VAT on the materials used in such contract if such contract otherwise has the element of "works contract" which would fall within clause(b) of Article 366(29A) of the Constitution, as it would amount to transfer either in goods or some other form.Extending this logic to the GST regime, though services by way of health care services by a clinical establishment, an authorised medical practitioner or paramedics are exempt from GST²², where the cost of a package for treatment of the same disease differs significantly according to the kind of implant used, the Revenue may dispute the availability of the exemption, asserting the predominant intention as sale of goods.The Delhi High Court is examining whether medicines and consumables supplied to hospital inpatients are liable to GST or form part of exempt inpatient healthcare services. The court issued notice on a writ petition filed by Escorts Heart Institute²³ challenging a GST demand of ₹ 6.66 crore raised by the CGST Delhi Audit Commissionerate. While allowing adjudication proceedings to continue, the High Court restrained tax authorities from passing any final order until the petition is finally decided. The tax department alleged that GST was embedded in the MRP charged for medicines, implants, and consumables during inpatient treatment and was collected but not remitted. The hospital argued that such supplies are part of exempt composite healthcare services.Tests for determining predominant intentionDetermining whether a transfer of property in goods has occurred is a fact-intensive enquiry, heavily dependent on the circumstances surrounding a particular case, such as the subject and terms of the contract itself. In such a scenario, it is neither possible to lay down any "general principles" nor is it advisable to do so. The Supreme Court in Collector of Central Excise, New Delhi v. Ballarpur Industries Limited²⁴ has recognised this position.It is not necessary that a transaction should fall within either a composite supply or a mixed supply. A single contract instrument may consist of two distinct supplies, one of goods and the other of services. This position is recognised by the CBIC in Circular No. 47/21/2018-GST dated 08.06.2018.²⁵"Determining whether a transfer of property in goods has occurred is a fact-intensive enquiry, heavily dependent on the circumstances surrounding a particular case, such as the subject and terms of the contract itself. In such a scenario, it is neither possible to lay down any "general principles" nor is it advisable to do so."Composite supply in EU VATComposite supplies are one of the most commonly debated issues under European VAT (EU VAT). Despite its unquestionable relevance as a topic, there is no settled rule providing a clear indication of how to deal with the issue of single or multiple supplies. Fortunately, some guidance on the VAT treatment of composite supplies has been provided, through the years, by the Court of Justice of the European Union (CJEU).The EU's doctrine on composite supplies has a main rule and two exceptions. The main rule stipulates that every transaction must normally be regarded as distinct and independent for VAT purposes. This primary course is termed as 'splitting'.Two notable exceptions, however, are generally acknowledged to this main approach. Under the first exception, a single composite supply exists where one or more supplies constitute a principal supply, while the other supply or supplies constitute one or more ancillary supplies which ought to receive the tax treatment of the principal supply.²⁶ As such, the VAT treatment under this first exception follows the Latin maxim 'accessorium sequitur principale' or the 'principle of absorption of the ancillary (or subordinate) supply into the main (or principal) supply'.However, a single supply also exists, and that is the second exception widely acknowledged, where two or more elements (i.e., the supplies) made by a taxable person are so closely linked that they form, objectively, a single, indivisible economic supply that would be artificial to split.²⁷The ECJ has admitted that the price of different elements of supply itself is not a decisive factor for the determination of principal supply. The CBIC has toed this line of reasoning through Circular Number 34/8/2018-GST dated 01.03.2018 and Circular Number 11/11/2017-GST dated 20.10.2017.²⁸"While tax obligations are generally governed by statute, the way these obligations are distributed between contracting parties is largely a matter of private negotiation, judged by looking at the commercial intent, the jurisdiction's tax laws, and the common practices in the relevant industry, looked through the eyes of an average customer."Express communication of intention of parties to contractDrafting contractual clauses that effectively address indirect tax issues is a nuanced and often complex task. While tax obligations are generally governed by statute, the way these obligations are distributed between contracting parties is largely a matter of private negotiation, judged by looking at the commercial intent, the jurisdiction's tax laws, and the common practices in the relevant industry, looked through the eyes of an average customer.Indian Courts have emphasized the contractual intention of parties in tax matters. Intention is a state of mind. Intention is an inference to be drawn from the relevant facts.²⁹ No person can make out the state of mind of another person. The state of a person's mind can only be determined by deducing facts of a case from the underlying documents.In most jurisdictions, Courts aim to uphold the intent of the parties unless a clause contravenes mandatory tax law. In this respect, it is relevant whether the customer, being an average customer, has a single economic purpose in purchasing the service consisting of several elements.³⁰ An approach consisting of taking account of the intention of each recipient individually would be contrary to the objectives of the VAT system of ensuring legal certainty and a correct and straightforward application of the provisions of law.³¹There is also a single supply where one or more elements are to be regarded as constituting the principal supply, while other elements are to be regarded, by contrast, as one or more ancillary supplies which share the tax treatment of the principal supply. In particular, a service must be regarded as ancillary to a principal supply if it does not constitute for customers an end in itself but a means of better enjoying the principal service supplied.³²,³³Whether a single price is charged is not decisive. If the service provided to customers consists of several elements for a single price, the single price may, however, suggest that there is a single service, but if the customers intend to buy two distinct services, the single price will need to be split using the simplest possible method of calculation.³⁴Whether the customer is allowed to purchase one of the supplies from another service provider is also important in order to determine whether there is a single supply or two distinct supplies.³⁵¹ TS-688-SC-2025-VAT; 2025-TIOL-76-SC-MISC; 07.10.2025² [2000] 118 STC 09 (SC): 02.02.2000³ [2000] 119 STC 53 (SC): 20.07.2000⁴ [2001] 124 STC 59 (SC): 25.01.2001⁵ [2006] 145 STC 91 (SC): 02.03.2006⁶ [2012] 55 VST 420 (Bombay): 25.10.2012⁷ [2003] 132 STC 539 (Bombay): 22.08.2003⁸ [2011] 41 VST 102 (Allahabad): 08.12.2010⁹ [2013] 65 VST 1 (SC): 26.09.2013¹⁰ [2014] 71 VST 01 (SC): 06.05.2014¹¹ TS-688-SC-2025-VAT; 2025-TIOL-76-SC-MISC; 07.10.2025¹² 2011 SCC OnLine Ker 3685: business of providing a service of chemical treatment of effluent water (transfer of property despite consumption of goods).¹³ Pest Control India Limited v Union of India & Ors., 1989 SCC OnLine Pat 288; [1989] 75 STC 188 (Patna HC): 14.09.1989¹⁴ Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. M.K Velu, 1993 SCC OnLine Ker 577; [1993] 89 STC 40 (Kerala HC):20.01.1993¹⁵ Dynamic Industrial and Cleaning Services (P) Ltd. v State of Kerala & Anr, 1994 SCC OnLine Ker 379; [1995] 97 STC 564 (Kerala HC): 24.05.1994¹⁶ Microtol Sterilization Services Pvt Limited v State of Kerala 2009 SCC OnLine Ker 1480; [2009] 26 VST 213 (Kerala HC):25.03.2009¹⁷ No transfer of property due to consumption of goods¹⁸ Stark Photo Book v The Assisstant Commissioner (Intelligence) (2025) 35 Centax 121 (Ker.); TS-852-HCKER-2025-GST: 07.10.2025¹⁹ 2018-TIOL-173-AAR-GST: 27.08.2018²⁰ 2018-VIL-02-SC; [2018] 55 GSTR 99 (SC); [2018] 13 GSTL 401 (SC): 30.01.2018²¹ Bankers Cardiology Private Limited & Anr v Commissioner of Commercial Tax & Anr TS-634-HC-2025(GUJ)-VAT: 25.07.2025²² Serial number 74 in Notification number 12/2017 (CTR): 28.06.2017²³ Escorts Heart Institute and Research Center Limited v Additional Commissioner of CGST Audit-I & Ors [W.P.(C) 19355/2025, CM APPL. 80732/2025 & CM APPL. 80733/2025] order dated 19.12.2025²⁴ 1989 (43) E.L.T. 804 (S.C.); (1989) 4 SCC 566: 29.09.1989 as quoted by the Supreme Court in Aristo Printers (supra)²⁵ Servicing of cars involving both supply of goods (spare parts) and services (labour) where the value of goods and services are shown separately.²⁶ See Card Protection C-349/96 para 32²⁷ Levob Verzekeringen B.V, OB Bank N.V, v. Staatssecretaris van Financiën, (C-41/04) 27.10.2005, paragraphs 20 and 22²⁸ Aktiebolabolaget NN v Skatteverket (case C-111/05) decided on 29.03.2007²⁹ CIT v Vikram Cotton Mills Ltd [1988] 169 ITR 597 (SC) - Matter involved taxation under the head 'Income from House Property'³⁰ Levob Verzekeringen B.V, OB Bank N.V, v. Staatssecretaris van Financiën, (C-41/04) 27.10.2005 para 24³¹ Město Žamberk v Finanční ředitelství v Hradci Králové C-18/12: 21.02.2013 para 36³² Card Protection Plan Ltd v. Commissioners of Customs and Excise C-349/96 25.02.1999 para 30³³ Stadion Amsterdam CV v. Staatssecretaris van Financiën, C-463/16: 18.01.2018³⁴ Card Protection Plan Ltd v. Commissioners of Customs and Excise C-349/96 25.02.1999 para 31³⁵ Minister Finansów v Wojskowa Agencja Mieszkaniowa w Warszawie (C-42/14): 16.04.2015Author may be reached at sanjayk2202@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 63–67
Ep. 165 — Internal Financial Control (IFC) – Regulation, Global Practices and Evolution
CA Journal
· September 2026
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Transfer of property in goods used in Service Contracts: GST implicationsThe judgment of the Supreme Court in Aristo Printers, in a matter under the VAT laws, on transfer of property in goods in works contract, has triggered debate in the tax fraternity. The ratio of the judgment may have relevance not only in pending VAT disputes but also, in limited contexts, under GST where similar concepts concerning transfer of property in goods fall for consideration. The intention theory, which ruled for a considerable period of time and was subsequently abandoned through the judgments of the Apex Court, has been revived under the GST regime. As intention is a state of mind, a thorough understanding of the law and careful drafting of commercial contracts accordingly are important for any businessman.By CA. Sanjay Kumar Agarwal, Member of the InstituteIntention Theory in pre-GST eraOne of the pain points in the pre-GST era of VAT/Service tax was taxation of composite contracts involving both goods and services, particularly works contracts and catering contracts. Initially, the Courts applied the 'dominant intention' theory for the classification of a works contract as a sale of goods or a supply of service. In Rainbow Colour Lab² and Hindustan Shipyard³ cases, the Supreme Court held that a division of a contract, post insertion of clause (29A) in Article 366 of the Constitution, can be made only if the works contract involved a dominant intention to transfer the property in goods and not in contracts where the transfer of property in goods takes place as an incident to a contract of service.The correctness of Rainbow Colour Lab (supra) was doubted in the Associated Cement⁴ case. Subsequently, a Full Bench of the Supreme Court in Bharat Sanchar Nigam⁵ held that only Associated Cement (supra) is to be followed and that of Rainbow Colour Lab (supra) is not to be followed. The Court clarified that "after the 46th amendment.....there is no question of dominant nature test applying". Still, there persisted an impression that in the case of a transaction involving a very small value of goods and where skill was more important, the transaction should not be a works contract but a service contract.The Bombay High Court in Ramdas Sobhraj⁶ dispelled such doubts while holding, relying on Matushree Textile⁷, that what is relevant for the applicability of the works contracts is the passing of the property in goods and not the quantity of goods that passes. The Allahabad High Court in Aristo Printers⁸ relied on Matushree Textile (supra) to hold that, in a printing contract, property in ink passes to customers as it is apparent on the printed paper. The law was finally settled by the judgment of the Supreme Court in Larsen and Toubro Limited⁹, which was approved by the Constitution Bench in Kone Elevator¹⁰, wherein the Court reiterated that the dominant intention test is not applicable for determining whether a particular contract is a works contract for the purposes of Article 366(29-A)(b).Different forms of transfer of property in goodsThe taxpayer assailed the correctness of the judgment in Aristo Printers (supra) before the Supreme Court in Aristo Printers Private Limited v. Commissioner of Trade Tax, Lucknow, U.P.¹¹The Court noted that various High Courts and the Supreme Court have discussed the aspect of transfer of property in goods involved in the execution of works contracts in three buckets: (a) tangible transfer of property; (b) no transfer of property due to consumption of goods; and (c) transfer of property despite consumption of goods.The Supreme Court ruled that printing lottery tickets on the paper supplied by the customer is a works contract. The use of ink, chemicals, and other processing materials in the printing of the lottery tickets amounts to transfer of property in goods. The taxable event, or the "deemed sale", occurs at the precise moment the ink is applied to the paper. This act constitutes "incorporation in the works", as the ink and the chemicals (with which the ink is mixed) are involved in the execution of the works contract and become a part of the lottery ticket. In this process, there is a tangible transfer of the diluted ink, a composite good comprising both the ink and the processing chemicals.In the process, the Supreme Court upheld the judgment of the Kerala High Court in Enviro Chemicals v. State of Kerala.¹² The Supreme Court also held that Pest Control¹³, M.K. Velu¹⁴, Dynamic Cleaning¹⁵ and Microtol Sterilization¹⁶ proceeded on the wrong footing.¹⁷ The emphasis of the courts on 'consumption' in the aforesaid cases was incorrect.A works contract for providing pest control or cleaning services (as was the case in Pest Control (supra) and Dynamic Cleaning (supra), respectively) would not lead to the creation of a new end product or a tangible transfer of property in goods. However, the chemicals used are indeed being transferred, as without such transfer of goods, it would be impossible to make an area clean or pest-free. Similarly, in M.K. Velu (supra) and Microtol Sterilization (supra), the works contracts therein could not have been executed successfully without the transfer of property in the fireworks and ethylene oxide, respectively. The chemicals, fireworks, and ethylene oxide are the primary goods facilitating the works under the respective contracts. It is in this context that they may be said to be incorporated in the 'works' of the respective contracts. Consequently, it is undeniable that the property in such goods is being transferred when the respective works contracts are executed. These goods differ from consumables such as water and electricity, which merely aid in executing works contracts and the property in them is not transferred before they are consumed."Section 2(90) of the CGST Act defines 'principal supply' as the supply which constitutes the predominant element of a composite supply and to which any other supply forming part of that supply is ancillary. The phrases 'naturally bundled', 'predominant element' and 'ancillary' have not been defined under the GST Act."In a recent GST judgment¹⁸ in respect of a business of offset printing press engaged in the printing and sales of brochures, books, magazines, posters, leaflets, photo books, notice etc. wherein the content would be supplied by the customer as digital files or digital video through CD/DVD/SVD/Pen drive and the materials required for printing the same, such as ink, papers, etc. are provided by the petitioners, the Kerala High Court agreed that by supplying printing material, there is a supply of goods in the form of paper used for printing. However, as far as the paper used for printing is concerned, it is only a material or means used for printing the actual property, which is the photographs, figures, etc., and therefore, it is only a tool or means to supply the service of printing of those contents supplied by the customers. In such circumstances, the activity of printing amounts to the predominant element of the composite supply, and the supply of paper by the petitioners, which is only meant to affect such supply of service, has to be treated as an ancillary activity. Therefore, the tax liability has to be determined based on the activity of printing and the supply of goods in the form of paper used for printing is not at all relevant. To be precise, the fact that the final output contains photographs printed on the paper would not make the same an act of transfer of goods.The Court further observed that "a distinction has to be drawn, between a case where printed material, wherein, the content was obtained by the assessee from its own source, and a case in which, the assessee undertook a service of printing of the material furnished by the customer. The first case referred to above, would fall under the category of supply of goods, whereas, the second one would fall under the category of supply of services."Application of pre-GST concepts in GST eraThe definition of 'works contract' through Section 2(119) of the CGST Act, 2017 mirrors pre-GST law by using the phrase "transfer of property in goods (whether as goods or in some other form)...involved in the execution of such contract." Thus, the understanding of transfer of property in goods in the pre-GST era will squarely apply to the works contract under GST law.While the concept of works contract in the GST regime is limited to immovable property, for taxation of transactions involving supply of goods and services simultaneously, the Act has brought in the concept of composite supply, as defined under Section 2(30) of the CGST Act, which calls for determination of the principal supply [Section 2(90)].Section 2(90) of the CGST Act defines 'principal supply' as the supply which constitutes the predominant element of a composite supply and to which any other supply forming part of that supply is ancillary. The phrases 'naturally bundled', 'predominant element' and 'ancillary' have not been defined under the GST Act.In a commercial transaction, which aspect of the supply is of predominance will have to be decided on a case-to-case basis, in the facts and circumstances of each case.In a matter before the Authority for Advance Ruling, Gujarat,¹⁹ the applicant was engaged in the business of carrying out blasting work at various sites by means of use of explosives and other materials for which it had obtained a licence from the Petroleum and Explosives Safety Organization. During the entire blasting activity, explosives were neither handed over to the client nor were they in the possession of the client. Any leftover quantity of explosives was collected back by the applicant. The Authority referred to the Supreme Court's judgment in the State of Gujarat v. Bharat Pest Control²⁰ to hold that there is a deemed supply of explosives by the applicant to the client as well as a supply of service in the form of the blasting work. The activity was held to be a composite supply.In the case of composite supplies of 'works contract' and 'restaurant service', the Act itself provides certainty by inclusion in Schedule II. However, for other supplies involving goods and services both, the predominant element of supply will have to be ascertained. One of the transactions open for litigation is that of health care services. Recently, the Gujarat High Court, in a detailed judgment,²¹ has upheld the levy of VAT on the goods portion in hospital services, observing that a simple treatment with medicine cannot be equated with complicated medical procedures undertaken by the petitioner hospitals involving skill and use of expensive implants/prosthetics and use of laboratory testing equipment. It is true that the dominant intention of the contract was not to transfer the property in goods, i.e. consumables, medicines, implants, stents, etc. used in the treatment of indoor patients by the petitioner hospitals, but the same was for rendering of services. However, the ultimate transaction is nothing but a transfer of movable property and it would be open for the respondent State to levy sales tax/VAT on the materials used in such contract if such contract otherwise has the element of "works contract" which would fall within clause(b) of Article 366(29A) of the Constitution, as it would amount to transfer either in goods or some other form.Extending this logic to the GST regime, though services by way of health care services by a clinical establishment, an authorised medical practitioner or paramedics are exempt from GST²², where the cost of a package for treatment of the same disease differs significantly according to the kind of implant used, the Revenue may dispute the availability of the exemption, asserting the predominant intention as sale of goods.The Delhi High Court is examining whether medicines and consumables supplied to hospital inpatients are liable to GST or form part of exempt inpatient healthcare services. The court issued notice on a writ petition filed by Escorts Heart Institute²³ challenging a GST demand of ₹ 6.66 crore raised by the CGST Delhi Audit Commissionerate. While allowing adjudication proceedings to continue, the High Court restrained tax authorities from passing any final order until the petition is finally decided. The tax department alleged that GST was embedded in the MRP charged for medicines, implants, and consumables during inpatient treatment and was collected but not remitted. The hospital argued that such supplies are part of exempt composite healthcare services.Tests for determining predominant intentionDetermining whether a transfer of property in goods has occurred is a fact-intensive enquiry, heavily dependent on the circumstances surrounding a particular case, such as the subject and terms of the contract itself. In such a scenario, it is neither possible to lay down any "general principles" nor is it advisable to do so. The Supreme Court in Collector of Central Excise, New Delhi v. Ballarpur Industries Limited²⁴ has recognised this position.It is not necessary that a transaction should fall within either a composite supply or a mixed supply. A single contract instrument may consist of two distinct supplies, one of goods and the other of services. This position is recognised by the CBIC in Circular No. 47/21/2018-GST dated 08.06.2018.²⁵"Determining whether a transfer of property in goods has occurred is a fact-intensive enquiry, heavily dependent on the circumstances surrounding a particular case, such as the subject and terms of the contract itself. In such a scenario, it is neither possible to lay down any "general principles" nor is it advisable to do so."Composite supply in EU VATComposite supplies are one of the most commonly debated issues under European VAT (EU VAT). Despite its unquestionable relevance as a topic, there is no settled rule providing a clear indication of how to deal with the issue of single or multiple supplies. Fortunately, some guidance on the VAT treatment of composite supplies has been provided, through the years, by the Court of Justice of the European Union (CJEU).The EU's doctrine on composite supplies has a main rule and two exceptions. The main rule stipulates that every transaction must normally be regarded as distinct and independent for VAT purposes. This primary course is termed as 'splitting'.Two notable exceptions, however, are generally acknowledged to this main approach. Under the first exception, a single composite supply exists where one or more supplies constitute a principal supply, while the other supply or supplies constitute one or more ancillary supplies which ought to receive the tax treatment of the principal supply.²⁶ As such, the VAT treatment under this first exception follows the Latin maxim 'accessorium sequitur principale' or the 'principle of absorption of the ancillary (or subordinate) supply into the main (or principal) supply'.However, a single supply also exists, and that is the second exception widely acknowledged, where two or more elements (i.e., the supplies) made by a taxable person are so closely linked that they form, objectively, a single, indivisible economic supply that would be artificial to split.²⁷The ECJ has admitted that the price of different elements of supply itself is not a decisive factor for the determination of principal supply. The CBIC has toed this line of reasoning through Circular Number 34/8/2018-GST dated 01.03.2018 and Circular Number 11/11/2017-GST dated 20.10.2017.²⁸"While tax obligations are generally governed by statute, the way these obligations are distributed between contracting parties is largely a matter of private negotiation, judged by looking at the commercial intent, the jurisdiction's tax laws, and the common practices in the relevant industry, looked through the eyes of an average customer."Express communication of intention of parties to contractDrafting contractual clauses that effectively address indirect tax issues is a nuanced and often complex task. While tax obligations are generally governed by statute, the way these obligations are distributed between contracting parties is largely a matter of private negotiation, judged by looking at the commercial intent, the jurisdiction's tax laws, and the common practices in the relevant industry, looked through the eyes of an average customer.Indian Courts have emphasized the contractual intention of parties in tax matters. Intention is a state of mind. Intention is an inference to be drawn from the relevant facts.²⁹ No person can make out the state of mind of another person. The state of a person's mind can only be determined by deducing facts of a case from the underlying documents.In most jurisdictions, Courts aim to uphold the intent of the parties unless a clause contravenes mandatory tax law. In this respect, it is relevant whether the customer, being an average customer, has a single economic purpose in purchasing the service consisting of several elements.³⁰ An approach consisting of taking account of the intention of each recipient individually would be contrary to the objectives of the VAT system of ensuring legal certainty and a correct and straightforward application of the provisions of law.³¹There is also a single supply where one or more elements are to be regarded as constituting the principal supply, while other elements are to be regarded, by contrast, as one or more ancillary supplies which share the tax treatment of the principal supply. In particular, a service must be regarded as ancillary to a principal supply if it does not constitute for customers an end in itself but a means of better enjoying the principal service supplied.³²,³³Whether a single price is charged is not decisive. If the service provided to customers consists of several elements for a single price, the single price may, however, suggest that there is a single service, but if the customers intend to buy two distinct services, the single price will need to be split using the simplest possible method of calculation.³⁴Whether the customer is allowed to purchase one of the supplies from another service provider is also important in order to determine whether there is a single supply or two distinct supplies.³⁵¹ TS-688-SC-2025-VAT; 2025-TIOL-76-SC-MISC; 07.10.2025² [2000] 118 STC 09 (SC): 02.02.2000³ [2000] 119 STC 53 (SC): 20.07.2000⁴ [2001] 124 STC 59 (SC): 25.01.2001⁵ [2006] 145 STC 91 (SC): 02.03.2006⁶ [2012] 55 VST 420 (Bombay): 25.10.2012⁷ [2003] 132 STC 539 (Bombay): 22.08.2003⁸ [2011] 41 VST 102 (Allahabad): 08.12.2010⁹ [2013] 65 VST 1 (SC): 26.09.2013¹⁰ [2014] 71 VST 01 (SC): 06.05.2014¹¹ TS-688-SC-2025-VAT; 2025-TIOL-76-SC-MISC; 07.10.2025¹² 2011 SCC OnLine Ker 3685: business of providing a service of chemical treatment of effluent water (transfer of property despite consumption of goods).¹³ Pest Control India Limited v Union of India & Ors., 1989 SCC OnLine Pat 288; [1989] 75 STC 188 (Patna HC): 14.09.1989¹⁴ Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. M.K Velu, 1993 SCC OnLine Ker 577; [1993] 89 STC 40 (Kerala HC):20.01.1993¹⁵ Dynamic Industrial and Cleaning Services (P) Ltd. v State of Kerala & Anr, 1994 SCC OnLine Ker 379; [1995] 97 STC 564 (Kerala HC): 24.05.1994¹⁶ Microtol Sterilization Services Pvt Limited v State of Kerala 2009 SCC OnLine Ker 1480; [2009] 26 VST 213 (Kerala HC):25.03.2009¹⁷ No transfer of property due to consumption of goods¹⁸ Stark Photo Book v The Assisstant Commissioner (Intelligence) (2025) 35 Centax 121 (Ker.); TS-852-HCKER-2025-GST: 07.10.2025¹⁹ 2018-TIOL-173-AAR-GST: 27.08.2018²⁰ 2018-VIL-02-SC; [2018] 55 GSTR 99 (SC); [2018] 13 GSTL 401 (SC): 30.01.2018²¹ Bankers Cardiology Private Limited & Anr v Commissioner of Commercial Tax & Anr TS-634-HC-2025(GUJ)-VAT: 25.07.2025²² Serial number 74 in Notification number 12/2017 (CTR): 28.06.2017²³ Escorts Heart Institute and Research Center Limited v Additional Commissioner of CGST Audit-I & Ors [W.P.(C) 19355/2025, CM APPL. 80732/2025 & CM APPL. 80733/2025] order dated 19.12.2025²⁴ 1989 (43) E.L.T. 804 (S.C.); (1989) 4 SCC 566: 29.09.1989 as quoted by the Supreme Court in Aristo Printers (supra)²⁵ Servicing of cars involving both supply of goods (spare parts) and services (labour) where the value of goods and services are shown separately.²⁶ See Card Protection C-349/96 para 32²⁷ Levob Verzekeringen B.V, OB Bank N.V, v. Staatssecretaris van Financiën, (C-41/04) 27.10.2005, paragraphs 20 and 22²⁸ Aktiebolabolaget NN v Skatteverket (case C-111/05) decided on 29.03.2007²⁹ CIT v Vikram Cotton Mills Ltd [1988] 169 ITR 597 (SC) - Matter involved taxation under the head 'Income from House Property'³⁰ Levob Verzekeringen B.V, OB Bank N.V, v. Staatssecretaris van Financiën, (C-41/04) 27.10.2005 para 24³¹ Město Žamberk v Finanční ředitelství v Hradci Králové C-18/12: 21.02.2013 para 36³² Card Protection Plan Ltd v. Commissioners of Customs and Excise C-349/96 25.02.1999 para 30³³ Stadion Amsterdam CV v. Staatssecretaris van Financiën, C-463/16: 18.01.2018³⁴ Card Protection Plan Ltd v. Commissioners of Customs and Excise C-349/96 25.02.1999 para 31³⁵ Minister Finansów v Wojskowa Agencja Mieszkaniowa w Warszawie (C-42/14): 16.04.2015Author may be reached at sanjayk2202@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 63–67
Ep. 166 — Creditor’s Rights and the Persistence of Zombie Borrowing in India
CA Journal
· September 2026
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Creditor's Rights and the Persistence of Zombie Borrowing in IndiaThe Insolvency and Bankruptcy Code (IBC) of 2016 in India aims to facilitate the exit of financially non-viable firms and address broader issues in credit dynamics. The time-bound procedures coupled with empowering creditors intend to curb the zombification of corporate firms, i.e., firms that remain operational despite the inability to service their debts out of current earnings over a long horizon. In this backdrop, the study aims to, first, analyse the present trends of firm zombification in India, and secondly, assess the impact of IBC reform on firm zombification. Finally, the study attempts to empirically examine the influence of the IBC on zombie borrowing in India.IntroductionThe Insolvency and Bankruptcy Code (IBC) of 2016 in India aims to facilitate the exit of financially non-viable firms and address the broader issue of credit dynamics (IBBI, 2025). The time-bound procedures coupled with empowering creditors intend to curb the zombification of corporate firms, i.e., firms that remain operational despite the inability to service their debts out of current earnings over a long horizon (Caballero et al., 2008). However, prior studies exhibit a sudden surge in zombie borrowing in the pre-IBC period (Bhaduri and Selarka, 2022). In the post-reform era, we observe the persistence of firm zombification growth as well (Kulkarni et al., 2021). According to the RBI Bulletin¹, around 10% of non-financial firms in India are considered zombie firms. Moreover, it also claims a spurt in the borrowing of zombie firms at a lower cost, based on countercyclical policy support, which leads to inefficient credit allocation in the economy (Acharya et al., 2024). Their ongoing existence disrupts the competitive environment by undermining more efficient and capable firms, making it harder for new players to enter the market, and increasing the overall productivity difference in the economy. The rise of zombie firms poses a serious challenge to how resources are allocated and to achieving long-term economic efficiency (Caballero and Hammour, 2001).Lenders' weak screening incentives, reluctance to recognise non-performing assets, and other factors are responsible for the continued credit growth of zombie firms despite the reform (Kulkarni et al., 2021). However, such phenomena are further amplified during COVID-19, based on regulatory forbearance and liquidity initiatives (although these are inevitable for systemic stability), which unintentionally support those financially non-viable firms, allowing more debt accumulation at a cheaper cost. Against this backdrop, the study aims to first analyse the present trends of corporate firm zombification in India and, secondly, assess the impact of IBC reform on firm zombification. Finally, the study attempts to empirically examine the influence of the IBC on Zombie borrowing in India. Therefore, the study intends to show the impact of IBC reform, the current picture of firm zombification, and zombie borrowing in the Indian financial market, thereby offering some important insights to market participants, investors, researchers, and so on.Trends of Corporate Firm Zombification in IndiaTo identify zombie firms, the paper adopts the criteria outlined in the RBI Bulletin (Pattanaik et al., 2022). A firm is classified as a zombie if it simultaneously satisfies three conditions: an interest coverage ratio (ICR) below 1 (calculated as EBIT divided by interest expenses), positive debt growth, and leverage above the respective industry median. Firms not meeting these conditions are considered non-zombie.YearZombie FirmsZombie GrowthTotal FirmsZombie Share (%)201144 7405.942012890.70481710.892013990.10684011.7820141180.17692112.8120151530.260106714.332016149-0.026118412.582017132-0.121123710.672018131-0.008124810.492019119-0.09612579.4620201880.457147612.732021173-0.083152211.362022130-0.28616148.0520231360.04517077.962024119-0.13416557.192025110-0.07816856.532026103-0.06517156.01Table 1: Trends of Corporate Firm ZombicationSource: Computed by Authors (2026)Table 1 shows a significant rise in zombie firms between 2011 and 2015, with their share of all firms rising to 14.3% in 2015. This indicates the presence of firms with financial distress before the introduction of the IBC. After the reform, the proportion of zombie firms gradually decreased to 9.5% by 2019, reflecting a positive impact of the reform. However, in 2020, the zombie share jumped back up to 12.7% due to the expected impacts of COVID-19 and credit forbearance, revealing some underlying weaknesses in the system. From 2021 to 2026, the zombie share continued to decline, hitting 6.01%, which points to a slow but steady return to financial discipline and potential benefits from the IBC reforms. In a nutshell, it indicates the potential effectiveness of the IBC in curbing corporate firm zombification since 2016. However, its usefulness is restricted by delays, weak enforcement, and strategic maneuvers by both lenders and borrowers.The study further compares the zombie and non-zombie firms using univariate statistics on key financial indicators like total assets, return on assets (ROA), cash profit, borrowing, and cost of debt. This analysis intends to highlight the fundamental differences in firm size, profitability, and financing behaviour between the two types of firms, thereby providing preliminary evidence of the distortions arising out of zombie lending. Therefore, the study has framed the following hypotheses:H1: Zombie firms enjoy greater credit compared to non-zombie firmsH2: Zombie firms enjoy a lower cost of credit than non-zombie firmsThe study has extracted yearly data for the period 2011-2026 from Prowess dx³. Identification of zombie firms follows the above-mentioned criteria of the RBI Bulletin. The following estimations are done using univariate statistics. A. Zombie FirmsB. Non-Zombie firmsMean Difference (T-test) (A-B)Total Assets (Cr. in INR)50910.9685379.18-34468.22*ROA-0.08440.1828-0.2672***Cash Profit Ratio-42.79440.0506-42.8450**Leverage0.88230.33010.5522***Cost of Debt0.09460.1307-0.0361**Table 2: Univariate Statistics between zombie and non-zombie firmsSource: Authors' computations using Stata 17 (2026). Note: *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels.Table 2 presents a comparative analysis of mean borrowing (estimated via leverage) and the cost of debt for zombie and non-zombie firms over the entire study period. In addition, the same analysis is also conducted for total assets, return on assets (ROA), and cash profit ratio (cash profit-to-sales).The findings show that the average borrowing (leverage) of zombie firms (0.8823) significantly exceeds that of non-zombie firms (0.3301). On the other hand, zombie firms, on average, enjoy a lower cost of borrowing (.0946) by a mean of 3.61% per year. This may be argued that zombie firms may have good relations with the banks (through influential promoters) who are reluctant to write off the existing credit as non-performing assets (NPAs). Similarly, some of the zombie firms belong to strategic sectors like telecom, infrastructure that enjoy continued cheaper credit because of government policies and low risk perceptions. Therefore, the study fails to reject both hypotheses H1 and H2.Other variables show that zombie firms hold lower mean assets and suffer from lower profitability (ROA and cash profit ratio) as compared to other healthy firms.IBC and Firm ZombificationThe Insolvency and Bankruptcy Code (IBC) aimed to help resolve or liquidate financially distressed firms on time, to reallocate financial resources more effectively. However, ongoing delays, legal challenges, and a tendency to prioritize the revival of even unviable firms have often resulted in the existence of zombie companies. Practices such as loan evergreening by banks, repeated restructuring, and selling assets at a discount further weaken market discipline."While the IBC has the potential to tackle this zombification issue through strict resolution timelines and enhanced institutional capacity, its success hinges on normalizing liquidation when needed, penalizing zombie lending, and ensuring that resolution plans genuinely restore business viability."Table 3 exhibits the role of IBC on firm zombification.AspectsPolicy UndertakenCurrent StatusObjective of IBCEnsuring time-bound resolution of distressed firmsOver 8,492 cases admitted till 2025. Delays in resolution persist, though average resolution time has improved (317-713 days)Expected OutcomeStrengthening exit mechanisms. Improving recoveryShare of zombie firms increased post-IBC. Policy gaps, with improved disclosure and governanceSystemic ChallengesEfficient tribunals. Responsible borrower behavior. Institutional readinessResolution takes >700 days on average. High NCLT case backlog. Zombie firms still access credit, with improving recovery ratesCredit Market EffectsDiscourage lending to unsustainable firms via better credit disciplineRBI reports GNPA ratio declined to 2.3% (March 2025). Weak risk assessment in banksPolicy GapsStrong enforcement. Promoter accountability. Less legal relianceIBC 2.0, mediation frameworks, PPIRP and e-filing introduced. Challenges on asset tracking and interim finance. Limited on-ground resultsReform ImperativesFaster resolutions. Stronger NCLTs resources. Digital monitoring. Lender discipline2025 Finance Budget further enhanced NCLT/IBBI. Digital case tracking, centralised databases and regulatory automation adopted in 2024-25Table 3: IBC and Corporate Firm ZombificationSource: IBBI Report (2025), Compiled by Authors (2026)IBC and Zombie BorrowingsTo empirically estimate the impact of IBC on the firm zombification, average borrowing, and debt cost of Indian zombie firms, the following hypotheses have been formulated.H3: Firm zombification has experienced a decrease in the post-IBC periodH4: Zombie firms enjoy restricted access to credit in the post-IBC periodH5: Zombie firms enjoy a higher cost of borrowing in the post-IBC period Pre-IBCPost-IBCMean Difference (T-test)Firm Zombification0.00270.00610.0034**Zombie Borrowing0.80310.93080.1277**Cost of Zombie Borrowing0.08440.0786-0.0058**Table 4: Role of Insolvency and Bankruptcy Code (IBC) on Zombie BorrowingsSource: Authors Computations using Stata 17 (2026). Note: *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels.Table 4 exhibits the mean of the variables as mentioned above in pre- and post-IBC, along with their difference (T-test). The first row indicates an increase in the firm zombification after the implementation of the IBC (as shown by a positive and significant value of 0.0034). This indicates that IBC has suddenly exposed financially distressed firms, which earlier used to survive based on bank forbearance or informal restructuring. This may include large corporate defaults, which are predominantly observed in sectors like steel, power, infrastructure, and so on (hence, rejecting hypothesis H3).However, zombie firms, in the post-IBC period, have gained greater access to credit (by an average leverage of 0.1277) at an average lower interest of 0.58%. We can argue that IBC leads to a greater flow of money to marginalised or zombie firms for their survival, based on the government's policy-backed credit support. Therefore, the results reject both hypotheses H4 and H5.As Figure 1 suggests, the study also investigates whether the COVID pandemic leaves any impact on zombie borrowing and associated costs. Before CovidAfter CovidMean Difference (T-test)Firm Zombification0.00390.00650.0026**Zombie Borrowing0.86920.88440.0152**Cost of Zombie Borrowing0.07540.09150.0161*Table 5: Role of the COVID-19 Pandemic on Zombie BorrowingsSource: Authors' Computations using Stata 17 (2026). Note: *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels.Table 5 also shows a similar upward trend for average firm zombification and zombie borrowing (leverage) in the post-COVID period. The massive economic disturbance triggered by the COVID-19 pandemic, along with nationwide lockdowns and a steep drop in demand, forced many distressed firms into financial trouble, which in turn increased the number of zombie firms. To tackle this, Indian policymakers and financial institutions introduced supportive measures like loan moratoriums, Emergency Credit Line Guarantee Schemes (ECLGS), and liquidity infusions to help businesses survive during this turmoil. These countercyclical measures allowed even the financially weaker firms to continue borrowing or even increase their loans, leading to a rise in zombie borrowing after COVID."Indian policymakers and financial institutions introduced supportive measures like loan moratoriums, Emergency Credit Line Guarantee Schemes (ECLGS), and liquidity infusions to help businesses survive during this turmoil. These countercyclical measures allowed even the financially weaker firms to continue borrowing or even increase their loans, leading to a rise in zombie borrowing after COVID."However, unlike the post-IBC period, where borrowing costs for zombie firms went down, the post-COVID landscape saw a surge. This shift can be attributed to lenders becoming more risk-averse, growing worries about asset quality, and tighter liquidity conditions following the pandemic. While Indian banks extended credit through government-backed schemes, they also started pricing loans more carefully to reflect the declining financial health and increased default risks of zombie firms. Additionally, global inflationary pressures and rising interest rates in post-pandemic periods saw a persistence in rising firm zombification and borrowing. So, while both the IBC and COVID-19 periods experienced a rise in zombification and subsequent borrowing, the paths of borrowing costs diverged due to differences in the economic climate, policy priorities, and how lenders perceive risk.Conclusive Opinion and Scope for Further ResearchThe study finds a substantial persistence in firm zombification in India, and its continued credit access despite IBC reform underscores the structural weakness in the credit markets. The evidence exhibits a limited impact of IBC on curbing firm zombification. These may include several procedural lopsidedness on the part of lenders and regulators. The COVID-19 pandemic has further exacerbated the situation through several government (countercyclical) policies to tackle the economic downturn. Although these measures are inevitable for macroeconomic stability, they inadvertently enabled these distressed firms to access more credit. Therefore, the empirical results find slow but steady effectiveness of IBC reform, highlighting a balance between systemic liquidity and inefficiency in credit allocation during the crisis. Hence, strengthening creditors' rights and eliminating inefficiencies in IBC will be essential for firm viability and credit allocation towards productive enterprises, unlike firm zombification. Future research may delve into the IBC's heterogeneous impact analysis across sectors, industries, or ownership structures.ReferencesAcharya, V. V., Crosignani, M., Eisert, T., Eufinger, C. (2024). Zombie credit and (dis-) inflation: evidence from Europe. The Journal of Finance, 79(3), 1883-1929.Acharya, V. V., Crosignani, M., Eisert, T., Steffen, S. (2022). Zombie lending: Theoretical, international, and historical perspectives. Annual Review of Financial Economics, 14(1), 21-38.Caballero, R. J., Hoshi, T., & Kashyap, A. K. (2008). Zombie lending and depressed restructuring in Japan. American Economic Review, 98(5), 1943-1977.Caballero, R. J., & Hammour, M. L. (2001). Institutions, restructuring, and macroeconomic performance. In B. S. Bernanke & K. Rogoff (Eds.), NBER Macroeconomics Annual 2000, Volume 15 (pp. 119-164). MIT Press.Insolvency and Bankruptcy Board of India (IBBI). (2021). Annual Report 2020-21.Insolvency and Bankruptcy Board of India (IBBI). (2025). 'Breaking New Ground: IBC's Role in Building a Resilient Economy'.Kulkarni, N., Ritadhi, S. K., Vij, S., & Waldock, K. (2025). Unearthing zombies. Management Science.Pattanaik, Sitikantha; Muduli, Silu; Jose, Jibin (2022): Zombies and the Process of Creative Destruction, RBI Bulletin, ISSN 004-5512, Reserve Bank of India, Mumbai, Vol. 76, Iss. 2, pp. 53-66.Reserve Bank of India. (2022). Financial Stability Report.¹ RBI Bulletin (2022), Zombies and the process of creative destruction. Weblink: https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/02AR 1702226379127C57444208BD066FEB3E8200F8.PDF² Economic Times Report (2023), 'Share of zombie firms in India doubled between FY12 & FY22. See Weblink: https://economictimes.indiatimes.com/news/company/corporate-trends/share-of-zombie-firms-in-india-doubled-between-fy12-fy22/articleshow/97088588.cms?from=mdr³ Prowess dx is a web-based database from CMIE providing detailed financial and performance data on Indian companies. Weblink: https://prowessdx.cmie.comAuthors may be reached at wadhawanmahiraa@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 75–79
Primary Agricultural Cooperative Credit Society (PACS) Act - Accounts - AuditThe article discusses the history and creation of Primary Agricultural Cooperative Societies (PACS) in the states, their operations, present accounting practices and audit. The active support from the government has led to a proliferation of cooperative societies in large numbers, warranting a need to regulate them such that their accounting practices are uniform. Also, accounting standards need to be laid down for adherence and compliance. There is a vast potential for Chartered Accountants to play their professional role to this field. ICAI can contribute to the improvement of accounting procedures and related audit matters, as well as the training of PACS staff.The Central Government encouraged farmers both owner-tillers and tenant farmers, residing within a cluster of villages to form a collective group, register themselves under the Cooperative Societies Act, and register such societies with the respective Registrar of Cooperative Societies (ROCS) in each state. The government enacted the Cooperative Societies Act with a view to regulate the creation and running of such cooperative societies, called Primary Agricultural Cooperative Credit Societies (PACS). At the state level, the Cooperative Societies Act was enacted by each state, which was modelled on similar lines to the central act. PACS were thus born and were affiliated with the nearest branch of District Central Cooperative Bank (DCCB) in the absence of Apex Bank, whose jurisdiction covered the villages wherein the concerned society members reside.PACS are the lowest tier of the cooperative structure, at the village level, with direct access to the landowner tiller/tenant farmer (who are PACS's members) and connecting them to the upper tiers of the cooperative structure. Fundamentally, the societies were expected to exclusively serve their members and to share the surplus revenue derived exclusively amongst their own members. Before we dwell upon the accounting and audit of PACS, it would be appropriate to understand some of the pertinent and typical issues relating to PACS governance and its operations.The ActsRespective State Governments promulgated their own acts to regulate the operation of PACS. By virtue of these acts, PACS are statutorily mandated to register with RoCS in respective states. For this purpose, land-owners & tenant farmers residing within a specified cluster of villages (and its peripheral jurisdictional areas), join together and collectively form a cooperative society, subject to the maximum limit of members as prescribed by its bye-Laws. These bye-laws stipulate its Share Capital, membership eligibility, Bank operations, Managing Committee constitution and meeting procedures, office working, Finance and Administration, measures for collecting deposits and giving loans to members, fixing interest rates (and requisite security), conducting meetings of Managing Committee, and Annual General Meetings (AGM).Class of PACS MembersThe Cooperative Societies Act has two classes of Shareholder members - one is 'Member' and the other as 'Associate Member'.The Society admits as member those farmers who own lands. Share Certificates are issued to them, to the extent they subscribe to the share capital. A member may subscribe for any number of shares within the limit set by its bye-laws. Associate Members, are those who do not own land, but are tilling the land as tenant farmers. Each Associate Member can subscribe for only one share in the PACS wherein they are registered as members.If any member wants to borrow from society, he has to subscribe for additional shares as security. The quantum of such additional shares is a percentage of the loan amount. It usually varies between 5% and 10% (of loan quantum) depending on the type of loan sought.Society members mortgage their land and/or other immovable property (like buildings) as security. In such case, PACS normally ask their legal heirs to be co-executants to the mortgage deed for the property offered as security. The legal heirs being non-members entrust the work of preparing annual Financial Statements to external specialists (ROCS staff or CA firms alternatively), who also issue an Audit Report. Tax deducted by any party, while releasing payment to PACS, is also to be accounted, simultaneously with relevant income account. The net income receipt is to be raised to the extent of such TDS shown in Balance Sheet. With the introduction of Annual Information Statement (AIS), auditor can check both the 26AS, as well as AIS, to account the correct income for the year, matching with these figures. It is observed that there is some delay in preparation of PACS Annual Accounts. Hence the need for a professional, and reliance on CAs arises. It is felt apt to entrust concurrent audit of PACS to ROCS staff, and the statutory audit to CAs. This blend of both ROCS and CAs will ensure a more professional touch, and timely completion of audit. This is an area where practising Chartered Accountants can render useful service, and add to their potential activity list."The Institute of Chartered Accountants of India can play a vital role in this regard by devising and drafting Accounting Standards specific to PACS transactions and also addressing improvements in several aspects of PACS accounting."The Central Government has also felt the need for timely and correct preparation of PACS accounts. The Institute of Chartered Accountants of India can play a vital role in this regard by devising and drafting Accounting Standards specific to PACS transactions and also addressing improvements in several aspects of PACS accounting. A pertinent issue is member-wise ledger accounts for each loan availed, security mortgaged for such loans, interest due thereon including subvention, and reconciliation of loan accounts with the linked branch of DCCB (from whom they draw loans and maintain bank accounts), etc.Audit Plan & ProgrammeThe primary task before the commencement of the PACS audit is to understand PACS's business operations, its geographical spread, major events and transactions that occurred during the year. Audit of accounts of PACS ensures that its governance is in accordance with applicable statutory obligations and RoCS guidelines, compliance with its bye-laws, Cooperative Societies Act and rules thereunder.The scope of the audit additionally covers the proprietary nature of transactions, adherence to basic internal control procedures, compliance with accounting standards, and deviation from its accounting policies.Satisfy that such policies are acceptable, consistent with and appropriate to the nature of PACS's business, and then judge the degree of reliance that can be placed thereon. Thereafter, determine the nature and extent of audit coverage to be done, while also considering circulars of NABARD/RBI, the state government and DCCB.Awareness of any special reporting requirements, as necessitated.Review internal control environment; verify evidence of effectiveness of internal controls, and system prevalent checks and balances, and any relevant circulars. Where any loan has become overdue, verify that recovery is factually correct without any window dressing (i.e., by a mere book adjustment/entry).Examine entity-specific related issues, warranting a customised audit plan. For instance, PACS may have a gold loan scheme (subsequently discussed).Peruse previous year'sfiles relating to incomplete capital expenditure,carry forward of previous year's audited account balances,audit observations and their compliance,minutes of Management Committee & General Body meetings, with compliance status.Auditor has to express his opinion on maintenance of accounts records, internal control measures, identify potential problems and their resolution. All working papers, notes should be preserved by the auditor for any future reference.Auditor should report any instance where Act (or rules there-under), or society bye-laws have been deviated/flouted. Confirm that loans are disbursed only on basis of eligibility and with adequate security of land holding. Also confirm that repayments are up todate & for correct amount, without any book adjustment. Peruse Audit observations of previous year, statutory & legal compliances, rectifications of any defects etc."The primary task before the commencement of the PACS audit is to understand PACS's business operations, its geographical spread, major events and transactions that occurred during the year."The audit classification and rating accorded to PACS for the relevant audit period should be considered. Key indices and performance ratios should be compared with those of the previous year and with other PACS of similar size. Activity areas prone to material misstatement or fraud should be identified. The source of audit evidence and the extent of reliance thereon, especially during the pandemic situation and/or related lockdown periods, should be assessed. Risk factors should be evaluated, concurrent Audit Reports should be perused, and the sample size for audit purposes should be determined. A comparison should be made with the previous year's financial statements. The audit opinion should be supported by evidence obtained during the audit. The financial statements should comply with the legal requirements applicable to PACS and the applicable financial reporting framework.Special Features of PACS AuditFamiliarise with Cooperative Society Act (central and relevant State Act and Rules there under), bye-laws of PACS (as duly updated and registered with ROCS). Ensure that PACS amend its bye-laws, to be in conformity with and, in accordance with updated provisions of Central / State Cooperative Societies Act.Verify that PACS accept deposits from and lend funds only to its members, with proper records and adequate security.PACS have a charge on member's share/interest in capital/deposits/dividend/bonus/profit.PACS can invest their surplus funds only in PO Savings, shares of other Societies, deposits with banks and other prescribed Securities.Under the Act, PACS have to create Statutory Reserves, including a fixed percentage to Reserve Fund. These funds are not distributable.Imbalance: Seasonal Agricultural Operations (SAO Loans) to PACS members provided by DCCB through PACS, are short term in nature and repayable over a ten-month tenure, and against collateral security, which is usually immovable property. The bank verifies the title of the mortgaged land through 'web-landing' (an online owner-wise data base of agricultural lands as per revenue records). Every time land parcel is mortgaged and registered, the data is simultaneously captured, updated and uploaded to the website. With an access key, PACS can check in whose favour mortgage exists. The bank debits the concerned PACS in which the borrowing land owner is a member. As loan is routed through PACS, it's the responsibility of PACS to execute mortgage documents and recover outstanding loan from concerned member. PACS charge a slightly higher interest rate, from its member, than the rate at which bank charges PACS. Sometimes, borrowers may default, and bank exerts pressure through the PACS (in which borrower is member) for recovery of overdue loan. The bank, in its anxiety not to have a NPA in its books (for which provisioning is mandated by RBI, thereby adversely affecting their bottom line), sometimes resorts to window dressing, by recording the loan (with interest due) as having been realised in cash. On subsequent day, same is rolled over as a fresh loan. Thereby a situation exists where the loan is virtually reflected (in bank records) as settled, but the loan still exists as outstanding in PACS records. Thus, imbalance exists and grows. PACS should take effective steps for timely recovery, or resort to auction of mortgaged property.Some PACS have added activity of providing loans to its members against security of gold/valuables. Special care is needed to physically verify the number of gold packets in custody with PACS, and ensure it matches with the record. Verify that insurance policy includes this activity and the value tallies with the value as per records. Furthermore, it is prudent to have it verified regularly by an external gold appraiser. Special emphasis is necessary for overdue gold loans, and satisfy that the quality as well as the quantity of pledged jewellery is matching with the records.Inspection: District Central Cooperative Bank (DCCB) supervisory staff visit PACS at prescribed frequency, (usually once a quarter). Such inspections have tended to become perfunctory, lacking incisiveness. It is felt that a qualitative improvement in such inspections be achieved by a blend of in-house and external service providers (i.e. through RoCS staff). An inspection through RoCS staff (similar to RBI/NABARD inspection of scheduled Banks) at prescribed frequency, in conjunction with DCCB staff, may enable in-depth analysis, and more professionalism in content/quality reporting, enhancing incisive qualitative reporting manner. Inspection format can be designed to focus on serious aspects of PACS operations, which warrant intervention by higher authorities.Report CoveragePACS Audit Report should cover:Examination of overdue debts & its analysisPhysical verification of all securities, cash and bank balance, fixed assets, investments, stock statements and valuation,Examine documents for loans/advances sanctioned and disbursed,Demand Collection Balances of members,Interest income and accrued,Over-dues, bad and doubtful debts (provisioning & write-offs/withdrawals), advances schedule, non-performing assets (NPAs), investments statement and confirmation from concerned entities from whom amounts are outstanding,Tax deduction (TDS) and its cumulative accountability.Common Accounting SystemAs envisaged under the Revival Package of GoI, NABARD in collaboration with GTZ has devised a Simplified, Standard and Common Accounting System (CAS) for PACS. While designing the Common Accounting System for PACS, the existing systems and practices of accounting of the PACS in a number of states have been studied both under manual and computerised systems having regard to the nature and scale of business, prudential norms and best practices in accounting and their relevance to computerization and discussions held with various stakeholders such as State Cooperative Banks, District Central Cooperative Banks, Dept. of Cooperative Audit, Registrar of Cooperative Societies and the Training Institutes of Cooperatives. In line with the "CAS" prepared for "PACS", this operational Accounting Manual ("AM") is prepared to guide PACS in accounting for transactions under "Double Entry System of Accounting" as per "Accrual basis".Major Components of CASApplicability of universally accepted basic concepts and principles in the maintenance of accounts by the PACS.Adoption of standard financial statements, viz., Balance Sheet, P&L A/c and Trading A/cList of a common set of General Ledger Heads of Account compatible with financial statements; andMaintenance of minimum essential and Standard Books of Accounts.Audit under Computer EnvironmentRecently, government earmarked funds to enable PACS, computerise their accounts and maintain uniformity in accounting practice. PACS are in the process of computerisation of their financial data and records for which Government is providing budgetary support to enable PACS computerise operation and also uniform accounting system; providing computer systems, and training PACS staff to work in computerised environment. NABARD has developed an accounting package, developed by intellect and customised for PACS related operations. PACS should ensure that balances in respective manual ledgers are correctly loaded in the computer system, and also have a migration audit done, to certify the accuracy thereof. While carrying out statutory audit of PACS, it should be ensured that standard test procedures, as laid down in their manual, is followed. Furthermore, before commencement of audit, auditor should familiarise with the different Head of Accounts operated, and their respective account codes; ascertain whether any new accounting policies adopted during the year, its impact in both current year, as well as previous year.In case of hybrid type of accounting, where control accounts are available on the computer system, but the sub-ledgers are manually maintained, verify at year end, that aggregate of balances in sub-ledger tally with the control account balances. During vouchers verification process, ensure that authorisation is available for each entry, as per existing delegated powers. Auditor should observe any adjustment entries (particularly year end vouchers) passed while finalising financial statements, that same are authorised and correctly entered in books of accounts. While ensuring Trial Balance is correctly generated, and duly tallied, auditor much check whether the Profit & Loss Account and Balance Sheet are correctly prepared, duly authenticated by PACS CEO / Secretary.Auditor must verify whether software used for accounting package is licensed, and is of current version only. Regular back-up data should be taken periodically, and preserved at some off-site place for safety, ensuring easy retrieval. Check data integrity, and ensure safeguarding of assets; ensure identified System Administrator available and so nominated; all available features of data safety are installed, including bio-metric based data access levels (based on need-to-know basis and job-based requirement); passwords available for each level of access and same revised on regular basis. The back-up data be periodically tested for easy retrieval of disc and its contents. The system will need to be updated at each stage of version change. Confirm firewall systems installed for data protection. Further, it must be ensured that the balances in sub-ledgers match the balances in the control accounts. Review accounting process and verify that authorising officer has approved each transaction voucher. Ensure no adjustment entries made at year end are outside of the computer system. Check that the balances, in the manual version of accounts, is correctly migrated to the computer system. Confirm that Trial Balance is tallied without any entry in 'suspense account' (for any possible difference). Verify that date is put on every computer-generated document, numbered and duly authenticated by accounts in-charge. Confirm off-site data storage facility is available, and periodical data verification is done. Note the maintenance frequency, and how operations run during that period. Confirm licensed copy of software with updating arrangements strictly followed. Verify any mirroring facility exists, so that system is kept running if and when the data is corrupted. Verify AMC exists and is functional for Software maintenance and any updating.Income Tax on PACSThe general misconception amongst PACS fraternity, is that PACS has no tax liability. Thereby a general aversion to face tax issues developed, and many PACS try to brush any tax related matter, under the carpet. PACS Management Committee members being agriculture oriented, are often reluctant to file their Society's tax returns.Being an agrarian economy, a slew of exemptions has been granted to PACS for all agricultural related activities. It is therefore necessary that PACS management ensures strict compliance of time limits imposed under IT Act. Usually delay occurs in issue of statutory Audit Report by RoCS staff. PACS must impress upon statutory auditor to complete their audit, much before the tax return filing date. In case any delay is anticipated, it is advisable that provisional income tax return be filed, on the basis of 'Receipts and Payments' data. After audit is completed, PACS can file a revised return, to reflect the correct income, before tax assessment.Supreme Court has held that ethos of PACS is embedded in the concept of 'mutuality of interest'. In essence, only members of PACS are exclusively to be eligible to deposit in and borrow from PACS. Emphasis is on linkage of loans to and deposits from only PACS members. Under this philosophy, the earnings of PACS after setting aside stipulated and prescribed statutory funds/reserves, should be exclusively shared amongst its members only. Otherwise PACS are not eligible for tax reliefs available under Income Tax Act. All Co-operative Societies are required to file Income Tax Returns (ITR). The income of PACS is eligible for deduction only under Section 80P. However, such deduction shall be allowed only if the ITR is filed within the prescribed due date as per Section 80AC of the Income-tax Act. The subject of taxation of PACS requires separate analysis and discussion.Enhancing CompetencyIt's imperative to enable staff to independently prepare annual financial statements. Prior to the selection as secretary / CEO of a PACS, mandatory eligibility conditions could be stipulated, and a skill development course designed and followed by an aptitude test.NABARD may consider introducing a customised skill development course specific to financial management and accounting aspects for PACS staff, in consultation / association with ICAI. The audit of PACS is predominantly being done by RoCS staff. While RoCS staff may conduct concurrent audits, the statutory audit turf should be entrusted to professional CAs only.Goods and Services TaxPACS are also liable for GST if their turnover exceeds the threshold limit. PACS staff have to be alert enough to register themselves under GST and to avail the Input Tax Credit as available under the GST Act. A GST audit is mandatory for turnover beyond a threshold limit.To conclude, it is advisable to have a checklist prepared encompassing all relevant PACS operational activities for a comprehensive audit programme.Author may be reached at bashok2703@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 80–84
Ep. 168 — Journey of the Audit Profession
CA Journal
· September 2026
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Journey of the Audit ProfessionChartered Accountants are the ambassadors of our country's economic system, occupying an important role and serving as an interface between the government, tax-paying companies, and individuals. Their professional responsibilities reach far beyond the preparation and certification of books of accounts. They are instrumental in upholding accountability, transparency and trust in the economic framework of the country.As recognised by the Hon'ble Prime Minister of India, Shri Narendra Modi, during ICAI's Foundation Day celebrations in 2017, the signature of a Chartered Accountant holds far greater significance and responsibility, reflecting the trust and confidence reposed in the profession by the Government. It places an immense responsibility on CAs, entrusting them to maintain the highest standards of integrity, objectivity and ethical conduct in the discharge of their professional duties.IntroductionAudit as a process is as old as Accounting. It is believed that Pope Nicholas III entrusted national notaries with accounting responsibilities, reflecting the importance of financial accountability. Luca Pacioli, though a mathematician, was the first to systematically document the principles of double-entry accounting, thereby laying the foundation of modern accounting practices. The significance of verifying cash balance & inventory was determined as the most important elements of the accuracy of accounting data. During the cultural movement, the Medici family introduced controls over the use of raw materials by linking consumption at each stage of production. These developments demonstrate that concerns over fraud, errors, and accountability are always central to financial governance.Personal ExperienceAs a former Director Finance & CFO of HAL, the largest defence aerospace company of our Motherland, I had the opportunity to witness several audits of financial statements, such as system audit, internal audit, statutory audit, concurrent CAG audit & supplementary audit. However, my professional journey and the experience I've garnered through it have shown that despite multiple audit mechanisms being in place, they do not, by themselves, ensure the detection or prevention of fraud.Over the course of my career, spanning 1983 to January 2016, I worked as a CFO in various State & Central Government organisations, except for the 3 years when I was CFO of the project cell of a CPSU and a large manufacturing unit. During the various assignments that I undertook, I encountered several instances of fraud and financial irregularities ranging from anomalies involving a few thousand rupees to those of a few crores. My modus operandi was fairly simple to conduct discreet inspections and scrutinise some unnoticed functions, rather than being solely dependent on standard audits. As CFO, it is important to be observant, interact with individuals working at the grassroots levels, and gain a profound understanding of the organisation beyond formal and established channels.In several cases, deviations were brought forth through such investigations and observations, although they had not been detected through the existing audit and vigilance mechanisms. The nature of these inconsistencies was also diverse. In one instance, a thorough evaluation of manually maintained cash records disclosed a fault in the balancing of accounts, which, upon deeper analysis, led to the uncovering of a financial defalcation. In another case, concerns originating from observations outside the formal work environment instigated a review of cash and bank transactions. The ensuing examination unveiled manipulation of vouchers and diversion of funds.Another instance involved a small office handling logs of provident fund, an area that could simply avoid notice as senior management commonly focuses on larger and more leading offices. An evaluation of individual ledger accounts brought to light the anomalous credits being made to an employee's account by transferring the monthly contributions of other individuals. Although the particulars encircling the conduct implied personal financial difficulties and the employee otherwise held a good reputation, the matter was managed suitably by reversing the entries and a warning being given rather than the matter being pursued further.A further case comprised remittance to an external party in a critical manufacturing facility. A system audit, started with a precise focus on such payments, uncovered periodic payments unsupported by the necessary documents and involving considerable amassed amounts. Further probe led to identifying the individuals who were involved, and the matter was directed to the competent authorities. The investigation also exposed inadequacies in the banking process, including payments being released against a single signature despite the organisation's requirement for dual authorisation. The bank thereafter took measures against some of its employees and remunerated approximately the total amount to the organisation."Audit processes are fundamental safeguards, but they cannot replace the attentiveness and discernment of those accountable for the administration of an organisation."These experiences strengthened my belief that fraud may remain unnoticed despite the existence of several layers of audit and monitoring frameworks. Audit processes are fundamental safeguards, but they cannot replace the attentiveness and discernment of those accountable for the administration of an organisation. In my experience, the capacity of higher management to discover uncommon patterns, question discrepancies and act upon a reasoned intuition can play an instrumental role in bringing hidden abnormalities to light.My experience also demonstrated that not every irregularity necessarily warrants an expensive technological or systemic intervention. In one instance, issues detected during a study could be resolved through strengthened HR and inventory controls at a fraction of the proposed cost, leading to the rejection of a ₹250 crore expenditure.The underlying lesson from these experiences is that effective fraud prevention and detection require more than the existence of formal audit structures or sophisticated systems. A combination of professional scepticism, management oversight, direct engagement with the organisation, timely scrutiny and sound judgement is often necessary to identify what routine processes may overlook. Audits provide an important line of defence, but an alert and responsible management remains an equally critical component of the overall control framework.Analysis of Selected Research Publications1. Article on "The Current State and Future of Audit Profession"¹The article mentions that audit is independent in nature and based on historical data. Stakeholders may not rely on this data in their decision-making due to a large time gap between data generation and information assurance. However, they get assurance about the authenticity of the data after the audit.The article states that information technology provides users with a plethora of information as compared to traditional financial statements. Thus, the current audit profession is becoming less relevant to investors, creditors and financial analysts. As far as the current state of audit is concerned, audit models reflect continuous audit of the entire business process and associate, analysing the issues adequately, thereby providing assurance on historical data. The current technology and automation tools use quantitative analysis such as probability evaluation, and spend more time reviewing, analysing and interpreting results to determine the desired course of action.Accounting education is also changing with the incorporation of technology, analytics, fraud detection, risk analysis, forensics and International Financial Reporting Standards, etc. The CA curriculum in India widely encompasses, as per my evaluation, risk assessment and internal control, digital audit, strategic changes through digital transformation, Ind-AS, audit evidence, digital auditing and assurance, etc.Auditing is judgemental in nature. Automation can support the judgement process and can't replace it. The article also points out that internal auditors will take over some functions from external auditors in the future, and external auditors will depend upon ledger scrutiny & internal journal entry analysis. The burden for low-risk areas regarding assurance on the quality of data should go to internal auditors, and high-risk areas must remain the responsibility of external/statutory auditors because of independence issues.2. Article on "The Impact of Digitalization on Future Audits"²The article observes that audit firms have started developing and incorporating cutting-edge technologies into the audit process. It specifies the following potential areas where digitization may impact future audits:Audit Users' Perception of Future AuditChanges in the auditor-client relationshipAudit Regulatory ChangesStructural changes in AuditingProcedural Audit ChangesChange in Auditors' Professional ProfileAudit Quality and Culture of InnovationThe article suggests the adoption of a new matrix, capabilities, skills and a new business model to cover digital technologies. It points out that technological breakthroughs will have a significant impact on auditing, as numerous labour-intensive and tedious manual tasks are being eliminated and routine audit processes are being automated, which will result in predictive and intelligent audit, thus enhancing the reputation of auditors.It states that audit involves substantial subjectivity that includes auditors' professional judgements and social intelligence for bringing value to the audit. Thus, human judgement will not be substituted by the technology entirely but will be a part and parcel of the automated audit process.The digital transparency will smoothen the auditor-client relationship. Both parties have to trust and rely on this technology and will have to keep in mind that it will not replace personal communication and collaboration between the auditors and auditee.3. Article on "The Future of Auditing: An interview with Robert Elliott"³The article covers the status of the current audit profession, such as shrinking revenues, increased competition, broader sources of information, more reliable accounting in software and greater online access to databases. It deals with evolving regulations, while regulators are not at the forefront of cutting-edge innovation but are typically interested in establishing best practices and developing standards. It discusses the impact of Big Data and Artificial Intelligence on the audit profession for creating value for businesses and investors. The article gives thrust in the areas on the value of auditing, the importance of information, the impact of information technology, and future changes in the audit profession resulting from emerging technological tools.It states that with the growing technology and data collection through various data acquisition equipment like RFID, GPS and Sensor Chips, information acquisition is easily getting integrated with ERP (Enterprise Resource Planning) systems and used for decision-making. However, accounting systems are still based on the 12th-century Venetian merchant business model. Quarterly, half-yearly, and annual reporting of financial statements is not providing sufficient and timely information to stakeholders and investors.Information technology has become one of the most important methods of auditing. IT-enabled audit solutions displace human auditors; they could produce greater information probability at a lower cost. Audit firms need to use advanced technology tools to enhance the authenticity of audit procedures and improve audit quality at the earliest. The time has come when a skill set required of future auditors is changing, and the audit profession no longer requires auditors to perform a tick-and-tie task, but also to possess statistical inference and technological skills.Future of the Audit ProfessionA few inputs on the Indian data centre reveal that its current market size as of 2025 stands at $10.11 billion dollars, and the projected market size (2030) is approximately $21.80 billion with a forecasted CAGR (2025-2030) of 16.61%. The major contributory factors are rising OTT & 5G, cloud investments, mandatory data localisation rules, improved submarine cable capacity & AI workloads, etc. NASSCOM pointed out that India's data centre industry was expected to receive, on average, an annual investment of $5B by 2025. These advancements will have a significant impact on the accounting and auditing industry.One of the most important changes is the increasing reliance on technology-driven audits. Businesses today undertake complex cross-border transactions and operate under multiple regulatory frameworks. Traditional audit techniques alone may not be sufficient to handle the volume and complexity of such transactions. Auditors will increasingly use advanced technological tools to analyse data, assess risks, and provide assurance. The growing emphasis on Environmental, Social and Governance (ESG) reporting requires auditors to verify non-financial disclosures and ensure their reliability and compliance with applicable standards.The widespread adoption of cloud-based systems is another significant development. It enables remote access to records, real-time collaboration, and efficient data management. While it improves audit efficiency, it also requires auditors to gain expertise in cybersecurity, data protection, and privacy regulations to safeguard confidential client information.Blockchain technology is also emerging as an important tool in sectors such as finance, healthcare, and supply chain management. Its decentralised and tamper-resistant nature enhances transparency, traceability, and trust in transactions. Auditors will need to understand different blockchain models, including public, private, consortium, and hybrid blockchains, to effectively evaluate controls and verify transaction records.Similarly, Big Data Analytics is revolutionising the audit process. By analysing large volumes of structured and unstructured data, auditors can identify unusual patterns, detect potential fraud, and improve risk assessment. Data analytics enables more comprehensive audits and enhances the quality of audit conclusions.Despite these technological advancements, human judgement will remain at the core of the audit function. Technology can assist in processing information and identifying exceptions, but risk evaluation and decision-making will require the expertise of auditors.While discussing with my colleagues, both at the professional level as a Chartered Accountant and at the academic level with the faculty of Law and Management, I was told to consider the impact of the growth of digitalisation on future audits. It has been observed that researchers have argued that current financial reporting is losing its relevance to investors, and accounting usefulness is decreasing.To bridge the emerging talent gap, technological concepts should be incorporated into the CA curriculum, while practising professionals must continuously upgrade their skills through training and refresher programs. Regulators and professional bodies should also modernise auditing standards and practices to align with technological developments.The future of auditing will therefore require a combination of technological competence, professional judgement, and ethical conduct. Auditors who adapt to these changes will be better positioned to deliver high-quality assurance services in an increasingly digital and complex business environment. The time has come when auditors need to shift their focus to evaluate risks rather than focusing on transactional data.Summary, Conclusion & RecommendationsBefore the internet, financial statements were the primary source of information about a company for investors, regulators and CAG (wherever applicable). With the advent of cloud-based audit tools, blockchain, and big data analytics, companies can now provide real-time information to stakeholders. The audit profession is adapting to these advances and becoming more sensitive to global economic changes. In the coming decades, greater use of AI and machine learning will shift the focus from transaction testing to risk evaluation. Traditional paper & pencil checklists are already being replaced by automated decision aids, interactive checklists, and analytical software. Customised audit plans and XBRL reporting enhance auditors' efficiency in fieldwork. Future auditing may involve automation of judgments, modernised procedures, inclusion of ICT professionals in audit teams, reliance on internal audit functions, and changes in statutory audit frequency. Statutory auditors may increasingly depend on internal auditors, releasing time to address complex issues such as data privacy, security laws, and regulatory compliance. There is no doubt that the audit profession will significantly evolve over the next decade to remain relevant and competitive.Let us not resist new advancements in technological requirements but equip ourselves with emerging technologies to ensure that audited financial statements, including audit reports, continue to be accepted as the gold standard, while meeting the standards set by our Hon'ble Prime Minister, Shri Narendra Modi. This requires our Mother Institute, ICAI, to evolve appropriate training modules for small & medium-size CA firms, even at no cost, to assist a large number of colleagues for future audits. This is essential; otherwise, traditional audit practices may become obsolete, much like many bookstores that failed to adapt to the digital revolution and were displaced by tablets, e-books, and smart devices.¹ Danielle R. Lombardi, Rebecca Bloch and Miklos A. Vasarhelyi, "The Current State and Future of the Audit Profession," Current Issues in Auditing, Vol. 9, No. 1 (2015), pp. 10-16, https://doi.org/10.2308/ciia-50988² Lazarus Elad Fotoh and Johan Ingemar Lorentzon, "The Impact of Digitalization on Future Audits," Journal of Emerging Technologies in Accounting, Vol. 18, No. 2 (2021), pp. 77-97, https://doi.org/10.2308/JETA-2020-063³ Huijue Kelly Duan, "The Future of Auditing: An Interview with Robert Elliott," Journal of Emerging Technologies in Accounting, Vol. 19, No. 2 (2022), pp. 23-27, https://doi.org/10.2308/JETA-10823Author may be reached at eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 86–89
Ep. 169 — The Mediation Act, 2023: An Overview and the Road Ahead
CA Journal
· September 2026
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The Mediation Act, 2023: An Overview and the Road AheadDue to the absence of exclusive legislation in India, Mediation was facing its own problems. Enactment of the Mediation Act, 2023, is a momentous breakthrough in the dispute resolution sphere in India. This is a reflection of the strong intent of the government, be it the executive or the legislature, to encourage amicable resolution of disputes and also to reduce the burden on the courts. This article offers an overview of the Mediation Act, 2023, emphasizing the significant features and also highlighting its incomplete areas for its effective execution.By Dr. Rohit Moonka (Academician) & Dr. Silky Mukherjee (Academician)IntroductionCourts are the primary institutions to adjudicate disputes between the litigants and a quintessential part of the justice delivery mechanisms. However, litigation before the courts is often found to be time-consuming and costly. In contrast, certain disputes are better suited for resolution through alternative dispute resolution mechanisms than litigation. Mediation is one of the 'primary' alternative dispute resolution mechanisms where the parties intend to resolve their dispute by involving a neutral third party who provides assistance to the disputants consensually. Informal, cost-effective and party-centric approach of mediation leads to a win-win situation for both parties and helps in preserving the relationship.Despite this, there was no specific law regulating mediation in India. Till the enactment of the Mediation Act, 2023², it was largely conducted under Section 89 of the Code of Civil Procedure, 1908, with several lacunae attached to it. The need was long felt for an inclusive statute providing for a comprehensive structure for mediation, which can help gain more acceptability and encourage parties to resort to mediation. The Mediation Act, 2023, seeks to fill this gap by providing a comprehensive legal framework for mediation across India.Legislative Background and RationaleTo bring this Act into existence, firstly, the Mediation Bill, 2021, was brought in and presented in the Rajya Sabha on 20th December 2021 by the Government and was referred to the Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice for review. After a wide consultation and detailed review with various stakeholders, the Standing Committee submitted its report to the Rajya Sabha on 13th July 2022. Thereafter, the Union Cabinet approved some of the recommendations of the Standing Committee and re-introduced the Mediation Bill, 2023, in the Rajya Sabha, which was passed on 02nd August 2023 and by the Lok Sabha on 07th August 2023. It received the assent of the President of India on 14th September 2023 and became part of the statute. Through Gazette notification on 09th October 2023, the Central Government notified limited sections of the Mediation Act, 2023, to come into force. They are namely, 'Section 1, Section 3, Section 26, Section 31 to 38, Section 45 to 47, Section 50 to 54 and Section 56 to 57' of the Act.The Mediation Act, 2023, is a defining moment in the sphere of ADR as it is the leading statute governing mediation in India. This Act formalizes mediation by providing for the enforceability of mediated settlement agreements, safeguards confidentiality, recognizes online mediation, community mediation and provides for mediation service providers. The statement of objects of the Act highlights mediation as a cost-effective, time-efficient, and maintaining relationship which is predominantly appropriate for disputes involving relationships, including business and commercial disputes.³Scope and Applicability of the ActThe Mediation Act, 2023, applies to mediation between the domestic parties as well as to International commercial mediation in India, wherein at least one party is a foreign national or a body corporate or body of individuals whose place of business is outside India.⁴ This Act also applies to court-referred mediation, pre-litigation mediation and mediation conducted pursuant to a mediation agreement.⁵Certain kinds of disputes are explicitly barred from the application of this Act such as disputes involving third-party rights, criminal offences and matters relating to sovereignty or public interest, which are provided in the First Schedule of the Act.⁶ However, the provisions of this Act shall not apply to the proceedings conducted by the Lok Adalat and Permanent Lok Adalat under the Legal Services Authorities Act, 1987.⁷Salient Features of the Mediation Act, 2023Definition of MediationThe Mediation Act, 2023, expands the scope of mediation and provides for legal recognition to voluntary pre-litigation mediation, online mediation and community mediation.⁸ It also removes the provision of conciliation from Part III of the Arbitration & Conciliation Act, 1996 and replaces it with mediation.⁹ Through this Act, different types and modes of mediations are statutorily recognized, however, conciliation has been completely omitted from different statutes and is being replaced by mediation governed under this Act.Voluntary Pre-litigation MediationThe Mediation Act provides for voluntary pre-litigation mediation in all civil disputes, irrespective of the fact that there was any prior mediation agreement in existence or not.¹⁰ Though the Mediation Act excludes commercial disputes of specified value from its purview, which will be subjected to the provisions of the Commercial Court Act, 2015.Listing out Disputes not fit for MediationIn the Mediation Act, 2023, provisions have been made to list out the matters that are not suitable for mediation.¹¹ This will help filter out such disputes instantly that are unfit for resolution through mediation. It is in contrast to the provisions of the Arbitration & Conciliation Act, 1996, which has not provided any guidelines for the classification of disputes that are subject to arbitration.Timeline for Completion of MediationThe Mediation Act, 2023 has incorporated a provision whereby a timeline has been introduced for the completion of the mediation process within 180 days from the date of first appearance before the mediator.¹² This period may be extended for another 60 days if agreeable to the parties. This provision will keep a check on all the stakeholders, including the mediator as well as parties, to complete the whole process of mediation within the time limit.Establishment of the Mediation Council of IndiaTo supervise the process of mediation, the Mediation Act provides for the establishment of an all-encompassing body named as the Mediation Council of India to perform the functions necessary for the development and promotion of domestic as well as international mediation in India.¹³Provision for Online MediationKeeping pace with technological advancement, the Mediation Act, 2023, recognises online mediation under this Act.¹⁴ However, while online mediation is allowed, maintaining the integrity of proceedings and confidentiality is required to be maintained under this section, for which the mediator is empowered to take necessary measures.¹⁵Agreement for Conducting MediationThe Mediation Act, 2023, recognises such written agreements for mediation whereby parties agree to submit their existing or future dispute to mediation. Such agreements can be separate or integrated into the main contracts.¹⁶ This provision augments contractual certainty and encourages mediation, enabling drafting of the contracts.Appointment and Conduct of MediatorsThe Act provides that the mediators must perform impartially and neutrally. Prior to the commencement of the mediation, including during the mediation process, mediators are required to disclose any circumstances which may likely to give rise to any conflict of interest.¹⁷ The Act underscores facilitation, which reinforces the amicable nature of mediation.Maintaining ConfidentialityUnder the Mediation Act, 2023, confidentiality is mandated as a foundational stone of mediation. All communications during the mediation process, including statements, documents and proposals, are made confidential and inadmissible in evidence in any other proceeding.¹⁸ Any kind of recording of the proceedings during mediation is explicitly barred.¹⁹ Having these provisions as a part of the Act will facilitate open discourse between the parties and the mediator and safeguard profound personal information.Mediated Settlement AgreementsOne of the most unique features of the Mediation Act, 2023, is the provision for mediated settlement agreements. Once this mediated settlement agreement is signed by the parties and duly authenticated by the mediator, it becomes final and binding and enforceable as a decree of a civil court under the provisions of the Code of Civil Procedure, 1908.²⁰ Such a mediated settlement agreement can be challenged before a court of law on very limited grounds, provided, viz:'(i) fraud;(ii) corruption;(iii) impersonation;(iv) where the mediation was conducted in disputes or matters not fit for mediation under section 6'²¹Mediation Service ProvidersThe Mediation Act, 2023 provides for mediation service providers who will 'accredit mediators and maintain a panel of mediators to provide the services of mediators for the conduct of mediation. They will also provide all facilities, secretarial assistance and infrastructure for the efficient conduct of mediation.²² Such mediation service providers can include a body or an organisation that provides for the conduct of mediation under this Act and needs to be recognised by the Mediation Council.²³ Apart from this, 'an Authority constituted under the Legal Services Authorities Act, 1987 or a court-annexed mediation centre or any other body as may be notified by the Central Government will also come under the category of mediation service providers which shall be deemed to be recognised by the Mediation Council.'Pending Tasks and Challenges AheadDespite the progressive framework formulated through the enactment of the Mediation Act, 2023, several tasks remain pending and yet to be implemented. Some of the major pending tasks related to this Act are discussed below:Notification of RulesThe effectiveness of the Mediation Act, 2023, is yet to be tested as the majority of the rules relating to various aspects are yet to be notified. To name a few, rules regarding the qualifications and accreditation of the mediators, their fee structures, protocols for conducting online mediation and process and requirements for registration of mediation service providers are pending notification.Non-operationalized Mediation Council of IndiaSince the Mediation Council of India has been entrusted with several important responsibilities under the Mediation Act, 2023. However, it is yet to be constituted and fully operationalized. Due to this one reason, the Mediation Act has yet to achieve its intended objective. Therefore, it is imperative that the Mediation Council of India must be immediately constituted and fully operationalized to let it accomplish its regulatory and other important functions efficiently.Non-Applicability for the Enforcement of Foreign Mediated Settlement AgreementAs per the provisions of the Mediation Act, 2023, it applies only to those mediations that are conducted in India, whether it is a domestic mediation or an International Commercial Mediation.²⁴ However, the Act does not make any provision for the enforcement of mediation settlement agreements conducted outside India and brought into India for enforcement. In this context, the recently brought Singapore Convention on Mediation, of which India is a signatory, provides for cross-border enforcement of mediation agreements. Making provision for the enforcement of a mediated settlement agreement resulting from international mediation will be on the lines of the Singapore Convention on Mediation and will help promote international trade.Appointment of MediatorIn the Mediation Act, 2023, a mediator of any nationality is appointed as per the process agreed by the parties.²⁵ However, there are certain anomalies in this regard. First, for a foreign mediator to be appointed, he/she shall possess such qualification, experience and accreditation "as may be specified" in this regard. Second, there are no guidelines (unlike Schedule V of the Arbitration & Conciliation Act, 1996) to determine the circumstances giving rise to justifiable doubts with regard to the independence and impartiality of the prospective mediator. Both these aspects are required to be duly taken care of in future amendments to the Act.Interim InjunctionThe Mediation Act, 2023, provides for an interim injunction order that can be passed by the Court/Tribunal while referring them to mediation for protecting the interests of any party.²⁶ However, unlike Section 9 of the Arbitration & Conciliation Act, 1996, it does not provide for the nature and extent of such interim injunction orders. It is also not clear that the conditions for the grant of an interim injunction will be similar to those for an interim injunction sought under Section 9 of the Arbitration and Conciliation Act 1996. A clarification in this regard will help the courts and the parties seeking interim injunctions under this Act.Online MediationWhile the provision of online mediation is a laudable step, it will bridge the geographical gap and will be convenient to all the stakeholders. However, to ensure the process is safe and secure, detailed rules are required to be prescribed, which will govern the conduct of parties during such online mediation for maintaining confidentiality.Community MediationIn the Mediation Act, 2023, provision for community mediation is incorporated primarily to resolve disputes in any area or locality that is likely to affect the peace, harmony and tranquillity amongst the local residents.²⁷ For this purpose, the competent authority is required to maintain a permanent panel of community mediators, and any such community dispute will be referred to a panel of three such mediators. However, there is no provision for any training/capacity building with respect to the mediation process for such community mediators in the Act. In the absence of any training about mediation, the efficacy of such community meditation is doubtful.Grounds of ChallengeIn the Mediation Act, 2023, provision has been made to challenge the mediated settlement agreement arrived at between the parties.²⁸ However, there is no need for the provision of a challenge to a mediation settlement agreement arrived at by the mutual consent of the parties. Further, the Act does not provide for any automatic stay if the mediation settlement agreement is challenged, which can lead to unnecessary litigation. Therefore, it is suggested that suitable changes must be made by the legislature in these aspects of the Mediation Act.ConclusionEnactment of the Mediation Act, 2023, which is the first standalone law on mediation in India, is certainly a constructive step to increase the space of the ADR apparatus in India. This Act signifies a transformative stride in the direction of an effective dispute resolution mechanism. By making provisions for statutory recognition of mediation settlement agreements, their enforceability as a court decree, adequate measures for maintaining confidentiality and institutional support through the Mediation Council of India, the Act braces mediation as a dependable alternative to litigation. This will also reduce the burden on the existing judicial system, which is already overburdened with the backlog of cases in India.However, certain lacunae, such as delay in the rule-making, non-operationalization of the Mediation Council of India and lack of emphasis on institutional capacity building, are essential to realise the full potential of this Act. Therefore, to make the Mediation Act a comprehensive legal framework for the resolution of civil and commercial disputes, it is imperative to remove the above-stated defects, which will further India's position as a pro-ADR jurisdiction in all spheres.¹ Sriram Panchu, Mediation Practice & law The Path to Successful Dispute Resolution 11-15 (Lexis Nexis 2nd edn., 2015)² Mediation Act, 2023 (Act 32 of 2023)³ Statement of Objects and Reasons, Mediation Bill, 2023⁴ Ibid., at Section 2⁵ Ibid., at Section 3(g)⁶ First Schedule, Mediation Act, 2023⁷ Ibid., Section 26⁸ Ibid., Section 3(h)⁹ Ibid., Section 61, The Sixth Schedule¹⁰ Ibid., Section 5(1)¹¹ Ibid., Section. 6 read with First Schedule¹² Ibid., Section 18¹³ Ibid., Section 38¹⁴ Ibid., Section 30¹⁵ Ibid.¹⁶ Ibid., Section 4¹⁷ Ibid., Section 10¹⁸ Ibid., Section 22¹⁹ Ibid., Section 23²⁰ Ibid., Section 27²¹ Ibid., Section 28²² Ibid., Section 41²³ Ibid., Section 40²⁴ Ibid., Section 2²⁵ Ibid., Section 8 (1)²⁶ Ibid., Section 7(2)²⁷ Ibid., Section 43²⁸ Ibid. Section 28Authors may be reached at rohitmoonka@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 90–93
Ep. 170 — Transition of Basel III as an approach towards Improving Risk Management in the Banking Sector
CA Journal
· September 2026
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Transition of Basel III as an approach towards Improving Risk Management in the Banking SectorThe Global Financial Crisis compelled the Basel Committee to come up with an improved Basel III regulation in 2010. It aimed at introducing changes to existing regulations, the addition of new regulations, and constraining overly optimistic internal models used by banks. Most of the changes have been made in the credit risk section which include introduction of capital conservation buffers and countercyclical cover. In terms of liquidity measures, Basel III introduced liquidity standards to ensure short-term and medium-term funding stability of the banks. Since implementation, the Committee has always consistently focused on transition and enhancement, leading to a move from Basel III to Basel 3.1 in 2017 (which the industry refers to as Basel IV). The study aims to examine the status of major banks with respect to enhanced risk management practices.Capital requirement is the most important for a bank, at any point in time, to stay solvent in the long run and be able to meet cash requirements of the depositors from time to time. Bank failures have not been uncommon in the past. The Herstatt Bank (1974) crisis was one of the catalysts to awaken central banks and take steps towards banks' financial health. It was by the end of 1974 that a group of ten central bank governors across Europe came together to form a committee on banking regulations and supervisory, commonly known as the Basel Committee. The Basel Committee was a consequence of the numerous bank failures that caused a catastrophic effect on the world economy. Basel Accord I was the first in the series, primarily addressing Credit Risk and related Capital Adequacy for the banks to always stay solvent. Later, it was realised that banks are not involved in just basic banking functions of lending and borrowing but have extended to taking market risk. Subsequently, to address this, Basel Accord II was introduced, in the form of three pillars, focusing on various kinds of risks. The addition of Market Risk, Operation Risk and increment in Capital Adequacy Ratio were the major focus of the Basel Committee. In the late 2000s, with the Great Financial Crisis of 2008, bank liquidity played a pivotal role in amplifying the impacts of the economic downturn. Basel III was introduced in 2013 through 2019 with an initial implementation deadline of March 2020. The said framework focused on strengthening the core capital for a bank, and at the same time adding a cushion for globally and systemically important financial institutions to cope with bad times. With time, the Basel Committee has been coming up with recommendations and frameworks to cope with newly arising risks. Since 2017, the committee has published numerous new frameworks as a part of Basel III post-crisis reforms, which the industry generally also refers to as Basel 3.1 or Basel IV.Background Study: Transition from Basel I to Basel IIIThe Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group Ten (G10) in 1974. The committee expanded its membership in 2009, and then again in 2014. Now, the BCBS has 45 members from 28 jurisdictions, consisting of central banks and authorities responsible for banking regulations."BASEL I was the first international banking regulatory framework, introduced in 1988 that aimed to promote the stability of the international banking system by establishing a minimum capital requirement for banks."BASEL I was the first international banking regulatory framework, introduced in 1988, that aimed to promote the stability of the international banking system by establishing a minimum capital requirement for banks. The focus of Basel I was to ensure that banks maintained a minimum level of capital to absorb unexpected losses. The capital requirement was set at 8% of risk-weighted assets (RWAs). Risk weightings ranged from 0% for government bonds to 100% for unrated or poorly rated corporate bonds and other high-risk assets. Later, in the mid-1990s, BCBS introduced netting and market risk & trading book adjustments in 1995 and 1996 respectively. Basel II was introduced in 2004. It aimed to improve the measurement and management of credit risk, operational risk, and market risk. The accord accompanied three pillar approaches consisting of:Capital Requirement,Supervisory Review &Market Discipline (leading to Information Transparency)Basel III was introduced in 2010. Basel III increased capital for credit risk and tightened the definition of capital in response to the 2007-2009 financial crisis. Basel III increased capital requirements for credit risk and tightened capital definition for Tier 1 and Tier 2 capital. Core Tier 1 equity capital must be at least 4.5% of risk-weighted assets, total Tier 1 capital must be 6% of risk-weighted assets, and total capital (Tier 1 plus Tier 2) must be at least 8% of risk-weighted assets.The Capital Conservation Buffer (CCB) is a component of Basel III capital requirements that requires banks to hold an additional buffer of common equity Tier 1 capital to ensure that banks have an extra layer of protection to absorb losses during periods of financial stress. The CCB is set at 2.5% of a bank's risk-weighted assets (RWAs) and is in addition to the minimum common equity Tier 1 capital requirement of 4.5%. This means that banks are required to hold a total of 7% of common equity Tier 1 capital. Total Tier 1 capital must be 8.5% of risk-weighted assets and Tier 1 plus Tier 2 capital must be 10.5% of risk-weighted assets in normal periods. If a bank's capital level falls below the CCB requirement, it will face restrictions on its ability to pay dividends, buy back shares, or pay discretionary bonuses to its executives.The Bank for International Settlement came up with regulatory frameworks in 2013, and since then, there have been significant changes in the originally proposed "Basel III framework". The Basel Committee came up with Basel III reforms in 2017. The committee says: "It complements the initial phase of Basel III reforms previously finalised by the Committee. The Basel III framework is a central element of the Basel Committee's response to the global financial crisis. It addresses a number of shortcomings with the pre-crisis regulatory framework and provides a regulatory foundation for a resilient banking system that supports the real economy." - BCBS, Dec 2017Generally, in the banking industry, Basel III (2017) significantly reduced reliance on internal models by enhancing standardized approaches and introducing capital output floors, and many more changes have come from time to time in order to immunize banks against financial crisis.Transition to Basel 3.1 or Basel IVMajor reasons for continuous improvement to Basel III by the Basel Committee on Banking Supervision (BCBS) have been made to accommodate newly emerging risks within the banking industry. The aim is to make banks more resilient and less prone to economic downturn and ultimately avoid the deepening of an economic crisis.As far as the central banks across the world are concerned, active participation has been seen in the implementation of the Basel framework, and the implementation stages are presented in Figure 1.(Refer to Figure 1: Basel Implementation Worldwide in the original document)The definition of capital is an important aspect while classifying different equity classes into capital buckets. The Capital "definition" for G-SIBs and Non-G-SIBs are comprehensive and widely available on public platforms. Post 2017, there have not been any major changes in the capital definition, but a few new guidelines have been introduced for implementation and better risk management practices around the world.Basel III Reforms: Capital Efficiency, Liquidity Standards, and Systemic Risk ControlIntroduction of a leverage ratio: Basel III introduced a non-risk-based leverage ratio to prevent excessive lending and off-balance-sheet leverage, ensuring banks do not depend solely on risk-weighted assets to determine capital adequacy.Enhanced liquidity standards: Two major liquidity ratios were added: (i) the Liquidity Coverage Ratio (LCR), requiring banks to hold high-quality liquid assets to withstand a 30-day stress period; and (ii) the Net Stable Funding Ratio (NSFR), designed to promote stable, long-term funding structures.Improved risk coverage: Basel III strengthened the measurement of risks associated with complex products like derivatives and expanded the calculation of counterparty credit risk, reducing interconnected exposure in the system.Focus on systemically important institutions: Additional capital surcharges and intensified supervision were introduced for Global Systemically Important Banks (G-SIBs) to address their higher systemic impact.Strengthening risk governance and transparency: Basel III encourages improved disclosure, enhanced risk culture, and robust internal risk management frameworks to support better financial decision making.Impact on the banking sector: Although higher capital requirements may create short-term pressure on profitability, the reforms significantly enhance stability, resilience, and long-term confidence in the banking sector.Effect of Basel Guidelines on JP Morgan Chase's Capital Adequacy & Return on EquityJP Morgan Chase (JPM) is one of the oldest banks in the world, the largest in terms of assets under management, and one of the most well recognized banks worldwide. Most major countries that hold reserves in terms of dollars generally have country accounts with JPM or similar large banks. The bank faced trying times during the 2008 crisis, and its solvency was also questioned by the critics. Both the regulators and the bank realised that they cannot afford to declare JPM bankrupt or insolvent. Therefore, to address this, adequate capital must be maintained to sustain bad times.As presented by BCBS, the Basel regulations suggest proper capital requirements that are to be met by all globally active banks, and an additional safety tier for Globally Systemically Important Financial Institution (G-SIFIs). The domestic regulators also ensure that proper supervision is done, and sometimes, even an additional buffer is added to banks' capital requirement. BIS has closely monitored banks such as JPM in order to avoid financial crises arising due to poor risk management practices.Basel III introduced the Capital Conservation Buffer and the Countercyclical Buffer. It also introduced an institution-specific buffer in order to add an extra layer of safety to the entire financial system. Regulators have constantly been working towards increasing core capital requirements and making capital definitions stricter. The trend in Common Equity Tier-1 capital over the years, as can be seen in Figure 2, showcases how requirements have gone up, and banks have been consistently increasing capital to cope with these changes. (Regulatory requirement are shown by the red line, while the bank's actual capital is represented by grey bars.)(Refer to Figure 2: CET1 Comparison in the original document)Similarly, the Total Capital Trend over the years, shown in Figure 3, represents how total capital requirements have increased and how JPM has perfectly worked on the capital side to not only stay above regulatory limits but also to maintain a good buffer in case of any further regulatory requirements. (Regulatory requirement are shown by the red line, while the bank's actual capital is represented by grey bars.)(Refer to Figure 3: Total Capital Comparison in the original document)The liquidity position, as shown in Table 1, is another important part of the company.YearEligible High-Quality Liquid AssetsNet Cash OutflowLiquidity Coverage RatioExcess Eligible High-Quality Liquid Assets2017$560.08$472.08119%$88.002018$529.27$467.70113%$61.572019$545.28$469.40116%$75.882020$697.06$634.04110%$63.022021$738.12$664.80111%$73.322022$733.05$652.58112%$80.472023$798.63$704.86113%$93.77Table 1: Liquidity Profile of JP Morgan ChaseSource: Compiled by Authors from JP Morgan Chase Annual ReportsThe RWA-to-asset ratio can be seen to be declining over the years, indicating a reduction in RWA over the year. Figure 4 shows a decline in RWA post the introduction of new Risk-Weighted Assets (RWA) calculation methods and techniques.(Refer to Figure 4: RWA-to-Total Asset Percentage in the original document)As a result of the decrease in RWA over time, the capital requirements for banks have decreased, ultimately leading to a healthy Return on Equity and Return on Regulatory Capital, as shown in Figures 5A & B.(Refer to Figures 5A & B: Return on Capital Comparison in the original document)In conclusion, we can say that the bank has benefited from the introduction of the new Basel Regulations, leading to no negative impact on ROE and a sharp reduction in RWA.Effect of Basel Guidelines on HSBC's Capital Adequacy & Return on EquityHSBC, an acronym from its founding member, The Hongkong and Shanghai Banking Corporation, is a British universal bank and financial services group headquartered in London, England, with historical and business links to East Asia and a strong multinational footprint. Many major officials gave inputs during the preparation of the Basel framework for banks' capital adequacy. Detailed data has been gathered and analysis has been done in order to make meaningful interpretation and comment on how Basel has impacted HSBC in a European context. Banks in Europe are governed by the Prudential Regulation Authority of the Bank of England.While checking for different capital ratios for HSBC, it was noted that the bank has consistently worked on improving and maintaining adequate ratios as per the Basel framework. Figures 6A & B showcase the difference between Total Capital as per Basel and Common Equity Tier 1 Capital (between the years 2017 to 2023). They also reflect the growth in capital over the years. There has not been a significant increase, but the ratio has always been above regulatory requirements.(Refer to Figures 6A & B: CET1 & Total Capital in the original document)Coming to the liquidity position, as shown in Table 2, the Liquidity Coverage Ratios have been significantly above the regulatory requirements. High-Quality Liquid Assets are almost 1.5 times the Net Cash Outflow. We can say that HSBC has a good liquidity position to cope with stressed times.YearEligible High-Quality Liquid AssetsNet Cash OutflowLiquidity Coverage RatioExcess eligible High-Quality Liquid Assets2017$512.60$359.90142%$217.492018$567.20$368.70154%$305.372019$601.40$400.50150%$301.682020$677.90$487.30139%$265.152021$717.00$518.00138%$275.452022$647.00$490.80132%$205.912023$647.50$477.10136%$231.26Table 2: Liquidity Profile of HSBCSource: Compiled by Authors from HSBC Annual Reports (2017-2023)Now, the focus comes to Risk-Weighted Assets (RWA), and their movement, increase, and decrease over time. The following interpretations can be made from Table 3. RWA has been relatively constant over the research period. This raises the question of whether the bank's total assets were also stagnant. This can be seen in the next segment of the RWA-to-Total Asset ratio:RWA2017201820192020202120222023Total RWA$871.30$865.30$843.40$857.50$838.23$839.70$854.10$ Change -$6.00-$21.90$14.10-$19.24$1.43$14.40% Change -0.69%-2.60%1.64%-2.29%0.17%1.69%Table 3: RWA Change year-over-yearSource: Compiled by Authors from HSBC Annual ReportsThe RWA-to-Asset has been decreasing over the years, meaning that, with stagnant RWAs, the total assets have been increasing through the years, leading to a declining trend in Figure 7.(Refer to Figure 7: RWA-to-Asset Percentage in the original document)One of the major performance metrics for any bank is Return on Equity (ROE). After the implementation and new amendments of Basel, ROE and RORC have shown significant improvements, as can be seen in Figures 8A & B. Hence, HSBC has benefited partly from the introduction of the new Basel guidelines as well.(Refer to Figures 8A & B: Return on Capital Comparison in the original document)In conclusion, we can say that HSBC has benefited from the introduction of the new Basel regulations, ultimately leading to improvement in ROE and a sharp reduction in the RWA-to-Asset ratio."The RBI started the implementation of Basel III capital regulations on April 1, 2013, with a transition period for full compliance completed by March 31, 2019. It has continued to update and add to the Basel III norms as and when newer reforms are introduced."India's Status on the Implementation of Basel IIIThe RBI started the implementation of Basel III capital regulations on April 1, 2013, with a transition period for full compliance completed by March 31, 2019. It has continued to update and add to the Basel III norms as and when newer reforms are introduced. The Basel III capital framework was also extended to All India Financial Institutions (AIFIs) and came into effect from April 2024. The Reserve Bank of India issues the norms and guidelines for Basel III in India, which are sometimes stricter than the international Basel norms, further strengthening the Indian Banking System.(Refer to Figure 9: Basel Implementation in India in the original document)FindingsA summary of the findings from the above analysis is as follows:For many types of exposures, there is a significant and much needed reduction in risk weights. The unnecessarily high risk weights for various reasons has been matched to industry expectations.Banks have been given lesser options to use internal model approaches that are designed by the banks themselves; the shift is toward using more standardized approaches to ensure reliability and comparability among banks.Exposure calculation for securitisation portfolios and additional liquidity measures have been included. It will be vital to see how bank performance evolves after implementation.Bank performance has responded positively since the implementation of Basel IV. More practical risk weights have led to a reduction in RWAs, which has further led to a decrease in the minimum required regulatory capital.Return on Equity (ROE), being a function of profit and capital, has increased as a result of the above facts. Net Interest Margins have almost remained flat which is directly related to profits. So, it can be said that ROE has increased on account of reduction in capital requirements.RecommendationsMajor recommendations from the above analysis are as follows:One of the major insights is the reduction in risk weights for assets held by banks by the Basel Committee for Banking Supervision (BCBS). While this is a step taken toward more practical and realistic risk weights, some areas still remain unaddressed. The BCBS should take up all such areas to ensure even better risk management practices.Although the new approaches are undoubtedly more practical, they have increased the complexity of modeling and assessing all kinds of risks that a bank faces. Bankers should wisely take decisions while implementing Basel IV, balancing practicality with complexity.Banks with high-quality collateral and loans get lower risk weights. This framework is devised in a way which promotes banks to give higher-quality loans to reduce capital requirements. However, risk and profitability should be kept in mind because it's one of the core aspects of banking.From the case study, it is also seen that by adopting a new rule for the calculation of RWAs, there is a significant reduction in banks' RWA-to-Assets ratios. It can be due to improved asset quality or better calculation techniques developed by Basel. A proper in-depth analysis is required to come to a conclusion.The increase in Return on Equity due to the reduction in the required CET1 capital may be one of the reasons, apart from other internal reasons. Further research can be conducted to support such findings.ConclusionIn the above study, the objectives and motivations of the Basel Committee on Banking Supervision (BCBS) for introducing Basel IV reforms were discussed in the beginning, and concerns related to the misuse of internal model flexibility by bank and the strategies used in order to reduce capital requirements and thereby increase Return on Equity were also raised.Furthermore, comparison with the previous framework has also been made wherever possible, highlighting the major differences in risk weights and their potential impact on the banks' risk-weighted assets calculations.Additionally, key guidelines as framed by the Bank for International Settlements have been discussed by elaborating on major risk assessment areas like credit risk, market risk, and operational risk, along with other factors like liquidity ratios and capital floors.Lastly, case studies on JP Morgan Chase and HSBC have been taken up to understand the impact of Basel IV on banking operations, leading to meaningful insights.In conclusion, it can be said that all objectives of the research have been fulfilled, and results have been obtained and mentioned in this study.ReferencesSchneider, S., Schröck, G., Koch, S., & Schneider, R. (2017). Basel "IV": What's next for banks: Implications of intermediate results of new regulatory rules for European banks. McKinsey & Company. https://www.mckinsey.com/in/~/media/mckinsey/business%20functions/risk/our%20insights/basel%20iv%20whats%20next%20for%20european%20banks/basel-iv-whats-next-for-banks.pdfMagnus, M., Margerit, A., Mesnard, B., & Korpas, A. (2017). Upgrading the Basel standards: From Basel III to Basel IV? European Parliament. https://www.europarl.europa.eu/RegData/etudes/BRIE/2016/587361/IPOL_BRI(2016)587361_EN.pdfAmorello, L. (2016). Beyond the horizon of banking regulation: What to expect from Basel IV? Harvard International Law Journal, 58(1). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2888960Feridun, M., & Özün, A. (2020). Basel IV implementation: A review of the case of the European Union. Journal of Capital Markets Studies, 4(1), 7-24. https://www.emerald.com/jcms/article/4/1/7/204651/Basel-IV-implementation-a-review-of-the-case-ofBodellini, M. (2019). The long journey of banks from Basel I to Basel IV: Has the banking system become more sound and resilient than it used to be? ERA Forum, 20(1), 81-97. https://doi.org/10.1007/s12027-019-00557-xParchimowicz, K., & Spence, R. (2020). Basel IV postponed: A chance to regulate shadow banking? Erasmus Law Review, 13(1), 13-22. https://eprints.leedsbeckett.ac.uk/id/eprint/7381/1/BaselIVPostponedAChanceToRegulateShadowBankingPV-SPENCE.pdfHelbekkmo, H., Levy, C., & White, O. (2019). Creating the bank enterprise risk management function of the future. Journal of Risk Management in Financial Institutions, 12(4), 297-310. https://www.ingentaconnect.com/content/hsp/jrmfi/2019/00000012/00000004/art00002Authors may be reached at harsh.jindal8377@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 94–101
Ep. 171 — Beyond Traditional Banking – Tailored debt products to suit changing business needs
CA Journal
· September 2026
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Beyond Traditional Banking - Tailored debt products to suit changing business needsIndia's rapidly evolving economic landscape has created unprecedented opportunities for businesses across sectors. However, access to timely and flexible financing remains a core challenge for many businesses. Traditional bank lending (term loans and cash credit facilities), once the go-to solution, is increasingly proving insufficient due to rigid norms, collateral requirements, and slow processes. This article explores alternative financing avenues including trade finance, asset-backed finance (sale and leaseback, equipment funding, lease rental discounting), and structured finance (promoter funding, acquisition funding, and venture debt). It provides a comprehensive overview of each financing model, its use cases, and limitations, helping the Chartered Accountants community to guide business leaders in making informed capital-raising decisions in a dynamic environment.IntroductionIn India's entrepreneurial ecosystem, the ability to secure the right kind of financing at the right time can define business success. While traditional bank loans have been the mainstay of corporate finance, they are not always well-suited to the needs of agile, high growth, or distressed businesses, especially those with:Irregular, lumpy cash flows (e.g., defence contractors) or exponential short-term growth spikes (e.g., Direct-to-Consumer brands on q-commerce).Asset-light models (e.g., Quick Service Restaurant chains and aggregator platforms) or balance sheets dominated by intangible assets like proprietary software and patents.Accelerated business cycles (e.g., fast fashion brands) and shorter product lifespans driven by rapid technological obsolescence (e.g., consumer electronics).These limitations have opened the door to a new wave of alternative financing options, tailored to modern business models and cycles. These new-age financing tools are not only designed to meet diverse capital needs but are also structured with greater flexibility and responsiveness to business realities. This shift is largely powered by technology, making these modern solutions possible through:Seamless API integration provides lenders with instant access to a borrower's banking, GST, and other compliance data.Alternative credit assessments evaluate the borrowing entity's transaction flows and its promoter's behavioural metrics in conjunction with historical financials.Continuous, real-time risk monitoring helps identify early warning signals instead of relying on delayed, periodic financial statements.This article offers a structured examination of a few of such financial solutions. By diving deep into their operating mechanisms, eligibility norms, pricing, and ideal use cases, the aim is to equip Chartered Accountants with the insights necessary to optimise their funding strategy in an increasingly competitive market.Emerging Alternatives: A Taxonomy of Modern Financing InstrumentsA. Trade Financei. Cross-border factoring/discountingModus Operandi: Cross-border factoring/discounting is a short-term working capital financing tool designed to support businesses engaged in the import and export of goods. When a seller dispatches goods to a buyer overseas, the lender provides an advance to the seller of up to 90% of the invoice value at the time of shipment. The buyer (borrower) pays the full invoice value to the lender on the due date, typically 90 to 120 days later. Upon receipt of these funds from the buyer (borrower), the lender remits the remaining 10% balance to the seller, minus applicable charges.Interest Rate: 8% to 12% p.a. for importers, with slightly lower rates for exporters. Interest rates are generally linked to SOFR (for USD-denominated transactions).Primary Security: No charge is filed on any assets.Collateral Security: No charge is filed on any assets. The lender mitigates their risk by obtaining insurance cover on the transaction.Active Lenders: Examples of few active lenders in this segment are Modifi, Drip Capital, TradeWind and DP World.Ideal For: This financing model can support the working capital requirements of the borrower by complementing the existing cash credit facility.Key Points: Import/export factoring offers quick liquidity without any collateral security and is generally considered off-balance sheet financing, thus not impacting financial ratios of the borrower.ii. Domestic factoring/discounting & TREDSModus Operandi: Domestic factoring involves the discounting of invoices either through direct arrangements with Banks/NBFCs or via electronic platforms like Trade Receivables Discounting System (TReDS). TReDS is an RBI regulated digital platform which enables MSMEs to receive early payments against invoices without collateral.Interest Rate: Interest rates range from 8% to 15% p.a. depending on a case-to-case basis and the credit rating of the buyer and/or supplier.Primary Security: No charge is filed on any assets.Collateral Required: No charge is filed on any assets.Active Lenders: Most private and public sector banks, along with NBFCs, offer this discounting facility. TREDS platforms are offered by Receivables Exchange of India Limited (RXIL), a JV between NSE and SIDBI, and InvoiceMart, among others. These platforms provide a transparent platform for the financing.Ideal For: MSMEs seeking timely working capital funding without approaching Banks for Cash Credit facility.Key Point: Registration on TReDS is mandatory for corporates with turnover above Rs. 250 crores, signalling government support for digital supply chain financing.B. Asset-Backed Financei. Equipment FundingModus Operandi: Equipment funding involves the purchase of machinery using financing provided by banks or NBFCs. The lender typically covers 50% to 100% of the equipment's purchase price, including taxes and installation costs. The borrower repays the loan through periodic instalments over a specified tenure which can range from 3 to 7 years.Interest Rate: Banks typically charge 8% to 10% p.a., while NBFCs may quote higher rates, ranging from 10 to 14% p.a.Primary Security: The machine financed by the lender will be exclusively charged to the lender.Collateral Required: While banks may demand collateral in the form of a fixed deposit (5% to 25% of asset value), many NBFCs approve such loans without any additional collateral requirement.Active Lenders: Apart from Banks, certain NBFCs like Tata Capital, Bajaj Finance, and Oxyzo Financial Services are active lenders in this segment.Ideal For: This financing solution is suitable for businesses requiring frequent acquisition of machinery or movable equipment, especially in manufacturing or processing sectors.Not Suitable For: Businesses which operate on an asset-light model do not require Equipment Finance.Key Point: Equipment finance enables businesses to boost productivity and revenue without a large upfront capital outlay, and the loan is typically serviced through cash flows generated by the asset itself.ii. Sale and LeasebackModus Operandi: Under a sale and leaseback arrangement, a business sells its owned, unencumbered fixed assets to a financial institution, typically an NBFC. The asset is then leased back to the original owner for continued operational use through monthly rental payments. At the end of the lease term, the business may repurchase the asset at nominal cost depending on the terms of the sale-leaseback transaction.Interest Rate: Effective financing cost, reflected through lease rentals, can be as low as 9% p.a. in certain cases. Generally, the effective financing cost is around 12% p.a.Primary Security: Not applicable, since the asset is sold to the lender and thus not reflecting in the books of business.Collateral Required: Generally, a fixed deposit ranging between 10% to 25% of the asset value may be required as collateral security. This amount can be lower or higher depending on case-to-case basis.Active Lenders: Siemens Financial Services and Tata Capital are among the notable players offering sale and leaseback products at competitive terms.Ideal For: This model is ideal for asset-heavy industries such as textiles, beverages, and sectors with significant capital expenditure. It is particularly effective for companies facing a temporary liquidity crunch, and those with accumulated GST input tax credit (ITC) that can be utilized. The sale of fixed assets results in collection of output GST which can be set-off against existing ITC balance, thus resulting in freeing up of cash flow.Not Suitable For: Borrower may not be entitled to subsidy linked to Fixed Assets appearing in the balance sheet.Key Point: Sale and leaseback help unlock liquidity without impacting operational continuity and lowers reported leverage on the company's books since the transaction is structured as a lease rather than a loan.iii. Lease Rental Discounting (LRD)Modus Operandi: Lease Rental Discounting is a financing option where businesses can borrow funds against their rental income from pre-leased properties. In this structure, the lender provides a loan based on the future cash flows (rental income) generated from a commercial property that is already under lease agreement. The loan tenure is linked to the lease tenure. The loan amount typically ranges from 70% to 85% of the present value of future rental income.Interest Rate: Banks generally charge interest rates in the range of 8% to 10% p.a., depending on factors like the tenure, tenant stability, and property value. NBFCs may offer slightly higher interest rates but they may also disburse higher loan amounts on a case-to-case basis.Primary Security: The underlying property is taken as primary security by the lender apart from the lease rental income stream.Collateral Required: Collateral is generally not required.Active Lenders: Most Banks and NBFCs offer this lending facility.Ideal For: LRD is one of the most preferred options of borrowing by real estate developers.Not Suitable For: In case lease tenure is short (up to 1 year) and/or the lessee is not a reputed name, then Lenders may not consider LRD facility. However, Loan Against Property (LAP) may be availed in such cases.Key Point: LRD offers businesses the ability to leverage their existing rental agreements for immediate liquidity. This facility enables them to raise funds for various purposes, such as expansion, reinvestment in business, or to meet short-term financial needs, without the need to sell the property or disturb the ongoing lease arrangements."Through ULI, lenders get instant, seamless access to a massive variety of data required for underwriting, including state-level land records, satellite imagery (useful for agricultural credit), tax filings and KYC details, and Account Aggregator financial data."C. Structured Financei. Private Credit FundingModus Operandi: For structured use cases where Banks are not allowed to lend due to regulatory framework, private credit funds come to the rescue. These funds can structure the transaction for all kinds of needs of borrowers. Typical end uses include buyback of shares from exiting shareholder, delisting of the company, acquisition of another business, funding stuck real estate projects, one-time settlement funding, etc.Interest Rate: Interest rates vary significantly depending on the structure of the transaction. Typically, interest rates range in the mid-teens to high-teens p.a. Since the interest rates are high, the lenders structure the repayments to match the expected future cash flows of the borrower.Security Required: The security required for transactions differ on a case-to-case basis. Possible securities include land, building, plant and machinery, listed co. shares, and even unlisted shares.Active Lenders: Many lenders like InCred Capital, Edelweiss, Modulus, Kotak Credit Funds, Baring Private Credit, UTI Alternates, are in this space.Ideal For: Ideal for special situations transactions where banks are unable to lend because of high risk or regulatory framework.Not Suitable For: May not be suitable for companies with unstable or declining business performance, as the interest rates are high and servicing of the same can become a challenge.Key Point: In case of structured credit requirements, private credit offers tailormade solutions to borrowers.ii. Venture DebtModus Operandi: Venture Debt is a type of financing that allows early-stage, high-growth startups to borrow funds. Unlike traditional loans, which rely on collateral and credit history, venture debt is secured by the company's future cash flows and often the backing of existing equity investors. Typically, this form of debt is provided to startups that are in the growth or scaling phase and have recently raised equity funding. The loan is typically structured with interest payments and may include a warrant or equity kicker, allowing the lender to convert a portion of the debt into equity in the future.Interest Rate: Interest rates for venture debt are generally higher than traditional loans and is around 15% p.a. or higher, depending on the company's stage of growth, market conditions, and the financial health of the business. This is due to the higher risk taken on by the lender, given that the borrowers are often not yet profitable.Security Required: Venture debt is typically secured by the company's assets, such as intellectual property, equipment, or future receivables. In some cases, the lender may require the company to pledge some equity or issue warrants, which gives the lender the right to convert a portion of the debt into shares at a later stage, usually when the company raises more equity capital or is acquired.Active Lenders: Few names of the leading venture debt providers in India are, Trifecta Capital, BlackSoil, Stride Ventures, Innoven Capital.Ideal For: High-growth startups that have raised venture capital and have recurring revenues in form of subscriptions.Not Suitable For: Not suitable for very early-stage startups that do not have a proven track record of revenue or customers, as the lenders usually require some level of market validation and revenue generation. Startups that are not backed by venture capital or institutional investors may also find it more difficult to access this form of financing.Key Point: Venture debt provides growing startups with access to capital without giving up significant equity. It is a valuable tool for businesses that need to extend their cash runway or accelerate their growth without diluting ownership in the company."Tailored debt products represent a transition from "loan as a product" to "credit as a service" - adaptive and responsive to business realities. Institutions that successfully integrate data, technology, and risk governance will define the next phase of banking beyond traditional boundaries."iii. Revenue-Based Financing (RBF)Modus Operandi: The Lender advances upfront capital after considering the borrower's monthly sales and unit economics. Repayments are defined as a percentage of sales, so the EMI burden automatically reduces during slow months and accelerates during peak seasons.Interest rate: Lenders typically charge a flat fee (typically 6% to 12% on the principal). This rate may seem deceptively low, but the effective interest rate usually translates to 18% and higher.Security required: Lenders secure their capital by setting up an escrow mechanism or an auto-debit mandate directly integrated with the borrower's payment gateways or nodal bank accounts.Active lenders: Specialized fintech platforms like Velocity, GetVantage, and Recur Club, help in arranging these facilities.Ideal For: Digital-first businesses with high gross margins and predictable recurring revenues. This includes D2C brands, B2B SaaS platforms, e-commerce sellers.Not Suitable For: Pre-revenue startups, traditional brick-and-mortar stores with sales collections in cash, low-margin B2B trading firms, or project-based businesses that experience massive, lumpy cash inflows.Key Point: RBF results in zero equity dilution and no board seats.Real Life Case StudiesCase Study 1Borrower is engaged in the manufacturing of steel bars. The borrower had availed of cash credit facility from multiple banks. As the business grew, managing the documentation with multiple banks became a hassle. For every enhancement in sanctioned limits, the banks would have a long-drawn process which would impact the business growth. To complement this cash credit facility, the Borrower started with Rs. 5 cr of unsecured bill discounting facility from TREDS platform. In a few years, this facility was enhanced to Rs. 300+ cr by lenders on the TReDS platform.Case Study 2Borrower is engaged in the manufacturing of consumer electronics. Borrower had a large balance of GST ITC on their books due to earlier capex which impacted short-term liquidity. Borrower entered into sale and leaseback transactions with lenders for the machines owned by Borrower. By selling the machines to the lender, the Borrower collected GST on output which was set-off against GST ITC balance and resulted in immediate liquidity relief for the Borrower's cashflows.Case Study 3Borrower is engaged in the business of manufacturing of nutraceuticals. The promoters wanted to buy out the stake of their JV partner. So, promoters approached private credit fund for funding the transaction and used proceeds to give exit to JV partner. The transaction was backed by unlisted shares of the Borrowing company. The repayment event was tied to the listing of the Borrower company.Regulatory and Policy ConsiderationsWhile the alternative debt products are filling a critical gap in the market for the borrowers, this shift puts the regulator in a tricky spot. RBI has to balance rapid innovation with systemic protection, weigh seamless data access to lenders against borrower's privacy concerns, and figure out how new credit models fit into traditional capital adequacy and prudential norms.RBI and the Government of India have been proactively laying the foundation through digital public infrastructure initiatives such as the Account Aggregator framework, UPI, GSTN integration, etc. and the e (Central Bank's Digital Currency).RBI recently launched ULI (Unified Lending Interface), a platform designed to do for credit exactly what UPI did for payments. Through ULI, lenders get instant, seamless access to a massive variety of data required for underwriting, including state-level land records, satellite imagery (useful for agricultural credit), tax filings and KYC details, and Account Aggregator financial data. As programmable money and smart covenants gain wider acceptance through the e (Central Bank's Digital Currency) and tokenization, lenders will gain even more precise, automated tools to manage risks.These initiatives have created a strong foundation for the banking ecosystem and will enable highly scalable and tailored debt solutions in the times to come.ConclusionIn conclusion, as India's business landscape continues to evolve, so must the financing strategies that support its growth. While traditional bank loans have their place, alternative financing models like trade finance, equipment leasing, structured finance, and revenue-based financing offer businesses the flexibility and agility needed to thrive in a dynamic market. Tailored debt products represent a transition from "loan as a product" to "credit as a service" - adaptive and responsive to business realities. Institutions that successfully integrate data, technology, and risk governance will define the next phase of banking beyond traditional boundaries. By understanding the nuances of these options, business leaders and financial managers can make more informed decisions, ensuring they access the right capital at the right time to fuel growth, manage risk, and capitalize on new opportunities.BENEVOLENCEVOLUNTARY CONTRIBUTION TO THE CHARTERED ACCOUNTANTS' BENEVOLENT FUND (CABF)Name: CA. Padmini Khare KaickerFirm Name: B K KHARE & COFirm No.: 105102WAmount: ₹ 25,00,000Place: MumbaiAuthor may be reached at poddarharsh1998@gmail.comTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 102–107
Ep. 172 — Talent Acquisition, Training, and Retention Strategies in CA firms
CA Journal
· September 2026
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Talent Acquisition, Training, and Retention Strategies in CA firmsThe Chartered Accountancy (CA) Profession requires a variety of skills and a high level of discipline to deliver quality services. Not only technical, but also soft skills such as communication skills play a major role in the success of a firm. Finding, acquiring, training, and retaining such talent is difficult and of utmost importance.This article emphasizes various techniques related to talent acquisition, training, and retention strategies in CA firms to strengthen their professional services and maximize customer satisfaction.IntroductionThe right talent acquisition strategy is crucial for any business, and in CA firms, it can truly make or break the firm. Talent acquisition, training, and retention are critical components for the success of CA firms, as the quality of talent within the firm determines the quality of services being rendered by the firm. Effective strategies for talent acquisition, training, and retention can help ensure that the right technical expertise is being maintained within the firm. This will help CA firms to build a competent work environment capable of delivering quality services. This article focuses on various approaches to hiring, training, and retaining talent in CA firms to deliver high-quality services.Challenges faced by CA Firms in Attracting the Right TalentSeason-Driven Workload: The workload in the Chartered Accountancy (CA) profession is very seasonal, which makes it difficult to manage workflow and retain staff during the entire year. During the peak season (such as ITR filing, audits, and year end closings), team members feel over-burdened due to work pressure, and once the season is over, they have comparatively lighter schedules, which can limit opportunities to fully utilise and demonstrate their skills and expertise.Long Qualification Process: Unlike other professions, the qualification process in the CA profession is very time consuming. Firms invest their time and resources to train articled assistants with the objective of retaining them for the future. However, due to the lengthy qualification process, the turnaround time for realizing the benefits of this investment increases.Competitive Hiring Landscape: The demand for skilled accountants and finance professionals exists not only in CA firms but also in other fields such as banks, corporates, consultancy, etc. Due to this high demand, attracting and retaining a skilled professional becomes a challenging task.Technological Shift: Due to technological shift, existing professionals are required to keep themselves updated with the required skills. This poses a challenge for the employers to find competent and talented employees. Employers must also train their existing employees to keep pace with the technological shift and deliver quality services.Changing Expectations of Young Professionals: Today's professionals look beyond salary while choosing an employer. Flexible working arrangements, career development opportunities, and workplace culture play a major role in attracting talent. CA firms that are unable to adapt to these changing expectations may face difficulties in hiring and retaining skilled professionals.Keeping Up with Regular Amendments: CA Professionals are required to keep themselves updated with all the latest amendments. Staying updated is not something that everyone can easily manage. Only a well-informed professional can provide effective assistance and finding such a professional is a task in itself.Considering these ongoing challenges, CA firms should implement a holistic approach to manage their human capital."The demand for skilled accountants and finance professionals exists not only in CA firms but also in other fields such as banks, corporates, consultancy, etc. Due to this high demand, attracting and retaining a skilled professional becomes a challenging task."Talent Acquisition Strategies in CA FirmsTalent Acquisition strategies play a vital role in attracting, hiring and retaining skilled professionals. As the demand for skilled professionals exists not only in CA firms but across various industries, talent acquisition strategies have become more vital than ever. These strategies help firms hire individuals on the basis of their talent, rather than solely on the basis of their degree. Firms can explore digital platforms, campus recruitment, and other methods. If recruitment strategies are aligned with long-term organizational goals, the firm automatically heads towards sustainable growth.Campus Hiring & Internship Programs: To recruit skilled individuals, partnerships can be established with commerce colleges, CA coaching centers, and ICAI branches. These collaborations will help firms identify talented individuals.Employer Branding: Any professional will be attracted to workplaces that promote work-life balance, offer growth opportunities, and provide a continuous learning environment. When a firm focuses on its human capital, it earns credibility and more people prefer to work with such a firm.Prioritizing Attitude in Hiring: At the time of hiring, employers should prioritize soft skills rather than technical skills. Technical skills can be taught, but soft skills are deeply inculcated in an individual's personality. Conducting interviews with personality assessments will help in identifying individuals who can maintain the firm's culture.Referrals & Former Employee Networks: In order to recruit talented staff, referral programs can be initiated. Offering rewards for referring new candidates to the firm will motivate existing employees to refer talented individuals.Employing External Hiring Support: Employing external hiring support should be viewed as a strategic investment rather than just a cost. This enhances hiring quality while allowing internal teams to focus on core business functions.Competitive Compensation Packages: Many CA firms find it difficult to match the salaries offered by corporate employers, making them less attractive to talented individuals. To stay competitive, CA firms can focus on non-financial incentives such as flexible work models and a positive organizational culture.Hybrid Work Model: Operating in a hybrid work model enables CA firms to attract and hire talented individuals from diverse locations. This flexibility not only broadens the talent base but also promotes work life balance which makes the firm more attractive to professionals seeking both professional and personal growth."As the demand for skilled professionals exists not only in CA firms but across various industries, talent acquisition strategies have become more vital than ever. These strategies help firms hire individuals on the basis of their talent, rather than solely on the basis of their degree."Training Strategies in CA FirmsEffective training strategies help CA professionals gain technical knowledge and apply that knowledge while delivering services. Training strategies help update candidates on the latest changes in law and technology, resulting in a more educated staff. Educated staff deliver quality services, which lead to customer satisfaction and eventually enhances the company's prestige.Planned Induction and Onboarding Process: CA Firms should plan proper induction and onboarding process which should include a brief introduction to the organization and the roles and responsibilities of each individual. This will make sure that the employees are aware of what is expected from them, leading to a smoother workflow.Continuous Skill Enhancement: In order to keep pace with the competition, it is essential to stay updated with all the latest amendments in the applicable laws including the Income-Tax Act, GST Act, and the Companies Act. Conducting regular classes and training programs can help achieve this objective and ensure delivery of high-quality work.Technology and Digital Tools Training: Different tools like Tally, Zoho, SAP, and similar platforms help individuals perform task with fewer errors. Therefore, employees should be trained to use these platforms to complete their work in less time and with more accuracy.Soft Skills Development: Companies should plan proper training sessions to improve the soft skills of candidates, such as communication, presentation, client handling and professional behavior. Improving these skills help attract clients, which leads to customer satisfaction. It also helps in personal growth and continuous learning of employees.Continuing Professional Education (CPE): Providing structured learning opportunities to candidates helps them learn new skills. Continuous Education removes education gap and supports upskilling of employees. Employers should allow employees time during working hours to complete this CPE to ensure their growth. This not only ensures compliance with regulatory requirements but also enhance the skills of professionals.Work Integrated Learning: Job rotation, client rotation, and similar practices help team members gain experience in diverse tasks. This will help proper work management during the absence of an employee. Additionally, these practices promote continuous knowledge enhancement within the team.Setting Standard Operating Procedures: Setting Standard Operating Procedures (SOPs) helps new and existing staff work in a prescribed manner. These standards help maintain accuracy and consistency in work. They also help gain the advantage of the expertise gained through experience, enabling professionals to adopt the most efficient way to complete tasks.Normalizing Errors: Committing mistakes should be treated as a natural part of the work process. Employees should be provided with a fear free environment, which will help boost their confidence to take initiatives. This not only improves individuals' confidence but also leads to greater efficiency and collaboration within the firm.Consider Learning Curve: It is important to allow new employees time to settle in. This will help them feel comfortable in the work environment. The learning curve will automatically take effect, and it is essential to understand that new team members can't perform at the level of experienced members.Retention Strategies in CA FirmsThe success of a CA firm largely depends on its employees. To make sure that the objectives of the firm and its employees do not contradict each other, the firm should create such an environment and culture in which employees feel valued and their growth is not hindered. Firms must emphasize implementing strategies that accelerate the growth of both the firm and its employees. Such strategies help reduce employee turnover and retain talent pool within the firm.Career Development Opportunities: Every employee seeks development not only in financial terms but also in terms of skills and learning. On-the-job training and seminars provide a sense of motivation for employees to learn new skills in a rapidly changing environment. This helps prepare employees to adapt effectively to such changes.Work-Life Balance: In order to allow employees to work at their full potential, it is essential to ensure that a healthy work-life balance is maintained. Individuals who get time to recharge themselves after work come back more energetic, clear and focused. Organizations should ensure that work-life balance is maintained and no single employee is overburdened with excessive workload.Recognition and Appreciation: To keep employees motivated, it is important to recognize their efforts and reward them for their contribution. This motivates low performing employees and creates a sense of competition to perform better. It also encourages high performing employees to maintain their performance. Continuous recognition and rewards help retain the talent pool within the firm.Positive Work Culture: Work culture plays a crucial role in the efficiency and loyalty of employees. A negative work culture can make employees less interested in the growth of the firm and eventually in their work. Hence, a firm should always maintain a positive work culture where employees enjoy a sense of belonging and are willing to contribute to the growth of the firm."Companies should plan proper training sessions to improve the soft skills of candidates, such as communication, presentation, client handling and professional behavior. Improving these skills help attract clients, which leads to customer satisfaction. It also helps in personal growth and continuous learning of employees."Alumni Network: Former employees can be valuable assets, even after they leave the organization. Having a strong alumni network helps share knowledge and creates opportunities to bring talented people into the firm. These alumni often have extensive industry connections and may refer highly suitable candidates for open positions. Alumni also help market the firm on different platforms, thereby increasing its reach across sectors.Feedback: Feedback plays a crucial role in identifying and addressing the concerns of the employees in a timely manner. When proper feedback is provided to employees, they understand what is expected from them, which leads to improved performance and promotes the growth of both employees and the organizations.Performance Based Rewards: Rewards should match the contribution made by each employee and compensate them fairly for their efforts. There must be a well-structured reward system in place that encourages employees to strive for excellence and develop a competitive attitude. Rewards such as bonuses and increments motivate employees to work harder. When employees see a clear link between their efforts and tangible rewards, they are more likely to remain committed to the firm.Prioritizing Employee Health: Healthy employees are more capable of delivering high quality work. Hence, a firm should always prioritize its employees' health. This can be achieved by providing regular health check-ups and health insurance. Firms can also organize fun activities in the workplace so that employees can get a break from office work. Such activities help reduce work-related stress and support employees' overall well-being.ConclusionAs businesses are becoming more complex, compliance related complexities are also increasing; hence, the Chartered Accountancy profession needs to adapt to such rapid changes. CA firms should focus on continuous learning and training to cater to the needs of their clients. The success of CA firms will depend on their talent pool and the systems in place to deal with new challenges. Focusing on talent acquisition and analyzing the business environment is key to success in this new world.Author may be reached at monika.ahuja477@gmail.com and eboard@icai.inTHE CHARTERED ACCOUNTANT · SEPTEMBER 2026 · PAGES 108–111
Ep. 173 — Navigating the Path to a Low-Carbon Future: Internal Carbon Pricing (A Financial Tool)
CA Journal
· September 2026
00:00
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PARIS CLIMATE AGREEMENT - Navigating the Path to a Low-Carbon Future: Internal Carbon Pricing (A Financial Tool)The accounting profession plays a pivotal role in steering organizations toward a low-carbon future. By leveraging their expertise in financial analysis, reporting, and strategic planning, accountants can drive sustainable practices and facilitate the transition to a net-zero economy.Climate change has become one of the most pressing challenges of our time, evident in rising global temperatures, erratic weather patterns, and the alarming rate of glacier melting. At the core of this crisis is the growing concentration of greenhouse gases (GHGs) in the atmosphere, particularly carbon dioxide (CO₂), which is responsible for about 78% of the heat-trapping effect from these gases. Over the past four decades, CO₂ levels have risen significantly, from 339 parts per million (ppm) in 1979 to 417 ppm in 2022, a 20% increase. Industrial activities are the primary drivers, with China, United States, and India being the top emitters globally. These alarming trends demand urgent action from governments, organizations, and professionals, including accountants, toward a sustainable, low-carbon future.The Paris Agreement and Global Commitments to Carbon NeutralityThe Paris Agreement, established in 2015, marked a pivotal global response to climate change, urging nations to take decisive action to reduce GHG emissions and limit global warming to below 2°C. India, as a signatory, ratified the agreement in 2016, pledging to reduce its GHG emission intensity by 33-35% by 2030 compared to 2005 levels, later raising this target to a 45% reduction. Additionally, India aims to achieve carbon neutrality by 2070.For these targets to be met, every sector must contribute. Accountants, in particular, play a critical role in operationalizing these commitments. By embedding sustainability into financial systems, accountants can:Track and audit carbon emissions to ensure accurate reporting.Budget for carbon costs and assess their impact on financial performance.Prepare detailed sustainability reports that showcase progress toward carbon neutrality.Support decision-making through cost-benefit analyses of carbon mitigation strategies.These actions position accountants as key players in bridging the gap between climate goals and organizational accountability.Carbon Mitigation Strategies and Regulatory FrameworksEfforts to reduce carbon emissions have accelerated over the past decade, with industries shifting to renewable energy sources like wind and solar and adopting electric vehicles in place of traditional internal combustion engines. Companies are setting net-zero targets by reducing direct (Scope 1) and indirect (Scope 2) emissions.Scope 1 emissions are direct greenhouse gas emissions from sources owned or controlled by an organization, arising from its operational activities. Scope 2 emissions are indirect emissions from purchased electricity, and Scope 3 emissions originate from sources outside the organization's direct control, such as supply chains and product usage by customers.Government support these goals through regulatory frameworks such as:Carbon Taxes: Imposing taxes based on emission volumes to incentivize cleaner practices.Emissions Trading Scheme (ETS): Setting emission limits, allowing companies below the threshold to trade carbon credits with those exceeding it.Accountants play a critical role by:Calculating the financial impact of carbon taxes and credits.Forecasting future costs tied to carbon pricing.Ensuring compliance to avoid penalties and reputational risks.As the need to limit global warming to 1.5-2°C intensifies, carbon pricing mechanisms are becoming central to climate strategies. Accountants must be equipped to help organizations navigate this landscape, ensuring compliance, financial optimization, and a meaningful contribution to combat climate change.Carbon Border Adjustment Mechanism (CBAM)After ETS, the European Union introduced the Carbon Border Adjustment Mechanism (CBAM) on May 17, 2023, to address carbon leakage and align import carbon costs with the EU's Emissions Trading System (ETS). CBAM prevents unfair competition by charging for the carbon content of imported goods, adjusted to the exporting country's carbon pricing. This mechanism will significantly impact India's exports, particularly aluminium and steel. CBAM will be fully implemented by 2026, with EU importers paying the levy from that year. During the transition phase (October 2023-December 2025), EU importers must report emissions for specific goods like cement, electricity, and fertilizers, without financial penalties.For accountants, CBAM requires:Monitoring and reporting the carbon content of imports.Assessing its financial impact on supply chains, especially in export-heavy industries.Guiding carbon emissions strategies to avoid penalties.Aligned with the EU's climate goals, CBAM ensures fair global competition, making compliance management essential for accountants.India's Carbon Credit Trading Scheme (CCTS)India is moving towards a national carbon market, like the EU ETS and California ETS. Amendments to the Energy Conservation Act (2022) empower the government to introduce a Carbon Credit Trading Scheme (CCTS), enabling the trading of carbon credits, each representing one ton of CO₂ equivalent (tCO₂e).In July 2024, the Bureau of Energy Efficiency (BEE) launched a compliance system for CCTS, initially targeting four energy-intensive industries: cement, iron and steel, pulp and paper, and petrochemicals. The power generation sector will join in later phases. This initiative supports India's climate goals and commitment to reduce greenhouse gas emissions.For accountants, CCTS introduces the need to:Track and report carbon credit transactions for compliance.Assess the financial benefits of carbon trading for organizations.Develop strategies to manage emissions and minimize costs.CCTS is crucial for India's climate commitments and offers businesses opportunities to trade carbon credits and lower their carbon footprint.Total GHG Emissions = Direct Emissions (energy) + Direct Emissions (Process) + Indirect Emissions from Purchased Electricity & Heat - Adjusted Emissions (exported power, CCUS)GHG Emission Intensity = Total GHG Emissions (t CO₂) / Total Equivalent Output (t or MWh)Internal Carbon Pricing: A Strategic Tool for Decarbonization and SustainabilityInternal Carbon Pricing (ICP) is a vital tool for companies aiming to meet net-zero targets and comply with evolving regulations. By assigning a financial cost to greenhouse gas emissions, ICP incentivizes emission reductions or penalizes for continued high-emission practices, aligning sustainability with financial decision-making. Adopting ICP proactively offers a competitive edge, appealing to investors, customers, and employees focused on sustainability.For accountants, implementing ICP involves:Setting an internal carbon price based on emissions and carbon risk exposure.Integrating carbon pricing into investment and operational decisions.Preparing for future carbon pricing regulations.Establishing an internal carbon price helps companies assess the financial impact of emissions and pursue sustainable alternatives. Accountants play a crucial role in guiding these strategies, supporting the shift to a low-carbon economy while enhancing financial performance and sustainability.Primary types of Internal Carbon PricingShadow Pricing: Shadow pricing assigns a hypothetical value to carbon emissions to evaluate risks tied to business investments, particularly in light of anticipated policies increasing emissions-related costs. This approach helps integrate these projected costs into financial planning, affecting items like net income. Shadow pricing typically ranges from $2 to $800 per ton of emissions, depending on investment and risk factors, supporting informed, long-term decision-making.For accountants, shadow pricing helps:Projecting financial impacts of regulatory changes.Incorporating carbon costs into forecasts and risk assessments.Managing investment portfolios with future carbon costs in mind.Setting up long-term sustainability goals while aligning financial strategies with environmental objectives.Implicit Pricing: Implicit carbon pricing reflects the cost of emissions reduction projects, such as renewable energy investments or energy efficiency improvements. Unlike explicit pricing (direct taxes or fees), implicit pricing is calculated after meeting reduction goals. Companies with climate-related targets often use this method. Some companies calculate 'Implicit carbon price' using the formula: Cost of Carbon Abatement / Tonnes of CO₂e abated.For accountants, implicit pricing is crucial for:Evaluating the costs of emission reduction efforts and tracking their impact.Internal Carbon Tax/Fee: An internal carbon tax involves companies charging themselves for carbon emissions they produce, creating a fund to finance emissions reduction projects with long-term benefits. Unlike shadow pricing, which focuses on future emissions, this tax addresses present emissions.For accountants, an internal carbon tax:Creates a financial incentive for reducing emissions.Supports long-term sustainability planning through dedicated funding.Ensures adherence to internal carbon pricing mechanisms.Internal Carbon Trading Mechanism: An internal cap-and-trade system sets a carbon emissions cap within the organization. Business units receive allowances for each ton of carbon emitted, which can be traded, introducing a tangible carbon price internally. This system is especially beneficial for large corporations with diverse operations, allowing flexibility for high-emission units while driving overall reductions. It fosters collaboration and innovation, encouraging sustainable practices organization-wide.For accountants, internal trading mechanisms:Track emissions and allocate allowances efficiently.Promote collaboration to achieve company-wide emission targets.Drive sustainability and cost-effective carbon reduction strategies.How to Implement ICP?Here are the recommended steps:Understand ICP Objectives and Align with Corporate Climate Goals: To begin implementing ICP, it's essential to establish a clear understanding of its objectives and ensure they align with the organization's broader climate goals. A dedicated team should: define clear objectives for ICP; review capital requirements for implementing carbon reduction initiatives; and align ICP strategies with corporate climate and sustainability targets. Key Outcome: Establishment of a strong foundation for implementing an effective ICP framework that supports both financial and environmental goals.Review GHG Emissions & Past Climate Actions: Conducting a comprehensive review of greenhouse gas (GHG) emissions and past climate actions is critical. This step involves: assessing the organization's carbon footprint; evaluating the effectiveness of previous climate initiatives; and analyzing carbon abatement costs to identify potential savings. Key Outcome: Actionable insights to optimize future carbon reduction strategies and enhance the efficiency of existing efforts.Identify & Review Various ICP Methodologies: Selecting the most appropriate ICP methodology requires careful consideration of available options. Organizations should: identify and compare different ICP methodologies; analyze costs and benefits relative to market prices; finalize a pricing structure tailored to the organization's needs; and estimate the impact of ICP on sample projects. Key Outcome: A customized, effective ICP approach that balances carbon reduction goals with financial feasibility.Finalize Best ICP Implementation Route: To ensure smooth implementation, organizations need to finalize a detailed plan that aligns with corporate goals. Key steps include: developing a comprehensive implementation plan, including Standard Operating Procedures (SOPs); identifying strategies for periodic updates to the framework; and ensuring alignment with internal policies and market dynamics. Key Outcome: A clear roadmap for integrating ICP into business operations and achieving meaningful emissions reduction.Monitor and Evaluate: Regular monitoring and evaluation are vital to ensure the ICP framework's success and identify areas for improvement. Organizations should: establish mechanisms for tracking carbon emissions and pricing impacts; evaluate progress toward emission reduction targets; conduct regular reviews of the ICP framework; and implement continuous improvements based on findings. Key Outcome: Formulation of an adaptive, effective ICP framework that drives continuous improvement and supports long-term sustainability goals.Case StudiesICP helps align investment decisions with decarbonization goals, enabling organizations to manage climate risks and achieve environmental objectives. Below are key examples of how companies have effectively implemented ICP to foster low-carbon practices in leading organizations.Driving Low-Carbon Investments through a Carbon Pricing Fund: In 2015, a leading cement manufacturer in India introduced a carbon fee to generate funds for low-carbon projects. Based on low-carbon projects, the company set an ICP of $11 per metric ton of CO₂. This fee, modelled against Indian carbon regulations, incentivized reductions in energy-intensive activities. Revenue generated was allocated to a dedicated carbon pricing fund, enabling the company to bridge the viability gap for projects like a 10MW waste heat recovery plant in Odisha. This project reduced emissions by 80,000 metric tons of CO₂ annually. The company ensured that the fund's investments aligned with its renewable energy and energy productivity targets, demonstrating how financial expertise can support decarbonization.Achieving Carbon Neutrality by 2045 with ICP Integration: A leading steel manufacturing company employs ICP as a core tool for its decarbonization strategy, targeting carbon neutrality by 2045. The company has embedded ICP into two critical processes:Capital Expenditure (CapEx): Every capital project is evaluated using a carbon-adjusted internal rate of return. Projects must surpass a hurdle rate that includes carbon costs.Operational Decisions: ICP is used to calculate the Total Cost of Ownership (TCO) for raw materials, incorporating emissions-related costs into procurement decisions.By aligning investment appraisals with emissions reduction goals, the company demonstrates that sustainability is central to its business planning.Striving for Carbon Neutrality by an IT Company: A global IT company in India aims to achieve carbon neutrality through internal carbon pricing. Its strategy focuses on reducing electricity consumption by 50% (per capita, 2008-2018), switching to green power for remaining needs, and investing in offset projects for unavoidable emissions. In 2016, the company worked with WRI India to establish an internal carbon price of $10.50 per metric ton of CO₂, targeting its primary emissions from purchased electricity. The price was based on electricity costs, energy efficiency and renewable measures, and offset procurement costs. This mechanism encourages business units to prioritize renewable energy investments, supporting the goal of 100% green electricity use.Challenges & LimitationsWhile Internal Carbon Pricing (ICP) offers immense potential to drive sustainability, it also presents certain challenges and limitations that organizations must address for effective implementation. A major challenge lies in accurately measuring and monitoring emissions data. Reliable data is essential for setting a meaningful internal carbon price. However, collecting such data is resource-intensive and requires robust systems, particularly in large, diverse organizations.Another limitation is the inconsistency in regional regulations. Variations in carbon policies across jurisdictions can complicate the integration of ICP into global operations. Such discrepancies may undermine the intended benefits of aligning business practices with broader climate goals.Fluctuating carbon market prices add to the complexity. Companies often struggle to set an internal price that balances short-term financial performance with long-term sustainability objectives. These price uncertainties can deter investments in low-carbon technologies and hinder effective risk mitigation.The lack of a well-established culture of sustainability within organizations further compounds the issue. Without a clear commitment to sustainability from leadership, ICP implementation may lack the necessary support and strategic alignment.Additionally, the initial costs of adopting low-carbon technologies and adapting business models can strain financial resources. Companies may hesitate to prioritize sustainability initiatives over immediate profitability, especially in competitive markets.Lastly, market and policy uncertainties create challenges in forecasting the long-term impact of ICP. Shifts in government policies or global economic conditions can affect the relevance and effectiveness of internal carbon pricing strategies.Addressing these challenges requires a proactive approach. Investing in advanced emissions monitoring tools, fostering a culture of sustainability, and closely monitoring policy trends can mitigate risks. Regularly revisiting and adjusting the internal carbon price can help organizations stay agile and effective in their decarbonization efforts. By overcoming these limitations, ICP can remain a powerful tool for promoting sustainable growth and aligning corporate practices with global climate commitments.Role of the Accountancy ProfessionThe accounting profession plays a crucial role in driving sustainability, managing climate-related risks, and guiding companies toward greener operations. Here's how accountants contribute to this transition:Developing Robust ICP Framework: Accountants collaborate with stakeholders to create an effective ICP framework, set objectives aligned with sustainability goals, and evaluate pricing mechanisms like shadow pricing, carbon taxes, or cap-and-trade.Data Collection and Analysis: Accountants ensure accurate measurement of GHG emissions and integrate data into financial reports to assess ICP's impact on profitability and investment decisions.Scenario Planning and Risk Management: By using ICP for scenario planning, accountants model financial outcomes under different carbon pricing scenarios and evaluate risks and opportunities arising from evolving regulations.Budgeting and Investment Decision Support: Accountants integrate ICP into project evaluations to prioritize low-carbon investments, conduct cost-benefit analyses, and guide resource allocation.Sustainability Strategy and Decision-Making: Accountants help shape sustainability strategies by evaluating the financial viability of carbon reduction initiatives. They assess ROI for projects like renewable energy, energy efficiency upgrades, and carbon offset programs, ensuring sustainability is integrated into business operations.Key Actions for AccountantsCAs should focus on:Understanding how carbon pricing, CCTS, and other climate-related regulations, like CBAM, impact financial planning.Gaining expertise in carbon accounting and emissions reporting standards, such as the Greenhouse Gas Protocol, Science-Based Targets initiative (SBTi), and the Task Force on Climate-Related Financial Disclosures (TCFD).Developing systems for accurate measurement and emissions reporting.Strengthening internal controls for emissions data tracking and sustainability reporting.By taking these steps, accountants can help clients meet environmental regulations and support broader sustainability efforts.ConclusionIn conclusion, addressing climate change requires immediate and concerted action from all sectors, including the financial community, with accountants playing a pivotal role in operationalizing sustainability goals. With global commitments, such as the Paris Agreement, and regulatory frameworks, including carbon taxes, emissions trading schemes, and the emerging Carbon Border Adjustment Mechanism (CBAM), there is a clear path forward for businesses to align with climate targets.Internal Carbon Pricing (ICP) serves as a crucial strategic tool, allowing organizations to embed carbon costs into their decision-making, incentivize emission reductions, and ensure compliance with evolving regulations.As we move towards a low-carbon future, accountants must take proactive steps to integrate carbon pricing into their organizations' financial and operational strategies. This involves setting internal carbon prices, managing carbon credit trading, and preparing for future carbon taxes and regulations. By embedding sustainability in financial systems, accountants help businesses not only meet regulatory requirements but also enhance long-term financial performance while contributing to global climate goals.The future of carbon pricing is clear: it will continue to shape investment decisions, regulatory compliance, and sustainability efforts. Companies that embrace ICP will not only mitigate risks but also unlock opportunities in a rapidly evolving market. Now is the time for organizations to act by taking responsibility for their emissions and adopting carbon pricing mechanisms, positioning themselves as leaders in the global transition to a sustainable, low-carbon economy.Referenceshttps://carbonpricingdashboard.worldbank.org/compliance/instrument-detailhttps://www.wbcsd.org/Overview/News-Insights/WBCSD-insightshttps://www.wri.org/insights/4-ways-companies-can-price-carbon-lessons-indiahttps://www.accountingforsustainability.org/en/about-us/our-networks/abn/abn-climate-action.htmlhttps://beeindia.gov.in/en/programmes/carbon-markethttps://beeindia.gov.in/sites/default/files/Draft_Compliance_Procedure_October_2023.pdfhttps://plana.earth/glossary/internal-carbon-pricinghttps://cdn.cdp.net/cdp-production/cms/reports/documents/000/002/740/original/cpu-2017-how-to-guide-to-internal-carbon-pricing.pdf?1521554897https://shaktifoundation.in/https://cdn.cdp.net/cdp-production/cms/reports/documents/000/006/900/original/CDP-India-Annual-Report-2022.pdf?1677751685
Ep. 175 — The Importance of the Board’s Role in ESG Disclosures: A Governance Perspective
CA Journal
· September 2026
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Practical Nuances of Governance and Compliance Norms: The Importance of the Board's Role in ESG DisclosuresIn today's complex business landscape, distinguishing management fraud from procedural aberrations is vital for addressing control overrides, governance lapses, compliance gaps, and revenue leakages. Effective compliance relies on frameworks like CARO 2020, the Companies Act 2013, SEBI (LODR) Regulations, 2015, and BRSR disclosures. Key areas include compliance certifications, data governance, validation checks, record-to-report controls, and robust communication between management and boards. Since April 2023, mandatory audit trail functionality ensures preservation of electronic evidence with source document support. This article highlights the critical role of Independent Directors in monitoring financial decisions, ensuring impartial investigations, and fostering enhanced disclosure norms to drive transparency and sustainable investments.Effective governance requires strengthening the vigil mechanism and the board's role to address challenges associated with managerial override of controls, compliance gaps, and revenue leakages. In real-life situations, the operational definition of what constitutes fraud is often blurred and requires a complete sequence of evidential information trail. The challenges include the absence of a governance taxonomy that poses impediments in resolving matters in distinguishing fraudulent practices from genuine procedural lapses. The Environment, Social and Governance (ESG) factors are increasingly demanding and increase the importance of vouching, accounting trails, the preservation of source documents, the validation check, including tracing and tracking of budgets to end use monitoring of the various initiatives and measures taken by the management. Additionally, continuous monitoring of budgets and initiatives taken by management must be tracked and validated to maintain compliance and transparency. In some cases, the failure to escalate matters to governance boards or regulatory agencies results in delayed disclosures or post facto actions that could violate statutory reporting norms such as CARO 2020, applicable provisions of the Companies Act 2013, or SEBI (LODR) Regulations, 2015.Further, frameworks such as CARO 2020, Internal Audit Standards, organizational policies, and company laws create distinctions between Key Managerial Personnel (KMP), senior management, non-management cadres, workers, and contractual employees. Such classifications are also applied across different segments, including gender, geography, corporate office, registered office, and project offices. A deep understanding of these distinctions is critical for ensuring regulatory compliance and effective ESG disclosures, particularly when considering the practical nuances of corporate governance in a diverse regulatory environment.This article aims to address this gap by emphasizing the importance of data governance solutions, the necessity of validation checks in compliance certifications, and the creation of an evidential trail for impact assessments, particularly related to sustainability measures.Data Validation in Business Reporting and ESG DisclosureIn professionally managed corporate business groups, the Chairman typically communicates the company's vision, mission, and ethical values through the Business Responsibility and Sustainability Reporting (BRSR) or erstwhile Business Responsibility Reports (BRR), in the annual report. These documents outline the company's strategic goals, aligned with business outlooks and value creation efforts, and demonstrate the organisation's commitment to ethical business practices.However, a misclassification of data at the input stage, whether during data validation, accounting categorization, or initial analysis, can have disastrous consequences, in terms of audit risks and control risks. Such errors create long-term risks for organizations that neglect the critical importance of validating data at both the input and analysis stages. The accuracy of secondary data, annual reports, and ESG rating scores is directly linked to the integrity of primary data and the thoroughness of input validation checks. Ignoring these checks compromises the entire reporting framework and can undermine the credibility of ESG disclosures and financial reporting.Case Study: Budgeting Controls and Financial ManagementA foreign company's budgeting process, cost control mechanisms, and cash flow monitoring raised concerns, prompting an independent investigation in its Indian project office. This marked the critical importance of budgeting controls and financial management to report exceptions, abnormalities, overrides, variances and deviations to governance boards, audit committees, and key stakeholders.The Chief Financial Officer (CFO), whose performance was tied to cost savings and budget utilization, exploited the system by outsourcing bookkeeping to his nephew, engaging in undisclosed related-party transactions, and fabricating expenses using false letterheads and rubber stamps. Revenues and collections were inflated through fictitious documentation, while legal notices added a layer of perceived authenticity.The investigation was triggered by a seemingly minor anomaly, a handwritten cash memo in Hindi for Rs. 1,000 in Chennai, where Tamil or English is predominantly spoken. The CFO's overconfident statement, "You will find a voucher for every transaction," prompted deeper scrutiny. The audit team uncovered fabricated documents and other incriminating evidence, all meticulously documented.This case underscores the necessity of robust governance frameworks, vigilance mechanisms, and proactive auditing to detect and address fraud, safeguarding organizational integrity and accountability.External ValidationsHow to ascertain a conflict of interest? The chain of money traces from source to various entities, closes the loop on the evidential trail, where the money keeps recycling in various forms till it evaporates completely when it is converted into goods and services in the chain of money trail outside the organisation. This results in Non-Performing Assets (NPA) provisioning in bank records or is provision for bad debts in books of account after a period of limitation is over in recovery of dues, or is reflected in the form of failed projects or discontinued business operations. Often, the mastermind ensures control over the funds in the Payee Listed Entity and Payee Vendor Entity in the chain of money trails. These expense claims are generally booked in subsequent financial years after the closure of books. This makes detection of suspicious transactions difficult due to crossover of financial transactions beyond the audit purview period (generally after the month of April of the next year) spread over months in the next financial years to provide legitimacy in the accounting transactions in breaking down the amount of expense claims to smaller denominations that makes the entire transaction non-material or insignificant beyond scrutiny of the computer aided audit tools and other filtering mechanism.Whenever there is a transition in leadership, data migration, software version change, or quarter and year-end accounting closures, these are areas of high risk priority in the planning stage of the audit process. These are transitions that require maintaining of records in versions, and require a thorough evaluation of managerial override of controls against any form of manual intervention. The alterations to computer programme codes, cybercrime, and other forms of manipulation are beyond the scope of this article. The primary focus is on the accounting trail, data accuracy, and validation checks in compliance management. A trail of how changes in data structure, contents are taken on record, is important from the point of view of validation of evidential information.Another area of focus could be contracts executed, signed and liabilities created in the books by outgoing officials exiting the organisation and improper handover procedures. The symptomatic disorders could be:(a) Wherein the greed factor is to recover as much amount as possible before such transfers in roles, within their authority, directly or through proxies and surrogate methods, or delegated authorities, like self-certification of claims without reaching out to reporting supervisors.(b) What cannot be claimed directly called settlement of dues, is indirectly treated as business expense claims.(c) The masking of expense heads in the digital payment system is a serious fraud risk that can impact the quality of financial reporting.(d) The data analysis software can only throw light on abnormalities, whereas it requires an eagle eye, to distinguish personal expenses from regular business expenditures.(e) Expense claims might have contracts in a proxy firm, ensuring monthly rental contracts with the organisation for hire charges, to ensure a parallel cash flow of operations, working in the company managing vehicle loan instalments for EMI that are paid from assured monthly rentals.Financial ControllershipIn Indian Corporations, there is a robust budgeting process and control mechanism, prudent norms on spending, conservatism, thriftiness, and austerity practiced. This is extended to suppliers and vendors in the value chain. All information related to bill passing and budget vs. actuals are routed through HoDs, and where there is collusion or concurrence amongst HoDs, the control fails, resulting in revenue leakages. These Budget Analyses at the functional and entity levels are consolidated, summarized, and reported as the Management Information System. When the findings or variation analyses reach a tipping point, these are escalated to higher authorities wherever there is no satisfactory response from HoDs. The budgeting controls play a crucial role in cost control and compliance management that cannot be seen in isolation. An integrated approach to compliance management, financial reporting, and governance practices would ensure that the big picture is presented before the governance board and its sub-committees.The role of external consultants and 'outside-in' experts brings credibility to the process of investigation post a mandate from the management, governance board, or audit committee, preferably from independent directors, where there is a case of suspected management fraud or override of managerial controls as described under CARO 2020 and SEBI Regulations. The investigation plan and strategy normally include gathering preliminary information through interviews, survey methods, and process flow diagrams. This risk prioritisation of the issues enables a proper documentation process tuned to auditing standards and guidelines published by regulatory agencies.Governance ChallengesOver the decades, there have been several corporate scandals where there is a lead and lag in reporting aberrations in the timely reporting of financial irregularities. These primarily relate to suspicious expense claims, expense frauds, and the misreporting of funds utilisation, often personal contributions or self-branding expenses disguised as business expense claims. These practices have been observed across various industries, including notable instances during major events such as large sports events in the country, and sponsorships and social engagements. As distinguished from CSR initiatives, often these events and activities, beyond an entity's business operations, involve crowd-sourcing of funds and settlement processes after the conclusion of the event to remove initial personal contributions. Such expense claims are commonly reviewed for linkages to the manipulation of funds and misclassification of expenses.Leadership transitions, data migrations, software version changes, and the closing of financial periods (quarter or year-end) often present significant challenges in maintaining data integrity. These transitions require careful record management, especially to ensure the preservation of records across various versions. A thorough evaluation of managerial override of controls is essential during such transitions to prevent manual interventions that could lead to discrepancies. While alterations to program codes and cybercrimes fall outside the scope of this article, the primary focus remains on ensuring accurate accounting trails, maintaining data accuracy, and implementing effective validation checks in compliance management systems.A detailed record trail is essential when addressing changes in data structure and content, especially from the perspective of validating evidential information. How these modifications or changes are handled must be clear and accountable, ideally with independent approval from a higher authority outside the direct chain of accounting transactions. This process ensures transparency and safeguards the integrity of the records.While law and secretarial standards do not require verbatim transcription of board proceedings, capturing the essence of discussions effectively is vital. Such documentation serves as an evidential record, archived for future reference. In governance practices, management interactions with the governance board are often informal, verbal, and confidential. This can lead to issues when suspected aberrations or managerial overrides occur, particularly when the absence of documented records, notes, or justifications weakens the defence in a fair trial. Without proper documentation, issues may be dismissed prematurely to protect the brand's reputation, often at the expense of stakeholder interests. It is crucial that communication protocols follow established mandates from engagement terms, organisational procedures, and relevant laws and regulations. Using documented trails such as emails or other formal communication methods provides a strong defence, offering clarity and accountability for all stakeholders, particularly in situations involving scrutiny or legal examination.Harmonious Interpretation of Laws and RegulationsThe Companies Act, 2013, in conjunction with the SEBI (LODR) Regulations 2015, provides a robust framework for corporate governance and compliance. A harmonious reading of key provisions such as Section 2(60), Section 2(76), Section 134, Section 135, Section 138, Section 141, Section 143(12), Section 166, Section 177, Section 188, Section 197, Sections 241 to 246, Section 447, and Section 448 is essential to address the operational, legal, and regulatory aspects of the company's functioning, particularly in relation to Board and committee responsibilities.The SEBI (LODR) Regulations, 2015 further supplement the Companies Act, 2013 by defining the operational modalities of the Board and its committees, ensuring that the implementation of company law, listing obligations, and transparency in reporting, especially in Environment, Social, and Governance (ESG) matters, are effectively integrated into corporate practices. This alignment is critical for reinforcing the organization's ethical and operational governance.From a compliance management perspective, it is imperative that auditors, board members, and audit committee members ensure adherence to data governance practices, validating compliance certifications, and verifying the completeness, relevance, and sufficiency of contractual obligations disclosed. Furthermore, proactive measures such as conducting "Propriety Audits" during CFO transitions can significantly mitigate risks related to financial decisions that impact the long-term sustainability of the organization. These audits focus on legacy issues and establish clear accountability for individuals holding fiduciary responsibilities.Key elements to monitor in this regard include:1. CFO Transitions: CFO transitions require careful examination of job roles, employment records, and appointment dates to ensure a smooth handover and address legacy issues. Documenting formal handover processes, including board resolutions, is crucial. Propriety audits are recommended to assign accountability for legacy matters in financial management and reporting. Such audits should adhere to legal and regulatory frameworks, including the Companies Act 2013, covering CFO appointments, terms, remuneration, and claim settlements. These measures ensure compliance with board mandates and uphold transparency, fostering trust in financial reporting and governance during CFO transitions.2. Audit Trails: Examining audit findings, trail actions, and compliance reports is critical to maintaining financial record accuracy and integrity during leadership transitions. The Ministry of Corporate Affairs reinforced this through amendments to Rule 3(1) of the Companies (Accounts) Rules, 2014, mandating the implementation of audit trail functionality. Effective from FY 2023-24, this requirement ensures transparent tracking of financial data modifications, bolstering accountability and regulatory compliance. Such measures strengthen governance frameworks by providing robust documentation, which becomes essential during leadership changes, safeguarding organizational interests, and upholding confidence in financial reporting practices.3. Regulatory Compliance: Ensuring smooth data migration, seamless role transitions, and proper handling of conflicts of interest requires strict adherence to mandatory secretarial standards, accounting standards, and compliance norms set by the Ministry of Corporate Affairs (MCA). Accurate and transparent disclosures are essential to meet statutory requirements. Special attention must be given to timely and error-free filings, ensuring alignment with regulatory expectations. By prioritizing these measures, organizations can strengthen governance, uphold accountability, and maintain stakeholder confidence throughout role transitions and compliance processes.By implementing these measures, organizations can enhance governance mechanisms, ensure transparency, and promote long-term sustainability while adhering to the Companies Act, 2013, prescribed rules therein, and SEBI regulations.ConclusionThis article underscores the significance of strengthening vigil mechanisms, fraud reporting backed by independent scrutiny, and clear communication protocols for senior management personnel in addressing control overrides. It advocates for improved transparency in disclosures and accountability in corporate governance. Emphasizing fraud prevention, data validation, and regulatory compliance, it highlights the role of special investigative assignments in enhancing credibility and attracting sustainable investments. The aim is to foster robust corporate governance and drive long-term sustainability towards value-driven growth in Indian corporates.ReferencesThe Companies Act, 2013 https://www.mca.gov.in/The SEBI (Listing Obligations and Disclosure Requirements (LODR)) Regulations, 2015. https://www.sebi.gov.in/The Institute of Chartered Accountants of India (ICAI). (2020). CARO 2020 Companies (Auditor's Report) Order. Guidance Note by ICAI. https://www.icai.org/International Auditing and Assurance Standards Board (IAASB). (2018). https://www.iaasb.org/Ministry of Corporate Affairs (MCA). (2022). Provisions for Compliance Certification and Validation of Accounting Trails. Circulars and Notifications. https://www.mca.gov.in/Reserve Bank of India (RBI). (2021). Guidelines on Risk-Based Internal Audit for NBFCs. Regulatory Advisory. https://www.rbi.org.in/Organisation for Economic Co-operation and Development (OECD). (2019). Guidelines on Corporate Governance. https://www.oecd.org/corporate/Enhanced Framework for Corporate Governance Reporting. SEBI Circular No. SEBI/HO/CFD/CMD-2/P/CIR/2021 is a circular by the Securities and Exchange Board of India (SEBI) that specifies the format for corporate governance compliance reports by listed entities. The circular was issued on May 31, 2021. https://www.sebi.gov.in/International Organization of Securities Commissions (IOSCO). (2020). Good Practices for Audit Committees in Supporting Audit Quality. Regulatory Frameworks. https://www.iosco.org/Institute of Company Secretaries of India (ICSI). (2019). Secretarial Standards on Meetings of the Board of Directors (SS-1). https://www.icsi.edu/
Ep. 176 — Impact of ESG Factors on Private Equity Investments
CA Journal
· September 2026
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Impact of ESG Factors on Private Equity InvestmentsThe integration of Environmental, Social, and Governance (ESG) factors into Private Equity (PE) investments has shifted from a niche focus to a crucial aspect of investment strategy. Traditionally reliant on financial metrics, PE now sees ESG as key to identifying risks, fostering value, and meeting evolving regulatory and societal standards. This article examines the benefits, challenges, empirical evidence supporting the correlation between ESG adoption and superior financial performance, and value potential of ESG in PE, with case studies from leading global private equity firms. Chartered Accountants play a vital role in ESG integration, guiding strategy and valuation. Firms that prioritize ESG are positioned for long-term success and positive societal impact.IntroductionIn recent years, Environmental, Social, and Governance (ESG) criteria have evolved from a niche focus to a core aspect of investment evaluation, particularly within private equity. Traditionally, private equity firms emphasized financial metrics and operational improvements to drive returns. However, as the link between business practices and long-term sustainability becomes clearer, ESG factors are increasingly influencing investment strategies. These non-financial considerations, such as environmental stewardship, social responsibility, and governance practices, are now viewed as critical indicators of future performance, risk management, and resilience.ESG considerations have become integral to the private equity landscape, as investors seek more than just financial returns. Institutional investors, in particular, are pursuing opportunities that align with their ethical values and long-term sustainability goals. As a result, ESG factors have shifted from optional to essential elements in establishing competitive advantages within a rapidly changing market.Moreover, integrating ESG into investment strategies can unlock new growth opportunities, drive value creation, and mitigate potential risks. Private equity firms that prioritize ESG are likely to see improvements in operational efficiency, customer loyalty, and market position, which can ultimately lead to enhanced financial results. This growing focus on ESG reflects broader societal trends and evolving regulations, with both public and private entities stressing the importance of responsible business practices. As private equity firms work to maintain a competitive edge, the integration of ESG factors into their decision-making processes is becoming a critical part of their investment framework.This article explores the increasing significance of ESG factors in private equity, examining their impact on investment strategies, decision-making, value creation, and financial outcomes. By understanding the relationship between ESG and private equity, firms can better navigate changing market dynamics, achieve sustainable growth, and meet the demand for greater transparency and accountability in business practices.Understanding ESG Factors in Private EquityEnvironmental, Social, and Governance (ESG) elements are playing an increasingly crucial role in shaping private equity investment strategies. These non-financial elements assist private equity firms in evaluating the long-term viability, ethical conduct, and risk management of businesses. Below are the principal ESG elements that private equity firms consider throughout the investment process.Environmental Factors: Environmental factors focus on a company's impact on the environment, with private equity firms evaluating aspects like carbon emissions, waste management, energy consumption, and resource efficiency. Businesses that adopt strong environmental practices are seen as lower-risk and more sustainable over time. For instance, companies that reduce carbon emissions and use renewable energy sources are favoured, especially as climate change becomes a global concern. Additionally, firms assess compliance with environmental regulations and the management of risks such as resource depletion and climate-related challenges, while also creating opportunities in green technologies and energy-efficient solutions.Social Factors: Social factors relate to a company's interactions with its employees, customers, suppliers, and local communities. Key considerations include labour practices, health and safety measures, diversity and inclusion, and human rights. Private equity firms are increasingly recognizing the social impact of their investments, understanding that businesses that treat employees fairly, maintain safe working environments, and uphold equitable labour practices are more likely to succeed long-term. Companies that embrace diversity and inclusion tend to foster innovation and better decision-making. Social responsibility extends beyond the workplace, influencing community engagement, social initiatives, and human rights, which helps mitigate reputational risks and build brand loyalty.Governance Factors: Governance elements emphasize the leadership and operational transparency of a business. This encompasses the composition and diversity of the board, executive pay, shareholder rights, and anti-corruption measures. Strong governance guarantees that a company is managed ethically and in the best interests of shareholders and other stakeholders. Private equity firms seek businesses with diverse boards, appropriately aligned executive compensation structures, and efficient internal controls to deter fraud and corruption. Clear governance practices foster investor trust and decrease the chances of legal or regulatory challenges that could jeopardize long-term profitability.In conclusion, by prioritizing these ESG elements, private equity firms can make better-informed investment choices that support sustainable, long-term value creation.The Growing Importance of ESG in Private Equity InvestmentsThe need for incorporating ESG criteria in private equity investments is rapidly increasing, propelled by investor expectations, regulatory demands, and the potential for improved reputation and brand equity.Investor Expectations: Institutional investors such as pension funds, endowments, and sovereign wealth funds are progressively requiring private equity firms to integrate ESG factors into their investment processes. As sustainable investing becomes increasingly common, investors are looking for options that align with environmental, social, and governance standards. Private equity firms that show a dedication to ESG are more likely to draw in capital and secure funding.Regulatory Demands: Governments and regulatory agencies are enforcing more stringent ESG-related regulations. Significant examples include the European Union's Sustainable Finance Disclosure Regulation (SFDR) and the U.S. SEC's heightened focus on climate-related disclosures. These regulations mandate private equity firms to provide information on ESG risks and practices, encouraging firms to modify their strategies and ensure adherence, thus avoiding regulatory challenges and promoting transparency.Reputation and Brand Equity: Companies that give precedence to ESG factors are regarded as responsible and reliable, enhancing their public image. This improved perception can lead to stronger connections with investors, clients, and employees, resulting in appealing investment prospects and potentially higher exit valuations. Firms that focus on ESG are often viewed as superior long-term investments.Benefits of Incorporating ESG in Private Equity InvestmentsIntegrating ESG considerations into private equity investments presents several significant advantages that can improve both immediate and future performance.Sustainable Value Generation: Businesses that embrace robust ESG practices are often in a stronger position for enduring success. They tend to exhibit superior risk management, reduced operational expenses, and more consistent financial growth. By investing in companies that emphasize environmental, social, and governance factors, private equity firms can foster lasting value, as these firms are likely to thrive over the long haul due to their commitment to responsible practices.Risk Reduction: The incorporation of ESG factors aids in minimizing various risks, including regulatory, operational, and reputational threats. For instance, firms that comply with environmental laws or maintain ethical labour standards are less likely to face legal issues or public criticism. This proactive approach to risk management helps shield investments and ensures sustained profitability.Drawing Investments: As institutional investors increasingly prioritize ESG criteria, private equity firms that embed these considerations in their investment approaches are more capable of attracting capital. Investors with an emphasis on ESG, such as pension funds and endowments, are more inclined to support firms that align with their sustainability objectives.Improved Exit Opportunities: Firms with strong ESG standings frequently secure higher valuations during exits. Whether through initial public offerings (IPOs) or strategic sales, acquirers are increasingly assessing ESG performance as part of their decision-making process. This trend can result in more profitable exits for private equity firms, boosting their investment returns.Challenges in Implementing ESG in Private EquityIntegrating ESG considerations into private equity investments presents numerous challenges that firms must overcome to achieve successful implementation.Lack of Standardized Metrics: The absence of standardized metrics is one of the primary obstacles in embedding ESG factors. Without a common framework for ESG disclosures, it is difficult for investors to evaluate the ESG performance of companies across different sectors. This lack of consistency complicates decision-making and poses risks of inconsistent reporting, making the assessment of long-term sustainability more challenging.Data Availability and Quality: Reliable and accurate ESG data is essential for assessing potential investments. However, many companies do not provide transparent or consistent disclosures about their ESG practices, which complicates the process of obtaining trustworthy information. Private equity firms may have to turn to third-party ESG rating agencies or invest in data analytics to ensure that the data they utilize is credible and relevant for their investment decisions.Balancing Profitability with ESG Goals: There may be concerns about the possibility of short-term impacts on profitability while pursuing ESG goals. Private equity firms must find a careful balance between achieving financial returns and incorporating ESG targets, ensuring that both objectives are harmonized without sacrificing one for the other.Short-Term Focus in Traditional Private Equity: The conventional private equity model, characterized by a 3-7 year investment horizon, may conflict with the long-term focus required by certain ESG strategies. Consequently, private equity firms need to adjust their strategies to effectively implement and evaluate ESG initiatives within the typical duration of their investments.The Role of Chartered Accountants in ESG IntegrationChartered Accountants (CAs) are essential in assisting private equity firms to effectively integrate ESG (Environmental, Social, and Governance) considerations into their operations and investment strategies.ESG Reporting and Assurance: CAs can enhance the accuracy and transparency of ESG reporting by establishing solid reporting frameworks and validating ESG data. They aid private equity firms in meeting regulatory obligations and industry standards, ensuring that the disclosed ESG information is dependable and credible. This fosters accountability and transparency, which are vital for attracting investors.Advisory on ESG Strategies: CAs offer invaluable advisory services by supporting private equity firms in embedding ESG elements into their investment strategies, due diligence processes, and post-investment evaluations. They can synchronize ESG objectives with financial goals, ensuring that investments yield both social benefits and sustainable financial returns.Risk Management: CAs help identify and reduce ESG-related risks such as environmental liabilities, labour violations, or governance challenges. By incorporating these risks into the firm's comprehensive risk management framework, they help prevent financial or reputational harm, thus supporting long-term value retention.Valuation of ESG Initiatives: CAs also play a crucial role in measuring the financial impact of ESG initiatives. They assist private equity firms in evaluating the added value generated by sustainable practices, aiding in improved decision-making and showcasing the long-term advantages of ESG investments.Secondary Research and Empirical EvidenceTo establish a clearer correlation between ESG integration and private equity performance, recent studies provide compelling data supporting this relationship.According to a 2022 study, PE funds with strong ESG integration achieved internal rates of return (IRR) up to 8% higher than those with minimal ESG consideration. This suggests that ESG factors contribute positively to investment outcomes, reducing risk and enhancing operational efficiencies.A 2021 report found that ESG-aligned companies exhibit lower volatility, higher valuation multiples, and stronger long-term growth prospects.Similarly, a study by Principles for Responsible Investment (PRI) indicated that ESG integration leads to lower downside risk and improved exit valuations, demonstrating that ESG can be a tool for value creation in private equity investments.However, not all studies agree on a direct positive correlation. Research from The Wall Street Journal (2023) highlighted tensions between PE firms and investors regarding ESG-related expenses. Some institutional investors argue that ESG compliance costs reduce short-term profitability, and certain regulatory changes have led to increased scrutiny of ESG disclosures.Case Studies: Successful ESG Integration in Private EquityThe below given case studies demonstrate that incorporating ESG factors into private equity investments can enhance operational effectiveness, improve risk management, build stronger reputations, and ultimately yield better financial outcomes. By implementing ESG strategies, private equity firms can play a role in fostering a more sustainable future while generating considerable value for their stakeholders.Global private equity leaders such as KKR, the Carlyle Group, and Blackstone have each made ESG central to investing, though with different levers that tie sustainability to performance. The first embeds ESG through structured diligence that becomes post-close action plans with measurable targets, enabling portfolio companies like Contour Global to expand renewable projects, cut emissions, and commit to net-zero goals. The second emphasizes governance and social factors, upgrading boards, compliance, and workforce practices to reduce risk and unlock opportunities, including $13 billion in sustainability-linked revenue in 2024. The third applies ESG at scale in real estate, committing over $18 billion to energy-transition projects and efficiency upgrades that have reduced emissions by 15% since 2021, cut operating costs, and enhanced valuations. Together, these approaches show ESG is not a trade-off but disciplined execution that lowers risk, improves efficiency, and compounds value from acquisition through exit.ConclusionIntegrating ESG factors into private equity investments is no longer a niche interest or optional practice; it has become a core component of the investment process. As investors, regulators, and stakeholders increasingly prioritize sustainability, private equity firms that focus on ESG are positioned to outperform their competitors and drive sustainable, long-term growth. Chartered Accountants play a crucial role in this shift by helping private equity firms navigate the financial, regulatory, and strategic complexities of ESG integration. They can guide firms in managing risks, creating value, and seizing new opportunities.As ESG becomes a critical factor in future investment success, private equity firms that effectively integrate ESG considerations into their strategies will not only meet the demands of investors but also contribute significantly to a more sustainable global economy. By embedding ESG principles, these firms can ensure they remain competitive while supporting broader environmental, social, and governance goals.References2022 EY Study on ESG Integration and Private Equity Performance (https://www.ey.com/en_us/insights/private-equity/how-private-equity-can-optimize-esg-to-maximize-value-creation)2021 McKinsey Report on ESG-Aligned Companies (https://www.mckinsey.com/About-Us/Social-Responsibility/2021-ESG-Report/overview)Principles for Responsible Investment (PRI) Study on ESG Integration (https://www.unpri.org/pri-blog/part-iii-esg-factors-and-returns-a-review-of-recent-research/12728.article)2023 Wall Street Journal Article on ESG-Related Expenses in Private Equity (https://practicalesg.com/2024/12/ey-survey-shows-changes-in-investor-attitude-on-esg)KKR Sustainability Report 2024 (https://www.kkr.com/content/dam/kkr/sustainability/pdf/2024-sustainability-report.pdf; https://www.kkr.com/approach/sustainability/reporting-suite)Carlyle ESG Report 2024 (https://www.carlyle.com/sites/default/files/2024-06/Carlyle-ESG-Report-2024.pdf; https://www.carlyle.com/esg/esg-report-2024)Blackstone Sustainability Report 2024 (https://www.blackstone.com/wp-content/uploads/sites/2/2025/06/Blackstone-2024-Sustainability-Report.pdf; https://www.blackstone.com/sustainability)
Ep. 177 — Sustainable Finance and its Prominence in the Sustainable Development of the Indian Economy
CA Journal
· September 2026
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Sustainable Finance and its Prominence in the Sustainable Development of the Indian EconomyThe 'Conference of Parties 11' (CoP 11) to the Convention on Biological Diversity, held in Hyderabad, had the theme 'प्रकृति रक्षित रक्षतः' which expresses the notion that 'Nature protects if she is protected', meaning that when we protect nature, she, in turn, protects us. Environmental issues such as rising temperatures, shifting weather patterns, and increasing frequency of extreme weather events, and global climate change have brought us to the brink of a planetary crisis, and global warming has become one of the biggest challenges of our times. It is, therefore, high time for each stakeholder to take responsibility for the protection of the planet. Sustainable Finance can play a major role in contributing to this noble cause from the side of the business world. Mobilizing the necessary financial resources from the public and private sectors needed to ensure the global pursuit of sustainable development and environmental conservation has paved the way for innovative financial instruments to align economic growth with ecological responsibility. These financial instruments are designed to fund projects with environmental benefits, including renewable energy, clean transportation, and waste management, and hence are termed as Sustainable Finance.The growing urgency to tackle climate change and environmental decline has positioned green finance as an essential element of sustainable development. This field includes various financial products and services designed to support initiatives that benefit the environment. Thus, green finance can be understood as the flow of financial investments into projects and initiatives that promote environmental conservation.This article dives into the conceptual understanding of Sustainable Finance. This includes its functions, its stages, the current scenario, its advantages, and the problems it is facing, particularly in the Indian context. This article also throws light on the role and importance of Sustainable Finance in the sustainable development of the Indian economy and the major initiatives taken by the government that have contributed to the advancement of the concept of Sustainable Finance in India.IntroductionCharles (2009) has studied carbon neutrality and environmental sustainability to reduce carbon footprints and has given various programs related to environmental sustainability. Problems like carbon emissions, pollution, climate change, resource depletion, etc., were on the radar of his study. This led to a survey about sustainable finance as a way to tackle the problems. Before that, green finance had been in debate since 2008, when the World Bank issued its first Green Bond, which followed a conventional "plain vanilla" approach.Gutterman (2024) describes the parameters of Sustainable Finance, and also defines the concept of interrelationships that exist between environmental, social, and governance ("ESG") issues on the one hand, and financing, lending, and investment decisions, on the other, along with long-term-oriented financial decision making that integrates ESG considerations. Sustainable finance is the process of taking ESG considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.Sustainable finance is the term used to describe financial operations and investments that promote projects and activities that are environmentally sustainable. It entails investing money in initiatives, companies, and innovations that benefit the environment, including sustainable agriculture, energy efficiency, renewable energy, and more. Sustainable finance encompasses various financial instruments such as impact investments, sustainable loans, green bonds, and others that aim to generate financial gains while advancing environmental sustainability. It is essential for tackling environmental issues such as adaptation, mitigation, and the shift to a low-carbon, more sustainable economy.According to the United Nations Environment Programme, sustainable financing will boost the amount of money flowing to sustainable development priorities from the public, private, and nonprofit sectors (through banking, microcredit, insurance, and investment). A foundational element of this involves effectively handling environmental and social hazards, capitalizing on prospects and advancing them through modifications to national regulatory structures, standardizing financing decisions for the public sector, fulfilling the environmental aspect of the Sustainable Development Goals (also known as the Global Goals, adopted by the United Nations in 2015 as a universal call to action for peace and prosperity of the people by 2030) by augmenting investments in eco-friendly technologies, funding sustainable natural resource development grounded in green economies and climate-smart blue economies, utilizing green bonds more frequently, and so forth.Sustainable Finance: ConceptSustainable finance encompasses financial services and investments that incorporate Environmental, Social, and Governance (ESG) considerations into their decision-making processes. Its primary objective is to foster sustainable economic growth while tackling pressing global issues such as climate change, resource depletion, and social inequality. By applying ESG criteria, sustainable finance promotes investments in initiatives that yield positive societal outcomes, including renewable energy, affordable housing, and sustainable agriculture. Financial institutions are increasingly embracing sustainable finance methods, such as green bonds, impact investing, and responsible lending. These strategies not only help to reduce risks linked to unsustainable practices but also open up avenues for long-term value creation. Additionally, regulatory frameworks and international accords like the Paris Agreement play a crucial role in encouraging the adoption of sustainable finance principles. Ultimately, the goal of sustainable finance is to align capital flows with sustainable development objectives, contributing to a more resilient and equitable economy for future generations.Drivers of Sustainable FinanceSustainable finance is shaped by various factors that influence both the demand for and the supply of sustainable investment options, like:Regulatory pressure: Governments and regulatory bodies establish policies mandating companies to disclose their environmental, social, and governance (ESG) practices. The EU Sustainable Finance Disclosure Regulation (SFDR) and the Task Force on Climate-related Financial Disclosures (TCFD) are important frameworks.Rising demand from investors: Investors are increasingly prioritizing sustainability in their portfolios, especially institutional ones. This shift is driven by a commitment to responsible investing and the belief that sustainable companies are likely to deliver better long-term returns.Awareness regarding Climate Change: The growing awareness of climate change as a critical global challenge has led to heightened interest in green investments and renewable energy projects. Companies are adopting sustainable practices not only to comply with regulations but also to enhance their brand image and meet consumer expectations, further fuelling the need for sustainable finance solutions.Technological innovations: Technological innovations such as blockchain and artificial intelligence, improve the tracking of ESG metrics, enhancing transparency and creating more investment opportunities.Financial institutions: Financial institutions are also recognizing that ESG factors can significantly impact financial performance and risk management. By incorporating these considerations into their decision-making processes, they can better identify potential risks and opportunities.Global initiatives: Initiatives at the global level like the Paris Agreement motivate nations and businesses to commit to sustainable practices, directing investments toward sustainable projects.Social movements: The movements at the social level advocating for issues such as inequality and labour rights also encourage investors and companies to integrate social criteria into their investment strategies.There is an increasing acknowledgment that sustainable practices can lead to long-term value creation, with companies that focus on sustainability often experiencing lower costs and enhanced operational efficiency. Furthermore, the availability of financial products like green bonds and sustainability-linked loans is facilitating easier access to capital for businesses pursuing sustainable initiatives. Together, these factors are transforming the landscape of sustainable finance, promoting a shift toward more responsible investment and lending practices.Sustainable Financial InstrumentsSustainable financial instruments are financial products designed to support environmental, social, and governance (ESG) initiatives. Their primary goal is to direct capital toward projects and companies that have a positive impact on sustainability. Notable examples include green bonds, sustainable bonds, sustainability-linked bonds, impact investing funds, etc.Green Bonds: These are the debt securities aimed at funding environmentally beneficial projects like renewable energy and energy efficiency i.e., eco-friendly projects.Social Bonds: These are financial instruments issued to raise capital for projects or initiatives with specific social or environmental purposes, such as social security and healthcare facilities.Sustainability-linked Bonds: These bonds have financial terms tied to the issuer's performance on specific sustainability targets. These are the bonds "for which the financial and/or structural characteristics can vary depending on whether the issuer achieved pre-defined sustainability/ ESG objectives."Impact Investing Funds: They focus on generating measurable social or environmental benefits alongside financial return, while ESG funds, comprising mutual funds or ETFs, invest in companies based on their ESG performance.Green loans: A Green loan is a form of financing that enables borrowers to use the proceeds to exclusively fund projects that make a substantial contribution to an environmental objective.Blue Bonds: These are the bonds used for clean water management, water recycling, and for the sustainable maritime sector, like sustainable shipping, sustainable fishing, fully traceable sustainable seafood, ocean energy, and ocean mapping. It was issued by SEBI in February 2023 along with the Yellow and Transition Bonds.Yellow Bonds: These are the bonds raised for solar energy generation and the industries related to it. It was issued by SEBI in February 2023.Transition Bonds: 'Transition bonds' is one of the sub-categories of the revised definition of 'green debt security.' As per the SEBI (Issue and Listing of Non-Convertible Securities), transition bonds comprise "funds raised for transitioning to a more sustainable form of operations, in line with India's Intended Nationally Determined Contributions."Sustainable Financial InstitutionsSustainable financial institutions are organizations that incorporate sustainability into their operations, investment strategies, and lending practices. Their main objective is to foster responsible finance and support projects aligned with Environmental, Social, and Governance (ESG) criteria, addressing global issues like climate change and social inequality. Development banks, such as the World Bank, are a key type of sustainable financial institution. They focus on financing sustainable development projects in areas like infrastructure and poverty alleviation, providing crucial funding for long-term growth in developing regions. Some of them are:Green Banks: It specializes in financing renewable energy and energy efficiency projects. By leveraging public funds to attract private investment, they facilitate the transition to a low-carbon economy.Sustainable Commercial banks: Traditional banks that incorporate ESG principles into their lending and investment policies.Socially Responsible Investment (SRI) Firms: They prioritize investments in companies with strong ESG practices while avoiding those involved in harmful industries. This approach helps create a more sustainable economic landscape.Insurance Companies with an ESG focus: They are also increasingly integrating sustainability into their risk management and investment strategies.Lastly, Pension Funds with sustainable mandates invest in assets that reflect the values of their beneficiaries, ensuring a stable future. Together, these institutions mobilize capital for initiatives that tackle pressing global challenges.Sustainable Finance in IndiaSustainable finance is rapidly becoming an essential part of India's financial landscape, incorporating environmental, social, and governance (ESG) criteria into investment strategies. The Securities and Exchange Board of India (SEBI) has rolled out regulations like the Business Responsibility and Sustainability Report (BRSR), which requires listed companies to disclose their sustainability efforts. This regulatory framework, along with initiatives from the Reserve Bank of India (RBI), aims to improve transparency and accountability in corporate governance. India has also established itself as a key player in the green bond market, directing investments toward renewable energy projects to achieve its ambitious goal of 500 GW by 2030. Furthermore, the growth of impact investing and fintech solutions is making sustainable investment options more accessible to a rising number of socially conscious investors. Despite this progress, challenges such as limited data availability, regulatory inconsistencies, and varying levels of market development persist. However, the growing interest in responsible investment and the potential for collaboration between public and private sectors offer significant opportunities for advancing sustainable finance. As knowledge and awareness of ESG factors continue to expand, India is well-positioned to harness sustainable finance for both economic growth and addressing critical environmental and social issues.In India, green bond IPOs are currently issued in large numbers, as the RBI has issued a total of 36,000 crore in green bonds since 2022-23. The government plans to issue 20,000 crore in green bonds in four tranches in the second half of 2025. Even public and private companies like NTPC (National Thermal Power Corporation Ltd.) and Adani Group are going to issue green bonds in the coming days.To raise funds for sustainability in India, green debt securities like Blue Bonds for SDG Goal 6 of Clean Water and Sanitation and SDG Goal 14 of Life Below Water, Yellow Bonds for the generation of solar energy and related industries, and Thematic Bonds for SDG Goal 13 of Climate Action under the targets set up by India's Nationally Determined Contributions of Paris Agreement were authorized by the Securities and Exchange Board of India (SEBI) in February 2023.Sustainable Finance & SustainabilitySustainable finance refers to financial practices that include environmental, social, and governance (ESG) factors into financial services and investment decision-making. Long-term benefits for investors, the environment, and society are the goals of this strategy. Sustainable finance places a high priority on funding programs that support renewable energy, sustainable agriculture, and ethical corporate governance in order to address pressing global concerns including resource depletion, social inequality, and climate change. Tools like impact investing, which seeks to provide measurable social or environmental benefits in addition to financial gains, and green bonds, which provide funding for environmentally friendly initiatives, are significant components of this paradigm. Ultimately, sustainable finance advocates for a shift away from traditional financial metrics and toward a more holistic viewpoint that recognizes the connection between environmental, social, and governance stewardship.The general idea of sustainability highlights the need to address current demands without sacrificing the capacity of future generations to address their own. Sustainability in terms of the environment, society, and economy is comprised of three interconnected pillars. Environmental sustainability is centred on safeguarding natural resources and ecosystems, promoting pollution-reduction strategies, and fostering biodiversity. By putting an emphasis on fairness, communal well-being, and human rights, social sustainability makes sure that everyone has access to opportunities and a respectable standard of living. Establishing mechanisms that promote steady employment, fair wealth distribution, and conscientious consumer habits is essential to achieving economic sustainability. These pillars work together to provide a holistic framework that respects natural boundaries, encourages social equality, and builds economic resilience through a balanced approach to growth. Sustainable finance plays a critical role in advancing these goals by mobilizing capital toward initiatives that align with sustainability principles.Challenges faced by Sustainable FinanceSustainable finance faces a variety of challenges that can hinder its growth and effectiveness. A major issue is the absence of standardized methods for measuring and reporting Environmental, Social, and Governance (ESG) factors. This lack of uniformity leads to inconsistent data and evaluations, making it difficult for investors to compare sustainable investment opportunities. Additionally, greenwashing is a significant concern, as some companies may inflate their sustainability efforts to attract investment, complicating the task of identifying truly sustainable projects.The availability and quality of ESG performance data are often insufficient, with many companies not disclosing critical information, resulting in inconsistencies. Furthermore, a short-term focus among many investors can detract from long-term sustainability objectives. Inconsistent regulatory frameworks across various regions also create obstacles for sustainable investments, as this uncertainty may deter financial institutions from fully committing to sustainable finance.Market perceptions contribute to the issue, as some investors still consider sustainable finance a niche area with potentially lower returns, limiting capital flow into sustainable initiatives. Traditional financial models frequently overlook environmental and social risks, leading to an under appreciation of potential losses associated with unsustainable practices. Moreover, there is often a lack of knowledge and expertise within financial institutions regarding sustainable finance strategies, which hampers effective development. Political and economic instability can further impact investments in sustainable projects, especially in developing regions where access to sustainable finance is limited due to weaker financial markets and infrastructure. To tackle these challenges, collaboration among governments, financial institutions, businesses, and civil society is essential for creating a more robust framework for sustainable finance.ConclusionIndia's Sustainable Finance scene is still relatively young. To stay up to date on the most recent advancements in this field, it is crucial to refer to more recent sources and official announcements. Governments, corporations, and financial institutions are constantly adapting and innovating in the field of green finance to meet environmental challenges. Since green finance is giving environmentally sustainable projects the funding they need, it is genuinely illuminating the path forward for India's sustainable future. The country's green finance industry is expanding as a result of government initiatives, increased tech optimization, and participation from the private sector. India stands to gain from the adoption of green finance in a number of ways, including enhanced energy security, reduced carbon emissions, and promotion of sustainable development. It is anticipated that India will continue to prioritize green finance and accelerate its efforts in unfurling a sustainable and greener future.ReferencesCharles. (2009). Understanding the Nature and Rationale of Carbon Neutrality. World Scientific. doi:https://doi.org/10.1142/S2345748123500124Gutterman, A. S. (2024). Sustainable Finance. Sustainable Finance. Retrieved from FI_C1Sustainable Finance ICMA.UNO. (n.d.). Financing for Sustainable development. Sustainable Development Goals. Retrieved from https://www.un.org/sustainabledevelopment/financing-for-development/https://www.sebi.gov.in/reports-and-statistics/reports/aug-2024/consultation-paper-on-expanding-the-scope-of-sustainable-finance-framework-in-the-indian-securities-market_85691.htmlhttps://www.worldbank.org/en/news/feature/2021/10/04/what-you-need-to-know-about-green-loans
Ep. 178 — Investing in ESG Initiatives: The Way Ahead
CA Journal
· September 2026
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Investing in ESG Initiatives: The Way AheadIn the wake of escalating global challenges like climate change, corporate misconduct, and rising social and income inequality, ESG investing has gained significant prominence among investors, stakeholders, and regulatory bodies. This article provides an in-depth coverage of the various challenges, complexities, and improvement areas associated with the ESG framework. Further, it highlights the crucial role of asset managers, investors, regulatory bodies, company managers, and society in advancing and shaping ESG investing in India.IntroductionESG (Environment, Social, and Governance) is a critical framework for assessing a company's ethical and sustainable practices. The ESG encompasses three key non-financial dimensions that include: impact on society, environment, and corporate governance. ESG holds utmost importance for India, as India experiences extreme weather events, rising sea levels, floods, changes in weather patterns, uneven rainfall, and landslides. Also, India continues to work towards addressing important social challenges like poverty, low-level income, and income inequality. Ethical conduct and strong governance contribute to promoting transparency and attracting investment in India.The regulatory framework for reporting sustainable business practices in India can be dated back to 2009, when the Ministry of Corporate Affairs (MCA) launched "Voluntary Guidelines on Corporate Social Responsibility". Over the years, the reporting framework for responsible business practices has changed from voluntary guidelines to mandatory reporting. SEBI introduced the Business Responsibility Report (BRR) in August 2012, making it mandatory for the top 100 listed companies to file the BRR. The BRR intends to communicate the responsible business practices adopted by the companies to their stakeholders. In 2021, the Business Responsibility and Sustainability Report (BRSR) replaced BRR. The top 1000 companies based on market capitalization have to compulsorily include BRSR as a part of the Annual Report from the financial year 2023-24. The BRSR is indeed organized into 3 sections, the first section is related to general disclosures, the second pertains to management and process disclosures, and the third section focuses on principle-wise performance indicators. The BRSR initiative will help investors and companies alike. Investors will now be able to take informed investment decisions, as investors will be aware of opportunities and risks related to sustainability. On the other hand, companies can also attract new capital and investors by sharing their sustainability initiatives and bringing in more transparency. Furthermore, "BRSR Core" was introduced in 2023. BRSR Core is a subset of BRSR, and it discloses the ESG performance of companies across nine major Key Performance Indicators (KPIs)/metrics (SEBI, 2023). Beginning from the financial year 2024, the top 150 companies based on market capitalization are required to file BRSR Core compulsorily.Indian companies' efforts towards sustainability are getting recognized by international agencies. 18 out of the 106 companies in the Dow Jones Sustainability Emerging Markets Index, which is a gold standard for measuring the company's efforts towards ESG parameters, are of Indian origin. The index consists of companies from 20 emerging nations and is widely referred to by analysts and investors around the globe for investment decisions. Further, according to a study by DBS Bank, Indian companies are more focused on ESG reporting and compliance as compared to the regional counterparts like China, Singapore, and Hong Kong. Additionally, India is also a signatory to "The Paris Agreement" and has pledged to reduce the emissions intensity of greenhouse gas as a percentage of GDP to 30-35% by 2030 from the 2005 level. Further, it has pledged to increase the forest cover and scale up the power capacity using non-fossil fuels to 40% in 2030 (Centre for Policy Research, 2016). Many corporate houses like Dalmia Cement, Infosys, Tata Motors, and Mahindra & Mahindra have become part of the RE100 initiative and are committed to sourcing 100% energy from renewable sources (Mudaliar and Telang, 2020).The Reserve Bank of India (RBI) is now a member of the Network for Greening the Financial System (NGFS). The NGFS is a group of central banks and financial supervisors that share best practices and work to mitigate financial risks posed by climate change, while also mobilising capital for low-carbon and green investments. This step would help India in its transition towards a sustainable economy. Besides various regulatory measures, the Indian government has also introduced various policies, financial incentives, and tax rebates to support sustainable business practices, renewable energy, and eco-friendly business conduct.Apart from regulatory actions and policy initiatives, the ESG adoption in Indian is also driven by domestic and foreign businesses. India is a part of the supply chain for a lot of MNCs, and they all have high standards with respect to ESG parameters. This results in Indian businesses addressing ESG issues (Davis-Peccoud as cited in Mathew, 2022).Challenges Associated with ESG FinanceSocially Responsible Investing (SRI) refers to incorporating social and environmental aspects in investment decision-making (Searcy and Elkhawas, 2012). SRI is flourishing and picking up pace globally. However, there are still some challenges that need to be addressed. First, there is a lack of SRI-related data for emerging economies. Lack of data is an impediment to the growth of SRI and results in low inflow of funds (Bruggia, 2022). Data acts as a link between ESG investments and investors in emerging markets. It helps the domestic and foreign investors to evaluate the companies and thus, make an investment. Further, emerging nations also face challenges in extracting ESG-based information from companies, and often there are imbalances between the information available and the information required for ESG screening (Payton, 2024).Secondly, there is a lack of standardization in SRI-related terms, definitions, strategies, standards, and ratings. Socially responsible investing, sustainable investment, ESG integration, and responsible investing are often used interchangeably, and there are regional variations in definitions. Moreover, with respect to SRI strategies, the United States and Australasia do not track data on norms-based screening. Further, Australasia includes corporate engagement within ESG integration. Furthermore, ESG ratings are provided by many providers such as Bloomberg, Refinitiv, Crisil, Sustainalytics, etc., and there is low correlation between the ratings provided by these agencies (Dimson et al., 2020; Brandon et al., 2021, and Berg et al., 2022). Each rating agency uses its own criteria and methodology for providing ESG ratings. Sometimes, a company can be rated best by one provider, but on the other hand, it can be rated worst by others.Third, the social pillar is lagging behind. Till now, among the ESG parameters, the environment and governance parameters have received most of the attention across the globe. India has also witnessed a similar trend where investors have majorly invested in climate tech. Lack of attention for the social pillar could be due to some reasons: Firstly, there is difficulty in quantifying social impact. Secondly, data related to social parameters is complex for analysis and inclusion in the investment process (Allen et al., 2021). Thirdly, unlike environmental parameters, there is an absence of a standard and reliable metric for measuring societal impact. For instance, we have greenhouse gas emission units for measuring environmental impact. All three ESG parameters are interlinked; however, by focusing on the "S" parameter, companies can improve the well-being of employees (the most important asset), build customer loyalty, and improve reputation.Fourth, excessive focus on SRI could result in "greenwashing" efforts by the companies. Greenwashing is when a company claims to be conscious of ESG parameters for marketing/disclosure purposes, but in reality, isn't making any efforts towards sustainability. Corporations make false or exaggerated claims about sustainability practices. Moreover, asset managers can also attach misleading names to the funds and further, can mislead on how sustainability is integrated in the investment process. Greenwashing can induce investors to prefer one fund over another. In addition to this, it can also result in biased ESG ratings by the rating agencies. To curb greenwashing, governments and regulators across the globe are taking steps such as increased regulation and scrutiny. Recently, the U.S. Securities and Exchange Commission (SEC) took action against firms like BNY Mellon and Goldman Sachs Asset Management for various ESG-related misstatements (Fernstrom, 2023). However, with increased regulation, there is always a risk of unintended consequences. One such consequence is green hushing. Companies engage in green hushing by deliberately avoiding or underreporting sustainability efforts in order to escape strict regulatory actions. Worried about legal trouble and tarnished image, companies become conservative while reporting sustainability efforts to avoid greenwashing accusations.Role of Key StakeholdersInvestors, asset managers, company management, government, and regulators all play a pivotal role in nurturing SRI. Investors, both institutional and individual investors, can act as a catalyst and bring the necessary changes to the investee company. Firstly, investors can consciously invest in funds that meet sustainability parameters. Secondly, investors might choose to use their ownership rights to improve corporate behavior, social responsibility, and ESG performance. Investors can use various methods such as shareholder activism, proxy voting, and direct dialogue with company leadership. Thirdly, investors can drive innovation in financial products by demanding more SRI options such as ESG-themed funds, green bonds, and impact investing vehicles.On the other hand, asset managers can disclose all the material information, like portfolio holdings, investment processes, and ESG integration methodologies, to the investors. This helps to foster transparency and enables investors to make informed decisions. Further, asset managers with investment expertise can curate more SRI-focused funds according to the diverse needs and risk preferences of investors. Asset managers can also take initiatives to educate clients and contribute towards the growth and mainstream adoption of sustainable investment practices. Moreover, the asset managers can support the policy and regulatory changes that aid sustainable investment.The management of the company can adopt sustainable practices such as reducing carbon emissions, recycling waste, and use of renewable energy sources, etc. Further, the managers can contribute by meeting the expectations of all the stakeholders. Open communication with the important stakeholders can help to build trust and confidence in the company. The management must comprehensively review the existing policies with regard to ESG criteria and accordingly plan the roadmap for the future. In addition to this, focus on diversity, workplace safety, well-being of employees, and transparent pay policy can further enhance responsible behavior. Managers can uphold high standards for corporate governance by fostering transparency and encouraging ethical behavior.The government undertakes a pivotal role in fostering the growth of SRI in a nation. Firstly, the government can shape the regulation that promotes transparency, standardization, and accountability in SRI. Secondly, it can oversee the proper implementation of rules and regulations and strengthen regulations related to investor protection. Thirdly, the government can develop a reporting framework that helps companies to disclose all the sustainability-relevant information in a standardized manner that is easy to compare and comprehend by the investors. Further, the government can provide financial incentives like tax breaks and subsidies to encourage the adoption of sustainability practices. Moreover, a partnership with the private sector can help to develop renewable energy solutions, develop green infrastructure, and water conservation, etc. The government can also lead by example by adopting ESG parameters in government spending.On the other hand, regulators assume a critical role in shaping the regulatory climate, providing clarity to market participants, building investor confidence, and promoting accountability. Regulators may identify gaps and introduce new elements that strengthen SRI. Regulators also devise rules to avoid greenwashing, greenhushing, fraud, and unethical behavior. Regulators may mandate and standardize sustainability reporting from listed companies and to disclose all the material information related to sustainability indicators.ConclusionIn this article, we focus on the road ahead in ESG Investing. SRI is quite popular and often promoted as the solution to the problems that the world is facing today. However, SRI faces some of the challenges that include a deficiency of credible data, insufficient data from emerging economies, a lack of standardization, clarity of terminology, greenwashing, green hushing, and the missing social parameter. Further, investors, regulators, government, asset managers, and the management of the company are central to the development of SRI.ReferencesAllen, T., Aubertel, E., Basirov, A., Craig, M., Delvoye, V., Hammond, L., Hecquet, J.-P., Spencer, K., Paris, A. S., Content Team, Crabtree, E., Fontan, F., Lambert, F., Lubineau, F., Lumley, C., Morriss, N., Queniart, D., Wilson, R., & Zorrilla Fernandez, D. (2021). THE ESG GLOBAL SURVEY 2021. https://securities.cib.bnpparibas/app/uploads/sites/3/2021/09/the-esg-global-survey-2021.pdfBerg, F., Kölbel, J. F., & Rigobón, R. (2022). Aggregate confusion: the divergence of ESG ratings. Review of Finance, 26(6), 1315-1344. https://doi.org/10.1093/rof/rfac033Brandon, R. G., Krueger, P., & Schmidt, P. (2021). ESG rating disagreement and stock returns. Financial Analysts Journal, 77(4), 104-127. https://doi.org/10.1080/0015198x.2021.1963186Bruggia, S. (2022, December 7). Sustainable growth in emerging markets starts with data. LSEG. https://www.lseg.com/en/insights/data-analytics/sustainable-growth-in-emerging-markets-starts-with-the-data/Dimson, E., Marsh, P., & Staunton, M. (2020). Divergent ESG ratings. Journal of Portfolio Management, 47(1), 75-87. https://doi.org/10.3905/jpm.2020.1.175Fernstrom, A. (2023, July 24). Investing responsibly: ESG and the well-intentioned investor. Forbes India. https://www.forbesindia.com/article/darden-school-of-business/investing-responsibly-esg-and-the-wellintentioned-investor/86923/1Mathew, J. (2022, December 28). ESG to influence 90% of India-bound investments in 5 years: Bain & Company. Fortune India. https://www.fortuneindia.com/enterprise/esg-to-influence-90-of-india-bound-investments-in-5-years-bain-co/110921Mudaliar, A., and S. Telang. (2020). Corporate Renewable Energy Sourcing: The Way to 100% Renewable Electricity in India. Pune Maharashtra: Energetica India.Payton, B. (2024, March 12). Are ESG data demands hurting emerging markets? Responsible Investor. https://www.responsible-investor.com/are-esg-data-demands-hurting-emerging-markets/Searcy, C., & Elkhawas, D. (2012). Corporate sustainability ratings: an investigation into how corporations use the Dow Jones Sustainability Index. J. Clean. Prod. 35, 79-92.SEBI. (2023, July 12). BRSR Core Framework for assurance and ESG disclosures for value chain. https://www.sebi.gov.in/legal/circulars/jul-2023/brsr-core-framework-for-assurance-and-esg-disclosures-for-value-chain_73854.htmlSignificance of India's ratification of the Paris Agreement. Centre for Policy Research. (2016, October 3). Retrieved from https://cprindia.org/significance-of-indias-ratification-of-the-paris/
Ep. 179 — e-INR: The Mjolnir of RBI against Climate Change
CA Journal
· September 2026
00:00
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e-INR: The Mjolnir of RBI against Climate ChangeThe e-INR, India's Central Bank Digital Currency (CBDC), is more than a digital payment solution; it is a transformative tool designed to reduce the production cost of physical cash, increase accessibility to money, and make management of payment systems easier. The acceptance of e-INR in our daily transactions will also have a significant impact on climate change, which is being discussed in the article. Much like Thor's hammer, Mjolnir, the e-INR wields the power to dismantle inefficiencies, foster sustainable practices, and combat environmental challenges. This article explores how the e-INR can revolutionize green finance, streamline energy usage, incentivize eco-friendly behaviours, and empower policymakers with real-time data. By addressing physical and transition risks associated with climate change, the e-INR emerges as a catalyst for sustainability, ensuring financial inclusion, environmental protection, and economic resilience. However, to realize its full potential, challenges such as energy efficiency, public trust, and equitable infrastructure must be overcome.In Norse mythology, Thor's hammer, Mjolnir, is not just a weapon; it is a symbol of strength, resilience, and the power to restore balance. With Mjolnir in hand, Thor was able to protect Asgard, defeat giants, and ensure harmony in the cosmos. In much the same way, India's e-INR, the digital rupee introduced by the Reserve Bank of India (RBI), stands as a modern-day equivalent, a tool of immense potential to tackle one of humanity's greatest adversaries: climate change.Just as Mjolnir could strike down the fiercest of foes with precision and might, the e-INR has the power to dismantle the systemic inefficiencies and environmental impacts of traditional financial systems. Mjolnir could also summon storms, much like how the e-INR can summon revolutionary changes in how we perceive and address environmental challenges. From enabling transparent carbon markets to incentivizing sustainable consumer behaviour, the e-INR wields the capability to transform the financial ecosystem into a driver of sustainability.Imagine Mjolnir in Thor's hands as the ultimate equalizer against the chaotic forces of frost giants. Similarly, the e-INR is the RBI's weapon to fight the disarray caused by climate change, be it the rising costs of carbon emissions, the inefficiencies of physical cash, or the need for a greener economy. Where Mjolnir smashed through obstacles, the e-INR breaks through barriers like the digital divide, high transaction costs, and the slow pace of green finance implementation.Just as Thor's hammer had the unique ability to return to its master, the e-INR also comes full circle by not only addressing current challenges but also creating long-term benefits. It builds financial inclusion by bringing digital currency to rural and vulnerable populations, empowers communities with renewable energy trade, and supports governments in developing real-time, data-driven climate policies.Moreover, Thor's hammer is a symbol of hope and strength, a reminder that even in the face of overwhelming challenges, there is a way to fight back. The e-INR embodies this same spirit for India. It is more than just a digital currency; it is a call to action, a leap toward innovation, and a tool to forge a sustainable future. Like Thor wielding Mjolnir to protect his realm, India can wield the e-INR to safeguard its environment, economy, and future generations from the looming threats of climate change.CBDC or e-INR - The WeaponCBDC stands for Central Bank Digital Currency. Just from the name, one can understand that it is a currency, in digital form, and is issued by central banks. This currency is similar to fiat money or money in physical form, issued by the government, and not backed up by gold reserves, but exists solely in electronic form. The e-INR, or Digital Rupee, is India's Central Bank Digital Currency (CBDC) introduced by the Reserve Bank of India (RBI). So, two questions arise in the mind after reading this:First, how is it different from online payment banks or UPIs?To answer this let us understand some scenarios, imagine going to sketchers to buy yourself trendy sports shoes, you like one pair of shoes, the salesman takes it to the cashier and now it is time for you to pay the money, you take out your mobile phone, scanned the QR code and received a pop-up "Your banks' server is down please try later." Let's take another example- you purchased an anime merchandise from Japan that costs around 8000 INR, you add it to your cart and proceed to payment options through digital wallets, the wallet shows a transaction fee of 5% for international purchases means now you have to pay 400 rupees extra to the wallet's company. Let's go with one more example, suppose you go to a village, you are thirsty and you forgot your purse, you find a shop, but the shopkeeper says they have a mobile but do not have a bank account, therefore, they cannot receive online money. In all the above scenarios, e-INR can work wonders. e-INR minimizes intermediaries like banks or private companies, reducing transaction costs and technical problems of the intermediaries. The major benefit of CBDC is financial inclusion; e-INR will make digital money available to people without a bank account. It will also ensure highly secure transactions that will minimize the risk of hacking and fraud, and reduce the risk of privacy invasion by fraudulent practices.The second question that comes to our mind is: how does it differ from cryptocurrency?Well, the answer is simple: e-INR or CBDCs are centralized, issued, and regulated by central banks, with their value tied to the national currency, ensuring stability, whereas cryptocurrencies, like Bitcoin, are decentralized, privately created, and often operate on public blockchains without government control. Their value is highly volatile and determined by market demand.The Climate-Change VillainFlood in Rajasthan, drought in western Uttar Pradesh, snow-less January in Shimla, fifty-two degrees Celsius in April, depleted groundwater in Delhi, warm winters- we all are witnessing climate change with our own eyes, and we cannot deny it as propaganda, as we are ourselves the reason and spectators of this changing environment.The Task Force on Climate-related Financial Disclosures (TCFD) has divided climate change-related financial risks into two categories - physical and transition risks.Physical Risks - Physical risks refer to the tangible damage and financial losses caused by climatic hazards, impacting infrastructure, assets, and the economy. These risks are categorized as acute, which are immediate and event-driven (e.g., cyclones, floods, wildfires), or chronic, which involve long-term climate changes (e.g., rising sea levels, global warming). Acute risks can lead to significant losses, such as Australia's $110 billion wildfire damage (2019-2020) or Himachal Pradesh's 8,000 crore loss from heavy rains in 2023. Chronic risks, like Antarctic ice melting at 150 billion tons per year, exacerbate issues like sea-level rise and ocean acidification, causing widespread environmental and economic harm.Transition Risks - Transition risks emerge when countries make significant changes to achieve lower-carbon goals, involving shifts in technology, legal frameworks, markets, and policies. These changes can pose financial and reputational risks to organizations. Policy and legal risks include the implementation of regulations like carbon pricing and sustainability incentives, which may impact businesses depending on the policy's scope and timing. Legal risks also arise from climate-related litigation against organizations for failing to adapt to climate change or disclose its financial effects. Technology risks relate to the high costs and resource demands of adopting new technologies, which can also displace workers. Reputation risks highlight the potential impact on a company's brand image as consumers assess its contributions to the transition to a low-carbon economy.How CBDC tackles climate-related financial risks - The StrategyNow let us come to the main theme of this article, "How is a monetary instrument going to help us with our fight against our arch-nemesis, the CLIMATE CHANGE?"The e-INR RBI's Mjolnir has the potential to play a significant role in addressing climate change by promoting sustainable practices, reducing environmental impacts, and fostering green economic policies. The following are some of the ways it can help us in mitigating the impact of climate change on our economy.Reducing the Environmental Cost of Physical Cash: The production, distribution, and disposal of physical currency or paper currency incur a considerable environmental cost. It requires paper (trees), ink, and a significant amount of water as its raw materials. Manufacturing, transporting, and storing cash consumes energy, contributing to greenhouse gas emissions. Worn-out notes must be shredded or incinerated, creating waste and emissions. By replacing a portion of physical cash with the e-INR, India can reduce deforestation and conserve water, cut down the carbon footprint associated with the logistics of cash management, and lower overall waste generated from currency disposal.Enabling Green Finance: The e-INR can serve as a tool to promote and track green finance initiatives. It can directly allot funds to green finance. Government and financial institutions can channel funds to renewable energy projects, sustainable agriculture, and green infrastructure using e-INR, ensuring transparency and accountability. e-INR can also streamline the issuance and management of green bonds, making it easier to raise funds for climate-friendly projects. Blockchain or centralized ledgers used in e-INR enable real-time tracking of funds, ensuring they are used for their intended environmental purposes.Supporting Carbon Markets: Efficient carbon markets play a crucial role in reducing greenhouse gas emissions, and the e-INR can enhance their effectiveness. By providing a secure and transparent platform for buying, selling, and settling carbon credits, the e-INR ensures quicker transactions with reduced costs. Additionally, it can facilitate cross-border carbon trade by offering a stable and regulated medium of exchange, simplifying and standardizing international carbon trading. This would not only promote global collaboration in emissions reduction but also encourage investment in sustainable practices, helping countries and businesses meet their climate goals more efficiently.Incentivizing Sustainable Consumer Behavior: The e-INR could be programmed to incentivize eco-friendly choices through various mechanisms. Consumers could receive cashback or discounts in e-INR when purchasing renewable energy products, electric vehicles, or energy-efficient appliances, encouraging sustainable consumption. Additionally, dynamic taxation could be implemented, where eco-friendly products and services are taxed at a lower rate, while carbon-intensive goods face higher taxes, all facilitated seamlessly through e-INR transactions. For instance, public transport users could earn small e-INR rewards, promoting the use of environmentally friendly transport. Similarly, retailers could offer discounts to customers using reusable bags, further encouraging sustainable practices, all managed through the e-INR payment system.Revolutionizing Energy Payments: The e-INR can be integrated with smart grids to optimize energy use, offering several benefits for sustainable energy management. Through smart energy payments, consumers could pay for electricity in real-time based on their usage, enabling time-of-use pricing that encourages the consumption of renewable energy during peak production periods. This approach would help balance demand and supply while promoting the use of clean energy. Additionally, decentralized renewable energy systems could be enhanced with the e-INR, allowing communities that generate excess energy from sources like solar to trade it with neighbours. This would foster local green energy ecosystems, encouraging sustainability and reducing reliance on centralized energy grids.Enhancing Financial Inclusion for Climate Resilience: India's rural and vulnerable populations, who are often the most affected by climate change, can benefit significantly from the e-INR. It can facilitate the direct disbursement of financial aid, allowing subsidies, disaster relief, or funds for climate adaptation programs to reach affected communities quickly and without intermediaries. This direct support ensures faster and more efficient assistance in times of need. Additionally, the e-INR can enable access to green subsidies, providing farmers and small businesses with financial incentives to adopt sustainable practices. This could include support for eco-friendly solutions like solar-powered irrigation systems or organic fertilizers, promoting long-term resilience and sustainability in rural areas.Reducing Energy Use in Financial Systems: Traditional banking systems, including ATMs, cash logistics, and branch operations, consume large amounts of energy. The e-INR can help mitigate this by streamlining payments, reducing the need for physical infrastructure and cutting operational energy costs. Since it operates entirely digitally, the e-INR promotes a digital-first approach, which requires fewer physical resources, such as paper or coins, and thus has a significantly smaller carbon footprint. This shift towards a completely digital currency system not only enhances efficiency but also contributes to a more sustainable financial ecosystem, reducing the environmental impact associated with traditional banking methods.Promoting Supply Chain Sustainability: The e-INR, when integrated with blockchain or traceable ledgers, can significantly promote sustainability in business practices. It can encourage green supply chains by providing transparency into the environmental footprint of goods, enabling eco-conscious consumers and businesses to make informed choices and opt for sustainable products. Additionally, businesses that adopt sustainable practices could receive certifications and rewards through the e-INR system, such as lower transaction fees or tax incentives. This approach not only incentivizes companies to adopt greener practices but also creates a transparent system that supports environmentally responsible consumer behavior.Supporting a Circular Economy: The e-INR can play a key role in fostering a circular economy, where resources are reused to minimize waste. Through recycling rewards, citizens could be incentivized with e-INR for recycling or participating in waste reduction initiatives, encouraging more sustainable behavior. Additionally, companies that adopt circular practices, such as using recycled materials or engaging in sustainable production, could receive subsidies or tax breaks directly in e-INR. This would create a financial incentive for businesses to contribute to resource efficiency, helping to drive a more sustainable and waste-reducing economy.Empowering Policymakers with Real-Time Data: The digital nature of the e-INR offers valuable insights that can support climate action. By monitoring consumption patterns, the e-INR enables the analysis of spending trends, helping to identify areas with high carbon footprints. This data can then be used to target those sectors for green initiatives, promoting more sustainable practices. Additionally, real-time data from e-INR transactions can be leveraged to customize climate policies, allowing for the design and implementation of tailored measures such as carbon taxes, renewable energy incentives, or fuel subsidies. This data-driven approach ensures that climate policies are more effective and responsive to current consumption patterns.Enhancing Cross-Border Climate Collaboration: Climate change demands global cooperation, and the e-INR can facilitate international efforts in several ways. First, it can enable efficient climate funds transfers, allowing India to contribute to or receive climate funds from global institutions directly via e-INR, ensuring transparency and reducing delays. Additionally, a CBDC-backed system like the e-INR can support standardized transactions, simplifying collaboration on large-scale environmental projects. This streamlined process would foster more effective and transparent partnerships between countries, international organizations, and businesses, making it easier to allocate resources and fund initiatives aimed at combating climate change.Educating and Engaging Citizens: The e-INR can incorporate built-in features to promote climate change awareness and encourage sustainable behaviours. Through gamified incentives, citizens could earn e-INR rewards by participating in climate-friendly activities, such as planting trees, reducing energy consumption, or adopting eco-friendly practices. This fun and engaging approach motivates individuals to contribute to environmental sustainability. Additionally, educational campaigns could be integrated into e-INR payment platforms, displaying climate awareness messages or reminders to encourage eco-conscious habits. These features would help raise awareness and foster a culture of sustainability, empowering individuals to make more environmentally responsible choices in their daily lives.The Obstacles in the WarWhile the e-INR offers significant potential, several challenges need to be addressed. First, energy efficiency is a concern; if based on blockchain, the system must adopt energy-efficient models to avoid the high power consumption associated with cryptocurrencies. A large-scale move to renewable energy should also be considered to maintain sustainability. Another challenge is the digital divide, as infrastructure must be accessible to rural and underprivileged communities to ensure inclusivity and equitable participation. Implementation costs are also significant, as transitioning to a CBDC system requires substantial investments in technology, infrastructure, and cybersecurity. Additionally, there may be privacy concerns, as the digital nature of the currency raises questions about data security and surveillance. The adaptation of existing financial systems is another challenge, as banks and financial institutions need to integrate the e-INR seamlessly with their current operations. Lastly, public trust could be an issue, as citizens may be hesitant to adopt a digital currency without a clear understanding or confidence in its security and long-term viability.The e-INR is more than just a digital currency; it is a tool that can transform how India addresses climate change. By reducing the environmental footprint of money, incentivizing green behaviour, enabling efficient carbon trading, and supporting sustainable practices, the e-INR aligns economic activities with the country's climate goals. While challenges exist, with thoughtful design and implementation, the e-INR has the potential to lead India towards a greener and more sustainable future.ConclusionThe e-INR represents a bold step forward in India's fight against climate change, serving as a modern-day Mjolnir to restore balance to the environment and economy. By reducing the environmental cost of physical cash, facilitating carbon markets, and promoting sustainable consumer and corporate behaviors, the e-INR aligns financial innovation with climate goals. Its integration with smart grids, renewable energy systems, and data-driven policymaking further strengthens its potential as a green financial tool. Despite challenges like the digital divide, privacy concerns, and implementation costs, the e-INR offers a promising pathway to a sustainable future. With careful planning, robust infrastructure, and widespread adoption, the e-INR can become a cornerstone of India's commitment to combating climate change and achieving environmental and economic resilience.ReferencesInternational Monetary Fund. (n.d.). Virtual handbook on central bank digital currency (CBDC). Retrieved from https://www.imf.org/en/Topics/fintech/central-bank-digital-currency/virtual-handbookMinistry of Finance, Modi, N., International Monetary Fund, & Georgieva, K. (2022). CENTRAL BANK DIGITAL CURRENCY (DIGITAL RUPEE). https://static.pib.gov.in/WriteReadData/specificdocs/documents/2022/dec/doc2022121139201.pdfNGFS. 2018. "NGFS First Progress Report." October 2018. Available at: https://www.ngfs.net/en/first-progress-reportNGFS. 2019a. "NGFS First Comprehensive Report. A Call for Action - Climate Change as a Source of Financial Risk." April 2019. Available at: https://www.ngfs.net/en/first-comprehensive-report-call-actionNGFS. 2019b. "Macroeconomic and Financial Stability: Implications of Climate Change". NGFS Technical Supplement to the First Comprehensive Report." July 2019. Available at: https://www.ngfs.net/en/first-comprehensive-report-call-actionODI (n.d.). The role of central banks in tackling climate change. Www.Climate-Transparency.org. https://www.climate-transparency.org/wp-content/uploads/2021/08/ODI_role-of-central-banks-in-tackling-climate-change.pdfReserve Bank of India Frequently asked questions. (n.d.). https://www.rbi.org.in/Scripts/FAQDisplay.aspx?Id=169TCFD (Task Force on Climate-related Financial Disclosures). 2017. "The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities Technical Supplement Technical Supplement." TCFD. Available at: https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Technical-Supplement-062917.pdfThomä, Jakob, and Hugues Chenet. 2017. "Transition Risks and Market Failure: A Theoretical Discourse on Why Financial Models and Economic Agents May Misprice Risk Related to the Transition to a Low-Carbon Economy." Journal of Sustainable Finance and Investment 7 (1): 82-98. https://doi.org/10.1080/20430795.2016.1204847
Ep. 180 — Challenges Faced in Implementing Objective Accounting for Sustainable Financial Reporting - Evidence from Selected Indian Municipalities
CA Journal
· September 2026
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Challenges Faced in Implementing Objective Accounting for Sustainable Financial Reporting - Evidence from Selected Indian MunicipalitiesWith the vision of Viksit Bharat 2047 and the growing need for improved urbanization, states and cities need additional funds to access capital markets, which requires strong financial discipline through standardized financial reporting as per applicable guidelines. Despite the introduction of the National Municipal Accounts Manual (NMAM) in 2004, many municipalities still struggle with adopting accrual accounting, leading to inconsistencies with NMAM guidance. This article highlights the need for objective accounting over selective accounting to ensure transparency, accuracy, and financial integrity in municipal reporting. It emphasizes the challenges posed by inconsistent accounting practices in Indian municipalities and advocates for a standardized and objective approach to financial reporting.IntroductionThe Chintan Shivir on "Reimagining Urban Governance and Urban Spaces," organized by MoHUA on May 29-30, 2024, fostered insightful discussions and meaningful knowledge exchange. The event focused on key thematic sessions that addressed urban challenges, promoted inclusive development and economic growth, and envisioned cities as economic powerhouses. To achieve this, cities must be prepared to raise funds whenever required, with robust financial reports and sound credit ratings.At present, municipalities serve 377 million people, representing 31% of India's population, while contributing 63% to the national GDP. By 2050, this urban population is projected to rise to 800 million, with every second Indian living in a city. Despite SEBI's 2015 municipal bond guidelines, only 23 municipalities have accessed these bonds, accounting for less than 1% of India's 4,000+ cities. This highlights a significant concern, as access to capital markets hinges on several factors, particularly the availability of high-quality, objectively prepared Annual Financial Statements (AFS).Many municipalities still follow the cash-based accounting system at the local level, whereas worldwide, the Urban Local Bodies are shifting to an "accrual-based accounting system." In Kautilya's Arthashastra, there is evidence of the accrual concept, with revenue being recognized in a manner similar to the modern revenue recognition principle. Yet, even after so many centuries, a lot of municipalities in India still struggle to migrate from cash to accrual accounting. (Tulsyan, 2021)More than 30 years have passed since autonomy was provided to Urban Local Bodies (ULBs) through the 74th Constitutional Amendment Act (CAA), and still, financial reporting is restricted to the preparation and uploading of Annual Financial Statements (AFS), and that too with the assistance of third-party professionals with the limited capacity of Municipal Accountant. Now, the time has come for these selective accounting practices of ULBs to be tested and validated on many parameters to migrate to objectivity in accounting. This examination is essential because if India aims to achieve the Sustainable Development Goals (SDGs) and transform by 2030, it must prioritize SDG 11-Sustainable Cities. By 2030, over 60% of India's population will reside in urban areas, making the attainment of sustainable cities crucial. Achieving this goal requires sustainable financing strategies supported by objective municipal financial reporting.Broad Objectives of the study:The objectives of this study, therefore, are as follows:a) To identify key challenges to objective accounting through the assessment of current financial reporting practices in selected municipalities by examining annual financial statements available on the City Finance Portal.b) To recommend strategies for strengthening objective accounting practices in municipalities.Each section of this article has been designed to flow logically from the previous one, building a cohesive argument for addressing selective accounting practices in municipalities. The structure of the article is as follows: after the introductory section, which outlines the background of the study, Section 2 examines the rationale of objectivity in accounting as prescribed by commissions/guidelines/standards. Section 3 details the data collection and methodology employed in the study. Section 4 explores selective accounting practices in various municipalities, supported by practical examples from their published Annual Financial Statements (AFS). Finally, Section 5 presents the conclusions and implications of the study.Objectivity in Accounting - Governance effort to dateMunicipalities in India face challenges in financial management, with weak fiscal practices and delays in preparing audited annual accounts. The evolution of accounting reforms includes phases of computerization and accrual-based accounting, with guidelines from the Supreme Court and the Ministry of Housing and Urban Affairs. Key developments include the introduction of the National Municipal Accounts Manual (November 2004), the development of State-level municipal accounts manuals, and the commencement of issuance of the Accounting Standards for Local Bodies by ICAI (March 2005). Municipalities are required to adopt an accrual-based double-entry accounting system to qualify for funding under urban reform schemes. Recommendations from the CAG and the 14th and 15th Finance Commissions stress the need for standardized accounting practices and performance-based grants to ensure timely financial reporting. City financial rankings are being used to assess fiscal health based on these reforms. The 15th Finance Commission specifically set deadlines for financial disclosures, requiring unaudited Annual Financial Statements (AFS) for FY 2023-24 to be uploaded by May 15, 2024, and audited AFS for FY 2022-23 by the same date. Looking ahead, the 16th Finance Commission, whose report is expected in October 2025 and will be applicable from April 1, 2026, for five years, may introduce further provisions for enhanced financial reporting, aligning with India's SDG 2030 goals. Various Government policies and guidelines expect adherence to basic accounting principles and reporting practices by municipalities, as prescribed by the National Municipal Accounts Manual (NMAM), for objective financial reporting. By following standardized accounting principles and reporting guidelines, municipalities can ensure consistency and accuracy in their financial statements to enhance transparency and accountability for better decision-making by stakeholders.1. Data Collection and MethodologyIn this study, secondary sources were explored alongside other relevant materials, as most existing studies are narrative-driven and lack an in-depth analysis using actual Annual Financial Statements (AFS) from municipalities. The majority of research on financial reporting focused on corporate governance in private and public sector enterprises, with limited attention given to municipalities. This gap in the literature forms the foundation for the argument in the present article, highlighting the need for objectivity in financial reporting for enhanced access to capital markets.The data has been collected from the annual financial statements of 30 cities from selected States, covering three zones to highlight the selective accounting practices followed by the selected municipalities, i.e., States of Assam (5), Uttar Pradesh (5), and Jharkhand (20).2. Evidence of Selective Accounting and Financial Reporting Practices FollowedAbout Objective 1 of the article, which aims to identify key challenges to objective accounting through an assessment of current financial reporting practices in selected municipalities, the following key issues have been identified. These issues, highlighted by an examination of the annual financial statements available on the City Finance Portal, suggest that selective accounting practices create doubt among analysts when assessing creditworthiness. This is primarily due to the lack of qualitative characteristics in the financial statements, which undermines their reliability and effectiveness in credit assessments.i. Error of Omission: Omission in Reporting (Non-Disclosure of Financial Indicators as per NMAM)Chapter 31 of NMAM, specifically Para 31.4, mandates that the Annual Report of Urban Local Bodies (ULBs) should include financial statements such as the Balance Sheet, Income and Expenditure Statement, Statement of Cash Flows, Receipts and Payments Account, Notes to Accounts, and Financial Performance Indicators. However, an analysis of a selected sample of cities reveals that only Jharkhand consistently includes Financial Performance Indicators in its Annual Financial Statements. Among the 30 cities examined, only 12 in Jharkhand use these indicators, highlighting a gap in standardization and adherence to best practices. Jharkhand municipalities began incorporating these indicators in the fiscal year 2021-22, following recommendations from their Project Management Unit (PMU), demonstrating a proactive effort to improve financial management, transparency, and accountability. (Pankaj Goel, 2023)ii. Error of Principle: Common Errors in AccountingThe analysis of annual financial statements from selected cities indicates that many municipal accountants responsible for preparing these statements have a limited understanding of NMAM. As a result, essential accrual accounting principles are often ignored, leading to selective accounting practices that fail to present a true and accurate picture of the municipality's finances. An illustrative example of an error in accounting from Annual Financial Statements is given below.It's important for municipalities to record tax revenue accurately, particularly property tax, as outlined in the NMAM. In the recording of Tax Revenue (Code -110 as per NMAM) - Property Tax, a municipality may get some advance amount as a round-off amount, some rebates may be allowed to citizens for digital payment, senior citizens, etc., and due to late deposit, a fine may be collected. It has been seen that the total collection is recorded as income against Property Tax without taking into account the effect of rebates, advances, and fines. As per NMAM, the effect of rebate and advance shall be accounted for separately, and fines shall be recorded independently.Example: Mr. X has a property tax demand of Rs 95 for FY 2023-24; Rs 100 was paid online on 15th June 2023, including a fine of Rs 5. The municipality, in general, allows a rebate of 5% online and 5% for payment up to Quarter 1 of FY.Incorrect AccountingBank (Code:450) - 100To Property Tax 100 (Code: 110 tax Revenue)This shows an inflated figure of Tax revenue, which is not a correct picture.Correct Accounting as per NMAMThe municipality must pass Demand Entry as of 1 April, FYProperty Tax Receivables: Code: 431 - Dr 95To Tax Revenue, Code: 110 - Cr 95Bank A/c - Dr 100Rebate on Property Tax - Dr 9.5To Property Tax Receivables - Cr 95To Other Income (Code 180) Fines - Cr 5To Income in Advance - Cr 9.5Note: Current Demand Rs 95 less rebate 10% (9.5) = Due is Rs 85.5, Fine Rs 5. The Total Due is Rs 90.5, but what is paid by a citizen is Rs 100. Thus, Rs 9.5 shall be accounted as an advance.A significant portion of selected cities (10 out of 30) do not account for property tax correctly, according to the guidelines outlined in the NMAM. Recording the entire collection as tax revenue without accounting for factors like rebates, advances, and fines can indeed distort the true financial position of cities.iii. Error of Reporting: Financial Statements FormatsFormats of components of Annual Financial Statements (Income & Expenditure Statement, Receipts, and Payments Account, Balance Sheet, and Cash Flow Statements) are presented in Chapter 31 of the NMAM in vertical format. However, it has been observed during analysis that some smaller cities are still preparing financial Statements in T-shaped formats, which is not in line with NMAM. (Refer to Figure 1)The below sample from the Annual Financial Statements of the City of Assam shows that the balance sheet of the city of Assam for the financial year 2020-21 was prepared in a T-shaped format, which is not in line with the guidelines outlined in the NMAM, leading to selective financial reporting.Figure 1: Selective Balance Sheet format of Selected Municipality of Assam: (Not in line with NMAM)LiabilitiesAmount (Rs.)AssetsAmount (Rs).Capital FundOpening BalanceAdd: Excess of Receipt over Expenditure7,02,11,147.951,63,57,983.00Fixed AssetsAs per Details Annexed 10,53,844.00 Total Capital Fund8,65,69,130.95 Current LiabilitiesSecurity DepositAdd: During the year46,30,550.006,97,000.00Current AssetsCash-in-HandCash-at-Bank0.008,13,58,236.95Total Current Liabilities53,27,550.00Total Current Assets8,13,58,236.95 9,18,96,680.95 9,18,96,680.95It is good to observe during analysis that there's a significant parity in the preparation of balance sheets among the selected cities, with only 3 out of 30 following the T-shaped format, which is not recommended by the NMAM.iv. Error of Reporting: Non-Disclosure of Code of AccountsChapter 4 of NMAM, Codification Structure & Chart of Accounts, specifies codes that municipalities must use while recording transactions, and such code of accounts shall be shown during financial reporting of annual financial statements (Refer Figure 2). However, it has been observed in many cities that financial reporting doesn't disclose these codes, though the format is as per NMAM.Figure 2: Without Code-wise Balance Sheet of the selected Municipality of Assam (Not in line with NMAM)LiabilitiesScheduleCurrent Year (Rs.) 2021-22Previous Year (Rs.) 2020-21RESERVE & SURPLUSMunicipal (General) FundEarmarked FundsReserve & Surplus12311,66,61,453.25--9,37,21,452.86--Total Reserve & Surplus (A) 11,66,61,453.259,37,21,452.86GRANT/CONTRIBUTION FOR SPECIFIC PURPOSE (B)452,51,486.2552,51,486.25LOANSSecured LoansUnsecured Loans562,18,869.00-1,71,300.00-Total Loans (C) 2,18,869.001,71,300.00CURRENT LIABILITIES & PROVISIONS (D)Deposits receivedDeposit worksOther LiabilitiesProvisions789108,11,495.00-14,38,781.00-11,07,275.09-6,83,940.00-Total Current Liabilities & Provisions (D) 22,50,276.0017,91,215.09TOTAL LIABILITIES (A+B+C+D) 12,43,82,084.5010,09,35,454.20The analysis indicates a positive trend, as most of the selected cities disclose codes of account, with only 4 out of 30 cities failing to do so in their financial reporting.v. Error of Commission: Non-Disclosure of Code 260Revenue Grants, Contributions, and Subsidies, as per Codes 160 and 260 of the National Municipal Accounts Manual (NMAM), require municipalities to book revenue grants received and expenses incurred out of such grants under these codes. For example, under the Smart City Mission, funds for Administrative and Office Expenses (A&OE) are provided to states/ULBs for the preparation of Smart City Proposals (SCPs) and Project Management Consultants (PMCs), in addition to capital grants. However, some cities may be incorrectly recording receipts under code 160 without booking the corresponding revenue expenses under code 260, resulting in an overstatement of receipts and an inaccurate surplus position.Figure 3: Without Code 260 accounting Income and Expenditure of selected Municipality of Uttar Pradesh (Not in line with NMAM)Code No.Item/Head of AccountSchedule No.Amount ( ) 2021-22Amount ( ) 2020-21INCOME 1-10Tax Revenue1-1739,101,912.75684,003,677.841-20Assigned Revenues & Compensation1-2--1-30Rental Income from Municipal Properties1-315,182,346.0015,571,073.501-40Fees & User Charges1-477,581,400.0056,081,111.421-50Sale & Hire Charges1-513,321,981.006,917,367.001-60Grants, Contributions & Subsidies1-64,052,349,718.004,035,151,660.251-70Income from Investments1-79,145,800.009,143,924.001-71Interest Earned1-83,696,960.004,864,248.001-80Other Income1-9104,798,984.861,004,424.50A:Total - INCOME 5,015,179,102.614,812,737,486.51EXPENDITURE 2-10Establishment Expenses1-103,280,182,205.002,422,507,636.002-20Administrative Expenses1-1153,259,502.0040,070,307.002-30Operations & Maintenance1-12931,128,716.001,320,085,778.612-40Interest & Finance Expenses1-13115,823.62200,331.682-50Programme Expenses1-14485,636.001,157,701.002-60Grants, Contributions & Subsidies1-15--2-70Provisions & Write off Property Tax1-16--2-80Miscellaneous Expenses1-17284,510.0014,750,926.002-72DepreciationB-11727,726,551.56716,928,660.004-30Consumption of StockB-1452,928,300.0016,194,200.01B:Total - EXPENDITURE 5,046,111,444.184,531,895,540.303. Suggested Interventions for Transition to Objectivity in AccountingThe NMAM (2004), AMRUT guidelines (2015), and recommendations from various finance commissions in the past all advocated for better accounting and reporting practices. However, the above section analysis reveals that the actual accounting practices in selected cities remain far from achieving objectivity in accounting and reporting, which is essential for a true and fair view of financial statements. It is essential to move beyond selective accounting and reporting by actively implementing the frequent guidelines and recommendations provided by various stakeholders over the past two decades. Strengthening adherence to standardized practices will enhance transparency and financial discipline. Thus, the time has come for a smooth transition from selective accounting to objective accounting, with cities now assessing capital markets for funds through Municipal Bonds.In summary, among the 30 selected cities, those in Jharkhand demonstrate relatively strong adherence to objective accounting and reporting practices compared to cities in Uttar Pradesh and Assam.Specifically, cities in Jharkhand appear to excel in implementing standardized accounting practices recommended by the National Municipal Accounts Manual (NMAM).Against objective 2, interventions that may be adopted by the Centre, State, or City for objective accounting have been detailed below:i. City Finance Portal Improvement: The City Finance portal still does not allow municipalities to upload all six mandatory components as per Chapter 31 of the NMAM. It is therefore suggested that the City Finance Portal develop a Management Information System (MIS) in two parts: one for cities that upload all six components as required by NMAM, and another for cities that do not. This would enable comparisons to be made and highlight which cities require support in the automation of financial reporting.ii. Institutionalise Surveillance Mechanism: Establishing Project Management Units (PMUs) or Municipal Reform Cells (MRCs) at the National Level dedicated to financial reforms, as seen in cities like Patna Municipal Corporation and Guwahati Municipal Corporation, is a proactive approach for improving financial management practices within municipalities. (Abraham, 2013)iii. Mandate Certificate Course for Accountants: The Institute of Chartered Accountants of India (ICAI) and the Comptroller and Auditor General of India (CAG) have developed a certificate course for accountants of municipal bodies to improve the quality of financial management and reporting in municipalities. This course shall be considered to be mandated by States or cities for accountants of ULBs and accountants proposed to be hired in ULBs.iv. Mandatory Enforcement of Accounting Standards for Local Bodies: 2 ASLBs (ASLB 2 & ASLB 5) out of 31 have been mandated by ICAI to be compiled by members of ICAI while auditing the financial statements of Local Bodies w.e.f. April 1, 2022 (Pankaj Goel, 2023). It is suggested that just as Accounting Standards are made mandatory for companies through amendments in the Companies Act by the Ministry of Corporate Affairs, a similar approach can be taken at the state level for municipalities to make the adoption of Accounting Standards for Local Bodies (ASLBs) mandatory through amendments in relevant State Municipal Acts until NMAM has been amended at National level.v. Resolving Accounting Staff Shortage Issues: State-imposed restrictions on recruitment to positions and inadequate staffing levels can hamper the efficiency and effectiveness of financial management in ULBs. For example, in Tamil Nadu, due to a Government Order (GO), no fresh vacancies were created, and only people were appointed on a compassionate basis. Recognizing the staffing shortage, the Asian Development Bank (ADB), under its TNUFIP program, provided an incentive of Rs 5,00,000 per vacancy to be filled in selected ULBs covered, as prespecified in the Facility Administration Manual of Tranche 1, as a performance incentive. Furthermore, the creation of a Municipal Accounts Service cadre was proposed in one of the reports of the Ministry of Housing and Urban Affairs (MoHUA), may be adopted by the State.This study highlights a prime issue regarding selective accounting practices in cities, which are meant to be engines of growth and drivers for effective service delivery. States and cities must take proactive steps toward reforming their financial management practices without waiting for advisories from MoHUA. Chartered Accountant firms responsible for preparing financial statements for cities should ensure compliance with NMAM and other relevant accounting standards. By implementing these interventions, states and cities can overcome the challenges associated with selective accounting practices and strengthen their financial management systems. This, in turn, will contribute to more efficient resource allocation, improved service delivery, and sustainable urban development.ReferencesAbraham, C. T. (2013). Municipal accounting reforms in India: An implementation guide. Asian Development Bank, 20, 56.Accountants, C. (n.d.). Compendium of accounting standards for local bodies (ASLBs). The Institute of Chartered Accountants of India.Goel, P. (2023). Common mistakes in annual financial statements. 1127-1131.ICAI - ICAI ARF. (2023). Transition to accrual accounting: Models and learnings for urban local bodies. January, 611-614.Ministry of Housing & Urban Affairs. (2023). City financial ranking guidelines. Ministry of Housing & Urban Affairs, Gol, March.Murali, R. S. (2023). Accounting standards for local bodies. Chartered Accountant.Pelekh, U. V., Khocha, N. V., & Holovchak, H. V. (2024). Financial statements as a management tool.Pham, D. C., Do, T. N. A., Doan, T. N., Nguyen, T. X. H., & Pham, T. K. Y. (2024). The impact of sustainability practices on financial performance: Empirical evidence from Sweden.Singh, C., & Singh, C. (2015). Financing of urban local bodies in India. SSRN Electronic Journal, 493.Tulsyan, N. K. (2021). Chartered accountant, accounting and bookkeeping in ancient India.
Ep. 181 — Taxation of Intellectual Property under the Income Tax Regime in India
CA Journal
· September 2026
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Taxation of Intellectual Property under the Income Tax Regime in IndiaThe taxation of intellectual property (IP) under the Indian Income Tax regime presents a complex and often contradictory landscape. While several provisions aim to recognize and facilitate IP-based income, procedural ambiguity and restrictive eligibility criteria often act as impediments. This article critically evaluates whether or not the current regime fosters IP development. By examining key provisions, judicial interpretations, cross-border taxation, and India's preferential tax initiatives like the patent box regime, the article argues that although India has made incremental progress, still, further impetus is required for IP growth.IntroductionThe significance of IP in modern economics has transformed taxation policy into a pivotal tool for either enabling or discouraging innovation. This article analyses the Indian income tax regime through this lens: does it act as an impetus for IP development or an impediment? To explore this, the paper evaluates the treatment of IP transactions, cross-border taxation frameworks and preferential tax mechanisms. The presence and growth of intellectual property (IP) is undeniable across various realms-social, cultural and increasingly, economic. Historically, IP (or intellectual capital) was undervalued and excluded from parameters measuring wealth and productivity. This has changed considerably over the past two decades, with rising academic and commercial interest in IP, driven by the economic growth it catalyses. Beyond economic growth, IP has become integral to high-value business transactions, especially in sectors like IT, biotechnology, communications, and pharmaceuticals. Post-TRIPS, the importance of IP in commercial dealings has surged, with companies actively seeking protection through various forms of IP to secure their innovations. In fact, for many global enterprises, a significant portion of their market value is now attributed to their IP assets.IP-based business transactions typically involve licensing, transfers, or self-developed IP activities. Given the high profitability of IP exploitation, taxing such income under state-provided legal protection appears both logical and necessary. Globally, including in India, companies are investing significantly in technology-intensive industries that generate valuable IP. A prime example is IBM, which spends billions annually on patents. Estimates suggest that 62% of a company's total value lies in its intangible assets, underscoring the immense potential for taxation in this domain.Treatment of Intellectual Property under the Income Tax Act 1961: An OverviewTo determine whether India's IP tax regime incentivises or obstructs innovation, it is essential to understand how IP is characterised and taxed under the Income Tax Act. This section provides a foundational overview before engaging in deeper analysis of transactional and structural challenges. The tax net provided under the Income Tax Act, 1961 is quite vast and contains a number of provisions for the taxation of intellectual property assets directly as well as indirectly. Though the Act does not provide for an explicit definition of an 'intellectual property', it lays down that patents, know how, trademarks, copyright, licenses and any other commercial or business related rights of a similar nature constitute intangible assets for the purpose of taxation under the Act.A capital asset as defined by the Act to include property of any kind held by the assesee, which could be tangible or intangible and thus by extension, includes intellectual property within its ambit. Hence, IP is an intangible capital asset for the purpose of the Act. Such assets have been considered to be depreciable assets for the purpose of computation of income. Depreciation usually means loss or decline in value of the asset which occurs gradually over the useful life of a material thing owing to physical wear and tear and decay, which can generally not be restored by current repairs and maintenance.Despite existing provisions permitting IP taxation in India, awareness among government officials and industry players has been limited. Clarity emerged only after the Supreme Court ruled that off-the-shelf software qualified as 'goods' under the Andhra Pradesh General Sales Tax Act, making it taxable. However, India still lacks a concrete policy on IP taxation and while several amendments and rules have been introduced, they remain insufficient to address the complexities involved. A key gap lies in the absence of standardized methods for IP valuation, which is essential for fairness in IP taxation.IP Transactions and Direct Taxation in IndiaThe core of the IP taxation debate lies in how IP-generated income is treated when monetised, either directly through commercial use or indirectly via transfers and licensing. These taxation rules ultimately affect whether IP creation is encouraged or penalised. Income can be generated through both direct and indirect exploitation of IP. Direct exploitation refers to the commercial use of IP by its owner i.e., the individual or entity possessing exclusive legal rights over innovative products or services that function as business identifiers. Indirect exploitation, on the other hand, denotes the mediated use of the IP by third parties pursuant to contractual arrangements with the IP owner. This typically occurs through the transfer or licensing of associated rights. Accordingly, the mode of exploitation determines the taxation treatment of income derived from IP assets under the IT Act.While various other transactions exist within a typical IP business model, this article focuses on the three most prevalent modes of IP commercialisation-licensing, transfer, and self-developed IP-to evaluate whether the prevailing tax treatment under the Indian law serves as a catalyst or deterrent for IP growth.i. Licensing: Licensing of IP is akin to licensing any other business asset and involves two parties: the licensor (IP owner) and the licensee (user). The licensor grants the licensee the right to use the IP in return for consideration, commonly referred to as royalty. The licensee, in turn, uses the licensed IP for their business operations. For the licensor, the royalty constitutes a source of income. A licensing agreement governs the rights granted to the licensee and typically includes provisions on the scope of the license (exclusive, non-exclusive, or sole), payment terms, territorial limitations, sublicensing rights and duration. These terms are critical in determining the tax implications of licensing income.Taxation of Licensing Proceeds: To apply tax provisions appropriately, the income stream must be defined under the IT Act. In the case of licensing, the consideration received i.e. royalty is generally taxable. The IT Act recognises royalty as a form of income, whether received as a lump-sum (potentially chargeable as capital gains) or as a recurring revenue stream, in exchange for licensing or granting usage rights over IP. Section 9 of the Act specifically enumerates taxable transactions involving royalty: a) transfer of IP, b) imparting of IP-related knowledge, and c) use of IP, technical services, or scientific knowledge. Such royalties are treated as business income under the IT Act, reinforcing the tax base. However, whether this treatment promotes domestic innovation depends on how the provisions balance revenue objectives with R&D incentives.Tax treatment of licensing payments: Under the IT Act, licensing fees are generally treated as revenue expenditure rather than capital expenditure, in alignment with the matching principle of accounting. Sections 30 to 36 enumerate specific deductible expenses, while Section 37 provides general rules for deduction. However, the treatment of royalty payments, especially under exclusive licensing arrangements, can be contentious. In such cases, the transaction may closely resemble a transfer of IP, raising questions about whether the royalty should be classified as revenue or capital expenditure. Judicial guidance helps clarify such ambiguities. For instance, the Supreme Court of India in CIT v. IAEC (Pumps) Ltd. held that a lump-sum royalty payment for an exclusive, renewable ten-year license to use patents in India constituted revenue expenditure. Despite the lump-sum nature of the payment and the exclusivity of the license (which resembled a transfer), the Court emphasised the renewability clause to conclude that the transaction was a license, not a transfer. Hence, the royalty was treated as a recurrent expenditure. This 1977 ruling continues to hold contemporary relevance as a foundational authority on the tax treatment of royalty payments under licensing arrangements and its principles have informed subsequent judicial decisions in recent cases, for instance, Maruti Suzuki India Ltd. and LG Electronics India. In today's innovation-driven economy, where IP licensing is a common commercial model, the Pumps ruling remains a vital precedent in distinguishing between capital and revenue outflows.ii. Transfer: An IP transfer involves a complete and exclusive transfer of rights to the transferee, allowing them to use, sublicense, or assign the IP without involvement from the original owner. This is analogous to the sale of a capital asset, wherein a one-time consideration is paid to the owner for transferring all rights and interests. Accordingly, income from an IP transfer is taxed similarly to the sale of capital assets, as the consideration does not meet the usual criteria of income, namely periodicity, separability from source and regular inflow. Nonetheless, since IP is considered a depreciable asset in India, gains from its transfer are treated as capital gains arising from the transfer of short-term capital assets. While this may safeguard the tax base, it potentially disincentivizes the commercialisation of self-created IP, thereby tilting the framework toward impediment.Taxing the consideration received against transfer: The transfer of an IP asset triggers capital gains taxation, akin to the sale of tangible or intangible property. A capital gain (or loss) arises from the difference between the sale consideration and the cost base of the asset. As per George O. May, capital gains represent profits realised outside the ordinary course of business, exceeding the original cost of the asset sold. While taxation of capital gains is relatively straightforward for depreciable assets used in business, it becomes more complex for non-depreciable assets or for transactions outside the regular business context. Nonetheless, since IP is considered a depreciable asset in India, gains from its outright disposal are treated as capital gains arising from the transfer of short-term capital assets, a measure that helps protect the tax base but may inadvertently discourage transfer of self-developed IP to third parties or spin-off entities. A careful balance must therefore be struck between tax revenue protection and mobility of IP assets.Taxing the Acquired IP: From the transferee's perspective, acquiring IP is akin to acquiring a capital asset, whereby exclusive rights are secured through a lump-sum consideration and additional incidental costs. The total cost forms the acquisition cost, and since the benefits of IP materialise over time, the IT Act allows for depreciation. Depreciation applies to both tangible and intangible assets, which are grouped into Blocks of Assets (BOA). Intangible IP assets fall under a dedicated BOA, whose total value, known as the Written Down Value (WDV), is adjusted annually. The WDV increases with new acquisitions and decreases with disposals, and depreciation is applied to the net WDV at prescribed rates. Under Rule 5 of the Income Tax Rules, intangible assets are depreciated at 25% of the WDV. Interestingly, Indian courts have, in recent years, continued to permit the immediate depreciation of lump-sum payments made in connection with IP transfers. For instance, in Hilton Roulunds Ltd. v. CIT, a one-time lump-sum payment for exclusive use of the "Hilton" trademark was treated as revenue expenditure since no ownership was transferred and the licence was not perpetual. Similarly, in a 2022 ruling by the Delhi Bench of the Income Tax Appellate Tribunal (ITAT), royalty and lump-sum payments made for temporary use of technical know-how were held to be revenue in nature, as no enduring asset was created in favour of the licensee.iii. Taxation of Self Developed IP: The tax treatment of self-developed IP primarily concerns how expenses incurred during its development are classified under the income tax regime. Developing a new IP asset involves multiple stages, each with distinct tax implications, particularly for R&D, marketing, and registration costs. These expenses may either be expensed immediately (typically R&D costs) or capitalised and depreciated over time (common for trademarks). The cost base becomes relevant when the asset is later transferred. Advertising and non-R&D expenses are generally treated like other tangible or intangible expenditures. The IT Act provides specific deductions for R&D, whether current or capital in nature. Expenditures on scientific equipment and IP used in R&D are fully deductible in the year of acquisition, whereas land and buildings are excluded per Section 35(2)(i). This precludes claiming depreciation under Section 32. Moreover, distinguishing between capital and revenue expenses can be challenging. Tax authorities often classify certain expenditures as capital, while companies may prefer to treat them as current, leading to frequent disputes that are assessed case-by-case.Double Taxation Avoidance Agreements (DTAAs)Cross-border IP transactions raise unique challenges and DTAAs form a key element in evaluating whether India facilitates such exchanges efficiently. This section assesses whether these treaties simplify IP monetisation for global firms or unintentionally complicate tax compliance. Double Taxation Avoidance Agreements (DTAAs), also known as tax treaties, aim to promote international trade and investment by preventing dual taxation. Double taxation arises when the same income is taxed by two jurisdictions. It typically affects individuals or entities residing in one country (such as India) but earning income in another (such as the US). DTAAs ensure that such income is taxed only once, either by assigning taxing rights to one country or by splitting them between both countries.In India, Section 90 of the Income Tax Act empowers the government to enter into DTAAs. Where a DTAA exists, the provision that is more beneficial to the taxpayer, whether from the Act or the DTAA, will prevail. This is particularly relevant to non-residents whose tax liability under the Indian law may change if a DTAA offers more favorable terms. For example, Section 9 of the IT Act offers certain tax reliefs to non-residents. DTAAs typically cover various types of income such as dividends, interest, royalties, and fees for technical services. The taxation of royalties, in particular, remains a significant issue under DTAAs, often guided by either the United Nations Model or the OECD Model. These models provide frameworks to allocate taxing rights and define terms like "royalty" or "technical services."Despite their objectives, DTAAs often become grounds for disputes due to differing interpretations of income classification, contract structures, and legal definitions between countries, especially when the countries follow different legal systems (common law vs. civil law). Taxpayers seek to minimize their liability, while tax authorities aim to protect revenue, resulting in conflicting interests. With the rise of digital technologies and intellectual property transactions, these disputes have become more complex.India has signed DTAAs with over 173 countries, including comprehensive treaties with the US, the UK and Canada to name a few. Some of them offer concessional tax rates. However, having a DTAA does not mean a non-resident Indian (NRI) is exempt from tax obligations altogether. Instead, it helps manage their tax liabilities by preventing excessive taxation in both countries, while also reducing instances of tax evasion. DTAAs thus promote transparency and certainty for cross-border transactions.Judicial pronouncements have further shaped the interpretation of DTAAs. In a 2017 case, the Bangalore Bench of the ITAT criticized both Google India and Google Ireland for attempting to misuse the India-Ireland DTAA to avoid taxes entirely, an act deemed impermissible under the law. A landmark judgement of the Supreme Court of India in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT & Ors. clarified that payments made by Indian companies to foreign software suppliers for off-the-shelf software do not constitute "royalty" under most DTAAs. This ruling distinguished between mere software purchase and the right to use or exploit underlying intellectual property, offering critical clarity on the tax treatment of software-related transactions. In today's globalized economy, DTAAs offer a stable and predictable tax environment for multinational corporations looking to invest or expand operations in India.In a significant 2025 judgment that clarifies the tax treatment of digital services, the Delhi High Court in Commissioner of Income Tax v. Amazon Web Service, has held that payments made by Snapdeal Pvt. Ltd. to Amazon Web Services Inc. (AWS) for cloud computing services do not constitute "royalty" or "fees for included services" (FIS) under Article 12 of the India-United States DTAA. This judgment underscores the critical distinction between access to digital infrastructure and ownership of intellectual property, reinforcing that not all cross-border digital payments involve taxable IP use under the Indian tax law.Preferential IP Tax Regimes of IndiaThis section critically assesses India's preferential tax policies like the patent box regime, evaluating whether their design and implementation serve as genuine incentives for IP development or create more procedural barriers. Preferential tax regimes (PTRs) are special fiscal policies offering reduced tax rates and simplified compliance to promote specific economic activities or benefit targeted groups. In the context of IP, preferential IP Tax Regimes allow income from IP exploitation to be taxed at a rate lower than the standard statutory rate. Many countries have adopted such regimes to retain IP income and encourage indigenous R&D. However, due to concerns about misuse, the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan 5 introduced the 'nexus approach', requiring a clear link between the IP-related income and the R&D activities conducted in the granting jurisdiction. India, along with 19 other countries, endorsed this principle, which discourages mere legal ownership of IP in low-tax jurisdictions without actual R&D activity.India introduced its patent box regime via Section 115BBF of the IT Act through the Finance Act, 2016. This move has marked a significant policy shift towards incentivising innovation via a concessional tax regime for royalty income derived from patents. However, the regime's limited applicability which is restricted to Indian-resident patentees and patents developed in India (at least 75% of the expenditure must have been incurred in India), has constrained its impact. These rigid conditions, while intended to prevent abuse, have inadvertently reduced the attractiveness of the regime, particularly when compared to more flexible international patent boxes. As a result, its potential to act as a meaningful tax incentive for IP creation and commercialisation remains underutilised, raising concerns about whether India's tax policy truly fosters an innovation-driven economy.ConclusionA critical evaluation of India's taxation framework for IP reveals that on one hand, the inclusion of IP as depreciable assets, concessional rates under Section 115BBF, and tax treaty networks indicate India's intention to align with global best practices; however, on the other, there is an absence of detailed valuation norms and clarity in the treatment of self-developed IP coupled with the withdrawal of weighted deductions for R&D and restrictive clauses in preferential tax regimes. To reposition India as a global innovation hub, the tax regime must further evolve toward clarity, inclusiveness, and effective implementation to be an active policy lever in promoting intellectual property.
Ep. 182 — Bridging Eras: A Comparative Insight into the making of the Income-Tax Acts of 1961 and 2025
CA Journal
· September 2026
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Bridging Eras: A Comparative Insight into the making of the Income-Tax Acts of 1961 and 2025Last year, in the Union Budget 2024-25, the Hon'ble Finance Minister announced a comprehensive review of the Income-tax Act, 1961. The stated objective is to make the Act concise, lucid, easy to read, and understand. The expected outcome is a reduction of disputes and litigation, thereby providing tax certainty to the taxpayers. The review exercise was proposed to be completed in six months.Sticking to its timeline with precision—a rarity in large-scale legislative overhauls, the Income-tax Bill, 2025, was tabled in Parliament on 13th February 2025, simplifying the language and structure of the Income-tax Act, 1961. The Bill was referred to the Select Committee for examination. Following a series of stakeholder consultations, including detailed consultation with ICAI, the Select Committee presented its report in the Lok Sabha on 21st July, 2025. As per the PIB Press Release posted on 21st August, 2025, almost all of the recommendations of the Select Committee were accepted by the Government. In addition, since there were other changes in drafting, alignment of phrases, and cross-referencing to be incorporated based on suggestions received, the Government withdrew the Income-tax Bill, 2025, as reported by the Select Committee. Thereafter, the Income-tax (No. 2) Bill, 2025 was introduced, considered and passed by the Lok Sabha on 11th August, 2025 and returned by the Rajya Sabha on 12th August, 2025. After receipt of the Hon'ble President of India's assent on 21st August 2025, the Income-tax Act, 2025, has been notified in the Official Gazette.The three core principles of the simplification exercise undertaken while drafting the 2025 Act were:Textual and structural simplification for improved clarity and coherence.No major tax policy changes to ensure continuity and certainty.No modifications of tax rates, preserving predictability for taxpayers.Whether the expected outcome, i.e., reduction of disputes and litigation, thereby providing tax certainty to the tax payers, can be achieved, given the possibilities of a new wave of legal disputes triggered by changes in statutory terminology, like substitution of "notwithstanding anything contained" with "Irrespective of anything contained" and consolidation of provisions in the Bill, remains to be seen.The intent of the formulation of the Income-tax Act, 2025, vis-à-vis the Direct Taxes CodeIn this context, it would be interesting to note the profound shift in the objective of the Income-tax Act, 2025, vis-à-vis the Direct Taxes Code, which was slated for introduction in the decade following the turn of the century but ultimately did not see the light of day.The Direct Taxes Code Bill, 2010, was introduced in the Lok Sabha on 30th August, 2010, exactly a decade and a half back. Shri Pranab Mukherjee, the then Union Finance Minister, in his Budget Speech Union Budget 2011-12, stated, "The introduction of the Direct Taxes Code (DTC) and the proposed Goods and Services Tax (GST) will mark a watershed."A reading of Paras 1.7 and 2.1 of the Discussion Paper released along with the Direct Taxes Code for public feedback in August 2009 would throw light on the objective of the Direct Taxes Code -"1.7 The Code is not an attempt to amend the Income Tax Act, 1961; nor is it an attempt to "improve" upon the present Act. In drafting the Code, the Central Board of Direct Taxes (the Board) has, to the extent possible, started on a clean drafting slate. Some assumptions which have held the ground for many years have been discarded. Principles that have gained international acceptance have been adopted. The best practices in the world have been studied and incorporated. Tax policies that would promote growth with equity have been reflected in the new provisions. Hence, while reading the Code, it would be advisable to do so without any preconceived notions and, as far as possible, without comparing the provisions with the corresponding provisions of the Income Tax Act, 1961.""2.1 The Code seeks to consolidate and amend the law relating to all direct taxes, that is, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio."Considering the objective of the Income-tax Act, 2025, to simplify the Income-tax Act, 1961, there is a dramatic departure in the intent and purpose of the Income-tax Act, 2025, vis-à-vis the Direct Taxes Code. Further, with the abolition of the wealth-tax from A.Y.2016-17, fringe benefit tax from A.Y. 2010-11, and dividend distribution tax in respect of dividends declared, distributed, or paid on or after 1-4-2020, there is no requirement of consolidation of direct tax laws at this point in time.The Direct Taxes Code Bill, 2010, was referred to the Standing Committee on Finance on 9th September, 2010, for examination, and the Standing Committee presented its report in the Lok Sabha in March, 2012. After the introduction of the Direct Taxes Code Bill, 2010, annual amendments were simultaneously effected in the Income-tax Act, 1961, and the Wealth-tax Act, 1957, through Finance Acts, 2011, 2012, and 2013, in line with the policy changes proposed in the Code. Since introducing these changes into the Direct Taxes Code Bill, 2010 would necessitate numerous official modifications, potentially rendering the Bill overly complex and making the legislative process unnecessarily burdensome, it was therefore decided to draft a new Direct Taxes Code that would incorporate all the proposed amendments and be introduced as a fresh Bill. Accordingly, the Direct Taxes Code Bill, 2013, was prepared.The year 2014 marked the onset of a new political chapter in India, and by 2015, the proposed Direct Taxes Code was formally shelved, signalling the end of a six-year-long push for a new direct tax legislation. Para 129 of the Budget Speech of 2015-16 by the then Union Finance Minister, Shri Arun Jaitley, highlighted the thought process of the new Government - "Enactment of a Direct Taxes Code (DTC) has been under discussion for quite some time. Most of the provisions of the DTC have already been included in the Income-tax Act. Among the very few aspects of DTC which were left out, we have addressed some of the issues in the present Budget. Further, the jurisprudence under the Income-tax Act is well evolved. Considering all these aspects, there is no great merit in going ahead with the Direct Tax Code as it exists today."It is noteworthy that in the intervening period and over the years, the features which were proposed in the Direct Taxes Code have been incorporated in the Income-tax Act, 1961 itself, for example, introduction of investment-linked tax deduction and phasing out of profit-linked tax incentives, the concept of "place of effective management" (POEM) for determination of residence of companies, introduction of advance pricing agreements for international transactions, application of transfer pricing principles to transactions involving non-cooperative jurisdictions (notified jurisdictional areas), and introduction of General Anti Avoidance Rules (GAAR).Purpose behind Evolution of Income-tax Legislation - Transition from 1922 Act to 1961 Act & from 1961 Act to 2025 ActIt would be interesting to go back 67 years in time and take a look at the Twelfth Report (Income-tax Act, 1922) of the Law Commission of India issued in 1958, which was instrumental in shaping the Income-tax Act, 1961. The Government had entrusted the task of revising the Indian Income-tax Act, 1922, to the Law Commission of India so as to make its provisions more intelligible without affecting its basic tax structure. The Commission acknowledged that the task was difficult, citing the observation of the Codification Committee in England, "to expect from us a codification of the law of income-tax which the layman could easily read and understand was a vain hope, which only the uninstructed could cherish". The Commission mentioned that while it is possible to make the provisions of the Act more logical and clearer without affecting the tax structure, it is certainly not possible to make the Act simpler without encroaching upon at least the "fringe and verge of the tax structure".A comparison of how the objective of simplification was sought to be achieved then, during the formulation of the Income-tax Act, 1961, and how it has been addressed now in the drafting of the Income-tax Act, 2025, is given below -Rearrangement and re-grouping of the sections of the Income-tax Act - While both the 1961 Act and the 2025 Act have tried to reorganise sections logically, the criticism in the 1922 Act was the lack of coherent arrangement of related provisions, which made the law cumbersome for the taxpayers and administrators. Therefore, while drafting the 1961 Act, the provisions were reorganised and grouped together in related chapters to address this concern. For instance, all provisions concerning income-tax authorities were grouped under Chapter XIII (comprising of sections 116 to 138); the provisions relating to Appeals and Revision were placed in Chapter XX (comprising of sections 246 to 269); and the provisions relating to incomes not included in total income were placed in a separate Chapter III (comprising of sections 10 to 13) of the Income-tax Act, 1961. The purpose of this restructuring was to improve the Act's clarity and ease of use. The Income-tax Act, 1961, had 298 sections and 5 Schedules at the time of its enactment. The 2025 Act has done a structural rationalisation through tabular presentations for enhanced readability and removed obsolete and redundant provisions, reducing the length by nearly half. For example, the provisions relating to charitable trusts spread across different Chapters of the Income-tax Act, 1961, have been consolidated in a single chapter in the 2025 Act. Shifting provisions from sections to related Schedules in the 2025 is also in line with the objective of simplification. The Income-tax Act, 2025, notified in the Official Gazette, has 536 sections and 16 Schedules.Splitting up of sections vs. Consolidation of sections - While framing the Income-tax Act, 1961, the sections in the 1922 Act, which ran into pages, were split up into independent sections for simplification, for example, provisions relating to capital gains, Income-tax authorities, and advance tax. Conversely, while drafting the Income-tax Act, 2025, many sections in the 1961 Act have been consolidated for reducing fragmentation, for example, provisions relating to TDS, TCS, presumptive income provisions of residents, and presumptive income provisions of non-residents. Interestingly, these are two diametrically opposite methods adopted for achieving the same objective of simplification.Conversion of provisos into sub-sections and clauses - It may be noted that even after the exercise of conversion of provisos in the 1922 Act into independent provisions while framing the Income-tax Act, 1961 reducing the number of provisos by more than 50% to around 90 in the 1961 Act at the time of its enactment, around 1100 plus provisos have been added thereafter in the last 65 years in the 1961 Act, which have once again been converted into sub-sections and clauses in the 2025 Act. It would be interesting to wait and watch how long the 2025 Act can stay free of provisos.Simplification of language - In drafting the Income-tax Acts of 1961 and 2025, new expressions were coined to simplify and replace lengthy phrases. To illustrate with an example, in the 1961 Act, the new expression "representative assessee" was coined to cover all cases where a person is made responsible in the assessment of the income of another person as a trustee, guardian, Court of Wards, receiver, agent of a non-resident or otherwise. A parallel example in the 2025 Act is the use of the phrase "competent authority" in sections 377 and 378 pertaining to revision of orders. "Competent Authority" has been defined to mean the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. Thereafter, the words "Competent Authority" have been used in these sections. Another example is defining "Specified Banking and Online Mode" in section 66 to mean a transaction by an account payee cheque or an account payee bank draft or use of the electronic clearing system through a bank account or through such other electronic mode, as may be prescribed. Accordingly, "specified banking and online Mode" has been used in the relevant provisions relating to Profits and gains of business or profession. Further, in the 2025 Act, references to sub-sections and clauses have also been simplified. For example, referring to section 246(1)(a), instead of clause (a) of sub-section (1) of section 246. Also, amounts have been referred to in figures rather than words. Like the quantum of penalty is mentioned as "Rs.500000" instead of "a sum of five lakh rupees". All these changes have contributed to reducing the word count in the 2025 Act and enhancing its readability.Substantive changes in the Act - In the 1961 Act, the substantive changes include the incorporation of provisions for the treatment of cash credits and unexplained investments in sections 68 and 69, respectively, to ensure that such incomes were adequately taxed and to prevent tax evasion. Another change was the removal of the provisions taxing remittances of past years' income on the reasoning that such provisions were counterproductive and discouraged repatriation of capital. This change was made to align the tax provision with the broader objective of encouraging investment and economic growth. In the 2025 Act, the objective was to simplify the language and structure of the law to make it concise, lucid, easy to read, and understand. Accordingly, the provisions in this Act are in line with the said objective. The only significant substantive change is the expansion of search and seizure provisions to include cases where the competent authority, in consequence of information in his possession, has reason to believe that a person to whom summons or notice is issued or might be issued, would not produce information in electronic form or on a computer system, which will be useful for, or relevant to, any proceedings under the Act. This provision allows the authorised officer to inspect any information, electronic records, and communication available on computer systems, including e-mails, social media etc."Previous Year" & "Assessment Year" vis-à-vis "Tax Year" and "Financial Year succeeding the relevant tax year" - The 1922 Act did not define "assessment year", though the concept of assessment year was there in the said Act and the definition of "Previous year" in the said Act also contained reference to assessment year. Accordingly, since the expression had been used by decisions of courts and was well-understood as meaning the financial year for which the assessment is being made, the definition of 'assessment year' was inserted while formulating the Income-tax Act, 1961. However, in the Income-tax Act, 2025, the 100-year-old concepts of "previous year" and "assessment year" have been replaced with "Tax Year" and "Financial Year succeeding the relevant tax year". The stated reason for the same is that the use of the terms 'previous year' and 'assessment year' was creating confusion in the minds of the taxpayers, as they represented two different financial years. In effect, the long-standing concepts of "previous year" and "assessment year," dating back to the 1922 Act, have now been substituted with "tax year", reportedly to mitigate confusion stemming from their representation of two different financial years.Examination of other tax laws - The provisions of the Estate Duty Act, the Wealth Tax Act, and the Gift Tax Act were examined, and the same were leveraged in framing the proposals of the Income-tax Act, 1961. With the repeal of the Estate Duty Act and the Gift Tax Act in the years 1985 and 1998, respectively, and the abolition of wealth tax from A.Y.2016-17, multiplicity of direct tax legislations was not a concern that required to be addressed while drafting the Income-tax Act, 2025. However, given its cross-references and reliance on key definitions from the Income-tax Act, 1961, it is imperative that the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, is revised in tandem with the Income-tax Act, 2025.Simplification in tax structure - Not a mandate while drafting the 1961 Act and the 2025 ActIn its 1958 report, the Law Commission had pointed out that meaningful simplification of income-tax law is not possible without a fundamental simplification of the overall tax structure, and expressed a wish that the Indian Legislature would simplify the tax structure following the good practices of other progressive countries. To better grasp the context of this observation, it is essential to revisit the tax structure as it stood in 1961, especially for individuals and HUFs - CategoriesBasic Exemption LimitFirst slab with a rate 3%1.Unmarried individuals and married individuals and HUFs with total income exceeding Rs. 20,000Rs.1,000Rs.4,0002.Married individuals with a total income not exceeding Rs. 20,000 with no child wholly or mainly dependent on him; HUFs with total income not exceeding Rs. 20,000 having no minor co-parcenorRs.3,000Rs.2,0003.Married individuals with a total income not exceeding Rs. 20,000 with one child wholly or mainly dependent on him; HUFs with total income not exceeding Rs.20,000 having one minor co-parcenorRs.3,300Rs.1,7004.Married individuals with total income not exceeding Rs.20,000 with more than one child wholly or mainly dependent on him; HUFs with total income not exceeding Rs.20,000 having more than one minor co-parcenorRs.3,600Rs.1,400The differences between these 4 categories were in the basic exemption limit and the first slab where the income-tax rate was 3%. Thereafter, there were four slabs of Rs. 2,500 with rates of 6%, 9%, 11% and 14%, respectively, which are common for all the categories. This was followed by a slab of Rs. 5,000 was subject to a rate of 18%. The highest rate of 25% was attracted on total income exceeding Rs. 20,000.Surcharge was leviable on income tax if the total income exceeded Rs. 7,500. The higher threshold exemption of Rs. 15,000 for the levy of surcharge on HUFs was linked to the number of members entitled to claim partition. Further, deeming to be entitled to claim partition was different for a HUF under Mitakshara Law and Dayabhaga Law.In addition to this, for individuals and HUFs having total income above Rs. 20,000, super-tax was levied which again increased in slabs with the increase in total income, ranging from 5% to 45%. Super-tax was an additional duty of income-tax levied under section 95 of the said Act as it stood at that point in time. The maximum rate of super-tax was 45% on total income exceeding Rs. 70,000. Again, a surcharge was imposed on super-tax also.A key point to consider is that, during that period when no online filing of returns or the Annual Information Statement (AIS) existed, verifying the basis on which individuals claimed higher exemptions, such as marital status or number of children, and whether or not they are wholly or mainly dependent on the individual, would have been inherently time consuming and reliance would have to be placed on the documentary proof submitted. Also, examining documentary evidence for Hindu Undivided Families (HUFs), whether governed by Mitakshara or Dayabhaga law, the number of minor coparceners and the members eligible to claim partition, solely to verify if the correct basic exemption limit for income-tax and correct threshold for surcharge, as the case may be, was applied, would have been a labour intensive and challenging task. In retrospect, a question arises as to whether the time and effort invested were worth the outcome.Thus, at that time, the tax structure was notably convoluted, characterized by multiple classifications of individuals and Hindu Undivided Families (HUFs), varying basic exemption limits, diverse income-tax slabs and rates, and layered surcharges. Additionally, a super-tax was imposed on individuals and HUFs with total income exceeding Rs. 20,000, which also attracted a surcharge.Subsequently, the super tax was removed with effect from 1-4-1965, and the rates of super tax were integrated with the rates of income tax in the rate schedule of income tax laid down in the Finance Act, 1965. Accordingly, the highest rate of income-tax was 65% for total income exceeding Rs. 70,000. The years 1971-1974 witnessed the highest rates of tax with the highest slab personal income-tax rate at 85% for total income exceeding Rs. 2 lakh. This was to be increased by a surcharge@10% where total income does not exceed Rs. 15,000 and surcharge@15% in other cases. From A.Y. 1976-77, the maximum personal tax rate was brought down to 70% for total income exceeding Rs. 70,000, with a surcharge@10% of income-tax.Now, standing in 2025, it would be fitting to commend the Government for its sustained efforts over the years in streamlining the nation's tax structure and moderating the tax rates. Individuals and HUFs are not divided into categories based on any criteria for the applicability of tax rates. The higher basic exemption for senior citizens and super senior citizens is also only in cases where the individual opts out of the default tax regime and pays tax as per the regular provisions of the Act. As per the data shared by the Income-tax Department in August 2024, 72% of the taxpayers paid tax under the default tax regime for A.Y. 2024-25, which is expected to go up to 95% by A.Y. 2026-27, with further rationalisation of tax slabs and rates under the default tax regime. There is no categorisation of individuals and HUFs based on any criteria under the default tax regime.The rates of taxes are now moderate, with the maximum rate of tax being 30% for individuals/HUFs/AOPs/BOIs (highest slab rate), domestic companies and firms (flat rate). Of course, surcharge on income tax is levied beyond a particular threshold, which is once again progressive and increases in slabs with the increase in total income of the taxpayer. The exception is in case of undisclosed income, assets, expenditure, etc., where the rate of tax is 78% (including surcharge and cess) to deter tax evasion.With simplified tax regimes offering concessional tax rates for different taxpayer categories and presumptive schemes benefiting small enterprises and professionals, the present tax framework reflects a high degree of rationalization.Thus, while there was a dire need to simplify the tax structure while drafting the Income-tax Act, 1961, such a need did not arise now in the context of the Income-tax Act, 2025, as recent years have already seen substantial rationalisation of tax slabs and rates across various categories of taxpayers.Income-tax Act, 2025- Last Mile Revisions before Roll OutReverting to the Income-tax Act, 2025, the new legislation is, undoubtedly, a comprehensive simplification initiative designed to make the law easier to understand.This is the first time that so many sections have been consolidated and presented in tabular form in an Act. Tabular form of presentation minimises the use of long sentences and enhances readability. However, so far, tables were more used in the Explanatory Memorandum to the Finance Bill or the Circular explaining the provisions of the Finance Act for illustrating the rationale of a change and were not used in the main Act itself. The lawmakers deserve appreciation for taking the risk and deviating from established drafting norms. However, numbering of tables and incorporating cross-references would have made the exercise complete and served the intended purpose of ease of comprehension. Assigning numbers to tables would enhance ease of reference, while incorporating cross-references would facilitate a more comprehensive understanding of the provision. For example, all the TDS provisions in the Income-tax Act, 1961, have been consolidated in one single section, namely, section 393 of the Income-tax Act, 2025, and presented in the form of a table. However, to have a complete understanding of a TDS provision, say, relating to commission or brokerage, Sl. No.1 in the table in section 393(1) has to be read with the exemption provided in Sl. No.1 in the table in section 393(4) and the meaning of "commission and brokerage" in section 402(7). Columns can be inserted in the table in section 393(1) to give reference to Sl. No. of exemptions contained in the table in section 393(4) and the meaning of the term in section 402. This would provide a holistic understanding of the provision.Also, further consolidation of provisions is possible; for example, provisions relating to penalties can be consolidated into one section and presented in a table. Other such provisions, which can be presented in a table, are the prosecution provisions, fees, and provisions relating to the set-off of losses.While the rates of income tax have been rationalised over the years, however, as far as rates of TDS are concerned, there are still six rates of TDS and differential threshold limits for different payments. There are examples of overlapping, which continue in the 2025 Act, and this is one of the reasons for litigation. Streamlining the rates and raising threshold limits would promote easier compliance. Introducing two or three uniform TDS rates along with standardized threshold limits could significantly reduce disputes, as it would minimize the likelihood of applying incorrect rates.The phrase 'Notwithstanding anything contained in 'in the Income-tax Act, 1961, has been the subject of extensive legal interpretation, and its meaning is judicially settled. Its replacement with 'Irrespective of anything contained in' or 'Irrespective of anything contrary' in the 2025 Act, solely for the sake of linguistic simplicity, risks triggering new rounds of litigation over whether the latter conveys the same legal effect as the former.Though the Income-tax Act, 2025 has not made significant policy-level changes, it is hoped that the Finance Bill, 2026 will incorporate certain substantive changes in law required to facilitate the ease of doing business in India and improve India's ranking in the Global map. For example, it is imperative to align the prosecution provisions of the Income-tax Act with the broader decriminalisation objectives of the Jan Vishwas Act. Equally essential is the rationalisation of penal provisions to reduce litigation. With the Rules remaining to be formulated and Forms to be developed, it is essential that the overarching goal of simplification remains a guiding principle throughout this process.ReferencesThe Indian Income-tax Act, 1922, the Income-tax Act, 1961 and the Income-tax Act, 2025The Finance Acts, 1961 to 1976Forty-Ninth Report of the Standing Committee on Finance (March, 2012) - The Direct Taxes Code Bill, 2010The Twelfth Report of the Law Commission of India (1958) Indian Income-tax Act, 1922Discussion Paper on Direct Taxes Code released in August, 2009.Budget Speech Union Budget 2011-12 and Union Budget 2015-16PIB Press Release posted on 2.8.2024 (Ministry of Finance)PIB Press Release posted on 21.8.2025 (Ministry of Parliamentary Affairs)
Ep. 183 — Intricacies in Taxation of Employees on Income from ESOPs
CA Journal
· September 2026
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Bridging Eras: A Comparative Insight into the making of the Income-Tax Acts of 1961 and 2025Last year, in the Union Budget 2024-25, the Hon'ble Finance Minister announced a comprehensive review of the Income-tax Act, 1961. The stated objective is to make the Act concise, lucid, easy to read, and understand. The expected outcome is a reduction of disputes and litigation, thereby providing tax certainty to the taxpayers. The review exercise was proposed to be completed in six months.Sticking to its timeline with precision—a rarity in large-scale legislative overhauls, the Income-tax Bill, 2025, was tabled in Parliament on 13th February 2025, simplifying the language and structure of the Income-tax Act, 1961. The Bill was referred to the Select Committee for examination. Following a series of stakeholder consultations, including detailed consultation with ICAI, the Select Committee presented its report in the Lok Sabha on 21st July, 2025. As per the PIB Press Release posted on 21st August, 2025, almost all of the recommendations of the Select Committee were accepted by the Government. In addition, since there were other changes in drafting, alignment of phrases, and cross-referencing to be incorporated based on suggestions received, the Government withdrew the Income-tax Bill, 2025, as reported by the Select Committee. Thereafter, the Income-tax (No. 2) Bill, 2025 was introduced, considered and passed by the Lok Sabha on 11th August, 2025 and returned by the Rajya Sabha on 12th August, 2025. After receipt of the Hon'ble President of India's assent on 21st August 2025, the Income-tax Act, 2025, has been notified in the Official Gazette.The three core principles of the simplification exercise undertaken while drafting the 2025 Act were:Textual and structural simplification for improved clarity and coherence.No major tax policy changes to ensure continuity and certainty.No modifications of tax rates, preserving predictability for taxpayers.Whether the expected outcome, i.e., reduction of disputes and litigation, thereby providing tax certainty to the tax payers, can be achieved, given the possibilities of a new wave of legal disputes triggered by changes in statutory terminology, like substitution of "notwithstanding anything contained" with "Irrespective of anything contained" and consolidation of provisions in the Bill, remains to be seen.The intent of the formulation of the Income-tax Act, 2025, vis-à-vis the Direct Taxes CodeIn this context, it would be interesting to note the profound shift in the objective of the Income-tax Act, 2025, vis-à-vis the Direct Taxes Code, which was slated for introduction in the decade following the turn of the century but ultimately did not see the light of day.The Direct Taxes Code Bill, 2010, was introduced in the Lok Sabha on 30th August, 2010, exactly a decade and a half back. Shri Pranab Mukherjee, the then Union Finance Minister, in his Budget Speech Union Budget 2011-12, stated, "The introduction of the Direct Taxes Code (DTC) and the proposed Goods and Services Tax (GST) will mark a watershed."A reading of Paras 1.7 and 2.1 of the Discussion Paper released along with the Direct Taxes Code for public feedback in August 2009 would throw light on the objective of the Direct Taxes Code -"1.7 The Code is not an attempt to amend the Income Tax Act, 1961; nor is it an attempt to "improve" upon the present Act. In drafting the Code, the Central Board of Direct Taxes (the Board) has, to the extent possible, started on a clean drafting slate. Some assumptions which have held the ground for many years have been discarded. Principles that have gained international acceptance have been adopted. The best practices in the world have been studied and incorporated. Tax policies that would promote growth with equity have been reflected in the new provisions. Hence, while reading the Code, it would be advisable to do so without any preconceived notions and, as far as possible, without comparing the provisions with the corresponding provisions of the Income Tax Act, 1961.""2.1 The Code seeks to consolidate and amend the law relating to all direct taxes, that is, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio."Considering the objective of the Income-tax Act, 2025, to simplify the Income-tax Act, 1961, there is a dramatic departure in the intent and purpose of the Income-tax Act, 2025, vis-à-vis the Direct Taxes Code. Further, with the abolition of the wealth-tax from A.Y.2016-17, fringe benefit tax from A.Y. 2010-11, and dividend distribution tax in respect of dividends declared, distributed, or paid on or after 1-4-2020, there is no requirement of consolidation of direct tax laws at this point in time.The Direct Taxes Code Bill, 2010, was referred to the Standing Committee on Finance on 9th September, 2010, for examination, and the Standing Committee presented its report in the Lok Sabha in March, 2012. After the introduction of the Direct Taxes Code Bill, 2010, annual amendments were simultaneously effected in the Income-tax Act, 1961, and the Wealth-tax Act, 1957, through Finance Acts, 2011, 2012, and 2013, in line with the policy changes proposed in the Code. Since introducing these changes into the Direct Taxes Code Bill, 2010 would necessitate numerous official modifications, potentially rendering the Bill overly complex and making the legislative process unnecessarily burdensome, it was therefore decided to draft a new Direct Taxes Code that would incorporate all the proposed amendments and be introduced as a fresh Bill. Accordingly, the Direct Taxes Code Bill, 2013, was prepared.The year 2014 marked the onset of a new political chapter in India, and by 2015, the proposed Direct Taxes Code was formally shelved, signalling the end of a six-year-long push for a new direct tax legislation. Para 129 of the Budget Speech of 2015-16 by the then Union Finance Minister, Shri Arun Jaitley, highlighted the thought process of the new Government - "Enactment of a Direct Taxes Code (DTC) has been under discussion for quite some time. Most of the provisions of the DTC have already been included in the Income-tax Act. Among the very few aspects of DTC which were left out, we have addressed some of the issues in the present Budget. Further, the jurisprudence under the Income-tax Act is well evolved. Considering all these aspects, there is no great merit in going ahead with the Direct Tax Code as it exists today."It is noteworthy that in the intervening period and over the years, the features which were proposed in the Direct Taxes Code have been incorporated in the Income-tax Act, 1961 itself, for example, introduction of investment-linked tax deduction and phasing out of profit-linked tax incentives, the concept of "place of effective management" (POEM) for determination of residence of companies, introduction of advance pricing agreements for international transactions, application of transfer pricing principles to transactions involving non-cooperative jurisdictions (notified jurisdictional areas), and introduction of General Anti Avoidance Rules (GAAR).Purpose behind Evolution of Income-tax Legislation - Transition from 1922 Act to 1961 Act & from 1961 Act to 2025 ActIt would be interesting to go back 67 years in time and take a look at the Twelfth Report (Income-tax Act, 1922) of the Law Commission of India issued in 1958, which was instrumental in shaping the Income-tax Act, 1961. The Government had entrusted the task of revising the Indian Income-tax Act, 1922, to the Law Commission of India so as to make its provisions more intelligible without affecting its basic tax structure. The Commission acknowledged that the task was difficult, citing the observation of the Codification Committee in England, "to expect from us a codification of the law of income-tax which the layman could easily read and understand was a vain hope, which only the uninstructed could cherish". The Commission mentioned that while it is possible to make the provisions of the Act more logical and clearer without affecting the tax structure, it is certainly not possible to make the Act simpler without encroaching upon at least the "fringe and verge of the tax structure".A comparison of how the objective of simplification was sought to be achieved then, during the formulation of the Income-tax Act, 1961, and how it has been addressed now in the drafting of the Income-tax Act, 2025, is given below -Rearrangement and re-grouping of the sections of the Income-tax Act - While both the 1961 Act and the 2025 Act have tried to reorganise sections logically, the criticism in the 1922 Act was the lack of coherent arrangement of related provisions, which made the law cumbersome for the taxpayers and administrators. Therefore, while drafting the 1961 Act, the provisions were reorganised and grouped together in related chapters to address this concern. For instance, all provisions concerning income-tax authorities were grouped under Chapter XIII (comprising of sections 116 to 138); the provisions relating to Appeals and Revision were placed in Chapter XX (comprising of sections 246 to 269); and the provisions relating to incomes not included in total income were placed in a separate Chapter III (comprising of sections 10 to 13) of the Income-tax Act, 1961. The purpose of this restructuring was to improve the Act's clarity and ease of use. The Income-tax Act, 1961, had 298 sections and 5 Schedules at the time of its enactment. The 2025 Act has done a structural rationalisation through tabular presentations for enhanced readability and removed obsolete and redundant provisions, reducing the length by nearly half. For example, the provisions relating to charitable trusts spread across different Chapters of the Income-tax Act, 1961, have been consolidated in a single chapter in the 2025 Act. Shifting provisions from sections to related Schedules in the 2025 is also in line with the objective of simplification. The Income-tax Act, 2025, notified in the Official Gazette, has 536 sections and 16 Schedules.Splitting up of sections vs. Consolidation of sections - While framing the Income-tax Act, 1961, the sections in the 1922 Act, which ran into pages, were split up into independent sections for simplification, for example, provisions relating to capital gains, Income-tax authorities, and advance tax. Conversely, while drafting the Income-tax Act, 2025, many sections in the 1961 Act have been consolidated for reducing fragmentation, for example, provisions relating to TDS, TCS, presumptive income provisions of residents, and presumptive income provisions of non-residents. Interestingly, these are two diametrically opposite methods adopted for achieving the same objective of simplification.Conversion of provisos into sub-sections and clauses - It may be noted that even after the exercise of conversion of provisos in the 1922 Act into independent provisions while framing the Income-tax Act, 1961 reducing the number of provisos by more than 50% to around 90 in the 1961 Act at the time of its enactment, around 1100 plus provisos have been added thereafter in the last 65 years in the 1961 Act, which have once again been converted into sub-sections and clauses in the 2025 Act. It would be interesting to wait and watch how long the 2025 Act can stay free of provisos.Simplification of language - In drafting the Income-tax Acts of 1961 and 2025, new expressions were coined to simplify and replace lengthy phrases. To illustrate with an example, in the 1961 Act, the new expression "representative assessee" was coined to cover all cases where a person is made responsible in the assessment of the income of another person as a trustee, guardian, Court of Wards, receiver, agent of a non-resident or otherwise. A parallel example in the 2025 Act is the use of the phrase "competent authority" in sections 377 and 378 pertaining to revision of orders. "Competent Authority" has been defined to mean the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. Thereafter, the words "Competent Authority" have been used in these sections. Another example is defining "Specified Banking and Online Mode" in section 66 to mean a transaction by an account payee cheque or an account payee bank draft or use of the electronic clearing system through a bank account or through such other electronic mode, as may be prescribed. Accordingly, "specified banking and online Mode" has been used in the relevant provisions relating to Profits and gains of business or profession. Further, in the 2025 Act, references to sub-sections and clauses have also been simplified. For example, referring to section 246(1)(a), instead of clause (a) of sub-section (1) of section 246. Also, amounts have been referred to in figures rather than words. Like the quantum of penalty is mentioned as "Rs.500000" instead of "a sum of five lakh rupees". All these changes have contributed to reducing the word count in the 2025 Act and enhancing its readability.Substantive changes in the Act - In the 1961 Act, the substantive changes include the incorporation of provisions for the treatment of cash credits and unexplained investments in sections 68 and 69, respectively, to ensure that such incomes were adequately taxed and to prevent tax evasion. Another change was the removal of the provisions taxing remittances of past years' income on the reasoning that such provisions were counterproductive and discouraged repatriation of capital. This change was made to align the tax provision with the broader objective of encouraging investment and economic growth. In the 2025 Act, the objective was to simplify the language and structure of the law to make it concise, lucid, easy to read, and understand. Accordingly, the provisions in this Act are in line with the said objective. The only significant substantive change is the expansion of search and seizure provisions to include cases where the competent authority, in consequence of information in his possession, has reason to believe that a person to whom summons or notice is issued or might be issued, would not produce information in electronic form or on a computer system, which will be useful for, or relevant to, any proceedings under the Act. This provision allows the authorised officer to inspect any information, electronic records, and communication available on computer systems, including e-mails, social media etc."Previous Year" & "Assessment Year" vis-à-vis "Tax Year" and "Financial Year succeeding the relevant tax year" - The 1922 Act did not define "assessment year", though the concept of assessment year was there in the said Act and the definition of "Previous year" in the said Act also contained reference to assessment year. Accordingly, since the expression had been used by decisions of courts and was well-understood as meaning the financial year for which the assessment is being made, the definition of 'assessment year' was inserted while formulating the Income-tax Act, 1961. However, in the Income-tax Act, 2025, the 100-year-old concepts of "previous year" and "assessment year" have been replaced with "Tax Year" and "Financial Year succeeding the relevant tax year". The stated reason for the same is that the use of the terms 'previous year' and 'assessment year' was creating confusion in the minds of the taxpayers, as they represented two different financial years. In effect, the long-standing concepts of "previous year" and "assessment year," dating back to the 1922 Act, have now been substituted with "tax year", reportedly to mitigate confusion stemming from their representation of two different financial years.Examination of other tax laws - The provisions of the Estate Duty Act, the Wealth Tax Act, and the Gift Tax Act were examined, and the same were leveraged in framing the proposals of the Income-tax Act, 1961. With the repeal of the Estate Duty Act and the Gift Tax Act in the years 1985 and 1998, respectively, and the abolition of wealth tax from A.Y.2016-17, multiplicity of direct tax legislations was not a concern that required to be addressed while drafting the Income-tax Act, 2025. However, given its cross-references and reliance on key definitions from the Income-tax Act, 1961, it is imperative that the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, is revised in tandem with the Income-tax Act, 2025.Simplification in tax structure - Not a mandate while drafting the 1961 Act and the 2025 ActIn its 1958 report, the Law Commission had pointed out that meaningful simplification of income-tax law is not possible without a fundamental simplification of the overall tax structure, and expressed a wish that the Indian Legislature would simplify the tax structure following the good practices of other progressive countries. To better grasp the context of this observation, it is essential to revisit the tax structure as it stood in 1961, especially for individuals and HUFs - CategoriesBasic Exemption LimitFirst slab with a rate 3%1.Unmarried individuals and married individuals and HUFs with total income exceeding Rs. 20,000Rs.1,000Rs.4,0002.Married individuals with a total income not exceeding Rs. 20,000 with no child wholly or mainly dependent on him; HUFs with total income not exceeding Rs. 20,000 having no minor co-parcenorRs.3,000Rs.2,0003.Married individuals with a total income not exceeding Rs. 20,000 with one child wholly or mainly dependent on him; HUFs with total income not exceeding Rs.20,000 having one minor co-parcenorRs.3,300Rs.1,7004.Married individuals with total income not exceeding Rs.20,000 with more than one child wholly or mainly dependent on him; HUFs with total income not exceeding Rs.20,000 having more than one minor co-parcenorRs.3,600Rs.1,400The differences between these 4 categories were in the basic exemption limit and the first slab where the income-tax rate was 3%. Thereafter, there were four slabs of Rs. 2,500 with rates of 6%, 9%, 11% and 14%, respectively, which are common for all the categories. This was followed by a slab of Rs. 5,000 was subject to a rate of 18%. The highest rate of 25% was attracted on total income exceeding Rs. 20,000.Surcharge was leviable on income tax if the total income exceeded Rs. 7,500. The higher threshold exemption of Rs. 15,000 for the levy of surcharge on HUFs was linked to the number of members entitled to claim partition. Further, deeming to be entitled to claim partition was different for a HUF under Mitakshara Law and Dayabhaga Law.In addition to this, for individuals and HUFs having total income above Rs. 20,000, super-tax was levied which again increased in slabs with the increase in total income, ranging from 5% to 45%. Super-tax was an additional duty of income-tax levied under section 95 of the said Act as it stood at that point in time. The maximum rate of super-tax was 45% on total income exceeding Rs. 70,000. Again, a surcharge was imposed on super-tax also.A key point to consider is that, during that period when no online filing of returns or the Annual Information Statement (AIS) existed, verifying the basis on which individuals claimed higher exemptions, such as marital status or number of children, and whether or not they are wholly or mainly dependent on the individual, would have been inherently time consuming and reliance would have to be placed on the documentary proof submitted. Also, examining documentary evidence for Hindu Undivided Families (HUFs), whether governed by Mitakshara or Dayabhaga law, the number of minor coparceners and the members eligible to claim partition, solely to verify if the correct basic exemption limit for income-tax and correct threshold for surcharge, as the case may be, was applied, would have been a labour intensive and challenging task. In retrospect, a question arises as to whether the time and effort invested were worth the outcome.Thus, at that time, the tax structure was notably convoluted, characterized by multiple classifications of individuals and Hindu Undivided Families (HUFs), varying basic exemption limits, diverse income-tax slabs and rates, and layered surcharges. Additionally, a super-tax was imposed on individuals and HUFs with total income exceeding Rs. 20,000, which also attracted a surcharge.Subsequently, the super tax was removed with effect from 1-4-1965, and the rates of super tax were integrated with the rates of income tax in the rate schedule of income tax laid down in the Finance Act, 1965. Accordingly, the highest rate of income-tax was 65% for total income exceeding Rs. 70,000. The years 1971-1974 witnessed the highest rates of tax with the highest slab personal income-tax rate at 85% for total income exceeding Rs. 2 lakh. This was to be increased by a surcharge@10% where total income does not exceed Rs. 15,000 and surcharge@15% in other cases. From A.Y. 1976-77, the maximum personal tax rate was brought down to 70% for total income exceeding Rs. 70,000, with a surcharge@10% of income-tax.Now, standing in 2025, it would be fitting to commend the Government for its sustained efforts over the years in streamlining the nation's tax structure and moderating the tax rates. Individuals and HUFs are not divided into categories based on any criteria for the applicability of tax rates. The higher basic exemption for senior citizens and super senior citizens is also only in cases where the individual opts out of the default tax regime and pays tax as per the regular provisions of the Act. As per the data shared by the Income-tax Department in August 2024, 72% of the taxpayers paid tax under the default tax regime for A.Y. 2024-25, which is expected to go up to 95% by A.Y. 2026-27, with further rationalisation of tax slabs and rates under the default tax regime. There is no categorisation of individuals and HUFs based on any criteria under the default tax regime.The rates of taxes are now moderate, with the maximum rate of tax being 30% for individuals/HUFs/AOPs/BOIs (highest slab rate), domestic companies and firms (flat rate). Of course, surcharge on income tax is levied beyond a particular threshold, which is once again progressive and increases in slabs with the increase in total income of the taxpayer. The exception is in case of undisclosed income, assets, expenditure, etc., where the rate of tax is 78% (including surcharge and cess) to deter tax evasion.With simplified tax regimes offering concessional tax rates for different taxpayer categories and presumptive schemes benefiting small enterprises and professionals, the present tax framework reflects a high degree of rationalization.Thus, while there was a dire need to simplify the tax structure while drafting the Income-tax Act, 1961, such a need did not arise now in the context of the Income-tax Act, 2025, as recent years have already seen substantial rationalisation of tax slabs and rates across various categories of taxpayers.Income-tax Act, 2025- Last Mile Revisions before Roll OutReverting to the Income-tax Act, 2025, the new legislation is, undoubtedly, a comprehensive simplification initiative designed to make the law easier to understand.This is the first time that so many sections have been consolidated and presented in tabular form in an Act. Tabular form of presentation minimises the use of long sentences and enhances readability. However, so far, tables were more used in the Explanatory Memorandum to the Finance Bill or the Circular explaining the provisions of the Finance Act for illustrating the rationale of a change and were not used in the main Act itself. The lawmakers deserve appreciation for taking the risk and deviating from established drafting norms. However, numbering of tables and incorporating cross-references would have made the exercise complete and served the intended purpose of ease of comprehension. Assigning numbers to tables would enhance ease of reference, while incorporating cross-references would facilitate a more comprehensive understanding of the provision. For example, all the TDS provisions in the Income-tax Act, 1961, have been consolidated in one single section, namely, section 393 of the Income-tax Act, 2025, and presented in the form of a table. However, to have a complete understanding of a TDS provision, say, relating to commission or brokerage, Sl. No.1 in the table in section 393(1) has to be read with the exemption provided in Sl. No.1 in the table in section 393(4) and the meaning of "commission and brokerage" in section 402(7). Columns can be inserted in the table in section 393(1) to give reference to Sl. No. of exemptions contained in the table in section 393(4) and the meaning of the term in section 402. This would provide a holistic understanding of the provision.Also, further consolidation of provisions is possible; for example, provisions relating to penalties can be consolidated into one section and presented in a table. Other such provisions, which can be presented in a table, are the prosecution provisions, fees, and provisions relating to the set-off of losses.While the rates of income tax have been rationalised over the years, however, as far as rates of TDS are concerned, there are still six rates of TDS and differential threshold limits for different payments. There are examples of overlapping, which continue in the 2025 Act, and this is one of the reasons for litigation. Streamlining the rates and raising threshold limits would promote easier compliance. Introducing two or three uniform TDS rates along with standardized threshold limits could significantly reduce disputes, as it would minimize the likelihood of applying incorrect rates.The phrase 'Notwithstanding anything contained in 'in the Income-tax Act, 1961, has been the subject of extensive legal interpretation, and its meaning is judicially settled. Its replacement with 'Irrespective of anything contained in' or 'Irrespective of anything contrary' in the 2025 Act, solely for the sake of linguistic simplicity, risks triggering new rounds of litigation over whether the latter conveys the same legal effect as the former.Though the Income-tax Act, 2025 has not made significant policy-level changes, it is hoped that the Finance Bill, 2026 will incorporate certain substantive changes in law required to facilitate the ease of doing business in India and improve India's ranking in the Global map. For example, it is imperative to align the prosecution provisions of the Income-tax Act with the broader decriminalisation objectives of the Jan Vishwas Act. Equally essential is the rationalisation of penal provisions to reduce litigation. With the Rules remaining to be formulated and Forms to be developed, it is essential that the overarching goal of simplification remains a guiding principle throughout this process.ReferencesThe Indian Income-tax Act, 1922, the Income-tax Act, 1961 and the Income-tax Act, 2025The Finance Acts, 1961 to 1976Forty-Ninth Report of the Standing Committee on Finance (March, 2012) - The Direct Taxes Code Bill, 2010The Twelfth Report of the Law Commission of India (1958) Indian Income-tax Act, 1922Discussion Paper on Direct Taxes Code released in August, 2009.Budget Speech Union Budget 2011-12 and Union Budget 2015-16PIB Press Release posted on 2.8.2024 (Ministry of Finance)PIB Press Release posted on 21.8.2025 (Ministry of Parliamentary Affairs)
Ep. 184 — Relief for Income Taxpayers: Tax Credit Allowed for TCS paid on Foreign Remittances
CA Journal
· September 2026
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Relief for Income Taxpayers: Tax Credit Allowed for TCS paid on Foreign RemittancesThe Income Tax Rules have been amended by way of two separate notifications issued by the Central Board of Direct Taxes (CBDT) vide CBDT Notification No. 112/2024 dated 15.10.2024 & vide CBDT Notification No. 114/2024 dated 16.10.2024 about new relief for income taxpayers on Tax Collected at Source (TCS). The first notification introduces Form 12BAA, allowing employees to declare their income from other sources to their employer so that TDS on all sources of income can be deducted at a single point. Further, the second notification permits TCS Credit on the purchase of goods, foreign remittances for education, travel abroad, etc., to a person other than the collectee. Notably, TCS credit even of minors can now be claimed if the minor's income is clubbed with the parents.This article highlights the amendments to the Income-tax Rules, 1962, with illustrations to suggest how a salaried individual should plan their discharge of income tax liability with efficient fund management.Background and IntroductionAn income tax assessee who purchases a motor vehicle exceeding Rs. 10 lakhs during a financial year and pays Tax Collected at Sources (TCS) @ 1% u/s 206C(1F) was not eligible to claim TCS credit for the same until Assessment Year 2024-25, i.e., before this amendment takes effect.Example 1: A person purchases a car from a showroom valued at Rs. 11 lakhs, then an amount of Rs. 11,000 (i.e., TCS @1%) is collected and deposited by the showroom as TCS. So, the total amount to be collected from the buyer is Rs. 11,11,000/- (Rs. 11,00,000 + Rs. 11,000). Earlier, the TCS of Rs. 11,000/- was not eligible for credit or refund. However, under the recent amendment, this TCS will be adjusted against his income tax liability, like TDS credit.In another instance, if a person undertakes foreign remittances under the Liberalised Remittances Scheme (LRS) for education, travel, or medical purposes during a financial year and paid TCS u/s 206C(1G), they were not eligible to claim TCS credit for the same until Assessment Year 2024-25, i.e., before the amendment took effect.Example 2: An employee's minor child is pursuing education in the USA, and to meet his expenses, a remittance of Rs. 30,00,000/- was made under the LRS. Accordingly, the total amount collected from the remitter (employee) was Rs. 31,50,000/- (Rs. 30,00,000 + Rs. 1,50,000). Earlier, the 5% TCS of Rs. 1,50,000/- was not eligible for credit or refund to the employee. However, under the recent amendment, this TCS can now be adjusted against the employee's income tax liability, like TDS credit.Enabling Single-Point TDS Deduction on All Sources of Income through the Introduction of Form 12BAAGenerally, Form 12BB (as per Rule 26C of the Income Tax Rules) is submitted by the employee to the employer, providing a statement of investments and claims made during the financial year. Employers typically deduct TDS from salary as per the declaration given by the employee, considering investments and expenses eligible for tax deductions. They do not adjust the taxes paid / TDS deducted by the employee against other sources of income. Consequently, employees, while furnishing Income Tax Return, often face difficulties in the computation of tax liability on income from other sources, such as house rent income, set-off of loss from house property, capital gains, interest income, etc.In many cases, assesses end up in excess tax payments, initially through TDS deduction, and later through payment of Self-Assessment Tax. The refund is then claimed at the time of filing the income tax return, resulting in unnecessary blocking of funds. There has been a long-standing demand from employees to synergize all sources of income and all taxes paid at one place at the end of the financial year, and not to wait for the due date of filing of return. The Honorable Finance Minister assured in Budget 2024 to tackle the issue of their commitment to better tax transparency and ease of taxes.CBDT has introduced Form 12BAA vide Notification No. 112/2024 on October 15, 2024, to address the above issue. It also allows a different person to claim credit for TCS instead of the individual who made the payment while incurring specific expenses. This amendment aims to assist taxpayers in reducing their income tax liability by allowing them to claim the TCS credit, rather than the person who originally deposited the money in the treasury. These amendments underscore the government's commitment to improve tax compliance and simplify the tax reporting process for individuals, tax authority, and corporates.This new Form 12BAA is to be furnished by employees to the employer to report the tax deductions from all sources, such as fixed deposits, insurance commissions, dividends from equity shares, or tax collected at source on the purchase of a car or foreign remittances. Additionally, employees are required to disclose all the details of income or losses derived or incurred from other sources or under the head "Income from House Property" in this form. This move aims to streamline TDS computation under section 192, allowing for more accurate tax calculations and clarity on tax obligations.Allowance of TCS Credit to Income Taxpayers on Purchase of Car, Foreign Remittances, and Other TransactionsAs per the PIB press release dated October 16, 2024, "Further, sub-section (4) of Section 206C of the Act was amended vide FA (No. 2) to allow the credit of TCS to a person other than the collectee-such as a parent in the case of a minor collectee-when the minor's income is clubbed with that of the parent. Accordingly, Vide CBDT Notification No. 114/2024 dated 16.10.2024 Rule 37-1 of the Rules has been amended to allow credit of tax collected at Source to a person other than the collectee, in whose hands the income of the collectee is assessable."This shift in the person's entitlement from collectee to the actual consumer is clearly illustrated in the following two scenarios:Scenario I: A Ltd. purchases goods of Rs. 10 Crores from B Ltd. As per Section 206C, A Ltd. collects TCS and deposits it with the government within the prescribed due date. Subsequently, A Ltd. is entitled to claim credit for the TCS against its income tax liability.Scenario II: Mr. A purchases a car from Mr. B Ltd. for Rs 11 lakhs, and B Ltd. collects TCS from Mr. A and deposits it to the government treasury, but here, instead of the TCS collectee, i.e., B Ltd., Mr. A is entitled to take the TCS credit in his Income Tax liability.Extract of Press Release on the AmendmentsThe extract of the Press Release issued by PIB is given below: -CBDT Notifies Amendments in Income-tax Rules for Ease in Claiming Credit for TCS Collected/TDS Deducted for Salaried Employees and Enabling claiming TCS Credit of Minors in the Hands of ParentsPosted On: 17 OCT 2024 2:55PM by PIB Delhi"Central Board of Direct Taxes (CBDT) has notified amendments in income-tax rules for ease in claiming credit for TCS collected/TDS deducted for salaried employees and enabling claiming TCS credit of minors in the hands of parents. Sub-section (2B) of Section 192 of the Income-tax Act, 1961 ('the Act') was amended vide the Finance (No. 2) Act, 2024 (FA (No. 2)) to include any tax deducted or collected at source under the provisions of Chapter XVII-B or Chapter XVII-BB, as applicable, for the purpose of making tax deductions in the case of salaried employees.Vide CBDT Notification No. 112/2024 dated 15.10.2024, the Income-tax Rules, 1962 ('the Rules') have been amended, introducing Form No. 12BAA as the prescribed statement of particulars required under sub-section (2B) of Section 192 of the Act. Employees must provide these particulars to their employers, who are responsible for making payments under sub-section (1) of Section 192. The employer, in turn, shall deduct TDS on salary after taking into account the furnished particulars.Further, sub-section (4) of Section 206C of the Act was amended vide FA (No. 2) to allow the credit of TCS to a person other than the collectee-such as a parent in the case of a minor collectee-when the minor's income is clubbed with that of the parent. Accordingly Vide CBDT Notification No. 114/2024 dated 16.10.2024 Rule 37-1 of the Rules has been amended to allow credit of tax collected at Source to a person other than the collectee, in whose hands the income of the collectee is assessable."Rule 26B of Income TaxRule 26B has been revised to guide taxpayers on reporting income outside of salary, TDS, and TCS via Form 12BAA. This change enhances transparency and ensures that all income types are adequately documented and reported. The extract provisions as amended are given below."26B. Statement of particulars of income under heads of income other than "Salaries" or details of tax deducted at source or tax collected at source. The assessee may submit to the person responsible for making payment under sub-section (1) of section 192, the details of (a) any income chargeable under any head of income other than 'Salaries' received in the same financial year; or (b) any tax deducted at source or tax collected at source under the provisions of Part B or Part BB of Chapter XVII, for the same financial year; or (c) loss, if any, under the head "Income from house property" in the same financial year, in Form No. 12BAA, for the purpose of computing the tax deduction at source under sub-section (1) of section 192."Form 12BAA FormatEmployees must furnish the following information:(a) Details of Other Tax Deducted at SourceSection under which tax deducted at sourceName of DeductorAddress of DeductorTAN of DeductorAmount of tax deducted (Rs)Amount of income received/credited (Rs)Any other relevant detailsABCDEFG(b) Details of Other Tax Collected at SourceSection under which tax collected at sourceName of DeductorAddress of DeductorTAN of DeductorAmount of tax deducted (Rs)Any other relevant detailsABCDEFIllustrationA brief illustration of 5 cases is produced below for a clear understanding of an income tax assessee under the new regime of the Income Tax Act:Illustration: 1Condition:-(i) Income from Salary(ii) Income from other sources on which TDS short deducted by Banking company / not applicable(iii) TCS paid on own Car purchase for Rs. 11 lakhs(iv) TCS paid on Rs 8 lakhs for Minor Child Overseas Education Remittances(Assumptions:- Form 12BAA NOT applicable and TCS Credit NOT allowed as in old provisions)Assessment Year 2025-26 (FY 2024-25)A.Computation of Income of Salaried person, Income Tax payable thereon and mode of Payment of Taxes(i)Income from Salary:Gross Salary Rs. 1 lakh per month: 12,00,000Less: Standard Deduction: -75,000Taxable Income from Salary: 11,25,000(ii)Income from Other Sources:Annual House Rent received: 1,80,000Interest from Fixed Deposits: 2,00,000Taxable Income from other sources: 3,80,000Gross Total Income: 15,05,000(iii)Income Tax Liability: 1,47,160TDS on salary deducted (salary income only considering Form 12BB): 71,500TDS on Residential House Rent deducted by Individual: NilTDS on Interest Income from Fixed Deposits @10% deducted: 20,000Merits:B.Self Assessment Tax payable for FY 2024-25: 55,660Illustration: 2Condition:-(i) Income from Salary(ii) Income from other sources on which TDS short deducted / not applicable(Assumptions:-Form 12BAA applicable as IT Rules amended w.e.f. 15.10.2024)Assessment Year 2025-26 (FY 2024-25)A.Computation of Income of Salaried person, Income Tax payable thereon and mode of Payment of Taxes(i)Income from Salary:Gross Salary Rs. 1 lakh per month: 12,00,000Less: Standard Deduction: -75,000Taxable Income from Salary: 11,25,000(ii)Income from Other Sources:Annual House Rent received: 1,80,000Interest from Fixed Deposits: 2,00,000Taxable Income from other sources: 3,80,000Gross Total Income: 15,05,000(iii)Income Tax Liability: 1,47,160TDS deducted by employer considering Form 12BAA declaration: 1,27,160TDS on Interest @10% deducted: 20,000Merits:B.Saving in Self Assessment Tax payable for FY 2024-25: 55,660Illustration: 3Condition:-(i) Income from Salary(ii) Set off of Loss under House property declaration(Assumptions:- Form 12BAA submission for Loss Set off under Income from House property)Assessment Year 2025-26 (FY 2024-25)A.Computation of Income of Salaried person, Income Tax payable thereon and mode of Payment of Taxes(i)Income from Salary:Gross Salary Rs. 1 lakh per month: 12,00,000Less: Standard Deduction: -75,000Taxable Income from Salary: 11,25,000(ii)Income from Other Sources:Loss under House Property-Set off: -2,00,000Taxable Income from other sources: -2,00,000Gross Total Income: 9,25,000(iii)Income Tax Liability: 44,200TDS deducted by employer considering Form 12BAA declaration: 44,200Merits: NilB.Savings in TDS and Income Tax liability attributable to Form 12BAA submission for Loss Set off reasons i.e. Tax savings on Rs 2,00,000: 27,300Note: This TDS/ Tax liability saving of Rs. 27,300/- can be read with Illustration 4 as mentioned below.Illustration: 4Condition:-(i) Income from salary(ii) TCS paid on own Car purchase for Rs. 11 lakhs(Assumptions:- TCS Credit allowed u/s 206C(1F) and Form 12BAA applicable as amended)Assessment Year 2025-26 (FY 2024-25)A.Computation of Income of Salaried person, Income Tax payable thereon and mode of Payment of Taxes(i)Income from Salary:Gross Salary Rs. 1 lakh per month: 12,00,000Less: Standard Deduction: -75,000Taxable Income from Salary: 11,25,000(ii)Income from Other Sources:Taxable Income from other sources: -Gross Total Income: 11,25,000(iii)Income Tax Liability: 71,500TDS deducted by employer considering Form 12BAA declaration: 60,500TCS u/s 206C on Car purchase @1%: 11,000Merits:B.Savings in TDS and Income Tax liability due to availment of TCS credit: 11,000Illustration: 5Condition:-(i) Income from Salary(ii) TCS paid u/s 206C(IG) on minor Child Overseas Education expenses remitttances Rs. 8 lakhs(Assumptions:- Form 12BAA applicable and TCS Credit Allowed u/s 206C (1G) as amended)Assessment Year 2025-26 (FY 2024-25)A.Computation of Income of Salaried person, Income Tax payable thereon and mode of Payment of Taxes(i)Income from Salary:Gross Salary Rs. 1 lakh per month: 12,00,000Less: Standard Deduction: -75,000Taxable Income from Salary: 11,25,000(ii)Income from Other Sources:Taxable Income from other sources: -Gross Total Income: 11,25,000(iii)Income Tax Liability: 71,500TDS deducted by employer considering Form 12BAA declaration: 31,500TCS u/s 206C(IG) on Remittance for Minor Overseas Education @5%: 40,000Merits:B.Savings in TDS and Income Tax liability due to availment of TCS credit u/s 206C(IG) in the hands of parent: 40,000Important Insights on CBDT's New TCS FrameworkThe changes introduced by the Central Board of Direct Taxes (CBDT) have brought significant relief for income taxpayers, particularly in the context of claiming Tax Collected at Source (TCS). With the issuance of CBDT Notification No. 112/2024 dated October 15, 2024, and Notification No. 114/2024 dated October 16, 2024, the applicability of amendments has been brought into immediate effect. As a result, it can be interpreted that TCS collected on or after October 15, 2024, is eligible to be claimed by the assessee.The primary objective of these amendments is to simplify the process of claiming TCS credit, particularly for individuals who incur substantial TCS through foreign remittances. The initiative aims to promote awareness among taxpayers about the tax benefits available to them and encourage timely and accurate filing of income tax returns.Importantly, there is no requirement for a separate TCS certificate like Form 16A for claiming such credits. The TCS credits will now be auto-populated in the relevant fields of the Income Tax Return (ITR) through details reflected in Form 26AS, thereby reducing administrative burdens and paperwork for taxpayers.In line with these developments, employers are also expected to comply with revised reporting requirements. Form 24Q, the quarterly TDS return related to salaries, has been amended to include a new column that captures the amount reported under Section 192(2B) specifically, other tax deducted or tax collected at source.Another significant aspect of the amendment concerns the claim of TCS credit in cases involving minors. Effective from January 1, 2025, as per the Union Budget 2024, the rules have been amended to allow TCS credit to be claimed by a parent if the income of the minor is clubbed with the parent's income. This enables parents to claim TCS on taxable investment income, such as interest earned on fixed deposits held in the minor's name, while the tax liability is borne by the parent.Further, Form 12BAA has been introduced as a vital tool for both employees and employers. This form enables employees to furnish complete details of their income, including from other sources, to their employer. In turn, this facilitates accurate deduction of tax at source (TDS) under Section 192. Timely and correct submission of Form 12BAA ensures that TDS is computed considering all sources of income, preventing excess deduction and aiding in efficient cash flow management.ConclusionThe amendment to allow TCS Credit to salaried assesses along with Form 12BAA enables employees to disclose all sources of income to the employer in one place, which will not only facilitate better accuracy in TDS computation and enhance the clarity of tax obligations for taxpayers but will also provide a cash surplus in the hands of the salaried person. Tax Collected at Source is shown in Form 26AS as a tax credit and can be claimed while an employee files an income tax return hassle-free and without further tax demand or refund.Referenceshttps://incometaxindia.gov.in/communications/notification/notification-112-2024.pdfhttps://incometaxindia.gov.in/communications/notification/notification-114-2024.pdfhttps://www.business-standard.com/budget/news/union-budget-2024-gives-salaried-individuals-some-relief-on-tds-tcs-124072401177_1.html
Ep. 185 — Revolutionizing Internal Audits: The AI Transformation
CA Journal
· September 2026
00:00
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Revolutionizing Internal Audits: The AI TransformationThis article delves into the use of Artificial Intelligence (AI) in internal audits and how it is altering traditional auditing processes by increasing efficiency, accuracy, and risk management. AI tools such as machine learning and natural language processing assist auditors in analysing big datasets, detecting abnormalities, and predicting potential hazards. This will increase fraud detection and continuous monitoring, but can also save money and time. Despite implementation hurdles like a significant initial investment and talent gaps, AI's ability to transform internal auditing is apparent. As AI advances, its position in audit tasks becomes important.AI's Role in Streamlining Audit ProcessInternal auditing is evolving by increasing efficiency and precision through Artificial Intelligence (AI). Traditional audit practices often require a substantial amount of manual labour for tasks like data collection, processing, and report creation. AI technologies are streamlining these operations, allowing auditors to focus more on high-value activities and strategic decision-making.Automating Routine Tasks: One of the obvious effects of AI on internal audit is the automation of everyday processes. AI-powered solutions can handle repetitive tasks and time-consuming jobs like data entry, document verification, and transaction matching. AI algorithms can automatically evaluate thousands of financial transactions in order to detect anomalies or unexpected trends. This speeds up the auditing process and also lowers the possibility of human error, resulting in more dependable results.Enhancing Data Analysis: AI excels at analysing massive amount of data quickly and reliably. Traditional audits frequently use sample approaches since it is impractical to review every transaction. With the help of AI, Auditors can analyse a vast amount of datasets, delivering a more complete picture of the financial situation. Machine learning algorithms can uncover the patterns and trends that may be overlooked by manual research, providing in-depth insight into an organization's financial health and risk profile.Improving Anomaly Detection: An important part of internal audits is detecting anomalies and irregularities. AI can improve this capability by using advanced algorithms to detect these deviations from predicted patterns. AI systems can detect strange spending patterns, fraudulent transactions, and anomalies in financial reporting in real-time anomaly identification, which will allow auditors to quickly analyse the potential concerns and resolve them before they become major problems.Facilitating Continuous Auditing: AI facilitates continuous auditing by allowing real-time monitoring of transactions and controls. Unlike traditional audits, which occur on a regular basis, continuous auditing provides for an ongoing examination of financial processes and controls. AI systems monitor and analyse transactions as they occur, offering real-time input on compliance and risk management. This proactive approach enables organizations to address concerns rapidly and maintain strong internal controls.Enhancing Predictive Analytics: Predictive analytics is another area where AI is having a significant impact. AI can forecast potential hazards and future trends by analysing previous data using advanced algorithms. For example, AI can analyse previous audit data to identify areas of elevated risk or probable fraud. This foresight enables organizations to implement preventive actions and make educated risk management and resource allocation decisions.Reducing Audit Time and Costs: AI-driven efficiency reduces audit time and expenses. Automated processes can decrease the need for manual intervention, allowing audits to be performed faster. Furthermore, AI's capacity to analyse massive datasets and detect abnormalities saves auditors time on data analysis and investigation. This saves an organisation's money because the auditing process requires fewer resources.Enhancing Auditor Expertise: While AI automates basic operations, it also enhances auditor knowledge by delivering advanced analytical tools and insights. Auditors can use AI-generated reports and visualizations to better analyse financial data. This improved awareness facilitates more informed decision-making and strategic planning for the organisations. AI techniques can also help auditors to find opportunities for improvement in internal controls and processes, in the future, increasing overall efficiency and company advancement.Supporting Compliance and Reporting: AI helps to ensure compliance with regulatory requirements and reporting standards. AI systems can automatically evaluate transactions and financial statements to ensure regulatory conformance, lowering the risk of non-compliance. AI can develop accurate and complete audit reports, speeding up the reporting process and ensuring that all the necessary information is incorporated.Key Benefits: Accuracy, Efficiency, and Cost ReductionIntegrating Artificial Intelligence (AI) into internal auditing systems provides dramatic benefits that are altering financial oversight. One of the most striking benefits is increased accuracy. AI's capacity to process massive amounts of data with precision considerably improves audit accuracy.Unlike traditional approaches, which rely on manual data entry and analysis that is susceptible to human mistakes, AI algorithms handle complex calculations and data comparisons flawlessly. For example, AI-powered technologies rigorously verify each transaction against predefined criteria and historical data, ensuring that discrepancies are correctly recognized and rectified. Machine learning models improve their accuracy over time by learning from previous data, recognizing anomalies and inconsistencies that would otherwise go undiscovered.In addition to accuracy, AI greatly enhances the efficiency of internal audits. AI solutions streamline and speed up routine and repetitive tasks, including data collection, transaction matching, and report preparation. This increased productivity enables auditors to focus on more strategic responsibilities, such as results analysis and risk assessment, rather than laborious data processing. As a result, the total performance of the audit function improves, resulting in better organizational outcomes.Cost saving is another key advantage of AI in internal auditing. Traditional audits frequently require substantial manual labour, data processing, and report creation, all of which contribute to high expenses. Organizations can save time and resources by using AI to complete these tasks. AI systems handle massive amounts of data processing and anomaly detection, which would otherwise necessitate a huge number of auditors spending long hours. This reduction in manual work and accompanying human costs leads to significant savings. Furthermore, increased accuracy in AI systems minimizes the risk of costly errors and compliance difficulties, which contributes to cost savings.AI also allows for real-time monitoring and reporting, increasing the timeliness of audit results. While traditional audits are conducted on a regular basis, AI-powered systems continuously monitor financial activities and controls. This real-time capability enables organisations to resolve issues as they develop, rather than waiting for the next audit cycle to reveal them. Immediate insights into possible concerns enable management to make informed judgments and take corrective action quickly, hence increasing overall risk management and financial control.Furthermore, AI's predictive analytics skills help to improve risk management. By evaluating previous data and recognizing patterns, AI can foresee potential problems and provide preventive steps. This proactive approach enables organisations to eliminate risks before they arise, thereby improving financial stability and compliance. AI's advanced analytical capabilities provide deeper insights into financial data and audit outcomes, allowing auditors and management to better grasp complicated data. These insights help to improve decision-making, identify areas for improvement, and optimize procedures, ultimately improving internal controls.Challenges in Adopting AI for AuditsIncorporating Artificial Intelligence (AI) into internal audits has numerous advantages, but it also poses certain problems that organisations must solve. These hurdles include initial investment and technology adaptation, the requirement for specialized skill sets, and concerns about data privacy and ethics.Initial Investment and Technology Adaptation: One of the biggest challenges in adopting AI for internal audits is the high upfront investment required. Implementing AI solutions incurs costs not just for purchasing and integrating new software, but also for modernizing current IT infrastructure. To properly support AI applications, organizations may need to invest in high-performance computer systems as well as secure data storage solutions. Furthermore, upgrading existing audit processes to include AI technologies can be difficult and time-consuming. Traditional audit procedures may need to be redesigned to fully utilize AI capabilities. This adaptation process entails integrating AI tools into existing systems, assuring interoperability, and aligning AI functionality with specific audit requirements. Transition is tough, as organisations handle the twin responsibilities of sustaining current procedures and integrating new technologies.Skillset Requirements and Training: Another key difficulty is the demand for specialized skills and training. AI technologies require a different set of abilities than traditional auditing tools. Auditors must learn to use AI technologies, comprehend their functionality, and interpret AI-generated outcomes. This transformation needs training and upskilling for audit professionals who may not be familiar with AI technologies. Organizations may need to invest in training programs or hire new employees with AI and data analytics skills. This necessity for specialized abilities may result in a skills gap, as there may be a limited pool of individuals who have both audit experience and AI expertise. Bridging this gap is critical to ensuring that AI tools are used properly and that the audit team can leverage AI.Data Privacy and Security Concerns: Data privacy and security are essential considerations when using AI for auditing. AI systems frequently require access to enormous amounts of sensitive financial data to perform properly. This material must be handled with extreme caution to avoid unauthorized access and potential breaches. Organizations must ensure that AI technologies comply with data protection rules and have adequate security measures in place. Furthermore, the deployment of AI creates issues with data ownership and governance. Organizations must develop clear standards for determining who has access to AI-generated insights and how this data is managed and shared. Maintaining trust and compliance requires ensuring that AI tools do not mistakenly divulge sensitive information or jeopardize data integrity.Integration with Existing Systems: Integrating AI tools into existing audit systems and processes might be difficult. Organizations may have legacy systems that are incompatible with modern AI technology and must be modified or replaced. This integration procedure entails ensuring that AI tools work seamlessly with existing systems and that data flows freely across them. Furthermore, the introduction of AI must be properly controlled to avoid interfering with ongoing audit processes. Organizations must plan and execute the integration process in such a way that downtime is minimized, and audit operations continue uninterrupted. Effective project management and coordination are required to overcome integration problems and ensure a successful AI deployment.Ethical and Bias Considerations: Artificial intelligence systems are not immune to ethical challenges and prejudices. AI algorithms are developed using historical data, which may contain inherent biases. If not addressed, these biases can skew audit results and lead to unfair or incorrect conclusions. Organizations must ensure that AI tools are built and tested to reduce bias and ethical problems. Creating visible and explainable AI models is critical for resolving ethical concerns. Auditors and stakeholders must understand how AI algorithms generate judgments and guarantee that they are based on fair and reliable data. Establishing ethical rules and constantly monitoring AI systems for bias are critical practices for ensuring audit process integrity.Change Management: Adopting AI in internal audits entails managing organizational change. Employees may be resistant to new technology because they are afraid of losing their jobs or changing their work patterns. Effective change management tactics are required to address these issues and highlight their benefits, to ensure a smooth transition in the new audit procedures.Future Trends: Predictive Analytics and BeyondThe future of internal auditing is being impacted by breakthroughs in Artificial Intelligence (AI), particularly predictive analytics. As AI technologies advance, they have the potential to transform auditing by providing deeper insights, greater risk management, and enhanced decision-making capabilities. Here are some of the important trends and innovations influencing the future of internal audits beyond predictive analytics.Advanced Predictive Analytics: Predictive analytics has already begun to revolutionize internal audits by generating forecasts based on past data. Moving forward, advances in AI will improve predictive skills, allowing auditors to foresee possible concerns with higher precision. Predictive analytics, which uses powerful machine learning algorithms, will allow organisations to recognize developing hazards, fraud tendencies, and financial irregularities before they become major problems. These advanced prediction models will be able to analyse complicated information from many sources, such as financial transactions, market movements, and external data, in order to offer more nuanced results. As predictive analytics advances, auditors will be able to proactively manage risks and optimize audit procedures based on projected situations.Real-Time Risk Management: Real-time risk management is gaining grip, thanks to AI's capacity to process and analyse data instantly. Future internal audits will rely on continuous monitoring technologies that provide real-time information on financial activity and controls. This change will allow organisations to detect and respond to threats as they arise, rather than waiting for periodic audits to reveal problems. AI-powered dashboards and analytics tools will enable real-time risk management by providing live updates on key performance indicators, compliance measurements, and risk factors. This immediate access to audit-related data will improve decision-making and allow for faster corrective measures, resulting in better overall risk management and organizational agility.Enhanced Automation and Robotics: Internal audits are becoming more efficient, thanks to robotic process automation (RPA) and AI-powered automation. Aside from automating basic processes, future developments will include the integration of more advanced automation technology capable of handling difficult audit functions. For example, AI-powered robotic auditors could undertake extensive transaction analysis, compliance checks, and exceptional reporting with little human involvement. Advanced automation solutions will reduce auditors' manual effort, allowing them to focus on high-value tasks like strategic analysis and risk assessment. As automation technology advances, it will become more flexible and scalable, allowing organisations to tailor their audit procedures to the changing needs and surroundings.Integration of Natural Language Processing (NLP): Natural Language Processing (NLP) is developing as a significant trend in the future of internal auditing. NLP technology enables AI systems to understand and interpret human language, which can be used for a range of audit activities. For example, NLP can be used to analyse and extract information from unstructured data sources such as emails, papers, and contracts. These skills will help auditors evaluate and assess qualitative data, detect compliance concerns, and identify potential risks. NLP tools will allow for more efficient and thorough audits by processing massive amounts of textual data and offering actionable insights based on language patterns and content analysis.AI-Driven Decision Support: AI's involvement in decision support is growing, with future trends focusing on giving auditors smart tools to help them make decisions. AI-powered decision support systems will provide data-driven recommendations and scenarios based on a thorough review of audit data. These methods will assist auditors in evaluating alternative courses of action, assessing probable results, and making informed conclusions. Organizations that include AI-driven decision assistance in audit processes will benefit from improved strategic planning, risk mitigation, and resource allocation. This will result in more effective audit outcomes and improve the capacity to manage complicated financial settings.Ethical AI and Transparency: The emphasis on ethical AI and transparency will increase as AI gets more integrated into internal auditing. To ensure that AI systems are built and implemented in accordance with fairness, accountability, and transparency principles. Future developments will stress the creation of explainable AI models, which will allow auditors to understand how AI-driven decisions are made and guarantee that they adhere to ethical norms. Organizations need to develop rules for the ethical use of AI in auditing, such as how to combat biases, ensure data privacy, and preserve the integrity of audit results. As AI technologies evolve, preserving transparency and ethical norms will be critical to fostering confidence and ensuring that AI's role in auditing is both effective and responsible.ReferencesInstitute of Internal Auditors (IIA)Deloitte InsightsEY: The Future of Internal AuditPwC Global InsightsKPMG: Harnessing AI in AuditACCA (Association of Chartered Certified Accountants)
Ep. 186 — Contemporary Structure of Fixed Monthly Expenses
CA Journal
· September 2026
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Contemporary Structure of Fixed Monthly ExpensesThe article attempts to deal with the dilemma of an investor who is facing the challenge of choosing a product among various available asset classes that provides monthly return on his investments (which is, say, approximately equal to his fixed monthly lump sum amount of household expenses) in addition to capital appreciation of his investments. The author has made an endeavour to compare the age-old practice of building rental income from buying and leasing real estate properties versus investment in structured products in the equity market, which yield fixed monthly income along with a gradual increase in the underlying corpus.What is 'your' ninja technique to structure a secured flow of fixed monthly expenses? This is a million-dollar question, especially for the mid-life age group of people who are fortunate enough to have accumulated some wealth. The so-called intellectual cult of human beings around us, belonging to old-school thought, often counsels us and fosters their earned wisdom by advocating for building rental income for a secure livelihood as a prescription to our retirement planning. However, a closer examination of this widely accepted wisdom reveals a contrasting reality. When this notion is critically assessed against the harsh truths of contemporary life and evaluated using various parameters, its limitations become evident. To facilitate further, the article has outlined a few such yardsticks in Matrix-1, intended as a reference for readers to explore independently.Matrix-1: Illustrative list of dark side of reality associated with investment in real estate properties to build rental income to secure monthly household expenses:As per the statistical data, the average RoI (Return-on-Investment) on residential properties is merely 3% p.a. pre-tax [reduced to 2.37% post-tax (considering the highest tax bracket of an individual and zero surcharge and 4% cess)]. This rate goes up to a mere 6% p.a. pre-tax [reduced to 4.74% post-tax (considering the highest tax bracket of an individual and zero surcharge and 4% cess)] in case of commercial properties.There is an exorbitant amount of stamp duty and registration charges payable on the purchase of real estate properties. These stamp duty and registration charges are in the range of say 6%-8% payable on the published circle rate or the actual sale consideration price, whichever is higher. These charges vary from state to state (as real estate property is a state subject and every state government decides and periodically tunes the applicable circle rate and stamp duty rate, and registration charges rate).The instrument of lease (lease deed) is also compulsory, and required to be registered at the office of Sub-Registrar (in case the lease tenure is more than 11 months) and the applicable stamp duty and registration charges are payable based on various factors including the tenure of lease, nature of entity of landlord and tenant, annual escalation in rent, security deposit amount, etc.The rented assets remain in physical possession of third-party tenants all the time, which may cause fear psychosis in the mind of the landlord, and sometimes it results in the unpleasant circumstances of trespassing and encroachment of the properties by the tenant.The ownership title of the assets may not be free from all defects. The latent and inherent defect in ownership title, if any, travels from seller to buyer even after payment of the entire sale consideration and registration of title documents at the office of Sub-Registrar after capturing photographs and thumb impressions of the parties in the presence of witnesses.These assets are not liquid. Sometimes, it takes more than 6 months time (or even more) to translate a real estate asset into a liquid asset, owing to various challenges in terms of finding suitable buyer, absence of established and regulated marketplace for price discovery, time period spent by buyer to pay the agreed sale consideration, time consumed in due diligence by the buyer or the lender bank of the buyer.Sometimes, the lender banks are not comfortable extending easy and instant loans against these assets, citing various reasons (excuses) of a complete chain of documents depicting ownership title, location of property, nature and character of assets, possession, physical conditions, difference in prevailing circle rate vs. actual market rate, etc. Thus, the owner may be deprived of liquidity to cater to some emergency requirement or to fetch leverage to meet his business or other pressing needs/circumstances.The physical and tangible built-up assets are subject to depreciation and wear and tear over a period of time. It needs regular expenses for upkeeping and maintenance. It also needs expenses every 5 to 10 years for repairs, renovations, and facelifts. The annual municipal taxes and insurance expenses are also required to be paid on real estate properties for the sake of statutory compliance and safeguard against the potential threat of physical damage to the properties. The municipal taxes are as high as 20% of annual rental in case of certain states in India.There is a hefty amount of brokerage (ranging from 0.50% to even 5% of the consideration) payable at the time of both purchase and sale of the assets.There is a threat of tenants vacating the premises, and the assets may remain vacant and unrented, yielding no monthly income at all. For example, the recently developed culture of WFH (Work-From-Home) in the post-COVID era has indeed caused downsizing the office areas by top-notch IT companies. Additionally, in case of change of tenants, the additional expenses of buffing of the premises and brokerage to the property dealer are also incurred, in addition to the statutory compliance of police verification of the new tenant.The inherent nature of the real estate assets is such that it cannot be split into small units and we need to deal with the whole property at a time, e.g. if someone owns one flat worth Rs. 10 crores he cannot sell 25% or say 50% of the flat to meet some immediate needs, if any. Similarly, if he has Rs. 2 crores available for top-up/ addition, he cannot invest it in the same flat, and instead, he will have to look for purchase of some additional property.Surprisingly, a huge amount of stamp duty, as high as the quantum of amount which is payable in case of actual sale to a third party, is also payable (in a few states in India), to record a gift of the property, even if the property is gifted to a person in blood relation.Needless to say, there is some element of trauma associated with safekeeping the original title documents of the properties.As the rental income is subject to GST levy (over the given threshold limit), the landlord has to additionally fulfil the requirement of obtaining GST Registration and monthly/quarterly compliance of the taxation formalities including raising tax invoices, filing of GST returns, collection of GST amount from the tenant, and finally remittance of GST amount to govt. These compliances are to be done every month before their respective due dates to avoid the levy of interest and penalty.In stark contrast, if we fetch the view of new age Gen-Y sharks, who have already built the corpus pool and sculpted their retirement pension planning at a young age vis-à-vis the Old-Money genre of population who are scripting their annuity scheme at the age of 50+, the difference between their respective story writing is quite evident. The newer generation believes that "the life should be plain, simple and uncomplicated" and in the same wave length they are adopting the cruising tool of autopilot mode which offers pre-defined constant stream of cash flow crediting in their bank account on 1st day of every month without indulging in any requirement to chase-up the remitter and at the same time the said model is tax efficient, online, automated, transparent, liquid and hassle free. Does it sound too good to be true? Calm down, it is not some fiction, and indeed it is happening in real life itself, and the smart species of mankind is deploying this toolkit.This gadget is not some form of rocket science and instead it is a paradigm shift available in the form of plain vanilla structured investment product in equity market in India itself which ensures steady streak of constant amount of cash flow every month, e.g. Rs. 1 lakh crediting to your bank account on 1st day of every month at the expense of say Rs. 939 (may be read as say Rs. 1000) of income tax, against one-time lump sum investment of Rs. 1 crore. Interestingly, the amount of income tax will be zero in case the desired monthly inflow of Rs. 1 lakh is bifurcated equally in two accounts, say husband and wife (thanks to the Union Budget of the previous fiscal year). Nonetheless, the amount of income tax will be higher in case the monthly target requirement is, say, Rs. 5 lakhs or Rs. 10 lakhs (please refer to the Matrix-2 above for a few cases of tax incidences) as the annual exemption of Rs. 1.25 lakhs ceded by the previous year's Union Budget remains fixed.Matrix-2: Illustrative list of Income Tax incidences of a few scenarios in case of investment in structured products in equity market:S. No.ParticularsScenario-1 [Amt in Rs.]Scenario-2 [Amt in Rs.]Scenario-3 [Amt in Rs.]Scenario-4 [Amt in Rs.]APrincipal Corpus of investment1,00,00,00050,00,0005,00,00,00010,00,00,000BFixed Monthly withdrawal from Corpus [commencing after 12 months of investment date]1,00,00050,0005,00,00010,00,000C=B*12Fixed Annual withdrawal from Corpus for 12 months12,00,0006,00,00060,00,0001,20,00,000DAnnual Amount of LTCG (Long Term Capital Gain) Tax payable [including applicable surcharge and cess] during first year of withdrawal**11,262Nil1,21,3112,58,872E=D/12Monthly expense of LTCG Tax939Nil10,11021,573FPrincipal Corpus at the end of 10 years after consistent annual withdrawal1,96,47,02798,23,5149,82,35,13519,64,70,270#Assuming conservative CAGR of 14% (which is even less than the historical rate of CAGR achieved by equity market since its birth). It is, however, subject to market risks.##Nonetheless, the annual amount of LTCG tax expense will tend to increase in subsequent years owing to the fact that the component of income comprising monthly withdrawals in subsequent years will gradually increase.Conclusion:Considering the listed pros and cons of investments in both options of asset classes, a critical assessment can be done by each investor in their own personal cases, amidst the facts and circumstances as applicable in their respective cases. Nonetheless, the readers are advised to personalise and structure their own investments and portfolios in consultation with their long associated Chartered Accountant and SEBI-registered investment advisors only, to rule out any dent or disastrous advice by the mushrooming and newly developed breed of finfluencers who are not authorised by the market regulators.
Ep. 187 — REITs and InvITs: Unlocking Real Estate and Infrastructure Wealth Creation
CA Journal
· September 2026
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REITs and InvITs: Unlocking Real Estate and Infrastructure Wealth CreationImagine tapping into miles of toll roads, the towering presence of office skyscrapers, or the quiet reliability of power grids, all without the headaches of direct ownership. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are your keys to this realm, blending the liquidity of stocks with the enduring value of tangible assets. These dynamic vehicles have surged in prominence, offering sophisticated investors a potent mix of yield, diversification, and resilience. In this exploration, we dive deep into their mechanics, historical roots, tax advantages under India's Taxation framework, and strategic edge, especially in emerging markets, arming you with the insights to navigate this compelling landscape with confidence.A Brief History of REITs and InvITsThe Rise of REITsBorn in the U.S. with the Real Estate Investment Trust Act of 1960, REITs were crafted to democratize real estate, letting everyday investors access income-generating properties. President Eisenhower's vision unleashed a wave of growth, with the U.S. REIT market swelling to over $1.4 trillion by April 2025 (Source: Nareit, 2025). From humble beginnings, REITs spread globally, adapting to local needs and fuelling commercial expansion. For example: Singapore pioneered in Asia with CapitaLand in 2000.India joined the REIT journey in 2014, when the Securities and Exchange Board of India (SEBI) introduced the REIT Regulations. The first Indian REIT i.e., the Embassy Office Parks REIT was launched in 2019, setting a precedent for institutional-grade real estate investment through capital markets.The Emergence of InvITsInvITs, a newer innovation, took shape in the 2000s to channel capital into infrastructure. Canada's early forays with pipeline and energy trusts paved the way, but India took a major step in 2014, when SEBI introduced the InvIT Regulations to attract private investments into infrastructure. The landmark came in 2017, with the launch of India's first InvIT, IndiGrid, focused on power transmission. This marked a turning point, unlocking investor access to toll roads, telecom towers, and energy assets. (Source: IndiGrid Annual Report, 2023).Today, InvITs in India stand as vital channels for monetizing public infrastructure and funding future development. Today, both vehicles stand as pillars of modern portfolio strategy.The Mechanics of REITsStructure and FunctionalityREITs pool capital to own and manage income-producing real estate, such as sky scraping office towers, bustling retail hubs, or cutting-edge data centres. Listed on stock exchanges, they merge the liquidity of equities with the steady returns of property. The utmost unique trait about them? REITs must distribute at least 90% of taxable income as dividends, ensuring reliable cash flows and often sidestepping corporate tax, a boon for yield-friendly investors.Classification of REITsEquity REITs: These trusts invest directly in physical properties, generating revenue through rents and, potentially, capital appreciation. They dominate the REIT market due to their tangible asset base.Mortgage REITs (mREITs): These focus on real estate financing, investing in mortgages or mortgage-backed securities. Their income derives from interest payments, exposing the investors to credit and interest rate risks.Hybrid REITs: Combining elements of equity and mortgage REITs, these trusts diversify across property ownership and debt instruments.Sector-Specific REITs: These target niche markets, such as logistics warehouses, healthcare facilities, or data centres, capitalizing on secular trends like e-commerce or digital transformation.Small and Medium REITs (SM REITs)Introduced in India by SEBI in 2024, Small and Medium REITs (SM REITs) aim to broaden access to fractional real estate ownership by focusing on smaller, often underutilized properties like warehouses, commercial offices, or retail spaces in Tier-2 and Tier-3 cities. Unlike traditional REITs, which require assets worth at least 500 crore, SM REITs have a lower asset threshold, ranging from 50 crore to ₹500 crore. This enables smaller developers and investors to participate in the REIT ecosystem. SM REITs maintain the same regulatory rigor as larger REITs, including mandatory listing and 90% income distribution, but offer higher growth potential due to their focus on emerging markets and underserved asset classes.Investment MeritsSteady Yields: Mandatory dividend pay-outs provide predictable income streams, catering to a set of investors prioritizing cash flow.Diversification Power: REITs exhibit low correlation with traditional equities and bonds, enhancing risk-adjusted returns.Liquid Access: Unlike direct real estate investments, listed REITs offer daily liquidity, enabling tactical portfolio adjustments.Professional Oversight: Managed by specialized teams, REITs mitigate the operational complexities of property management.Inflation Shield: Rental income often adjusts with inflation, preserving purchasing power over time.Tax Efficiency: Favourable tax treatment on distributed income enhances net returns for investors.Risk ConsiderationsInterest Rate Sensitivity: Rising interest rates increase borrowing costs and may reduce dividend yields' relative attractiveness compared to fixed-income alternatives.Market Volatility: As publicly traded securities, REITs are subject to equity market fluctuations, which may not always align with underlying property values.Sectoral Vulnerabilities: REITs concentrated in specific sectors (e.g., retail or hospitality) face risks tied to economic cycles or consumer behaviour shifts.Leverage Risks: Many REITs employ leverage to enhance returns, amplifying losses in adverse market conditions.The Mechanics of InvITsStructure and FunctionalityInvITs echo REITs but target infrastructure i.e., toll roads, power lines, or renewable plants. Pooling investor funds, they manage these giants, earning via fees, tariffs, or contracts. Listed and liquid, they too channel 90% of income into dividends, harnessing infrastructure's steady pulse for the investors.Investment MeritsStable Cash Flows: Infrastructure assets often operate under long-term contracts or regulated pricing, ensuring predictable revenue streams.Economic Resilience: Infrastructure's essential nature provides relative immunity to economic downturns, enhancing portfolio stability.Unique Exposure: InvITs offer exposure to a distinct asset class, reducing correlation with equities, bonds, and real estate.Growth Catalyst: By monetizing operational assets, InvITs enable developers to fund new projects, supporting economic growth.Tax Efficiency: Favourable tax treatment on distributed income enhances net returns for investors.Risk ConsiderationsRegulatory Exposure: Changes in government policies or tariff regulations can materially impact revenue.Operational Risks: Infrastructure projects are susceptible to delays, cost overruns, or performance issues, affecting cash flows.Rate Sensitivity: Rising rates can increase financing costs and compress valuations, particularly for leveraged InvITs.Macroeconomic Dependence: Demand for infrastructure services (e.g., toll collections) may decline during economic slowdowns.Formation of REITs and InvITsHow a REIT is FormedForming a REIT in India involves a structured process governed by SEBI (REIT) Regulations, 2014, as amended:Sponsor Setup: A sponsor (or sponsor group) initiates the REIT, typically a real estate developer or financial institution with a strong track record. The sponsor must have a net worth of at least ₹100 crore and a minimum of five years of experience in real estate or fund management.Trust Creation: The REIT is established as a trust under the Indian Trusts Act, 1882, with a trust deed registered with a sub-registrar. The trustee, an independent entity approved by SEBI, oversees compliance and protects unitholder interests.Asset Transfer: The sponsor transfers income-generating real estate assets (e.g., commercial properties) to a Special Purpose Vehicle (SPV), a company or LLP held by the REIT. The SPV must hold assets worth at least 500 crore (or ₹50 crore for SM REITs).Manager Appointment: A SEBI-registered REIT manager, with a net worth of 10 crore, is appointed to manage operations, leasing, and strategy. The manager must have at least two key personnel with five years of relevant experience.SEBI Registration and IPO: The REIT files a draft offer document with SEBI and the stock exchange, detailing assets, financials, and risks. Upon approval, the REIT launches an Initial Public Offering (IPO) to raise funds from investors, issuing units that are listed on exchanges like BSE or NSE.Operational Compliance: Post-listing, the REIT must distribute 90% of its net distributable cash flows, adhere to leverage limits (up to 49% of asset value), and provide regular disclosures to unitholders.How an InvIT is FormedThe formation of an InvIT follows a similar framework under SEBI (InvIT) Regulations, 2014:Sponsor Setup: The sponsor, typically an infrastructure developer or financial entity, must have a net worth of ₹100 crore and a proven track record in infrastructure or fund management.Trust Creation: The InvIT is set up as a trust under the Indian Trusts Act, 1882, with a SEBI-approved trustee to safeguard investor interests.Asset Transfer: Operational infrastructure assets (e.g., toll roads, power plants) are transferred to SPVs held by the InvIT. The assets must generate stable cash flows, with a minimum value of ₹500 crore for public InvITs.Manager Appointment: An investment manager with a net worth of 10 crore and experienced personnel is appointed to oversee asset management, contracts, and operations.SEBI Registration and IPO: The InvIT submits a draft offer document to SEBI, outlining assets, cash flows, and risks. After approval, it raises funds through an IPO or private placement (for private InvITs) and lists units on stock exchanges.Operational Compliance: The InvIT must distribute 90% of net cash flows, maintain leverage below 70% of asset value, and comply with SEBI's reporting and governance norms.Minimum Ticket Size for SponsorsREITs: The sponsor must hold at least 25% of the REIT's units at inception, reduced to 15% after three years. With a minimum REIT asset size of ₹500 crore (or ₹50 crore for SM REITs), the sponsor's initial investment (ticket size) typically ranges from 125 crore to 250 crore for standard REITs, or ₹12.5 crore to ₹25 crore for SM REITs, depending on the asset valuation and capital structure.InvITs: The sponsor must hold at least 25% of the InvIT's units initially, with a minimum 15% post-listing for three years. For a public InvIT with a minimum asset size of ₹500 crore, the sponsor's ticket size is approximately 125 crore to 250 crore, based on the InvIT's capital raise and asset portfolio.Tax Benefits Under the Indian Income Tax ActIn India, REITs and InvITs shine with tax benefits, carved out in the Income Tax Act, 1961:Dividend Exemption: Dividends from REITs and InvITs are tax-free in investors' hands if the trust pays no tax on that income (Section 10(23FD)), provided the trust distributes 90% of net income, removing entity-level tax.Capital Gains Clarity:Long Term Gains from selling REITs and InvITs unit held for more than one year are taxed at 10% (for gains up to 1 lakh annually for transfers before July 23,2024) or 12.5% (for gains exceeding 1.25 lakh annually for transfers on or after July 23,2024). Indexation benefits are not available.Short-Term Capital Gains from selling REITs and InvITs units held for less than one year are taxed at 15% (for transfer before July 23, 2024) or 20% (for transfer on or after July 23, 2024).Interest and Rental Pass-Through: Interest or rent from underlying assets flows to unitholders, taxed at their slab rates, while trusts sidestep double taxation.SPV Advantage: Special Purpose Vehicles under REITs/InvITs get tax relief on dividends or interest paid to the trust, streamlining returns (Finance Act, 2020).REITs and InvITs in Emerging MarketsIn lands of rapid urban sprawl and infrastructure growth, REITs and InvITs beckon private capital. India, Singapore, and Brazil lead with tight rules, blending growth with guardrails.The Indian ParadigmREITs in IndiaIndia's REITs, such as the Embassy Office Parks, Mindspace, or Brookfield, zero in on premium offices in Bengaluru, Mumbai, and NCR, riding IT and finance booms. Drivers? Urban surge, SEBI's transparent rules, and global funds eyeing India's ascent (source: CBRE India Market Report).InvITs in IndiaIndiGrid and IRB InvIT power India's grid and roads, unlocking value via the National Monetization Pipeline. A $1.5 trillion infra push by 2030 fuels growth, backed by stable contracts and policy zest (source: National Infrastructure Pipeline, 2021).Challenges in Emerging MarketsRegulatory Evolution: Developing regulatory frameworks may lack the stability of mature markets, creating uncertainty.Market Liquidity: Thin trading volumes in some markets can limit the liquidity of listed trusts.Investor Sophistication: Limited awareness among retail investors may hinder broad adoption at the nascent stage.Comparative Analysis: REITs vs. InvITsWhile REITs and InvITs do have certain similarities, it is their distinction with respect to the distinct asset classes and risk-return profiles that cater to different investment objectives:REITs are suited for investors seeking exposure to real estate market dynamics, while InvITs appeal to those prioritizing stable, long-term yields from infrastructure.DimensionREIT'sInvITsAsset FocusCommercial and residential real estateInfrastructure (roads, power, telecom)Revenue ModelRents, property appreciationTolls, tariffs, contractual paymentsRisk DriversReal estate cycles, tenant risksRegulatory changes, project executionInvestment HorizonMedium to long-termLongterm-Yield CharacteristicsCyclical, tied to property marketsStable, tied to contractsStrategic Role in Portfolio ConstructionWhy embrace REITs and InvITs? Their intersection with stocks, bonds, and commodities slashes the volatility, while inflation-linked rents and tariffs shield the gains. Institutional investors, such as pension funds and sovereign wealth funds, value REITs and InvITs for their yield stability and long-term capital appreciation potential. For retail investors with a high-risk tolerance, these trusts offer accessible exposure to alternative assets without the operational burdens of direct ownership.Future TrajectoryGlobally, REIT and InvIT markets are poised for growth, driven by structural trends and policy support. In developed markets, REITs are a mature asset class, with the U.S. REIT market valued at over $1.4 trillion in 2025 (source: Nareit, 2024). Emerging markets, however, offer untapped potential, as governments leverage these trusts to fund urbanization and infrastructure development, unlocking value in their areas.Technological and sustainability trends are reshaping the investment landscape. Data centre REITs, sustained by demand for cloud computing and AI infrastructure, are projected to grow at a CAGR of 15% through 2027 (source: JLL Global Data Center Outlook, January 2025), whereas InvITs are expected to ride the green wave, with renewable assets soaring as decarbonization accelerates across the globe.ConclusionREITs and InvITs aren't just investments; they're gateways to wealth, blending liquidity, diversification, and expert care. In India and beyond, they channel capital to real estate and infra, fuelling much growth in the infra sectors.As the financial markets evolve, REITs and InvITs will likely play an increasingly central role in portfolio strategies. Investors must continue to exercise due diligence, balancing their yield potential against market, regulatory, and operational risks. For those seeking to diversify beyond traditional assets, REITs and InvITs offer a forward-looking opportunity, for your portfolio's next leap.
Ep. 188 — Digital Financing: Evolution and Impact
CA Journal
· September 2026
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Digital Financing: Evolution and ImpactDigital financing has revolutionized financial services, providing unparalleled convenience, cost efficiency, and security. Key components include online banking, mobile payments, peer-to-peer lending, and blockchain technology. Benefits such as enhanced accessibility and financial inclusion are countered by challenges like cybersecurity threats and regulatory compliance. Case studies of M-Pesa, Ant Financial, and Wise highlight real-world impacts. Future advancements in AI, machine learning, and blockchain promise further innovation. By addressing challenges and leveraging opportunities, digital financing will continue to shape the global financial landscape, empowering individuals and businesses to manage their finances more effectively.Digital financing has radically transformed the manner employers and individuals can conduct their financial operations through the present years. The financial service sector has been transformed by the shift to digital, which has moved everything from mobile banking and video interactions to online investment platforms and beyond. In this piece, we dig deep into digital finance, its advantages, disadvantages, and what the future holds.Digital FinancingMeaning: Digital financing or digital financial services are the foundation of the digital economy, enabling and empowering individuals through their relationship with financial service providers. Key areas include the use of online banking, mobile payments, peer-to-peer lending, digital wallets, and blockchain transactions. Each of these facets has been an integral part of moulding the financial system that we know today. Online banking has become the bedrock of digital banking, enabling users to do all of their banking work through computers and mobiles. This includes checking account balances, transferring funds, paying bills and even applying for loans. Due to its ease and convenience, online banking has become the choice of many people.One of the key trends linked with smartphones is the rise of mobile payment services which allow users to pay with a tap of their phone, offering the same level of security as a chip card. These services are based on near-field communication (NFC) technology to enable contactless payments, which have seen a surge in demand, especially during the COVID-19 pandemic.Additionally, platforms like Lending Club and Prosper have democratized credit through peer-to-peer (P2P) lending, enabling individuals to lend directly to one another without the need for traditional financial intermediary. This gives more access to competitive interest rates and allows for others to take advantage of it who may not qualify for traditional bank loans.Digital wallets have become essential in the digital finance ecosystem, helping users to store money digitally and make online payments, which include features like transferring money to friends and family or paying for any service. However, there is lot more to digital wallets, including the ability to store cryptocurrencies or use loyalty points.Blockchain is a new form of technology designed to keep information secure and public for the future. Many applications, such as Bitcoin or Ethereum, are built on this technology. These platforms involve mining activities, which consume a significant amount of electricity just like games.Benefits of Digital FinancingConvenience and AccessibilityOne of the major advantages of digital finance is its easy accessibility. Customers can manage their accounts, make payments, and even apply for a loan from the comfort of their homes, 24/7. This level of convenience was once unimaginable. For instance, online banking allows users to check their account balance and transaction history without going to the bank. With mobile payment applications, users pay for groceries, coffee, or even split restaurant bills with friends instantly. Moreover, digital financing services are designed to be user-friendly. They often come with intuitive interfaces and comprehensive customer support to assist users in navigating through various features. For example, many online banking platforms provide virtual assistants or chatbots that can answer queries, guide users through processes, and even help troubleshoot issues.Cost EfficiencyPeople who belong to the "needs more cheese in sandwiches" club often don't know how it tastes until they try it. Similarly, many digital financial services come with lower fees compared to traditional banking methods. With less physical infrastructure and manual processing, digital finance leads to massive cost savings, which then leads to less painful charges for customers. For example, strictly online banks like Ally Bank and Chime tend to offer better rates on their savings account deposits and charge less fees, as they don't incur costs from branch locations. Moreover, utmost care is undertaken to decrease the use of paper money transactions by using e-statements, online bill payments, and digital receipts, providing an environmental friendly alternative as part of the green financing trend.Enhanced SecurityThe safety and security of digital financing transactions are ensured through advanced encryption and authentication technologies. Blockchain, in particular, ensures a high level of security, trust, and transparency. Each transaction is encrypted and added to the previous one which makes it virtually impossible for anyone to alter or tamper with. Moreover, with most digital finance products, multi-factor authentication is used, which means two or more verification factors must be provided by the user when accessing applications. This includes something they know (a password), something they have (a fingerprint), or something sent to them (an ultra-short time code on their mobile).Speed and EfficiencyDigital transactions are processed much quicker compared to traditional modes. Be it fund transfer, paying bills, or investing in stock, every digital platform provides real-time processing advantages. For example, mobile banking apps have an option for instant account-to-account transfer. Stock trading can be done online with real-time buying or selling of stocks to grab the profit-making opportunity. Automated processes in digital finances also remove the possibility of human error, as is the case with ACH (Automated Clearing House) transfers. This form of money transfer ensures that customers get their payroll and bill payments processed correctly and on time, every time.Financial InclusionFinancial inclusion is one of the key areas where digital financing plays a vital role, as it can provide financial services in areas where physical access is difficult. Digi-banks and payment apps can deliver financial services to people in the hinterland without the need to create complicated and costly Branch and transaction networks. For instance, mobile money service called M-Pesa in Kenya has helped millions of financially excluded individuals gain access to the financial system to conduct financial activities such as money transfer, savings, and micro-credit. Digital financing also has a positive impact in enhancing the SMEs in the market by providing easier access to credit and other related financial facilities. Instead of approaching banks, where they are less likely to be granted credit, SMEs can borrow money online or even raise funds through crowdfunding. This type of financial inclusion encourages and promotes entrepreneurship and economic development, especially in the most capable yet vulnerable countries across the globe.Challenges and ConsiderationsWhile digital financing offers numerous benefits, it also presents challenges that need to be addressed:Cybersecurity ThreatsThe high utilization rate of connective technology implies that digital platforms are vulnerable to attack by cyber-thugs. To safeguard institutions and individuals, continuous education on cybersecurity and significant investments in protection are paramount. For instance, financial firms have no option but to develop a robust cybersecurity strategy to mitigate the possibilities of data leakage, identity theft, or fraud. Security reviews, fresh scans, and penetration testing are considered indispensable measures within a modern cybersecurity plan. Furthermore, it should be noted that users must be introduced to activities, behaviors, and practices that should be performed or avoided in cyberspace. This includes educating the public on phishing scams, use of strong and distinct passwords, and avoid posting sensitive information about the self on the internet. Banks and other financial establishments may periodically arrange or popularize cybersecurity information sessions and offer literature for their consumers.Regulatory ComplianceThere is a pressing need to develop effective regulatory strategies targeting the new digital finance markets, as these markets are constantly growing, and consumers need to be defended from unfair actions. Regulating emerging technologies remains a key concern for policymakers, as they must balance innovation with necessary oversight. For instance, the GDPR protects the rights of data subjects across the European Union, and this disrupts how digital financing platforms use customer data. In the United States, the Consumer Financial Protection Bureau has been assigned with different responsibilities of service delivery and control in digital finance with a special emphasis on issues of fair lending, and disclosure. It can also be highlighted that compliance requirements are critical when seeking to sustain the trust of clients and investors in the online financial services field. Thus, when analyzing these factors, it is necessary to take into account the appearance of excessively restrictive elements that can hinder new product and service offers while ensuring adequate protection of consumer interests.Digital LiteracyThe growth of digital financing can only occur if a user has a general understanding of how these services function. It becomes important to carry out awareness programs to ensure users are knowledgeable enough to make the right choices. Some of the common initiatives that have been taken by financial institutions and government agencies include involvement in digital literacy programs, workshops, and the provision of resources. Digital literacy programs, which are generally targeted at the population, provide instructions on how to conduct banking operations, make payments using cashless means and utilize other forms of digital financial services and products properly and securely. They also reach and educate users on personal finance issues like budgeting, saving, investing, and other aspects of money management.Case Studies in Digital FinancingTo further understand the impact and applications of digital financing, let's explore a few real-world case studies:M-Pesa in KenyaIn 2007, Safaricom introduced M-Pesa which is one of the most thriving mobile money services around the globe. Through their mobile phones, users can transfer, withdraw, deposit, and pay for goods and services. Millions of Kenyans have had access to financial services due to increased financial inclusion brought about by M-Pesa. Simplicity and accessibility made M-Pesa successful. The service does not require users to have a bank account-just a mobile phone is enough. Small business owners, who are called M-PESA agents, make it possible for people to put in or take out cash. This agent network is found in remote areas where traditional banking infrastructure is unavailable.Ant Financial in ChinaAlipay is run by Ant Financial, an affiliate of Alibaba Group, and is the world's largest online and mobile payment platform with around 110 million European stores and over a billion active Alipay users. Alipay was originally a digital wallet for online shopping but quickly expanded into providing a range of financial services. The company now provides an array of services which includes mobile payments, wealth management, insurance, and microloans. Alipay's success is driven by its seamless integration with Alibaba's e-commerce platform, its extensive merchant network, and its commitment to innovation. For example, Alipay's "Smile to Pay" service uses facial recognition technology to enable secure and convenient payments. Users simply smile at a camera to complete a transaction, eliminating the need for cash or cards.TransferWise (now Wise) in the UKTransferWise, now known as Wise, is a fintech company that is disrupting the traditional remittance industry by providing low-cost, transparent international money transfers. Founded in 2011, Wise offers a platform allowing users to send money abroad at mid-market exchange rates, and with very low transparent fees. Wise's innovative approach to international money transfers involves matching currency transfers between users in different countries. For example, if someone in the UK wants to send money to the US, Wise matches this transfer with someone in the US who wants to send money to the UK. By avoiding the traditional banking network, Wise reduces costs and speeds up the transfer process. Wise's transparency and customer-centric approach have earned it a loyal user-base. The platform provides real-time exchange rate information, detailed fee breakdowns, and estimated delivery time, allowing users to make informed decisions. Wise's success demonstrates the potential of digital financing to disrupt traditional financial services and offer better value to consumers.The Synergistic Relationship Between Digital Finance & FintechThe world of finance has undergone a significant transformation in recent years, driven by the advent of digital technologies and the emergence of fintech. Digital finance and fintech are two interconnected concepts that have revolutionized the way financial services are delivered, consumed, and managed. Before we deep dive into the relationship between the two, let us first look into what is contained in Fintech.What is Fintech?Fintech, short for financial technology, refers to the intersection of finance and technology. It involves the use of software, algorithms, and digital platforms to deliver financial services and products. Fintech companies leverage technology to develop innovative solutions, improve existing financial products, and disrupt traditional financial business models.Relationship Between Digital Finance and FintechInterdependence: Digital Finance relies on fintech innovations to improve financial services, while fintech companies depend on digital finance infrastructure to deliver their solutions.Mutual Reinforcement: Advances in digital finance enable fintech companies to develop more sophisticated solutions, which in turn drive further innovation in digital finance.Co-evolution: Digital finance and fintech are evolving together, with each influencing the development of the other.Vulnerabilities, Threats, and Risks in Digital Finance: Navigating the Cybersecurity LandscapeThe rapid growth of digital finance has significantly evolved, expanding to encompass the consumption, delivery and management of financial services. While digital finance offers numerous benefits, including increased efficiency, convenience and accessibility, it also introduces a unique set of vulnerabilities, threats, and risks.Vulnerabilities in Digital FinanceOutdated software and systems: Failure to update software and systems can leave them exposed to known vulnerabilities.Poor password management: Weak passwords or inadequate password policies can compromise account security.Insecure data storage: Sensitive data stored in plaintext or without proper encryption can be easily accessed by unauthorised parties.Insufficient network securities: Unsecured networks can allow attackers to intercept sensitive data or gain unauthorised access to systems.Threats to Digital FinancePhishing and Social Engineering: Attacks that trick users into revealing sensitive information or performing certain actions.Malware and Ransomware: Malicious software that can compromise systems, steal data, or demand payment.Denial of service (DoS) and Distributed Denial of Service (DDoS): Attacks that overwhelm systems, making them unavailable to users.Advanced Persistent Threats (APTs): Sophisticated, targeted attacks that aim to steal sensitive data or disrupt operations.Risks in Digital FinanceSome common risks include:Financial lossData BreachesReputation damageRegulatory non-complianceSystem downtimeTo navigate the cybersecurity landscape of digital finance, organizations must implement robust security measures to mitigate and manage vulnerabilities, threats and risks. Some strategies include:Implementing robust security protocols like encryption, firewalls, and secure coding practices.Conducting regular security audits and testing.Providing employee training and awareness.Implementing IRPs.Updating regulatory requirements.The Future of Digital FinancingThe future of digital financing looks promising, with ongoing advancements in technology driving further innovation. Artificial intelligence (AI) and machine learning (ML) are set to enhance personalized financial services, while blockchain technology will continue to improve security and transparency.Artificial Intelligence and Machine LearningAI and ML are poised to revolutionize digital financing by enabling more personalized and efficient financial services. AI-powered chatbots and virtual assistants can provide personalized financial advice, answer customer queries, and assist with transactions. For example, Bank of America's Erica is an AI-driven virtual assistant that helps customers manage their finances, track spending, and find ways to save money. ML algorithms can analyze vast amounts of data to identify patterns and make predictions. This capability is particularly useful in credit scoring, fraud detection, and investment management. For instance, ML-based credit scoring models can assess creditworthiness more accurately by considering a wider range of data points, such as transaction history, social media activity, and online behavior. In investment management, robo-advisors use AI and ML to create and manage personalized investment portfolios. These platforms consider factors such as risk tolerance, financial goals, and market conditions to optimize investment strategies. Robo-advisors offer a cost-effective and accessible alternative to traditional financial advisors, making investment services available to a broader audience.Blockchain and Decentralized Finance (DeFi)Blockchain technology continues to evolve, offering new possibilities for digital financing. Beyond it is being used to develop decentralized finance (DeFi) applications that operate without intermediaries. DeFi platforms use smart contracts to automate financial transactions, such as lending, borrowing, and trading, on a decentralized network. DeFi has the potential to democratize access to financial services by removing barriers and reducing costs. For example, platforms like Compound and Aave allow users to lend and borrow cryptocurrencies without relying on traditional banks. These platforms offer attractive interest rates and greater transparency, as all transactions are recorded on a public blockchain. Moreover, blockchain technology is being explored for various other applications, such as supply chain finance, identity verification, and cross-border payments.Regulatory Technology (RegTech)As the digital finance landscape evolves, regulatory technology (RegTech) is emerging as a key enabler of compliance and risk management. RegTech solutions use advanced technologies, such as AI, ML, and blockchain, to streamline regulatory processes, enhance data analysis, and ensure compliance with regulatory requirements. For example, AI-powered Reg-Tech platforms can automate the monitoring and reporting of financial transactions to detect suspicious activities and ensure compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations. Blockchain-based Reg-Tech solutions offer immutable and transparent records, making it easier to track and verify compliance-related data. Reg-Tech not only reduces the burden of regulatory compliance but also enhances the overall security and integrity of digital financial services. As regulatory frameworks continue to evolve, Reg-Tech will play a critical role in helping financial institutions navigate the complexities of compliance and risk management.Unlocking the Future: Scope of Professional Opportunities for CAs in Digital FinanceWith the speedy and magnanimous evolution of digital finance, the role of CAs has expanded beyond traditional accounting and auditing. Digital finance has created a plethora of opportunities for CAs to leverage their skills, expertise, and knowledge to drive innovation, growth, and success. Digital finance encompasses a broad range of financial services, including online banking, mobile payments, digital wallets, and investment platforms. This new frontier requires professionals who can navigate the complex intersection of finance, technology, and regulation. Chartered Accountants with their unique blend of financial expertise, analytical skills, and business acumen, are well-positioned to capitalize on these opportunities.Emerging roles of CAs in Digital FinanceDigital Financial Reporting Specialist: CAs can leverage their expertise in financial reporting to develop and implement digital financial reporting solutions.Financial Data Analyst: CAs can analyse and interpret complex financial data to perform decision-making and drive growth.Digital Audit and Assurance SpecialistFintech Consultant: CAs can advise Fintech companies on financial regulations compliance and risk management.Blockchain and Virtual Asset SpecialistRegulatory Compliance SpecialistThe scope of opportunities for Chartered Accountants in digital financing is vast and exciting. As digital finance continues to evolve, CAs can leverage their skills, expertise, and knowledge to drive innovation and growth. By developing key skills, exploring emerging roles, and navigating career pathways, CAs can unlock the future of digital finance and achieve their full potential. The time for Chartered Accountants to embrace digital finance is now, the future of finance depends on it.ConclusionDigital financing has undoubtedly transformed the financial landscape, offering numerous benefits such as convenience, cost efficiency, enhanced security, speed, and financial inclusion. However, it also presents challenges, including cybersecurity threats, regulatory compliance, and the need for digital literacy.As technology continues to advance, the future of digital financing looks promising. Artificial intelligence, machine learning, blockchain, and Reg-Tech are set to drive further innovation, making financial services more personalized, secure, and accessible. By addressing the challenges and leveraging the opportunities, digital financing will continue to shape the global financial landscape, empowering individuals and businesses to manage their finances more effectively.
Ep. 189 — Effective Time Management for Chartered Accountants Working in Industry for a Better Work-Life Harmony
CA Journal
· September 2026
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Effective Time Management for Chartered Accountants Working in Industry for a Better Work-Life HarmonyTime management is a fundamental skill for Chartered Accountants (CAs) working in industry. Their roles often involve long hours, tight deadlines, and complex tasks that can lead to stress and burnout. Effective time management not only enhances professional productivity but also fosters a harmonious work-life integration. This article discusses various strategies for optimizing time, including prioritization, delegation, and the use of technology. Additionally, it highlights the importance of personal well-being and mental health in achieving work-life harmony. By adopting these strategies to manage time effectively, CAs can not only elevate their professional performance but also cultivate a fulfilling, balanced life.The role of a Chartered Accountant (CA) in industry is both demanding and rewarding. As guardians of financial integrity, their responsibilities include managing audits, regulatory compliance, financial planning, and strategic decision-making. Given the pressures of monthly closings, tax filings, and stakeholder demands, many CAs in industry struggle with work-life balance. The rise of remote working, however, presents an opportunity to rethink how time can be managed effectively, ensuring that career ambitions align with personal well-being.In this article, we explore the importance of time management for CAs working in industry and provide actionable tips for balancing work and life. We will examine the challenges CAs face, the impact of poor time management, and practical techniques to enhance efficiency while maintaining personal well-being.The Importance of Time Management for Chartered AccountantsTime management for CAs in industry is not merely about organizing work tasks; it is about maximizing efficiency, reducing stress, and ensuring long-term career sustainability. As the financial backbone of organizations, CAs are entrusted with complex responsibilities, often under tight deadlines. The failure to manage time effectively can result in:Consequences of Poor Time ManagementCompromised professional reputation: Missing deadlines or delivering substandard work can erode trust and damage career prospects.Missed deadlines and costly errors: Timeliness and accuracy are crucial. Errors or delays can lead to financial penalties, audits, and reputational damage.Increased stress and burnout: Inefficiency often results in longer working hours, which negatively impact mental health.Poor work-life balance: Without clear boundaries, personal relationships and health deteriorate, leading to long-term dissatisfaction.Benefits of Effective Time ManagementEnhanced productivity: Streamlined processes allow CAs to focus on high-value tasks.Better career progression: Efficient time management demonstrates leadership potential and reliability.Improved health and relationships: With better planning, CAs can devote quality time to family and personal goals.Organizational benefits: Effective time management by CAs positively impacts the entire organization, ensuring compliance, reducing financial risks, and fostering a culture of accountability.By embracing effective time management, CAs can experience improved productivity, job satisfaction, and better health- ultimately leading to a more balanced and fulfilling life.Understanding Work-Life HarmonyWork-life harmony is often misunderstood as simply achieving an equal balance between work and personal life. However, true work-life harmony for CAs is about creating a dynamic integration where professional responsibilities align seamlessly with personal well-being. Achieving harmony involves:Elements of Work-Life Harmony:Flexibility in task allocation: Ensuring critical work hours are protected while accommodating personal responsibilities.Self-awareness: Understanding personal limits and recognizing signs of overwork to maintain health.Adaptability: Embracing changes in priorities as they arise without compromising core values.Continuous alignment: Periodic reflection on whether current practices align with both professional goals and personal values helps maintain long-term harmony.This requires a mindset shift from viewing work and life as competing domains to recognizing them as interconnected elements of a fulfilling existence. Harmony is achieved by proactively adjusting priorities to meet the needs of both areas. Unlike traditional "work-life balance," which seeks equal partitioning of time between work and life, work-life harmony is about finding a rhythm that supports both domains effectively.Challenges Chartered Accountants Face in Time ManagementChartered Accountants face unique challenges in their time management practices, stemming from the nature of their roles and the demands of working in industry.High Workload and Tight Deadlines: Many CAs work under immense pressure, particularly during month-end closings, quarterly financial reporting, and tax filing periods. During these high-pressure times, it's common for CAs to work extended hours, which can disrupt their personal life. For example, during tax season, a CA may have to prepare several tax returns while ensuring compliance with the latest regulatory changes. The workload increases significantly, leading to stressful and long hours.Expanding Scope of Responsibilities: As businesses grow more complex, CAs are increasingly called upon to play strategic roles beyond traditional accounting. They may contribute to mergers, acquisitions, and strategic financial planning, adding layers of complexity to their workload.Frequent Interruptions and Multitasking: CAs often face constant interruptions in the workplace, whether from colleagues seeking approval, meetings that run overtime, or urgent requests from management. Multitasking- while seemingly efficient-can be counterproductive as it divides focus and leads to mistakes. For instance, while preparing a financial statement, answering emails or attending a conference call can divert attention, resulting in errors that could have been avoided with undistracted focus.Complexity of Roles and Responsibilities: A CA working in industry is responsible for a range of tasks, from managing internal audits and regulatory filings to making strategic financial decisions. Juggling these various tasks can be overwhelming, especially when conflicting priorities arise.Technological Overload: While technology helps streamline financial processes, it can also become a source of distraction. Constant emails, instant messages, and social media notifications can fragment a CA's focus, reducing productivity. In addition, reliance on multiple systems can lead to time spent navigating different platforms, which can be inefficient if not managed properly.Global Collaboration Challenges: In multinational organizations, CAs often collaborate with teams across different time zones. Coordinating schedules for meetings or project deadlines can disrupt personal time and lead to irregular work hours.Effective Time Management Strategies for Chartered AccountantsAdopting the right time management strategies is key to overcoming these challenges. Here are several proven techniques to improve time management for CAs in industry:1. Prioritization and PlanningEffective time management begins with prioritization. Not all tasks are created equal, and knowing how to prioritize is crucial.Daily Planning: Start each day by listing the three most important tasks to complete. This creates a sense of focus and ensures that critical items get addressed first.Weekly Reviews: Conducting a weekly review to assess ongoing projects and deadlines can help CAs anticipate and allocate time for critical tasks.Dynamic priority systems: Employ software that adjusts task priorities based on deadlines and dependencies in real-time.The Eisenhower Matrix: A powerful tool for prioritization, this method divides tasks into four categories:Urgent and Important (Do): Tasks with clear deadlines and significant consequences if not completed in a timely fashion.Important, Not Urgent (Schedule): Tasks with no set deadline but that bring you closer to your long-term goals.Urgent, Not Important (Delegate): Tasks that need to get done, but don't need your expertise in order to be completed.Not Urgent, Not Important (Delete): Tasks that distract you from your preferred course, and don't add any measurable value.2. Delegation and Empowering TeamsCAs should recognize that they don't need to do everything themselves. Delegating tasks, such as routine audits or data entry, to junior staff or outsourced partners allows them to focus on high-value activities.Delegation Training: Investing in training for team members to handle routine tasks efficiently can free up significant time for senior CAs.Train for Excellence: Invest in team training to build trust in their ability to handle delegated responsibilities.Performance feedback loops: Regular reviews of delegated work with constructive feedback improve team efficiency and maintain quality standards.Creating Accountability: Establishing clear accountability frameworks ensures that delegated tasks are completed accurately and on time.3. Setting Boundaries and Managing ExpectationsSetting clear boundaries between work and personal life is essential.Work Hours: Communicate clear working hours to colleagues, and resist the temptation to work outside of these hours unless absolutely necessary.Saying No: Learning to say "no" or negotiating deadlines can also be a valuable skill. When overwhelmed with tasks, it is better to acknowledge capacity limits than risk sacrificing quality or health.Establish Clear Availability: Use tools like calendar blocks to communicate work hours.Boundary reinforcements: Periodically re-communicating boundaries ensures they are respected by colleagues and clients.4. Leveraging Technology and AutomationTechnology should be used to save time, not create distractions.Task Management Tools: Applications like Asana, Trello, or Monday.com can help organize tasks, assign responsibilities, and set deadlines.Automation: Automating repetitive tasks such as data entry, report generation, and notifications can save significant time. Software like Excel macros or Enterprise Resource Planning (ERP) systems can automate these tasks efficiently.Adopt AI-Powered Tools: Utilize AI for financial forecasting, error detection, and automating repetitive tasks.Streamline Communication: Consolidate platforms for email, messaging, and task management to reduce complexity.Data Visualization Tools: Software like Power BI or Tableau can streamline reporting, allowing quicker insights and decision-making.5. Time BlockingTime blocking is a strategy where specific hours of the day are allocated to particular tasks or activities.Focus Blocks: Designate uninterrupted time to focus solely on high-priority tasks.Meeting Blocks: Group meetings together in specific blocks during the day to minimize disruption to focused work.Focus-enhancing environments: Invest in tools like noise-canceling headphones or quiet workspaces to maximize the benefits of time blocking.6. Managing Meetings EffectivelyMeetings are often the biggest time sink. CAs should manage meetings efficiently by:Setting clear agendas for every meeting.Keeping meetings brief and to the point.Limiting attendance to key participants to ensure that time is spent productively.7. Minimizing DistractionsDistractions, both internal and external, can derail productivity.Use "Do Not Disturb" Modes: On emails and messaging apps, activating "Do Not Disturb" modes can help maintain focus.Workspace Organization: A clutter-free workspace encourages concentration. It is essential to create an environment conducive to productivity.8. Developing Contingency PlansUnforeseen challenges are inevitable. Creating contingency plans for common disruptions, such as system failures or unexpected audits, can reduce downtime and maintain efficiency.Promoting Work-Life Harmony1. Flexible Work ArrangementsPromoting flexible work options, such as remote work or flexible hours, is essential for enhancing work-life harmony. This flexibility can reduce commuting time, improve focus, and allow CAs to manage family responsibilities more effectively.Hybrid models: Tailoring work schedules that balance on-site collaboration with remote flexibility ensures efficiency without sacrificing team dynamics.2. Personal Development and Well-BeingInvesting in personal health and development is vital for long-term career success.Physical Fitness: Regular exercise improves concentration, reduces stress, and enhances overall well-being.Mental Health: Practicing mindfulness, meditation, or seeking professional therapy when needed can help manage work-related stress.Holistic wellness programs: Organizations can introduce initiatives like yoga, meditation, or fitness challenges tailored for accounting professionals.Professional Therapy: Address stress proactively through counseling or coaching.Continuous Learning: Enrolling in courses or attending seminars helps CAs stay current in their field, fostering confidence and career growth.3. Building Supportive NetworksCreating a robust network of colleagues, mentors, and family members is crucial for balancing career pressures.Mentorship: Having a mentor to guide through complex career decisions can ease the burden of uncertainty.Supportive Family: Having open communication with family members about work demands can lead to better understanding and fewer personal conflicts.Peer forums: Joining industry groups or CA associations fosters professional growth and provides a platform for shared challenges.Measuring Success in Work-Life HarmonySuccess in work-life harmony can be assessed by evaluating:Professional Metrics: These include the ability to meet deadlines, accuracy in financial reporting, and the quality of work.Personal Metrics: Indicators like physical health, relationship satisfaction, and mental well-being are essential to gauge work-life harmony.Holistic KPIs: Develop key performance indicators (KPIs) that measure not just deadlines and deliverables but also employee well-being, turnover rates, and feedback scores.ConclusionEffective time management is indispensable for chartered accountants striving to excel professionally while maintaining a fulfilling personal life. By adopting proven strategies, leveraging technology, and fostering a culture of efficiency, CAs can achieve work-life harmony. This approach not only enhances individual well-being but also contributes to organizational success, making time management a cornerstone of sustainable professional excellence.ReferencesCovey, S. R. (1989). The 7 Habits of Highly Effective People. Free Press.Goleman, D. (1995). Emotional Intelligence: Why It Can Matter More Than IQ. Bantam Books.Allen, D. (2001). Getting Things Done: The Art of Stress-Free Productivity. Penguin Books.Drucker, P. F. (1967). The Effective Executive. Harper Business.Harvard Business Review. (2023). "Time Management Tips for Professionals."American Psychological Association. (2021). "Work-Life Balance and Mental Health."Chartered Accountants Australia and New Zealand. (2020). "Strategies for Work-Life Integration."Microsoft. (2022). "Maximizing Productivity with Technology."
Ep. 190 — Leadership Beyond Numbers: How Financial Professionals Can Shape Tomorrow’s Business World
CA Journal
· September 2026
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Leadership Beyond Numbers: How Financial Professionals Can Shape Tomorrow's Business WorldThe modern business landscape has fundamentally shifted, requiring financial professionals to step beyond traditional boundaries and embrace strategic leadership roles. This transformation demands more than technical expertise; it requires the ability to navigate digital disruption, engage diverse stakeholders, and build sustainable competitive advantages. Through personal experiences and industry observations, this article explores how Chartered Accountants can evolve from financial gatekeepers to strategic visionaries. Having met top corporates, change makers, visionaries, and experts as a business journalist, I present a bird's-eye view from this vantage point on how these leaders developed leadership capabilities, fostered innovation, remained agile, and created value in an increasingly complex world.From Number Crunchers to Business BuildersTraditionally, finance professionals were often seen as the gatekeepers who said "no" to creative ideas, focusing primarily on compliance and cost control. Their responsibilities revolved around number crunching, financial analysis, and management, rarely venturing beyond the confines of the balance sheet and P&L.Today, the landscape has transformed dramatically. Finance professionals now stand at the very core of organizational strategy and innovation, shaping the future of businesses across the globe. Consider Vaibhav Taneja, Tesla's CFO, who earned an astounding 1,200 crores in 2024, firmly positioned in the front seat as a key navigator of one of the most disruptive firms of this century or the legendary late Rakesh Jhunjhunwala, whose investment acumen built a fortune exceeding 60,000 crores. These examples underscore how Chartered Accountants possess a dynamic qualification that empowers them to soar in any industry.From industrial giants like Kumar Mangalam Birla and financial visionaries like Deepak Parekh, to banking leaders such as Naina Lal Kidwai and IT stalwarts like T.V. Mohandas Pai, Indian CAs have consistently demonstrated their ability to lead and innovate across finance, industry, and technology. This shift didn't happen overnight. It emerged from necessity as businesses grappled with unprecedented challenges: global pandemics, climate change, technological disruption, digital adaptation and changing social expectations. Organizations discovered that their survival depended not just on financial management, but on strategic thinking, stakeholder engagement, and adaptive leadership i.e., areas where our analytical skills and systemic thinking proved invaluable.The Changing Dynamicsi. The Tech Reset: I recall my first seminar on AI in 2018, when I was utterly lost in the technical language and could not see the connection between this and my profession. Skip to the present, and I am assisting clients in deploying AI-based financial reporting to perception analysis and reputation management. This is an individual experience that many of us have had, the breakneck speed of technological change that at first appeared to be marginal but soon became central to our work lives. The most important lesson I have learned is that we do not have to be technologists, but we need to know how technology presents opportunities and risks to our organizations. As artificial intelligence will be able to process thousands of transactions in seconds, we will not be valued by processing data but by interpreting insights, making strategic suggestions, and ensuring long term implications. Think about how routine accounting tasks have changed with robotic process automation. Instead of perceiving this as a threat, progressive professionals have used automation to concentrate on more valuable tasks such as strategic analysis, risk assessment, and business partnership. The most successful of us have learned to work with technology, not against it.ii. The Stakeholder Revolution: The transition to stakeholder capitalism is one of the most significant changes that I have witnessed in the recent years. This is not just a change in corporate social responsibility; it is a paradigm shift in what business is about and what value means. The modern leaders have to find their way through a maze of expectations that entail the interests of shareholders, employees, customers, governments, communities, and the environment. It requires a different type of analytical thinking, one that considers many bottom lines and balances sustainability with profitability in the short run. This development requires a wider range of measures to financial professionals. The traditional KPIs such as ROI and ROCE are not to be ignored, but they have to be supplemented with the indicators of employee engagement, customer trust, societal impact, and geopolitical risk. Financial returns are no longer the only indicator of true business success. It is characterized by the capacity of an organization to acquire and maintain the best talent, establish long-term customer relations, work successfully with governments and make a difference to the greater good.iii. Globalization Meets Localization: The interconnectedness of contemporary business has its challenges and advantages. Although with the unprecedented growth of global markets, revolving around them exposes organizations to complex risks and cultural considerations. The lessons learned in a multi-national team environment have helped me understand that effective leadership needs to be based on cultural intelligence as well as financial insight. Disruptions in the supply chain in the recent past have underscored the needs to develop resilient business models capable of responding to shifting global realities. Leaders need to strike a balance between global integration and flexibility, and reduction of risks in their operation. This will entail scenario planning, stakeholder analysis, and strategic thinking far beyond traditional financial analysis.Leadership 2.0: Preparing for What's Nexti. Leadership Development as Investment: To be sustainable, existing organizations should develop future leaders. But that development of leadership is not only the mandate of the organization but also of an individual leader. We need to be ready to share our time, knowledge, and experience to help develop other individuals. Experiential learning should be integrated with some formal training as a good strategy to develop a leadership approach. This can be in the form of tough assignments, cross functional exposure, and exposure to seniors in leadership positions. The trick is to put people in scenarios that challenge them outside their personal comfort zone and also offer guidance and support. In the case of financial professionals, leadership training must focus on technical skills, as well as soft skills. Leadership does not just entail action: it has been portrayed through networking encounters, self-marketing, self-branding actions as well. This encompasses strategic thinking, communication, emotional intelligence and stakeholder management. These abilities are becoming more and more vital as we assume more strategic roles in our organizations.ii. Mentoring as a Leadership Practice: One of the most fulfilling parts of my career has been mentoring, both as a mentee and as a mentor. The chance to exchange experiences, look for and offer advice, and aid in the growth of others generates value that goes well beyond short-term financial gains. However, dedication, openness, and a sincere interest in the success of others are necessary for effective mentoring. I have learned as much from my mentoring relationships as I have gained from them. Working with less experienced coworkers has allowed me to stay up to date on fresh viewpoints, cutting-edge methods, and emerging trends. My own leadership skills have enhanced by this reciprocal learning, which has also assisted me in remaining current in a setting that is changing quickly. Effective mentoring requires clear expectations, regular communication, and mutual commitment. Mentors must be willing to share both successes and failures, provide honest feedback, and create opportunities for growth. Mentees must be proactive in seeking guidance, applying lessons learned, and contributing to the relationship.iii. Willing to Unlearn and Re-learn: Fostering cultures that support continuous learning and development requires focused intent and ongoing effort. Such cultures welcome experimentation and value all results as learning opportunities, including successes and failures. Embracing learning organizations promotes diversity of thought, interdisciplinary collaboration, and actively supports personal and professional growth through formal training, informal learning, and outside development activities. Providing professional development calls for leaders to actively model the learning they expect by developing their own capabilities, gathering feedback, and being open to new ideas. Such approaches ensure psychological safety for others to acknowledge knowledge gaps and pursue development opportunities.The Human Side of Future Leadershipi. Emotional Intelligence in the Digital Age: The more technology takes up the task of those repeat actions, the more valuable human skills, such as emotional intelligence, are expected to become. Leadership in a complex, ambiguous scenario involves skills to decode and manage emotions, not only our own but also that of others. My experience has taught me that emotional intelligence is not only about being nice or caring but it also concerns dealing with conflicts, building trust, and understanding human motivations. These skills are crucial in stakeholder engagement, the management of change as well as team performance. Emotional intelligence requires self-awareness, practice, and feedback. This involves knowing our personal hot buttons, learning to read social cues, and developing skills to deal with tough conversations. In many cases, this requires analytical professionals to step out of their comfort zones and tolerate uncertainty.ii. Authentic Leadership in Uncertain Times: In the age of greater transparency and stakeholder accountability, authenticity has become a leadership requirement. Individuals desire to be led by leaders who are authentic, consistent, and in line with their professed values. It involves being vulnerable, understanding oneself, and being able to acknowledge mistakes. My leadership philosophy is based on honesty, integrity, and consistency. This implies openness in problems, acknowledging my ignorance in certain areas, and seeking assistance when necessary. This approach may seem risky but it creates trust and credibility that are good sources of leadership effectiveness. Authentic leadership is not about being perfect, it is about being real. This involves acceptance of our weaknesses, the need to learn and also to keep on improving. This can be a challenge to financial professionals, in that it requires us to get out of our comfort zones and into the muddy waters of human relationships and organizational dynamics.iii. Purpose-Driven Leadership: Contemporary professionals, especially the younger generations, want their work to have meaning and purpose. Leaders should be capable of explaining the ways in which individual roles can be related to the wider organizational aims and contribution to the society. This involves knowing and explaining the reason behind strategic decisions and business operations. Purpose-driven leadership is the alignment of individual values with organizational values and assisting others in deriving meaning in their work. This involves knowing what motivates each person, giving them a chance to grow and make a difference, and establishing links between everyday tasks and larger goals.Preparing for an Uncertain Futurei. Embracing Artificial Intelligence as Partner: The emergence of artificial intelligence poses challenges and opportunities to leaders. Instead of being afraid of AI, we should also learn to use its potential, preserving human control and moral principles. This involves technical knowledge, strategic planning and changing management skills. My strategy towards AI implementation is to enhance human abilities instead of substituting human judgment. This entails determining the activities that can be automated and saving jobs that need creativity, emotional intelligence, and strategic thinking. The aim is to develop human-AI collaborations that take advantage of the strengths of each other. Ethical considerations, data privacy, and algorithmic bias must be taken into consideration in order to implement AI successfully. Leaders should make sure that AI systems are transparent, accountable and in line with organizational values. This involves continuous monitoring, stakeholder involvement and continuous improvement.ii. Leading in Hybrid Environments: The transition to remote and hybrid working environments has altered the collaboration patterns and organizational functioning to its core. Leaders need to establish emerging skills in how to lead distributed teams and sustain organizational culture and productivity in virtual workplaces. Working remotely has led me to strongly embrace the essence of purposeful communication, the establishment of trust, and the leadership of results. This demands alternative performance management, team building and professional development. The trick is to keep human relationships and use technology as a tool for collaboration and communication. Hybrid workplaces can provide higher flexibility and work life integration and allow access to international talent. Nonetheless, they also come with a series of challenges involving equity, inclusion, and the organization culture. Leaders should be active in solving these issues and maximizing the advantages of flexible work arrangements.iii. Sustainability as a Strategic Imperative: Environmental and social issues have shifted into the mainstream of strategic priorities. Leaders need to learn how to incorporate sustainability in business strategy and still sustain financial performance and competitive position. The attitude towards sustainability must focus on long-term value creation rather than short-term cost-optimization. This includes the knowledge of stakeholder expectations, evaluation of environmental and social risks, and the opportunities of sustainable innovation. The aim is to develop business models that are beneficial to all stakeholders and also help in the overall well-being of the society. Sustainability needs to be measured, reported, and improved. Leaders should also build the capacity to monitor ESG performance, report on progress to stakeholders, and adjust strategies in response to evolving expectations and needs.Conclusion: The Journey ContinuesThe shift of our profession to strategic leaders rather than financial gatekeepers is one of the most important changes in the history of business. This transformation demands that we build new skills, become comfortable with ambiguity, and leave our customary comfort zones. Nevertheless, it also opens up new possibilities of value creation, innovation, and contribution to society like never before.The path to strategic leadership excellence is individual and continuous. It involves lifelong learning, risk-taking, and service to others. Successful leaders will be the ones who will be able to integrate analytical rigor with emotional intelligence, strategic thinking with operational excellence, and financial acumen with human understanding.In the future, authentic, purpose-driven leadership will become even more important. Organizations that will succeed will be those whose leaders are able to manage complexity, inspire others, and generate value for all stakeholders through the highest levels of integrity and professionalism.To the people who are willing to take this journey, it is important to note that leadership is not about knowing all the answers but rather it is about asking the right questions, getting the best out of people and creating an environment where people can achieve success. The world requires leaders who are able to break the divide between analytical thinking and human understanding, financial performance and social impact, and current realities and future possibilities.The future is with people who can look beyond the figures to the human stories behind them, who can juggle competing interests whilst still having a clear moral compass and who can motivate others to deliver extraordinary performance. This is our chance and our task as the future generation of business leaders.
Ep. 191 — Building Tomorrow’s Leaders for a Thriving Economy
CA Journal
· September 2026
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Building Tomorrow's Leaders for a Thriving Economy"The function of leadership is to produce more leaders, not more followers." - Ralph NaderIn the tumultuous symphony of modern economies, where volatility, complexity, and disruption now form the new normal, leadership is no longer a prerogative of the select few but an imperative for the many. As global paradigms shift and emerging economies like India ascend toward superpower status, the most valuable currency is not capital, technology, or even innovation. It is leadership capable, courageous, and conscientious leadership.As finance professionals, corporate custodians, and institutional visionaries, we must nurture and engineer a new breed of leaders leaders who are not merely efficient managers but inspired nation-builders. These torchbearers must master economic levers and possess the moral fibre, intellectual curiosity, and cultural sensitivity needed to steer our economies toward inclusive and sustainable prosperity.The Architecture of Future LeadershipLet us be unequivocal: tomorrow's economy will not be built by yesterday's thinking. As we stand at the confluence of geopolitics, artificial intelligence, and climate urgency, the leadership we require must evolve from tactical guardianship to transformational stewardship.Traits that will define tomorrow's leaders:Adaptive Intelligence: Beyond IQ and EQ lies AQ - the Adaptability Quotient. The leader of tomorrow must be at ease with uncertainty, evolve through ambiguity, and harness chaos into opportunity.Moral Courage: In a world besieged by ethical dilemmas and stakeholder activism, leaders must be guided by integrity, transparency, and empathy, even when it is inconvenient.Global Mindset with Local Soul: The ability to think globally while acting locally will define leaders who can scale businesses without losing cultural resonance.Digital Dexterity: Fluency in data, AI, and emerging technologies is no longer optional. Leaders must not only deploy tech but also demystify and democratise it across their organisations.Collaborative Capital: Hierarchies are fading; ecosystems are thriving. Tomorrow's leaders will win not by command and control but by influence, partnerships, and collective intelligence.Lessons from the Corporate TrenchesIn my journey across multiple sectors from FMCG, manufacturing and telecom to media/advertising and infrastructure - I have witnessed leadership in its most dynamic, demanding, and sometimes disillusioning avatars. In the various chairs I have occupied, I have often had to make decisions that weren't black or white but rather 51:49, requiring both precision and prudence.Let me offer a reflection born not from the boardroom but from a boarding gate. Once, I found myself in a delayed flight scenario. The delay was long, the passengers agitated, and answers were few. Yet, what amazes me was how calmly and transparently the airline staff responded. It was evident that there were no perfect or accurate answers, yet they communicated and tried to answer everyone with reassurance. I learnt a profound lesson of leadership that day, which values presence over perfection.This echoes a broader truth I've learned leaders aren't always expected to have answers, but they are expected to show up. I reflected on this recently during my address at the University of Delhi, where I shared that visibility and engagement matter even more than certainty. It's not the turbulence but the tenor of your response that defines you.This learning has also manifested in high-stakes professional scenarios. For instance, during a critical acquisition across two culturally distinct geographies, the balance sheet dynamics were robust, yet the ground-level integration posed existential risks. Finance alone could not solve the problem. What worked was listening to people, respecting legacy, bridging languages, not merely in dialect but in intention, and aligning divergent aspirations. It wasn't a transaction; it was a transformation.That's the future of leadership: orchestrating alignment without enforcing uniformity. Think conductor, not dictator.Building a Leadership Pipeline: From Chalkboards to BoardroomsAddressing the pipeline is one of the major things when we are talking about future leaders. Leaders are nurtured and made with deliberate, systematic, and inclusive interactions.1. Education that elevates, not just instructs.Rote memory will never build the quality of leadership. The quality of leadership in a person is the outcome of reflection, resilience, and real-world experience.Case-based learning from both failures and successes and integrating it helps to foster leadership in a person.Encourage internships that expose students to ambiguity, not just algorithms.Invite cross-sector mentorships where an engineer learns from an economist and a CA shadows a poet.2. Corporate grooming beyond KRAsTrue leadership potential is often concealed in surprising places - within the hardworking project manager, the compassionate HR leader, and the inquisitive financial analyst.Switch roles among different functions and locations. Encourage questioning and exploration, not only obedience and routine.Create leadership platforms that allow ideas to flow from all tiers, not just the executive level.3. Institutionalising valuesA thriving economy must be built on a solid foundation of values.Introduce "Ethics in Action" labs in every leadership program.Promote a culture of whistleblowing as a sign of strength, not betrayal.Create zero-tolerance policies against toxic leadership behaviours.India's Moment: The Economic Mandate for LeadershipIndia, today, stands at a unique historical crossroads. Leveraging its demographic advantage, robust physical and digital infrastructure, and diplomatic influence, it is set to become one of the globe's leading three economies. However, this climb requires skilled guides.Our economic framework, encompassing green energy shifts and digital public assets such as Aadhaar and UPI, requires a cadre of innovative and implementation-focused leaders. The finance department, in particular, is experiencing a revival. As pointed out in my latest Forbes article, the CFO position has transitioned from a compliance regulator to a strategic guide. This requires not only financial intelligence but also emotional strength, foresight, and skillful communication.I've frequently mentioned that CAs are more than just number analysts - we are storytellers. We are not just risk managers - we are builders of resilience. We do not adhere to rules - we create policy and define purpose.We should not overlook our impact. When a CA emphasizes ESG metrics, it creates a ripple effect throughout the supply chain. When a finance leader advocates for gender equality in recruitment, it reshapes organizational standards. When a CA guides a rural entrepreneur, it elevates not just the business but the whole ecosystem.Leadership Is Not a Title - It's a TemperamentPeter Drucker once said: "Management is doing things right; leadership is doing the right things."This distinction is critical in today's era of performative success. Leadership is not about showmanship, but about stewardship. A leader walks the floor, not just the boardroom. A leader listens before they speak. A leader takes accountability even when it's tempting to deflect. A leader cultivates more leaders, not followers.Analogies from Nature: The Bamboo and the BanyanNature, in its quiet wisdom, offers profound metaphors for leadership.The Bamboo: It spends years growing roots underground, silently building strength. Then, in weeks, it shoots up to great heights. Leadership, too, is subterranean before it is seen.The Banyan: It grows not only upward but outward, sending roots from branches to support others. It creates shade, shelter, and strength. Great leaders do the same.These are not poetic indulgences. These are principles I have witnessed in boardrooms where long-term vision triumphed over short-term earnings and where empathy led to higher productivity than efficiency alone ever could.What can ICAI and the Profession Do?As members of the ICAI, we are not bystanders in this narrative we are protagonists.Let us commit to:Leadership literacy as a part of our process not just managerial, but moral and societal.Diversity accelerators, including women and underrepresented communities and regional voices.Digital transformation is a leadership mandate, not just an IT initiative.Mentorship movements that create ripple effects across generations.We must also lobby for the infusion of greater public leadership, encouraging finance professionals to step more into government advisory roles, public policy, and non-profit leadership.The Leader in the MirrorLeadership, for all its external dimensions, is deeply internal. It is forged in solitude as much as in seminars. In my journey, the moments that shaped me the most were not the ones featured on magazine covers but those filled with doubt, dilemmas, and decisions. Saying "no" to an easy deal because it compromised a value. Standing up for a junior team member when it wasn't politically prudent. Leaping into an unfamiliar industry, trusting learning over legacy.These were not headline moments, but they were defining ones.A Leadership Renaissance BeckonsIf I may sum up, leadership is not a sprint it is an inheritance. As economies transform, industries morph, and societies awaken, the call to leadership has never been louder. Let us respond not with timidity, but with tenacity. Not with echo chambers but with empathy. Not with self-interest but with shared purpose. For in every young finance professional and in every silent contributor to the profession of CA, there lies the dormant seed of leadership. It is our sacred task to nurture it for ourselves, for our organisations, and for India's thriving economy we all dream of.Author may be reached at eboard@icai.in
Ep. 192 — From Vision to Value: Redefining Leadership in the age of Disruption
CA Journal
· September 2026
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From Vision to Value: Redefining Leadership in the age of DisruptionLeadership in the modern era demands far more than directional guidance. It requires resilience, adaptability, and the ability to create competitive advantage amid chaos. This article explores how effective leaders are navigating the "new world order" characterized by geopolitical volatility, digital disruption, and generational shifts. Drawing upon real-world insights and professional experience, it outlines the strategic role of leaders in translating vision into reality, building future-ready teams, and anchoring purpose in an age of uncertainty. The article provides how CAs can evolve from financial experts to strategic changemakers. These reflections are especially relevant in today's VUCA (volatility, uncertainty, complexity & ambiguity) world, where India's CAs have the opportunity to lead global transformation narratives.The New World Order: Navigating Turbulence with TenacityThe global leadership landscape has undergone tectonic shifts. The post-pandemic world continues to be shaped by:Technological convergence - AI, Blockchain, and IoT redefining business modelsClimate consciousness ESG obligations now sit at the core of boardroom agendasGeo-political realignments Supply chain nationalism and trade recalibrationWorkforce evolution - Millennials and Gen Z demanding purpose and flexibilityLeadership today is not about commanding from the top but orchestrating from the center. Command-and-control is giving way to "collaborate-and-coach." The successful leader is now part strategist, part change agent, and part culture builder.Leadership must be reimagined, not as authority, but as influence; not as control, but as enablement.For Chartered Accountants, this is a pivotal moment. With a unique grounding in business logic, financial acumen, governance, and analytical thinking, CAs can evolve into enterprise leaders."In times of rapid change, the learners inherit the earth." Eric HofferThe Evolving Role of the CA as a Strategic LeaderTraditionally perceived as financial gatekeepers, Chartered Accountants today are stepping up as enterprise navigators. CAs bring a distinctive edge: they understand financial truths, business realities, and governance imperatives. These attributes, when combined with agility and digital thinking, make them ideal candidates to lead disruptive transformations.Key shifts in the CA leadership archetype:Traditional CAStrategic CA LeaderRisk AverseRisk AwareBack-office functionBoardroom influencerCost controllerValue creatorCompliance-centricInnovation-enablerReflection - Leading AI Strategy as a CAAs a Chartered Accountant leading a group-wide AI transformation, I've steered AI initiatives, not just building models, but defining strategic use cases, ensuring data quality, and maintaining RoI discipline. Our training in systems thinking, risk management, and governance gives us a unique edge. It enables us to approach emerging technologies in a systematic and calibrated manner to drive real business value.Leadership begins where comfort zone ends. For CAs, stepping into strategy, product, and innovation roles is no longer optional, it's essential.Vision Without Execution is Hallucination: Strategy in ActionA powerful vision inspires, but only execution delivers value. Modern strategic leadership involves three critical dimensions:a. Sensemaking: Leaders must interpret complex signals, economic, social, and technological, and anticipate the next curve. For example, proactive investment in AI is no longer optional but essential for staying competitive.b. Strategic Re-alignment: Bridging the gap between vision and execution means ensuring that operational objectives, KPIs, capital allocation, and talent strategies are all aligned.c. Agility and Iteration: In a VUCA world, strategic plans must allow for iterative experimentation. Agile leadership means making small bets, learning quickly, and pivoting as needed.Professional Example Transforming Adani Airports Experience Through Digital Innovation and AIAt Adani Digital, we envisioned building India's first integrated digital travel experience through Adani One. This platform allows passengers to book flights, cabs, duty-free items, lounges, and more, unifying disparate travel touchpoints into a seamless journey.But the real transformation came from integrating AI across our airport operations. We used AI to predict passenger footfall based on seasonality, events, and weather; optimize boarding gate allocation to reduce delays; and enhance surveillance and safety through computer vision. What began as a vision became a new operational standard.The initiative proved that visionary leadership in today's context must also champion integration, iteration, and institutionalisation of innovation.Building Competitive Advantage: A Leadership ImperativeCompetitive advantage today is not just about product or pricing, it's about speed, culture, and adaptability.a. Culture as Strategy: Peter Drucker's maxim that "culture eats strategy for breakfast" has never been truer. Purpose-driven cultures outperform purely profit-driven ones, especially with younger employees.b. Speed to Learn vs. Speed to Market: Firms that learn faster outperform those who scale faster. Leadership must build learning organizations with empowered teams.c. Digital Transformation with Purpose: It's not about digitizing for efficiency alone, but for resilience and experience, whether that's customer-facing (CX) or internal (EX).Professional Example AI for Power Generation Forecasting in RenewablesRenewables are at the centre of world's energy transition. But volatility in wind, solar irradiance, and grid behaviour makes planning a constant challenge. In our renewables vertical, we deployed AI-based forecasting models to predict solar and wind energy generation. These models ingest weather, irradiance, and historical load data to improve scheduling accuracy, reduce grid penalties, and optimize trading decisions. This created a unique competitive edge-not just by reducing imbalance charges, but by improving market responsiveness.The leadership challenge wasn't just about building the model it was about aligning operations, regulatory, and tech teams to trust and use the intelligence while fostering a culture of innovation & adoption.Leading in the Age of AI, ESG, and Stakeholder CapitalismStrategic leadership now sits at the intersection of technology, trust, and transformation.a. AI: From Automation to Augmentation: Leadership must embrace AI not as a threat to jobs but as a force multiplier for productivity. Ethical considerations, algorithmic bias, and governance will become Board-level priorities.b. ESG Leadership: A robust ESG strategy is now tied directly to cost of capital, investor sentiment, and brand equity. The CA's role in ESG reporting, integrated thinking, and assurance is becoming indispensable.c. Stakeholder Capitalism vs. Shareholder: Today's leaders are judged not just by returns but by impact. Employee well-being, environmental responsibility, and social equity are no longer optional.Professional Example AI-Driven ESG and Operations at PortsAdani ports business presented a rich canvas to deploy AI for both operational efficiency and ESG impact. For instance, in one of our port terminals, we are experimenting to leverage AI-powered computer vision to monitor emissions on real time, flagging anomalies and ensuring compliance. Simultaneously, we have deployed AI for berth allocation optimization, reducing turnaround time and cutting fuel emissions. Here, ESG is not a separate track, it is embedded in operational KPIs. In today's era, leadership must break silos between compliance, sustainability, and business.Developing Tomorrow's Leaders: The CEO's New KPIFuture-readiness requires not just capability but capacity building. Leadership development must move from classroom theory to in-field action. Key strategies include:Reverse Mentoring: Learning from digital natives inside the organisation.Cross-functional Rotations: Building T-shaped leaders with wide and deep skills.Succession Pipelines: Creating readiness at every level, not just the top.Personal Example - Empowerment over ControlIn my entrepreneurial journey of launching and scaling a farm-to-fork retail venture, I learned that scalable leadership is less about control and more about trust. Delegating core decisions to team leads, while providing coaching frameworks and clarity around performance expectations, fostered a culture of ownership. This, in turn, accelerated growth and culminated in a profitable exit. The lesson has stayed with me across subsequent roles: leaders grow when they create space for others to lead.At Adani AI Labs, we run a reverse mentoring program where young data scientists mentor senior leaders on AI trends. It's a two-way street: wisdom meets freshness.Leadership pipelines are not built overnight. But by fostering autonomy, creating learning loops, and rewarding risk-taking, we can develop resilient future leaders.Crisis Leadership: The Ultimate Test of StrategyThe true test of leadership lies not in times of comfort, but when turbulence strikes.The last five years have thrown multiple curveballs: COVID-19, supply chain shocks, war tensions. In crisis, leadership is truly tested.Three traits make the difference:Clarity - Regular, transparent updates remove panicSpeed Decisions must be made with 80% informationEmpathy - People-first approaches win loyalty and trustOne insight: Decisiveness beats delay, even if the first decision needs course correction later.Lessons from the Trenches: Reflections from PracticeHaving led strategic and AI-driven transformations across enterprises over the past two decades, marked by successes, setbacks, and reinventions, I share here some key personal takeaways. These reflections are intended to guide and inspire emerging leaders as they navigate their own paths forward:Vision is important, but traction is divine.Empowerment beats oversight.Upskill constantly as leaders need to evolve faster than technology.Metrics matter, but meaning drives teams.Sometimes, legacy systems are easier to modernize than legacy mindsets. Invest in the latter more than the former.Leadership is not a job. Its a journey.Conclusion: Leading with Purpose in a Perpetually Uncertain WorldAs India surges forward in this decade of opportunity, the demands on leadership will only grow. From climate adaptation to AI ethics, from public trust to investor scrutiny, leaders must juggle growth, governance, and generational change.The road ahead is uncertain, but not unclear. Leadership in this new world order requires a combination of:Strategic clarityCultural humilityDigital fluencyUnshakeable ethicsAs India positions itself as a global economic force, Chartered Accountants have a once-in-a-generation opportunity to step up, not just as finance leaders but as nation-builders. Chartered Accountants are uniquely placed to lead this evolution. With the right mix of strategic exposure, tech fluency, and purpose-led thinking, they can be the architects of tomorrow's institutions.Let us lead not just with vision, but with values that turn that vision into enduring value.ReferencesKotter, J. (1996). Leading Change. Harvard Business Press.ICAI. (2023). Chartered Accountancy Curriculum Vision 2040.McKinsey & Company. (2024). The State of Organizations 2024.HBR. (2023). Strategy in the Age of AI.World Economic Forum. (2024). Future of Jobs Report.EY India. (2023). ESG Readiness of Indian Enterprises.
Ep. 193 — Turning Vision into Reality: Learning to Lead Without a Map
CA Journal
· September 2026
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Turning Vision into Reality: Learning to Lead Without a MapLeadership often evokes images of boardrooms, strategic blueprints, and grand speeches. But in reality, leadership begins long before titles and designations are handed out. It starts with a mindset, a willingness to step forward in uncertainty, to take responsibility when things go wrong, and to build trust when direction is unclear. True leadership is forged not in comfort but in action. It's a choice made repeatedly: to rise above setbacks, to see potential in people before they see it in themselves, and to move forward with conviction, even when the road is unmarked.In today's fast-moving world, the nature of leadership has evolved. It is no longer about commanding from the front but about enabling from within. Great leaders aren't necessarily the loudest voices in the room; they are often the most attentive listeners. They don't merely chart the course; they build the ship while sailing it. Their focus isn't only on where to go, but how to bring people along with them in a way that's meaningful, sustainable, and human.We often assume leaders are born with answers, but more often, they are shaped by questions; questions they weren't afraid to ask, even when no one had answers. In an era where change is the only constant and information moves faster than clarity, leadership is less about control and more about alignment. It is not about knowing everything, but about learning endlessly, listening openly, and responding with intent. Today, leadership is no longer static; it's not a destination, it's a motion. The leaders of tomorrow will be those who remain in motion: learning, listening, adjusting, and leading by example.Whether you're at the beginning of your journey or somewhere in the middle of it, the path forward isn't about being perfect. It's about being real, staying open, and having the courage to move, even when the direction isn't fully clear yet. I've never had a boss. Never reported to a manager, followed corporate protocol, or waited for a promotion. But over the past decade, I've led teams, built structures, faced markets I didn't fully understand, and made decisions without handbooks or benchmarks.In doing so, I learned one fundamental truth: leadership doesn't begin with answers. It begins with action. Not the kind of action that headlines success stories, but the daily, deliberate kind, making things work when you have more belief than clarity, more effort than experience. Leadership, I've learned, is not about being in control. It's about taking responsibility.Leadership Without the LabelsStarting young often sounds glamorous. But when you're 21 and building something from scratch in a field you've never studied, the weight of responsibility shows up quickly. No one gives you a playbook when you're an entrepreneur. You have to write your own, usually by trial.I remember, early on, standing at rickshaw stands in Ahmedabad, trying to convince drivers to let us install tiny shelves inside their autos for magazines we created ourselves. We wrote, designed, printed, and distributed every copy. The idea didn't succeed as we had hoped. But it taught us something priceless: start fast, fail faster, and learn fastest. Those moments didn't look like leadership. But they were. Because leadership is often disguised as experimentation, effort, and an endless loop of adjusting and moving on. It's not about waiting to feel ready; it's about showing up before you are.From CA to CEO: Discipline Meets CuriosityI cleared my Chartered Accountancy exams in the first attempt. That milestone opened doors, most of which I chose not to walk through. I didn't want to work within systems. I wanted to build my own. But what CA gave me was something more enduring than career choices. It gave me structure. In advertising, the pace is frenetic. Ideas change by the hour. Clients pivot mid-campaign. Markets evolve overnight. Amidst this, my training in CA gave me a compass. It taught me how to evaluate risks, maintain consistency under pressure, and make long-term decisions with limited data.The world of media might seem like a contradiction to the world of finance. But for me, they balanced each other. One gave me agility and the other gave me grounding. Between 2015 and 2018, I traveled more than I stayed still. Sleepless train rides, back-to-back city meetings, and a dozen stories of wrong stations missed connections, and improvised stays. I slept in train corridors because there were no confirmed tickets. Those years were anything but comfortable. But they were necessary. Because it's in discomfort that consistency is tested. And leadership, to me, is a test of consistency, of showing up when no one expects you to, of working when it's easier to pause. Even through exhaustion and uncertainty, the goal remained clear: Build something new every day, every client meeting mattered, and every presentation was a chance. Even the rejections taught us what not to do. That steady repetition, unseen, uncelebrated, laid the foundation of everything that followed.As the business grew, my role had to shift. From doing everything myself to enabling others to do better. That meant listening more than speaking. Trusting more than checking. Letting go of perfection so others could learn, lead, and contribute in their own way. It's not always easy. Especially when your instinct is to solve. But true leadership isn't about solving every problem. It's about building people who can. I began to understand that leadership wasn't about control. It was about clarity. If the team knows the direction, they don't need handholding. If they know the mission, they'll find their own method.Crisis Builds CultureWhen the pandemic hit, like most businesses, we were scared. But one thing was clear: we weren't going to abandon our team. We decided that there would be no layoffs, salary cuts and compromise on culture. Instead, we expanded our services, diversified rapidly, and relied heavily on our people. We adapted fast, not because we had the answers, but because we trusted each other to figure out together. That time period taught me that culture is not built in strategy meetings; it's built on how you show up for your team when things go wrong. The way you respond to fear, uncertainty, and risk is what people remember. That's what builds belief.Popular culture often romanticizes the idea of the solo genius. But in reality, leadership is rarely about one person. It's a relay, not a sprint. And your job as a leader is not to run every lap, but to build people who run faster, smarter, and more fearlessly than you did.I've been fortunate to work with people who brought in fresh perspectives, bold ideas, and sharper instincts. Some of the best decisions we've made came from voices that were not the loudest, but the most thoughtful. Leadership, to me, is about making space for others to shine. It's not about being the best in the room. It's about building a room full of people who are better than you at what they do.Adaptive LeadershipMarkets shift, teams evolve, what worked last year can fail tomorrow. So leaders must stay in motion. Rigid plans age quickly. Adaptive leadership is not about being reactive; it's about being ready. That means letting go of methods that no longer serve the mission. It means being open to feedback, especially when it's uncomfortable. It means acknowledging mistakes, learning from them, and moving on with humility. Some of my toughest decisions came after failed experiments. But those failures never stopped us. Because leadership is not about being right all the time. It's about being accountable all the time.People often associate leadership with scale, more clients, more cities, and bigger numbers. But I believe the real marker of leadership is depth, not breadth. It's how deeply your team trusts you. How honest are they in meetings? How willingly they take ownership, not because they're told to, but because they care. At our agency, I've seen that the strongest culture comes not from perks or parties, but from presence. When leaders are accessible. When tough conversations are welcomed. When feedback flows in all directions.Leading Without the LoudspeakerLeadership doesn't require a stage. Some of the most powerful moments I've experienced have been in 1:1s, in quiet problem-solving sessions, and in simple check-ins with teammates. We often think of leadership as big announcements and bold moves. But sometimes, it's just being there. Listening and backing your team without conditions. Saying, "I don't know either, but let's figure it out together."If there's one belief that has kept me going, it's this: you don't need to have it all figured out to start. Leadership is not about certainty. It's about courage. Not the loud kind, but the consistent kind. The kind that shows up even when things don't go your way. The kind that adjusts, learns, and continues to move. The kind that makes space for others to rise. Turning vision into reality isn't a straight path. It's full of wrong turns, late trains, unexpected stops, and surprising destinations. But if you stay honest, stay curious, and stay committed to your people, the map writes itself.Because leadership is not a destination. It's how you walk the road. And perhaps, the greatest lesson of all is this: leadership is never finished. It evolves with every person you hire, every risk you take, and every failure you recover from. It lives in the moments you stay silent so others can speak. It grows when you let go of needing credit and focus instead on creating impact. It's not a title, it's a tendency. A constant pull towards responsibility, towards improvement, towards people. Leadership is waking up one more day, choosing to show up, and leading with both heart and head, because your team deserves nothing less. Leading without a path is uncomfortable. It means facing risk, not just of failure, but of being misunderstood or getting it wrong. But it also builds strength. It teaches you to listen, to adapt, and to lead from values, not just goals. You learn to create structure where none exists, and to stay grounded in your vision even as the methods shift.The best leaders aren't those who know the whole route; they're the ones who didn't stop walking when the road disappeared. In doing so, they don't just reach their destination; they create new paths for others to follow. That's the real legacy of leadership: not having all the answers, but being willing to explore the unknown and bring others along. As John Quincy Adams once said, "If your actions inspire others to dream more, learn more, do more and become more, you are a leader." And that is, in the end, what leadership without a map truly becomes: a journey worth taking, and one worth leaving behind.
Ep. 194 — The Evolving Landscape of Strategic Management in India
CA Journal
· September 2026
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The Evolving Landscape of Strategic Management in IndiaIn India's strategic management sphere, a paradigm shift is underway, undergoing a significant transformation. This transformation is fueled by digital innovation, sustainability imperatives, and the integration of global business practices. Strategy has emerged as a crucial aspect of business operations, with companies recognizing the need for strategic planning to stay competitive in a rapidly changing market. The profession has evolved significantly over the years, with professionals from diverse backgrounds contributing to the development of innovative strategies that drive business growth and success.The focus on eco-friendly practices and ethical governance is redefining corporate strategies, making them not just profitable but also sustainable. Diverse sectors, including corporate, non-profit, government, and technology, seek strategy professionals to drive growth and innovation.The Strategy Consulting market size is projected to grow USD 79.90 billion by 2032, exhibiting a CAGR of 5.70% during the forecast period (2024-2032). The future of strategic management in India is vibrant, demanding a blend of traditional wisdom and modern agility, positioning the nation as a burgeoning hub of strategic excellence on the global stage.IntroductionIn the dynamic landscape of Indian business, Strategy has emerged as a crucial aspect of business operations, with companies recognizing the need for strategic planning to stay competitive in a rapidly changing market. This profession has evolved significantly over the years and undergone a remarkable transformation, with professionals from diverse backgrounds contributing to the development of innovative strategies that drive business growth and success.The rapid pace of technological advancements, heightened competition, volatile markets, and resource constraints have all increased the complexities of modern management. These factors have increased external pressures on businesses while diminishing their internal agility to adapt. Consequently, strategic management's purview has broadened significantly, becoming a vital facet of business operations that guides leaders in steering organizational activities towards the right path.Strategy is not just about grand visions, but it is about connecting the dots between markets, competition, capabilities, and resources. The essence of effective strategic management lies in formulating and executing an organization's vision and goals. Strategic leadership is a rare commodity, with studies indicating that less than 10% of leaders possess such skills. It is imperative for professionals to acquaint themselves with esteemed strategic frameworks like Porter's Five Forces, SWOT analysis, the Balanced Scorecard, and the Blue Ocean Strategy. The more tools in your toolbox, the more equipped you are to approach any strategic challenge.This article aims to provide an overview of the strategy profession in India, highlighting its history, current landscape, significance, key roles, and the skills required to excel in this field of Strategic Management.History and Evolution of Strategy as a ProfessionThe concept of strategy has been around for centuries, with its roots in the ancient civilizations like the Greeks and Romans employing strategic thinking to achieve their goals. In India, the concept of strategy has been present in various forms, such as the ancient Indian philosophy of "Dharma" that emphasizes the importance of strategic planning and decision-making. However, the modern concept of strategy as a profession began to take shape in India in the post-independence era, particularly in the 1950s and 1960s, when Indian businesses started to adopt Western management methodologies or practices.The concept of strategic management gained prominence in the mid-20th century, with scholars like Peter Drucker, Michael Porter, and Igor Ansoff laying the foundations of modern strategic thinking. Their contributions on competitive advantage, strategic planning, and market diversification provided the framework for businesses worldwide, including those in India, to navigate complex market dynamics.Current Landscape of Strategy Profession in IndiaIn India's vibrant business ecosystem, the strategy profession has undergone significant transformations in recent years, with strategy becoming an integral component of business operations across various sectors. Management consulting firms play a crucial role in disseminating strategic management principles and providing advisory services to firms of all sizes. Both established conglomerates and growing startups in India are increasingly recognizing the value of strategic thinking in driving sustainable growth and competitive advantage.According to a study by the Strategic Management Society, the number of strategy professionals in India is expected to grow by 15% annually from 2024 to 2028.In response to this growing demand for strategic expertise, Indian business schools are curating and offering specialized courses in strategic management and related disciplines. These programs or educational offerings are designed to arm the next generation of strategy professionals with the knowledge and skills needed to tackle the complexities of the modern business landscape. The programs focus on developing critical thinking, problem-solving, and analytical skills, as well as the ability to adapt to changing market conditions and technological advancements. There are over 50 MBA programs in India that offer specializations in strategy, with many top-tier universities offering such programs.The digital revolution has further revolutionized strategic management practices in India. Cutting-edge tools like data analytics, artificial intelligence, and machine learning are equipping businesses with the capability to make informed decisions, streamline operations, and forecast market movements with unprecedented accuracy.Case Study: Recent data reveals a shift in the way Indian professionals are crafting their online personas. An analysis by LinkedIn of over 45 million profiles in India uncovered a trend: buzzwords like "strategic," "excellent," and "certified" have fallen out of favor since 2017. In their place, "skilled" has made its debut, climbing swiftly to the top three, both in India and on the global stage. This linguistic evolution reflects a broader emphasis on demonstrable abilities over abstract personal qualities in the professional narrative of India's workforce.Pathway to Success in the Strategy Profession in IndiaA successful strategy career requires more than just technical acumen, it demands a blend of continuous learning, adaptability, and building meaningful relationships. By embracing a holistic approach, understanding industry nuances, and remaining steadfast in the face of challenges, individuals can truly unlock the secrets to thrive in the dynamic world of strategy.For Chartered Accountants, the transition into strategy roles can be seamless. Their financial acumen, analytical thinking, and understanding of compliance and risk management position them strongly for roles in corporate strategy, M&A advisory, and strategic finance. Many organizations seek CAs for roles like Strategic Finance Manager, FP&A Lead, and Internal Strategy Consultant, where they evaluate capital allocation, growth investments, and long-term planning.Educational Foundation: A degree, with its specialization in strategy, stands as a coveted degree, offered by prestigious universities. Additionally, specialized programs like Master's in Strategy or Strategic Management and Master's in Data Analytics or Business Analytics further enrich one's strategic expertise.Professional Certifications: Complementing formal education, certifications serve as tangible validations of proficiency. Certifications such as SMP (Strategic Management Professional Certification), Certified Business Strategist (CBS), and Certification in Risk Management Assurance (CRMA), offer targeted skill enhancement in strategic planning, mastering strategy concepts, and risk management, respectively. Proficiency in data analytics tools like Tableau, PowerBI, and advanced Excel also holds significant value.Continuous Learning: Platforms like Coursera, edX, and LinkedIn Learning often have courses on strategic management, business models, and related topics. Learning is essential for staying abreast of evolving trends and practices in strategic management and related domains.Essential Skills: A strategist's toolkit is incomplete without robust analytical abilities to decipher complex data, coupled with stellar communication skills to articulate insights and influence stakeholders. Leadership acumen is crucial for guiding cross-functional teams, while soft skills such as empathy, collaboration, and negotiation foster a harmonious work environment and facilitate consensus-building.Strategic Demand Across IndustriesIn today's fast-paced and competitive business landscape, strategy professionals are in high demand across various sectors in India. These professionals play a crucial role in driving growth, success, and innovation within organizations. The following points to explore the sectors where strategy professionals are in demand, highlighting the key roles they play, and the skills required to excel in these positions. As per a statistic, India is home to over 100 strategy consulting firms, with many more startups and small firms emerging in the sector.Corporate Organizations: Strategy professionals are responsible for developing and implementing business strategies that drive growth and success. They work closely with senior management to identify market trends, analyze competitors, and develop strategies that position the organization for long-term success.Non-Profit Organizations: NPOs, such as the United Nations and local charities, employ strategy professionals to develop and implement strategies that maximize impact with limited resources. These professionals must be able to think creatively and develop innovative solutions to complex problems, often with limited budgets and resources.Government Agencies: Government agencies, such as the Ministry of Finance and the Ministry of Commerce, employ strategic professionals to develop and implement policies that drive economic growth and development.Technology Domain: The fast-paced tech and internet sector, home to giants like Google and Meta (formerly Facebook), demands strategy professionals to steer product innovation and market expansion. Indian tech companies like Infosys and Tata Consultancy Services (TCS) have created dedicated strategy units to explore digital transformation opportunities for clients. Similarly, startups like Zerodha and CRED have built internal strategy teams focused on user acquisition, pricing models, and business scalability.Case Study: Reliance Jio's strategy revolutionized the Indian telecom sector through aggressive pricing policy, digital infrastructure investments, and a customer-centric approach. By offering free data initially and later bundling services, it disrupted legacy players. Strategic vertical integration, from fiber networks to content (JioCinema, JioTV), has made it a benchmark in India's digital transformation journey.Key Roles and OpportunitiesIn the realm of strategy as a profession in India, professionals occupy pivotal roles across various sectors encompass diverse responsibilities aimed at driving organizational growth and success. According to Zippia, there are 16,000 job opportunities generated every year in strategic management, with a yearly growth rate of 5%.One such role is that of the Strategy Consultant, who collaborates with clients to identify business opportunities and devise strategies to harness them effectively. Often employed by prestigious consulting firms, these consultants offer actionable recommendations grounded in thorough analysis. Business Development Manager is another role which helps in identifying and nurturing business prospects, forging key relationships, and spearheading organizational growth initiatives through the implementation of strategic plans.CAs are increasingly taking up roles like M&A Strategists, Corporate Development Leads, and Strategic Finance Business Partners, where they help evaluate investment opportunities, streamline financial operations, and support board-level decision-making. Their understanding of financial statements, cost analysis, and risk frameworks adds depth to strategic initiatives.In the domain of marketing and advertising, Strategic Planners serve as linchpins, bridging the realms of brand strategy and consumer behavior understanding. Tasked in developing and executing marketing strategies, these professionals are instrumental in shaping brand narratives and driving market penetration. Tech and consumer goods companies often enlist the expertise of Product Strategy Managers to steer the strategic trajectory of product lines. Responsible for conceptualizing and implementing product strategies, these managers play a vital role in ensuring product relevance and market competitiveness.These key roles underscore the diverse landscape of strategy professions in India, each contributing uniquely to organizational success and innovation. As the strategic landscape continues to evolve, these professionals remain at the forefront, driving strategic initiatives and navigating dynamic market landscapes with ingenuity and expertise.Comprehensive Guide to Potential Career ProgressionFrom entry-level roles to senior executive positions, a strategy career offers a diverse range of opportunities to develop skills, gain experience, and build a reputation in the industry. Whether you are interested in working in a corporate setting, a consulting firm, or an entrepreneurial venture, a career in strategy can provide a rewarding and challenging path for those who are passionate about strategic planning and execution. This career map not only underscores the importance of industry exposure and niche expertise but also highlights the continuous learning imperative to navigate the ever-evolving business landscape.The Foundation (0-3 years): As Strategy Analysts, newcomers immerse themselves in data analysis and presentation crafting, gaining a solid grasp of industry frameworks. Simultaneously, Market Research Analysts dedicate their efforts to dissecting consumer and competitor data, identifying trends that inform strategic decisions.Developing Expertise (3-7 years): Progressing to Strategy Consultants at esteemed firms, professionals deliver tailored recommendations to diverse clients. Business Development Managers emerge as the architects of growth, cultivating partnerships and spotting opportunities, while Strategic Planners in marketing agencies translate consumer insights into compelling brand strategies.Leadership Roles (7-15 years): In senior roles, Strategy Managers and Directors within corporate strategy teams orchestrate major projects, mentoring the next generation of analysts and aligning initiatives with organizational objectives. Product Strategy Managers navigate the product lifecycle, guiding tech and consumer goods companies through the competitive landscape.Strategic Visionaries (15+ years): At the executive level, the Chief Strategy Officer (CSO) plays a pivotal role in shaping and executing the company's strategic endeavors alongside the CEO. The VP of Business Development scouts for long-term growth avenues, exploring new partnerships, acquisitions, or markets.ConclusionThe future of strategic management in India is both promising and complex, offering a world of opportunities for those who are willing to adapt, innovate, and lead their organizations to sustainable success in the dynamic Indian market. There are tremendous opportunities in this profession as research from LinkedIn survey shows that Creative Strategist is one of the top fastest growing jobs in India.It is undergoing a transformative journey, shaped by rapid technological advancements, shifting market dynamics, and evolving societal expectations. As businesses grapple with the complexities of the digital age and embrace sustainability imperatives, the role of strategy professionals becomes increasingly vital.Author may be reached at sajalgupta899@gmail.com and eboard@icai.in
Ep. 195 — ITC on Construction Costs: A Post-Budget Review in Light of the Supreme Court’s Safari Retreats Case
CA Journal
· September 2026
00:00
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ITC on Construction Costs: A Post-Budget Review in Light of the Supreme Court's Safari Retreats CaseThe decision of the Hon'ble Supreme Court in the case "Chief Commissioner of Central Goods and Service Tax & Ors. Vs Safari Retreats Private Ltd. & Ors. (Supreme Court of India)" is an eye opener for all taxpayers in regard to availability of Input Tax Credits on Construction Cost. Although the credit of the same is blocked under section 17(5), Clause (c) and (d), the Hon'ble Apex Court has very carefully analysed the meaning of 'plant and machinery' and 'plant or machinery' and the availability ITC. In the following paragraphs, the judgement and its implication and grey areas are analysed in detail.The Hon'ble Supreme Court of India made several key observations regarding the constitutional validity of Section 17(5)(c) and (d) of the CGST Act, 2017, and the issue of Input Tax Credit (ITC) in the case of the "Chief Commissioner of Central Goods and Service Tax & Ors. Vs Safari Retreats Private Ltd. & Ors. (Supreme Court of India)". Although the review petition is filed by the revenue before the Hon'ble Apex Court, the aforesaid judgment of the Hon'ble Apex Court shall be a game changer in relation to the availability of Input Tax Credits on Construction Cost. However, the Finance Bill 2025 has proposed an amendment in clause (d) of Section 17(5) of the CGST Act, 2017 wherein the phrase "plant or machinery" has been substituted by "plant and machinery" retrospectively with effect from 1 July, 2017 [Refer clause 119 of the Finance Bill 2025]. In this article, by analysing the provisions of Section 17(5), Clause (c) and (d), of the CGST Act, 2017 in light of the Hon'ble Apex Court's Judgment, the author wishes to share his views on the validity of the Apex Court's verdict after enactment of the retrospective amendment proposed in the Finance Bill, 2025.What the provisions sayThe Goods and Services Tax Laws were envisaged to have seamless flow Input Tax Credits. However, in reality, in many cases, the ITC is denied or blocked even if it is for the purpose of furtherance of business. Section 17(5) of the CGST Act, 2017 is a non-obstante provision in the Act which deals with blocked ITC on certain expenses even though it is otherwise available as per the Act. In Section 17(5), Clause (c) and Clause (d) are dealing with disallowance of ITC on construction activity. For reference, I wish to quote the provisions below:"17(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub section (1) of Section 18, input tax credit shall not be available in respect of the following, namely:(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.Explanation. For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;"Apparent meaning of the aforesaid provision:By reading the aforesaid provisions of the CGST Act, 2017 the following can be derived:Works Contract Services procured for construction of immovable property is not available for ITC, if capitalised in books of accounts. However, ITC is allowable if works contract service is availed for further supply of works contract services. Also, ITC is available in respect of Plant and Machinery.Goods or Services or both, received for construction of immovable property on own account is not available for ITC if the same is capitalised in books of accounts. However, ITC is available if goods and/or services are used for construction of "plant or machinery".So, the legislature has used the term "plant or machinery" in the exclusion portion of Clause (d) of Section 17(5). Further, in the said provision, though meaning of the term "plant and machinery" is defined, no definition in GST laws was provided in regard to "plant or machinery". From an apparent reading, one can interpret that if goods and/or services are procured for construction of "plant" or "machinery", then ITC is allowed.Issues for consideration before the Apex Court:Whether the definition of "plant and machinery" in the explanation appended to Section 17 of the CGST Act applies to the expression "plant or machinery" used in clause (d) of sub-section (5) of Section 17?If it is held that the explanation does not apply to "plant or machinery", what is the meaning of the word "plant"? andWhether Clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act are unconstitutional?Key Observations by the Hon'ble Apex Court:The explanation to Section 17(5) defines "plant and machinery". However, nowhere in the CGST Act is "plant or machinery" defined. Clause (c) and Clause (d) of the CGST Act do not exclude every class of immovable properties from the applicability of ITC. As per Clause (c), if the construction is of "plant and machinery", the benefit of ITC will accrue. Similarly, under Clause (d), if the construction is of "plant or machinery", ITC will be available.As per the well settled principle of interpretation of taxing statute, there is no scope to give any meaning to Clause (c) of Section 17(5) other than its plain and natural meaning. The "plant and machinery" is defined in the explanation to Section 17(5) of the CGST Act, 2017. Works contract service is also defined in the CGST Act. Therefore, there is nothing to add or subtract from the Clause (c) of Section 17 of the CGST Act. As ITC is a creation of legislature, it can exclude specific categories of goods or services from ITC and such exclusion, per se, will not defeat the object of the CGST Act.The phrase "plant and machinery" is used in the CGST Act at several different places. However, the term "plant or machinery" is only used in Section 17(5)(d) of the CGST Act. Therefore, it has been inferred that the legislature has intentionally used the expression "plant or machinery" in Clause (d) of Section 17(5) of the CGST Act, 2017. Therefore, the expression "plant and machinery" and "plant or machinery" cannot have the same meaning.The expression "plant or machinery" can either be "plant" or "machinery". Nowhere in the GST Laws is the word "plant" defined. To derive the meaning of the term "plant", the Hon'ble Apex Court has referred some judgments like COMMISSIONER OF INCOME-TAX, AP VERSUS TAJ MAHAL HOTEL [1971 (8) TMI 2 SUPREME COURT] and COMMISSIONER OF INCOME-TAX VERSUS ANAND THEATRES [2000 (5) TMI 4 SUPREME COURT]. In this regard, the Apex Court has held that dominant functionality test shall be carried out to determine whether a building can be considered as a "plant" or not. If it is found on facts that a building has been so planned and constructed so as to serve an assessee's special technical requirements, it will qualify to be treated as 'plant'. For the purpose of Section 17(5)(d), 'plant' should not be given a restrictive meaning to exclude land, buildings etc. The Hon'ble Apex Court has considered the Mall as a plant because by constructing it, the service provider generates taxable service on which GST liability is discharged. Therefore, by using the building, taxable output services are generated and in those cases the Hon'ble Apex court has stated that the Mall shall be treated as a "plant". For this purpose, the Hon'ble Apex court has taken the reference from income tax laws as well.The activity of renting or leasing buildings is already covered under Schedule-II of the CGST Act, 2017 as supply of service. Even the activity of construction of building is a supply of service if the total consideration is collected before getting the Completion Certificate. Therefore, a building can be considered as "plant" and ITC can be availed for construction of such building if the same is used for further supply of services like renting, leasing etc. However, if the building is used for own use, then ITC will not be available.Further, in regard to the constitutional validity of Section 17(5) Clause (c) and (d), the Apex Court has relied upon the decision in the case of Union of India & Ors. Versus VKC Footsteps India Pvt. Ltd. 2021 (9) TMI 626 Supreme Court and held that the provisions of Section 17(5), Clause (c) and Clause (d) do not meet the test of reasonable classification, which is a part of Article-14 of the Constitution of India. To satisfy the test, there must be an intelligible differentia forming the basis of the classification, and the differentia should have a rational nexus with the object of legislation. It is further held that the right of ITC is conferred only by the Statute; therefore, unless there is a statutory provision, ITC cannot be enforced. It is a creation of a statute, and thus, no one can claim ITC as a matter of right unless it is expressly provided in the statute. It cannot be disputed that the legislature can always carve out exceptions to the entitlement of ITC under Section 16 of the CGST Act.Moreover, the Hon'ble Apex Court has also analysed the meaning of the term 'On his Own Account' used in Clause (d) of Section 17(5). In this regard, Clause 32 of the judgment of the Hon'ble Apex Court is worth noticing which I wish to quote herein below:"32. Clause (d) of Section 17(5) is different from clause (c) in various aspects. Clause (d) seeks to exclude from the purview of sub-section (1) of Sections 16 and 18, goods or services or both received by a taxable person to construct an immovable property on his own account. There are two exceptions in clause (d) to the exclusion from ITC provided in the first part of Clause (d). The first exception is where goods or services or both are received by a taxable person to construct an immovable property consisting of a "plant or machinery". The second exception is where goods and services or both are received by a taxable person for the construction of an immovable property made not on his own account. Construction is said to be on a taxable person's "own account" when (i) it is made for his personal use and not for service or (ii) it is to be used by the person constructing as a setting in which business is carried out. However, construction cannot said to be on a taxable person's "own account" if it is intended to be sold or given on lease or license."This judgement is a landmark decision in regard to availability of ITC on construction activity, which are blocked under Section 17(5) Clause (c) and (d) of the CGST Act. It is observed that the Hon'ble Apex Court has settled the position of Clause (c) of Section 17(5) and stated that the legislature has the power to disallow ITC in relation to certain categories of Goods and/or Services. The said clause disallows ITC on Works Contract Services if used for Construction of Immovable Property other than "Plant and Machinery". Therefore, ITC on Works Contract Services used for Construction of Plant and Machinery is allowed.However, in regard to Clause (d), the Hon'ble Apex Court has identified two important questions required to be asked before disallowing ITC which are:Whether ITC in relation to Goods and/or Services procured are in relation to construction of "plant" or "machinery"?Whether the Construction of immovable property is on OWN ACCOUNT?Amendments proposed in the Finance Bill 2025:The GST Council in their meeting held on 21.12.2024 has recommended to replace the phrase "plant or machinery" with the term "plant and machinery" and accordingly the Finance Bill 2025 has proposed a key amendment in Clause (d) of Section 17(5) where in the word "plant or machinery" has been proposed to be replaced to "plant and machinery" retrospectively with effect from 1 July 2017. Therefore, the intention of the government is very clear i.e., to negate the judgment of the Apex Court. Here, the main question is whether the proposed amendment will at all be able to supersede the Hon'ble Apex Court's Judgement. Let us analyse:First of all, retrospective amendments are not expressly forbidden as per the Constitution of India. Therefore, it cannot be said that retrospective amendments are expressly unconstitutional. However, time and again the judiciaries have decided to strike down the retrospective amendments in laws as unfair. Moreover, the Hon'ble Supreme Court has interpreted the law as was in force at the time of pronouncement of the verdict. Later on, by way of bringing a retrospective amendment, the exchequer cannot negate the interpretation made by the Apex Court based upon the law for the time being was in force. Further, the reason for bringing an amendment mentioned in GST Council's meeting is to align it with the intent of the government which took long years after implementation of the GST law.The questions still unanswered:In the given case, the retrospective amendment proposed in the Finance Bill 2025 is to replace the wordings "plant or machinery" with "plant and machinery". The definition of 'plant and machinery' is already present in the proviso to Section 17(5) Clause (d) and therefore, there shall be no scope to interpret the definition of "plant" as analysed by the Hon'ble Supreme Court. To that extent, it will be in favour of the revenue. However, there shall be lot more questions which remain unresolved in respect of Section 17(5) (d) like:The said clause has stated that the construction shall be on "own account". What does this "own account" mean? Here, it is not denied that ITC is not available if somebody constructs a building for his/her residence. However, if a factory is getting constructed where taxable products are going to be manufactured, can it be said that the construction is done on 'own account'. Moreover, if a service provider builds up his office from where taxable services will be provided, can it be said that the construction is on 'own account'. Interestingly, Clause (c) of Section 17(5) never tells that construction shall be on own account. Therefore, even after the retrospective amendment, difference shall still remain between Clause (c) and Clause (d) of Section 17(5) in regard to the term "own account" and one can still refer to Safari's case to refer the views of the Hon'ble Apex Court.Moreover, both Clause (c) and Clause (d) of Section 17(5) directs that the ITC is denied if works contract services or goods or services procured are for construction of immovable property. Now, upto what extent can this provision disallow credit? Suppose, a company has applied for a bank finance for a project which includes a significant or majority part as cost for construction of factory shed. For obtaining the finance, the company has to carry out various surveys, get valuations etc. which do not have direct nexus to construction but are required for obtaining the loan. Are these credits denied under Clause (c) or (d) of Section 17(5)? The situation may not yet be envisaged by the law makers.As per GST laws, Composite Supply of Works Contract is a Service. If that is so, then what would be the utility of Clause (c) because Clause (d) itself covers goods or services or both. This is also not clear as per the provisions of the section.ConclusionThe Judgement of the Hon'ble Supreme Court is a welcome judgement which can be an eye opener for all of us in the industry and profession. It cannot be a straitjacket case that the credit is not available on construction of immovable property. We need to analyse each and every case and decide whether credit can be availed or not. However, the retrospective amendment proposed in the Finance Bill will change the scenario to the extent of definition of "plant" as analysed by the Hon'ble Apex Court. However, there are lots of issues which may arise in future in regard to disallowance of ITC under Clause (c) and Clause (d) of Section 17(5). A careful and conscious decision shall be taken by the Industry on case-to-case basis instead of simply disallowing ITC on construction activity.Author may be reached at eboard@icai.in
Ep. 196 — Enhancing GST Compliance: The Role of GSTR-1 and GSTR-1A in Streamlining Tax Reporting
CA Journal
· September 2026
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Enhancing GST Compliance: The Role of GSTR-1 and GSTR-1A in Streamlining Tax ReportingWith the introduction of GST, the tax structure has been simplified, and a unified market has been created. It has transformed the way businesses operate, particularly in terms of compliance and reporting. Since its introduction, various forms and returns have been introduced. Among these, GSTR-1 and GSTR-1A are essential, as they play a crucial role in the tax return filing process. Although GSTR-1A was suspended after GST implementation in 2017, it was reintroduced through the 53rd GST Council Meeting dated 22nd June 2024 and through CBIC Notification No. 12/2024-Central Tax dated 10th July 2024.To enable registered taxpayers ensure accuracy in their sales reporting and tax liabilities and to reduce discrepancies between GSTR-1 and GSTR-3B, a correction mechanism for GSTR-1, i.e., Form GSTR-1A, has been reintroduced. This article allows for exploration of how GSTR-1 provides comprehensive sales data, while GSTR-1A facilitates necessary amendments, ensuring accurate tax filings and improving transparency in the GST System. The recent reintroduction of GSTR-1A in 2024 further emphasizes its importance in reconciling discrepancies and enhancing compliance for businesses.GSTR-1Section 37(1) read with Rule 59 of the CGST Act, 2017 prescribes Form GSTR-1. GSTR-1 is a monthly or quarterly return that every registered person under GST must file. This return contains details of all outward supplies of goods and services made by the taxpayer. Essentially, it is a detailed record of sales transactions carried out by a business during a specific period.The key features of GSTR-1 are as under:All registered taxpayers under GST, except those registered under the Composition Scheme, must file GSTR-1.Businesses with an annual turnover of up to 5 crore have the option to file GSTR-1 on a quarterly basis. Others must file it monthly.The due date for monthly filers is 11th of the subsequent month.The due date for quarterly filers is 13th of the month following the quarter.The details to be furnished include the invoices issued during the period, debit and credit notes issued in the period, and the details of export sales, including deemed exports, B2B (Business to Business), and B2C (Business to Consumer) sales, along with respective details.Any errors in previous filings can be corrected by making amendments in subsequent GSTR-1 filings.Amendment in Form GSTR-1In Sub-Rule (4) of Rule 59 of the CGST Rules, 2017, the following amendment has been made via CBIC Notification No. 12/2024 Central Tax dated 10th July 2024, with effect from 1st day of August 2024, in Form GSTR-1(4) The details of outward supplies of goods or services or both furnished in FORM GSTR-1 shall include the(a) invoice wise details of all(ii) inter-State supplies with invoice value more than "Rs. 1 lakh" made to the unregistered persons;(b) consolidated details of all - (ii) State wise inter-State supplies with invoice value "Rs. 1 lakh" made to unregistered persons for each rate of tax;The limit of Rs. 2.5 lakh has been substituted with Rs. 1 lakh in sub-clause (ii) of clause (a) of sub-rule (4) and sub-clause (ii) of clause (b) of sub-rule (4) of rule 59 of the CGST Rules, 2017. Consequently, amendments are made in Tables 5 and 7 of Form GSTR-1. A similar threshold is prescribed for Form GSTR-1A. This will increase the compliance in the case of B2C interstate supplies.Understanding GSTR-1ADuring the 53rd GST Council meeting held on 22nd June 2024, a new optional facility in Form GSTR-1A was recommended, allowing taxpayers to add or amend details filed in GSTR-1 for a tax period before filing their GSTR-3B for the same period. GSTR-1A was reintroduced as a correction mechanism for GSTR-1 in order to help registered taxpayers to ensure accuracy in their sales reporting and tax liabilities and to reduce discrepancies between GSTR-1 and GSTR-3B.With the suspension of GSTR-2 and GSTR-3 in the current GST filing system, GSTR-1A was no longer in use. The reconciliation process has since been streamlined, and the requirement for GSTR-1A was effectively removed. The GST Council has periodically made changes to the GST return filing process to make it more efficient. The removal of GSTR-1A and suspension of GSTR-2 and GSTR-3 are part of these reforms. Now, the reconciliation of outward and inward supplies is largely managed through GSTR-1 and GSTR-3B filings, along with the Input Tax Credit (ITC) reconciliation via GSTR-2A and GSTR-2B.On 18th June 2024, APIs were introduced by the GST Network, indicating a possible reintroduction of the GSTR-1A Form and its implementation soon on the GST portal. Although GSTR-1A was suspended after GST implementation in 2017, it was reintroduced through the 53rd GST Council Meeting, dated 22nd June 2024, and through Central Board of Indirect Taxes & Customs (CBIC) Notification No. 12/2024 Central Tax dated 10th July 2024.Since the implementation of GST in 2017, GSTR-1A has been in existence but the same was never implemented. Following Notifications and Circulars were issued regarding the same.S. No.Notification/CircularRemarks1Notification No. 10/2017 - Central Tax dated 28th June, 2017The reference of GSTR-1A was mentioned in Chapter VIII Returns - Point No. 59.(4) stating that "The details of inward supplies added, corrected or deleted by the recipient in his Form GSTR-2 under section 38 or Form GSTR-4 or Form GSTR-6 under section 39 shall be made available to the supplier electronically in Form GSTR-1A through the common portal and such supplier may either accept or reject the modifications made by the recipient and Form GSTR-1 furnished earlier by the supplier shall stand amended to the extent of modifications accepted by him."2Notification No. 45/2017-Central Tax dated 13th October, 2017The substitution of Table 4 of GSTR-1A i.e. "Zero rated supplies made to SEZ and deemed exports" was done through this Notification.3Circular No. 15/15/2017-GST dated 6th November, 2017The due date for furnishing of FORM GSTR-1A for July 2017 has been extended. Therefore, the details in FORM GSTR-1A shall be made available to the supplier from the 1st of December to the 6th of December, 2017 for the month of July 2017.4Notification No. 19/2022-Central Tax dated 28th September, 2022The FORM GSTR-1A, FORM GSTR-2 and FORM GSTR-3 of the said rules was omitted.5Notification No. 12/2024- Central Tax dated 10th July, 2024Bringing various amendments in the rules of CGST Rules, 2017 by inserting the words "GSTR-1A" in Clause (f) of Rule 21, Clause (a) of sub-rule (2A) of Rule 21A, Clause (a) of sub-rule (4) of Rule 36, Rule 37A, Clause (e) of sub-rule (1) of Rule 40, Sub-rule (3) of Rule 48, Sub-rule (1) of Rule 60, Rule 78, Sub-rule (1) of Rule 88C, Proviso to clause (b) of sub-rule (1) of rule 96, sub-rule (2) of rule 96, sub-rule (2) of rule 96A, Clause (c) of sub-rule (1) of Rule 163.After sub-rule (1) of Rule 59, the proviso has been inserted stating that "Provided that the said person may, after furnishing the details of outward supplies of goods or service or both in FORM GSTR-1 for a tax period but before filing of return in FORM GSTR-3B for the said tax period, at his own option, amend or furnish additional details of outward supplies of goods or services or both in FORM GSTR-1A for the said tax period electronically through the common portal, either directly or through a Facilitation Centre as may be notified by the Commissioner."After sub-rule (4) of Rule 59 a new sub-rule i.e. sub-rule (4A) has been inserted stating that the additional details or the amendments of the details of outward supplies of goods or services or both furnished in FORM GSTR-1A may, as per the requirement of the registered person, include the(a) invoice wise details of inter-state and intra-state supplies made to the registered persons and inter-state supplies with invoice value more than one lakh rupees made to the unregistered persons;(b) consolidated details of intra-state supplies made to unregistered persons for each rate of tax and State wise inter-state supplies with invoice value upto one lakh rupees made to unregistered persons for each rate of tax;(c) debit and credit notes, if any, issued during the month for invoices issued previously."After clause (ii) of sub-rule (7) of Rule 60 a new clause (iia) has been inserted stating that the additional details or amendments in details of outward supplies furnished by his supplier in FORM GSTR-1A filed between the day immediately after the due date of furnishing of FORM GSTR-1 for the previous tax period to the due date of furnishing of FORM GSTR-1 for the current tax period."S. No.Advisory and FAQSRemarks6Advisory for Form GSTR-1A dated 26th July, 2024 andAn Advisory for Form GSTR-1A has been issued on 26th July, 2024.7Detailed manual and FAQs on filing of GSTR-1A dated 1st August, 2024.A detailed manual and FAQs on filing of GSTR-1A has been issued on 1st August, 2024."If there is a need to change the GSTIN of a recipient for a supply that was reported in Form GSTR-1 for a tax period, the change can only be made in the subsequent tax period using Form GSTR-1."Key Features of GSTR-1AThe main features of Form GSTR-1A are as follows:GSTR-1A is an optional feature and can only be submitted once for a specific tax period.The taxpayer's liability in GSTR-3B for a specific tax period will be impacted by any modifications made in GSTR-1A.The recipient will have access to input tax credit (ITC) for the supplies declared or modified by the suppliers through GSTR-1A in the GSTR-2B for the subsequent tax period.Taxpayers who file Form GSTR-1 on a monthly basis can access Form GSTR-1A on the portal every month starting from the due date of filing Form GSTR-1 or the actual filing date of Form GSTR-1, whichever is later. Form GSTR-1A will be available until the corresponding Form GSTR-3B for the same tax period is actually filed. It's important to note that a taxpayer cannot file Form GSTR-1 for a month until Form GSTR-3B for the previous month is filed.From a liability standpoint, the combined impact of the details declared or updated through Form GSTR-1A, along with the details declared in Form GSTR-1, will be automatically reflected in Form GSTR-3B for the same tax period as Form GSTR-1.The Form GSTR-1A will be accessible quarterly after the actual filing of Form GSTR-1 (Quarterly) or the due date of filing of Form GSTR-1 (Quarterly), whichever comes later, and will remain accessible until the actual filing of Form GSTR-3B of the same tax period for QRMP taxpayers.Any supplies that are reported in Form GSTR-1 of the present tax period, including those disclosed in IFF for the initial month (M1) and second month (M2) of a quarter, are eligible for amendment through the corresponding Quarterly GSTR-1A.The details provided in GSTR 1A (Quarterly) and the details submitted in Form GSTR-1 (Quarterly) (or through IFF of Month M1 and M2, if submitted) will be automatically transferred to Form GSTR-3B (Quarterly) for the same tax period from a liability standpoint.It is emphasized that there will not be a separate facility for amending records submitted through IFF for the months M1 and M2 during the months M1 and M2.If there is a need to change the GSTIN of a recipient for a supply that was reported in Form GSTR-1 for a tax period, the change can only be made in the subsequent tax period using Form GSTR-1.GSTR-2B will include the supplies already generated as well as all the supplies declared by the suppliers in GSTR-1A. Any supplies declared or amended in Form GSTR-1A will be included in the next open Form GSTR-2B.Differences between GSTR-1 and GSTR-1ALet's deep dive into some of the major differences in the Form GSTR-1A released in 2017 and 2024.Form GSTR-1A (2017)Form GSTR-1A (2024)Reference of Rule 59(4).Reference of Proviso to Rule 59(1).It enabled taxpayers to update details based on changes made by buyers in GSTR-2.It allows taxpayers to amend sales details reported in GSTR-1.GSTR-1A is filed after GSTR-1 but before GSTR-2.GSTR-1A is filed after GSTR-1 but before GSTR-3B for the same tax period.GSTR-1A cannot be changed again in the subsequent month's GSTR-1. GSTR-1A of 2017 did not have this restriction.Amendments made in the 2024 GSTR-1A cannot be changed again in the subsequent month's GSTR-1. Only unamended records can be modified in the next period's GSTR-1.GSTR-1A had 5 headings with details to be reported.GSTR-1A has 15 headings with details to be reported. This GSTR-1A will ensure correct liability is auto-populated in GSTR-3B, reducing notices related to differences in outward GST liability reported in GSTR-1 vs GSTR-3B.In summary, while both versions serve to amend GSTR-1 details, the 2024 GSTR-1A has some key differences in terms of timing, amendment rules, and impact on GSTR-3B liability.Filing Requirement: GSTR-1 is mandatory for all registered taxpayers. In contrast, GSTR-1A is optional and is used only for making amendments.Purpose: GSTR-1 is filed to report details of outward supplies made during a tax period. GSTR-1A, on the other hand, is used to amend discrepancies based on feedback received from the recipients.Due date of filing: GSTR-1 must be filed by the 11th day of the month following the relevant tax period. Taxpayers with an annual turnover of up to 5 crore have the option to file it quarterly. GSTR-1A can be filed after the submission of GSTR-1 and before the filing of GSTR-3B.Late Fees: Late fees are applicable for delayed filing of GSTR-1. However, there is no concept of late fees for GSTR-1A, as it is an optional facility provided to taxpayers.Despite having the above said differences in GSTR-1 and GSTR-1A, both have some similarities, i.e., the details of outward supplies of goods or services or both furnished in FORM GSTR-1/ GSTR-1A shall include the invoice-wise details of all inter-state supplies with invoice value more than Rs. 1 lakh made to the unregistered persons and consolidated details of all state wise inter-state supplies with invoice value Rs. 1 lakh made to unregistered persons for each rate of tax. Consequently, amendments are made in Table 5 and 7 of Form GSTR-1 and GSTR-1A.ConclusionThe reintroduction of GSTR-1A is a pivotal step towards enhancing GST compliance for businesses in India. It is a proactive measure that significantly enhances compliance for businesses by allowing timely corrections, improving accuracy in reporting, and streamlining the ITC claims process. The understanding of GSTR-1 and GSTR-1A is essential for businesses to ensure compliance with GST regulations in India."While GSTR-1 is a mandatory return detailing all outward supplies, GSTR-1A serves as an optional tool for amending discrepancies reported by the recipients."While GSTR-1 is a mandatory return detailing all outward supplies, GSTR-1A serves as an optional tool for amending discrepancies reported by the recipients. By enabling timely corrections and reducing discrepancies between GSTR-1 and GSTR-3B, it not only simplifies the filing process but also fosters a more transparent and efficient tax environment.The step of bringing GSTR-1A is highly appreciable. The GST authorities eventually decided to bring a mechanism or give a facility to the registered person to make corrections in the returns filed by them. It is a matter of debate again that the recipient might be given a chance to participate in this new mechanism of making corrections amendments, as it was available in the original previous version of GSTR 1A.We hope authorities may also introduce a new return GSTR-3C (or any suitable name), which will reflect on the portal of the recipient after the due date of GSTR-3B, so that the recipient could immediately come to know about the deposit of tax against all the supplies received in that tax period. It will help to bring to the notice of all stakeholders that GST is duly deposited against the supplies shown in the GSTR-1 by a registered person or not. This can minimize the Fake invoices issues, ITC issues & other related issues. It would be of great help in avoiding unnecessary issuance of notices and litigations under various provisions of the GST Act, 2017.Referenceshttps://taxinformation.cbic.gov.in/content-page/explore-notificationhttps://taxinformation.cbic.gov.in/content-page/explore-circularshttps://services.gst.gov.in/services/advisoryandreleases/read/506https://services.gst.gov.in/services/advisoryandreleases/read/509Form GSTR-1A of 2024 and Form GSTR-1A of 2017Author may be reached at eboad@icai.in
Ep. 197 — Insights into SelfAssessment under GST
CA Journal
· September 2026
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Insights into Self-Assessment under GSTSince its implementation in 2017, GST has unified India's indirect taxation system, replacing a fragmented regime. Businesses still face compliance challenges, especially with self-assessment under Section 59, which requires accurate tax calculation and reporting. The GST framework includes various assessment types and allows for rectification of errors under Section 39(9). Recent developments, like Form GSTR-1A, aim to improve accuracy and reduce compliance burdens. Despite challenges, continuous updates to the GST system reflect a commitment to enhancing transparency, compliance, and efficiency in tax administration, contributing to India's economic growth.Since its implementation on July 1, 2017, the Goods and Services Tax (GST) has revolutionized indirect taxation in India by consolidating multiple taxes into a unified system. Despite amendments and updates, businesses face challenges such as audits, investigations, and demand notices, leading to litigation and compliance burdens. As the GST Appellate Tribunal is awaited, disputes escalate to High Courts with significant pre-deposits. Navigating the complexities of GST compliance, particularly in terms of self-assessment, remains a critical challenge for businesses across the country.Before the introduction of GST, India operated under a fragmented tax regime comprising Central Excise, Service Tax, and VAT, each governed by its own set of rules and compliance requirements. This decentralized approach often resulted in overlapping taxes, cascading effects, and compliance burdens, especially for businesses operating across different states. In the early 90's, the assessment used to happen in the presence of Central Excise officer, however, the same has been placed by the self-assessment regime wherein the taxpayer can assess their liabilities on their own and pay the taxes to the government. The self-assessment regime has been continued subsequently on the introduction of Service Tax, Sales Tax, and VAT regime. Due to multiple taxes, the taxpayer used to self-assess their liabilities under the respective act.The Act contemplates the following types of Assessments under different sections of the Act:Self-assessment (Section 59)Provisional assessment (Section 60)Scrutiny of returns filed by registered taxable persons (Section 61)Assessment of non-filers of returns (Section 62)Assessment of unregistered persons (Section 63)Summary assessment in certain special cases (Section 64)."The GST's implementation sought to address the challenges of multiple assessments by unifying India into a single market with a uniform tax structure."The GST's implementation sought to address the challenges of multiple assessments by unifying India into a single market with a uniform tax structure. The GST framework operates through three primary components: Levy, Assessment provisions, and Tax recovery/payment. These components collectively aim to streamline tax administration, ensure uniformity in tax rates, and facilitate easier compliance for taxpayers.Overview of Assessment under GSTAssessment under GST is pivotal for determining a taxpayer's liability and ensuring compliance with statutory obligations. In terms of Section 2(11) of the CGST Act, 2017 (hereinafter referred to as Act'), "assessment" means a determination of tax liability under this Act and includes self-assessment, re-assessment, provisional assessment, summary assessment and best judgement assessment.While self-assessment (Section 59) and provisional assessment (Section 60) places the responsibility on taxpayers to calculate and report their tax liabilities, other provisions such as scrutiny of returns (Section 61), assessment of non-filers (Section 62), assessment of unregistered persons (Section 63), and Scrutiny Assessment (Section 64) empower tax authorities to validate the declarations made under self-assessment.In addition, the law has also given powers to proper officers to demand and recover the unpaid or short-paid taxes under Section 73, 74 and 76 of the CGST Act, 2017. While some sections like 60, 62, and 63 stand independently, others such as 61 and 64 rely on Sections 73 or 74 for a coherent outcome. Collectively, these sections form what can be referred to as the "GST Assessment Framework".Self-assessment: Key principles and proceduresSelf-assessment is central to GST compliance, mandated under Section 59 of the Act which provides that "Every registered person shall self-assess the taxes payable under this Act and furnish a return for each tax period as specified under section 39".Key Objectives of GST AssessmentThe overarching objectives of GST assessment are multifaceted:Ensure compliance: Encourage taxpayers to comply with GST laws and file accurate returns.Revenue protection: Safeguard government revenue by identifying and addressing tax evasion.Simplification: Provide a clear and consistent framework for assessing tax liabilities.Transparency: Enhance transparency in the tax assessment process, making it easier for taxpayers to understand and comply.Types of self-assessments under GSTGST prescribes different types of self-assessment procedures tailored to various categories of taxpayers. These include:Sl.No.Type of Self-assessmentSectionRuleForm1Self-Assessment by Regular Assesse and Casual Taxable Person39(1)61Form GSTR 3B2Self-Assessment by Composition Dealer39(2)62Form GSTR 43Self-Assessment by Non-Resident Taxable Person39(5)63Form GSTR 54Self-Assessment of OIDARS provided by person located outside India to non-taxable person in India39(1)64Form GSTR 5A5Self-Assessment by ISD39(4)65Form GSTR 66Self-Assessment of Tax Deducted at Source39(3)66Form GSTR 77Self-Assessment of Tax Collected at Source52(4)67Form GSTR 88Self-Assessment for purpose of Refund by persons having UIN39(1)82Form GSTR 11Each category of taxpayer is required to comply with specific rules and forms to ensure accurate reporting and timely compliance with GST regulations.What consists of self-assessment?The self-assessment process involves a meticulous evaluation of various aspects, including:Whether to obtain registration if crossing the threshold or opting for voluntary registration under Section 25(3).Determining if activities constitute taxable supplies under GST.Classifying supplies as goods or services.Identifying the nature of supply (inter-state or intra-state).Deciding the liability to pay tax under Forward Charge Mechanism (FCM) or Reverse Charge Mechanism (RCM).Calculating the taxable value.Applying the correct tax rate.Assessing the eligibility for exemptions.Verifying the admissibility of input tax credit, calculating eligible credit, and determining reversals.Computing the net tax liability.Allocating availed credits and evaluating the need for separate registrations.Managing restricted credits as per GST regulations.Assessing if supplies qualify as exports, zero-rated supplies, or other categories.Evaluating the applicability and amount of eligible refunds.As the GST regime endorses the self-assessment, it requires each registered person to calculate their tax liabilities in compliance with the Act and disclose these along with the method of computation through periodic returns on the GST common portal i.e., the tax dues determined (i.e., liability) is reported in statement filed under Section 37 and liability reported is discharged in returns filed under Section 39, either by way of utilisation of credit available or cash deposited."The self-assessment process is not merely an administrative formality but a legal obligation that requires accurate computation and reporting of tax liabilities."The self-assessment process is not merely an administrative formality but a legal obligation that requires accurate computation and reporting of tax liabilities. Any errors or discrepancies discovered post-filing can be rectified under Section 39(9) of the Act, subject to specified conditions and within prescribed timelines.Rectification of the returns furnished and Impact on tax liabilitiesIn terms of Section 39(9) of the Act, "where any registered person after furnishing a return under sub-section (1) or sub-section (2) or sub-section (3) or sub-section (4) or sub-section (5) discovers any omission or incorrect particulars therein, other than as a result of scrutiny, audit, inspection or enforcement activity by the tax authorities, he shall rectify such omission or incorrect particulars in such form and manner as may be prescribed, subject to payment of interest under this Act."Proviso to Section 39(9) of the Act provides that rectification of any omission or incorrect particulars is permissible until the 30th day of November following the relevant financial year's end or the actual date of filing the annual return, whichever is earlier.Let's break down the time limits with an example involving Mr. A, who reported a supply with a taxable value of Rs. 52,000/- in his tax invoice dated 23-02-2023, but inadvertently recorded only Rs. 25,000/- in both GSTR-1 and GSTR-3B returns for March 2023.Scenario 1: If Mr. A files his annual return for FY 2022-23 on 31-12-2023, he can rectify this invoice error on or before 30th November 2023.Scenario 2: If Mr. A files his annual return for FY 2022-23 on 31-10-2023, the rectification deadline for this invoice would be 31st October 2023.From the above, it is inferred that, in no case will the last date to rectify extend beyond 30th November following the end of the FY.If rectification reveals a higher tax liability than originally paid, interest¹ is levied at 18% per annum from the original due date of the tax payment to actual payment date. Conversely, if the reassessed liability is lower than taxes paid, a refund can be claimed using Form GST RFD-013 within two years from the tax payment date, with interest payable at 6% per annum if the refund is delayed beyond 60 days from the application's receipt.Self-assessment in GST involves rectifying discrepancies in GSTR-1 through specific tables like 9A, 9C, 10, 11A, 11B, 14A, and 15A. However, unlike GSTR-1, GSTR-3B does not have separate tables for reporting past month discrepancies. Para 4 of circular no. 26/26/2017-GST dated 29-12-2017 clarifies that these differences should be reported on a net basis along with current month values in appropriate tables like 3.1, 3.2, 4, and 5. These guidelines underscore the principle of self-assessment, emphasizing that it does not imply unsupervised self-administration.Recovery of unpaid self-assessed taxesIn situations where taxes reported in GSTR-1 exceed those discharged in GSTR-3B, or when additional liabilities arise due to factors like the reversal of input tax credit (such as in the case of unsold flats in a construction project), questions arise about the method of recovery. Specifically, whether recovery should be through direct action by the proper officer or through procedures outlined in Section 73 or 74 of the Act."Section 75(12) of the Act grants the proper officer authority to recover unpaid self-assessed tax or interest overriding Section 73 or 74."Section 75(12) of the Act grants the proper officer authority to recover unpaid self-assessed tax or interest overriding Section 73 or 74. An explanation to the above provision states that "self-assessed tax" includes taxes due on outward supplies reported in GSTR-1 but not included in GSTR-3B. Referring to Section 78, "Initiation of recovery proceedings," any outstanding tax may be recovered under Section 79, "Recovery of tax," if rectification is not made within three months. Despite these provisions, judicial precedents such as Refex Industries Ltd. v. ACCES and UoI v. LC Infra Projects Pvt. Ltd. have emphasized the need for tax authorities to issue prior notices before initiating recovery actions. This judicial scrutiny aims to safeguard taxpayer rights and ensure procedural fairness in tax recovery processes.Taxpayers are advised to exercise caution in reporting their tax liabilities accurately in both GSTR-1 and GSTR-3B. Timely rectification of errors and discrepancies is crucial to avoid interest liabilities and potential recovery actions by tax authorities.Developments and Enhancements in GST Self-AssessmentThe 53rd GST Council has recently introduced Form GSTR-1A which allows taxpayers to amend or add details in Form GSTR-1 before filing Form GSTR-3B for the same tax period. This initiative aims to facilitate corrections in tax declarations promptly, thereby improving the accuracy of returns and reducing compliance burdens.ConclusionIn conclusion, the GST self-assessment framework plays a pivotal role in India's indirect tax regime by empowering taxpayers to calculate, report, and pay their tax liabilities in a transparent and efficient manner. While the system aims to simplify tax compliance, challenges such as complex legal provisions, procedural nuances, and technological dependencies persist. Continuous updates and enhancements to the GST assessment framework underscore the Government's commitment to addressing these challenges and ensuring the smooth functioning of the tax system. By fostering compliance, protecting revenue, and promoting transparency, GST aims to contribute to India's economic growth while ensuring fairness and accountability in tax administration.ReferencesCGST Act, 2017 (Bare Act)Background material issued by ICAI¹ Section 50 of the Act² Section 54(8) of the Act³ Rule 89 of the CGST Rules, 2017 (hereinafter referred to as 'Rules')⁴ Inserted vide The Finance Act, 2021 dated 28-03-2021 w.e.f. 01-01-2022⁵ 2020 (74) GSTR 274 (Mad.)⁶ 2020 (81) GSTR 281 (Kar)Author may be reached at eboard@icai.in
Ep. 198 — Management Accounting in Tempestuous Time: Pathway to Sustainability Amid Global Disruptions
CA Journal
· September 2026
00:00
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Management Accounting in Tempestuous Time: Pathway to Sustainability Amid Global DisruptionsIn the modern business landscape, management accounting faces challenges from technology, geopolitical risks, economic downturns, and climate change. Effective integration of AI demands robust data governance and new skills. Geopolitical uncertainties and recessions require agile risk management and cost control. Climate change emphasizes the need for precise environmental cost management and sustainability reporting. Recent corporate failures highlight the importance of accurate financial reporting and risk management. Advanced control metrics and dashboards are crucial for executives to navigate disruptions, ensure financial stability, and drive strategic growth.IntroductionIn today's dynamic business environment, management accounting must address a range of contemporary challenges, including the impact of technological advancements, geopolitical risks, global recessions, and climate change. The integration of AI and automation offers significant benefits in data analysis and decision-making but introduces complexities in data management, skill requirements, and regulatory compliance.Geopolitical uncertainties require agile risk management strategies to handle currency fluctuations, supply chain disruptions, and regulatory changes. Global recessions demand rigorous cost control, cash flow management, and strategic decision-making to maintain financial stability. Meanwhile, climate change necessitates accurate environmental cost management, sustainability reporting, and strategic investment in green initiatives. This framework provides a comprehensive approach to management accounting in modern times, guiding organizations to navigate these evolving disruptions and achieve financial stability and strategic growth.Management Accounting in Modern Times - A Practical FrameworkIn today's dynamic business environment, management accounting faces the dual challenge of leveraging technological advancements like AI and automation while managing risks from geopolitical uncertainties, economic recessions, and climate change.These factors demand advanced data analysis and decision-making capabilities, agile risk management strategies, rigorous cost control, and comprehensive environmental reporting. This framework addresses these contemporary issues, guiding organizations in maintaining financial stability and driving strategic growth amidst evolving disruptions."In today's dynamic business environment, management accounting faces the dual challenge of leveraging technological advancements like AI and automation while managing risks from geopolitical uncertainties, economic recessions, and climate change."Technological Advancements (AI/GPT)Integrating Artificial Intelligence (AI) and Generative Pre-training Transformer (GPT) technologies in business processes brings significant potential benefits, such as increased efficiency, improved decision-making, and enhanced data analysis capabilities. However, it also presents several challenges for management accounting practices, including:Data Management and Quality: AI and GPT technologies rely heavily on large datasets for training and analysis. Ensuring data quality, accuracy, and consistency is crucial, as poor data can lead to incorrect insights and decisions. Management accountants must implement robust data governance frameworks to manage data integrity.Skills and Expertise: The adoption of AI and GPT requires management accountants to possess new skills, such as data analytics, machine learning, and an understanding of advanced algorithms. The traditional accounting skill set is evolving, and accountants need to adapt to these technological advancements and stay current with emerging tools and methodologies.Ethical Considerations and Bias: AI systems can inadvertently introduce biases if they are trained on biased data. This can lead to unethical or unfair outcomes in financial reporting, decision-making, and risk assessment. Management accountants must be vigilant in identifying and mitigating potential biases in AI models and ensure that ethical standards are upheld.Transparency and Explainability: AI and GPT technologies can be complex and operate as "black boxes," making it difficult to understand how decisions or predictions are made. This lack of transparency can be a challenge in management accounting, where explaining and justifying financial data and decisions is essential. Accountants need to work with data scientists and IT professionals to develop models that are explainable and auditable.Regulatory Compliance and Governance: The use of AI and GPT technologies in financial processes must comply with existing accounting standards, regulations, and industry-specific requirements. As regulatory frameworks evolve to address the implications of AI, management accountants must ensure that their practices remain compliant and that adequate controls are in place.Integration with Existing Systems: Integrating AI and GPT technologies with existing accounting systems and processes can be complex and costly. It requires careful planning and collaboration between finance, IT, and other departments to ensure seamless integration and minimal disruption to operations.Security and Privacy: The use of AI and GPT technologies involves handling sensitive financial and personal data. Ensuring data security and privacy is critical, as breaches can lead to significant financial and reputational damage. Management accountants must work closely with cybersecurity experts to implement strong security measures and protect data."The use of AI and GPT technologies in financial processes must comply with existing accounting standards, regulations, and industry-specific requirements."Geopolitical RisksGeopolitical risks, which include political instability, trade tensions, regulatory changes, and regional conflicts, present significant challenges for management accounting practices. These risks can have a profound impact on business operations, financial performance, and strategic planning. Here are the key challenges that geopolitical risks pose for management accounting:Currency Fluctuations and Exchange Rate Risk: Geopolitical events can lead to significant volatility in currency exchange rates. For multinational companies, this creates challenges in managing currency exposure and accurately forecasting financial performance. Management accountants must develop strategies to hedge against currency risk and adjust financial statements for exchange rate fluctuations.Supply Chain Disruptions: Political instability or changes in trade policies can disrupt supply chains, affecting the availability and cost of raw materials and components. Management accountants need to assess the financial impact of these disruptions, such as increased costs or delays, and incorporate these considerations into budgeting and forecasting.Regulatory and Compliance Uncertainty: Geopolitical risks often lead to changes in regulations, such as tariffs, sanctions, or new trade agreements. These changes can impact a company's operations and financial reporting requirements. Management accountants must stay informed about regulatory developments and ensure compliance with local and international laws.Risk Assessment and Scenario Planning: The unpredictability of geopolitical events makes risk assessment and scenario planning more complex. Management accountants must develop robust risk assessment frameworks that consider various geopolitical scenarios and their potential financial impacts. This includes stress-testing financial models and creating contingency plans.Cost Management and Budgeting: Geopolitical risks can lead to unexpected costs, such as tariffs, increased security expenses, or higher insurance premiums. Management accountants must incorporate these potential costs into budgeting processes and identify areas where cost-saving measures can be implemented to offset these impacts.Investment and Capital Allocation Decisions: Geopolitical risks can affect investment decisions and the allocation of capital. For example, political instability in a region may deter investment or necessitate the relocation of operations. Management accountants play a crucial role in evaluating the financial viability of investments under different geopolitical conditions and advising on optimal capital allocation.Reputation and Brand Risk: Companies operating in politically sensitive regions may face reputational risks if they are perceived as supporting or being complicit with controversial political actions. Management accountants must consider the potential financial impact of reputational damage, including potential loss of customers, legal liabilities, and increased costs related to public relations efforts.Financial Reporting and Disclosure: Geopolitical risks may necessitate additional disclosures in financial reports, particularly regarding exposure to certain regions, regulatory risks, and the potential impact on future financial performance. Management accountants must ensure that these disclosures are accurate, comprehensive, and comply with relevant accounting standards.Global RecessionA global recession poses numerous challenges for management accounting practices, as it typically leads to economic downturns, reduced consumer spending, and increased financial uncertainty. These challenges require management accountants to adopt more cautious and flexible approaches to financial planning, reporting, and decision-making. Here are the key challenges that a global recession presents:Revenue and Profitability Pressures: During a recession, businesses often experience declines in sales and profitability due to reduced consumer and business spending. Management accountants need to adjust revenue forecasts and assess the impact on profitability. They must identify areas where cost reductions can be made without compromising essential operations.Cost Management and Budgeting: With revenue pressures, cost control becomes critical. Management accountants must scrutinize all expenses, prioritize essential spending, and identify areas where costs can be cut. This includes renegotiating contracts, optimizing supply chains, and delaying non-critical capital expenditures.Cash Flow Management: A recession can lead to cash flow constraints as customers delay payments or default. Management accountants must closely monitor cash flow, manage working capital, and ensure sufficient liquidity to meet short-term obligations. This may involve revising credit policies, managing receivables more aggressively, and optimizing inventory levels.Risk Management and Financial Stability: The increased economic uncertainty during a recession heightens financial and operational risks. Management accountants must enhance risk assessment frameworks, including stress testing financial models under various recession scenarios. They should also evaluate the company's financial stability and solvency, considering potential impacts on debt covenants and financing costs.Valuation and Asset Impairment: A recession can lead to a decline in asset values, necessitating asset impairment reviews. Management accountants must evaluate the recoverable amounts of tangible and intangible assets, including goodwill, and recognize impairments where necessary. Accurate asset valuation is crucial for financial reporting and investor communication.Strategic Decision Support: During a recession, companies may need to make strategic decisions such as divesting non-core assets, restructuring operations, or pursuing mergers and acquisitions. Management accountants provide critical financial analyses and scenario planning to support these decisions, helping to identify viable options and potential risks.Financial Reporting and Disclosure: A global recession can affect the assumptions and estimates used in financial reporting, such as revenue recognition, inventory valuation, and provisions for bad debts. Management accountants must ensure that financial statements accurately reflect the economic conditions and comply with relevant accounting standards. They also need to provide transparent disclosures about the impact of the recession on the company's financial position and performance.Stakeholder Communication and Investor Relations: Effective communication with stakeholders, including investors, employees, and customers, is crucial in times of economic uncertainty. Management accountants play a role in crafting clear and accurate financial communications, providing updates on the company's financial health and strategic responses to the recession."As businesses and societies become increasingly aware of the environmental impact of their activities, management accountants must adapt to new requirements, standards, and expectations."Climate ChangeClimate change poses unique and multifaceted challenges for management accounting practices. As businesses and societies become increasingly aware of the environmental impact of their activities, management accountants must adapt to new requirements, standards, and expectations. The key challenges include:Environmental Cost Management: Identifying and managing environmental costs, such as energy consumption, waste management, and emissions, can be complex. Management accountants must develop methods to accurately measure these costs and integrate them into traditional cost accounting systems. This includes accounting for direct costs (e.g., compliance with environmental regulations) and indirect costs (e.g., potential future liabilities or reputational damage).Sustainability Reporting and Compliance: Many companies are now required or encouraged to report on their environmental impact, including carbon emissions, resource usage, and other sustainability metrics. Management accountants must be familiar with frameworks such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD). They need to ensure accurate, consistent, and transparent reporting that complies with these standards and meets stakeholder expectations.Risk Assessment and Scenario Planning: Climate change introduces new risks, such as physical risks (e.g., extreme weather events) and transition risks (e.g., changes in regulations and market demand). Management accountants must incorporate these risks into financial models and scenario planning exercises. This includes assessing the financial implications of potential regulatory changes, shifts in consumer preferences, and the physical impacts of climate change on operations.Valuation of Assets and Liabilities: Climate change can affect the valuation of assets and liabilities. For example, assets in industries with high carbon footprints may face "stranding" risks, where they become obsolete or significantly devalued due to regulatory changes or market shifts. Management accountants must consider these factors in asset valuation, impairment testing, and the calculation of liabilities, such as environmental remediation costs.Investment and Capital Allocation: Companies are increasingly considering environmental, social, and governance (ESG) criteria in their investment and capital allocation decisions. Management accountants play a critical role in evaluating the financial viability of green investments, such as renewable energy projects, and assessing the long-term sustainability of business strategies. This includes calculating the return on investment (ROI) for sustainability initiatives and considering the potential for long-term cost savings or revenue generation.Cost of Carbon and Emissions Accounting: As governments and markets implement carbon pricing mechanisms (e.g., carbon taxes, cap-and-trade systems), management accountants must account for these costs in financial planning and analysis. They need to track and report on the company's carbon emissions, understand the financial impact of carbon pricing, and develop strategies to reduce emissions and mitigate associated costs.Stakeholder Engagement and Communication: Investors, customers, and other stakeholders are increasingly interested in companies' environmental performance and sustainability efforts. Management accountants must work closely with corporate communications and investor relations teams to provide clear and accurate information about the company's climate-related risks, opportunities, and actions. This includes participating in the preparation of sustainability reports and responding to inquiries from stakeholders.Impact of Erroneous Management Accounting & Risk Analysis in the Post-Pandemic EraIn the post-pandemic era, several corporate entities faced significant challenges, and some even collapsed due to errors in management accounting and inadequate risk analysis. The rapid and unprecedented changes in global markets, supply chains, and consumer behavior exposed vulnerabilities in companies that failed to adapt their financial and risk management practices.Case Study: WirecardWirecard, a German payment processing company, collapsed in 2020 after it was revealed that €1.9 billion in cash was missing from its balance sheets. The company's downfall was attributed to fraudulent accounting practices and a lack of robust internal controls. The scandal highlighted the importance of accurate financial reporting and the role of management accounting in providing reliable financial information.Case Study: Luckin CoffeeLuckin Coffee, a Chinese coffee chain, experienced rapid growth and was touted as a strong competitor to Starbucks in China. However, in 2020, the company admitted to fabricating sales data, leading to a major financial scandal. The lack of transparency and poor risk management led to severe reputational damage, delisting from the NASDAQ, and significant financial losses.Case Study: Archegos Capital ManagementArchegos Capital Management, a family office, collapsed in early 2021 after failing to meet margin calls, leading to a loss of billions of dollars for several global banks. The firm's excessive use of leverage and failure to adequately assess and manage risk were key factors in its downfall. This incident underscored the importance of effective risk management and accounting controls in financial institutions.These cases demonstrate the critical role of management accounting and risk analysis in ensuring corporate governance and financial stability. Companies that fail to implement robust accounting practices and comprehensive risk assessment frameworks are more susceptible to errors, fraud, and financial distress, especially in times of economic uncertainty and rapid change. The lessons from these collapses emphasize the need for accurate financial reporting, strong internal controls, and proactive risk management strategies to navigate the complexities of the modern business environment.Emerging Control Metrics & Suggested Dashboards for C-Suite Professionals & Board MembersAs businesses navigate a complex and rapidly changing environment, C-suite professionals and board members require timely and accurate information to make informed decisions. Emerging control metrics and advanced dashboards can provide valuable insights into the company's performance, risks, and strategic direction. Below are some key metrics and dashboard features that can enhance decision-making at the highest levels.1. Key Financial MetricsRevenue and Profitability AnalysisMetrics: Revenue growth rate, gross profit margin, net profit margin, EBITDASuggested Dashboard: A financial overview dashboard that displays real-time revenue and profitability metrics, along with variance analysis against forecasts and prior periods.Cash Flow ManagementMetrics: Operating cash flow, free cash flow, cash conversion cycleSuggested Dashboard: A cash flow dashboard showing cash inflows and outflows, liquidity ratios, and trends in working capital.2. Operational Efficiency MetricsProductivity and EfficiencyMetrics: Labor productivity, asset utilization, overall equipment effectiveness (OEE)Suggested Dashboard: An operations dashboard featuring key efficiency metrics, production schedules, and bottleneck analysis.Supply Chain PerformanceMetrics: Supplier lead time, order fulfillment rate, inventory turnoverSuggested Dashboard: A supply chain dashboard tracking supplier performance, inventory levels, and logistics metrics.3. Risk Management MetricsFinancial Risk IndicatorsMetrics: Debt-to-equity ratio, interest coverage ratio, credit risk exposureSuggested Dashboard: A risk management dashboard highlighting key financial risks, stress test results, and scenario analysis.Operational and Compliance RisksMetrics: Incident frequency, compliance breach incidents, regulatory compliance scoresSuggested Dashboard: A compliance and risk dashboard that monitors regulatory adherence, incidents, and internal audit findings.4. Strategic Performance MetricsInnovation and R&DMetrics: R&D expenditure as a percentage of sales, number of new product launches, innovation pipeline valueSuggested Dashboard: An innovation dashboard tracking R&D investments, project progress, and market introduction timelines.Market and Customer MetricsMetrics: Customer acquisition cost (CAC), customer lifetime value (CLV), Net Promoter Score (NPS)Suggested Dashboard: A customer experience dashboard displaying customer satisfaction scores, retention rates, and market share.5. Sustainability and ESG MetricsEnvironmental ImpactMetrics: Carbon footprint, energy consumption, waste reductionSuggested Dashboard: An ESG dashboard showcasing environmental impact metrics, sustainability initiatives, and compliance with environmental regulations.Social and Governance MetricsMetrics: Employee engagement scores, diversity and inclusion metrics, corporate governance ratingsSuggested Dashboard: A corporate responsibility dashboard highlighting social and governance performance, CSR activities, and stakeholder engagement.Concluding RemarksIn today's complex business environment, management accounting must address challenges from technological advancements, geopolitical risks, economic downturns, and climate change. The integration of AI and automation requires robust data governance and upskilling, while geopolitical uncertainties and recessions demand agile risk management and cost control. Environmental sustainability calls for accurate cost management and adherence to reporting standards. Post-pandemic failures highlight the need for precise financial reporting and risk management. Advanced control metrics and dashboards are crucial for C-suite professionals to make informed decisions and drive strategic growth.ReferencesHesford, J. W., Lee, S. H. S., Van der Stede, W. A., & Young, S. M. (2006). Management accounting: a bibliographic study. Handbooks of management accounting research, 1, 3-26.Kaplan, R. S. (1984). The evolution of management accounting. Readings in accounting for management control, 586-621.Authors may be reached at eboard@icai.in
Ep. 199 — Navigating Goodwill and Impairment in Business Combinations: An Analysis
CA Journal
· September 2026
00:00
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Navigating Goodwill and Impairment in Business Combinations: An AnalysisGoodwill arises in business combinations when the purchase price exceeds the fair value of net assets acquired. It is tested for impairment rather than amortized, using qualitative or quantitative assessments. The International Accounting Standards Board (IASB), through its Business Combinations-Disclosures, Goodwill, and Impairment project, has refined impairment testing by eliminating redundant steps and improving transparency. The 2024 Exposure Draft proposes amendments to IFRS 3 and IAS 36 to enhance disclosure and refine impairment assessments. These changes aim to address stakeholder concerns, improve financial reporting, and provide better insights into the performance of acquired businesses.Goodwill and impairment are critical concepts in accounting for business combinations. Goodwill represents the excess payment made to acquire a company over the fair value of its identifiable net assets. It's an intangible asset not amortized but tested periodically for impairment. A qualitative assessment can indicate if a full (quantitative) test is needed. The quantitative test involves identifying reporting units, assigning assets/liabilities, and comparing the unit's fair value to its carrying amount. Recent rules removed the second step of comparing implied and carrying goodwill. Key factors include testing timing, trigger events, fair value methods, and links to other asset impairments.Brief History of ProjectThe IASB issued IFRS 3 in 2004 and revised it in 2008, followed by a post-implementation review in 2013-2014, with findings published in 2015. To address concerns raised, the IASB launched the Business Combinations-Disclosures, Goodwill, and Impairment project, releasing a Discussion Paper in 2020 and conducting stakeholder outreach. Based on feedback, it developed new proposals and issued an Exposure Draft in March 2024 for public comment.Background- Exposure DraftThe Exposure Draft proposes changes to IFRS 3 and IAS 36 to improve transparency and effectiveness. It aims to enhance disclosures on the performance of business combinations and refine the impairment testing of cash-generating units with goodwill, addressing issues identified in the post-implementation review of IFRS 3.Proposed Amendments to IFRS 3Rationale For Proposed AmendmentsWhen one company acquires another, investors seek clarity on the goals of the management behind the acquisition and whether those goals are achieved in the subsequent years. This helps assess if the acquisition was effective, including pricing, integration, and expected benefits. Without such information, investors often rely on impairment tests, raising concerns that goodwill impairments are recognized too late. Preparers are concerned that the proposals may require disclosure of commercially sensitive information, increasing litigation risk. To address this, the IASB proposes an exemption allowing companies to withhold certain details if disclosure would seriously prejudice key acquisition objectives. The IASB also proposes limiting performance disclosures to strategic acquisitions to avoid disclosure overload.The key proposed changes to IFRS 3 include:New disclosure requirements:Information about the entity's acquisition-date key objectives and related targets for strategic business combinations, and the extent to which those objectives and targets are being met.Quantitative information about the synergies expected to arise from a business combination. Example, revenue synergies, cost synergies, and other types of synergies.To require an entity to disclose for each category of synergies:The estimated amounts or range of amounts of the expected synergies.The estimated costs or range of costs to achieve these synergies.The time from which the benefits expected from the synergies are expected to start and how long they will last.Exempting entities from disclosing some of this information in specific circumstances where it could prejudice the achievement of the entity's key objectives.Replacing the requirement to disclose the primary reasons for a business combination with a requirement to disclose the strategic rationale.Strategic Business CombinationsThe acquirer must disclose information about each strategic business combination as reviewed by key management personnel (as defined in IAS 24 Related Party Disclosures). The required disclosures include:Year of Acquisition:Key Objectives and Targets: Disclose acquisition-date key objectives and related targets, either as a range or point estimate.Year of Acquisition and Subsequent Reporting Periods:Performance Against Objectives: Disclose the extent to which acquisition-date key objectives and targets are being met. This includes:Actual performance data reviewed to assess whether objectives and targets are being met.A statement indicating whether actual performance meets the acquisition-date objectives and targets.Duration of Disclosure:The acquirer must continue to disclose this information as long as key management personnel review the actual performance against the acquisition-date objectives and targets.Non-Review and Cessation of Review:If key management personnel have not started and have no plan to review the achievement of the objectives and targets, disclose this fact and the reasons.If the review stops before the end of the second annual reporting period after the year of acquisition, disclose this fact and the reasons. If key management personnel continue to receive information based on the original metric during this period, disclose that information as well.The IASB proposes that acquisitions that meet any one of these thresholds would be strategic acquisitions:Criteria for Strategic AcquisitionsQuantitative(a) Most Recent Annual Reporting Period Before Acquisition Date:(i) Acquiree's Operating Profit or Loss $\geq$ 10% of Acquirer's Consolidated Operating Profit or Loss OR(ii) Acquiree's Revenue $\geq$ 10% of Acquirer's Consolidated Revenue(b) Assets Acquired (Including Goodwill) as of Acquisition Date $\geq$ 10% of Acquirer's Total Assets in Consolidated Statement of Financial Position as of Most Recent Reporting PeriodQualitativeResulted in Acquirer Entering New Major Line of Business or New Geographical Area of OperationsIdentifying Information to DiscloseKey disclosures required include:DisclosureDetailsGeneral InformationName and description of the acquiree, acquisition date, percentage of voting equity interests acquired, and primary reasons for the business combination.Acquisition Date Fair Value of the Total Consideration TransferredFair value of total consideration transferred, including contingent consideration arrangements, and basis for determining acquisition-date fair value.Contingent Consideration ArrangementsBasis for determining the amount recognized, estimate of range of outcomes (undiscounted), or if a range cannot be estimated, the reasons why.Acquired ReceivablesFair value, gross contractual amounts, and best estimate of contractual cash flows not expected to be collected.ContingenciesAmounts recognized and nature of assets and liabilities arising from contingencies.Partial and Step AcquisitionsFair value of noncontrolling interest and valuation techniques used.Revenue and Earnings of the AcquireeRevenue and earnings of the acquiree since the acquisition date, and pro forma revenue and earnings of the combined entity for public companies.Exemptions from DisclosureCommercially Sensitive Information: Entities are exempt from disclosing commercially sensitive or proprietary information to protect competitive advantage and confidential strategies.Litigation Risk: Entities may be exempt from disclosing information that could lead to legal risk or litigation, as such details might be used against them in legal proceedings.To ensure transparency and accountability, entities claiming exemptions would be required to disclose:The fact that an exemption has been applied.The specific disclosure requirement(s) for which the exemption has been claimed.The nature of the information omitted and the reasons for claiming the exemption.Other Proposed Amendments to IFRS 3Aligning with IFRS 19: Subsidiaries without Public Accountability- DisclosuresThe proposed amendments aim to align IFRS 3 with the forthcoming IFRS 19 standard. Key disclosure requirements under the proposal include:Disclosures about the strategic rationale for a business combination.Information about the expected synergies from the business combination.The contribution of the acquired business to the reporting entity's revenue and profit or loss.The discount rate used in calculating the value in use for impairment testing purposes.Effective Date and Early Application: The IASB will set the effective date after reviewing feedback, but early application is allowed to enhance disclosure transparency and adopt the new requirements sooner.Proposed Amendments to IAS 36:Rationale:Stakeholders raised two main concerns regarding impairment testing:Impairment losses on goodwill are often not recognized promptly. This delay is frequently due to the shielding of goodwill from impairment by the headroom in an existing business with which an acquisition is integrated. Additionally, management's overoptimism can contribute to delayed recognition.The impairment test can be expensive and time-consuming.To address these issues, the IASB proposes targeted changes to IAS 36 to improve goodwill impairment testing, aiming to reduce shielding and over-optimism, and enhance transparency and reliability.Key ConcernProposed AmendmentDetailsObjectiveShielding of Goodwill from ImpairmentClarification on goodwill allocation to CGUsThe proposed amendments clarify how goodwill should be allocated to cash-generating units (CGUs) for impairment testing purposes. This change ensures that goodwill is appropriately assigned to the CGUs that benefit from the synergies of the business combination.Reduce the potential for shielding goodwill from impairment by ensuring a fair and transparent allocation process. Mandatory disclosure of the reportable segment for CGUs containing goodwillEntities will be required to disclose the reportable segment in which a CGU containing goodwill is included. This disclosure provides additional insights into the impairment testing process.Improve transparency and enable users to assess the reasonableness of management's assumptions.Management Over-OptimismRemoval of restrictions on including future restructuring and asset improvementsThe amendments remove the constraint on incorporating cash flows from future restructuring or asset improvements when calculating an asset's value in use. Entities can include such cash flow projections if they meet specific criteria.Provide a more realistic assessment of an asset's value by allowing future cash flows that align with planned restructuring and improvements.Constraints on Cash Flow ProjectionsRemoval of the requirement to use pre-tax cash flows and discount ratesEntities will no longer be required to use pre-tax cash flows and discount rates when calculating value in use. Instead, they may use either pre-tax or post-tax inputs, aligning with their internal valuation practices.Enhance flexibility and consistency with common valuation methods used by entities.The following example demonstrates how the proposed amendments impact the allocation of goodwill and the potential for shielding goodwill from impairment.Fact Pattern:Entity P operates a chain of fitness centers. It operates separate centers for gym facilities and yoga classes. It identifies two operating segments gym facilities and yoga classes. Each fitness center is identified as a Cash Generating Unit (CGU).Entity P does not have any presence in City Y. To enter the market in City Y, in January 20Y1, it acquires a fitness center for yoga classes (Center Y) from Entity Q in City Y. It recognizes goodwill of INR 1.5 crore from the acquisition of Center Y. Center Y will be a part of the operating segment of yoga classes. Entity P's management does not monitor goodwill separately for internal management purposes. It monitors each center separately for internal management purposes.The carrying amounts as of 31 December 20Y1 are as below:Net assets of Center Y (excluding goodwill) INR 8 croreGoodwill allocated to Center Y INR 1.5 croreNet assets of the operating segment yoga classes INR 60 croreThe recoverable amount (value in use) of Center Y is INR 9 crore. The recoverable amount (value in use) of the operating segment - yoga classes is INR 75 crore.Analysis:Under the existing requirements:Entity P does not monitor goodwill for internal management purposes. Therefore, under the current requirements, it can allocate the goodwill recognized on the acquisition of Center Y to the operating segment yoga classes as that is the highest level set by at which goodwill can be allocated.The carrying amount of the net assets of the operating segment - yoga classes as at 31 December 20Y1 is INR 60 crore.The carrying amount of the net assets of the operating segment - yoga classes, including goodwill recognized on the acquisition of Center Y, as at 31 December 20Y1 is INR 61.5 crore. The recoverable amount of this operating segment is INR 75 crore. Therefore, no impairment is recognized.Under the proposed approach:The business associated with the goodwill that is monitored for internal management purposes is the CGU of Center Y. Therefore, the goodwill is allocated to the CGU of Center Y for impairment testing.The carrying amount of the CGU of Center Y, including goodwill, is INR 9.5 crore (i.e., INR 8 crore + INR 1.5 crore). The recoverable amount of the CGU of Center Y is INR 9 crore.Therefore, Entity P is required to recognize an impairment loss of INR 0.5 crore, which will be allocated to goodwill.Thus, under the existing requirements, due to the headroom available in the operating segment - yoga classes, goodwill is shielded from impairment. Under the proposed requirements, this shielding is reduced.The IASB has proposed amendments to address concerns about the cost and complexity of impairment testing, specifically relating to the calculation of value in use. The key impacts are:Inclusion of Uncommitted Future Cash Flows:Current Restrictions Removed: The proposed amendments remove the restriction on including cash flows from uncommitted future restructuring or asset enhancement. Previously, IAS 36.33 and IAS 36.44 prohibited these estimates in cash flow projections.Impact: This change allows for a more realistic and internally consistent projection of cash flows, aligning impairment tests with the cash flow projections used for internal decision-making.Reduction in Cost and Complexity:Simplified Budget Adjustments: By allowing the inclusion of future restructuring and enhancement cash flows, the need to adjust management's financial budgets or forecasts specifically for impairment testing is reduced.Impact: This simplification is expected to lower the cost and complexity associated with the impairment testing process.Future Cash Flows:Requirements Maintained and Expanded: Future cash flows must still be estimated based on the asset's current condition. However, estimates can now include:Cash outflows are necessary to maintain the asset's current economic benefits.Cash flows associated with potential restructurings, improvements, or enhancements.Impact: This allows for a more comprehensive and accurate reflection of the asset's future economic potential.Treatment of Restructuring Provisions:Provisions Recognized in Accordance with IAS 37: When an entity becomes committed to a restructuring and recognizes a provision for it, the calculation of value in use should:Include future cash inflows and outflows reflecting the cost savings and benefits from the restructuring.Exclude future cash outflows for the restructuring itself.Impact: This ensures that the value in use calculations reflect the economic benefits of restructurings without double-counting the associated costs.The IASB has also proposed amendments to IAS 36.80 to enhance the accuracy of goodwill impairment testing:Clarification of Allocation Level:Amend IAS 36.80(a) to specify that goodwill must be allocated to the lowest level at which the associated business is monitored for internal management purposes.New Paragraphs:Paragraph 80A: Ensure entities first apply IAS 36.80(a) to determine the lowest monitoring level for the business associated with the goodwill.Paragraph 80B: Apply IAS 36.80(b) only after determining the lowest monitoring level, setting the highest permissible level for goodwill allocation.Impact:Prevents defaulting to operating segment level allocation when goodwill is not separately monitored.Ensures more precise and stringent impairment testing, reducing the risk of shielding goodwill from impairment.Value in Use CalculationThe proposed amendments to IAS 36 changes the value in use calculation, a key part of impairment testing, to better estimate the present value of future cash flows from an asset or CGU, including goodwill.Removing Constraints on Cash Flow Projections:The current version of IAS 36 prohibits entities from including cash flows from future restructuring or asset improvements when calculating an asset's value in use.The proposed amendments remove this constraint, allowing entities to incorporate cash flow projections from planned future restructuring or asset improvements, provided they meet certain criteria.This change aligns the standard with common valuation practices and reflects the economic reality that entities often undertake restructuring or asset improvements to enhance future cash flows.Eliminating the Requirement for Pre-Tax Inputs:Currently, IAS 36 requires entities to use pre-tax cash flows and pre-tax discount rates when calculating value in use.The proposed amendments remove this requirement, permitting entities to use either pre-tax or post-tax inputs, whichever is more consistent with their internal valuation practices.This change provides greater flexibility and aligns the standard with common valuation practices, where post-tax inputs are often used.The proposed amendments to value in use aim to improve the relevance and reliability of impairment testing by aligning with common valuation practices, allowing post-tax inputs and future restructuring cash flows. To ensure transparency, entities must disclose key assumptions and judgments used in the calculation.Implications and Next StepsConclusionThe evolving landscape of goodwill and impairment accounting in business combinations reflects the increasing need for transparency, reliability, and practicality in financial reporting. The IASB's proposed amendments to IFRS 3 and IAS 36 aim to address long-standing concerns related to the impairment testing process, including management over-optimism, goodwill shielding, and the cost and complexity of assessments. These changes not only improve financial statement disclosures but also align accounting practices with economic realities.Managerial ImplicationsFor corporate financial managers and decision-makers, the amendments reinforce the importance of strategic accountability in acquisitions. Enhanced disclosure requirements ensure that investors and stakeholders gain clearer insights into the rationale and performance of business combinations, leading to more informed decision-making. The adjustments to impairment testing, such as removing constraints on future cash flows and allowing post-tax inputs, provide greater flexibility in valuation and risk assessment. However, companies must also navigate the balance between transparency and the protection of commercially sensitive information.Contributions of the StudyThis study contributes to the broader discourse on financial reporting by critically evaluating how the IASB's amendments refine impairment testing and enhance disclosure quality. By analyzing these changes, the study provides a valuable reference for accountants, auditors, and regulators in understanding the implications of evolving accounting standards. The modifications to impairment testing criteria and disclosure requirements highlight a shift toward more investor-centric financial reporting.Current Developments and Next StepsIn March 2024, the IASB published an Exposure Draft proposing amendments to IFRS 3 and IAS 36. As of February 2025, it continues redeliberating key areas, including improved disclosures, exemptions for sensitive information, and targeted changes to address goodwill shielding and over-optimism, reaffirming its focus on transparency and practical implementation.Scope for Further InvestigationWhile the amendments show progress, future research should assess their real-world impact on reporting, investment decisions, and corporate behavior. Studies should also examine cost-benefit trade-offs and how companies adapt, helping refine standards to stay practical, transparent, and stakeholder-focused.ReferencesExposure Draft: Business Combinations- Disclosures, Goodwill and Impairment Snapshot: Exposure Draft Business Combinations-Disclosures, Goodwill and Impairment retrieved from https://www.ifrs.org/content/dam/ifrs/project/goodwill-and-impairment/exposure-draft-2024/iasb-ed-2024-1-bcdgi.pdfAuthor may be reached at eboard@icai.in
Ep. 200 — Career as an Information System (IS) Auditor for Chartered Accountants
CA Journal
· September 2026
00:00
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Career as an Information System (IS) Auditor for Chartered AccountantsWith the world moving fast towards digitalization, the Information System (IS) Auditor has become an essential part of businesses today. Chartered Accountants can get a chance to fi nd exciting and rewarding careers with opportunities in this sector that can leverage their fi nancial expertise to make IT systems secure, effi cient, and compliant with regulations. This article focuses on the diverse career landscape of an IS Auditor, the competent skills that are required, and the possible career path for the CAs.Information System Auditors: The Diverse Job DescriptionCareer as an Information System (IS) Auditor for Chartered AccountantsWith the world moving fast towards digitalization, the Information System (IS) Auditor has become an essential part of businesses today. Chartered Accountants can get a chance to find exciting and rewarding careers with opportunities in this sector that can leverage their financial expertise to make IT systems secure, efficient, and compliant with regulations. This article focuses on the diverse career landscape of an IS Auditor, the competent skills that are required, and the possible career path for the CAs.By CA. Pallav Singhania, Member of the InstituteInitially, auditors pertained to only financial audits. In today's businesses, where technology has central assistance in functioning the work process, the auditing domain is quite extensive. IS Auditors validate the effectiveness of the IT controls, verify compliance with prevailing regulatory requirements, and ensure the safeguarding of sensitive information from prevalent cyber threats. This is particularly crucial in modern organizations, as most activities depend on technology.Securing Critical InfrastructureIS Auditors form the main line of defense in protecting significant critical infrastructure, viz. Banking, Financial Services & Insurance (BFSI), Power & Energy, Transport, Strategic & Public Enterprises, Telecom, Government and Health sector. These infrastructures are essential in the operation of society and the economy and, thus, are considered the prime attack targets from cyber-space. The auditors are, therefore, mandating that an evaluation be made for the security and resilience of this infrastructure to improve protection and preparedness, maintain conformity to industry benchmarks and regulations, and conduct risk assessments. Their job has an important role in ensuring that there are no disturbances that would have undesired effects.Addressing Privacy ConcernsPrivacy concerns have become critical in the modern data-centric world. IS Auditors play a key role in ensuring that organizations comply with privacy regulations such as the General Data Protection Regulation (GDPR), Income Tax Act, Sarbanes Oxley Act and other allied regulatory compliance. They audit the controls adopted by organizations regarding personal data, ensuring that the organizations maintain a balance between severe protection of personal information and privacy considerations for individuals. IS Auditors support the organization in adopting leading practices about privacy, continually conducting assessments regarding privacy impact, and proposing remedial actions to be taken in the mitigation of risks concerning privacy. This approach benefits an organization in gaining the trust of customers and stakeholders and guarding its reputation.Skills and Qualifications RequiredFor CAs who want to make the shift and become an IS Auditor need to have a mix of basic accounting knowledge and IT. The most important requirements for this include the following:Technical Proficiency: Essentially, for this kind of role, knowledge of IT systems, networks, databases, and principles of cybersecurity is primary. Knowledge of relevant tools and software is essential for auditing and security assessments. IS Auditors must be knowledgeable in using technologies and platforms because this capability will allow them to identify vulnerabilities and recommend effective solutions. More importantly, this knowledge will help them communicate effectively with IT professionals, enabling the practical and workable implementation of their findings and recommendations. One needs to have the skills to analyze sophisticated systems and information to identify gaps and areas for improvement. Therefore, IS Auditors should be good at problem-solving and critical-thinking. Analytical skills are essential for interpreting the findings of an audit to show specific trends so that recommendations are made. Attention to detail is crucial for an IS Auditor, as even the smallest error in execution can lead to significant security and compliance issues for the organization.Regulatory Knowledge: Knowledge of diverse laws and regulations governing information security and privacy is necessary. This includes understanding how such regulations impact the business, its business processes, and, consequently, its IT systems. IS Auditors need to be abreast of regulatory changes and advise their organizations on the requirements to comply with new legislation. This knowledge helps the organization avoid legal and monetary penalties, thus gaining trust among its stakeholders.Communication: The IS Auditors should be able to communicate appropriately with both technical and non-technical people. They must be capable of communicating and expressing their audit findings and recommendations clearly and convincingly. Their communication skills will help them in coordinating relationships among the departments within the organization, with external auditors, and regulators. The IS Auditor should also be able to write detailed reports on the audit performed with a proper recording of the findings and clear recommendations to be provided.Certifications: Certifications such as Diploma in Information Systems Audit (DISA), Certified Information Systems Auditor (CISA), Certified Information Security Manager (CISM), Certified in Risk and Information Systems Control (CRISC), Certified Information Systems Security Professional (CISSP), Cybersecurity Practitioner (CSXP), or Certified Internal Auditor (CIA) added significant credibility to the profession. These designations indicate professional commitment and a high level of standing for that individual. Additionally, obtaining these certifications often requires passing tough exams and accumulating relevant work experience, which further boosts the IS Auditor's qualification and marketability.Key ResponsibilitiesThe responsibilities of an IS Auditor are manifold and involve most areas of IT and business processes:Risk Assessment and Management: IS Auditors spot potential risks associated with information systems and design strategies to mitigate them. This includes the assessment of the probability and impact of all sorts of various threats and, thereby, formulating robust risk management frameworks. To do this, they have to be 'one step ahead' through constantly monitoring the technology scene and tweaking strategies. This approach helps address potential problems before they escalate into serious issues.Adherence and Compliance: Ensuring that the IT systems remain in compliance with laws, regulations, and current industry standards is one of the foremost roles of IS Auditors. They need to keep up with changing regulations, which necessarily include those established by the Information Technology (IT) Act, the General Data Protection Regulation (GDPR), the Health Insurance Portability and Accountability Act (HIPAA), and the Sarbanes-Oxley Act of 2002 (SOX). This involves a deep understanding of the regulatory environment, translating requirements into practical policies and procedures that enable the entity's operation.Security of Systems and Networks: In evaluating security measures, it is crucial to measure security regarding data breaches or cyber-attacks and any other form of security threats. Such measurement includes assessment of firewalls, encryption methods, access controls, and all manner of security protocols. IS Auditors have to ensure that they test such measures regularly, so far as to ensure they are working correctly, by recommending updates or amendments for making improvements when required. Such an aspect of their role is critical because sensitive information ought to be kept intact and confidential.Audit Planning and Execution: IS Auditors formulate complete audit plans, execute the audit process entirely, and communicate the findings to the stakeholders. This requires comprehensive documentation, control tests, and recommendations on the way forward. Proper planning for an audit entail grasping the organization's objectives, risks, and regulatory requirements. IS Auditors must also be able to prioritize and focus on the key critical areas in auditing.Continuous Monitoring and Improvement: Implement constant monitoring mechanisms for continued compliance and security. IS Auditors also advise on improvements to increase the effectiveness and efficiency of IT controls. This has to be through the advanced mechanisms, methodologies, and tools of real-time performance and security monitoring. It is one such philosophy that IS auditing is built around. It is one aspect that could help organizations stay several steps ahead of emerging threats and other changing regulatory requirements.Career Growth OpportunitiesIS Auditors are in high demand across sectors such as banking, healthcare, government, and technology. New technologies are bound to throw up new challenges and, simultaneously, a plethora of opportunities for IS Auditors. Career progression in this field can lead to senior positions such as IT Audit Manager, Chief Information Security Officer (CISO), and IT Governance Manager. As technology continues to evolve, Information Systems Auditors will remain at the forefront of innovation and security within businesses.Financial InstitutionsIS Auditors have essential responsibilities in financial institutions to make sure that sensitive financial data is safeguarded and adhered to with a lot of strict regulatory requirements. They assess the security of online banking systems, payment processing systems, and customer data management systems. Cybercriminals always focus their activities on financial institutions because of the magnitude of valuable information that can be used for fraud and theft. Auditors who can fill this critical role of preventing fraud and protecting customers' data against cybercrime attacks are IS AuditorsHealthcare ProvidersIn the healthcare industry, IS Auditors are charged with the responsibility of protecting patient data and ensuring compliance with regulations governing it, like HIPAA. They evaluate the security level of electronic health records, medical device control systems, and patient management systems. The healthcare industry is adopting digital technologies to improve service delivery and increase operational efficiency; simultaneously, the scope for maintaining effective information security practices grows. IS Auditors help healthcare organizations safeguard the confidentiality and integrity of the information related to the patients and obtain compliance with legal and regulatory requirements.Government AgenciesIS Auditors in government agencies must protect sensitive information and ensure compliance with established governmental regulations and standards. They review security compliance for governmental databases, communication systems, and platforms for public service. Furthermore, they play a crucial role in maintaining backup and disaster recovery plans for government operations and business enterprises. IS Auditors in government agencies work in a complex regulatory environment and have to deal with various stakeholders to achieve the result.Tech CompaniesIn technology companies, IS Auditors analyze software products, cloud services, and internal IT infrastructure for security. They act according to industry standards. However, these organizations work on a highly competitive basis; therefore, information security remains management's prime focus. IS Auditors help such organizations to build secure products and services, protect their intellectual property, and sustain customers' trust. They also ensure that organizations will implement standards of data privacy regulations and industry requirements.Challenges and ConsiderationsWhile the career path of an IS Auditor is promising, it comes with several challenges. Lifelong learning is required to update oneself with the ever-changing landscape of technology and new threats in the environment. Hence, IS auditors need to stay informed about trends in cybersecurity, new laws, and best practices to act effectively. Thus, this is an exhausting process of active learning, but it is very much needed for the continuing integral life of information systems.Another major challenge comes from potential changes in regulations. IS Auditors must stay updated with new laws and standards so that they maintain their organization's compliance and mitigate the risk of legal and financial liabilities. These regulation changes affect an organization's operations directly; hence, IS Auditors should lead proactively. They need to interpret and apply complex rules within the context of the organization, which indeed makes this an exciting challenge. It can also be tricky to find the right balance between strong security and operational efficiency. IS Auditors need to ensure that security will not conflict with an organization's ability to execute. That requires an understanding of the business operations of a firm and an ability to design feasible solutions that maintain the balance between security and operability. IS Auditors must be good at managing relationships with various stakeholders to gain their support for security initiatives.ConclusionA career as an Information Systems Auditor provides a unique opportunity for Chartered Accountants to apply their financial acumen in the realm of IT and cybersecurity. In today's world, when organizations are on a spree to enhance and adopt methods to maintain information security and regulatory compliance, demand for skilled IS Auditors will continue to increase. This career path provides Chartered Accountants, who are passionate about technology and committed to protecting digital assets, with professional satisfaction and career growth. By embracing the challenges and opportunities in this evolving field, Chartered Accountants can achieve both personal and professional fulfillment.Author may be reached at eboard@icai.inTHE CHARTERED ACCOUNTANT · AUGUST 2025 · PAGES 82–84
Ep. 201 — Equity Incentives: A Guide to Sweat Equity and ESOP
CA Journal
· September 2026
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Equity Incentives: A Guide to Sweat Equity and ESOPEquity incentives like Sweat Equity and Employee Stock Ownership Plans (ESOPs) are powerful tools for aligning employees' interests with business growth. Sweat equity offers shares to key employees in exchange for their contributions, such as intellectual property or expertise, making it ideal for cash-strapped startups. ESOPs, on the other hand, are formal plans that distribute shares over time to a broader pool of employees, promoting retention and long-term engagement. Both options have pros and cons, including tax implications, ownership dilution, and regulatory compliance. In India, these mechanisms have gained popularity, particularly among startups, with specific legal frameworks governing their use and offering potential tax benefits.By CA. Tejas Savla, Member of the InstituteIntroductionIn the corporate world, compensation goes beyond just salary; businesses now offer ownership stakes to employees through different instruments. Two of the most popular mechanisms are Sweat Equity and Employee Stock Ownership Plans (ESOPs). These instruments align employees' interests with the company's growth and offer a tangible sense of ownership in the company. Let's dive into the specifics of both Sweat Equity and ESOP, exploring their definitions, differences, benefits, challenges, compliance requirements, and taxation implications.Meaning of Sweat Equity and ESOPSweat Equity: Sweat equity refers to shares issued by a company to its employees or directors as a reward for their commitment, contributions, or expertise in the organization. Rather than being paid in cash, employees receive equity (ownership shares) in the business, reflecting the value of their "sweat" or hard work. This method is widely used by startups that may not have the cash flow to pay high salaries but want to retain key personnel through ownership incentives. These shares can also be issued in exchange for intangible benefits, such as intellectual property, know-how, or other crucial contributions.ESOP (Employee Stock Ownership Plan): An ESOP is a structured plan that allows employees to own shares of the company they work for. Typically, an ESOP is created as a trust, where the company sets aside shares for distribution to employees over time. Employees can either buy these shares at a predetermined price or acquire them at no cost, based on performance, tenure, or other criteria. The primary goal of ESOPs is to offer a long-term incentive for employees, ensuring that they have a stake in the company's success, as well as aligning their interests with the company's growth.Difference Between Sweat Equity and ESOPWhile Sweat Equity and ESOPs may seem similar because they both offer ownership in the company, there are key differences in how they are structured, distributed, and valued.AspectSweat EquityESOPDefinitionIssued to employees in recognition of non-cash contributions such as intellectual property or expertise.A formal plan under which employees can acquire shares over time.PurposeRewards specific efforts or intangible contributions.Encourages long-term participation and retention.StructureDirect issuance of shares at discounted or no cost.Shares are held in a trust and distributed over time.EligibilityTypically reserved for key employees or directors who have made significant contributions.Available to a broader pool of employees, including all full-time staff.ValuationValued based on the company's current worth or the specific contribution.Pre-determined valuation and pricing.Ownership TransferDirect ownership upon issuance.Ownership transferred gradually or upon certain events (vesting).FlexibilityHighly flexible, based on individual contributions.More structured, with uniform guidelines for share distribution.Pros and Cons of Selecting Sweat Equity vs. ESOPChoosing between Sweat Equity and ESOP requires a careful assessment of the company's needs, employee expectations, and long-term objectives. Both have their advantages and drawbacks.Pros of Sweat EquityCost-Effective for Cash-Strapped Companies: For startups or early-stage businesses with limited capital, issuing sweat equity provides a way to compensate key contributors without immediate cash outlay.Direct Recognition of Contributions: Sweat equity directly rewards employees for specific contributions, which can be highly motivating for individuals who play a significant role in the company's development.Aligns Long-Term Interests: Since employees hold ownership stakes, they become more invested in the company's long-term success.Flexible Issuance: There is no formal plan or structure, so sweat equity can be issued to specific individuals based on the company's needs.Cons of Sweat EquityDilution of Ownership: Issuing sweat equity results in a dilution of the founder's or other shareholders' ownership, which can be problematic if done excessively.Valuation Challenges: Determining the fair market value of sweat equity can be complex, especially for early-stage startups.Tax Implications: In some jurisdictions, employees may be taxed on the value of sweat equity at the time of issuance, creating a potential financial burden.Limited to Key Personnel: Sweat equity is typically reserved for top executives or contributors, leaving the broader employee base out of such rewards.Pros of ESOPEmployee Motivation and Retention: ESOPs provide a structured, long-term incentive plan that encourages employees to stay with the company and perform better.Tax Advantages for the Company: In some countries, contributions to ESOPs can be tax-deductible for the company, providing a financial incentive for implementation.Broad-Based Ownership: ESOPs typically extend ownership to a larger pool of employees, which can foster a more collaborative, ownership-driven work environment.Gradual Vesting: The vesting period in ESOPs allows the company to distribute ownership over time, minimizing the risk of immediate dilution.Cons of ESOPComplexity and Cost: Setting up and maintaining an ESOP involves legal, administrative, and compliance costs, making it more complicated than issuing sweat equity.Employee Expectations: The potential for employees to cash out may create pressure for the company to perform well consistently, as declining share prices can lead to dissatisfaction.Dilution Over Time: Like sweat equity, ESOPs result in ownership dilution, though it is spread over a broader group of employees.Regulatory Oversight: ESOPs are often subject to strict regulations and compliance measures, which can increase administrative burdens on the company.Compliance Requirements for Sweat Equity and ESOPBoth Sweat Equity and ESOPs require adherence to various legal and regulatory requirements. The compliance obligations differ significantly between these two mechanisms.Compliance for Sweat EquityBoard and Shareholder Approval: In most jurisdictions, the issuance of sweat equity requires approval from the company's Board of Directors, as well as its shareholders.Disclosure Requirements: The company must provide full disclosure regarding the issuance of sweat equity shares, including details about the recipient, the valuation, and the rationale for issuance.Valuation Standards: Companies must adhere to fair market valuation standards when determining the number of shares to be issued as sweat equity.Statutory Limits: Some countries impose limits on the percentage of equity that can be issued as sweat equity within a specific period.Reporting: Issuance of sweat equity must be reported to regulatory bodies and may need to be reflected in the company's financial statements."In most jurisdictions, the issuance of sweat equity requires approval from the company's Board of Directors, as well as its shareholders."Compliance for ESOPPlan Documentation: Companies must prepare a detailed ESOP plan that outlines the terms of the stock ownership plan, including eligibility, vesting periods, and distribution mechanisms.Regulatory Approval: ESOPs often require regulatory approval from authorities such as securities boards or labour ministries.Trust Setup: In many jurisdictions, an ESOP must be administered through a trust, which holds the shares on behalf of the employees until they are vested.Annual Reporting: Companies must provide annual reports on the ESOP, including details of the shares allocated, the current valuation, and employee participation.Compliance with Securities Laws: Issuance of shares under an ESOP must comply with applicable securities laws, including disclosure requirements and restrictions on trading.Taxation in Sweat Equity and ESOPThe tax treatment of Sweat Equity and ESOPs varies across jurisdictions, but some general principles apply globally.Taxation in Sweat EquityAt Issuance: In some countries, the value of sweat equity is taxed as income in the hands of the recipient at the time of issuance. The tax is based on the fair market value of the shares issued.At Sale: When employees eventually sell the sweat equity shares, they may be liable for capital gains tax. The gain is calculated as the difference between the sale price and the market value at the time of issuance.Tax Deductions for the Company: Some countries allow companies to claim tax deductions for the issuance of sweat equity if it is part of employee compensation.Taxation in ESOPAt Allocation: In most cases, employees are not taxed when shares are allocated under an ESOP, as they are not immediately vested or sold.At Vesting: Depending on the jurisdiction, employees may be taxed on the value of the shares at the time they vest or when they are sold.Capital Gains: When employees sell their vested shares, they may be subject to capital gains tax. The gain is typically the difference between the sale price and the FMV on exercise date.Tax Benefits for the Company: In many jurisdictions, contributions made by companies to ESOPs are tax-deductible, providing a financial incentive to implement the plan.Ideal Preference: When to Choose Sweat Equity or ESOPThe choice between Sweat Equity and ESOP depends on various factors, including the stage of the business, the objectives of the company, and the type of employees being incentivized.When to Choose Sweat EquityEarly-Stage Startups: For cash-strapped startups that rely heavily on key personnel to build intellectual property, sweat equity is an ideal choice. It provides immediate rewards for high-value contributions without the need for significant cash outflows.Small, Agile Teams: Sweat equity works well for smaller teams where individual contributions can be easily identified and directly tied to business growth, allowing for more tailored and impactful equity allocation.Specific Insights on Sweat Equity and ESOP in the Indian MarketIn India, both Sweat Equity and Employee Stock Ownership Plans (ESOPs) have gained significant traction, especially with the rise of startups and growing entrepreneurial culture. However, these instruments are governed by specific regulations that companies must adhere to.1. Sweat Equity in IndiaRegulatory Framework: The issuance of sweat equity shares is governed by Section 54 of the Indian Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations for listed companies. Unlisted companies are governed by the Ministry of Corporate Affairs guidelines.Eligibility: Only permanent employees, directors, and promoters are eligible to receive sweat equity. In India, sweat equity shares are issued as a reward for non-monetary contributions like intellectual property, technical know-how, or other intangible assets.Statutory Limits: Companies in India can issue sweat equity up to 15% of the paid-up equity capital in a year or shares worth 5 crore, whichever is higher. However, the overall ceiling for sweat equity is capped at 25% of the company's paid-up equity capital.Popular in Startups: Sweat equity is widely used by Indian startups as a tool to attract and retain talent, especially when cash compensation is limited.2. ESOPs in IndiaRegulatory Framework: ESOPs in India are governed by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 for listed companies, and under the Companies Act, 2013 for unlisted ones.Vesting and Lock-In: In India, ESOPs generally have a vesting period of one year, and companies often impose additional lock-in periods to ensure employees' long-term commitment.Taxation in ESOPs: Employees in India are taxed at two points:At Exercise: The difference between the fair market value and the exercise price is considered a perquisite and taxed as part of the employee's income.At Sale: When the employee sells the shares, capital gains tax is applicable. Short-term capital gains (if sold within 24 months) are taxed at a higher rate than long-term capital gains.Adoption Among Corporates: ESOPs are widely adopted by Indian tech companies, fintech startups, and unicorns such as Paytm, Zomato, and Flipkart, offering significant ownership to employees to incentivize loyalty and growth."In India, both Sweat Equity and Employee Stock Ownership Plans (ESOPs) have gained significant traction, especially with the rise of startups and growing entrepreneurial culture."3. Trends in IndiaRising Popularity in Startups and SMEs: Both ESOPs and sweat equity are becoming increasingly common in the Indian startup ecosystem. They serve as an effective tool to attract top talent in a competitive job market, especially in technology and high-growth sectors.Government Incentives: The Indian government has been providing various incentives, such as deferring the payment of ESOP-related taxes for employees of startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). This has further increased ESOP adoption in Indian startups.Valuation Sensitivities: Valuation plays a critical role in Indian ESOPs and sweat equity agreements, as most startups operate at high valuations but with volatile stock prices. Employees are often conscious of the timing of their equity exercise to avoid tax liabilities during market downturns.4. Compliance ConsiderationsFair Valuation: For sweat equity, Indian companies must ensure compliance with fair market value assessments. This often requires certified valuation reports and approval from the board and shareholders.Reporting Requirements: Both sweat equity and ESOP issuance must be reported to the Registrar of Companies (ROC) and SEBI for listed companies. Non-compliance may result in penalties.Lock-In Restrictions: The government mandates lock-in periods for sweat equity shares, ensuring employees and directors remain with the company for a specified period.5. Tax Implications in IndiaSweat Equity: In India, sweat equity is taxed as perquisite income at the time of allotment, and the difference between the fair market value and the issue price is considered taxable income. When the shares are sold, capital gains tax is applicable.ESOPs: The tax implications of ESOPs involve both the perquisite tax at the time of exercise and the capital gains tax at the time of selling the shares. However, there have been discussions around tax deferral for ESOPs in startup ecosystems to make it more employee-friendly.6. Ideal Use Cases in IndiaSweat Equity: Best suited for early-stage startups and businesses that rely heavily on the technical skills and contributions of founders or key team members.ESOP: Suitable for more established Indian startups and mid-sized companies that aim to create a broader ownership base among employees, promoting long-term retention.Example of ESOPA company, namely Company A, decides to set up an ESOP to retain employees.Employee's Offer: 1,000 shares allocated at an exercise price of ₹50 per share.Fair Market Value (FMV): ₹100 per share at the time of exercise.Vesting Period: 4 years (25% each year).Scenario: After 4 years, the employee exercises all 1,000 shares.Total Exercise Cost: ₹50,000 (1,000 shares x ₹50).Sale Price: ₹150 per share.Profit on Exercise: ₹50,000 (₹100 - ₹50 x 1,000) (FMV on exercise date - Exercise Price)Profit on Sale: ₹50,000 (₹150 - ₹100 x 1,000) (Sale Price FMV on exercise date)The employee benefits from the appreciation in share value while the company retains a committed employee.Example of Sweat EquityA startup, namely Company B, rewards its CTO with Sweat Equity for developing a proprietary software.Company Valuation: ₹10 crore.Sweat Equity Issued: 2% of the company (20 lakh worth of shares).Fair Market Value: ₹200 per share.Number of Shares Issued: 10,000 (₹20 lakh ÷ ₹200).Scenario: The CTO receives 10,000 shares valued at ₹200 each. If the company's valuation rises to 20 crore after a year:Value of Sweat Equity: ₹40 lakh (2% of 20 crore).Benefit to CTO: 20 lakh gain.Conclusive RemarksIn the Indian ecosystem, both ESOPs and Sweat Equity have emerged as pivotal tools for fostering employee engagement, incentivizing talent, and driving organizational growth. While they cater to different business needs and stages, their impact on the Indian startup and corporate landscape is undeniable.1. Sweat Equity:Sweat Equity is a valuable mechanism for early-stage startups to attract and retain key talent without immediate cash outflows.It works exceptionally well in industries reliant on intellectual property, innovation, or niche expertise.In India, regulatory frameworks such as the Companies Act, 2013, provide clear guidelines for issuance, ensuring transparency. However, compliance requirements and valuation complexities remain challenges for small businesses.For example, a tech startup issuing 20 lakh in Sweat Equity can secure crucial technical contributions, which, when valued in future funding rounds, can yield exponential returns."ESOPs have proven to be a cornerstone for employee retention and long-term engagement in mid-to-late-stage startups and established businesses."2. ESOPs:ESOPs have proven to be a cornerstone for employee retention and long-term engagement in mid-to-late-stage startups and established businesses.The structured nature of ESOPs aligns employee goals with the company's growth, fostering a culture of ownership.With SEBI regulations and favourable tax policies for DPIIT-recognized startups, ESOPs have become increasingly attractive. However, challenges like the dual taxation model (at exercise and sale) need simplification to enhance their appeal.For instance, an employee receiving ESOPs worth 5 lakh at issuance could see their value grow to 20 lakh upon company growth, significantly boosting morale and financial benefits.Final InsightsThe growing adoption of both mechanisms in India highlights their critical role in bridging the talent gap and fostering innovation in the dynamic startup ecosystem. While Sweat Equity suits startups seeking immediate contributions, ESOPs are ideal for businesses aiming to create a collaborative and ownership-driven work environment. To maximize their potential, further simplification of taxation and compliance processes will be key in ensuring broader adoption across industries.Author may be reached at eboard@icai.in
Ep. 202 — Service levelAgreements: ImportantAspects – An Analysis
CA Journal
· September 2026
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Service level Agreements: Important Aspects - An AnalysisService Level Agreements (SLA) are documents that give an outline to agreed commitments between service provider(s) and service recipients or clients. SLAs set an expectation level that a client would expect a service provider to deliver and details the point of contacts during service delivery and metrics by which the effectiveness of processes is monitored and approved. Modern business arrangements, where outsourcing of services and product delivery has become a norm, are governed by agreed service performance metrics commonly known as SLAs.By CA. Nishant Kirtikumar Bharti Patel, Member of the InstituteIn the 21 century, marked by rapid advancements in Information Technology, increasing digitization, and the growing use of Artificial Intelligence (AI) across global economies, modern-era companies commonly employ Service Level Agreements (SLAs) to uphold customer service standards and outline specific remedies or deductions in case those service parameters are not met.Below are the broad contents of SLAs:Expectation from vendor by service-recipient.Metrics to measure service delivery vis-à-vis expectations.Remedial measures if service delivery expectations do not meet expectations.Penalties if service delivery do not meet expectations.Example of an SLAA Ltd. which is a service provider of IT support services viz. LAN set-up, internet access and hardware service support enters a contract with P Ltd. which is into trading of garments at PAN-India level. One of the points in the SLA mentions that A Ltd. shall provide 24X7 service support to P Ltd. This means that even if there is a support requirement by P Ltd. related to say LAN issue on a Sunday or a public holiday, then too A Ltd. shall also render services to their client i.e., P Ltd. In case of default by A Ltd., where metrics are not adhered to, remedial measures including penalty would be levied based on terms of the SLA.Requirement for having SLASLAs summarize the basic tenets of a contract and hence form an integral part of the contract. An SLA pulls together information on all the contracted services and their agreed-upon expected reliability into a single document."SLAs clearly state metrics, responsibilities, and expectations so that, in the event of issues with the service, neither party can plead ignorance, and helps avoid litigations."SLAs clearly state metrics, responsibilities, and expectations so that, in the event of issues with the service, neither party can plead ignorance, and helps avoid litigations. Any significant contract without SLAs is open to deliberate or inadvertent misinterpretation. SLAs protect both parties in the agreement.SLAs should align with the technology and business objectives of engagement with the management. Misalignment will have a negative impact on pricing, quality of service delivery, and customer experience resulting in litigations in the future and consequent loss of business.With SLAs in place, there is a mutual understanding between clients and service providers/vendors with regards to service expectations, allowing team members to know the issues faced and which needs to be addressed, manage customer expectations from vendor's side, and various benefits in terms of structured approach to solve day-to-day problems faced by client's business.In modern business scenarios, it is a necessary and non-negotiable instrument to ensure the success of business transactions for day-to-day operations with minimum hassles.Benefits of SLAsEnsures strong client relationships: SLAs try to address concerns over risks which invariably improve trust among clients and help ensure strong client relationships for vendors.Formalization of processes: Business environments involve formality, whether it is India or abroad, and SLAs add to this requirement by having a formal and documented process-cum-metrics for performance delivery and measurement.Example: No vendor would like to entertain issues multiple times a day on the same problem which will reflect badly on their service expertise. SLAs help having cogent conversations based on agreed upon terms in writing.Boost to productivity and team morale: SLAs ensure that business requests which are critical to operations are attended first to ensure minimal impact on operations. This ensures productivity as employees know what is critical to address, when and how to address it, and continued operations ensure success and boosts the team's overall morale.SLAs Vs. KPIs: DifferenceDifference in metrics: SLAs define a future course of action between vendor and clients i.e., it involves external parties to the agreement. KPIs measure employee productivity within an organization, i.e., a measurement of the team and team members performance against agreed standards, i.e., it involves internal parties to agreed standards of operations.Freedom to agreement on metrics: In the case of SLAs, an external element is always involved due to the participation of vendors in the agreement process. Additionally, the terms are typically reviewed by internal and/or external legal counsels. Therefore, there is flexibility to finalize SLAs through mutual consensus before sign-off. KPIs, being internal to organizations, have lesser degree of control as far as freedom to agree is concerned as it is between a head of the department or superior-subordinate agreement based on predefined parameters for internal evaluation and performance targets.Scope: SLAs, typically, could be broader in scope as a vendor may be providing a host of services to a client. For example, SLAs for providing IT support services could involve services related to desktops, laptops, servers, mobiles as well as data security, data privacy and encryption services, on-line or off-line mode of services, services provided at head-office or PAN-India or even at a global level. KPIs, typically, are narrower in scope with specific metrics that will help ensure that processes and teams coordinate and deliver requisite internal targets on a periodic basis.Reviews: SLAs need review either annually or on change of operational events necessitating re-visit of SLAs terms and metrics of performance between vendors and clients which again shall go through legal review process as done initially. KPIs need review as and when required since it is internal to an organization.ChallengesTracking issues: SLA metrics used for tracking and measurement would invariably need to be backed by data which may be voluminous in the case of global organizations. This may pose challenges in tracking the issues and pinpointing actual cause and resolution of issues.Metrics alignment: SLA metrics must align with the capabilities and objectives of the clients and service providers to ensure success. Ever changing business scenarios require deep-thinking and practical approaches to design measurable and practicable SLA metrics which align with long-term goals and vision of organizations.Lack of flexibility: In today's business environment, the bottom-line is whether SLAs have met the expectations or not. There is no partial acceptability of services by customers: therefore, service delivery is perceived as either 0% or 100% by the service providers.Co-operation: Successful drafting of SLAs requires sign-off from top management on either side of the negotiating table; therefore, co-operation is necessary and can be challenging sometimes.Framing correct SLAsAs a thumb-rule to setting SLAs, avoid arbitrariness in setting up the same and try to be as precise and concise as possible. It is important to measure the right performance metrics and capture the business processes so that SLAs can prove to be a yardstick to measure performance over a period. Finally, periodic review of SLAs in light of the changing business environment and needs helps to have relevant SLAs in the contract.Let us learn more about the same below:Starting point of SLAsIf the organization has a current set of SLAs, the best starting point is reviewing the same and jotting down the performance against existing metrics and then evaluating the need for improvements. The updated list of SLAs should align with the organization's goals and objectives and encompass all stakeholders who are relevant to the organization.FeedbackFeedback from existing clients/customers should form an important consideration while reviewing SLAs. Pertinent questions must be raised viz.What is working well?Which areas need improvement?What can help to deliver and satisfy clients?Are we offering the right services or package of services to clients?DraftThe next step is to draft the SLAs given above, taking into account the background and the feedback received. It is important to be precise and concise, eliminating irrelevant services that do not add value to clients. Most importantly, based on the feedback received, new areas of services should be added to ensure client/customer satisfaction and bring value to their businesses.SupportA successful SLA sign-off needs consultation and consensus with the top management of both your organization and the client's. It is, therefore, important to get their buy-in and incorporate their vision during the drafting process so that the sign-off is smooth and less time-consuming on either side.Best practicesMastering the art of drafting SLAs is a journey and with each SLA draft, one improves incrementally. However, certain tips can be especially helpful, and may be termed as "Best Practices" for an amateur drafter of SLAs.It is important to have measurable SLAs so that team members on either side can track the same and ensure an efficient turnaround of objectives.One must ensure that measurements and reporting systems also incorporate exceptional situations viz. dependency on third-party, system down-time, possibility of delay from client's end etc.Simple and clear well-defined nomenclatures help keep the SLAs concise, precise, and brief.Break-down large complex SLAs into simpler and measurable SLAs.Update SLAs as frequently as possible to ensure that client's considerations are incorporated.High priority items must be identified, measured and tackled on a priority basis. For example, if it is an IT service provider, attending to printer-issues may not always be a high priority area but if the same becomes a recurring issue, it can turn into a persistent problem for the client, which may result in unnecessary escalations.Flexibility should be inherent in SLAs and help ensure reviews and updates.Customize the SLAs based on each client's requirements and business operations.Types of SLAsCustomer-based SLA: As the heading suggests, the SLA is a customer-centric template that focuses on simplicity and leverage, specifically for similar contracts where the same or similar industry-based customer services are provided to clients.Example: A customer-based SLA for all clients in the warehousing industry would have similar requirements.Service-based SLA: Similar to customer-based SLAs, service-based SLAs focus on similar type of services required by clients but across different industries. This helps in replicating the SLA template for a multitude of clients requiring similar services but across different industries.Example: A service-based SLA for resolution of printer-related issues which can remain consistent across different industries and could be used to help set up standard SLAs for resolution of tickets.Multi-level SLA: This template offers adequate flexibility to customize as per client requirements by addition of service conditions to address different customers within an organization. Such SLAs try to address customers across hierarchy from top-management to ground-level workers in operations, address issues at specific levels and at group levels, specific to a particular corporate entity within industries, and hence would be more granular compared to other two types of SLAs seen above."The SLA is a customer-centric template that focuses on simplicity and leverage, specifically for similar contracts where the same or similar industry-based customer services are provided to clients."SLA metrics to consider for draftingIt is important that SLAs monitor appropriate metrics to ensure overall success. The right data is a pre-requisite to know if the service arrangement is serving both the parties to the SLA. Too many metrics may make the SLA unviable and different services may require different metrics for serviceability. Please note that the below are universally accepted industry metrics, and the same could cater to each client or industry-specific needs to prepare mutually acceptable SLAs.Uptime: Uptime refers to the number of working hours when services are in place and working for the client, and measurability is in % terms e.g., 99% for 30 days for an 8-hour workday means 0.3 days or 2.4 hours in a month of down-time which may be acceptable in industries.Error rates: Error rates track service failures, which could be in terms of the percentage of time when services by the vendor could not be delivered, resulting in missing deadlines, delays in updates, negative interactions with the client, escalations to top management on either side, and defects in services.Response time: Response time refers to the acceptable time for a service provider to log and respond to the client's issue.Resolution time: Resolution time refers to the acceptable time for a service provider between log-in time and resolution of the issue raised by a client i.e., turn-around time.First call resolution rate: This means the percentage of resolutions by the vendor that are done in the first attempt itself, which speaks of the quick turnaround and good serviceability from the service provider's perspective.Updates and security: Data privacy by the vendor cannot be compromised under any circumstances, and regular updates in services provided, be it antivirus patches, ERP updates, or statutory compliances, must be adhered to, including local and global laws which are non-negotiable."It is important that SLAs monitor appropriate metrics to ensure overall success. The right data is a pre-requisite to know if the service arrangement is serving both the parties to the SLA."Indemnification clause - Is the clause necessary?A pertinent question to ask is whether the indemnification clause from vendor's side should be made a part of SLAs or the main contract?In practical experience, vendors do include indemnification clauses as a part of SLAs. However, wider practice would be to make it a part of the general contract as well.If included, the indemnification clause is an important part of SLA, given it provides compensation to the client in case of any loss or breach of serviceability which may include litigation costs, restoration costs because of breach of SLAs and could have vital impact on the business of the service providers. Therefore, the same must be drafted carefully if it is made a part of SLA.Dispute resolution mechanismThe business world is a practical world, and it is necessary that disputes between clients and service providers are minimal. However, in the worst-case scenario, if there are major disputes, it is necessary to build safeguards within SLAs to resolve the disputes quickly.SLAs may incorporate an escalation matrix whereby, based on the gravity of issues faced and turnaround time to address the same, the issues from vendor or client's side could be escalated to higher authorities at the service provider and/or recipient's level.In case of very high-stake disputes, reference to arbitration by vendor or client at a mutually agreed place of dispute resolution by an experienced arbitration authority or expert could also be incorporated. The core idea should be to avoid litigation costs and time that arise in dispute resolution by courts, which will be harmful for the reputation and bottom-lines of organizations on either side."In case of very high-stake disputes, reference to arbitration by vendor or client at a mutually agreed place of dispute resolution by an experienced arbitration authority or expert could also be incorporated."Whether graphs/charts can be a part of SLA?SLA metrics would always be measurable and could be numeric, but charts and/or graphs would be helpful to emphasize or demonstrate a critical point of view or practice and if aggreable to both parties of the SLA.ISO standards of SLA'Drafting is a skill learnt by extensive reading and practical experience. The motive behind this article is to inculcate essential skills to draft SLAs which will be useful right from an articleship trainee to a seasoned practitioner in his/her field.To draw insights into ISO level standards to refer to while drafting SLA agreements, below are useful standards applicable to SLAs accepted industry-wide:Standardized SLA templates need to be in existence in every organization and this should include the basics of contract drafting elements viz.Definition of the document and its scopeAttention to detailsBase level requirements essential for engaging and sustaining client relationshipsFire-fighting mechanism in case of escalationsDispute resolution clauses necessary to save the engagementsTermination clausesSLA is a living document which needs to be kept up-to-date as per the changing business dynamics.SLA templates must include a clear definition of services, expected service quality in terms of measurable metrics, turnaround time (TAT), service costs which are easily quantifiable for the clients. Most importantly, for vendor and clients, there must be a clear description of how the service delivery is to be monitored, measured in terms of compliance requirements with expected service levels.ConclusionSLAs are core to most agreements between service providers/vendors and service recipients/clients in modern businesses and must be made keeping the fundamentals of contract management in mind.SLAs not only prove useful as reference points to monitor and measure performance-based vendor management but can also be an effective risk management tool, through appropriate construction of SLAs and incorporation of clauses related to indemnity and arbitration in case of any losses and/or disputes in the long-run.It is advisable to review SLAs with technical, legal, and commercial teams to ensure that they foolproof, and that any loose ends are addressed before execution/sign-off by either party.Referenceshttps://iso-docs.com>products>service-level-agreement-sla-template-iso-20000?_pos=1&_sid=a669e364c&_ss=rwww.atlassian.comwww.cio.com.https://www.ibm.comwww.servicenow.comAuthor may be reached at eboard@icai.in
Ep. 203 — Transforming Financial Services: The Role of Fintech in Empowering Chartered Accountants and Allied Professionals
CA Journal
· September 2026
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Transforming Financial Services: The Role of Fintech in Empowering Chartered Accountants and Allied ProfessionalsThis article explores the transformative impact of Fintech on Chartered Accountants (CAs) and allied professionals in financial services. It analyses practical applications across auditing, taxation, advisory and compliance, discussing trends, challenges and future opportunities. Key findings include enhanced efficiency through AI-driven auditing, blockchain's role in secure transactions and the rise of robo-advisors. Challenges like data privacy and regulatory compliance are examined, alongside opportunities in decentralized finance (DeFi) and sustainable finance. Embracing Fintech equips professionals to navigate complexities, innovate and enhance client service, positioning them as leaders in a digitally evolving financial landscape.IntroductionIn the rapidly evolving landscape of financial services, the emergence of Financial Technology (Fintech) stands as a transformative force reshaping traditional practices and opening new avenues for innovation. Fintech encompasses a broad spectrum of technologies and innovations that leverage digital advancements to enhance the delivery and accessibility of financial services. From blockchain and artificial intelligence (AI) to digital currencies and robo-advisors, Fintech solutions are revolutionizing how financial transactions are conducted, managed and analyzed.The significance of Fintech in the financial services industry cannot be overstated. It not only improves operational efficiencies and reduces costs but also enhances customer experiences by providing personalized and efficient financial solutions. Fintech has democratized access to financial services, empowering individuals and businesses with tools that were once exclusive to large institutions. This democratization is fostering financial inclusion globally, bridging gaps in access to banking and investment opportunities.Understanding FintechFinancial Technology, commonly known as Fintech, encompasses a diverse range of innovations that leverage digital advancements to enhance and automate financial services. Initially coined to describe the integration of technology into financial processes, Fintech now represents a dynamic sector driving significant industry disruption and innovation.Meaning and Scope of FintechFintech refers to any technological innovation that aims to improve and automate the delivery and use of financial services. It spans a wide spectrum of applications, including payment systems, lending platforms, investment management, and digital banking solutions. Fintech innovations often focus on enhancing efficiency, accessibility and transparency within financial transactions and services.Evolution and Historical Development of FintechThe evolution of Fintech can be traced back to the early 2000s with the rise of online banking and payment systems (Manasov et al., 2018), which marked the beginning of digital transformation in finance. Over the years, technological advancements, regulatory changes and consumer demand have accelerated the growth of Fintech, leading to the emergence of new players and business models in the financial services industry.Key Technologies and Innovations Driving FintechBlockchain: A decentralized ledger technology that ensures secure, transparent and immutable transactions. Blockchain has revolutionized areas such as payments, supply chain finance and digital identities by eliminating intermediaries and reducing transaction costs. Cryptocurrencies like Bitcoin and Ethereum, along with stablecoins and CBDCs, facilitate financial inclusion and challenge traditional banking models.Artificial Intelligence (AI) and Machine Learning: AI-powered algorithms enable data analysis, predictive analytics and personalized financial recommendations. In Fintech, AI enhances fraud detection, credit scoring, and customer service automation, improving operational efficiency and customer experience.Data Science: It involves analyzing large datasets to extract insights and inform decision-making. In Fintech, it aids in understanding customer behaviour, managing financial risks and analyzing market trends. Data science also streamlines regulatory compliance through automated data collection and analysis, ensuring accuracy and efficiency in adhering to regulations.Relevance to CAs and Allied ProfessionalsFinancial Technology integration into various domains of financial services not only enhances operational efficiency but also introduces new methodologies and tools that redefine client engagement and service delivery (Fülöp et al., 2022).Fintech allows to leverage advanced technologies like AI, blockchain and data analytics to enhance auditing procedures, optimize tax planning strategies, offer personalized financial advisory services, and ensure regulatory compliance (Faes et al., 2022). Embracing Fintech enables professionals to stay competitive in a rapidly evolving industry landscape driven by technological innovation (Nasir et al., 2021).Impact of Fintech on Various DomainsAuditing: Automated auditing tools powered by AI and machine learning algorithms enable CAs to conduct more thorough and efficient audits. These technologies can analyze vast datasets quickly, detect anomalies, and provide insights that enhance audit quality and reduce risk.Taxation: Fintech solutions streamline tax compliance processes through automated reporting and real-time data analysis. AI-driven tax software can interpret complex tax codes, optimize deductions, and facilitate accurate tax filings, thereby improving efficiency and minimizing errors.Financial Advisory: Robo-advisors and digital wealth management platforms powered by Fintech offer personalized investment advice and portfolio management strategies based on client preferences and risk profiles. These platforms utilize AI algorithms to analyze market trends, manage asset allocation, and optimize investment decisions.Compliance: Fintech solutions enhance regulatory compliance by automating compliance monitoring, reporting and risk assessment processes. Blockchain technology ensures transparent and immutable records, facilitating regulatory audits and improving transparency in financial transactions.Algorithmic Trading: It uses complex AI algorithms to execute trades at optimal times based on market data and pre-set criteria. This technology enables high-frequency trading, improves market efficiency and allows for sophisticated trading strategies that were previously inaccessible to individual traders and smaller firms."Fintech solutions streamline tax compliance processes through automated reporting and real-time data analysis."Practical Applications of Fintechi. Automated Auditing Processes and AI-driven AnalyticsReal-time Data Analysis: AI algorithms can analyze vast amounts of financial data in real-time, detecting anomalies and patterns that may indicate potential risks or errors.Predictive Analytics: Machine learning models can forecast financial trends and identify emerging risks based on historical data, enhancing audit planning and risk assessment.Enhanced Accuracy and Efficiency: Automated auditing reduces manual effort and human error, improving audit accuracy and allowing CAs to focus on strategic analysis and client advisory.Real-World Example: A global audit firm adopts AI-powered audit analytics software to enhance audit procedures for multinational clients. The software analyses financial transactions, identifies irregularities, and provides actionable insights that improve audit quality and compliance.Implementation Strategy: CAs can integrate AI-driven audit tools into their practice by investing in specialized software solutions or partnering with technology providers specializing in audit automation. Training staff in data analytics and AI applications is crucial to leverage these technologies effectively.ii. Blockchain Technology for Secure Transactions and Smart ContractsSecure Transactions: Blockchain ensures secure and tamper-proof transaction records, reducing fraud and enhancing trust in financial transactions.Smart Contracts: Self-executing contracts coded on blockchain automate contract terms and conditions enforcement, ensuring compliance and reducing transaction costs.Immutable Records: Blockchain provides an immutable audit trail of transactions, facilitating regulatory compliance and simplifying audit processes.Real-World Example: A financial institution implements blockchain technology to streamline cross-border payments, reducing transaction times and costs while ensuring transparency and compliance with international regulations.Implementation Strategy: CAs can explore partnerships with blockchain technology providers or develop in-house expertise in blockchain development and integration. Educating clients on the benefits of blockchain technology for transaction security and compliance can facilitate adoption.iii. Robo-Advisors and Their Role in Investment ManagementRisk Assessment: Robo-advisors assess client risk tolerance and investment goals through automated questionnaires and data analysis.Portfolio Management: Algorithms optimize asset allocation based on market conditions and client preferences, rebalancing portfolios to maintain desired risk-return profiles.Cost Efficiency: Robo-advisors typically offer lower fees compared to traditional human advisors, making investment management accessible to a broader range of investors.Real-World Example: A wealth management firm integrates a robo-advisor platform to offer personalized investment advice and portfolio management services to tech-savvy millennials. The platform uses AI to analyze market trends and adjust asset allocations in response to market fluctuations.Implementation Strategy: CAs can partner with robo-advisor platforms or develop proprietary robo-advisor solutions tailored to client needs. Educating clients on the benefits of automated investment management and demonstrating transparency in algorithmic decision-making are crucial for client trust and adoption.Challenges and Considerationsi. Data Privacy and Cybersecurity ConcernsData Breaches: The interconnected nature of digital financial transactions increases the risk of data breaches and cyberattacks.Regulatory Compliance: Stricter data protection regulations (e.g., DPDP, GDPR, CCPA) require robust security measures to safeguard client information. DPDP (Digital Personal Data Protection) aims to protect the personal data of individuals by establishing a comprehensive framework for data privacy and security. It mandates stringent measures for data handling, storage, and sharing, ensuring that organizations adhere to robust data protection standards to safeguard personal information from misuse and breaches.Client Trust: Maintaining client trust through secure data handling practices is crucial for maintaining reputation and compliance.ii. Regulatory Compliance and Legal ImplicationsCompliance Challenges: Adhering to diverse regulatory frameworks across jurisdictions poses compliance challenges for global operations.Regulatory Uncertainty: Emerging technologies like blockchain and digital currencies often outpace regulatory guidance, leading to uncertainty and legal risks.Audit and Reporting Requirements: Meeting regulatory audit and reporting requirements necessitates comprehensive understanding and integration of Fintech solutions.iii. Ethical Considerations in AI and Algorithmic Decision-MakingAlgorithmic Bias: AI algorithms may unintentionally perpetuate biases based on historical data, impacting fairness in decision-making processes.Ensuring Transparency: Ensuring transparency in AI-driven decisions is crucial for accountability and client trust.Ethical Use of Data: Respecting privacy rights and ethical standards in data collection, usage, and storage is imperative.iv. Strategies for Mitigating Risks and Overcoming ChallengesInvest in Cybersecurity: Adopt robust cybersecurity measures, including encryption, multi-factor authentication and regular security audits.Stay Informed: Stay updated on regulatory changes and industry standards to ensure compliance and mitigate legal risks.Ethics Training: Provide ongoing training on ethical considerations in AI and algorithmic decision-making to promote responsible use of technology.Collaborate with Experts: Partner with legal advisors and cybersecurity experts to navigate regulatory complexities and address compliance challenges effectively.v. Dependencies on Third PartyThe recent issue with Microsoft has highlighted the significant dependencies on third-party service providers in the technological ecosystem. Any glitches or failures in these services can have substantial impacts on business operations, causing disruptions and raising concerns about the resilience and reliability of outsourced technology solutions.Current Trends in FintechThe Fintech sector is experiencing rapid growth, both in India and globally. Currently, the Indian Fintech market is valued at approximately $80 billion and is projected to reach $150 billion by 2025 and $420 billion by 2029 (Patel, 2024). Globally, the Fintech market is valued at around $1.2 trillion, with expectations to grow significantly, driven by technological advancements and increased adoption of digital financial services. Key trends shaping the Fintech landscape include the rise of digital payments, the proliferation of blockchain technology and the growing use of artificial intelligence for personalized financial services. These trends highlight the vast potential of, and opportunities within the Fintech sector, offering substantial growth prospects for businesses and professionals alike.i. Decentralized Finance (DeFi)Peer-to-Peer Transactions: DeFi platforms facilitate direct transactions between users without intermediaries, enabling faster and cheaper financial services.Lending and Borrowing: Smart contracts on blockchain platforms enable automated lending and borrowing of cryptocurrencies, providing liquidity and earning interest.Tokenization: Assets such as real estate or commodities are tokenized and traded on blockchain platforms, enhancing liquidity and accessibility for investors globally.ii. Digital BankingMobile Banking: Increasing adoption of mobile apps for banking transactions, payments and account management.Neobanks: Digital-only banks offering streamlined services with lower fees and enhanced user experience compared to traditional banks.Open Banking: APIs allow third-party developers to build applications and services around financial institutions' data, promoting innovation and competition in the banking sector.iii. ESG IntegrationCastro et al., 2020 suggested that Environmental, Social and Governance (ESG) factors are becoming integral to investment decisions and financial services:Sustainable Investing: Investors prioritize companies with strong ESG practices, influencing asset allocation and investment strategies.ESG Reporting: Fintech solutions enable transparent reporting and measurement of ESG metrics, supporting regulatory compliance and stakeholder engagement.Green Finance: Fintech platforms facilitate investments in renewable energy projects and sustainable development initiatives, aligning with global sustainability goals.iv. Impact of Digital Currencies and Stablecoins on Financial MarketsCryptocurrencies: Bitcoin, Ethereum and other cryptocurrencies serve as alternative assets and mediums of exchange, challenging traditional fiat currencies.Stablecoins: Stablecoins pegged to fiat currencies provide stability and facilitate cross-border transactions with reduced volatility.Central Bank Digital Currencies (CBDCs): Governments explore CBDCs as digital representations of fiat currency, aiming to enhance financial inclusion and payment efficiency.v. Emerging Technologies and Future ImplicationsArtificial Intelligence (AI): Continued advancements in AI enable personalized financial advice, risk assessment and fraud detection.Internet of Things (IoT): IoT devices gather real-time financial data for predictive analytics and personalized services.5G Technology: High-speed connectivity enhances mobile banking capabilities and supports real-time transaction processing.Stimulating Debate and Innovation in Fintechi. Controversial Topics in FintechPrivacy vs. Transparency: Balancing the need for data privacy with the transparency requirements of blockchain and AI-driven technologies.Regulatory Oversight: The adequacy of existing regulations to address emerging Fintech innovations such as decentralized finance (DeFi) and digital currencies.Ethical Use of AI: Concerns about algorithmic bias, accountability and the ethical implications of AI-driven decision-making in financial services.ii. Debate on Scalability and Democratization of Financial ServicesFinancial Inclusion: Leveraging Fintech to reach underserved populations and provide affordable banking, credit and investment opportunities.Challenges in Adoption: Overcoming barriers such as digital literacy, infrastructure limitations and regulatory constraints to ensure widespread adoption of Fintech solutions (Shahrokhi, 2008).Impact on Traditional Institutions: How Fintech disrupts traditional banking models and challenges established financial institutions to innovate and remain competitive.iii. Opportunities for Innovation and CollaborationCross-Industry Collaboration: Partnerships between financial institutions, technology firms and startups to co-develop innovative solutions.Emerging Technologies: Exploring the potential of AI, blockchain, IoT and 5G to create new financial products, improve customer experiences, and enhance operational efficiency.Entrepreneurship and Startups: Incubators, accelerators, and venture capital funding support the growth of Fintech startups, driving entrepreneurial innovation in the industry.Embracing these discussions and collaborations allow stakeholders to shape the future of Fintech responsibly, address challenges effectively, and capitalize on opportunities to innovate and improve financial services for a global audience (Bajwa et al., 2022).Future Directions and Opportunities in FintechThe future of Financial Technology (Fintech) promises continued disruption and innovation, presenting new opportunities and challenges.i. Predictions for the Future of FintechIntegration of AI and Machine Learning: AI will play an increasingly crucial role in automating financial processes, enhancing predictive analytics, and personalizing customer experiences.Expansion of Blockchain Applications: Beyond cryptocurrencies, blockchain technology will revolutionize supply chain finance, digital identities, and decentralized applications (dApps) in various industries.Rise of RegTech and Compliance Automation: Fintech solutions will continue to streamline regulatory compliance processes, reducing costs and improving transparency."CAs can partner with robo-advisor platforms or develop proprietary robo-advisor solutions tailored to client needs."ii. Emerging Areas of Opportunity for CAs and ProfessionalsAdvanced Data Analytics: CAs can leverage data analytics tools to gain deeper insights into financial trends, predict market movements and optimize client strategies.Cybersecurity and Risk Management: As cyber threats evolve, professionals skilled in cybersecurity will be in high demand to safeguard sensitive financial data and transactions.ESG and Sustainable Finance: CAs can advise clients on integrating Environmental, Social and Governance (ESG) factors into investment strategies and financial reporting, aligning with global sustainability goals.iii. Strategies for Staying Ahead in a Rapidly Evolving LandscapeContinuous Learning and Skill Development: Stay updated with emerging technologies and industry trends through ongoing education, certifications and professional development programs.Embrace Collaborative Partnerships: Collaborate with Fintech startups, technology providers and regulatory experts to co-develop innovative solutions and navigate regulatory complexities.Enhance Client-Centric Services: Adopt client-centric approaches by offering personalized financial advice, leveraging AI-driven insights and enhancing digital customer experiences.Invest in Robust Cybersecurity: Implement robust cybersecurity measures, including encryption, secure authentication and proactive threat detection, to protect client data and maintain trust.By staying informed, adaptable and strategic, professionals can effectively harness the potential of Fintech to drive sustainable growth and client success in the future (Mention, 2019).ConclusionIndia's Fintech sector is rapidly expanding, with over 9,000 Fintech startups contributing to its growth. According to Patel (2024), the sector has captured 14% of global funding and ranks second in deal volume. It is projected to reach $150 billion by 2025 and $420 billion by 2029. In 2022, Indian Fintech startups raised $5.65 billion, making it the second most-funded startup sector in the country.The success of India's Fintech landscape is supported by a robust regulatory framework. The India Stack, which includes a set of APIs, and the JAM Trinity (Jan Dhan Yojana, Aadhaar, and mobile connectivity) have been pivotal in driving financial inclusion. Jan Dhan Yojana has enrolled over 508.9 million beneficiaries, and Aadhaar has issued over 1.3 billion IDs, streamlining identification processes (Patel, 2024).Looking ahead, the Reserve Bank of India's Payments Vision 2025 sets ambitious goals for digital payments, including tripling transaction volumes, achieving a 50% CAGR in mobile-based transactions, increasing PPI transactions by 150%, and expanding card acceptance infrastructure to 25 million by 2025. These initiatives highlight the pivotal role digital payments will play in India's financial future. In conclusion, the evolution of Financial Technology (Fintech) represents a transformative shift in the financial services industry, offering CAs and professionals unprecedented opportunities for growth and innovation.Additionally, upcoming compliance regulations for blockchain, AI, and data privacy will further enhance the role of Chartered Accountants, making their expertise increasingly crucial in navigating the evolving Fintech landscape.Summary of Key Findings and InsightsFintech innovations, such as AI-driven analytics, blockchain technology and robo-advisors, are revolutionizing traditional practices across auditing, taxation, financial advisory and compliance. These technologies enhance operational efficiency, improve accuracy, and empower professionals to deliver more personalized and effective services to clients. The integration of digital currencies and stablecoins is reshaping financial markets, offering new avenues for investment and transaction efficiency.Implications of Fintech for CAs and Allied ProfessionalsEmbracing Fintech enables professionals to enhance client service delivery, optimize risk management strategies and navigate regulatory complexities more effectively. By leveraging advanced technologies and staying ahead of industry trends, CAs can position themselves as trusted advisors capable of addressing the evolving needs and expectations of clients in a digital-first era.Final Thoughts on Embracing Fintech for Sustainable GrowthTo achieve sustainable growth in an increasingly competitive landscape, it is imperative for CAs and professionals to embrace Fintech wholeheartedly. This entails continuous learning and adaptation of emerging technologies, fostering a culture of innovation within firms and collaborating with Fintech startups and technology providers to co-create solutions that meet client demands and regulatory requirements. By investing in robust cybersecurity measures, maintaining ethical standards in AI and data usage, and prioritizing client-centric service models, CAs can not only mitigate risks but also capitalize on the vast opportunities presented by Fintech. Ultimately, embracing Fintech is not just about adopting new tools-it's about transforming professional practices, enhancing client outcomes, and shaping the future of financial services in a sustainable and responsible manner.As we look ahead, the journey of Fintech integration for CAs and allied professionals is one of ongoing evolution and adaptation. By staying informed, proactive and client-focused, professionals can navigate the complexities of Fintech with confidence, driving growth, innovation and value creation for clients and stakeholders alike.ReferencesBajwa, I. A., Ur Rehman, S., Iqbal, A., Anwar, Z., Ashiq, M., & Khan, M. A. (2022). Past, Present and Future of FinTech Research: A Bibliometric Analysis. SAGE Open, 12(4). https://doi.org/10.1177/21582440221131242Castro, P., Rodrigues, J. P., & Teixeira, J. G. (2020). Understanding FinTech Ecosystem Evolution Through Service Innovation and Socio-technical System Perspective. Lecture Notes in Business Information Processing, 377 LNBIP, 187-201. https://doi.org/10.1007/978-3-030-38724-2_14Faes, A., Gunnella, V., & Giorgino, M. (2022). Collaborate or Perish: A Conceptual Framework for Banks and FinTechs Partnerships. https://knowledge.wharton.upenn.edu/article/banks-fintechs-adversaries-partners/Fülöp, M. T., Topor, D. I., Ionescu, C. A., Căpuşneanu, S., Breaz, T. O., & Stanescu, S. G. (2022). Fintech Accounting and Industry 4.0: Future-Proofing Or Threats To The Accounting Profession? Journal of Business Economics and Management, 23(5), 997-1015. https://doi.org/10.3846/jbem.2022.17695Manasov, J., Banka, S., & Josimovski, S. (2018). Comprehensive Overview of Fintech Industry: Definitions, Evolution and Segments. In KNOWLEDGE- International Journal (Vol. 22, Issue 1). http://ikm.mk/ojs/index.php/kij/article/download/3475/3473Mention, A. L. (2019). The Future of Fintech. In Research Technology Management (Vol. 62, Issue 4, pp. 59-63). Taylor and Francis Inc. https://doi.org/10.1080/08956308.2019.1613123Nasir, A., Shaukat, K., Khan, K. L., Hameed, I. A., Alam, T. M., & Luo, S. (2021). Trends and directions of financial technology (Fintech) in society and environment: A bibliometric study. In Applied Sciences (Switzerland) (Vol. 11, Issue 21). MDPI. https://doi.org/10.3390/app112110353Patel, M. (2024) https://www.linearloop.io/blog/future-of-fintech-in-indiaShahrokhi, M. (2008). E-finance: status, innovations, resources and future challenges. Managerial Finance, 34(6), 365-398. https://doi.org/10.1108/03074350810872787Author may be reached at sofiakhan07@gmail.com and eboard@icai.in
Ep. 204 — Indian FinTech Sector - Emerging Trends, Opportunities, and Challenges (An Analytical Study Based on SWOT Technique)
CA Journal
· September 2026
00:00
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Indian FinTech Sector - Emerging Trends, Opportunities, and Challenges (An Analytical Study Based on SWOT Technique)India's vast unbanked and underbanked population has positioned it as a dynamic and promising landscape for the global FinTech industry. With the rapid advancement of digital technologies, India's FinTech sector has witnessed remarkable growth over the past decade and is poised for further expansion in the coming years. This article delves into the sector's role, current landscape, and emerging trends while also outlining its various segments. It further incorporates the key priorities for India's FinTech ecosystem by 2047, as outlined by the Governor of the Reserve Bank of India (RBI) at the Global FinTech Fest in August 2024. To provide a comprehensive and realistic assessment of India's FinTech domain, the article employs the 'SWOT' analysis framework. Additionally, it concludes with insightful and impactful recommendations to enhance the sector's development and sustainability.'FinTech' is a sunshade term invented in the recent past that symbolize technological novelties having a good-looking attitude on financial services. Today, the FinTech' market or sector is watched as a game modifier and disruptive innovation that is proficient in shaking up the old-style financial market.According to the 'Financial Stability Board (FSB)' of the Bank of International Settlements (BIS), the term 'FinTech' is a technologically enabled innovation in financial services that could result in new business models, applications, processes, or products with an associated material effect on financial markets, financial institutions, and financial services. It is notable that the same definition has been adopted by the RBI and has been used in several publications/reports.India now stands in the transformation era, where technology, knowledge, and skill will be the locomotives to encounter the ambitions of the 1.4 billion people of our country. In the words of Shri Ajay Kumar Choudhary (Non-Executive Chairman and Independent Director of NPCI), "India is among the fastest growing fintech markets in the world. As of 2024, it is estimated to be around USD 110 Billion, and by 2029, it is projected to reach an impressive around USD 420 Billion at a CAGR of 31%. Boosting over 9000 fintech entities, India ranks 3rd globally in terms of the highest number of fintech entities and commands 14% of startup funding in the country. Threat of fintech in India is 87%, which is well above the global average of 67%. Thus, we can say that these companies are also changing the monetary and technological-based financial environment of India. Additionally, the Indian FinTech sector is greatly helping the underserved society with innovative services.The RBI, IRDAI, and SEBI are the key regulatory bodies that regulate FinTech companies in India. To identify opportunities and challenges associated with the FinTech sector, a FinTech Department had been established by the RBI in January 2022. On the other hand, the 'FinTech WG' has also been constituted by the RBI for FinTech growth and regulations. The FinTech WG is working on a framework to develop and manage the FinTech ecosystem in our country.Different Segments of Indian FinTech SectorThese segments can be categorized as under:Lend Tech CompaniesThese firms specialize in offering various financial solutions, including fixed-term financing, corporate cards, trade finance, Buy Now Pay Later (BNPL) services, gold and auto loans, personal loans, and Peer-to-Peer (P2P) lending. Notably, P2P lending eliminates intermediaries, directly connecting borrowers with lenders. It is also known as crowd lending, which can be categorized into donation-based, investment-based, and reward-based models. Some of the examples of Lend Tech companies include Razorpay and Google Pay, etc.Pay Tech CompaniesThese firms facilitate digital transactions through advanced platforms, making up the largest segment of FinTech in India. PayTech solutions offer Application Programming Interface (API) integration, enhancing seamless and secure payments. Some examples include Google Pay, PhonePe, etc, as well as payment gateways, card networks, and payment security providers like Paytm, etc.WealthTech CompaniesThese firms provide wealth and expense management services through robo-advisors, mutual fund platforms, and investment research tools. Some examples include Groww, Zerodha, etc.Reg Tech CompaniesThese firms specialize in regulatory technology solutions, streamlining compliance processes for financial institutions and businesses. They offer services such as fraud detection, Know Your Customer (KYC) verification, digital onboarding, Anti-Money Laundering (AML) compliance, risk management, and banking regulations. Some examples of the companies include Ascent, IBM, Forter, MetricStream, etc.Agri Tech CompaniesThese firms offer comprehensive agricultural solutions, including customized farm advisory, market linkages, and digital commerce platforms. Through mobile applications, farmers can access agronomy content, receive real-time insights, and enhance productivity. Some AgriTech companies include CropIn, DeHaat, etc.Insurance Tech CompaniesThese firms specialize in digital insurance solutions, offering services such as employee insurance, electronic insurance, policy administration, and insurance product configuration. By leveraging technology, they enhance accessibility, efficiency, and customer experience in the insurance sector. Prominent InsurTech companies include PolicyBazaar, Acko, etc.NFT Tech CompaniesThe Non-Fungible Token (NFT) sector is an emerging segment within India's FinTech landscape. These companies create unique digital ledgers using tokenization, enabling secure ownership and authentication of digital assets. Some examples of the NFT platforms include WazirX NFT, OpenSea, etc."The Non-Fungible Token (NFT) sector is an emerging segment within India's FinTech landscape. These companies create unique digital ledgers using tokenization, enabling secure ownership and authentication of digital assets."Facts and findings of this study are based on the four slices of SWOT technique, and these can be enumerated as below:StrengthsAfter the life-threatening era of the global COVID-19 pandemic, the Government of India is taking essential and innovative steps according to the altering requirements of the FinTech zone of our country. Due to such efforts, the Indian FinTech sector is growing regularly and reaching new heights in the current changing compass of time.Marvelous evolution in terms of internet access and mobile admission due to improvements in skills, knowledge and technology. According to the report published in October 2024 of TRAI, India is the 2nd largest internet-user base in corresponding numbers, and this base has had a direct impression on the demand for digitized financial services. This user base in India has grown by 199 million in the last three years. Additionally, there are about 969.60 million total internet subscribers in our country.The hasty formation of Rs. 40 crore "JAN-DHAN-ACCOUNTS" has confirmed extensive financial inclusion, which provides a powerful platform for Indian FinTech sector.At present, India is at the forefront of the FinTech revolution. Several empowering forces have come together to strengthen this revolution. It is also important that this FinTech revolution is a merger of government-led initiatives and enabling regulatory frameworks of financial regulators like the RBI, SEBI, etc.India's 'Digital Public Infrastructure' has rapidly expanded, making India a leader in this era of innovation, which delivers robust support in the promotion of the FinTech sector of India. Indians have actively comprised advanced solutions like Bharat Bill Payment System, BNBL, UPI, etc. In the context of UPI, India maintains its position as the global leader in instant payments, accounting for 46% of all instant payment transactions. The RBI said in its annual report for FY 2024-25 that we will begin working in FY 2025 towards taking UPI to 20 countries with a completion timeline of FY 2029.To provide innovative solutions in the financial sector, a tech platform for frictionless credit as Unified Lending Interface (ULI) has also been started for the whole country by the RBI on 26th August 2024. Earlier, it was launched in August 2023 as a pilot project aimed to bring about efficiency in the lending process in terms of reduction in cost, quicker disbursement, and scalability. Experts say that similar to UPI, ULI will transform the lending landscape in our country. It will facilitate a seamless and consent-based flow of digital information, and it will cut down the time taken for credit appraisal, especially for smaller and rural borrowers. Notable that the ULI developed by the RBI's innovation hub has been designed on the basis of a "Plug and Play" approach.Auspicious demography of society having a hunger for advanced technology in the financial sector.To meet the diverse requirements of our developing economy, the FinTech ecosystem of India is continuously growing on behalf of AI and ML-driven lending, digital money & payments, DBs & DBUs, blockchain innovations, mobile banking, etc.In May 2024, the much-awaited final framework and guidelines for setting up Self-Regulatory Organizations in the FinTech sector (SRO-FT) were released by the RBI. An SRO-FT recognizes the multiple streams and businesses in this sector, like Account Aggregators, Peer-to-Peer Business, etc. and it sets standards for the conduct of FinTech firms operating in India.An exclusive two-hour window "FINQUIRY" has also been launched by the RBI on 26th June, 2024. This initiative aims to offer a platform for FinTech players to seek clarity, rationality, and lucidity and discuss FinTech-related debriefings and curious directly with RBI administrators. The transformative control of FinTech innovations, attached with the promise of financial inclusion and consumer protection, sets a strong basis for Indian FinTech Companies for the future."India's 'Digital Public Infrastructure' has rapidly expanded, making India a leader in this era of innovation, which delivers robust support in the promotion of the FinTech sector of India. Indians have actively comprised advanced solutions like Bharat Bill Payment System, BNBL, UPI, etc."WeaknessesAlthough the Indian Fintech sector is growing regularly, but due to some weaknesses and deficiencies, this sector could not achieve desirable targets in comparison to the international progress. As we know that, there is a deficiency of financial literacy and awareness regarding innovative and technology based financial services in our country. On the other hand, the absence of proper knowledge of technologies and their uses/functions creates so many constructive hurdles in the growth of this sector. Also, we can see the emotional attachment of Indians to "cash," which generates barriers to promote innovative cashless approaches. The lack of timely enactment of regulatory controls is also a big weakness of this sector. The absence of trust and confidence in new financial technologies also produces a frightened environment in society.OpportunitiesAs a striving and go-getting country, India has mammoth opportunities in the FinTech sector. At present, the availability of strong and auspicious government initiatives tied up with the momentous escalation in the number of FinTech startups. On the other side, the Internet dominates Indian society, seeking more digitized financial services that will provide huge opportunities for this sector. Fluctuating and changing Indian customers' inclinations, leanings, likings, testes, penchants etc., are also offering huge chances for the development of the Fintech Sector. The rural area of the economy denotes enormous and under-utilized opportunities for FinTech companies.The 'Internet of Things (IoT)' also represents a frontier of opportunity for the Indian FinTech companies because IoT devices surrounded with instruments and connectivity competences are redesigning the payment echo-system by permitting unified dealings. At present, all new business entities are trying to replace the traditional financial system with the help of innovative, effective, and efficient methods by applying new technologies.The journey towards India @100 in 2047 is jam-packed for the FinTech ecosphere of our country, with enormous potential and opportunities. In the direction of promoting the Indian FinTech Sector, three major aspects have been highlighted by Shri Shakti Kanta Das, Governor, RBI at the Global Fintech Fest - Mumbai as of 28th August, 2024 are as under:Setting the 5 priorities for India @100/2047:Online Financial Inclusion;Digital Public Infrastructure;Consumer Protection and Cyber Security;Sustainable Finance; andGlobal Integration for Cooperation.Technologies for the future; andRegulatory Architecture and FinTech.Missions led by the Government of India like 'Financial Inclusion', 'Digital India' etc., are driving innovations and modernization. These are also providing glaring and magnificent opportunities to the Indian FinTech Startups. As Artificial Intelligence and Machine Learning proficiencies continue to advance, their possible submissions in governing compliance, investment recommended facilities, and algorithmic transactions are predicted to further redefine the FinTech landscape of India. The Global International Financial Services Centre (GIFT) is also emerging as a healthy gateway for India's Fintech ecosystem to provide global financial services.ChallengesNowadays, traditional financial institutions of India are not able to catch up with FinTech on account of their leisurelier implementation of change, inheritance matters, and monitoring. Additionally, a few areas/parts of our country do not have sufficient internet networks, and they do not have the required associations to utilize computerized cash administration. Also, capital access is still a big challenge for Indian FinTech companies. Cost-related problems for users as well as business firms also generate a threat for this sector. Lack of talented personnel forces, competent specialists, and their retention is also a big challenge. Educating customers about the benefits of FinTech solutions takes a lot of money and time. Penetrating competition and unbendable rivalry with banks, NBFCs, etc. is an immense challenge to survive in the financial sector.Non-adherence to regulations has led to the shutdown and restrictions of several prominent FinTech and crypto asset exchange companies in India. Regulatory non-compliance and supervisory issues have resulted in severe actions, including bans and operational halts. Additionally, rapid shifts in economic conditions further complicate the landscape, making regulatory alignment crucial. The rising instances of fraud, including data breaches, cyber-attacks, and privacy leaks, not only pose security risks but also erode consumer trust and damage the reputation of FinTech firms.SuggestionsTo stun and knock out the present and emerging hurdles/challenges of the Indian Fintech sector, FinTech companies must implement robust data protection measures including regular security audits, encryption, access controls, data quality management processes, data validation, cleansing etc., to address their data security-related challenges. India's FinTech ecosystem is in awful need of "Single-Umbrella Legislation and Stable Legal Framework". Focus on user retention is also needed. In this context, a survey says that about 71% of new app users stop using the app within a week after downloading or using it.Considering the evolution in the Indian FinTech sector, more active and effective regulations should be implemented by the regulators. There is an essential prerequisite to establish and preserve customer's conviction and faith towards cashless approaches.As India approaches 2047, the vision for "VIKSIT BHARAT" and its related background regarding India's FinTech territory requires solid assurance, innovative thinking, and deliberate guidance. Sustainable and orderly development of this sector needs an appropriate and delicate balance between innovations and prudence. There is also a repetitive requirement to recognize, appreciate, and evaluate the innovative segments and steps being taken by the FinTech players. FinTech companies can overcome retention-related challenges by incorporating social elements into their user communication and rolling out personalized push notifications from time to time and more."The 'Internet of Things (IoT)' also represents a frontier of opportunity for the Indian FinTech companies because IoT devices surrounded with instruments and connectivity competences are redesigning the payment echo-system by permitting unified dealings."ConclusionIt can be stated that the Indian FinTech sector is in transition, and the country has not fully contained digital solutions for financial needs nor fully rejected the traditional financial and banking system. It is also a concrete fact that strengths in this sector are greater in comparison to the weaknesses. This situation provides so many opportunities to explore the huge potential of the FinTech sector. But on the other hand, this transitional period creates so many obstacles/problems/challenges before the Indian FinTech echo-system. Therefore, more effective and long-term plans and policies should be formed and implemented to promote India as a FinTech-driven country.ReferencesSpeech of the Governor, RBI as on 28th August, 2024 at the Global Fintech Fest, Mumbai on "FinTech Innovations for India @100: Shaping the Future of India's Financial Landscape."Speech of the Governor, RBI as on 06th Sept., 2023 at the Global FinTech Festival Mumbai on "FinTech and Changing Financial Landscape."TRAI's report for quarter ending 30th June 2024, published in October 2024The Press Release of RBI on Self-Regulatory Organization in FinTech Sector (SRO-FT): 2024-25/989 (28/08/24).Special Key Note address delivered by Shri Ajay Kumar Choudhary (NPCI) on July 18, 2024 at ASSOCHAM's 2nd India International Fintech Festival in New Delhi.Speech of Sankar Raman T. R. (Technology enthusiast) as on 11th July, 2023 at the Money Control India Startup Conclave, Bangaluru on "The RBI and FinTech: The Road Ahead."https://www.bis.org/statistics/payment_stats.htmhttps://m.economictimes.comhttps://www.rbi.org.in - Notifications [from January, 2023 to August, 2024.]https://rbihub.in - India Fintech News.www.thehindu.com, 27th August, 2024;www.business-standard.com, 27th August, 2024.Author may be reached at eboard@icai.in
Ep. 205 — The Essence of Cybersecurity in Financial Sector
CA Journal
· September 2026
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The Essence of Cybersecurity in Financial SectorThe use of technology in the financial sector is an integral part of modern operational strategy. Financial services are central for economic development. Financial institutions store the data of billions of customers as well as financial transactions on an everyday basis. Cyber security is crucial in the financial sector because cyber-attacks are rising across the world which is costing up to 10% of the global GDP. This article aims to discuss various sources of cybercrimes including AI attacks, malwares, DoS and DDoS attacks, misconfiguration, third party risks, social engineering, and insider threats. It highlights the importance of cyber risk management in preventing financial losses, protecting sensitive data, maintaining business reputation, and ensuring customers' trust. Finally, it examines the development of a comprehensive cyber risk framework for the financial sector.IntroductionCyber theft is the illicit access and use of digital devices, networks, data, and information. The aim of cyber threats includes financial gains, disruption of networks, harassments, interference with regulatory systems and governments, and terrorist activities. They create multiple vulnerabilities and enable the exploitation of people, organizations, and governments. While digital devices and services provide numerous benefits and ease of doing business, they also introduce new kinds of risks.Financial systems play a vital role in the development of nations. Globally, banks and financial institutions have digitalized infrastructure to enhance competitiveness and ease of doing business. Digital technologies have reshaped the entire financial industry by automating operations for efficient management and faster financial transactions, providing better customer services via internet banking, mobile applications, BHIM UPI payments, mobile wallets, digital debit and credit cards, chat bots, and AI assistants that interact with customers. The financial digital landscape has become more convenient for the customers to carry out financial transactions and activities.However, the digital landscape is vulnerable to cyber-attacks that can lead to more concerns about the safety and security of personal, social, and financial affairs. According to the ITU (2024), the Global Cybersecurity Index report 2024 portrays that all countries including developed and emerging economies are hotspots for cybercrimes, with India ranking amongst the top 10 globally. The Indian Cybercrime Coordination Center (I4C) reported an average of 7,000 cyber complaints daily in May 2024. India's National Cybercrime Reporting Portal (NCRP) reported a total of 8,50,034 digital financial fraud complaints, with a total amount of 11,269.38 crore rupees lost due to cyberfraud in the first half of 2024. Steve Morgan (2020) stated that cybercrime costs are growing at a rate of 15 percent yearly, projected to reach 10.5 trillion USD by 2025. Therefore, it is essential to understand various sources of cybercrimes and conduct assessments to ensure the efficient implementation of cybersecurity measures.Key Sources of Cyber RiskCyberattack or threat is a pathway for cyber hackers to get illegitimate access of computers and networks to exploit network vulnerabilities. Attack vector or threat vector enables hackers to obtain sensitive and confidential data of an organization by delivering malicious malware into the system and network. Vector attacks include malware attacks, web attacks, network attacks, physical attacks, password attacks, internal threats, and social engineering attacks."Cyberattack or threat is a pathway for cyber hackers to get illegitimate access of computers and networks to exploit network vulnerabilities."In this section, some important cyber risk vulnerabilities have been presented.Artificial Intelligence (AI) is the most sophisticated technology which uses machine learning and complex algorithms to mimic human intelligence. No doubt, AI is greatly advantageous for the organization and customers due to its ability to process large amount of data and provide solutions, but it also enables advanced cyber-attacks. Cyber attackers use AI capabilities to wreak havoc on sensitive data belonging to organizations and individuals. AI algorithms are proficient in identifying and exploiting the network vulnerabilities, making cyber attackers more efficient to recognizing patterns in security system and enabling them to excute perfect attack on networks. There are multiple AI cyber-attacks including AI-powered social engineering, AI-powered fishing attacks, deepfakes, and malicious GPT. For instance, AI-powered chatbots are intelligent agents that can inject malicious malwares into the network while going undetected. AI-generated malwares are capable of designing personalized fishing attacks that are not easy to detect. The use of social medial and online platforms is inevitable today. Cyber attackers adopt AI algorithms to propagate false information and spread rumors, manipulating public behavior towards the credibility of financial firms. The National Cyber Security Centre (NCSC) of the UK reported that AI will certainly increase the volume of attacks and heighten the impact of cyber risk. They also stated that AI makes it easier to attack networks.Malware is a malicious software intentionally developed by cyber criminals to harm and exploit computer devices, networks, and servers to obtain personal, financial, and business data. Malware spreads via email attachments and links, advertisements on websites, virus, apps, infected drives, and text massages (McAfee). Malicious software has numerous forms including viruses, ransomware, spyware, adware, trojan horses, scareware, and worms. Cyber criminals use malicious software to steal, encrypt, decrypt, delete and alter sensitive data belonging to individuals, organizations, and the government.Denial of Service (DoS) is a malicious cyber-attack designed to disrupt the normal functioning of devices, servers, and networks with the aim of crashing or repudiating access to the user. Cyber criminals target specific devices, websites, networks, and servers by flooding them with illegitimate requests to crash normal functions, resulting in slowdowns, crippled websites, disrupted networks, ad preventing access for legitimate users. DoS can be carried out either through a buffer overflow attack or a flood attack. A buffer overflow attack involves consuming disk memory and CPU time to slowdown or crash a device or network. The flood attack involves sending an excessive amount of traffic to crash or slow down the system, preventing access for legitimate users.Distributed Denial of Service (DDoS) works similar to DoS but is launched from different systems in different locations. It is a more complex attack, executed from different systems simultaneously to flood the network with traffic, making it difficult for legitimate user to trace or mitigate.Misconfiguration means the settings of a system, network, and security being erroneously configured. Misconfigurations weaken the systems and networks that result in vulnerability or damage to the whole business data. Misconfiguration happens due to numerous reasons, including coding, weak passwords, erroneous firewalls, outdated software, and unsecured cloud storage. Erroneous configuration is the root cause of data breaches and is easy to exploit and block networks and applications.Social Engineering is the psychological manipulation of people to obtain sensitive information and access to personal devices. Social engineering attacks are very common in the financial sector. Cybercriminals use these tactics to obtain financial information like bank account numbers, passwords, debit card and credit card numbers, and OTP. Cybercriminals use these tactics through emails, text messages, and phone calls, claiming that your account will be blocked if you don't deposit a certain amount, or that you have won lottery money but need to deposit a specific amount in a specific account. They may also claim that an incorrect amount was credited to your account and demand repayment, threatening legal action. Sometimes, cybercriminals threaten people by sharing personal information, photos, and videos to obtain personal and financial benefits. Social engineering is an attack on people's behavior rather that an attack on systems.Insider Threats arise from a person who has legitimate access to an organizations resources, including networks, systems, and databases. Insider threats are a main concern for all organizations globally because they are more dangerous than external cybercriminals. These threats are either intentional or unintentional, but they exploit the organization. Ponemon Institute (2022) published the 2022 Cost of Insider Threats Global Report, stating interesting facts about a total of 6,803 insider threats within 278 organizations. 56% of these threats happened due to negligence which costed $6.6 million per incident; 26% were from malicious insider, costing $4.1 million per incident and 18% were from credential theft, costing $4.6 million per incident. Financial services firms are paying the highest average cost of $21.25 million per incident.Third Party Risk arises from external firms that supply IT services. Third party services place a vital role in supply chain management to provide an enhanced customer experience. Globally, 60% of firms are working with over 1,000 third parties. Either directly or indirectly, firms have been experiencing increasing breaches of sensitive and confidential data shared with third parties. Ponemon Institute (2017) reported that the 56% of firms experienced data breaches by their vendors with an average growth of 7% over the previous year. Financial and insurance firms operating with vendors are experiencing high level of data breaches (RiskRecon, 2018)."Social Engineering is the psychological manipulation of people to obtain sensitive information and access to personal devices. Social engineering attacks are very common in the financial sector."Importance of Cyber Risk ManagementThe financial sector landscape has transformed from bricks to digital. Customers are also experiencing digital services with the penetration of smartphones, which provide easy and convenient access for fulfilling their needs and wants. Therefore, cybersecurity is very important in todays' digital era, particularly in the financial industry.Protection of Data: Banks and other financial services providers handle billions of financial transactions and customers every day through digital means. Digital finance makes it easy to carry out any value of transactions. As technology grows, new kinds of cybercrimes are also growing across the world. The financial industry is experiencing a flood of cyber-financial frauds and complaints that worry the customers as well as financial firms about protecting the sensitive data of their businesses and customers. Cybercriminals are using new tactics to attack the digital landscape to obtain sensitive and important data for financial and psychological advantage. Data is vital for any business's sustainability, especially financial firms, which are the key players in the economy. India witnessed a total of 593 data breach cases in the first six months of 2024, including 388 cases of data breaches, 107 cases of data leaks, 39 cases of malwares, and 59 cases of access sales. Therefore, data protection is a major concern for every financial firm.Protection of financial losses: IMF (2024) reported that globally, cybercrimes have doubled after the COVID-19 period. Cyber incidents are directly costing around $28 billion for financial firms, which is expected to rise up to 10% of the global GDP. In India, a total of 177 crore was lost in cyberattack for the FY 2023-24, which is twice the loss in the previous FY 2022-23. Cyber-related financial losses have been substantially increasing year after year in India. For instance, 44.22 crore in FY 2019-20, 50.10 crore in FY 2020-21, and 80.33 crore in FY 2021-22. These statistics portray the importance of ensuring financial security from cyberattacks.Protection of Business Reputation: Data breaches highly impact the reputation of a business, especially small businesses. Cybercriminals target an organization to disrupt its entire business operations, which puts it at a greater risk of losing money, customers' trust, competitive advantage, and growth opportunities, ultimately impacting the reputation of the business. Building a reputation takes many years, but destruction can happen in minutes. Therefore, protecting sensitive data and ensuring comprehensive cybersecurity enhances business reputation, which is very important for financial firms because they act as agents of economic development.Ensuring customers' trust: Cybersecurity is vital for ensuring customers' trust. Cyberint (2024) found that 60% of customers stop shopping online after a data breach, 83% of customers stop using financial apps due to data breach, and 81% of customers expressed the need for a stringent security system for further use of digital services. This shows the importance of cybersecurity in building customer trust. Cybercrime and data breaches have a significant impact on reputation and customers' loyalty. The financial sector is highly vulnerable to cybercrimes. Therefore, customers' data protection and cyber risk mitigation are vital to ensure customers' sustainable use of digital finance.Comprehensive Cyber Security FrameworkInformation technology is an integral part of the modern financial system that helps to gain a competitive advantage and enrich customer experience. Financial stability is paramount for any economy. In the digital epoch, data breaches and cyber-attacks on banks and other financial institutions are growing across the world's economies. Especially after COVID, the financial landscape has been substantially digitalized. The digital landscape is posing new kinds of risks and challenges. To protect sensitive data, reputation, and ensure customers' trust, the financial sector needs to strengthen its cybersecurity framework."A cybersecurity framework is a set of rules and regulations that aim to protect against illegitimate attacks through continuous assessment of attacks and resolution with an immediate responsive system."Cybersecurity management in the financial sector must be comprehensive and dynamic depending on the evolution of technology and challenges. A cybersecurity framework is a set of rules and regulations that aim to protect against illegitimate attacks through continuous assessment of attacks and resolution with an immediate responsive system. To keep the entire digital landscape safe, a cybersecurity policy should be broader than mere IT security. The technological landscape varies from firm to firm. Hence, it is essential to understand the inherent risks and implement appropriate security measures in compliance with the governing mechanism, such as a centralized security management system, data access control, encryption of sensitive data, implementing security protocols in web and mobile apps, regular security updates, training employees, and educating customers.Robust control system: A cyber control system aims to focus on reliable and stable control algorithms that are not easily tampered with by illegitimate users. Every firm has a unique digital infrastructure, so the control mechanism should be designed based on their risk profile, like implementing strong firewalls for web and mobile applications, continuously updating the software and networks, and encrypting important and sensitive data. Implementation of a multilayer protocol to prevent malware and DDoS attacks is crucial. The adoption of AI and machine learning algorithms enables continuous assessment, including identifying, assessing, and auto-responsive systems. Blockchain technology is a shared immutable ledger that enhances integrity and transparency among the stakeholders.Regulatory compliance: From time to time, the government and regulatory authorities enact laws and amendments to protect all stakeholders, based on the type of challenges and risks arising in the digital environment. In India, the Information Technology Act 2000, Information Technology Rules 2021, and National Cyber Security Rules 2023 address all cyber-based issues and matters. In addition, the RBI is the regulatory body for banks and issued cybersecurity guidelines in 2016 that were amended and new master guidelines were implemented from 1 April 2024. Further, SEBI also issues and implements guidelines to protect investors from cyber-attacks.Third-party risk controls: Third parties play a vital role in supply chain management. Financial firms should concentrate on third party vendors related to data breaches who provide IT services and have legitimate access to sensitive financial data and systems. Financial institutions should draft stringent guidelines for third-party vendors to protect sensitive data and business reputation.Training employees: Creating awareness and educating staff about cyber-attacks and their consequences is very crucial. Hence, banks, financial institutions, the RBI, and the government should provide training for staff. This helps to mitigate cyber risk and financial losses.Educating customers: Most financial losses occur due to customers' lack of knowledge about safeguarding the credentials of debit cards, credit cards, internet banking, and BHIM UPI. Banks and financial institution should educate customers about various cyber-attacks and security measures for safeguarding sensitive financial data such as login credentials, OTP, debit and credit card details, and tracking financial transactions.ConclusionCybersecurity is pivotal for the financial sector, which handles a large quantum of financial transactions and stores financial information about customers. While digital infrastructure facilitates enhanced customer service, cyber-attacks are also evolving with new tactics like infiltrating malware and DDoS attacks into the digital landscape to damage networks and businesses. Therefore, financial institutions should adopt comprehensive cybersecurity measures to prevent and mitigate cyber-attacks. A multilayer security approach and advanced technologies like AI, machine learning, and blockchain are essential for efficient cybersecurity management.ReferenceCyberint. (2024). SECURITY MATTERS Consumer Views On Cybersecurity Retail Finance 2024.Deloitte. (2023). The rising importance of third party risk management (TPRM).IMF. (2024). GLOBAL FINANCIAL STABILITY REPORT.ITU. (2024). Global Cybersecurity Index 2024.KPMG. (2015). Small Business Reputation & The Cyber Risk.Ponemon Institute. (2017). Data Risk in the Third-Party Ecosystem Second Annual Study. https://insidecybersecurity.com/sites/insidecybersecurity.com/files/documents/sep2017/cs2017_0340.pdfPonemon Institute. (2022). 2022 COST OF INSIDER THREATS GLOBAL REPORTRiskrecon. (2018). THIRD-PARTY SECURITY RISK MANAGEMENT PLAYBOOK.Author may be reached at eboard@icai.in
Ep. 206 — AI enabled Audit Sampling – Unlocking the power of VBA Automation
CA Journal
· September 2026
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AI enabled Audit Sampling - Unlocking the power of VBA AutomationThis article focuses on how Chartered Accountants can use AI to generate different kinds of samples for auditing. The core concept explained in this article is the generation of quick VBA codes for the generation of different kind of samples through different prompts. AI can be used to create Random, Stratified, Risk-Based, and Predictive Samples. This article also explains how AI can help in continuously identifying red-flagged transactions without waiting for the Periodic Audit. Further, it elaborates on the key skills and care we need to adapt, adopt, and take for AI enabled Audit in future.IntroductionThe field of auditing has significantly changed over the years, due to massive advancements in technology. The most important advancement in recent times is the use of Artificial Intelligence (AI) into different audit processes & procedures. One of the most important things which auditors need to do is to collect Audit Sample to form an effective opinion with regards to the books of accounts maintained by businesses. However, the question arises - Can we use AI to generate samples? The answer is Yes!! In this article, we will understand how we can use Artificial Intelligence to generate VBA codes that will quickly generate various kinds of samples for us which will help us to improve and enhance audit quality and accuracy.What is VBA?VBA (Visual Basic for Applications) is a programming language that is inbuilt in Microsoft Excel and other Office applications. VBA helps us to automate repetitive tasks, analyze data, work with multiple office applications, and complete time-taking tasks in minutes, making it a very powerful tool for increasing office & business productivity. VBA can be used by professionals to streamline tasks in their own office and provide solutions to complex client problems."VBA can be used by professionals to streamline tasks in their own office and provide solutions to complex client problems."Understanding Audit SamplingAs we all know, Audit Sampling is a technique used by auditors to extract a subset from larger data to form conclusions for the entire population. While there are many techniques already available, they are time consuming and subject to human errors. There are many solutions available in the market. However, they may be costly for small and medium sized auding firms. AI has become a gamechanger in this regard.With good prompting and skills, we can easily generate VBA codes through AI which can be used in Excel, the platform we are all friendly with. All they need to do is write a proper prompt to explain steps in a simple natural language, and AI will generate the code in VBA Language to generate various kinds of samples. This saves time and unnecessary costs to purchase software for generating samples. One important benefit is that the samples can be customized from business to business. Thus, it gives flexibility and scalability in Audit Sampling for auditing firms.The Role of AI in Audit SamplingLet us understand how AI can helps us to generate different kinds of sample selection.1. Enhanced Sample SelectionAI can help us to write complex formulas and VBA codes to analyze large datasets quickly and identify the areas of concern and risk which were earlier too time consuming and resource hungry. Now, the same formulas and VBA codes can be generated through the use of different AI tools like ChatGPT, Gemini, Perplexity, and so on. We just need to explain about the Column Structure of our Master Data with AI Tools, and define the kind of sample we want. It will suggest us formulas and VBA codes that will give and generate the desired sample in new sheets. This will help us form a better opinion about the fairness of the statement of accounts and detect material misstatements, as our sample will be more representative, error-free, and regular.Let's understand this with examples of how AI can help you create VBA codes to generate different kinds of audit samples.We will use the following Vendor Data throughout this article.Transaction IDDateVendorAmountCategoryPayment MethodRisk Score100101-01-2023ABC Suppliers50,000Raw MaterialsBank Transfer0.2100205-01-2023XYZ Traders1,20,000MachineryCheque0.8100310-01-2023LMN Logistics75,000TransportationOnline Payment0.5100415-01-2023ABC Suppliers55,000Raw MaterialsBank Transfer0.3100520-01-2023PQR Inc.2,00,000MachineryBank Transfer0.9100625-01-2023XYZ Traders1,25,000MachineryCheque0.7100730-01-2023LMN Logistics80,000TransportationOnline Payment0.6Example 1: Random SamplingRandom Sampling is one of the most widely used methods to select an unbiased sample. This method ensures every item in the population has equal chance of getting selected. Let us understand if AI can help us to generate VBA code for random sampling.Prompt to AI:I have Vendor Transactions in a sheet with the name 'Transactions'. The sheet has the following columns.1. Transaction ID2. Date3. Vendor4. Amount5. Category6. Payment Method7. Risk ScorePlease write a VBA Code that will select random rows from this Dataset representing 10% of the entire population. These rows should be copied to a new sheet named as 'Random Sample'.VBA Code Generated by AI:Sub RandomSampling()
Dim ws As Worksheet
Dim wsSample As Worksheet
Dim lastRow As Long
Dim sampleSize As Long
Dim i As Long
Dim selectedRows As Collection
' Initialize collection to store selected rows
Set selectedRows = New Collection
'Set the worksheet containing the data
Set ws = ThisWorkbook.Sheets("Transactions")
lastRow = ws.Cells(ws.Rows.Count, "A").End(xlUp).Row
'Calculate sample size (10% of total transactions)
sampleSize = Application.WorksheetFunction.RoundUp((lastRow - 1) * 0.1, 0)
'Randomly select rows
For i = 1 To sampleSize
selectedRows.Add Int((lastRow - 1) * Rnd + 2)
Next i
'Create a new sheet for the random sample
Set wsSample = ThisWorkbook.Sheets.Add
wsSample.Name = "Random Sample"
'Copy headers to the new sheet
ws.Range("A1:E1").Copy Destination:=wsSample.Range("A1")
'Copy selected rows to the new sheet
For i = 1 To selectedRows.Count
ws.Rows(selectedRows(i)).Copy Destination:=wsSample.Rows(i + 1)
Next i
MsgBox "Random sample generated successfully!", vbInformation
End Sub
OutputTransaction IDDateVendor NameAmount (INR)Category100520-01-2023PQR Inc.2,00,000MachineryExample 2: Stratified SamplingStratified Sampling is a method to select a grouped or clustered or categorized sample. We have to ensure that the Sample Data should have items from each cluster. Let us understand if AI can help us to generate a VBA Code for Stratified Sampling.We have to choose the sample in such a manner that samples represent each category such as "Raw Materials," "Machinery," and "Transportation". Let us use AI to generate a VBA Code that will do this for us.Prompt to AI:"I have Vendor Transactions in a sheet with the name 'Transactions'. The sheet has the following columns.1. Transaction ID2. Date3. Vendor4. Amount5. Category6. Payment Method7. Risk ScorePlease write a VBA Code that will select 2 transactions from each category. These rows should be copied to a new sheet named as 'Stratified Sample'".VBA Code Generated by AI:Sub StratifiedSampling()
Dim ws As Worksheet
Dim wsSample As Worksheet
Dim lastRow As Long
Dim i As Long
Dim category As String
Dim dict As Object
Dim rng As Range
Dim cell As Range
'Create a dictionary to store categories and their counts
Set dict = CreateObject("Scripting.Dictionary")
' Set the worksheet containing the data
Set ws = ThisWorkbook.Sheets("Transactions")
lastRow = ws.Cells(ws.Rows.Count, "A").End(xlUp).Row
'Loop through the dataset to count transactions per category
For i = 2 To lastRow
category = ws.Cells(i, 5).Value
If Not dict.Exists(category) Then
dict.Add category, 0
End If
dict(category) = dict(category) + 1
Next i
'Create a new sheet for the stratified sample
Set wsSample = ThisWorkbook.Sheets.Add
wsSample.Name = "Stratified Sample"
'Copy headers to the new sheet
ws.Range("A1:E1").Copy Destination:=wsSample.Range("A1")
'Select 2 transactions from each category
For Each category In dict.Keys
Dim count As Long
count = 0
For i = 2 To lastRow
If ws.Cells(i, 5).Value = category And count < 2 Then
ws.Rows(i).Copy Destination:=wsSample.Rows(wsSample.Cells(wsSample.Rows.Count, "A").End(xlUp).Row + 1)
count = count + 1
End If
Next i
Next category
MsgBox "Stratified sample generated successfully!", vbInformation
End Sub
OutputTransaction IDDateVendor NameAmount (INR)Category100101-01-2023ABC Suppliers50,000Raw Materials100415-01-2023ABC Suppliers55,000Raw Materials100205-01-2023XYZ Traders1,20,000Machinery100520-01-2023PQR Inc.2,00,000Machinery100310-01-2023LMN Logistics75,000Transportation100730-01-2023LMN Logistics80,000TransportationExample 3: Risk-Based SamplingRisk-based sampling focuses on high-risk transactions, such as large amounts, transactions with new vendors, or unusual payment methods. Risk-Based Sampling is a method to select transactions that are more risk-prone. They may represent data above a certain amount, or irregular and unusual payment methods. Let us understand if AI can help us to generate a VBA Code for Risk-Based sampling.We have to choose the sample in such a manner that represent Amounts greater than INR 1,00,000, or Transactions with vendors with fewer than 5 transactions, or Transactions paid via cash or cheque. Let us use AI to generate a VBA Code that will do this for us.Prompt to AI:"I have Vendor Transactions in a sheet with the name 'Transactions'. The sheet has the following columns.1. Transaction ID2. Date3. Vendor4. Amount5. Category (Not shown in the above table)6. Payment MethodPlease write a VBA Code that will select:1. Transactions with Amounts greater than INR 1,00,000.2. Transactions with vendors with fewer than 5 transactions.3. Transactions paid via cash or cheque.These rows should be copied to a new sheet named as 'Risk-Based Sample'".VBA Code Generated by AI:Sub RiskBasedSampling()
Dim ws As Worksheet
Dim wsSample As Worksheet
Dim lastRow As Long
Dim i As Long
Dim vendorCount As Long
Dim highRiskRows As Collection
' Initialize collection to store high-risk rows
Set highRiskRows = New Collection
' Set the worksheet containing the data
Set ws = ThisWorkbook.Sheets("Transactions")
lastRow = ws.Cells(ws.Rows.Count, "A").End(xlUp).Row
'Loop through the dataset to identify high-risk transactions
For i = 2 To lastRow
vendorCount = Application.WorksheetFunction.CountIf(ws.Range("C2:C" & lastRow), ws.Cells(i, 3).Value)
If ws.Cells(i, 4).Value > 100000 Or vendorCount < 2 Or ws.Cells(i, 5).Value = "Cash" Or ws.Cells(i, 5).Value = "Cheque" Then
highRiskRows.Add i
End If
Next i
'Create a new sheet for the risk-based sample
Set wsSample = ThisWorkbook.Sheets.Add
wsSample.Name = "Risk-Based Sample"
'Copy headers to the new sheet
ws.Range("A1:E1").Copy Destination:=wsSample.Range("A1")
'Copy high-risk transactions to the new sheet
For i = 1 To highRiskRows.Count
ws.Rows(highRiskRows(i)).Copy Destination:=wsSample.Rows(i + 1)
Next i
MsgBox "Risk-based sample generated successfully!", vbInformation
End Sub
OutputTransaction IDDateVendor NameAmount (INR)Category100205-01-2023XYZ Traders1,20,000Cheque100520-01-2023PQR Inc.2,00,000Bank Transfer100625-01-2023XYZ Traders1,25,000Cheque"While Auditing, one of the key considerations which auditing firms need to take into account is the risks identified in the previous periods."2. Predictive AnalyticsWhile Auditing, one of the key considerations which auditing firms need to take into account is the risks identified in the previous periods. The risks identified in the previous years can be the most prioritized transactions which we have to select for sampling without caring for the value of the transactions. AI can help us to predict the potential material misstatements based on past data. This method ensures that risk-prone areas are always selected for sample. Let us understand if AI can help us to generate a VBA Code for such Predictive Analysis.Prompt to AI:"I have Vendor Transactions in a sheet with the name 'Transactions'. The sheet has the following columns.1. Transaction ID2. Date3. Vendor4. Amount5. Category (Not shown in the above table)6. Payment Method (Not shown in the above table)7. Risk ScorePlease write a VBA Code that will select Transactions with transactions with a risk score greater than 0.7. These rows should be copied to a new sheet named as 'High-Risk Transactions'"VBA Code Generated by AI:Sub PredictiveAnalytics()
Dim ws As Worksheet
Dim wsSample As Worksheet
Dim lastRow As Long
Dim i As Long
Dim highRiskRows As Collection
'Initialize collection to store high-risk rows
Set highRiskRows = New Collection
'Set the worksheet containing the data
Set ws = ThisWorkbook.Sheets("Transactions")
lastRow = ws.Cells(ws.Rows.Count, "A").End(xlUp).Row
'Loop through the dataset to identify high-risk transactions
For i = 2 To lastRow
If ws.Cells(i, 5).Value > 0.7 Then
highRiskRows.Add i
End If
Next i
'Create a new sheet for the high-risk transactions
Set wsSample = ThisWorkbook.Sheets.Add
wsSample.Name = "High-Risk Transactions"
'Copy headers to the new sheet
ws.Range("A1:E1").Copy Destination:=wsSample.Range("A1")
'Copy high-risk transactions to the new sheet
For i = 1 To highRiskRows.Count
ws.Rows(highRiskRows(i)).Copy Destination:=wsSample.Rows(i + 1)
Next i
MsgBox "High-risk transactions identified successfully!", vbInformation
End Sub
3. Continuous AuditingContinuous Auditing is a method to continuously monitor transactions throughout the financial year against some pre-specified criteria. This method ensures anomalies are automatically red flagged. With Continuous Auditing, the action can be taken immediately as and when the issue arises rather than waiting for the periodic audit.Let us see if AI can help us to generate a VBA Code in Continuous Auditing.Prompt to AI:"I have Vendor Transactions in a sheet with the name 'Transactions'. The sheet has the following columns.1. Transaction ID2. Date3. Vendor4. Amount5. Category (Not shown in the above table)6. Payment MethodPlease write a VBA Code that will select Transactions with Amounts greater than INR 1,00,000.These rows should be copied to a new sheet named as "Flagged Transactions"."VBA Code Generated by AI:Sub ContinuousAuditing()
Dim ws As Worksheet
Dim wsSample As Worksheet
Dim lastRow As Long
Dim i As Long
Dim flaggedRows As Collection
'Initialize collection to store flagged rows
Set flaggedRows = New Collection
'Set the worksheet containing the data
Set ws = ThisWorkbook.Sheets("Transactions")
lastRow = ws.Cells(ws.Rows.Count, "A").End(xlUp).Row
'Loop through the dataset to identify flagged transactions
For i = 2 To lastRow
If ws.Cells(i, 4).Value > 100000 Then
flaggedRows.Add i
End If
Next i
' Create a new sheet for the flagged transactions
Set wsSample = ThisWorkbook.Sheets.Add
wsSample.Name = "Flagged Transactions"
'Copy headers to the new sheet
ws.Range("A1:E1").Copy Destination:=wsSample.Range("A1")
'Copy flagged transactions to the new sheet
For i = 1 To flaggedRows.Count
ws.Rows(flaggedRows(i)).Copy Destination:=wsSample.Rows(i + 1)
Next i
MsgBox "Flagged transactions identified successfully!", vbInformation
End Sub
OutputTransaction IDDateVendor NameAmount (INR)Category100205-01-2023XYZ Traders1,20,0000.8100520-01-2023PQR Inc.2,00,0000.9Challenges and ConsiderationsWhile AI offers us many benefits, there are a lot of challenges before we use it. Auditors must consider these factors:Data & Prompt Quality: The output we receive from any AI tool depends on the quality of data and the efficacy & completeness of the prompt we write. If we lack in any of these, the quality of formulas and codes may not be effective and may not give the results desired by us. Auditors must ensure that they should use complete & reliable data, write proper prompts, and verify the results before actual implementation.Comparative AI Tools: There is an influx of AI tools on an everyday basis. The auditors should be well verse with the capacities and capabilities of different AI tools. Some tools are good in creating content, while others are goods at writing codes. Auditors should keep themselves updated with different tools and we cannot avoid AI tools anymore, and they are here to exist whether we adapt to it or not.Ethical and Privacy Concerns: We should be very particular in what we share with AI tools. Even while generating VBA Codes, we should share the Data Structure for the Excel or sample Data. We should never expose the credentials of our client as confidentiality is the core ethic for which Chartered Accountants are respected for.ConclusionAI is going to change the way we conduct audit. It is going to impact every aspect of audit. Audit Sampling is just one aspect. It will impact Audit Evidence, Audit Procedures, Audit Planning, and Reporting. Let us keep ourselves updated and ready to learn the different AI tools and see how we can use it for better auditing and consulting for our clients. Let's use AI to raise the quality of auditing and take it to the optimum level.Author may be reached at ca_pankajjain@yahoo.co.in and eboard@icai.in
Ep. 207 — Exploring Green Bonds and Debt Service Reserve Accounts (DSRA): A Sustainable Financing Solution
CA Journal
· September 2026
00:00
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Exploring Green Bonds and Debt Service Reserve Accounts (DSRA): A Sustainable Financing SolutionThe integration of Green Bonds with Debt Service Reserve Accounts (DSRA) presents a robust, sustainable financing solution aimed at funding environmentally beneficial projects while ensuring financial stability. Green bonds, dedicated to fund projects with positive environmental impacts, coupled with DSRA, which act as financial reserves to cover debt service payments during periods of financial stress, offer a unique synergy. DSRA provides additional security for investors, mitigating risks associated with green bond investments, and enhancing creditworthiness, ultimately fostering market confidence and facilitating the mobilization of capital towards sustainable development goals.IntroductionIn recent years, there has been a growing global emphasis on environmental sustainability and combating climate change. In response to this urgency, financial instruments like green bonds have gained traction as a means of funding projects with positive environmental impacts. Concurrently, Debt Service Reserve Accounts (DSRA) continue to play a crucial role in ensuring the stability and reliability of bond investments. This article aims to provide an in-depth exploration of green bonds, their significance in promoting sustainability, alongside the function and importance of DSRA in supporting these financial instruments.Green Bonds: Concept and EvolutionGreen bonds are a specialized type of debt instrument specifically earmarked to finance projects with environmental benefits. These projects typically include renewable energy initiatives, energy efficiency improvements, sustainable transportation infrastructure, and climate adaptation measures. The issuance of green bonds has seen exponential growth in recent years, reflecting heightened awareness and commitment to sustainability across the public and private sectors.i. Origin of Green BondsThe concept of green bonds originated in the early 2000s as a response to the need for innovative financing mechanisms to address climate change and environmental degradation. The first green bond was issued by the European Investment Bank (EIB) in 2007, followed by other development banks and multilateral institutions. These early issuances laid the groundwork for the establishment of standards and frameworks governing green bond issuance and verification.Green bonds are fixed-income financial instruments designed to fund projects with environmental benefits. They are typically issued by governments, corporations, or financial institutions to raise capital for initiatives such as renewable energy, clean transportation, and energy-efficient infrastructure. Investors are attracted to green bonds due to their potential for positive environmental impact and financial returns.Key Features of Green BondsUse of Proceeds: Green bonds allocate proceeds exclusively to environmentally sustainable projects, verified through rigorous criteria and reporting standards.Certification: Issuers often seek certification from independent organizations to validate the green credentials of their bonds, enhancing transparency and credibility.Investor Demand: Growing awareness of climate change and environmental issues has driven increasing demand for green bonds among investors seeking socially responsible investment opportunities.ii. Market Growth and StandardizationThe green bond market has witnessed significant expansion, with issuances ranging from sovereign entities and municipalities to corporations and financial institutions. Key drivers of this growth include regulatory incentives, investor demand for sustainable investments, and a growing recognition of the financial risks associated with climate change. To promote market integrity and transparency, organizations like the Climate Bonds Initiative (CBI) have developed voluntary standards and certification processes to verify the environmental integrity of green bond proceeds."Green bonds serve as a vital tool for mobilizing capital towards environmentally sustainable projects and initiatives."Role of Green Bonds in Promoting SustainabilityGreen bonds serve as a vital tool for mobilizing capital towards environmentally sustainable projects and initiatives. Their issuance facilitates the transition to a low-carbon economy, fosters innovation in clean technologies, and supports the achievement of climate mitigation and adaptation goals outlined in international agreements such as the Paris Agreement.i. Environmental Impact and AccountabilityProject Funding: Green bonds provide dedicated funding for projects that contribute to environmental sustainability, such as renewable energy generation, energy-efficient buildings, sustainable agriculture, and clean transportation infrastructure.Reporting and Transparency: Issuers of green bonds are typically required to provide detailed reporting on the use of proceeds and the environmental impact of funded projects. This transparency enhances accountability and investor confidence, ensuring that capital is deployed effectively towards genuine sustainability objectives.ii. Market Development and InnovationMarket Expansion: The growth of the green bond market has catalysed innovation and diversification in sustainable finance, attracting a broader range of investors and issuers. This expansion includes the emergence of thematic bonds targeting specific environmental objectives, such as biodiversity conservation and water resource management.Financial Performance: Research suggests that green bonds can offer competitive financial returns while simultaneously generating positive environmental outcomes. Investors increasingly recognize the long-term value proposition of integrating environmental, social, and governance (ESG) factors into their investment decisions, driving demand for green financial products.Debt Service Reserve Accounts (DSRA) in Green Bond IssuanceDespite their focus on sustainability, green bonds are subject to the same financial considerations and risk management practices as traditional bonds. Debt Service Reserve Accounts (DSRA) play a critical role in mitigating credit risk and ensuring the timely repayment of bondholders, thereby safeguarding the integrity of green bond investments.i. Purpose and Function of DSRARisk Mitigation: DSRA serves as a financial buffer to cover debt service obligations in the event of revenue shortfalls, unexpected expenses, or other adverse circumstances. By maintaining a reserve fund, issuers enhance investor confidence and reduce the likelihood of default, thereby lowering the cost of borrowing.Compliance and Assurance: The establishment of DSRA demonstrates issuers' commitment to fulfilling their financial obligations and maintaining the creditworthiness of green bonds. Compliance with DSRA requirements is often a condition for obtaining credit ratings and accessing capital markets on favourable terms.ii. Mechanics of DSRAFunding: DSRA funding typically occurs at the time of bond issuance, with a portion of bond proceeds allocated to establish the reserve account. The required DSRA amount is determined based on various factors, including bond ratings, debt service coverage ratios, and market conditions.Management: Once established, the DSRA is held in a segregated account and managed by a trustee or designated financial institution on behalf of bondholders. The trustee monitors the reserve account and ensures compliance with the terms outlined in the bond indenture.Release and Replenishment: DSRA funds are released to cover debt service payments when necessary, such as in the event of revenue shortfalls or unexpected expenses. After a withdrawal from the reserve account, issuers are typically required to replenish the DSRA to its original level over time, either through excess revenues or additional bond proceeds.iii. Significance of Municipal Bonds and DSRA in Public FinanceMunicipal bonds and DSRA play critical roles in financing public infrastructure and services, supporting economic development, and enhancing the quality of life for communities. Their significance extends beyond the realm of public finance to encompass broader economic and social implications.Infrastructure Investment and Economic Stimulus: Municipal bonds fund a wide range of infrastructure projects, including transportation, water and sewer systems, schools, and public facilities. These investments create jobs, stimulate economic growth, and enhance productivity by improving the efficiency and reliability of essential services.Long-Term Sustainability: Infrastructure investments financed through municipal bonds contribute to the long-term sustainability of communities by modernizing aging infrastructure, promoting environmental sustainability, and enhancing resilience to natural disasters and climate change.Tax Advantages: In India, municipal bonds that are specifically notified by Central government under Section 10(15)(iv)(h) of the Income Tax Act offer significant tax advantages. This makes them an attractive investment option, especially for individuals in higher tax brackets looking for tax-efficient returns. These bonds are typically issued by local government entities to finance urban infrastructure projects, providing stable returns with relatively low risk. Certain municipal bonds in India may qualify for tax exemptions, but the benefits depend on the type of bond and the investor's eligibility. While some bonds may offer tax-free interest income, capital gains tax could apply upon sale, with potential advantages for long-term holdings. However, tax benefits are subject to specific regulations and should be assessed based on prevailing tax laws. Investors should carefully evaluate the tax implications before investing. With growing government initiatives like the Smart Cities Mission, municipal bonds present a promising avenue for tax-efficient, long-term investment in India's evolving infrastructure landscape.Investor Considerations - Risk and Return Profile: While municipal bonds are generally considered low-risk investments compared to corporate bonds or equities, they are not without risk. Factors such as credit quality, interest rate fluctuations, and issuer-specific risks can impact bond performance and investor returns. DSRA provides an additional layer of security for bondholders by safeguarding against potential defaults or payment delays.iv. Integration with Green Bond FrameworksAlignment with Sustainability Objectives: DSRA provisions are incorporated into the overall framework of green bond issuance to ensure consistency with sustainability principles and best practices. Issuers may stipulate that DSRA funds are exclusively used to support eligible green projects or activities, further reinforcing the environmental integrity of green bonds.Investor Confidence and Due Diligence: The presence of DSRA provides investors with an additional layer of protection and assurance, enhancing the attractiveness of green bonds as an investment option. Investors conducting due diligence on green bond offerings carefully evaluate the adequacy and management of DSRA funds to assess credit risk and potential returns.Advancing Sustainable Finance through Collaboration and InnovationThe convergence of green bonds and DSRA represents a significant opportunity to advance sustainable finance principles and accelerate the transition to a more resilient and environmentally responsible global economy. Collaboration among stakeholders, including issuers, investors, regulators, and standard-setting bodies, is essential to harnessing the full potential of green bonds and DSRA in addressing climate change and promoting sustainable development."The convergence of green bonds and DSRA represents a significant opportunity to advance sustainable finance principles and accelerate the transition to a more resilient and environmentally responsible global economy."i. Regulatory Support and Market ConfidenceRegulatory Frameworks: Governments and regulatory authorities play a crucial role in providing incentives and guidance for green bond issuance, including tax incentives, disclosure requirements, and regulatory oversight. Clear and consistent regulatory frameworks help build investor confidence and foster market growth while ensuring the integrity and credibility of green financial markets.Market Innovation: Continued innovation in financial products and mechanisms, such as green bonds and DSRA, is essential to meet the evolving needs of investors and issuers in the transition to a sustainable economy. Market participants are exploring new structures, such as sustainability-linked bonds and transition bonds, to address emerging sustainability challenges and opportunities.Example: A renewable energy developer company in India, seeks to finance the construction of a solar power plant in the state of Rajasthan. The project aims to contribute to India's renewable energy targets and reduce carbon emissions. The company raise capital through the issuance of green bonds and establish a Debt Service Reserve Account (DSRA) to ensure timely debt repayment. The company effectively utilizes green bonds and Debt Service Reserve Accounts (DSRA) to finance a renewable energy project in India. The integration of these instruments not only facilitates the mobilization of capital for environmentally sustainable projects but also enhances investor confidence and contributes to India's broader sustainability agenda. This demonstrates the potential of green finance initiatives to drive positive environmental and financial outcomes in India's evolving economy.ii. Investor Engagement and Impact MeasurementESG Integration: Institutional investors are increasingly integrating environmental, social, and governance (ESG) factors into their investment strategies and decision-making processes. By considering ESG criteria, investors can assess the long-term sustainability and resilience of their portfolios, driving demand for green bonds and other sustainable investments.Impact Measurement and Reporting: Robust impact measurement methodologies and reporting frameworks are essential for evaluating the environmental effectiveness and social relevance of green bond projects. Standardized metrics, such as carbon emissions avoided, energy savings, and biodiversity conservation, enable investors to assess the tangible outcomes of their investments and track progress towards sustainability goals.ConclusionGreen bonds and Debt Service Reserve Accounts (DSRA) represent powerful tools for mobilizing capital towards environmentally sustainable projects and initiatives. By aligning financial objectives with environmental priorities, green bonds facilitate the transition to a low-carbon economy while providing investors with attractive investment opportunities. DSRA plays a critical role in mitigating credit risk and ensuring the reliability of bond investments, thereby safeguarding the integrity of green financial markets. Through collaboration, innovation, and collective action, stakeholders can harness the full potential of green bonds and DSRA to address climate change, promote sustainable development, and build a more resilient and equitable future for all.Author may be reached at eboard@icai.in
Ep. 208 — Roadmap for Viksit Bharat – Reimagining the Profession
CA Journal
· September 2026
00:00
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Roadmap for Viksit Bharat - Reimagining the ProfessionIndia has emerged as the fastest-growing large economy in the post-pandemic world. The multi-fold factors behind the resilient Indian economy are rising global competitiveness, innovation in technology, manifold increase in digital adoption, a large and young workforce, improving infrastructure, and strong domestic demand. India is well-positioned to transform itself from a developing economy to a developed economy status by 2047. As 'Partners in Nation Building', the CA profession has to make a significant contribution in this endeavour by adapting to the emerging challenging environment and by reinventing, reengineering, and reimagining its role.Viksit Bharat @ 2047Viksit Bharat is the vision of our Hon'ble Prime Minister, Shri. Narendra Modi, to transform India into a developed nation by 2047, synchronising with the centenary celebrations of India's independence. The four pillars of Viksit Bharat are Yuva (Youth), Garib (Poor), Mahilayen (Women), and Annadata (Farmers). The vision of Viksit Bharat is to build a prosperous India, equipped with modern infrastructure, where every citizen across all regions has equal opportunities to grow and achieve their full potential. Significant dimensions of Viksit Bharat are Resilient Economy, Environmental Stability, Inclusive & Harmonious Society, and Agile & Robust Governance. The vision for Viksit Bharat is a country characterised by zero poverty, quality school education for all, access to high-quality, affordable, and comprehensive health care, skilled labour with meaningful employment, higher participation of women in economic activities, and farmers making India the 'Food Basket of the World'.The Union Budget 2024-25 is reflective of these objectives of Viksit Bharat, by focusing on nine priorities viz., productivity and resilience in agriculture, employment and skilling, inclusive human resource development and social justice, growth in manufacturing and services, urban development, energy security enhancement, infrastructure development, innovation, research & development and the next generation reforms.Subsequently, in the Union Budget 2025-26, four engines of growth have been identified, viz., Agriculture, MSME, Investment and Exports, to achieve increased growth, secure inclusive development, enhance the spending power of India's rising middle class, invigorated private sector investments, and uplifted household sentiments.Select Key SectorsIT and BPM are two of the vital sectors supporting the economy by contributing about 10% of the GDP. India enjoys the largest market share at 55% in global IT outsourcing. This sector is instrumental in making India the 3rd largest startup ecosystem in the world, with over 100 unicorns. In the automobile sector, India is the largest electric two-wheeler and three-wheeler manufacturer globally. India accounts for 40% of the total US $31 billion of global engineering and R&D spend in this sector. This sector contributes about 6% of GDP.The Indian pharmaceutical sector is the 3rd largest in terms of volume globally. India emerged as the largest vaccine producer with a 60% global share. Not only did India produce the required vaccines during the COVID-19 period, but it also exported and supported over 100 countries in their fight against the pandemic. In terms of transport network globally, India can boast of having the 2nd largest road network, the 3rd largest aviation market, the 4th largest rail network, and being the 16th largest maritime country. The telecom sector is another fastest growing sector, with India having the second highest number of internet subscribers globally. The BFSI and Fintech sectors are also growing exponentially. Over the next two decades, the Indian banking sector is expected to emerge as the 3rd largest domestic banking sector.Another sector with immense potential is Tourism and Hospitality. Ranked 39th on the global travel and tourism development index, this sector contributes around 5% of the GDP, proving itself to be a major foreign exchange earner for the country, along with the tea and food processing sectors. India has immense potential for cultural tourism, eco-tourism, medical tourism, and spiritual tourism. With the development of infrastructure, this sector is bound to grow at a faster pace year after year. Presently, IT Services, Petroleum Products, Textiles, Gems & Jewellery, and Tea sectors are significant earners of foreign exchange for the nation. Finally, ranked as the 5th largest market globally, Media and Entertainment is another promising sector to drive the nation's economic growth.Government Reforms propelling GrowthThe major reforms that have propelled the growth trajectory of the Indian economy, together with the objective of inclusiveness, include the Production Link Incentive (PLI) scheme, Atmanirbhar Bharat Abhiyaan, Atal Pension Yojana, Mudra Yojana, Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, and PM Gati Shakti. Similarly, the initiatives of Digital India, Skill India, Make in India, Stand Up India, Goods and Service Tax (GST), Insolvency and Bankruptcy Code (IBC), Real Estate (Regulation and Development) Act (RERA) and the progressive reforms for the MSME Sector are paving the way for accelerated overall development of the economy.India's total exports increased by 76% over the last decade, reaching US$ 825 Bn in 2024-25, led by engineering goods, electronics, and pharmaceuticals. Out of this, services exports constituted US$ 387 Bn. During 2024-25, the cumulative FDI inflows reached US$ 1.05 trillion. Digital transactions surged 9x in volume between 2017-18 and 2023-24, with UPI processing 172 Bn transactions during the year 2024. Inflation is in control at an average of 5% during the last decade through targeted fiscal and monetary policies. Retail inflation was reduced to 4.6% in 2024-25.Outlook for India's GDP GrowthIn spite of the global slowdown, India is expected to record a growth rate of 6.5% during 2025-26. India overtook Canada in 2010 to become the 9th largest GDP sized economy (on a nominal basis). In 2015, it surpassed Italy and Brazil to emerge as the 7th largest economy, and overtook France to be ranked as the 6th largest economy globally in 2018. In March 2020, India almost surpassed the United Kingdom, but with the COVID-19 pandemic, this progress was derailed. However, during 2021, India regained its momentum to achieve the 5th rank. In 2025, India will become the 4th largest global economy, surpassing Japan. It is expected that India will relegate Germany to the 4th spot in 2027 when it scales up beyond a $5 trillion size to become the 3rd largest economy in the world. India's economy is on track to achieve the projected GDP of $7.3 trillion by 2030.The United States of America (USA), which is now at $30.51 trillion, took eight years to add the second trillion to its GDP, five years to add the third trillion, and thereafter added almost one trillion in every two years. Similarly, China, which is now at $19.23 trillion, took seven years to add the second trillion to its GDP, four years to add the third trillion, and thereafter added almost one trillion in every other year. Generally, the growth engine of every economy stabilizes by the time it achieves the size of three trillion. Thereafter, if all the enablers to economic growth are in place, then the momentum would be unstoppable. India, now at $4.3 trillion, with the immense untapped potential in vital sectors, will now accelerate its growth to add one trillion to the GDP size once every two years, if not in every alternate year.Risks to India's Economic OutlookIn India's journey to become a developed economy, there are certain risks that need to be factored in and mitigated. This includes global economic slowdown, climate change, inflation, energy import dependency, geopolitical tensions, capital outflows, technology and supply chain disruptions, and labour market challenges. These risks need to be adequately addressed in a calibrated manner.Mitigation measures for countering above risks could encompass stable and predictive policy environment, investing in physical and digital infrastructure, deepening domestic financial markets, strengthening supply chains and creating alternative sources of procurement, investing in sustainable practices, establishing effective disaster management systems, promoting entrepreneurship, supporting innovation & startups and enhancing domestic manufacturing capabilities."Accountancy, the backbone of financial management, plays a pivotal role in ensuring transparency, accountability, and efficient resource allocation, which are crucial for the sustained, stable economic growth of a nation."Accounting Profession and Economic DevelopmentEconomic development and the growing importance of the accountancy profession are intricately linked. Accountancy, the backbone of financial management, plays a pivotal role in ensuring transparency, accountability, and efficient resource allocation, which are crucial for the sustained, stable economic growth of a nation.Some of the key linkages between economic growth and accountancy profession arise from the critical functions such as ensuring regulatory and statutory compliance, driving corporate governance and ethics, enforcing structural financial reporting, adherence to Ind AS and applicable global standards, formulating and facilitating efficient tax compliance, strengthening institutions, supporting small businesses, enabling efficient resource allocation. In order to facilitate this and given the growing importance of the integration of the Indian economy globally, it is crucial to continuously build the capacity of the accountancy firms to match the global outreach of Indian businesses. Further, the CA profession can, in synergy with the Regulators and Government Departments, facilitate ease of doing business in the country. If GST collections have recorded Rs. 2.36 lakh crores in April 2025, which is the highest since its introduction in 2017, the credit should go equally to the Government Officials who have been implementing the law and to the members of the CA profession who have been constantly guiding the tax-paying community. Every CA should assume the role of a goodwill ambassador of the Government in the efficient implementation and compliance with the fiscal and other relevant legislations.Accounting Services MarketThe size of the global accounting services sector was about US $676.73 billion last year, and it is expected to reach US $804.27 billion in 2028 with a CAGR of 4.4%. India accounts for a share of 3.8% of the global accountancy market and has phenomenal scope to increase its share in the medium term. It is heartening to know that the Government is currently examining liberalisation of laws and regulations to facilitate the growth and expansion of Indian CA Firms, so that the next BIG 4 firms are of Indian origin. It is equally heartening that the Institute of Chartered Accountants of India (ICAI) has come out with "The Exposure Draft on proposed Guidelines for Overseas Network". Once the legal framework relaxations come into play, we can rest assured that many Indian Accounting Firms will consolidate and synergise to spread wings pan-India and across the globe.Paradigm Shifts in the CA ProfessionThe profession was chartered by an Act of Parliament in 1949, even before India became a Republic, and has been growing steadily, pursuing well-established educational, professional, and ethical standards. With the advent of the 21st century, the CA profession experienced a paradigm shift in many facets related to the profession. Indian CA was originally perceived as a number cruncher, but later came to be viewed as a strategic thinker. Earlier, CAs were meant to merely provide inputs for decision making, but later were considered competent decision makers. The rise of CAs in industry conventionally was up to the level of Chief Financial Officer (CFO), whereas now CAs have risen to the level of a Chief Executive Officer (CEO).The number of aspirants to qualify as a CA has grown manifold, which is reflected in the membership growth as well. At present, the total membership strength of the profession is 4,29,069 of which first 51 years (1949-2000) contributed 92,980 (21%); during the next 10 years, i.e., by 2010, membership added was 71,142 (17%), and during the last 15 years the addition has been 2,64,947 (62%).In terms of gender diversity, from the inception of ICAI, over a period of 51 years till 2000, the strength of female CAs rose hardly to 8% (7,826) out of the total membership of 92,980. Over the next decade, the growth of female CAs gained momentum, doubling to 16% (26,223) in 2010 when the total membership strength was 1,64,122. Currently, among the total strength of 4,29,069 members, the strength of female CAs has seen a phenomenal increase to 1,30,274, accounting for 30.36% as against male membership numbering 2,98,795, accounting for 69.64%.Yet another paradigm shift is that while the number of CAs with Certificate of Practice (COP) was overwhelming during the 20th Century, the strength of CAs without COP began to accelerate during the 21st Century. In 2000, out of the total membership of 92,980, CAs with COP constituted 71% (65,843) as against CAs without COP at 29% (27,137). It was during 2011 that the CAs without COP numbering 85,992 (50.4%) surpassed the strength of CAs with COP, constituting 84,618 (49.6%) of the total strength of 1,70,610. As of date, CAs with COP account for only 1,62,947 (37.98%) as against those without COP numbering 2,66,069 (62.02%).Capacity Building of the CA ProfessionWith the restriction on the number of partners in a firm (20) having been removed a decade ago, CA firms have been consistently growing to build their capacities both in terms of human resources and the bandwidth for handling a large volume of work. There are 98,861 practice units in India, out of which 71,915 are sole proprietary concerns or individual practitioners. Among the remaining 26,946 practice units constituted by partners, 25,316 are functioning as traditional Partnership Firms, and the rest of the 1,630 are registered as Limited Liability Partnerships (LLPs). The strength of partners is indicated at the bottom, and the aggregate number of firms and LLPs in each category are given at the top in the chart. For example, 2 partners firms are 14,279 and LLPs are 759 aggregating to 15,038. Only 13 LLPs are constituted and functioning in the category of beyond 50 partners.PartnersTotal UnitsProprietorsFirmsLLPs171,91571,915--215,038-14,2797593 to 59,831-9,2585736 to 101,625-1,44717811 to 20388-3028621 to 3035-251031 to 5016-51151 to 1006--6101 to 1677--7Strength of CA FirmsDespite the steady growth in the number of accounting professionals in India, the ratio of CAs to the population remains disproportionately low, underscoring an urgent need for capacity building in the profession. India's expanding economy, increasing complexity of regulations, and growing focus on transparent reporting practices have and will continue to lead to higher demand for accounting services. To cater to this demand, it is essential to expand access to CA education through digital platforms, financial aid, and localized training centres. Promoting awareness about the profession among students will also help in attracting talent in the sector. Concomitant with the skill development, it is essential to ensure strategic focus on technology adoption to empower the accounting professionals in the digital age.In the digital era, it is imperative that the accounting sector should be embracing AI & Automation on a larger scale. This would enable analysing large data sets quickly, identifying patterns, and even predicting future trends. This would reduce the risk of human error and would enable accounting professionals to focus on more strategic aspects of finance. There is an increasing complexity of financial operations, and therefore, there is a need for cost-effective solutions. CAs must develop specialised expertise with scalable solutions to meet the expectations of the growing Indian business community with global outreach. It would be prudent to shift towards cloud-based solutions as they allow for real-time data access and collaboration, irrespective of location. Besides, it offers enhanced data security and disaster recovery options.Future Outlook of the ProfessionFor several decades, the CA profession had confined itself within the conventional areas of practice such as assurance function, tax advisory, and traditional consultancy services. But there are newer areas such as business support services, KPO, forensic audit, risk-based audit and assessment, digital transformation services, internal financial controls audit, systems integration and Cyber Security services, AML compliance, and Resolution Professional (RP) under NCLT. CA professionals can take the lead in guiding corporates on Business Responsibility and Sustainability Reporting (BRSR) compliance in tune with the SEBI regulations and gain expertise in ESG audit and reporting. In addition to all these, even in the conventional consultancy arena, the CA profession can focus on services related to mergers and acquisitions, restructuring of businesses, wealth management, succession planning in family-owned businesses, investment advisory, and funding & capital mobilisation, which are gaining significance.ConclusionThere is no other regulated profession that can claim as much proximity as the CA profession to the economic growth of India. CA professionals should participate, partake, and partner in nation-building with utmost dedication and commitment. As envisioned by the Hon'ble Prime Minister of India, the next Big 4 firms should be Indian Accounting Firms. Even the 'International Networking of Firms' should originate from India and spread across the globe. The CA profession should make the flag of ICAI fly high in the esteem of the Government, Regulators, and all the other stakeholders by the high quality of services rendered and unblemished standards of ethics practised. Let us contribute our best to translate the dream of Viksit Bharat into a reality over the next two decades.Author may be reached at eboard@icai.in
Ep. 209 — Earning Trust in an Era of Accountability
CA Journal
· September 2026
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Earning Trust in an Era of AccountabilityAt this turbulent moment in history, trust is becoming scarce, and trusted actors and institutions are becoming more and more the exception. Global trading powers are engaging in more direct and disruptive competition which is generating friction throughout the global trading system. Geopolitical instability is making investment riskier and less attractive which could lead to further disruptions in economic activity. Climate change poses physical risks while making many other challenges even harder.At difficult and uncertain moments, the accountancy profession is a safe harbor. The entire profession is united by everlasting principles of integrity, professionalism, and independence. We are accountable to professional organizations and public oversight, and we have earned a trusted central role in the financial ecosystem over many generations.To keep earning this role in an era of accountability, we need to embrace changes while tackling ethical challenges. Our successful navigation of the sustainability transformation, the rise of artificial intelligence, and our continuing contributions to the fight against corruption will be particularly important.Stepping Into the Sustainability TransformationIt is a multifaceted and complex topic, but one way or another, the sustainability transformation is deeply relevant to every professional accountant in India and around the world, as well as every stakeholder in our profession.As an IFAC observer in 2019 and as a Board member since 2020, I have seen IFAC make sustainability a top priority, in particular under the leadership of our former president Alan Johnson and former Chief Executive Officer Kevin Dancey. The "building block approach" was a permanent matter for discussion at the Board while the EU launched the Green Deal, and IFAC played an important role in the emergence of the International Sustainability Standards Board, or "ISSB," under the IFRS Foundation.We continue to support our profession in driving the sustainability transformation, and in leading the transformation of the organizations and stakeholders our profession serves. IFAC has unique strengths to bring to these efforts in our role as both the profession's global voice and as its global convener. I believe this is a critical role."The accountancy profession, as a trusted and influential public interest profession, should speak clearly about how society can best undergo the sustainability transformation."The accountancy profession, as a trusted and influential public interest profession, should speak clearly about how society can best undergo the sustainability transformation. And within the profession, we need to engage with each other through active, ongoing dialogue and support each other's efforts by exchanging best practices and resources.The role of non-financial information in the sustainability transformation is simply essential. Financial markets need this information so that investors and lenders can make efficient decisions that align with sustainability targets. But for this to be true, no actor can be outside the reporting system.Our focus is on sustainability as it relates to all professional accountancy organizations in India, but also beyond India. We emphasize the need for a global system for mandatory sustainability disclosure, which will minimize regulatory fragmentation and reduce costs.We believe, the IFRS Foundation standards are the right foundation for this system. We welcome all well-intentioned initiatives for sustainability reporting standards, but we strongly encourage alignment and interoperability. Ultimately, we are all on the same sustainability journey, so we should embark on it together.Embracing Sustainability Disclosure and AssuranceWe have been talking to our colleagues across the accountancy profession, to the regulators and other stakeholders outside of the profession, about the opportunity that professional accountants have in embracing sustainability disclosure, sustainability assurance, and the broader sustainability transformation.We are the profession best positioned to lead on sustainability reporting and assurance. We have the technical skills to integrate financial and non-financial information. Wherever we are in the value chain, we have the skills to transform high quality standards into high quality information. And our reputation and clear accountability to our professional organizations and regulators will bring trust to this information, in the same way that we bring confidence to traditional financial statements.As sustainability disclosure has taken shape, another key area has emerged, which also calls for strong advocacy and engagement: the assurance of sustainability disclosure.Assurance gives investors and stakeholders confidence in the information they are receiving from companies. With it, investors and all other users of sustainability information can get a clearer picture of a company's true impact on the world and its prospects for long-term value creation.IFAC provides evidence-based insights into global sustainability reporting and assurance trends, helping stakeholders identify gaps, inform policy, and track progress through our State of Play series of research reports. We see a positive trend in the share of companies that obtain assurance on their sustainability disclosures, but we also find persistent fragmentation in the standards used for assurance.As with sustainability disclosure, it is vital for all countries to converge on a unified approach to sustainability assurance. Resolving a fragmented system only gets more difficult as time goes on.IFAC supports the International Standards on Sustainability Assurance (ISSA) 5000, produced by the International Auditing and Assurance Standards Board (IAASB), becoming the global baseline standard for sustainability assurance. It was developed to be profession-agnostic, and it allows for a broad range of assurance providers while maintaining a high level of quality.But for this standard to work as intended, jurisdictional policy makers and regulators must ensure that all assurance providers, whether they come from the accountancy profession or not, are held to the same stringent standards of competence, ethics, and independence. We must prevent the emergence of a two-tiered system, one in which regulated, professional accountants are held to stringent standards, while others function without uniform oversight or accountability.The accountancy profession in India should speak strongly in favor of the adoption and implementation of ISSA 5000 as the path forward on sustainability assurance. For our part, as individual professionals, we need to be ready to meet market expectations in the assurance space and to compete with non-professionals.Upskilling and Reskilling for SustainabilityEmbracing sustainability is going to require professional accountants to upskill and reskill, and acquire new competencies.The role of Professional Accountancy Organisations (PAO) at this point will be enormous because they are the primary support through this transformation for their individual members, at any age or level of experience, and this includes accounting students, who need their curriculum to include sustainability as the core material.In March 2025, IFAC revised the International Education Standards (IES), which are the global baseline standards for accountancy education, to embed sustainability-related learning outcomes in the training of professional accountants. These changes ensure that the next generation of professionals are equipped with baseline sustainability knowledge and skills.At IFAC, we will keep communicating with our member organizations to explain new changes and articulate the best ways they can adapt, for example, by developing effective training programmes for their own members.Let me emphasize that our profession is the profession best-positioned to lead on sustainability reporting and assurance. But if we want our stakeholders to call on us, we need to do our part, individually and collectively, by embracing sustainability.It is extremely important for PAOs to move swiftly and boldly with their members on sustainability. This will take a lot of hard work, and there will be bumps in the road on every PAO's journey, but it is imperative to keep going."ICAI, through its sustainability offerings for its members and its engagement in national, regional, and global conversations about best practices, is an excellent example of leadership."ICAI, through its sustainability offerings for its members and its engagement in national, regional, and global conversations about best practices, is an excellent example of leadership.Embracing Artificial IntelligenceIn my global engagement as IFAC President, I have found that artificial intelligence is being discussed everywhere, perhaps most prominently as the theme of ICAI's 2025 World Forum of Accountants in New Delhi, where I was honored to speak.AI is revolutionizing the way accountants and auditors work in ways that enable us to process and analyze vast amounts of data with greater speed, accuracy, and impact. For example, auditors can leverage AI to uncover hidden patterns, correlations, and insights, and these outputs can support predictive analytics, risk evaluation, and fraud detection. Generative AI is also proving to be a valuable tool for drafting audit reports and distilling complex information.Important changes are also happening outside of formal systems and processes, in emails and spreadsheets, in team meetings, in presentations, and in countless one-off tasks that AI is transforming.We have an incredible opportunity. We can use AI to shift from scorekeeping to strategy; to create more time to do higher-value work; and to participate in the transformation of our profession, rather than to resist it. The profession's real challenge is not whether we can use AI; it is whether we will redefine our own work before others redefine it for us.I must add that we should always consider, with high attention to our professional responsibilities, to meet the new and still emerging risks of AI, including cybersecurity, threats to privacy, lack of transparency, and bias within AI models.I fully recognize that some in our profession feel anxious about how AI might impact our relevance. Overall, I believe AI is an opportunity to add more value and increase our relevance. But we should consider carefully whether we are prepared to seize this opportunity. The core skills of a professional accountant are strong, and we do not need to reinvent ourselves, but we must build on those skills.Individually, we will need to increase our digital literacy and get practical experience with AI. At the national level, PAOs need to support their individual members to upskill and reskill for AI and a range of other digital competencies following ICAI's example. PAOs will always be the best and closest resource for individual professionals who are trying to upskill and reskill. Their support will be especially important for small- and medium-sized practices, which often have tight budgets for technology.PAOs also need to engage with educational institutions to make sure the curriculum for accounting students is keeping pace with technological change. IFAC's International Panel on Accountancy is exploring the AI competencies future accountants will need and how AI is reshaping the learning process.Overall, the era of accountability demands that professional accountants continue to lead with ethics on AI no less than on sustainability. AI is just a tool, not a solution. At all times, we need to keep earning our trusted reputation and never take it for granted.Fighting CorruptionAlthough new and emerging issues rightly grab our attention, it is also critical not to lose sight of the unending fight against corruption and money laundering. The accountancy profession has a direct role to play by enhancing transparency and accountability in the public and private sectors, and by supporting an ecosystem of actors and policymakers who strive to counter corruption and economic crime at the global and domestic levels.Our profession is a natural leader on this for a few reasons. We have the right technical skills and expertise to make a difference. We are in a central position in public and private organizations, where we can have an enormous positive impact. We are motivated to act because we stand for ethical integrity and the public interest, and against abuses of public trust. And our reputation is such that we are expected to play a role in this area.IFAC's efforts are mainly guided by our Action Plan for Fighting Corruption and Economic Crime. It sets the tone that the global profession understands our important role, and that we have a comprehensive, practical approach to fulfilling that role. It's a framework both for IFAC and for our members and partners. I encourage you to have a look online.Corruption and money laundering are permanent threats to businesses, good government, and healthy societies. They are fundamentally human issues, and that means they will always be a concern. But that cannot make us any less determined to do something about it as professional accountants.Returning to EthicsOur profession's fundamental purpose is to serve the public interest. The quality that enables us to do so, which sets us apart as a profession, is ethics. At all times, we need to continue to live up to the high expectations we have for ourselves as well as the high expectations of our stakeholders, and never take our trusted reputation for granted.It is our duty to act with integrity and professionalism, grounded in the principles of the International Code of Ethics for Professional Accountants, the gold standard for professional conduct. If we do, we are certain to thrive in the era of accountability.Author may be reached at eboard@icai.in
Ep. 210 — Leading the Business World Profession @ 100
CA Journal
· September 2026
00:00
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Leading the Business World Profession @ 100"We are a product of our Times", that is, we have to constantly change with the changing times.As we consider how the future will unfold with profession @100, it helps to reflect on our past journey and how we, as professionals, have changed with the changing times to play a vital role in leading economic, business, and societal developments.License Raj economyIf we look back 50 years, India was a closed economy when import tariffs were extremely high. A license was required to invest in new capacities and initiate an industrial activity. The licenses were granted for setting up factories in remote areas. Most of the times, licenses were granted to State Industrial Development Corporations, and the private sector had to partner with them.India was a resource-constrained economy, and therefore, the government stepped in to control prices.Even for a basic product like cement, the Bureau of Industrial Cost and Prices decided the price at which cement could be sold. There was a common wage board to negotiate and finalise wages in the cement industry. Since the output prices were controlled, the success of any venture depended on the highest operational efficiency and controlling costs.Our profession played an important role in guiding the industry in navigating successfully through these difficult times with their analytical skills and deep understanding of the entire business processes and cost and value drivers.The shortage of foreign exchange compelled the industry to look for avenues of indigenisation of machinery and spare parts within the country. All these localisation initiatives, the outcome of necessity, have become a foundation for the future growth of the economy. The industry today is recognised for frugal engineering, not as a substitute for low-quality products, but for cutting edge technology products as demonstrated in the launch of Chandrayaan at a fraction of the cost as compared to the Western world.Being a capital-starved country, the availability of capital and its cost were another challenge. This led to a very sharp focus on improving the working capital cycle to improve return on investment. Again, the profession played a very important role in guiding the management in achieving this objective. Today, these have become a fundamental strength of the Indian corporate world in consistently reporting better Return On Investment (ROI) compared to their peers all over the world.The liberalisation phaseThe times changed dramatically in the early 1990s with the liberalisation of the Indian economy. We saw competition from the Western world and a sharp increase in service activities, particularly in fields such as IT, banking, financial services, etc. With growing affluence, the consumption rose, and the consumer product companies started doing extremely well. During this phase, the profession reoriented itself and built competencies to compete effectively with the Western world and also partner with the corporate world in developing robust systems and practices to succeed in a competitive world and a service-oriented economy.The major changes during this period were a thrust on business development, product and application development, marketing, and developing a sales network to serve the rising aspirations of the fast-growing economy of India. The fast growth also brought about challenges in terms of realigning the entire supply chain, increasing working capital needs, taxation across multiple geographies, each having its own tax laws.During this period, the profession contributed significantly to the success of businesses with their ability to deal with a vast amount of complexities, develope newer avenues of financing and lead the efforts at mechanisation of all business processes with the integration of Information Technology. The organisation also accelerated the use of technology to improve the speed and efficiency of operations."The process of automation, mechanisation, and digitisation started in earnest, and every single industry underwent a significant change in how they did business in an interconnected world."The Globalised worldThe pace of globalisation picked up around the year 2000. The Indian IT sector and professionals started earning global recognition by playing a vital role in overcoming the Y2K scare through their programming skills and technical prowess.The initial phase of liberalisation saw foreign companies entering India, followed by many large Indian corporates venturing outside India and setting up their global footprints in diverse sectors like IT, pharma, auto, metals, etc.The process of automation, mechanisation, and digitisation started in earnest, and every single industry underwent a significant change in how they did business in an interconnected world.This called for the profession to reorient its thinking. While earlier the thrust was on improving operational efficiencies and managing the regulatory environment, now the focus was on ensuring profitable growth by developing a deeper understanding of the industrial landscape, not only in India but globally. It became imperative to deepen the understanding of the cost drivers and value creation across the global value chain. In-depth analysis and global peer benchmarking became inevitable, and partnering with the business leaders in formulating and implementing strategies for success became a key expectation from the profession. The size of many of our large corporate houses, and their successful presence across multiple geographies is a testimony to the extremely sound base of financial management and strategic thinking that the profession provided during this dynamic business environment. This also paved the way for financial professionals to move to the top echelons of business as CEOs of large corporations, as well as assuming an important role as advisors to industry in multiple fields.Riding the ups and downs of the world economyLest it appear that the world economy cruised through all these phases in a linear growth phase, lets also reflect on the major turbulence it faced multiple times, be it the Latin American credit crisis in 1980s with a sharp meltdown of stock market or the 1997 Taquila crisis which started in Mexico and SEA, and then engulfed the entire world economy, or the more recent GFC in 2008, and then of course the world facing the worst pandemic of Covid in 2020. The sharp swings in forex rates, for example, the Thai Bhat depreciating against the USD from 20 in 1980 to 25 in 1990, 40 in 2000, and again appreciating to 31 in 2010, or the Indian Rupee's steady depreciation from 6.61 in 1980 to 17 in 1990, 44 in 2000, and 86 at present, necessitate a dynamic response in business strategy and operational management. In the meanwhile, China emerged as a major player in the world economy and offered products at almost unmatchable prices.These required every industry to constantly re-evolve its business strategy, product portfolio, operational strategy and change its business processes to stay relevant.The profession had to step up its own way of working, change the business processes in line with the changing requirements, and help businesses navigate these turbulent times through a combination of strategies like moving up the value chain, optimising costs and enforcing strong discipline in operations and financial management. In some way, each of these crises forced businesses to become more efficient.The digitised, technology-driven worldToday, we are at the cusp of another technological revolution. Technology has become all pervasive in our lives, and every aspect, including business processes, is getting digitised. It is heartening to see India at the forefront of these initiatives of digitisation. According to the latest Reserve Bank data, India's share in global digital payments has reached 48.5%, largely driven by UPI.The new world of AI and AGIThe entire world is now talking about Artificial Intelligence (AI) and Machine Learning (ML).Businesses have started leveraging the same to expand their reach to customers, serving them faster and more effectively, and improving the efficiency of their operations. In our profession, AI enables faster work and response in multiple ways, be it through a detailed granular analysis vs competition, or a much wider coverage in audit with accuracy and speed, and identify discontinuities to understand the deviations from trends and the reasons behind the same, and use these insights for process improvements and course correction. In fact, more and more professionals have started becoming business partners, playing a key role in the transformation and success of the organisation. The deep understanding of the interplay of economic trends and their impact on different businesses and how the organisation processes can be contemporised with technology has helped professionals emerge as preferred business partners.AGI is likely to have an impact on the world that is, as yet, incomprehensible. The challenge before us is the dramatic pace of developments in technology. The jury is still out on how these will impact the way we live, think, and work, but a paradigm shift is on the horizons.These developments, combined with robotics and quantum computing, are likely to cause a dramatic shift in the world."The deep understanding of the interplay of economic trends and their impact on different businesses and how the organisation processes can be contemporised with technology has helped professionals emerge as the preferred business partners."The challenge before every profession, is to anticipate how these technologies are likely to evolve and their impact on the economy, different industries, and their business processes, and proactively prepare for multiple scenarios. While developing these technologies itself is a challenge, where the USA and China have taken a lead, the real opportunity is in being able to visualise their impact on the economy and the business at a macro level and on a particular industry at the micro level, in order to develop appropriate strategies. For the first time, this presents the profession with a unique challenge in its professional journey as it will be compelled to step out of its comfort zone. The conventional boundaries between different knowledge and competency streams are getting blurred and the competencies and skills required for success in the future are going to be vastly different.Excellence in basic discipline will no longer suffice. Success will depend upon developing a broader vision, the ability to look at the bigger picture, developing a foresight into likely changes and how they will impact the economy and businesses by connecting different dots and formulate strategies accordingly. This will require a high level of versatility of knowledge with tremendous curiosity and an innovative mindset with creative thinking to turn disruptions into a competitive advantage.This essentially means that the softer aspects such as sharp observation, developing insights and perceptive thinking will become more important. This is in sharp contrast to the earlier emphasis on analytical skills, which were based on data. The perceptive ability will require the capability to see what is not visible, a sort of intuitive insight."Excellence in basic discipline will no longer suffice. Success will depend upon developing a broader vision, the ability to look at the bigger picture, developing a foresight into likely changes and how they will impact the economy and businesses by connecting different dots and accordingly formulate the strategies."Besides a passion to ride the wave of change, this will require the ability to take high risks with confidence and persistence. Experimentation, re-experimentation, and finding the success formula with speed will be essential, along with the agility to quickly decide what works and move forward rapidly and swiftly drop what does not work.The challenges would be so humongous that it would become difficult for individual organisations to succeed on their own, and therefore, collaboration to expand the horizons of thinking will be a key source of success that will require developing a strong network across multiple industries, as collaboration must span both businesses and industries.One will have to reinvent oneself regularly, learning from mistakes, doubling down on success, developing a high level of resilience and confidence, while having the humility to create the necessary networks and coalitions, and accept the fact that success depends upon teamwork across multiple industries.This essentially means possessing a very high level of emotional intelligence besides technical expertise, a deep understanding of human behaviour, and the ability to communicate complex matters in a simple language with a sharp narrative and value proposition, and intellectual integrity to use technological innovations with ethics for the larger good of humanity.The added dimension of geopoliticsWe are seeing the conflict between major economies in their quest for future dominance of the world. This is playing out through different means like export/import curbs, tariffs, and other more subtle means. These developments will have a significant impact on economies and multiple industries, be it the hi-tech areas of communications, semiconductors, defence, or more traditional sectors like textiles and chemicals. Every profession will have to develop an understanding of the underlying realities of geopolitics, some of which have their origin in centuries-long history, anticipate how the situation may evolve in the future, and be prepared for multiple outcomes, and develop organisational resilience and agility to quickly adapt to the changing situation. The changes are going to impact every aspect of the economy, be it agriculture, manufacturing, or services.Anticipating and winning in the new, dynamic, ever-changing worldThe only certainty is that change is already upon us. As we look to the future with confidence, envisioning India becoming at least the third-largest, and possibly the second-largest economy by the time the profession turns 100, the journey ahead will present both challenges and opportunities. To navigate this path, the profession must continuously challenge and reorient itself, moving beyond traditional roles to become tech-savvy, creative, agile, and visionary. It must evolve into a thought leader capable of building impactful partnerships and coalitions, advancing with confidence, agility, and humility.Author may be reached at eboard@icai.in
Ep. 211 — Building an Ethical Culture: Strengthening Trust in the Global Profession
CA Journal
· September 2026
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Building an Ethical Culture: Strengthening Trust in the Global ProfessionThe accounting profession stands at a critical juncture. Troubling headlines about ethical lapses at accounting firms have prompted significant public scrutiny and raised widespread concerns. Some accounting firms have been facing substantial monetary penalties and sanctions. The impact extends beyond the individual firms involved, and it wears away at the reputation of and public confidence in the accounting profession. Further, where firms provide services that have banking, industry, or economy-wide effects or impact public services, such failures can have ripple effects on the integrity and functioning of capital markets, tax systems, and entire economies. In short, the risk of erosion of the value of accounting services and providers and, ultimately, of public trust cannot be ignored; addressing it is imperative for the stability and resilience of financial systems worldwide.Academic research identifies ethical culture as a key factor influencing professional behavior, establishing a strong link between an organization's ethical culture and the professional conduct of its employees. Research also shows that a strong ethical culture and governance support audit quality. Further, there are growing trends in accounting firms that can negatively impact public interest obligations. One study highlights that accounting firms have become increasingly driven by commercial interests over time, prioritizing revenue generation and client retention. Rising commercial pressures and private equity investments in firms also raise concerns about conflicts of interest and the potential erosion of public interest priorities. Against this backdrop, how does one ensure that ethics and the public interest are not compromised?IESBA's Response: A Framework that Fosters an Ethical CultureAs a global standard setter for ethics for the accounting profession, the International Ethics Standards Board for Accountants (IESBA) has a clear public interest mandate to respond to these developments.Informed by the insights from its Firm Culture and Governance (FCG) Working Group's final report, the IESBA approved the FCG project in December 2024 with the objective to establish a Firm Culture and Governance Framework (FCG Framework) consisting of eight elements, (1) ethical leadership; (2) oversight and governance; (3) provision of independent input; (4) accountability; (5) incentives and rewards; (6) a culture of open discussion and challenge; (7) continuous education and training; and (8) transparency, that can promote, support and reinforce a high standard of ethical behavior within accounting firms. This would help firms develop reputations and operate as highly ethical firms, mitigate the risks of unethical behavior, and strengthen public trust and confidence in services provided.The IESBA is keenly aware of the wide range of accounting firms that operate across the world, and the different jurisdictional contexts to consider. India, as an example, has approximately 96,000 Chartered Accounting firms, with 75,000 of them being small and medium-sized firms. However, the six largest firms account for about 67% of Nifty 500 audits, underscoring their market dominance and the relevance of scalable ethics guidance.The challenges of implementing the eight FCG elements, or some of them at least, are different for smaller firms as compared to larger firms, and accordingly, scalability and proportionality need to be considered.Building an Ethical Culture: Eight Elements of a Firm Culture and Governance FrameworkThe significance of ethical leadership and the impact a leader has on the conduct of people within their organization cannot be underestimated. They must establish the "tone at the top" by modeling ethical behavior and demonstrating their commitment to ethics in practice by consistently aligning actions with values.This is particularly relevant in organizations such as accounting firms and others alike which do not operate under a typical corporate structure, but rather a partnership model, where the leadership is usually significantly concentrated in one person or a very narrow group of people.To ensure that the tone at the top has appropriately cascaded throughout the firm, it is just as important for leaders to understand the "mood in the middle" and "buzz at the bottom," fostering an environment of trust and psychological safety, where people feel encouraged to speak up and question decisions."In the face of difficult ethical decisions, just like in day-to-day management and action, an ethical leader must not allow any kind of undue external or internal pressure, including from clients or their own interests, to compromise ethical decision-making."In the face of difficult ethical decisions, just like in day-to-day management and action, an ethical leader must not allow any kind of undue external or internal pressure, including from clients or their own interests, to compromise ethical decision-making. For those looking from the outside-in, not to mention those looking from within, there should be no question that ethics is a driving force in strategic decisions and deeply embedded within the firm's strategy. This includes focusing on promotion criteria and recruitment strategy to ensure that people with strong ethical values are hired, employed, and promoted, and that commercial achievements are not the only, or the most important, hiring and promotion drivers.Ethical leadership is a "must-have" in all firms, irrespective of their dimension. However, the impact of senior leadership's decisions at a small and medium practice (SMP) may be felt more directly and swiftly by individuals in the firm than those working in a larger firm. It can be argued that if senior leadership sets the appropriate ethical tone and strategy for the SMP, it is easier for it to permeate through the firm. But some ethical decisions, like declining a client for ethical reasons, can be more challenging in SMPs given the higher commercial pressures.Oversight and governance mechanisms are critical elements in building an ethical culture. In whatever form they are incorporated into a firm's structure, such mechanisms are crucial to ensure the fundamental checks and balances that support ethical decision-making. They are the "hardware" of an ethical organization.A senior-level ethics leader or committee, or internal oversight mechanisms, may help build and strengthen oversight and governance mechanisms. The appointment of a senior-level ethics leader, with appropriate levels of information and authority, sends a powerful message and establishes an effective platform for ethics as a strategic imperative.However, it is also important to consider operational realities and alternative approaches depending on the firm.Independent input mechanisms also reinforce the firm's internal oversight, governance, and culture by incorporating objectivity, challenge, and a public interest perspective into executive decision-making. This can be done through a supervisory board, an ethics committee, independent directors, external advisors, or other mechanisms. There is no one-size-fits-all approach for obtaining independent input, and each firm should tailor its approach based on its circumstances.SMPs can experience challenges with finding qualified and experienced external individuals to provide independent input. Nevertheless, they can seek input through other avenues, such as their Professional Accounting Organization (PAO), regulators, or consultants.Importantly, it is crucial to ensure the true objectivity of those providing such input and the absence of any factor that might unduly influence their judgment. This input, however, will only make a difference if and when the firm, and its leadership above all, is ready to accept it and transform it into real value that helps set a consistently ethical line of action throughout the firm.This is where accountability comes in, as an obligation to act responsibly for maintaining ethical standards, upholding the firm's values, and, accordingly, being answerable for one's actions. It involves not only being prepared to justify decisions and behaviors to those affected by the work but also being open to scrutiny and evaluation against principles of good practice, legitimate expectations, and professional norms.At its core, accountability stems from a fiduciary relationship: a privilege entrusted to an individual or institution to act on behalf of others. In audit, this means upholding public trust through certification of financial information, and in consulting, honoring client delegations with integrity.Clear and consistent expectations for ethical behavior must, therefore, be communicated across all levels to establish a baseline expected ethical behavior against which everyone in the firm is able to justify an action, irrespective of geography or service line. For example, a firm-wide code of conduct could establish clear expectations across service lines and regions.Continuous education and training are integral components for establishing expected behavior. It should not be treated as standalone training content, but rather to instill and build ethical awareness. This means being able to identify ethical dilemmas that are in the "gray zone" and having an "ethical muscle" with the necessary skillset and fortitude for ethical decision-making. This can either be done through in-house training programs or by making use of external support. For example, SMPs might rely on their PAO or form an informal sharing network with other SMPs. ii"Firms can also use incentives and rewards to emphasize ethical expectations and make ethical conduct organic. Setting financial targets or incentives for such behavior can be deeply transformative for a firm's culture."Firms can also use incentives and rewards to emphasize ethical expectations and make ethical conduct organic. Setting financial targets or incentives for such behavior can be deeply transformative for a firm's culture. For example, it has been used in the financial sector after the financial crisis, where it became clear that remuneration structures and policies were one of the factors contributing to the problems that ended up generating the crisis. Non-financial recognition, in many ways, can also be an effective tool to reward those who demonstrate exemplary ethical behavior. Additionally, firms can implement disincentive mechanisms, such as considering unethical behavior in determining promotions or bonuses.Awareness of ethical expectations is crucial for partners and staff, but individuals also need to feel comfortable to be able to raise questions and point out when they face ethical dilemmas in practice.This is why a culture of open discussion and challenge should be encouraged by firms. This is an effective and engaging way to allow early detection and timely addressing of the problems at the right level. Effective prevention or early remediation avoids small issues from becoming big problems. This includes open discussion of ethical issues and dilemmas at all levels and creating an environment where people feel comfortable challenging decisions, putting alternatives forward, and sharing their concerns. This starts at the top - leaders have a central role in creating an environment where such conversations are not only permitted but expected, while preserving confidentiality and avoiding any kind of explicit or implicit retaliation, ridicule or dismissal. In addition, trusted whistleblower or external speak-up channels are necessary when internal mechanisms are not sufficient.Finally, transparency is key for accounting firms. Transparency is not merely a virtue but an anchor of credibility and a quiet test of governance integrity. It signals a firm's willingness to be looked through, questioned, and understood by the broad ecosystem that depends on its judgments, not only by regulators. In a profession built on trust and discretion, transparency does not erode authority; it legitimizes it. When firms openly disclose how decisions are made, how risks are managed, and how standards are upheld, they reinforce the very foundation on which their license to operate rests. In this light, transparency becomes less about disclosure alone, and more about a posture of openness - an institutional habit of answering before being asked. Further, a firm's own internal transparency about ethical breaches can help people understand what is unethical and the related consequences, and help to clearly and effectively communicate leadership's ethical commitments within the firm.Looking Ahead: IESBA's Next StepsIt is evident that these eight FCG elements should not be looked at in isolation; there are clear interconnectivities between them and an added value resulting from a robust framework that goes beyond the mere sum of these elements. It is also clear that building an ethical culture requires more than a one-time initiative or checklist. An ethical culture takes time to cultivate, highlighting the importance of regular review and continuous improvement.To support firms on their ongoing journey to build and strengthen their ethical culture, IESBA will very soon launch a series of one-page "Viewpoints" outlining its thoughts and perspectives on each of the FCG elements. This will also serve as an invitation and a proposal to continue developing effective instruments that can foster ethical culture. At IESBA, we look forward to engaging with ICAI and all professionals in India to jointly build an accounting profession that is highly ethical, stronger, and more resilient to the many challenges it faces today.*The article is written with the collaboration of Kam Leung, IESBA Director, and Joanne Holt, IESBA Senior Manager1 For example, in the United States (US), the US SEC and PCAOB have placed sanctions on firms in relation to the examination cheating scandals that occurred between 2019 and 2024. The fines imposed ranged from $2 million to $100 million.2 According to Jeremy Hirschhorn (Second Commissioner, Client Engagement Group at Australian Tax Office), "Once a firm gets to a particular size, it fundamentally changes how it should think about itself and how society will think about it. Our concept of 'systemically important' is a firm with industry or economy-wide effects in a local jurisdiction. Naturally, we say that public interest is much more important once you get to that because you can change how things work in your society. Being systemically important brings a greater demand for transparency and public accountability and when I look at the big firms in Australia, we see them as systemically important across four distinct markets: financial statements audits, large market tax advice, private sector consulting and government consulting. This of course may not be the case in all jurisdictions" (April 17, 2024) (https://www.linkedin.com/pulse/firm-culture-governance-jeremy-hirschhorn-hs9lc).3 Kaptein (2011); Hiekkataipale & Lämsä (2019).4 PCAOB (December 2024) Spotlight: Insights on Culture and Audit Quality, and Nijmegen (June 2023) Audit Quality Indicators in the Netherlands: Perspectives from Audit Personnel5 Pierce (2007) - Page 3 of Academic Report by Dr. Eva Tsahuridu. Pierce discusses how this commercial focus can lead to ethical dilemmas for accountants, as the pressure to meet financial targets and satisfy clients may overshadow the commitment to ethical principles and independent judgment.6 Business Today (April 2024) - India's answer to Big Four firms could be in the works: Here are the details - Business Today7 Business Today (April 2024) Big 6 Indian audit firms strengthen dominance, oversee two-thirds of Nifty 500 database8 For example, law firms.i Members may refer to the provisions of ICAI Code of Ethics on this aspectii Members may refer to the provisions of ICAI Code of Ethics on this aspectAuthor may be reached at eboard@icai.in
Ep. 212 — Navigating Ethics and Trust in the Age of AI
CA Journal
· September 2026
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Navigating Ethics and Trust in the Age of AIFor the first time in the history of the Wimbledon Championship, all the tennis courts will use AI for line calls in 2025. It means no Human Line Judges. Automated voice calls will make instant decisions in Real Time.Artificial Intelligence, or AI, is no longer just a futuristic idea; it is a reality that's changing the way we live, work, and connect with the world. At its core, AI refers to computer systems that can mimic human thinking, such as learning, understanding, problem-solving, and even creativity. Thanks to advances in deep learning and powerful computing, AI is now performing tasks that were once considered exclusively meant for humans.One of the most remarkable developments in recent times is Generative AI, which is a branch of AI, capable of creating content like text, images, music, and videos simply by learning patterns from large datasets. This includes tools that can write essays, design graphics, compose tunes, or generate voices and video, all within seconds. Natural Language Processing, a part of this technology, helps AI understand and respond in ways that feel remarkably human.With all this power, it's no surprise that people are calling for proper regulations to ensure AI is used responsibly. After all, with great potential comes the risk of misuse.In the world of accounting and finance, AI is proving to be a game-changer. Technologies like machine learning and data analytics are now helping professionals automate routine work, analyze vast amounts of data, spot unusual patterns, and make better decisions. As a result, accountants can now focus more on strategic thinking and bringing real value to the table. In fact, across many sectors, AI has shifted from being a luxury to a necessity.In agriculture, for example, farmers are using AI-powered sensors, drones, and geospatial tools to monitor crops, increase yields, save costs, and even protect soil health. In healthcare, AI is helping diagnose diseases more accurately and deliver personalized care. Education is also benefiting from smart learning systems that adapt to each student's pace and style. And in finance, AI is streamlining operations and improving customer experiences."One of the most remarkable developments in recent times is Generative AI, which is a branch of AI, capable of creating content like text, images, music, and videos simply by learning patterns from large datasets."Even the devices we use every day are becoming smarter. The rise of AI-enabled PCs is bringing faster and more energy-efficient computing to our fingertips. Beyond laptops and smartphones, AI is also showing up in everyday gadgets like earphones that adjust to your mood, mattresses that guide you into better sleep, and smart glasses that help you remember people's names with facial recognition.AI in IndiaIndia released the National Strategy for AI titled 'AI for All' in 2018. This strategy emphasizes AI as a key driver for Economic Growth and societal benefit, aiming to position India as a Global Hub for AI innovation.The Indian AI mission aims to leverage AI technologies for the country's economic growth, governance, healthcare, education, agriculture, and other sectors. Initiatives under the AI Mission include-AI Kosha Portal - a knowledge repository for AI resourcesAI Compute Portal - to provide access to AI computing infrastructureAI Competency Framework - to train and upskill public sector officials, andIGOT-AI (Mission Karmayogi) - aimed at integrating AI into governance and civil services training.Sarvam AI, the first startup chosen to build Indian AI models under the Indian AI Mission, recently released an indigenous open-source multilingual model.OpenAI and the Indian AI Mission have signed an MoU to promote AI skilling in India with the launch of the startup's educational platform at OpenAI Academy in New Delhi.The Boston Consulting Group (BCG) in a report titled India's AI Leap: BCG Perspective on Emerging Challenges stated that India has a growing AI ecosystem, with over 600,000 AI professionals, more than 700 million internet users and a surge of AI startups, with over 2,000 launched in the past three years. India's domestic AI market is projected to more than triple to $17 billion by 2027, according to the report, making India one of the fastest-growing AI Economies globally.In 2021, NITI Aayog published the Principles for Responsible AI. This document serves as a roadmap for creating an ethical and responsible AI ecosystem across various sectors. Subsequently, in 2023, the Digital Personal Data Protection Act (DPDP Act) was enacted. This legislation lays down a comprehensive framework for data protection & privacy.The proposed Digital India Act is expected to replace the Information Technology Act, 2000, to address the challenges faced in the Digital & AI Sectors.An Artificial Intelligence and Data Authority of India is proposed to ensure the responsible creation and application of AI.Trust & Ethical Challenges in AIi. Bias and FairnessArtificial Intelligence is vulnerable to inherent human biases. AI models learn from data created by humans. Hence, human biases based on gender, caste, religion, and many other factors make their way into the AI models. It is critical for professionals to understand how biases manifest & implement measures to mitigate them."AI models learn from data created by humans. Hence, human biases based on gender, caste, religion, and many other factors make their way into the AI models."ii. Transparency and ExplainabilityAI models, especially complex ones like deep learning, often operate as "black boxes," making it difficult to explain how decisions are made. For auditors and accountants, ensuring transparency is vital for maintaining client trust and complying with regulatory requirements. Techniques such as explainable AI (XAI) are emerging to address this concern.iii. Data Privacy and SecurityThe use of personal information and vast data sets raises concerns about data privacy and unauthorised access to sensitive data. Robust regulations and ethical frameworks are essential for the development of AI.General Data Protection Regulation (GDPR), a European Union law, focuses on data protection & privacy for individuals within the EU. The EU Artificial Intelligence Act (AI Act), adopted in 2024, is a comprehensive legal network for AI development & deployment within the EU. India has also implemented the ethical use of AI by formulating responsible AI frameworks, encouraging transparency, fairness, and accountability in AI systems, and promoting innovation that aligns with societal values and data privacy norms.iv. Deepfakes and MisinformationThe proliferation of deepfake technology poses risks of fraud and misinformation. Professionals must stay vigilant and employ verification techniques to authenticate digital content. Recently, several deepfake videos have gone viral, contributing to a rise in scams by misleading victims into believing they are authentic.v. HallucinationAI Hallucination involves AI creating information that does not align with reality or logical reasoning, despite appearing plausible.The Former Chief Justice of India, D.Y. Chandrachud, stated "Amid the excitement surrounding AI's capabilities, there are concerns regarding potential errors and misinterpretations. Without robust auditing mechanism in place instance of 'hallucinations' - where AI generate false misleading information may occur."Interplay between Artificial Intelligence (AI) & Human Intelligence (HI)As Artificial Intelligence becomes more of part of our everyday lives, the relationship between human intelligence and AI is beginning to look less like a competition, and more like a collaboration.Humans are naturally intuitive, emotional, and creative. We can pick up on subtle cues, make decisions based on empathy, and understand things that aren't always black and white. AI, on the other hand, is great with data, spotting patterns, crunching numbers, and working tirelessly on repetitive tasks without losing focus. On their own, each has limits. But together, they can do incredible things.Think about a doctor using AI to help diagnose diseases. The AI might scan thousands of X-rays in seconds and suggest possible concerns. But it's the doctor who talks to the patient, understands their fears, and decides what to do next. In that moment, the technology helps, but it doesn't replace the human.Of course, this new partnership comes with big questions. Who's responsible when an AI system makes a mistake? How do we make sure it's being used fairly? Can we trust a machine to make decisions that affect our lives? These aren't easy issues, and they need real human judgment and ethics to solve.Navigating Ethics by the Accounting Profession in the AI EraEthics in the context of the Chartered Accountants Act, 1949, is interpreted and enforced through the Code of Ethics issued by the Institute of Chartered Accountants of India (ICAI).Professional Misconduct: Under Section 22 of the Chartered Accountants Act, 1949, the concept of 'professional misconduct' is introduced. This serves as the legal foundation for ethical behaviour expected from Chartered Accountants. The First and Second Schedules to the Act outline what constitutes professional misconduct.ICAI Code of Ethics: The ICAI Code of Ethics, which is substantially based on the International Ethics Standards Board for Accountants (IESBA) Code, lays down the following fundamental principles:IntegrityObjectivityProfessional Competence and Due CareConfidentialityProfessional BehaviourWhy Ethics in AI Matters for Accountants: Chartered Accountants play a vital role in society as they ensure financial transparency, protect stakeholders' interests, and uphold professional standards. As AI becomes part of audit tools, tax software, risk assessments, and business analytics, it's essential to ensure that these systems align with ethical values. Just as we wouldn't accept flawed financial statements, we must not accept AI tools that are biased, opaque, or unaccountable.Ethical Principles for the Accounting Profession when using AI:Integrity and Fairness: AI systems must reflect the same honesty and impartiality expected of CAs. If AI makes biased decisions, it undermines public trust. It's our duty to ensure fairness in every outcome.Transparency and Explainability: Clients and stakeholders must understand how decisions are made, whether by a person or an algorithm. Ethical AI requires that we can explain how a system arrived at a recommendation or flagged a transaction.Accountability: Just like auditors are accountable for their reports, professionals using AI must take responsibility for its results. It's not enough to say "the system said so." Human oversight must always be present.Confidentiality and Data Protection: Accountants handle sensitive information. When AI systems process this data, we must ensure it remains secure, confidential, and is used strictly within ethical and legal boundaries.Professional Competence: As AI tools become more sophisticated, so must we. Chartered Accountants need to stay informed, trained, and updated. Understanding how AI works helps us apply it effectively and ethically. The Certificate Course on AI conducted by ICAI as well as ICAI GPT, has played a stellar role in upgrading the AI knowledge of the Membership.Due Care and Human Judgement: AI is a powerful assistant, not a replacement for professional scepticism or judgment. Especially in audits, valuations, and financial decisions, human insight remains irreplaceable.Inclusivity and Sustainability: Ethical AI should serve all clients, big or small, local or global. And we must also be mindful of the environmental impact of digital tools, advocating for responsible and sustainable practices."As AI becomes part of audit tools, tax software, risk assessments, and business analytics, it's essential to ensure that these systems align with ethical values."Trust in the AI Era"Trust" refers to the confidence society places in Chartered Accountants due to their:Professional integrityIndependence and objectivityCompetence and due careCommitment to confidentialityResponsibility to act in the public interestDavid H. Maister, Charles H. Green, and Robert M. Galford, in their book 'The Trusted Advisor' define Trust as:$$T = (C + R + I) / S$$Where;$T =$ Trustworthiness$C =$ Credibility$R =$ Reliability$I =$ Intimacy$S =$ Self OrientationTrust isn't something that comes automatically with new technology. It's something that's built over time. And when it comes to AI, building that trust means being clear about how it works, making sure it's fair, and holding someone accountable when things go wrong. One of the biggest concerns people have is not knowing how AI makes decisions. A professional does not need to know every line of code, but we do need to understand the logic behind the outcome.AI learns from data, and if that data is biased, then the AI can end up making unfair decisions. That's why the people building and using AI need to be careful, thoughtful, and constantly check for problems.Trusting AI isn't just about trusting machines. It's about trusting the humans behind them. The developers who design them, the organizations that use them, the policymakers who regulate them, the educators who help us understand them & the accounting professionals who use them. All of them play a role in making sure AI is used ethically and responsibly."Ethical principles must guide how we use AI so that we don't just build smart systems, but also fair, trustworthy, and responsible ones."ConclusionAI's ability to automate tasks, improve accuracy, and provide data-driven insights has changed the accounting landscape. Humans, on the other hand, bring reasoning, creativity, and emotional intelligence to tasks that require judgment, decision-making, and social understanding. Hence, Artificial Intelligence (AI) and Human Intelligence (HI) need to work together to enhance overall performance.AI is expected to transform & elevate the Accounting Profession & not replace it. The profession needs to adapt to the change.Rather than fearing this change, the real opportunity lies in learning how to work with it using AI to extend our strengths, not erase them. When humans and machines learn to think together, we can go further than either one could alone.Artificial Intelligence is not a substitute for human intelligence; it is a tool to amplify human creativity and ingenuity.Chartered Accountants are more than number crunchers - we are ethical stewards of financial truth. In the age of AI, our role expands: we must ensure that the technologies we adopt uphold the same ethical standards that define our profession.By applying our values of Integrity, Objectivity, Professional Competence, Confidentiality, and Professional Behavior to AI tools, we ensure they work for people, not against them.Author may be reached at smitra101@gmail.com and eboard@icai.in
Ep. 213 — Sustainability Reporting and Assurance: The Evolving Landscape
CA Journal
· September 2026
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Sustainability Reporting and Assurance: The Evolving LandscapeIn recent years, the world has witnessed a cascade of disruptions, from escalating climate events like floods, wildfires, and heatwaves to the profound socio-economic upheaval caused by the COVID-19 pandemic. These events have made it clear that climate and sustainability risks are not abstract or distant; rather, they are immediate, material, and interconnected with economic and societal systems.Businesses today face not only physical risks from extreme weather events, but also transition risks such as changing policies, stakeholder expectations, and the introduction of carbon pricing mechanisms. Additionally, there is growing consensus that business viability increasingly depends on the health of natural ecosystems and the resilience of inclusive societies.In response, the sustainability reporting landscape is undergoing a significant transformation. While the push for greater transparency and disclosures initially came from investors, a number of regulators across the globe have rolled out their prescriptions for sustainability reporting to support informed decision-making and the efficient functioning of capital markets.Sustainability Reporting in India: From BRR to BRSRIndia was one of the early adopters of mandatory sustainability reporting. The journey began in 2012, when SEBI introduced the Business Responsibility Report (BRR) for the top 100 listed entities. This progressively extended to the top 500 listed entities in 2015 and to the top 1000 in 2019. The BRR required a description of the initiatives taken by companies from an ESG perspective in a prescribed format. It was largely qualitative and light-touch in nature.In view of global developments such as the adoption of the Paris Agreement on Climate Change and UN Sustainable Development Goals, and as investor interest in sustainability-related information intensified, there was a clear need to demonstrate outcomes. Driven by these developments, in 2021, SEBI introduced the Business Responsibility and Sustainability Report (BRSR).The BRSR is a granular, quantitative, and outcome-oriented reporting framework. It is home-grown, tailored to our unique domestic requirements and aligned with our national priorities. While developing the framework, we were cognizant that emerging markets have a different set of environmental & social challenges. Therefore, we have consciously followed a climate plus approach covering both environmental and quantitative social metrics. At the same time, we had also conducted a benchmarking exercise with the then available international frameworks, such as TCFD (Task Force on Climate-Related Financial Disclosures) and GRI (Global Reporting Initiative), and there are a number of commonalities between these frameworks and the BRSR. The BRSR is applicable to the top 1000 listed entities (by market capitalisation) on a mandatory basis. Over 1,200 listed entities filed the BRSR for FY 2023-24.The BRSR also seeks disclosures towards ascertaining the role played by and oversight of the Company Boards on sustainability-related issues. For instance, the BRSR seeks a statement by the director responsible highlighting the vision and strategy, sustainability priorities, challenges and outlook on targets. Disclosure is also sought on whether sustainability-related policies are approved by the Board and the frequency of review of performance against policies."The BRSR is a granular, quantitative, and outcome-oriented reporting framework. It is home-grown, tailored to our unique domestic requirements and aligned with our national priorities."BRSR Core - Raising the Bar on Assurance and Transparency in Value ChainTransparency without credibility can be counterproductive. With a number of stakeholders, such as investors and ESG Rating Providers, placing reliance on the disclosures in the BRSR, and concerns around greenwashing being raised globally, in July 2023, SEBI introduced the BRSR Core containing a select set of critical metrics, which would need to be assured by an independent third-party assurance provider. A glide path, in terms of timelines and applicability to listed entities, has been prescribed for implementation of assurance requirements, with coverage extending to the top 1000 listed entities by FY 2026-27.Given that a number of companies have significant sustainability footprints, such as the use of natural resources, employment practices, emissions and wastages in their value chain, disclosures as per the BRSR Core were also extended to the value chain of listed companies. With a view to facilitate ease of doing business for listed entities and their value chain partners, these disclosure requirements have been recently relaxed. Value chain disclosures are now "voluntary", instead of the earlier requirement of 'comply-and-explain.' The scope of value chain disclosures has been reduced to cover the top upstream and downstream partners of a listed entity, individually comprising 2% or more of the listed entity's purchases and sales (by value), respectively, while retaining the requirement that the listed entity may limit disclosure of value chain to cover 75% of its purchases and sales (by value), respectively.Global Developments: Convergence of the Alphabet Soup of Reporting FrameworksGlobally, the sustainability reporting landscape is converging. The issuance of the IFRS Sustainability Disclosure Standards (ISSB Standards) by the International Sustainability Standards Board (ISSB) has resulted in the consolidation of multiple reporting frameworks and reduced the fragmentation in this space. As per ISSB, 36 jurisdictions have adopted or otherwise used the ISSB Standards or are in the process of finalizing steps towards introducing them into their regulatory frameworks.Parallelly, two new pillars are shaping the credibility of sustainability reporting. At the beginning of this year, the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA) jointly launched the International Standard on Sustainability Assurance (ISSA) 5000 and the International Ethics Standards for Sustainability Assurance (IESSA), respectively. These standards were developed in response to market demand and calls from stakeholders for reliable sustainability information.The ISSA 5000 contains principle-based requirements that support limited or reasonable assurance engagements of sustainability information reported by entities. The IESSA provides a framework for ethics and independence requirements, for sustainability assurance engagements with the objective of mitigating unethical conduct including green-washing risks. The ISSA 5000 and IESSA, provide a cohesive package of global standards for sustainability assurance. The standards are profession agnostic, and framework neutral i.e. they can be applied in relation to sustainability information prepared under any suitable reporting framework.There is interconnectedness between the sustainability reporting, assurance, and ethics (including independence) standards. Together these standards form a powerful trinity, that promotes public trust in sustainability information."The IESSA provides a framework for ethics and independence requirements, for sustainability assurance engagements with the objective of mitigating unethical conduct including green-washing risks."The Road AheadWhile progress is evident, the headwinds are real. The political climate has shifted in parts of the world, from the withdrawal from the Paris Climate Accord to the rollback of climate mitigation measures. We have seen investors exit net-zero alliances and a growing sense of compliance fatigue. Yet, the science is irrefutable; 2024 was the warmest year on record, surpassing 2023. It is therefore important for companies to recognize that short-term political shifts do not change the existence of sustainability-related risks. Investor led pressure will therefore continue to sustain the momentum for voluntary sustainability disclosures, even in the roll-back or relaxation of regulatory mandates.As we look to the future, several themes are likely to shape the sustainability landscape:First, is the path towards convergence with international disclosure standards. At present, we are in a good spot with our indigenous framework, BRSR, which is calibrated to the needs of our economy, has given an impetus to sustainability disclosures and has prepared our companies to confidently deal with challenges in the evolving sustainability disclosure landscape. As recognized in the G20 New Delhi Leaders' Declaration (2023), while common global language is welcome, it is important that flexibility, to take into account country-specific circumstances, is preserved in the implementation of standards. Therefore, flexibility, proportionality, and a just transition supported by appropriate glide paths will remain critical.Second, we can expect an increasing connectivity between financial and sustainability reporting. This shift recognizes the inter-linkage between the financial risks a company faces from climate change, the environment and society and the impact that it creates for the planet. Integration of these perspectives, will enable a better understanding of the risks and opportunities faced by a company.Third, credible transition planning will become essential. Companies will need to go beyond intent and articulate practical, and time-bound pathways, backed by clear metrics and financial implications.Fourth, the challenge of greenwashing will become more pronounced. As sustainability claims proliferate, regulators will need to scale up their oversight capabilities. The assurance ecosystem including standards and a regulatory framework for oversight, will need to evolve to ensure credibility, consistency and independence, in reporting and assurance.The journey will not be without its challenges, in particular, the fundamental tension between profitability and sustainability. There is a trade-off between short-term gains over long-term survival and resilience. The short-term gains rewarded by the market are more visible. The market's emphasis on short-term gains must give way to a more nuanced understanding of value.ConclusionWe do not inherit the Earth from our ancestors; we borrow it from our children. The costs of inaction on sustainability, are real and rising. The businesses that integrate sustainability as part of their core strategy rather than treating it as a compliance obligation will be best positioned to thrive in a changing world.Chartered Accountants, have an important role to play in the transition. Long regarded as custodians of financial integrity, they are well placed to contribute to an ecosystem where sustainability disclosures are comparable, consistent and trust-worthy. The opportunity for the profession is clear: to evolve beyond accounting for economic progress, and help shape a more inclusive, transparent, and sustainable future.Author may be reached at eboard@icai.in
Ep. 214 — Driving Social Impact Through Strategic Financial Leadership
CA Journal
· September 2026
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Driving Social Impact Through Strategic Financial Leadership"The true nature of any society can be found in how it treats its most vulnerable members." - Mahatma GandhiIt is no longer about ROI (Return on Investment) but RoSI (Return on Social Impact). In the current times, where the world's most pressing challenges, from climate change and gender inequality to poverty and lack of access to healthcare, require urgent solutions, the convergence of financial leadership, judicious resource allocation and data-driven decision-making is proving to be a powerful catalyst for social impact.No longer confined to the realms of corporate social responsibility or philanthropic endeavours, financial leadership is now central to designing and scaling transformative initiatives that are both sustainable and measurable. Financial leadership is not just about numbers: it's about creating resources to create a lasting social value.The Rise of Financial Leadership in the Social SectorTraditionally, social impact has been perceived as the domain of non-profits, development agencies, and government welfare programs. However, the increasing involvement of the private sector and financial institutions is reshaping this narrative. Finance leaders, including CFOs, investment managers, and development finance professionals, are being called upon to embed Environmental, Social, and Governance (ESG) principles into investment decisions, allocate capital strategically, and measure returns beyond the bottom line. As per a recent finding, institutions' financial performance and their performance on ESG metrics is linked, with the strongest connection in social metrics.According to the Global Impact Investing Network (GIIN), the global impact investing market stands at $1.571 trillion in Assets Under Management (AUM) in its latest March '24 report, reflecting a 21% compound annual growth rate (CAGR) between 2019-2024. This indicates that financial decision-makers are actively pursuing investments that generate positive, measurable social and environmental outcomes alongside financial returns.Aligning Financial Strategy with Social PurposeFor decades, the walls of B-Schools have been honing the financial acumen of business aspiring leaders with a single mantra: profit maximization. Driven by this focus, leaders have worked on strategies on how to out-manoeuvre competitors in a relentless pursuit of growing the bottom line. However, the tide is turning. The emerging trend on Social Profit Orientation is nudging leaders to align their financial strategy with broader societal and environmental goals. Supporting this shift, a global study found that nearly 77% of individual investors are now interested in companies or funds that deliver market-rate returns while also driving positive social and environmental impact.In this evolving landscape, financial leaders can become catalysts for systemic change. They can play a pivotal role in embedding the Triple Bottom Line approach—People, Planet, and Prosperity—into business strategy. By championing socially responsible practices, driving environment-conscious investments, and fostering inclusive economic growth, they can steer organisations toward long-term sustainable value creation.Impact Investing and Resource Allocation: Blending Returns with ResponsibilityIt is a well-accepted fact that delivering on the SDGs will require more resources than what is being spent on development outcomes. This is especially true of developing countries. According to the UNCTAD's World Investment Report 2023, developing countries face an annual investment gap of approximately $4 trillion to achieve the SDGs. This gap has been widening over the years. In fact, to meet the UN SDG targets, India needs a whopping USD 2.64 trillion investment by 2030.Impact-led businesses, which are vital to accelerating progress toward the SDGs, present an opportunity to accelerate progress toward the SDGs. They offer innovative, market-based solutions across healthcare, climate, education, livelihoods, and other priority sectors, enabling efficiency and reach that conventional models are unable to achieve.Data Driven Impact MeasurementAt the heart of effective financial leadership for social impact is data—robust, reliable, and real-time information that drives strategic decisions, optimises resource allocation, and ensures accountability. Data empowers companies to identify underserved populations, measure progress against development objectives, and calculate returns on social investment."Rather than relying on assumptions or retrospective evaluations, data-driven approaches enable dynamic, responsive strategies that adapt to changing realities on the ground."Leveraging the Power of Frugal InnovationFrugal innovation i.e., doing more with less, is increasingly vital in emerging markets, where efficient use of resources drives impact. India offers compelling examples: from Jan Aushadhi's affordable generics and eSanjeevani's free tele-consultations to digital breakthroughs like Aadhaar and UPI. These scalable, low-cost solutions are powered by strategic financial tools like blended finance, public-private partnerships, and catalytic capital. With India's blended finance market projected to double by 2027 (from USD 1.30 billion in 2022 to USD 2.64 billion by 2027), the potential for impact is immense.Shifting Narrative of CSR: From Obligation to StrategyIn today's shifting landscape, CSR is no longer merely an option or philanthropy, but a strategic move, intrinsic within the company. This shift reorients businesses from short-term profit-driven models to stakeholder-centric approaches that prioritize long-term value creation. Companies are now expected not only to deliver profits but also to minimize harm, generate positive social and environmental outcomes, and build reputation, goodwill, and financial resilience.The Way Forward: A New Paradigm for FinanceIn order to harness the power of financial leadership and data for social good, adherence to the following is critical:Invest in Impact Data Infrastructure: Governments and multilateral agencies must support the creation of data platforms that track development indicators in real time. These systems must be interoperable and privacy-compliant.Build Capacity in Impact Accounting: Training finance leaders in ESG metrics, sustainability accounting, and development finance can ensure that social goals are embedded in core financial decisions.Develop Blended Finance Models: By combining public, private, and philanthropic capital, blended finance can de-risk investments and crowd in additional resources for high-impact sectors like health, education, and climate resilience.Use Technology for Last-Mile Data Collection: Innovations like satellite imagery, IoT, blockchain, and mobile data analytics can close the information gap, especially in rural or underserved regions.Conclusion: Purpose and Profit Go Hand in HandThe future of finance is not just about managing capital, but about mobilizing it to address humanity's greatest challenges. Financial leadership, when infused with a strong sense of purpose and supported by actionable data, has the potential to scale socially transformative innovations to change lives for a lasting impact. The future belongs to those who align social purpose with financial discipline. Sustainability and impact are no longer cost: they're smart business strategies that deliver both social and financial value. As financial leaders, it is our responsibility to ensure that not only are organisations financially healthy but also socially meaningful because when economics meets empathy, we can create true social progress.Author may be reached at eboard@icai.in
Ep. 215 — Green Finance – the Way Forward
CA Journal
· September 2026
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Green Finance: the Way ForwardThe year 2024 has been the warmest year so far in the history of the planet Earth. The apprehension that each successive year may exceed the previous one in severity poses a genuine and pressing threat. The atmospheric concentration of Greenhouse Gases (GHGs) like carbon dioxide, methane, and nitrous oxide reached the highest levels. The ill consequences of the extreme weather conditions can be felt in all parts of the globe. From floods and wildfires to prolonged droughts and rising sea levels, the adverse impacts are being felt in every region. In this critical context, the urgency and importance of Green Finance have never been more evident.As per the Fossil Finance Report 2025 on The Banking on Climate Chaos, published in June 2025, in 2024, global banks walked back many of those climate pledges and significantly increased their fossil fuel financing, including ramping up finance for fossil fuel expansion. It further reports that the 65 biggest banks globally committed $869 B USD to companies conducting business in fossil fuels in 2024. The 65 biggest banks globally committed $429 B USD to companies expanding fossil fuel production and infrastructure in 2024. Over $2/3$ of banks covered in the said report (45 banks) increased their fossil fuel financing from 2023 to 2024. 48 of the 65 banks increased fossil fuel expansion finance from 2023 to 2024.In this background, green energy is increasingly gaining importance. Green Finance means lending to and/or investing in the activities/projects that contribute to climate risk mitigation, climate adaptation and resilience, and other climate-related or environmental objectives, including biodiversity management and nature-based solutions. Climate mitigation and adaptation are two distinct, yet interconnected, approaches to address climate change.Mitigation focuses on reducing greenhouse gas emissions to prevent or slow down climate change (Example, transitioning to renewable energy sources, improving energy efficiency, promoting sustainable land management practices, and developing carbon capture technologies).Adaptation involves adjusting to the unavoidable effects of climate change that are already occurring or are projected to occur in the future (Example, building sea walls to protect coastal areas from rising sea levels, developing drought-resistant crops, implementing early warning systems for extreme weather events, and improving infrastructure resilience to climate impacts).Emerging SectorsAs the concept of green environment is increasingly finding importance, the newer areas for green financing include:SectorDescriptionRenewable EnergySolar/wind/biomass/hydropower energy projects that integrate energy generation and storage.Incentivizing the adoption of renewable energy.Energy EfficiencyDesign and construction of energy-efficient and energy-saving systems and installations in buildings and properties.Supporting lighting improvements (e.g., replacement with LEDs).Supporting the construction of new low-carbon buildings as well as energy-efficiency retrofits to existing buildings.Projects to reduce electricity grid losses.Clean TransportationProjects promoting the electrification of transportation.Adoption of clean fuels like electric vehicles, including building charging infrastructure.Climate Change AdaptationProjects aimed at making infrastructure more resilient to the impacts of climate change.Sustainable Water and Waste ManagementPromoting water-efficient irrigation systems.Installation/upgradation of wastewater infrastructure, including transport, treatment, and disposal systems.Water resources conservation.Flood defence systems.Pollution Prevention and ControlProjects targeting reduction of air emissions, greenhouse gas control, soil remediation, waste management, waste prevention, waste recycling, waste reduction, and energy/emission-efficient waste-to-energy.Green BuildingsProjects related to buildings that meet regional, national or internationally recognized standards or certifications for environmental performance.Sustainable Management of Living Natural Resources and Land UseEnvironmentally sustainable management of agriculture, animal husbandry, fishery and aquaculture.Sustainable forestry management, including afforestation/reforestation.Support for certified organic farming.Research on living resources and biodiversity protection.Terrestrial and Aquatic Biodiversity ConservationProjects related to coastal and marine environments.Projects related to biodiversity preservation, including conservation of endangered species, habitats, and ecosystems.RisksThe green financing comes with its own risks. The biggest risk in Green Lending is the risk of "Greenwashing" by organisations. "Greenwashing" means the practice of marketing products/services as green, when in fact they do not meet the requirements to be defined as green activities/projects. Globally, many large organisations have faced the issue of Greenwashing, and this creates a huge reputational risk for the organisations. Financial Institutions also have the responsibility to ensure that they finance only such eligible projects as green and do not end up supporting Greenwashing in any manner. To mitigate the risks of greenwashing, the following approaches are adopted internationally:Alignment with Green Taxonomy: A green taxonomy is a framework that defines what constitutes an environmentally sustainable investment or economic activity. It's a classification system used to identify and categorize investments that align with specific environmental objectives, like climate change mitigation or sustainable water management. For example, EU taxonomy. The Government of India has released a Draft framework on Climate Finance Taxonomy, inviting public feedback.Third party assurance/Certifications: Banks/Lenders insist on third party certifications such as Green Building certificates, Forest Stewardship Council (FSC) Certificate, etc.Periodic Impact reporting: Assess the impact associated with the funds lent for or invested in green finance activities/projects through an Impact Assessment Report by external parties.Greenwashing guidelines: Many countries have issued detailed guidelines on what is considered greenwashing and their penal provisions. In India, the Central Consumer Protection Authority has issued guidelines on the Prevention and Regulation of Greenwashing or Misleading Environmental Claims."Financial Institutions also have the responsibility to ensure that they finance only such eligible projects as green and do not end up supporting Greenwashing in any manner."Challenges to the FinanciersThe biggest challenge to the banking sector in terms of green financing is that as most of the projects are long term in nature they lead to mismatch in the Asset Liability Management (ALM). But for the large Indian banks, the smaller banks have limitations in this regard. Most of these projects are in the renewable energy sector which are dominated by the large corporates. The third party certification involves additional costs. This severely limits the ability of the retail/ SME/agri-borrowers from being able to classify their accounts as being eligible for the green finance. Further, the emerging technologies are very expensive, and the risk of their becoming obsolete faster is very high. The banks are obviously wary of financing such nascent-stage projects.The Regulatory FrameworkThe Regulatory Framework on Green Financing has also evolved over a period of time. Presently, the major regulations are listed below:Framework on issuance of listed green debt securities; Issued in 2017 & updated in 2023 by SEBI: The updated framework on the issuance of listed green debt securities aligns with the Green Bond Principles recognized by the International Organization of Securities Commissions (IOSCO) and reflects India's growing emphasis on sustainable finance. It outlines detailed initial and continuous disclosure requirements for issuers of green debt securities.Framework on Sovereign Green Bonds; Ministry of Finance, November 2022: The issuance of Sovereign Green Bonds will help the Government of India (GoI) in tapping the requisite finance from potential investors for deployment in public sector projects aimed at reducing the carbon intensity of the economy.Framework for acceptance of Green Deposits; RBI, April 2023: The Framework for Acceptance of Green Deposits issued by the Reserve Bank of India (RBI) establishes guidelines for regulated entities (REs), such as scheduled commercial banks and deposit-taking NBFCs, to offer green deposits from June 1, 2023.Draft framework on Climate Finance Taxonomy; Ministry of Finance, May 2025: The objective of this draft is to facilitate greater resource flow to climate-friendly technologies and activities. It will classify activities under categories of mitigation, adaptation, and transition support, ensuring inclusivity, particularly for MSMEs, and preventing greenwashing.Chartered Accountants in ESG, Impact, and Green FinanceThe increasing and evolving role of Chartered Accountants aligns with the global priorities such as sustainability, responsible investing, and climate action. The emerging green finance opens doors of opportunity for the profession. Today's CAs are increasingly involved in Environmental, Social, and Governance (ESG) assurance, offering credibility to non-financial disclosures and sustainability reports. With expertise in risk assessment, control systems, and ethical compliance, the profession plays a vital role in impact reporting, where transparency and accountability are of utmost importance. Additionally, with the rise of green bonds and climate-linked investments, CAs are emerging as key players in green finance verification, ensuring that funds raised are used for genuinely sustainable purposes. Today, Chartered Accountants are not just stewards of financial accuracy but also change makers for sustainable value creation.Concluding ThoughtsIn conclusion, driven by the fundamental instinct for human survival, green financing is poised to witness continued growth. While this trajectory presents a range of complex challenges, it also signifies a critical and inevitable shift toward a more sustainable future. Despite the obstacles, it is evident that this is the direction in which our collective future lies. We must pass the hurdles for a greener future and make this planet a better place to live for humans.Author may be reached at eboard@icai.in
Ep. 219 — The Role of Accountants in Uncertain Economic Times
CA Journal
· September 2026
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The Role of Accountants in Uncertain Economic TimesThe economic instability and geopolitical tensions currently affecting the global landscape present both challenges and opportunities for the accounting profession.By Prof. Dale Pinto, President and Chair, CPA AustraliaAs noted by Bruce Vivian, the Director of Accountancy Education at IFAC, future accountants must embody four essential qualities: critical thinking, curiosity, creativity, and collaboration. These attributes are crucial for navigating the complexities of today's environment and ensuring that accountants remain vital to global business and economic resilience.Accountants serve a dual role as both historians and strategists, meticulously documenting past events while assisting organisations in planning for the future. This unique perspective is not commonly found in other professions, as accountants provide clarity and risk analysis during turbulent times.Their influence spans various sectors, including finance, technology, healthcare, entertainment, and government. Accountants uphold financial integrity, playing a central role in ensuring that financial records are accurate, reliable, and compliant with relevant laws and standards. Their work is fundamental for decision-making, fostering investor trust, and ensuring regulatory compliance.Few professions possess a multidisciplinary approach to navigating global economic uncertainty. In times of crisis, it often falls upon accountants to restore balance and offer strategic insights. The distinctive combination of financial expertise, ethical responsibility, and stakeholder management skills, all grounded in a rigorous framework of standards and regulations, sets accountants apart. This is particularly relevant during periods of global economic uncertainty and geopolitical tension, such as those we are currently experiencing.Global Trade DisruptionsNavigating both local and international challenges is an inherent aspect of business operations; however, there are times when these challenges become more pronounced than anticipated. As accountants face an increasingly complex regulatory landscape and ongoing economic difficulties, their roles must adapt to meet new global priorities and pressures, regardless of geographical location.The incident in 2021 when the Ever Given container ship became lodged in the Suez Canal for six days serves as a prime example. This event occurred just as financial markets were beginning to recover from the initial impacts of COVID-19, triggering widespread economic repercussions as just-in-time supply chains and the delivery of goods across multiple sectors were disrupted.Similarly, conflicts in various regions have introduced temporary trade challenges that have tested the resilience of global exporters. However, ongoing trade disputes between major economies like the United States and China may ultimately reduce these disruptions to minor setbacks within the larger pursuit of economic prosperity. In these uncertain times, the accounting profession is positioned to play a vital role in guiding clients and organisations through turbulent economic conditions.Any disruption to global trade can lead to a multitude of consequences and challenges for businesses. During such periods of instability and uncertainty, effective planning, adaptability, and professional guidance become essential for helping organisations navigate the evolving landscape.Businesses that have yet to recognise the changing role of their finance teams will soon find it imperative to do so.Adapting to Changing Economic LandscapesAdapting to changing economic landscapes is essential for businesses, particularly in times of uncertainty when regulatory and tax changes can arise both locally and globally. Accountants play a pivotal role in helping organisations identify opportunities to manage tariffs and pursue growth in new areas. The evolving economic environment often serves as a catalyst for businesses to diversify, and accountants leverage their extensive experience across various sectors to guide organisations in establishing new pathways for growth and stability.To mitigate risks, businesses can enhance operational efficiencies and diversify their markets. Accountants ensure compliance with regulations while also helping organisations take advantage of temporary relief programmes and incentives. In uncertain environments, accurate forecasting becomes increasingly challenging yet vital. Accountants must develop more frequent and adaptable budgets that account for potential fluctuations in interest rates, inflation, or supply chain disruptions."Resilience and adaptability are hallmarks of the accounting profession, and these qualities are essential for businesses navigating turbulent times. Leaders rely on accountants to transform financial data into actionable strategies."One undeniable truth is that uncertainty brings challenges, and accountants are at the forefront of addressing these issues. The outdated stereotype of accountants as mere number-crunchers focused solely on taxes is rapidly fading. Today, accounting is a dynamic, versatile, and people-oriented profession. Many accountants are innovative thinkers who significantly influence business strategy and decision-making.Rather than concentrating solely on traditional tasks like bookkeeping and compliance, accountants are increasingly recognised as key strategic advisors who assist businesses in navigating volatility and making informed decisions. More organisations are beginning to appreciate this enhanced value.The Opportunities of Tech and AIAccountants will remain trusted advisors, providing essential oversight to ensure accuracy and integrity, particularly during challenging economic conditions. However, the profession is evolving rapidly, and accountants must adapt to the demands of the digital age. The increasing need for real-time data is driving the adoption of digital tools and automation, reshaping the way accountants work.Technological advancements, such as Artificial Intelligence (AI) and Machine Learning (ML), are transforming the profession by automating repetitive and time-consuming tasks. This shift allows accountants to focus on higher-value activities, such as strategic decision-making and business advisory. For example, smart accounting systems can now identify patterns, detect errors, and provide recommendations based on vast amounts of financial data. These insights enable accountants to make informed, business-savvy decisions that drive growth and stability. As a result, accountants with strong technical skills and the ability to manage digital tools effectively are in higher demand than ever.The future of accounting lies in embracing these technological advancements while maintaining a strong foundation of ethical and professional judgment. Just as Excel became an indispensable tool for accountants, AI and other emerging technologies will become valuable allies. Rather than viewing AI as a threat, accountants should see it as an opportunity to enhance their capabilities and deliver even greater value to businesses.With demand for accountants and financial professionals at an all-time high, particularly to address complex challenges facing businesses, communities, and the planet, organisations like CPA Australia are committed to preparing the profession for the future. CPA Australia is actively creating new pathways for success by offering ongoing development opportunities to help individuals enhance their knowledge and career prospects.To equip accountants with the skills needed in a rapidly changing environment, CPA Australia is evolving its CPA Program. This initiative pools expertise from industry leaders and professional bodies to develop resources that address the intersection of technical and financial literacy. For example, CPA Australia has partnered with the Australian Computer Society (ACS) to create learning opportunities that bridge the gap between IT and accounting. Additionally, collaborations with global EdTech leader Keypath Education and the Australian Financial Review have resulted in online short courses designed to help finance professionals master high-demand skills, such as data analysis and AI. These courses focus on practical, real-world applications, enabling busy professionals to stay competitive in a fast-paced marketplace. By embracing these opportunities, accountants can position themselves as indispensable strategic advisors, capable of navigating the complexities of modern business with confidence and expertise.The Future is BrightIn uncertain economic conditions, accountants are transitioning from traditional operational roles to become vital strategic advisors. They assist organisations in maintaining agility, resilience, and financial stability, providing clarity during critical decision-making moments when stakes are the highest.By integrating financial expertise with technological advancements and fostering cross-functional collaboration, accountants enable businesses to navigate economic uncertainties with greater confidence. For example, they can utilise data analytics to identify cost-saving opportunities or assess financial performance against industry benchmarks, allowing organisations to make informed decisions that align with their strategic objectives.While today's complex economic environment presents significant challenges, it is the strategic financial management provided by accountants that can guide organisations toward stability and success. During economic downturns, for instance, accountants can help businesses implement effective budgeting strategies and identify areas for cost reduction, ensuring financial health.As the demand for talent in the accounting profession continues to grow, the status of accountants is on an upward trajectory. Businesses increasingly recognise the value of strategic financial insights, positioning accountants as essential contributors to organisational strategy and decision-making. This evolution not only enhances the profession's reputation but also underscores the critical role accountants play in today's dynamic business landscape.Author may be reached at eboard@icai.in
Ep. 220 — Shaping the Future – Building CA Leaders of Tomorrow
CA Journal
· September 2026
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Shaping the Future – Building CA Leaders of TomorrowThe accounting profession is undergoing a seismic shift driven by technology, sustainability, and global integration. This article explores how Chartered Accountants should evolve from traditional roles to become visionary leaders, embracing digital tools like AI, blockchain, and data analytics. Ethical leadership, ESG integration, global readiness, and a strong sense of purpose are emerging as essential traits for future-ready professionals.The article underscores the need for continuous learning, emotional intelligence, and entrepreneurial thinking, while also highlighting ICAI's role in fostering leadership through education, global partnerships, and innovation platforms. From shaping sustainable businesses to advising in a borderless economy, modern CAs are expected to lead with integrity, adaptability, and strategic foresight.The Changing Landscape of the Accounting ProfessionIn the last decade, global disruptions from technological revolutions and climate crises to pandemics and geopolitical upheavals have transformed the business environment. These changes demand that accounting professionals move beyond traditional roles.CAs today are expected to:Leverage AI, blockchain, and Data Analytics to deliver insights.Champion ESG and Sustainability-driven reporting.Support global expansion and cross-border compliance.Uphold ethics while adapting to the speed of change.Leadership, therefore, is no longer a title or position. It is a mindset rooted in adaptability, integrity, and continuous learning.Future-Ready CA Leadershipi. Vision Beyond NumbersA future-ready CA is more than a financial expert. They are visionary leaders who can see the bigger picture—how financial decisions influence strategy, sustainability, and long-term impact. "Leadership is not just about managing the present; it is about imagining and shaping the future."CAs must cultivate foresight, anticipating changes in regulation, industry trends, and global shifts. Strategic thinking and scenario planning must be embedded in their leadership toolkit.ii. Digital Disruption - Beyond the Comfort ZoneThe current generation of accounting professionals needs to embrace technology to face the challenges in this era of digital disruption. The digital revolution is not a distant phenomenon; it is the ground on which the future of our profession stands. From AI-powered audits to predictive analytics in risk management, technology is becoming a key enabler of leadership."The digital revolution is not a distant phenomenon; it is the ground on which the future of our profession stands."Tomorrow's leaders must:Embrace lifelong digital learning.Integrate automation into workflows.Understand cybersecurity, data privacy, and tech ethics.Champion digital transformation in client organizations.Accounting leaders who remain tech-averse risk becoming obsolete. The profession's positioning and brand need to incorporate digital leadership and cognitive business.iii. Ethical Leadership and Trust BuildingIn a world plagued by mis-information and financial scandals, trust is a CA's most valuable currency. Leadership means standing tall for transparency, governance, and truth—even when it is not convenient. Professional scepticism, independence, and adherence to the highest standards of ethics must define the future leader. "A leader is best remembered not by their success, but by the integrity with which they achieved it."iv. Sustainability and Responsible FinanceThe future belongs to those who align purpose with performance. As the world moves toward net-zero and sustainable development, CAs must lead the integration of ESG (Environmental, Social, and Governance) principles in corporate decision-making.Roles for CA leaders include:Designing sustainability frameworks.Validating non-financial disclosures.Advising on green finance and responsible investing.CAs can be instrumental in driving India's and the world's green transition by embedding sustainability into the financial DNA of businesses.v. Global Mindset and Cross-Border ReadinessThe modern CA is not limited by geography. Whether servicing multinational clients, working with global regulatory frameworks, or managing remote teams, a global outlook is vital.Leadership of tomorrow must be:Culturally intelligent and globally mobile.Aware of international financial reporting and tax regimes.Collaborative in diverse and virtual environments.ICAI's growing global presence, through overseas chapters and MoU's must be leveraged to create globally competitive CA leaders. Today, the Indian CA qualification is well recognized in many countries, and we find that many young Indian CAs are able to take up attractive global careers and start work immediately. The Indian CAs are highly sought after around the world because of their skill sets and high quality of education.vi. Empowering People and Leading TeamsLeadership is not about individual brilliance; it's about enabling others to succeed. The future of the profession hinges on leaders who can:Mentor young professionals.Create inclusive and diverse workplaces.Foster a culture of continuous learning and well-being.Soft skills like empathy, communication, and team building are as essential as technical acumen.Developing Future Leaders – The Way Forwardi. Reviewing the CA Education and TrainingThe CA Curriculum must offer students an insight into digitisation trends, technological developments, and new business models and value chains, as well as new types of risk, transformation processes, etc., affecting accountancy activities. They must learn how to apply new business models (including models based on information technology, business procedures, analytics, risk, strategy, value chain analytics, processors, and product development). ICAI has already taken steps to align the CA curriculum with contemporary business needs.Future leaders will benefit from:Integrated learning modules on technology, ESG, and Ethics.Global internships and exchange programs.Leadership boot-camps and executive development.We must evolve from a qualification-based system to a capability-driven profession. CA education programs should equip students with a deep understanding of emerging technologies, digital transformation, evolving business models, and shifting value chains, along with new categories of risks and change processes impacting the accounting profession. Additionally, leadership skills must be integrated into their training from an early stage.ii. Developing new Leadership roles in the IndustryFirms, corporates, and public institutions should identify and nurture talent early. Leadership potential should be mapped, mentored, and measured. Creating structured growth paths—from article training to CXO-level roles—will retain talent and motivate excellence. Lifelong learning is critical to future-proofing the profession and future leaders should adopt modern learning habits in their professional life.iii. Role of ICAIICAI must continue its pivotal role in shaping leadership through:Global thought leadership forums.Executive Education initiatives.Industry-academia collaborations.Platforms for young CAs to innovate and express ideas.ICAI should aim to be not just a regulator, but a leadership catalyst.iv. Creating next generation CA leadersThe next generation CAs should be digitally native, socially conscious, and entrepreneurial in mindset. They should be eager to:Explore start-ups and fintechs.Solve societal problems through finance.Build careers that offer flexibility and meaning.As the profession races to build capacity and develop specialty practice areas, many professionals have started exploring new avenues in the field of Data Analytics, Robotic Process Automation, Artificial Intelligence, Blockchain and other emerging technologies. Our leadership development approach must be tailored to these aspirations providing autonomy, challenge, and impact. Let us not just train them to fit in; let us empower them to stand out.v. Developing Leadership Roles in CA FirmsThe next generation of CA leaders should help traditional accounting firms to re-invent and build the next generation of accounting firms and move forward. The new generation CA firms can offer services in new areas such as Forensic Accounting and Fraud Detection, Valuation, Insolvency and Bankruptcy, Cyber Risk Management, Mergers and Acquisitions, Investment Advisory, Start-up support services, and provide a host of Business Advisory Services to clients. The new generation CA firms should leverage emerging technologies and provide world-class services by building new delivery systems to clients across the globe.Global Challenges for CA LeadersManaging Change: The business environment has become increasingly complex and dynamic, and that's something that our profession has to adapt to in the way we serve our clients and our own operating models. This dynamism is driven by trends that include globalization, demographic shifts, technological advances, and regulatory change.Borderless World: Businesses are expanding beyond the boundaries of the nation. This makes accountants to deal with multiple accounting systems of different countries. Chartered Accountants must enhance their knowledge for seamless working in this environment.Credibility in Financial Reporting: Establishing trust in financial reporting has become increasingly difficult in both developed and developing nations, particularly in recent years due to corporate fraud, fluctuating capital markets, and growing public distrust in financial disclosures. As economies grow and integrate into the global marketplace and as businesses expand their operations and offerings internationally, the need for consistent and transparent financial reporting standards has become more critical than ever.Convergence to International Standards: The new challenge that has arrived is to ensure that audits of companies around the world are conducted using a common reporting language and that we work to achieve convergence to international standards. This will lead to increased transparency, greater accountability, and more understanding by the public worldwide.Promoting strong Corporate Governance: It is essential that all members of the profession, including those working in business and industry, uphold rigorous professional standards and actively foster robust corporate governance practices. This commitment must be reinforced by leadership and management that prioritize integrity, quality, and transparency in all aspects of their operations.Leadership Qualities in Today's Dynamic WorldAgility and Adaptability: Whether it's a regulatory shift, a global pandemic, or a client crisis, modern CAs must respond quickly and effectively. Agility is about learning fast, unlearning obsolete practices, and embracing continuous change with confidence.Strategic Foresight: Leadership today demands a forward-looking mindset. CAs are expected to guide clients and companies not only on what the numbers say, but what they mean for future growth, sustainability, and risk.Emotional Intelligence (EQ): A high IQ gets you into the profession; a high EQ makes you a leader. Building trust, showing empathy, resolving conflicts, and inspiring teams are essential soft skills in today's collaborative workplace.Collaborative Mindset: The modern CA does not work in silos. Whether it's cross-functional corporate teams or global audit networks, leadership means bringing people together, breaking barriers, and enabling shared goals.Global Perspective: Today's clients and regulations are global. A CA leader must be fluent in international accounting standards, cross-border taxation, and ESG reporting. Cultural intelligence and global outlook are no longer optional; they are essential.Purpose-Driven Leadership: CAs are custodians of trust. The new generation is increasingly driven by purpose, championing ethical finance, social impact, and sustainability. Strong leaders align business goals with broader societal good.Lifelong Learning Orientation: Standards evolve. Technologies change. Regulations get rewritten. What doesn't change is the need for constant upskilling. Today's leaders are not just experts—they're also curious learners.Resilience and Well-being: Modern leadership includes the strength to bounce back from setbacks and to create environments where mental health and work-life balance are respected. Resilient leaders model calmness, clarity, and care.Entrepreneurial Spirit: Whether in practice or industry, today's CA must think like an entrepreneur—solution-focused, innovative, and growth-oriented. From startups to strategic consulting, CAs are increasingly carving their own leadership paths.ConclusionThe modern CA is no longer just a number-cruncher. They are trusted advisors, change agents, and forward-thinking leaders. As we prepare for a future defined by technology, globalization, and social responsibility, these leadership qualities will determine not just professional success, but also the profession's continued relevance in a changing world. Shaping the future and building leaders of tomorrow is not an abstract ideal—it is a pressing professional responsibility. Every CA, whether in practice or industry, academia or administration, has a role to play. As India aspires to become a $10 trillion economy by 2032 and a global thought leader, the accounting profession must be its backbone, not just in compliance, but in vision, values, and leadership. Let us not only prepare for the future—let us lead it.Author may be reached at eboard@icai.in
Ep. 221 — Re-Imagining Finance: Building a Future-Ready Function
CA Journal
· September 2026
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Re-Imagining Finance: Building a Future-Ready Function"Transformation is not just about tools - it's about people. To future-proof our function, we are rewiring capabilities by investing in technology, talent, and a culture of experimentation."By CA. Ritesh Tiwari, Member of the Institute and CFO and Executive Director Finance and IT, Hindustan Unilever LimitedWe operate in uncertain times characterized by constant change. In today's volatile environment or the "new normal", finance must go beyond traditional stewardship to evolve and also become a co-architect of value creation. At Hindustan Unilever Limited (HUL), we are reimagining finance as a steward first, with the ability to wear the hat of a value creator—a co-pilot to the business, a strategic enabler that shapes the organization of tomorrow. As we build a future-ready function, it is cognizant to note that the job of finance at its core remains unchanged, however there are shifts which can be made within the same role using technology as an enabler to create value. Through this article, the shifts that the finance team at HUL have made and the capabilities we have built will be brought alive.The Imperative for ChangeToday, we are witnessing a disruptive consumer and channel landscape that demands a finance function that is proactive, predictive and participative. Maintaining a competitive edge thus requires making a shift from retrospective analysis to forward-looking strategies, and from transactional approaches to transformational ones, leveraging the power of technology, people, data and analytics. This shift, however, is not just about deploying new technologies, it is also about the ability to bring together financial and human capital, co-crafting organizational strategy, and re-wiring a culture to stay relevant and resilient.Future-Ready FinanceThere are four pillars to a successful transformation:Identifying the opportunity and deploying the right technology.Embedding innovation in legacy processes and established ways of working.Addressing organizational-wide change management.Encouraging upskilling and cross-functional learnings.Our transformation journey at HUL is guided by a clear and compelling vision—to build a finance organisation that is not just future fit, but also future ready in its capabilities. There are two ways to approach this transformation i.e., from left to right or right to left. Left to right is when you pick up technology and decide to implement it in the business. Usually that doesn't go so well. It's always good to start from right to left i.e., begin with the problem we are trying to solve and then work backwards. Starting right to left has a far higher chance of being accepted and implemented. It also has the right impact in the right place.Keeping this approach in mind, finance transformation at HUL is structured under three pillars:Partner to Drive Performance: Finance at the heart of business growth.Rewire Capabilities: Finance at the heart of driving net productivity, deploying the right technology and encouraging upskilling.World-Class Stewardship: Finance at the heart of holding accountability.1. Partner to Drive Performance: Finance at the Heart of Business GrowthTo put things into context for HUL—it is a complex business of Rs. 60,000 Cr.+ revenue operating across 50+ brands in 15 diverse FMCG categories, producing over 80 billion units in 27 own factories and 50 collaborative manufacturing sites and reaching over 9 million retail outlets, through our network of over 3,500 distributors across more than 2,000 towns and channel partners. Managing performance effectively and bringing insightful conversations to the table is not fruitful without harnessing technology, data and analytics capabilities, and a finance team that truly understands the business.At HUL, performance is care—we care deeply about our people and about the business. Finance is deeply integrated into the business—co-creating strategy, influencing decisions, undertaking dynamic resource allocation to drive growth and bringing out insightful data analytics to have the often uncomfortable but right conversations. Our finance business partners gain a holistic experience working in stewardship roles as well as working hand-in-hand with brand, customer, and supply chain teams to unlock the financial growth model and drive value creation. Demonstrating the mindset of "what needs to be true", finance is always at the table, often with insightful discussions and a lasting impact.At our disposal are powerful tools like Chanakya, our proprietary advanced data lake and analytics engine to democratize both financial and non-financial information, and Performance Cockpit—a business-first intuitive dashboard that provides a single source of truth across the organization. These tools leverage technology and aid in catalyzing the right conversations.2. Rewire Capabilities: Finance at the Heart of Driving Net Productivity, Deploying the Right Technology and Encouraging UpskillingFinance generally relies on systems and processes that are often rule-based, manual, and repetitive. To build a future-ready function, we have invested in upskilling, deployed technology to unlock trapped time, and embedded a culture of experimentation within the function, with a singular, underpinning thought: experiment and fail fast, or scale up fast.The Unilever Accounting, Controls and Risk Olympiad is a flagship initiative designed to provide focused learning over 5 months. The competition is structured to test and enhance participants' knowledge in accounting, risk management, and internal controls through multiple rounds, culminating in a global finale at the Unilever headquarters in London. The India team's proactive engagement through expert-led classroom sessions, gamified quizzes and leadership-led case studies helped embed a culture of ownership and continuous learning. This cultural shift was instrumental in HUL Finance securing a hat-trick win at the Olympiad in 2024.Shifting gears to the deployment of technology, the implementation of machine-led (ML) forecasting has been a success story for HUL. A forecasting cycle is complex, stakeholder intensive, repetitive, and takes up a good amount of time and resources at HUL. ML forecasting entails automation of the process, running the entire process, and forecasting each line of the P&L every month of the year for 4 business units, 3000 SKU's sold across 16 geographical clusters through various sub-channels. What started as a technology application taking baby steps is now galloping forward at HUL through the deployment of the ML forecasting solution. Collaborating closely with a cross functional team, we experimented, failed, and reiterated multiple times until we succeeded. We utilized the released trapped time to generate actionable insights. This led to the elimination of a manual forecasting process in 4 out of 12 cycles in a year and achieved 95%+ accuracy with intelligent co-relation of 45+ internal and external variables.3. World-Class Stewardship: Finance at the Heart of Holding AccountabilityWhile we embrace innovation, our foundation remains strong in stewardship."Embedding accountability and complete ownership across the organization ensures that transformation is both bold and responsible. Controls are integral to what we do in finance."Controls Week 2024 was a PAN-India initiative by the HUL finance team to embed a culture of risk ownership and control consciousness across the organisation, extending beyond finance. The week featured immersive activations across factories, sales branches and depots in addition to our head office. Senior leadership across functions led focused visits that included interactive case study sessions to reinforce the importance of controls. The week also featured gamified quizzes, simplified control bytes on topics like inventory and whistleblower policy, and candid share and learn sessions where recent control gaps were openly discussed to derive systemic solutions. Crowdsourcing ideas to enhance controls from teams across factories and branches allowed on-ground control problems and solutions to emerge. The whole week came together under the tag line "#UControl Unilever" reiterating the importance of an owner's mindset in controls.Reflections from the AuthorAs a proud Chartered Accountant, I have seen firsthand how the role of finance has evolved, from being a custodian of numbers to becoming a strategic architect of value. My professional journey of over 26 years has taught me that while tools and technologies evolve with speed, the core values of stewardship and "lifelong learning" remain timeless. The CA qualification gave me the analytical rigor and mindset of integrity to lead with confidence. The transformation we are driving at Hindustan Unilever Limited is rooted in these very principles.Looking AheadIn conclusion, finance at HUL is a catalyst for transformation. By embedding technology, upskilling talent, and reinforcing stewardship, we are reimagining finance as a forward-looking, value-creating partner to the business. Through collaboration, experimentation, and a strong culture of accountability, we are building a finance function that doesn't just respond to change but leads it.Our journey is far from over. As we look towards the future, our ambition is not just to be future-fit, but future-ready. I hope this article resonates with fellow CAs and aspirants alike, and inspires them to embrace transformation, lead with curiosity, and reimagine the "Finance of Tomorrow." We are excited to share our learnings, collaborate with peers, and collectively redefine the finance function of the future.Author may be reached at eboard@icai.in
Ep. 227 — Wellness at Work: Redefining Success with Balance and Purpose
CA Journal
· September 2026
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Wellness at Work: Redefining Success with Balance and PurposeIf you are a Chartered Accountant or one in the making, I congratulate you. Not for passing your exams, but for voluntarily enrolling in a profession that believes "balance" is what you do to a ledger and not your life.Let us begin, by making one thing perfectly clear: the pursuit of success as it's been defined thus far—i.e., glamorous LinkedIn job titles, sleep-deprived smugness, and inboxes that vibrate more than your mindfulness app—is a trap. A very elegant trap, to be sure, perfumed with "career growth" and lined with the plush velvet of "early promotions." But a trap, nonetheless.This year's theme, 'Vishwasniya', meaning trustworthy, may seem a curious companion to terms like rest, reflection, and inner peace. But what is trust if not the assurance that a professional will show up, competent, composed, and caffeinated, not merely in form, but in spirit? Integrity without wellness is like an audit without footnotes: dangerous, incomplete, and prone to late-night revision.The Big Lie About SuccessAs Janelle Bruland artfully points out in The Success Lie, success has been hijacked. We've turned it into a noisy, caffeinated monster—one that applauds working on weekends, glorifies burnout as a badge of honour, and considers a ten-minute lunch break as "me time." Bruland invites us to consider five modest truths instead: choice, intention, self-leadership, focus, and rest. Yes, rest. That scandalous, misunderstood state when you are not responding to a client WhatsApp with a 300-row Excel at 11:53 p.m.The truth is, the old metrics of success—i.e., money, motion, more—are increasingly being replaced by a desire for meaning, mastery, and mental health. As it turns out, we don't just want to survive our careers. We want to like ourselves at the end of them.Wabi-Sabi, or the Art of Beautiful ImperfectionNow, before you roll your eyes and mutter "Not another philosophy lesson," I ask you to bear with me as we travel to Japan; no visa required, just an open mind.There, whispered only in the stillest of tea gardens, is a concept called Wabi-Sabi. It has no direct translation, which immediately makes it more elegant than anything in your tax textbooks. Wabi is the quiet joy found in simplicity, like a cracked bowl, a slow breath, the absence of notifications. Sabi is the grace of aging, of time softening sharp edges. It is the beauty of a life that has been used, worn, imperfect, but deeply present.The Japanese, who have managed to maintain a bullet-train schedule while remaining aesthetically serene, seem to know that success isn't in adding more, but in subtracting what doesn't matter. Their approach is the antithesis of corporate life or practice as we know it, where the only things aged and worn are us, the professionals.As young professionals, you will be tempted to gloss over cracks in your spirit with shiny degrees, appraisals, and bonuses. But Wabi-Sabi asks: can you sit with your incompleteness, your questions, your mild existential dread, and find quiet pride in the fact that you are still here and still trying?Intelligent Careers Are Self-AuthoredIn An Intelligent Career, Michael B. Arthur and his co-authors offer a bold proposition: don't let your career happen to you. Instead, design it, like a bespoke suit. They describe three elegant forms of career capital:Knowing Why: Why do you do what you do? (And if the answer is "Because my father's cousin is a CA," please take a walk and return with something more... you.)Knowing How: What are your skills? Not just your technical prowess, but your ability to listen, adapt, and maybe even admit that you don't know everything yet.Knowing Whom: Your network. Not the 1,200 LinkedIn connections you ghost after placement season, but real relationships, like mentors, colleagues, and friends, who challenge and champion you.To live an intelligent career is to redefine success as autonomy, alignment, and agency. It's not about climbing the ladder; it's about ensuring the ladder is leaning against the right wall.Big Potential Isn't LonelyShawn Achor's Big Potential gently dismantles the myth of the solo success story. You know the type—the "self-made" prodigy who claims they worked harder than everyone else, when in reality, they simply forgot to thank the eight people who edited their resume, the twelve who recommended them, and the three who talked them off the ledge in audit season.Achor urges us to shift from small potential—the isolated pursuit of greatness—to big potential, which is rooted in lifting others as we rise. His SEEDS framework (Surround, Expand, Enhance, Defend, Sustain) is a masterclass in building a career that is not only productive, but joyous."To live an intelligent career is to redefine success as autonomy, alignment, and agency. It's not about climbing the ladder. It's about ensuring the ladder is leaning against the right wall."Defend Your Energy Like It's a Balance SheetChapter 6 of Big Potential is especially relevant in your early years, when you are prone to saying yes to everything, from extra work to existential dread. Achor advises building a firewall against negativity: toxic colleagues, unproductive cynicism, and WhatsApp groups that only post "pls share excel" every two hours.Set boundaries. Not the harsh, rude kind, but the gentle, resolute kind. Say yes to ambition, but no to annihilation. Protect your energy the way a good auditor protects a balance sheet—with vigilance, scepticism, and ideally, snacks.The Urban Monk Knows BetterPedram Shojai, former monk and current realist, gives us The Urban Monk, a toolkit for navigating modern chaos with ancient grace. He recommends practices like qigong, breathwork, nature walks, and conscious eating—all of which sound suspiciously impractical until you remember the last time you inhaled your lunch while fixing a TDS return and called it "multitasking."You don't need a monastery to find stillness. You need ten minutes. A breath. A non-negotiable moment in your calendar titled "Me." Because if you can schedule recurring vendor invoices, you can schedule serenity.Draw Your Life, LiterallyTony Buzan, father of mind maps, suggests that the best way to take control of your life is to... draw it. With colours and curved branches. Mind Maps at Work isn't just for brainstorming mergers; it's for visualising your goals, dreams, deadlines, and dinner plans.His logic is simple: the brain loves patterns, images, and beauty. So why force it to work in dull black-and-white spreadsheets alone? I know, that hurt. But even we, as Chartered Accountants, deserve a splash of red that isn't a loss. Map your career not just with logic, but with imagination. Let your goals include becoming a partner and having time for pottery.Final Debits and CreditsTo redefine success is not to deny ambition, but to declare sovereignty over it.Our profession rests on Vishwasniya—being trustworthy. But trust begins at home, with yourself. Can you trust yourself to rest, to reflect, to refuse the seductive lie of overachievement? Can you hold integrity not just for your balance sheets, but for your body, your boundaries, your being?Let your success be expansive, not exhausting. Let your wellness be a daily choice, not an annual resolution. Let your life, dear fellow Chartered Accountants, be beautifully accounted for—not just in numbers, but in meaning.And finally, should you falter, pause. Take a breath. And remember the wisdom of Wabi-Sabi:You are allowed to be incomplete.You are permitted to be imperfect.And still, you are, magnificently, enough.Author may be reached at eboard@icai.in
Ep. 228 — Al, Blockchain & Beyond: The Digital Future of the Accountancy Profession
CA Journal
· September 2026
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Al, Blockchain & Beyond: The Digital Future of the Accountancy ProfessionJuly 1st, for every Chartered Accountant, it's more than a date on the calendar it's a reminder of purpose, a moment to reflect, a reaffirmation of the values we stand for. And most importantly, it's a day to look ahead, ask ourselves tough questions, embrace the winds of change with clarity and confidence, and renew our commitment to the values that anchor our profession: integrity, trust, innovation, and service to the nation.This year, as we mark the 77th Chartered Accountants Day, the theme "Vishwasniya" (Trustworthy) could not be timelier. Because in a world where change is the only constant and where technology is reshaping everything, from how we live to how we lead, trust remains our only anchor. And as professionals, it is that trust we are called to safeguard, every single day.We've come a long way. But the journey ahead? That's even more exciting.The Profession is Evolving And So Are WeThere was a time when being a Chartered Accountant meant ledgers, balance sheets, and long paper trails. Today, that image has evolved. Our profession is increasingly seen as technology-integrated, insight-driven, and strategically aligned. We're now tech-savvy advisors, data interpreters, risk managers, and more. Technology has become part of our daily vocabulary not a threat, but a tool. From AI-driven audits to blockchain-based reconciliations, our profession has embraced transformation. But this transformation hasn't happened overnight.Over the past few years, the profession has witnessed:The integration of AI-based audit tools for real-time transaction monitoringUse of blockchain in ensuring immutability and transparency in financial recordsShift from periodic reporting to predictive and real-time analyticsDigital workflows replacing manual documentation in compliance and tax filingsThis is no longer the future, this is present. Today, these are part of boardroom conversations, audit strategies, client briefs, and increasingly, our day-to-day work. But amidst this, one thing is clear: Technology is no longer an optional upgrade. It is the new baseline. And that's a powerful shift.Artificial Intelligence: The Colleague that Never SleepsLet's begin with AI, perhaps the most talked-about (and misunderstood) development of our time.When people talk about Artificial Intelligence, there's often a sense of unease. "Will AI take our jobs?" "Will machines replace professionals?" Let's set the record straight.AI isn't here to replace Chartered Accountants. It's here to work with us, not instead of us.In practice, AI is doing more than automating tasks. It's analyzing trends, spotting anomalies, flagging risks and even drafting reports in some cases. And it's doing it all at lightning speed.But here's the catch: AI still needs human intelligence; it can't replace professional skepticism. It can't understand the nuances of a client's situation or offer empathy during a crisis. That's our domain. AI needs us more than we need AI to ask the right questions, validate the outcomes, interpret the context, and bring ethical judgment to the table. An AI system may predict that a transaction looks suspicious. But only a seasoned professional can explain why it matters, what the implications are, and how to respond."AI still needs human intelligence; it can't replace professional skepticism. It can't understand the nuances of a client's situation or offer empathy during a crisis."So, the role of the Chartered Accountant is not being diminished, it's being redefined. We are no longer just working harder, we're working smarter, with AI as a trusted co-pilot.And most importantly, what's heartening is how seamlessly Indian Chartered Accountants have embraced this shift. Many firms, from global networks to mid-sized practices, have integrated AI tools into their audits, risk assessments, and due diligence processes.Blockchain: Trust, Built into CodeIf AI is the brain, then blockchain is the backbone of this new era.In our profession, trust is everything. And blockchain, with its decentralized, tamper-proof architecture, offers a way to record and verify transactions with unprecedented transparency. For us, blockchain is more than a buzzword it's a breakthrough. Think about it: a system where every transaction is timestamped, verified, and locked in an immutable ledger. No backdating. No tampering. No ambiguity.Imagine audit trails that create themselves. Contracts that enforce themselves. Records that update in real time across multiple parties. A world where inventory is automatically updated on a blockchain as goods move, and financial ledgers sync across borders in real time, all without human intervention. That's not science fiction. That's the new normal. That's the power of decentralization and it's already transforming areas like supply chain, tax compliance, cross-border trade and even real estate, where tokenisation is enabling fractional ownership and seamless digital transactions.In fact, many of us are already seeing this change on the ground, whether it's advising a client on crypto regulations, or helping implement blockchain-based ERPs.As CAs, we're not just keeping up; we're leading these conversations.Beyond the Technology: The Human Core of the ProfessionNow, let's talk about something that often gets overlooked in all the tech talk - people.Yes, we're surrounded by AI, machine learning, robotics, and data analytics. But at the heart of our profession lies something no algorithm can replicate: Judgment. Ethics. Integrity.In fact, as technology becomes more pervasive, our ethical compass becomes even more critical. Clients don't just come to us for balance sheets or tax filings. They come for advice they can trust. For clarity in ambiguity. For someone to tell them what the numbers really mean and what they should do next.This human connection, this ability to guide is irreplaceable. It's what will always keep our profession relevant and respected, no matter how advanced the technology becomes.Because real trust is one kind that sustains relationships and reputations comes from human judgment, not machine precision.Reimagining the CA Skillset: From Compliance to Strategic ThinkingThis digital shift isn't just changing how we work; it's changing who we are as professionals. The CA of yesterday was a compliance expert. The CA of today? A technologically-aware, globally conscious business strategist.The theoretical and practical curriculum of Chartered Accountants, both academically at the Institute level and through training within firms, is undergoing a quiet revolution. ICAI has made commendable strides in integrating technology into education and continuing professional development.And firms are catching on. The most forward-thinking ones are no longer just hiring based on accounting acumen - they're looking for data fluency, tech curiosity, and problem-solving mindsets. Our students and young members are stepping up, too by learning Python, exploring AI ethics, and doing internships in startups and fintechs. The excitement is appreciable. The momentum is real.Tomorrow's CA may be an auditor in the morning, a data analyst in the afternoon, and a sustainability advisor by evening. Are we ready? The answer lies in how open we are to unlearning and relearning.The Broader Role: Nation Builders in a Digital IndiaBeyond balance sheets and compliance checklists, CAs are now part of bigger conversations like policy, nation-building, and global governance.Chartered Accountants have always been partners in the country's economic journey. From advising governments on tax policies and digital frameworks to contributing to the success of landmark reforms like GST, our footprint is growing.Today, our members are:Shaping financial inclusion strategiesSupporting MSME digitizationDriving ESG and sustainability reportingEnabling digital public infrastructure like e-invoicing and e-assessmentAdvising startups on valuation, regulatory compliance, and global expansion.Supporting governments in designing public finance systems, evaluating fiscal policies, and auditing large-scale development projects.In fact, the ICAI's global footprint, the expanding overseas chapters, and international collaborations are testament to the profession's growing influence in global governance frameworks.We're not on the sidelines. We're in the room where it happens, helping chart India's digital and economic journey. We are not just adapting to India's digital growth; we are enabling it.Startups, MSMEs & Youth: The Future Is Already HereOne of the most beautiful aspects of technology is its potential to level the playing field, as well as one of the most encouraging trends today is how technology is no longer the privilege of big companies. Startups, freelancers, and small traders all are accessing cloud platforms, digital ledgers, and automated filing systems. And they're looking for financial advisors who understand this world.And that's where we, as Chartered Accountants, can truly make a difference.Whether it's helping a small business move to digital invoicing, guiding a fintech founder through international tax rules, mentoring first-generation entrepreneurs on financial hygiene, or explaining how a smart contract works, we are bridging the digital divide and we are the professionals who will thrive.Technology should not just be about automation and scale; it should be about access and empowerment. We must ensure that our profession is accessible and aspirational for the youth, and equally, that we empower MSMEs with tools and guidance to stay competitive in the digital economy. Because technology, when democratized, doesn't just disrupt - it empowers.The Human AdvantageLet's remind ourselves that the most powerful tool we have isn't AI or blockchain.It's trust.The ability to look a client in the eye and say, "I've got you." The courage to speak the truth, even when it's hard. The wisdom to know when to follow the data, and when to challenge it. This is our human advantage, and no technology can replace it.In a noisy world, our voice of reason, our quiet integrity, and our relentless pursuit of fairness are what make us indispensable.It has never been a question of man vs. machine. It's a man with a machine. Because no algorithm can understand the nuances of client relationships, the empathy required in insolvency advisory, or the strategic thinking behind a business turnaround. These are deeply human attributes. In a world of infinite data, it is wisdom that will differentiate.As Chartered Accountants, our future lies in being:Technologically fluentStrategically mindedEthically strongSocially responsibleGlobally awareAdaptable, curious, and constantly learningMost importantly, the future CA is someone who brings trust to technology, making sense of complexity, bringing clarity to data, and ensuring that integrity is never compromised in pursuit of efficiency.Conclusion: Building a Digital India, Anchored in TrustAs we celebrate this 77th CA Day under the banner of "Vishwasniya", let us embrace the reality that technology will keep changing, but our core principles must remain steadfast.Let us remember that our journey is not just about adapting to digital tools, but leading a digital transformation with integrity. Let us reaffirm our role as nation builders, global ambassadors, and ethical innovators.The path to Viksit Bharat @ 2047 runs through every ledger we audit, every entrepreneur we advise, and every ethical decision we make.And in this journey, AI, Blockchain & Beyond are not challenges to be feared but opportunities to be embraced. Because the future may involve AI audits, blockchain-based records, and virtual CFOs. But behind all of that, there will always be a human being, a Chartered Accountant, guiding, interpreting, advising, and upholding trust.Because ultimately, it's not technology that builds trust - people do.And as long as we keep that at the center, we will not only stay relevant; we will lead.Here's to being future-ready, purpose-driven, and proudly Vishwasniya today and always.Author may be reached at eboard@icai.in
Ep. 229 — Reimagining the Profession: Technology as a Catalyst for Purposeful Work
CA Journal
· September 2026
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Reimagining the Profession: Technology as a Catalyst for Purposeful WorkAs I take on the honour and responsibility of serving as President of the Institute of Chartered Accountants in England and Wales (ICAEW), I do so at a pivotal moment for our profession. We are living through an era defined by rapid technological advancement, particularly artificial intelligence (AI), that is not only changing how we work but also prompting us to rethink why we work and what purpose we serve.By Derek Blair, ICAEW PresidentThe central challenge before us is this: how do we reimagine the accountancy profession so that technology becomes not a threat but a catalyst for purposeful, ethical and globally connected work? The choices we make now will determine how well our profession is prepared for what lies ahead.Building Tomorrow's ProfessionThe theme for the year is 'Building Tomorrow's Profession', and I believe it rests on four interconnected pillars: technology, regulation, trust, and sustainability. Together, these provide a framework for how our profession must evolve in response to the digital age.Nowhere is this evolution more visible than in our engagement with emerging technologies. The accelerating integration of AI, automation, blockchain, and advanced analytics is not something happening to our profession - it is something we must shape and lead. This is also where international collaboration becomes indispensable.I am proud to build on the strong foundation laid by my predecessor, Malcolm Bacchus, who represented ICAEW at the 2025 World Forum of Accountants where he delivered a keynote address on integrating ESG metrics into financial statements. Malcolm also met with the President and Vice-President of the Institute of Chartered Accountants of India (ICAI) in London earlier this year to reaffirm our shared vision and commitment to innovation, trust, and capacity building. These conversations were more than symbolic as they paved the way for deeper collaboration which I am determined to continue during my presidency.From Efficiency to Purpose: What Technology UnlocksTechnology has long helped us drive efficiency by automating tasks, reducing manual errors, and speeding up compliance work. These remain important gains. But AI and data driven tools now offer something more profound: the opportunity to reorient our work around purpose.AI is already empowering us to analyse complex datasets, detect fraud in real time, forecast financial risks, and advise businesses with unprecedented insight. These capabilities can elevate our role from that of processor to navigator trusted professionals who help society make sense of complexity.Additionally, as we saw through ICAEW and ICAI's recent collaborations, when we share knowledge and align around common values, technology becomes a lever not just for efficiency but for good.Equipping Professionals for a New RealityAI will not replace Chartered Accountants. However, Chartered Accountants who embrace and understand AI will undoubtedly replace those who do not. In today's world of rising misinformation, it is human judgement, not technology, that ultimately builds trust. Our profession's greatest contribution lies in its ethical foundations: professional scepticism, integrity, transparency, and public service."AI will not replace Chartered Accountants. However, Chartered Accountants who embrace and understand AI will undoubtedly replace those who do not."If the profession is to thrive in the AI age we must transform how we learn. At ICAEW, we view digital competence as essential, not optional. The half-life of many technical skills is now just a few years. That means continuous professional development (CPD) must expand to cover digital literacy, AI governance, and cybersecurity.However, it's not just about tools. The skills that matter most in a world of machines are uniquely human: curiosity, adaptability, communication, and collaboration. These are the qualities that allow accountants to question automated results, explain risks, and act ethically even when systems fail.Partnerships, such as the one we share with ICAI, enable us to explore new cross-border training pathways, knowledge-sharing programmes, and thought leadership on professional education in a digital world. Our collaboration offers a model for how institutes can work together to future-proof learning systems while upholding national strengths. We are actively working with regulators and standard setters to develop clear, forward-looking AI assurance models. In partnership with ICAI, we are sharing insights from our respective markets and exploring how standards for ethical AI use and audit can be harmonised. Our goal is not to constrain innovation, but to enable it by offering businesses and the public the certainty they need to invest confidently in emerging technologies.Digital Assets and the Role of the ProfessionWhile much attention is rightly focused on AI, digital assets, from cryptocurrencies to tokenised finance, are also reshaping our financial systems. The volatility, fraud, and regulatory gaps in this space point to an urgent need for trustworthy oversight. ICAEW believes that Chartered Accountants have a vital role to play in the accounting, taxation, and audit of digital assets, and we hope to ensure that professional standards evolve in line with how these assets function in the real economy.A Global Partnership for a Global ProfessionICAEW's relationship with ICAI is a key strategic partnership and a living example of how collaboration drives progress. The upcoming UK-India Free Trade Agreement will offer new commercial and professional opportunities. With this in mind, we are committed to working with ICAI to ensure that our members across both countries are equipped to lead in a dynamic and increasingly connected global economy.I look forward to deepening this relationship during my presidency, building on the excellent work led by Malcolm Bacchus and continuing our shared mission to develop a resilient, ethical and technology-empowered profession.A Profession With PurposeAt the heart of all this lies a simple truth: technology must serve people, not replace them. Our profession is not defined by software, algorithms, or automation, it is defined by purpose.Purpose means building trust in a time of change. It means advising businesses on growth and governance. It means preparing the next generation of accountants to be both technically fluent and ethically grounded. It means serving society, globally and locally.As Chartered Accountants, we have always stood for more than numbers. We stand for integrity, transparency, and public benefit. Technology, when used wisely, strengthens that foundation and broadens the impact we can have.To fully realise this opportunity, I believe there are a key actions we must take:Champion digital fluency - ensuring our members are equipped to lead in areas like AI, blockchain, and data governance.Deepen global partnerships - such as that we share with ICAI, global partnerships enable us to share knowledge and build capacity across borders.Shape smart regulation - working with governments and standard-setters to align innovation with accountability.Promote purpose-driven innovation - putting trust, ethics, and inclusion at the core of our transformation.ICAEW is committed to leading this work. Through thought leadership, education, and international collaboration, we will help build a profession that is future-ready, trusted, and impactful.The profession of tomorrow is ours to create. Let's ensure we build one that reflects our highest values and our global ambition.Author may be reached at eboard@icai.in
Ep. 230 — Engaging with Purpose: Building Trust Across the Value Chain
CA Journal
· September 2026
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Engaging with Purpose: Building Trust Across the Value ChainIndia stands at a defining moment in its development journey. With GDP growing at one of the fastest rates globally and a population embracing digitalization at an unprecedented scale, the country is undergoing an economic and digital renaissance. This momentum is central to realize the national vision of Viksit Bharat @2047, a fully developed, self-reliant India by its 100th year of independence. The Indian government, in partnership with private and institutional stakeholders, is working to build resilient economic foundations, modern infrastructure, and inclusive digital frameworks.However, this transformation also introduces a new level of complexity. Rapid globalization, accelerated digitization, compressed business lifecycles, and increasing cyber vulnerabilities are all redefining how businesses function. In this evolving environment, Chartered Accountants (CAs) are not only acting as custodians of financial integrity but also as enablers of governance, innovation, and strategic foresight.CAs in a Changing Business LandscapeIn the modern economic ecosystem, transparency, accountability, and regulatory compliance have become non-negotiable. Digital tools and data-driven models are transforming traditional business models. Companies are now expected to maintain resilient systems that ensure not only profitability but also compliance with regulatory mandates, ethical governance, and environmental requirements.Chartered Accountants are uniquely positioned to support this shift by:Ensuring accuracy and transparency in financial disclosuresIdentifying and managing financial and operational risksSupporting compliance with evolving statutory frameworks and governance normsEvaluating cybersecurity and data risk implications during financial auditsWith rising data breaches and increasing threats from cybercrimes, CAs must understand how digital vulnerabilities impact financial reporting. Their role is evolving from financial analysts to risk navigators, technology interpreters, and business strategists."With rising data breaches and increasing threats from cybercrimes, CAs must understand how digital vulnerabilities impact financial reporting."ICAI's Roadmap to Future-ReadinessThe Institute of Chartered Accountants of India (ICAI), functions under the Ministry of Corporate Affairs (MCA), is playing a pivotal role in enabling the CA profession to respond effectively to these new challenges. Through strategic reforms and capacity building, ICAI is preparing CAs to thrive in a digital, global, and competitive environment. Its approach is built broadly on the nine foundational pillars, addressing every stage of a CA's professional lifecycle—from entry to continuous learning.I. Inclusive and Rigorous Entry-Level SystemThe foundation of any profession lies in the strength of its entry process. ICAI's CA Foundation examination is designed to assess analytical skills, conceptual clarity, and ethical orientation. It attracts students from every part of India; urban metros, semi-urban areas, and rural belts ensuring that professional inclusivity matches the country's demographic diversity.This inclusiveness not only broadens the talent pool but also ensures that economic development is participative and representative of the entire nation.II. Modern and Globally Aligned CurriculumICAI revises its curriculum every three years to reflect emerging business realities and global practices. Its recent syllabus enhancements include contemporary and high-demand subjects such as:Artificial Intelligence (AI)Blockchain TechnologiesForensic AccountingData AnalyticsEnvironmental, Social, and Governance (ESG) ReportingInternational TaxationThese subjects are carefully integrated into the course structure, supported by dedicated literature and robust evaluation mechanisms. A question bank aligned with new topics ensures effective student assessment. Further, ICAI has institutionalized the triannual examination cycle, thereby increasing opportunities for aspiring professionals and aligning educational timelines with modern business needs.III. Digital Learning InfrastructureICAI has democratized learning by adopting a comprehensive digital strategy. Through the use of:Virtual classrooms and live webinarsRecorded sessions and e-learning modulesAI-driven personalized learning toolsStudents across remote regions now have access to high-quality education. The digital transformation in the CA education model has made learning continuous, flexible, and scalable. Additionally, to accommodate the increasing number of aspirants and the dynamic pace of the industry, ICAI has restructured exam frequency and delivery, further enhancing accessibility.IV. Alignment with Global Financial Reporting StandardsTo ensure that Indian Chartered Accountants can compete on a global stage, ICAI aligns Indian Accounting Standards (Ind AS) with International Financial Reporting Standards (IFRS). It actively:Participates in global accounting forumsIncorporates India-specific deviations where necessary to reflect local business environmentsUndertakes public consultations to ensure that Accounting Standards (AS) are responsive and adaptive to stakeholder needsThe process of standard formulation is very robust. It involves sectoral feedback, study groups, draft creation, public exposure, review of inputs, and final notifications. The draft Accounting Standard prepared by the study group is reviewed by the Accounting Standards Board, and thereafter the draft of the standard is exposed for public comments to receive inputs from stakeholders spread across the country. This continuous process keeps Indian standards updated with global best practices and relevant to the Indian economy.V. Lifelong Learning for Practicing MembersIn an environment of constant change, learning cannot end with qualifications. ICAI has implemented a strong Continuing Professional Education (CPE) ecosystem. It supports members through:Regular training programs, national webinars, and international workshops: This helps in the sharing of best practices adopted in India and globally, which will enhance the state of preparedness of members.Technical publications, guidance notes, and implementation guides: The Accounting Standard and Auditing Standards are always described in a very crisp manner and for the understanding and implementation of those standards. Further, hand-holding is done to ensure proper application of the standard by drafting guidance notes, implementation guides, research reports, and other technical publications.Specialized certificate courses in critical areas such as:International TaxationForensic AccountingESG ReportingCybersecurity and Digital Assurance, including AI.These certificate programs are increasingly becoming a prerequisite for audit roles in Navratna, and Maharatna PSU enterprises, showcasing their credibility and practical relevance.Metric202020212022202320242025Growth/RemarksRegistered CA Members~3.2 lakhs~3.4 lakhs~3.6 lakhs~3.8 lakhs~3.9 lakhs~4.0 lakhs25% growth from 2020, reflecting increased trust in the profession.Active CA Students~8.0 lakhs~8.5 lakhs~9.0 lakhs~9.5 lakhs~10 lakhs~11 lakhsRising enrolment driven by inclusive and tech-enabled education.Certificate Courses by ICAI15+18+20+23+25+Expanded to include AI, Forensic Accounting, Cybersecurity, etc.-Peer Reviews Conducted (Cumulative)~25,000~27,500~30,000~32,500~35,000-Enhancing audit quality and accountability.UPI Transactions (in trillion)41.0483.42125.94182.84246.82300+Reflects India's rapid digital adoption; UPI handled 83% of digital payments in 2024.VI. Strengthening Quality and Audit AssuranceICAI is committed to maintaining the highest audit standards through comprehensive regulatory mechanisms:Peer Review Mechanism: Conducted every three years, this assessment enhances audit quality and credibility. Firms with certified peer reviews receive priority in audit assignments for large public undertakings.Audit Quality Maturity Model (AQMM): Introduced to ensure uniform quality controls and internal audit practices across firms.Unique Document Identification Number (UDIN): This innovative system combats impersonation and document falsification. It also allows stakeholders to verify the authenticity of reports and track the types of work carried out by CAs.These mechanisms collectively elevate audit trustworthiness and reinforce public confidence in the profession.VII. Ethics and Professional Disciplinary OversightProfessional ethics form the bedrock of the CA profession. ICAI enforces a robust disciplinary framework to uphold integrity and accountability:Independent and thorough investigations ensure that professionals are protected against frivolous complaints while genuine issues are addressed with due diligence.Transparent hearing processes guarantee fair treatment and just outcomes.Sanctions and penalties, including suspension, are imposed as necessary to deter unethical behavior.While the media often highlights rare lapses, the everyday diligence of thousands of CAs ensures systemic integrity and economic transparency.VIII. Legislative Contributions of CAs in Nation-BuildingOver the past two decades, India has witnessed several legislative/financial reforms that have significantly reshaped the corporate and taxation environment. These include:The Companies Act, 2013The Insolvency and Bankruptcy Code, 2016Goods and Services Tax (GST) LawProposed New Income Tax BillReforms in the Foreign Exchange Management Act and the Prevention of Money Laundering Act, 2002 (PMLA)CAs have played a silent yet significant role in shaping these legislations. By collecting practical insights, interpreting legal implications, and advising policymakers, they have ensured that these laws are grounded in real-world applicability. Their behind-the-scenes involvement in bridging regulatory vision with business realities has been instrumental in the effective rollout and fine-tuning of these reforms.The GST reform unified India's fragmented indirect tax system. Since its implementation in July 2017, GST collections have shown sustained growth, touching record highs:For instance, GST collections reached ₹2.10 lakh crore in April 2024, the highest ever since the law was introduced.CAs have contributed in this achievement by:Ensuring accurate filing and input tax credit reconciliation.Advising on compliance strategies, thereby reducing tax evasion.Supporting automation and audit readiness, which in turn boosts voluntary compliance.India's fiscal performance has also shown promising signs of discipline. According to data released by the Controller General of Accounts (CGA):The fiscal deficit for 2024-25 has been marginally improved to 4.77% of GDP, compared to the revised estimate of 4.84%.This indicates tighter expenditure control and better-than-expected revenue mobilization, partly aided by robust GST collections and efficient tax administration.IX. Chartered Accountants: Catalysts for Viksit Bharat @2047As India aspires to become a developed economy by 2047, Chartered Accountants are emerging as pivotal change agents. Their contributions are no longer limited to audit and compliance. They are:Strategic advisors shaping business growthChampions of transparency and governanceArchitects of regulatory interpretation and executionEducators and mentors in the era of knowledge-based economiesThrough its continuous efforts in training, standard-setting, and digital transformation, ICAI is equipping Indian Chartered Accountants to serve as trusted partners in India's economic evolution.ConclusionIn a fast-changing, tech-driven, and globally interconnected business environment, the role of the Chartered Accountant has transcended traditional boundaries. Today's CAs are ethical leaders, risk managers, digital thinkers, and policy influencers. They engage not only with numbers but with purpose, driving trust across every layer of the value chain.As India journeys towards Viksit Bharat, ICAI and its members are not just observers but active contributors in nation-building, quietly yet powerfully shaping the future of a new India.Fittingly, this year's theme of ICAI is "Vishwasniya" (Trustworthy)—reflecting the essential role ICAI and CAs play across the value chain. Whether it's guiding business decisions, ensuring compliance, or maintaining ethical standards, Chartered Accountants are pillars of trust in India's growth story.Resources:Registered CA Members & Active CA Students: Data compiled from ICAI annual reports and publications.Certificate Courses by ICAI: Information from ICAI's official announcements and course catalogs.Peer Reviews Conducted: Cumulative data from ICAI's peer review department.UPI Transactions: Data from the National Payments Corporation of India (NPCI) and Reserve Bank of India (RBI) publications.Author may be reached at eboard@icai.in
Ep. 231 — Fuelling India’s Start-UpStory: The Pivotal Role ofChartered Accountants inBusiness Acceleration
CA Journal
· September 2026
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Fuelling India's Start-Up Story: The Pivotal Role of Chartered Accountants in Business AccelerationIndia has earned recognition as the world's third-largest start-up ecosystem, harnessing its vast human capital to drive innovation, employment, and economic growth. Fueled by a youthful demographic, expanding digital infrastructure, and robust government initiatives, the start-up landscape continues to flourish.IntroductionStart-ups are the backbone of innovation and economic growth, particularly in emerging markets like India, which has emerged as a global hub for entrepreneurship. India's start-up ecosystem has undergone a seismic transformation over the past decade, positioning itself as one of the most dynamic entrepreneurial landscapes globally, with over 159,000 start-ups and more than 120 unicorns as of 2025, contributing significantly to economic growth, innovation, and job creation. India's start-up ecosystem, the third-largest globally, thrives on innovation, government support through initiatives like Start-up India, and robust venture capital inflows (about $10.9 billion in 2024).The Indian start-up ecosystem isn't merely a reflection of policy success but also India's demographic advantage. With a median age of under 30 and growing digital penetration, the Indian market offers a unique canvas for entrepreneurial experimentation."The Indian start-up ecosystem isn't merely a reflection of policy success but also India's demographic advantage. With a median age of under 30 and growing digital penetration, the Indian market offers a unique canvas for entrepreneurial experimentation."However, start-ups face various challenges such as cash flow management, regulatory complexities, and intense competition. For early-stage ventures, sound financial management is often the difference between success and failure. Chartered Accountants bring a blend of technical proficiency, regulatory knowledge, and strategic insight to start-ups, making them indispensable partners in business acceleration.Chartered Accountants' Contributions Span Several Critical AreasFinancial Strategy and Planning: CAs craft robust financial strategies aligned with a start-up's vision, developing budgets, forecasting revenues, and creating cash flow models to ensure liquidity and operational efficiency.Fundraising Readiness and Investor Relations: CAs prepare investor-ready financial statements, pitch decks, and valuation models, ensuring smooth equity negotiations and due diligence compliance.Regulatory Compliance and Taxation: Navigating complex regulations like GST, corporate tax laws, and sector-specific RBI guidelines to minimize legal and financial risks.Cost Optimization and Financial Efficiency: Implementing zero-based budgeting or activity-based costing to streamline expenses and extend financial runways.Audit and Risk Management: Establishing robust accounting systems, conducting statutory and internal audits, and mitigating risks such as fraud or non-compliance.Data-Driven Decision Making: Leveraging financial analytics, KPIs (CAC, LTV, burn rate), and dashboards to empower founders with strategic insights.Supporting Scalability and Global Expansion: Managing multi-currency transactions, cross-border taxation, international compliance, and due diligence during mergers and acquisitions.Achievements of Chartered Accountants in India's Start-Up EcosystemFinancial Turnaround: CAs at Razorpay streamlined financial operations, securing $750 million in funding pivotal to its unicorn status.IPO Success: CAs played a central role in preparing Swiggy for its 2024 IPO, ensuring compliance with SEBI regulations and robust investor communication.The Road Ahead for Start-Ups in IndiaAs India's start-up ecosystem evolves toward a $10 trillion economy by 2035, emerging trends like ESG reporting, blockchain accounting, and AI-driven analytics will redefine responsibilities.OpportunitiesEmerging Technologies: AI, blockchain, green energy, and health tech are attracting major investments.Government Support: Start-up India, FFS, and Seed Fund Schemes foster steady growth.Global Expansion: International scaling and revenue diversification.ESG and Sustainability: Strong investor prioritization of environmental, social, and governance factors.Digital Penetration: 900 million internet users empowering D2C, fintech, and edtech segments.ChallengesFunding Winter: Tightening capital availability shifting focus to profitability.Regulatory Complexity: Managing evolving GST, data privacy laws, and RBI fintech compliance.Talent Retention: Rising costs and operational risks from skilled talent competition.Global Competition: Pressure from international market players.Economic Uncertainty: Inflation, currency fluctuations, and geopolitical tensions.CAs as Start-Up FoundersCAs are increasingly stepping up as founders and co-founders, building ventures in fintech (neo-banks, wealth tech), specialized financial consulting (fractional CFOs), tech-enabled accounting solutions (SaaS, AI audit tools), ESG and sustainability reporting, and social impact/AgriTech initiatives.ConclusionChartered Accountants serve as the backbone of India's start-up success, driving financial discipline, enabling fundraising, and ensuring compliance in a competitive landscape. By embracing technology and continuous upskilling, CAs are primed to shape India's dynamic economic future.Author may be reached at eboard@icai.in
Ep. 232 — Cultivating Women Leaders: Pathways for Inclusive Growth and Development
CA Journal
· September 2026
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Cultivating Women Leaders: Pathways for Inclusive Growth and DevelopmentAfter years of ongoing effort, it's important that the conversation around cultivating female leadership remains as necessary as ever. While there has been meaningful progress, recent shifts in some regions have led to a scaling back of Diversity, Equity, and Inclusion (DEI) initiatives, which could potentially slow momentum. Fortunately, countries like Australia and New Zealand continue to uphold strong anti-discrimination laws, helping to safeguard these important advances.Chartered Accountants Australia and New Zealand (CA ANZ) have always welcomed members and employees from all genders, cultural backgrounds, abilities and ages—people who reflect the clients and communities they serve. Remaining committed to DEI isn't just the right thing to do, it's a critical driver of business success. Many studies have found that an inclusive and equitable workplace brings benefits ranging from enhanced productivity, innovation and problem solving to the ability to attract and retain top talent. I strongly believe that embracing DEI will help us to achieve the best for our members, our organisation and our profession and that, by supporting members' DEI initiatives, we can support them to build strong and sustainable businesses of their own.A Short History of OpportunityI think it's true that you can't be what you can't see, so we owe special thanks to the trailblazers who paved the way for the female leaders who are now inspiring younger women by showing them what they could achieve. However, women are still likely to encounter significant roadblocks along the way. These can range from deep-rooted gender bias and established double standards to managing competing demands. Leadership positions take up a great deal of time and energy. The role of CEO comes with 24/7 news cycles, the pros and cons of social media and often extraordinary political pressure. While women still bear the brunt of caring responsibilities, it's little wonder that family impact is often their top consideration when they're deciding whether to accept a position in the C-suite or on the board.Women can't tackle these challenges alone. We need to include male allies in the conversation, and we need them to work alongside us to break down the traditional gender-based stereotypes associated with caring for children, ageing parents or, for today's sandwich generation, both.We also need to embed gender equity into workplace culture. I believe that what gets measured matters, which is why large multinationals have KPIs and scorecards for metrics such as profitability, risk management and market share. Gender equity needs to be approached in the same way. Add a gender or diversity-based target into management scorecards and I guarantee they will pay attention and find solutions.A Practical Approach at CA ANZWhen I joined CA ANZ about five years ago, my priority was to collate and analyse all data relating to DEI. I knew that the demographic sands of the profession were shifting with more women than male members under the age of 35. When I requested a survey of our members, we found that more than 70% of respondents wanted us to support DEI initiatives in the form of learning, education, tools, resources and practical guides. This was particularly important for me as it supported my commitment and advocacy. It also gave me an opportunity to address some members who feel that my focus should remain solely on tax and audit advocacy, rather than on broader social themes like inclusivity.The second piece was doubling down on our education, tools and resources. We collected case studies from organisations of all types and sizes, gathering information we could share on how they were addressing challenges such as the gender pay gap, increasing the participation of women across the workforce and helping women to gain senior positions.Our board was already 50% female, and we increased female representation on our councils and committees by introducing a DEI lens into their charters. I introduced a gender pay gap KPI for myself and the leadership team, while also working hard to narrow the gender pay gap in our profession, which is higher than average in both Australia and New Zealand.This year, our annual member remuneration survey, which attracted more than 8,000 responses from our members, found that many men in our profession do not think there is a gender pay gap. Only 39% of men believe a gender pay gap exists, compared to 72% of women, and around 50% of all respondents confused pay equality with gender pay gap. Our Narrowing Your Gender Pay Gap Playbook explains how they can sit side by side as well as provides practical guidance, case studies and other resources to help put this right.Different Kinds of SupportAlong with KPIs and scorecards, I believe that organisations need to include so-called softer measures, such as women in leadership programs, mentorship and networking events. We know that many women are more likely to ask questions in an intimate setting than as part of a large group, so we developed a style of networking event that takes this into account. The first was in Canberra, where about 100 women had 10 minutes to talk in small groups with each of 10 very senior female members of the profession—a bit like speed dating! I participated myself and it was one of the most successful networking events I've ever been to.We also know that women aren't good at being heard in meetings as they often wait to be called on rather than raising their hand or speaking up. We're helping women be more confident and persuasive, and to call out any male who simply repeats what they have already said.When it comes to interviews and CVs, studies have shown that a woman who uses 'I' when speaking about her achievements will be marked down. However, she'll also be marked down as "not leadership material" if she attributes the achievements to her team. Sometimes, no matter what you choose, it feels like there's a downside either way. I advise the young women I mentor to be very clear about what they have personally achieved in their last role or position, to use metrics and data to support their claims and, at the same time, try to balance the use of "I" and "team". Sadly, this is just one of the covert gender-based judgements that can influence whether women are hired or promoted. We need to know about them and help stamp them out."I advise the young women I mentor to be very clear about what they have personally achieved in their last role or position, to use metrics and data to support their claims and, at the same time, try to balance the use of 'I' and 'team'."Strong presentation skills and the confidence to speak persuasively in public are major assets for young women aspiring to senior leadership positions. I also encourage them to obtain a postgraduate qualification. When I worked at Westpac as a senior executive, one of our internal studies showed that women with a postgraduate qualification were paid 16 to 20% more than those with just a bachelor's degree. I took my own advice and studied for a Master of Applied Finance when my children were small and I was working part time. Most importantly, I believe the most important skill a woman can acquire is expertise in generative AI (Gen AI)—knowledge of the tools, their risks, responsible use and the technology's potential.Gen AI - A Critical SkillMost of us are familiar with the idea that Gen AI can automate "grunt work" such as reconciling data and generating reports, giving accountants more time for strategic, analytical and advisory work. It can also help to bolster women's credibility by creating a way to contribute to strategic decision-making and break through some of the traditional barriers to leadership. However, a 2024 Oliver Wyman survey of 25,000 people found that, across every age group, women are falling behind men in their use of Gen AI in the workplace. I found it surprising that the gap is most pronounced in Gen Z. Worrying, too, as this could be setting us up for an even more pronounced gender imbalance in the future.At CA ANZ, we encourage all our members to become fluent in Gen AI. We offer a wide range of resources including free LinkedIn Learning, practical AI learning pathways and on-demand AI CPD. The Certificate in AI Fluency which was launched in April this year has proved incredibly popular. It comes with a digital badge to verify their credential.We need to ensure that future accountants are equipped to work in what will inevitably be a fast-evolving workplace. This means reaching back to the way accounting is taught. CA ANZ is talking to both the Australian and New Zealand governments about including accounting in the curriculum for high schools, with AI and technology incorporated into the topic. We're also working with the Accounting & Finance Association of Australia and New Zealand, whose members are academics teaching accounting degrees, about updating the curriculum at the tertiary level. Currently, the subject is still very debit and credit focused, having changed very little since the 1990s.Along with all the benefits, CA ANZ accepts that Gen AI introduces a number of ethical issues and risks in our profession such as data security, bias, accuracy and the potential for fraud. Our new AI Ethics and Advisory Committee promotes socially responsible and ethically sound processes.Attracting Young People into AccountingAustralia and New Zealand are facing a critical shortage of accountants. A recent CA ANZ survey found that, in Australia, vacancy fill rates for key accounting roles were below 67%.The first, and most straightforward, step is to re-establish accounting as one of the more affordable STEM degrees. In 2018, the Morrison government made a significant policy shift by altering the classification of certain university degrees under the STEM (Science, Technology, Engineering, and Mathematics) umbrella. Specifically, accounting and finance degrees were excluded from the STEM designation, making these degrees more expensive than those with the STEM classification, reducing the number of students now enrolling in accounting degrees. We are advocating strongly for change in this area.This still leaves the challenge of how we attract young talent to accounting in the first place. Perception is still a major barrier—i.e., the idea that accountants are merely number crunchers, stuck in front of their screens and spreadsheets with little opportunity for creative or strategic thinking. Our Make Epic Things Happen campaign and online hub spread the message that accounting can lead to exciting and impactful careers in areas such as sports, sustainability, entertainment and game development. Resources include career cards, brochures and a poster. We also recently produced The Accountants: A New Generation Making Epic Things Happen, a Gen Z friendly advertisement that appeared like a 'movie trailer,' ahead of every Deadpool movie shown in Australia and New Zealand.In partnership with an organisation called Year 13, an Australian digital platform focused on improving the school-to-work transition for young people, we also created Business Class. This program aims to inspire young people to explore careers in accounting by showcasing the real-world impact accountants can make across a diverse range of professions and roles. I am especially delighted that of the 10,000 or so young people who have completed the program so far, 50 per cent were female.Meanwhile, our new pathways to the CA Program have opened the door to more candidates from diverse backgrounds who may not have a traditional accounting degree. I believe this will bring benefits beyond a boost in numbers by introducing different experiences and new ways of thinking into the profession. In fact, I have a colleague at CA ANZ who commenced her career as a cellist with a degree in music, but then she went on to complete her CA program with one of the UK's four big accounting firms, thanks to a similar pathway they introduced a number of years ago. If it wasn't for the alternative pathway that enabled her to commence her CA studies, our organisation would not have benefited from her incredible contribution. Her experience definitely inspired us to do the same in Australia and New Zealand.Looking ForwardAs recently as the 1970s, women leaders were few and far between. We've come a long way in 50 years, but we still have a long way to go. According to recent data from the Workplace Gender Equality Agency, just 19.4% of CEOs in Australia are female.I've touched on how employers can drive the shift to greater equity with strategies such as cultivating an inclusive culture, developing family-friendly policies and introducing so-called hard measures such as KPIs and targets. Women can help themselves by developing their ability to speak out, committing to ongoing education and, crucially, becoming fluent in AI. Their male colleagues can become visible advocates and allies, speaking up for women, championing their ideas and staying in touch with what gender equity really means.I have every confidence that, by working together, CA ANZ and the accounting profession can cultivate a more innovative, productive, inclusive and fair leadership environment.Author may be reached at eboard@icai.in
Ep. 233 — Women and Youth: Catalysts for Change and Leadership
CA Journal
· September 2026
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Women and Youth: Catalysts for Change and Leadership"From silent corners to centre stage,From unheard whispers to leading waves,Women and youth are no longer waiting,They are writing the new world\'s page.\"By CA. Aanchal Kapoor, Member of the InstituteIn the tapestry of transformation and the evolving narrative of global development and social transformation, women and youth stand at the forefront as powerful agents of change. Across centuries, they have defied limitations, broken stereotypes, and redefined the contours of leadership. Today, more than ever, their role is not just significant—it is indispensable. Women and Youth: Catalysts for Change and Leadership\"From silent corners to centre stage,From unheard whispers to leading waves,Women and youth are no longer waiting,They are writing the new world\'s page.\"By CA. Aanchal Kapoor, Member of the InstituteIn the tapestry of transformation and the evolving narrative of global development and social transformation, women and youth stand at the forefront as powerful agents of change. Across centuries, they have defied limitations, broken stereotypes, and redefined the contours of leadership. Today, more than ever, their role is not just significant—it is indispensable. They are not just participants in change; they are the pulse of progress.Women: From Silent Contributors to Strategic LeadersHistorically marginalized, women have long played quiet yet critical roles in shaping families, communities, and cultures. But the tides have turned. Women now lead countries, chair boardrooms, run successful enterprises, and drive social movements. Their leadership brings with it a distinct blend of empathy, resilience, and inclusiveness—qualities that are essential in today\'s complex, polarized world.Youth: Energy, Innovation, and Unfiltered VisionYouth is the pulse of progress. Unburdened by legacy systems and often fearless in the face of challenge, young people bring fresh perspectives, bold ideas, and digital fluency. Whether it\'s climate activism, social entrepreneurship, or political participation, today\'s youth are not waiting for permission; rather they are creating an impact.In countries like India, with its youthful population and long-standing gender imbalances, these two groups are not just participating in progress—they are redefining the very meaning of leadership.The Demographic Dividend: Power in Numbers, Passion in PurposeIndia\'s strength lies not just in its economy or resources, but in its people. Over 65% of India\'s population is under the age of 35, and nearly 50% are women. This isn\'t just a statistic, it\'s a potential powerhouse. Where traditional structures often undervalued women and youth as passive recipients of change, today they are protagonists of progress.The Rise of Women Leaders: From Margin to MainstreamIndian women are breaking through glass ceilings and, more importantly, building ladders for others to climb. It is rightly said, \'Main sirf ek naari nahi, main naye daur ki misaal hoon\' (I am not just a woman; I am a symbol of a new era).Trailblazers in the Professional ArenaDr. Tessy Thomas: Known as the \"Missile Woman of India,\" she shattered stereotypes by becoming the first woman to lead an Indian missile project (Agni-IV).Nirmala Sitharaman: India\'s Finance Minister, holding one of the most powerful offices in the country, reflecting the critical role of women in national policy-making.Falguni Nayar: Founder of Nykaa, who proved age or gender is no barrier by building one of India\'s most successful beauty e-commerce companies as a banker-turned-entrepreneur at 50.CA. Naina Lal Kidwai: The first Indian woman to graduate from Harvard Business School, former CEO and Country Head of HSBC India, and former President of FICCI.The Role of Education: The True Equalizer\'Padh likh kar ladkiyan sirf degree nahi, nayi soch bhi haasil karti hain.\' Education is not just a tool for empowerment—it\'s a launchpad for leadership. Over 48% of undergraduate enrollments in India today are women. Initiatives like Beti Bachao, Beti Padhao, and Kanya Shiksha Pravesh Utsav have helped boost female literacy and enrollment. In the profession, every third Chartered Accountant is a woman, and over 40% of CA students are female.Youth: Not just the Future, But the Fierce PresentIndia\'s youth are founding startups, leading digital revolutions, and organizing social movements:Kavya Kopparapu: A young Indian-origin inventor who built an AI tool to diagnose diabetic retinopathy.Disha Ravi: Environmental activist who co-founded Fridays for Future India.Young Parliamentarians: Leaders like Tejasvi Surya and Chandrani Murmu (India\'s youngest female MP) changing how governance connects with youth.Challenges: The Walls yet to FallDespite progress, women and youth leaders continue to face structural exclusion, economic hurdles (women earn 19% less than men; only 15% of CEOs are women), cultural resistance, and the digital divide.The Way Forward: Women and Youth as Catalysts for a Transformative FutureThe future demands empathetic, inclusive, and innovative leadership. To harness the full force of women and youth, we must invest in education, ensure representation, foster safe spaces, and dismantle structural barriers. Institutions and corporations must go beyond checklists to build inclusive pipelines.\"It is no longer enough to say women and youth are the future. They are the present and the most powerful catalysts for lasting change.\"Author may be reached at aanchalkapoor_ca@yahoo.com and eboard@icai.in
Ep. 234 — Building Trust, Ensuring Transparency: The Essence of Accounting Standards
CA Journal
· September 2026
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Building Trust, Ensuring Transparency: The Essence of Accounting StandardsAccounting and reporting of the results of economic activity, from the early days when it was primarily limited to reporting toll/tax collections by reading out the data/information, has evolved into the current-day reporting of business performance. It continues to be one of the key contributors to economic decision-making.The needs and expectations of stakeholders for effective and efficient communication of financial information have evolved over time, influenced by the development of economies, expanding geographies, and complex business and financial activities driven by innovation and cutting-edge technologies. This has transformed simple reporting standards into detailed accounting standards which impart credibility, achieve uniformity, and openly and honestly communicate financial results.A pivotal role is played by the accounting standard-setting process, ensuring that transparent, accurate, consistent, and comparable financial reporting is achieved. The conceptual framework establishes the foundation and fundamental concepts guiding standard setters in formulating accounting standards, creating a trusted accounting language that strengthens accountability and reduces the information gap between capital providers and recipients.The Accounting Standards: Building Trust and Enhancing TransparencyAccounting standards encompass rules and guidelines for recording, measuring, presenting, and disclosing financial transactions. Standardisation leads to uniformity and comparability. For example:Inventories (Ind AS 2): Costs are determined in a standard manner using specified cost formulae based on inventory nature, with disclosures regarding realisable values and write-downs.Intangible Assets (Ind AS 38): Prescribes identification conditions, control requirements, future economic benefits, reliable measurability, initial and subsequent measurement, and detailed disclosures.Business Combinations (Ind AS 103): Requires acquired assets and liabilities to be valued at acquisition-date fair values, with differences recognized as goodwill or capital reserve, backed by extensive disclosures.Disclosures - Mandated Plus?Prescribed disclosures are minimum mandatory requirements, but preparers are not debarred from providing additional comprehensive disclosures if necessary for a better understanding, provided they do not create clutter. Detailed disclosures build investor confidence, which is vital in a highly complex and interconnected global trade and investment environment. This evolution has shifted measurement bases from historical cost to fair value to reflect current economic conditions.Keeping Up with ChangeStandard-setting requires ongoing review to address economic realities, business environments, technological usage, and cost-benefit considerations. Historical events such as the 2008 US sub-prime crisis and the collapse of Lehman Brothers sparked debates regarding mark-to-market accounting. Subsequent SEC studies recommended maintaining fair value and mark-to-market accounting while enhancing application guidance, impairment accounting, and investment evaluations.In India, ICAI has actively established guidance and converged with International Financial Reporting Standards (IFRS) by adopting fair value as a guiding principle in Ind AS. Ind AS 113 provides a single framework for measuring fair value and specifying disclosure requirements. ICAI also conducts quality reviews, issues technical guidance, and operates continuing education programs.The EssenceHowsoever effective accounting standards are, they cannot unilaterally prevent fraud if form is followed over substance, as seen globally in cases like Enron and Lehman Brothers. Human nature and greed make continuous enhancement of standards and practical application guidance crucial."Faithful application of accounting standards, truthfully presenting the state of financial health of the entity and providing high-quality and reliable disclosures that facilitate users to assess risks associated with capital commitment, be it financial, human, societal, or other, have been rewarded by capital providers. And that is the essence of Accounting Standards: building trust and enhancing transparency!"Footnotes:1. Ind AS 2 (revised 2016)2. Ind AS 383. Ind AS 1034. Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting5. Ind AS 113Author may be reached at eboard@icai.in
Ep. 235 — Tech-Jus: Enhancing Access to Justice through Online Dispute Resolution
CA Journal
· September 2026
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Tech-Jus: Enhancing Access to Justice through Online Dispute ResolutionThe Indian judicial system is currently grappling with an extensive backlog of cases, which hinders the right of access to justice and significantly impacts economic growth and the ease of conducting business. As per the data available on the National Judicial Data Grid as on 20th May 2025, more than one crore civil cases are pending across the country. The Government of India enacted a central legislation, namely the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, to catapult the holistic growth of micro, small, and medium units and provide them with a competitive advantage. The MSMED Act provided a special framework for the resolution of delayed payment disputes faced by micro and small enterprises (MSEs) through alternative dispute resolution, including mandatory conciliation and statutory arbitration. It is pertinent to state that the legislature envisioned the adoption of the alternative dispute resolution methods through mandatory pre-arb conciliation and statutory arbitration in 2006, when such methods were not widely common or adopted.Alternative Dispute Resolution (ADR) methods offer several advantages over traditional dispute resolution, including cost-effectiveness, efficiency, flexibility, and greater control over outcomes. ADR methods are more efficient and less adversarial, allowing the parties involved to resolve disputes more expeditiously and privately, resulting in better preservation of business relationships.The MSMED Act introduced special provisions to address the power asymmetry between small businesses and large corporations. The special provisions include safeguards such as mandatory pre-arb conciliation to contain and settle the dispute for the maintenance of business relations between parties, the statutory arbitration without the requirement of an arbitration agreement, a quasi-judicial forum with members having experience in trade, commerce, industry to provide insights regarding the business models of micro and small enterprises, award of statutory compound interest in case of delayed payments, mandatory timelines, seventy-five percent deposit of arbitral award amount at the time of filing of appeal, disclosures in books of accounts, etc.The Ministry of MSME launched the MSME Samadhaan portal by deploying technological integration to facilitate the process of filing delayed payment references by micro and small enterprise sellers. The portal enables a limited e-filing process for MSEs and provides the facility of tracking cases. Subsequent to the initial filing process, all the other procedures and processes have largely remained physical. The learnings from the operationalisation of the MSMED Act and operational procedures have highlighted certain shortcomings, such as limited legal knowledge, a manual case management system, inadequate availability of physical, technical, and human infrastructure with the Facilitation Councils, lack of awareness regarding the special dispute resolution provisions of the MSMED Act amongst MSEs, lack of legal resources with the Facilitation Councils, additional administrative duties of the members of the Facilitation Councils, varied rules of procedures across states for the resolution of disputes, quality of arbitral awards, delays in the enforcement of arbitral awards, etc.The U.K. Sinha Committee report points out that despite the existence of rigorous legislative provisions, micro and small enterprises face delayed payments due to their low bargaining power, which adversely affects their working capital cycle and operational efficiency. The data collected by the Committee on average debtor days from 1997-98 to 2017-18 indicates that the average debtor days for MSEs is quite large and has consistently been over ninety (90) days. Unlocking the full potential of India's MSMEs through prompt payments report published by Global Alliance for Mass Entreprenuership (GAME) and Dun & Bradstreet (D&B), 2022 reported the finding that an estimated 5.9% of the gross value added (GVA) in the Indian economy INR 10.7 lakh crores - is locked up in delayed payments from buyers to MSME suppliers.The cost of litigation and delays in the disposal of delayed payment cases, coupled with systemic challenges associated with the dispute resolution framework, often act as an impediment to access to justice for micro and small enterprises. The bridging of these gaps requires new technological solutions through the integration of technology with the existing dispute resolution framework to effectively address the issue of delays and litigation costs.To strengthen the existing dispute resolution mechanism under the MSMED Act, 2006, the Ministry of MSME has re-imagined the overhaul of the existing system with technology disruption. The integration of technology with the traditional dispute resolution system has given birth to the idea of online dispute resolution. Online Dispute Resolution, as a form of alternative dispute resolution, refers to the use of technology to resolve disputes through various methods such as negotiation, conciliation, mediation, arbitration, etc.The intersection of law and technology under the guidance of the Supreme Court of India has resulted in the e-courts framework. The e-courts project has resulted in citizen-centric services, transparency in the justice delivery process, and an augmentation in judicial efficiency through automation and modernisation of court processes.Building on the e-courts framework that exists in the Indian judicial space, MSME Online Dispute Resolution Portal brings the entire dispute resolution to the doorstep of the small-scale supplier. MSME ODR Portal will facilitate dispute avoidance, dispute containment, and dispute resolution. The Portal will enable the ease of access to justice in a timely and cost-efficient manner through digital access, inclusion, and empowerment of Micro and Small Enterprises.MSME ODR Portal is conceived as a government-owned portal that would provide the facility of a digital guided pathway, negotiation, conciliation, and arbitration. While digital guided pathway and negotiation are voluntary processes, they would enable the parties to reach a speedier and cost-effective redressal of disputes before entering into the adjudication mechanism. The Portal provides the option of conducting settlement talks and exploring several options before the parties enter into the adjudication process under the MSMED Act, 2006. During these Digital Guided Pathway and Negotiation process, the parties can conduct negotiations digitally with a host of settlement options and ranges, thus allowing them to resolve their disputes quickly and in a cost-effective manner. The system also allows the parties to evaluate their cases before entering into the adjudication process to make an informed decision pertaining to the continuance of the adjudication process or the settlement of the matter.In the context of conciliation/mediation, the mediation proceedings would be conducted online in a secure environment, settlement agreements would be drafted, and the agreed-upon agreements would be executed online, through the portal. During the arbitration proceedings, the parties would file the entire pleadings, present evidence and cross-examine, appear in hearings, conduct arguments, and the arbitrator would send notices, pass the legally binding awards online, through the ODR Portal.The Online Dispute Resolution mechanism is not envisioned as just another portal, but would usher in an era of transformational reform that would make the ease of access to justice a reality for small businesses and bring in transparency, flexibility, efficiency, and convenience in the dispute resolution mechanism. Ultimately, it would provide a level playing field to the parties and enhance the trust and confidence of the parties in the legal system.Author may be reached at eboard@icai.in
Ep. 236 — Fostering Sustainable Growth for SMPs
CA Journal
· September 2026
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Fostering Sustainable Growth for SMPsSmall and medium practitioners (SMPs) are critical players in the professional services sector, yet many face significant barriers that limit their growth potential. This seeks to explore comprehensive strategies aimed at fostering an environment conducive to sustainable growth in this vital sector. Sustainability and resource allocation are central themes, focusing on the importance of implementing efficient practices that ensure long-term viability. By developing a mindset geared towards growth, practitioners will be encouraged to embrace innovation and adaptability, essential attributes in today's rapidly evolving market. Additionally, embracing change and collaboration are crucial topics, urging SMPs to explore technological advancements and engage with peer networks to enhance their service offerings. The article also addresses selective growth and client profiling as strategic approaches that enable practitioners to optimize their resources and target specific market segments effectively. It also covers the services that may be provided by a Chartered Accountant in the role of an SMP.IntroductionSmall and medium-sized practices (SMPs) are gaining recognition for their innovation and adaptability within the accounting profession. Their ability to meet the unique needs of small and medium-sized enterprises (SMEs), along with the increasing demand for services beyond conventional accounting, equips them well to seize growing opportunities. To unleash their maximum potential, however, SMPs must remain responsive towards evolving trends, comprising technological advancements and sustainability initiatives. It is to explore various growth avenues, and the mindset needed to seize these opportunities, highlighting initiatives and examples from India that showcase successful growth strategies.There are now 400 million small and medium-sized enterprises (SMEs) operating globally in 2025, up from 358 million at the end of 2023, highlighting rapid sector growth. However, 60% of small and medium construction enterprises fail within the first few years, mainly due to barriers like financial constraints, lack of management skills, and regulatory challenges. Only 16% of SMEs have achieved transformative digital integration, while 25% are in the early digital adoption stages, showing a wide gap in digital maturity. Key obstacles to SME and SMP growth include financial/fiscal barriers (like unreliable cash flow and high interest rates), business development barriers (lack of mentoring and entrepreneurial skills), and knowledge management barriers (poor marketing and innovation skills).Cultivating the Conditions for Effective Growth - Strategic Alignment and Overcoming BarriersSMPs juggle various responsibilities, including business development, service delivery, and talent acquisition. One of their primary challenges is the tendency to manage everything independently in order to retain clients and ensure high-quality service. As audit and assurance services demand significant time and effort, they often come with extensive responsibilities that may not yield profitable revenue. Consequently, many SMPs are exploring growth opportunities in other service areas. Effective growth should not be considered as mere expansion; rather, it entails thoughtfully aligning the activities with the firm's primary aims, attuned to its distinctive characteristics and conditions. However, repressive mindsets, such as the hesitance to adopt latest technologies or diversify service offerings, can obstruct the capacity to completely capitalize on these opportunities. Recognizing current sources of income is essential for assisting SMPs in achieving sustainable growth."Recognizing current sources of income is essential for assisting SMPs in achieving sustainable growth."Capitalizing Partnerships and Regulatory DevelopmentsForward-thinking strategies, such as building partnerships with external organisations like banks and developmental financial institutions, can provide considerable advantages, even if they face initial confrontation. Regulatory developments, often seen as obstacles, can also provide new possibilities for organizations that actively observe their surroundings. This dynamic stance requires permitting co-workers to not only furnish ongoing services but also to determine and unfold new opportunities. Additionally, collaboration between Professional Accounting Bodies and banks or financing institutions is necessary to fill the gap between SMPs and SMEs. This collaboration can aid in handling difficulties faced by several stakeholders while maximizing mutual gains.Banking Entities/Lending Institutions: Bank customer portfolios frequently comprise a multitude of SME clients who need support with financial literacy and management. Forging connections with SMPs to provide training and targeted support directly to SMEs can help overcome these challenges, instilling confidence in expanding service offerings for a broad range of SME clientele while increasing profitability.Small and Medium Enterprises: Insufficient financial awareness and ineffective financial oversight can hamper the progress and accomplishments of businesses. Skill-building provided by SMPs can strengthen fiscal capabilities, but building a connection with an SMP as a reliable consultant also allows an opening to comprehensive support services and financing prospects in the future.Small and Medium Practitioners: Collaborating with financial institutions can provide access to new SME clients, and offering foundational services or training programs can build trust, paving the way for additional business opportunities.Professional Accounting Bodies: Building connections that support local businesses and community economies increases the credibility of the profession, thus making it more attractive to newcomers.Sustainability and Resource AllocationSustainability is fundamental for businesses across all industries and locations. By embracing ethical principles and social responsibility, such as through community engagement, maintaining operational transparency, and treating workers fairly, companies can significantly improve their reputations. Responsible resource management is vital for retaining skilled talent while ensuring the ability to meet client demands, which requires ongoing staff training and development to adapt to evolving client needs and industry changes. A notable case from an SMP involved implementing a remote and flexible working model well before Covid-19. This approach was designed to reintegrate economically inactive female professionals into the workforce and successfully leveraging accessible digital tools to engage professionals who are unable to work in conventional offices due to personal circumstances.Developing the Right Mindset for GrowthEven in favourable growth conditions, firms must adopt a new mindset to effectively capitalise on available opportunities.Adapting to Change and Collaboration: As a result of scarce resources, SMPs must embrace a disposition that supports change and fosters collaboration. By pooling reserves, jointly developing solutions, and offering mutual support, they can achieve significant enhancements in service quality and foster growth. Keeping in mind the concept of 'Networking' or 'Pooling of Resources' or having a platform for enhanced training as the best solution, the Institute of Chartered Accountants of India (ICAI) has introduced various methodologies and platforms by creating committees on different subjects/areas and introducing CPE courses to elevate the quality of training for its students and members.Utilising Accessible Technologies: Platforms like LinkedIn, WhatsApp, and Twitter can play a key role in shaping the identity of a firm, improving brand visibility, and sourcing talent, and it may be noted that the members are required to ensure that their use is in conformity with the ICAI Code of Ethics. The outsourcing of services is a segment experiencing rapid growth in our jurisdiction, and given our strategic location and predominantly youthful population, it is expected to evolve into one of the most rapidly surging sources of earnings for SMPs.Strategic Growth and Client Classification: Sustainable growth isn't just about seizing all prospects or indiscriminately chasing revenue expansion. It is crucial for SMPs to focus on specialization and thoroughly evaluate potential clients' needs in relation to the firm's broader objectives. Identifying opportunities that offer the greatest value is vital. Although larger clients may present the potential for higher fees, they do not always align with the firm's capabilities.Opportunities for SMPsThere are various opportunities for CAs as SMPs in India:Management Consultancy Services: Financial management planning, capital structure planning, working capital management, project reports, feasibility studies, budgeting, and more.Project Finance: Actively participating in project financing and offering consultancy services to clients, working closely with various banking establishments.Due Diligence: Providing comprehensive assessment categories, particularly in the context of corporate restructuring.Risk Assessment: Providing comprehensive risk identification and assessing whether organisations have effective systems in place to manage these risks.Arbitration and Conciliation: Enabling MSMEs to access arbitration services, offering a quick and cost-effective alternative for dispute resolution.Information Technology Software Related Services: Setting up IT systems, addressing related challenges, Information Security, E-Governance, etc.Preparing Statutory Financial Statements: Assisting MSMEs in the compilation of financial disclosures essential under any law.Carbon Credit Mechanism Support Services: Conceptualizing the CDM, quantifying greenhouse gases, selecting cleaner technologies, registering projects, and obtaining host country approval.Services Required for Environmental Laws: Providing opinions on the viability of various projects and pollution prevention technologies, obtaining environmental consents, and conducting Environmental Clearances and Environmental Impact Assessments (EIAs).Compliance of Tax Laws: Providing services into Direct Taxes, Indirect Taxes, Cross border investments, Transfer pricing, Double Taxation Avoidance Agreements, E-commerce taxation, etc.ConclusionFor SMPs, achieving growth is complex and multi-dimensional, demanding a well-rounded approach that integrates thoughtful planning, a focus on innovation, and a cooperative, flexible attitude. By acknowledging their unique position in the market and seizing emerging opportunities, SMPs can achieve growth while also raising standards within the accounting profession. This holistic approach ensures that expansion is both attainable and sustainable, aligning with the firm's long-term vision of creating value across diverse economies.Ultimately, SMPs can achieve sustainable growth by adopting a holistic approach that combines strategic planning, innovation, and collaboration. The ICAI encourages SMPs to utilise its tools and training programmes to enhance service quality and drive long-term success.Author may be reached at vedantaceo@gmail.com and eboard@icai.in
Ep. 237 — MSMEs: Renaissance of the Global Era
CA Journal
· September 2026
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MSMEs: Renaissance of the Global EraWith the advent of fast communication and mobilization, world is becoming smaller. Globalization is a norm not only for the large companies; Micro, Small and Medium sector Enterprises (MSMEs) are also playing a pivotal role. This is indeed the dream of over 65+ million MSMEs, working tirelessly to achieve success on a global scale. As India rises on the world stage, MSMEs are poised to establish their presence in international markets through product innovation and enhanced services.Small Scale Industries (SSI) already metamorphosed into Micro, Small and Medium Enterprises (MSMEs), encompassing larger gamut of businesses coming within the formal definition. With the adequate level of policy interventions, financial assistance, market development and wide range of structural changes, MSMEs now have the fostering ecosystem where they not only thrive but innovate and deliver to the global consumers.MSMEs are contributing 45% and above to the overall Indian exports and it is steadily rising. There is no one reason that can be attributed to this growth. The resilience demonstrated by the MSME founders coupled with the strong government impetus towards supporting this sector will go a long way in paving the path to "2047 Vikshit Bharat" (2047 Developed India) goal.Since the liberalization of 1991, India opened its door to the global companies. Exports from India is not a new phenomenon and this was happening from the time immemorial through the famous Silk Route where the textiles, agriculture products and spices exported from India. With the globalization and well interconnected world, India started exporting petroleum products, gems and jeweleries, garments, pharmaceuticals, chemicals, machinery, iron and steel, high-end engineering products, agricultural produces to name a few.Key Boosters Leading to Unprecedented MSME Growth and Contributions:Bespoke products and solutions: Indian MSMEs are known for finding the quickest and sustainable solutions. In case of automobile and heavy engineering (including industrial products, machinery and equipment), MSMEs exports are increasing steadily at the rate of ~5%. Be it Peenya in Bengaluru; Oragadam cluster in Chennai; Taloja, Rabale of Mumbai; Kasba, Howrah near Kolkata - the industrial Units are plenty all across that are providing user specific customized products to global customers.Abundant Supply of Talent: The human capital dividend is unwavering in all spectrums of business. There are ample of blue collar workers who are ready to heavy lift the grass root level industrial and agricultural production. With 8800+ engineering colleges producing approximately 1.6 million engineering graduates every year, India is home to largest pool of engineering talent. Non-engineering colleges are equally contributing around 8.5 million graduates from about 44000 colleges. With large employable population, India is now becoming a favorite choice for large MNCs seeking to diversify and strengthen their supply chains. Indian MSMEs are well-equipped in grabbing and delivering expected outputs.Strong digital economy: Digital economy upsurge in the last decade witnessed by India is unparallel to any other economy across the globe. Launched in 2016, UPI was one of the game changer technology introduced in Indian fintech market enabling P2P and P2M transactions. In March 2025, UPI recorded over 18 billion transactions amounting to about $300 bn. You must have noticed a small placard or box with QR code for payment even in smallest of the road side stalls across India. Demonetization and COVID-19 are important factors behind wide range adoption of digital payments. Alongside, nil management fee on the billions of transactions also played crucial role in adoptions among the masses. On the cross border transactions, there are multiple initiatives by government and private sector that eases the export processes and collection complexities. Through Virtual Banking Account (VBA) facilities provided by private and public banks, collection issues are largely resolved.Government Support: The government actively supports MSME through various interventions directed towards ease of export, including dedicated support systems, schemes for technological upgradation and market access, and initiatives like the "Districts as Export Hubs" program. These interventions aim to facilitate access to credit, provide marketing support, and improve infrastructure for MSMEs, ultimately boosting their export competitiveness. The Ministry of MSME has established Export Facilitation Centre (EFCs) to provide mentoring, guidance and information on export related matters. Raising and Accelerating MSME Performance (RAMP) is launched to increase the access of MSMEs to technology, markets and credit. There are specific schemes, such as, for textiles-Rebate of State and Central Taxes and Levies (ROSCTL); for Steel, Pharma and Chemicals- Remission of Duties and Taxes on Exported Products (RODTEP); for credit protections-Export Credit Guarantee Corporation of India Limited (ECGC) etc., that are targeted for ease of business of the MSMEs exporting goods and services.Thriving eco-system: In the new India, there are abundant opportunities and robust eco-system where founders are identifying and working on multiple opportunities. The new-age innovations, cutting-edge technologies and path-breaking research-oriented think-tanks, nothing is untouched by our thriving community of MSMEs. In the words of Honorable Prime Minister Narendra Modi, "MSME sector is the backbone of India's manufacturing and industrial growth". The matured credit systems, well-oiled by Banks, NBFCs, venture capitalists and private equity firms along with angel investors provide the much needed funding (debt or equity or quasi debt) to the corporates with miniscule restrictions as compared to a couple of decades back. With active export trading councils, detailed think-tank report at a click of button, MSMEs are having competitive advantage of their product and industry related knowledge. There are accelerators and incubators who are providing much needed guidance and support to MSMEs and startups. Its important for MSMEs to know what they are looking for, they will get the solutions in their arm reach.Emergent Service SectorsWhen it comes to the export from India, how can we miss the contribution from Indian service sectors. The story started three decades back with the advent of Infosys, Wipro and other IT & ITeS service companies around Bengaluru; now it turned into a multibillion dollar exports contributing more than $200 billion to GDP of India. Key sectors include IT-BPM, various business services, telecommunication, computers and information services. The burgeoning Global Capability Centers (GCCs) are paving a new wave of growth to IT & ITeS sector, where multiple middle-sized, micro and nano delivery centers are mushrooming across India including Tier II and Tier III cities and towns. These companies are driving the innovations and product developments for their foreign sponsor companies. Most of the large GCCs are leveraging the deep expertise of MSMEs in similar sectors, together creating a strong never-ending positive growth spiral.GCCs are becoming a source of revenue centric value addition and is driven by following principles:Leveraging lower cost of services to extend penetration in the foreign company workSource superior talent to raise the service qualityReduce the hurdle rate for innovations to make new initiatives possibleLeverage data-driven customer analysis to design / refine / modify existing and new products / servicesExploit co-location of functional and regional capabilities to drive new service modelsDrive product / service innovation to better cater to the requirements and serve larger marketThere are MSMEs that are targeting setting up and operating the GCCs across India and giving the boost to this upcoming sector.India is delivering services to 50+ countries; US, UK and Europe contributing 62% of the total services exported out of India. India is the fifth largest recipient of FDI inflows with the service sector being the highest FDI recipient in the country.The MSME contribution to service sector cannot be undermined and it will continue to be the vena cava vein to the service sector.Strategies for MSMEs to enhance Regional Export OpportunitiesQuality Enhancement: MSMEs need to look for and implement high-quality standards and practices to meet international market requirements and ensure products adhere to global norms. After COVID-19, most of the large companies are looking for China Plus One policy to structure and create a redundancy on their supply chain. This will ensure uninterrupted supply and developing additional market for their much-needed, mission-critical products. While there is significant scope for improvement in areas such as quality control, intellectual property regulations, and skill development, addressing these will better position Indian MSMEs to unlock their full potential and emerge as key players in the global economy.Technological Intervention: Indian MSMEs needs to leverage digitization and R&D to improve production techniques and post-harvest management, enhancing product quality and shelf life. As a sector, it needs to ask the right questions and reach out for appropriate tech-upgradation. In the digital age, MSMEs working in archaic ways not able to survive in the long run.Infrastructure Development: It is inevitable for MSMEs to invest in robust infrastructure, including cold storage, warehouses, and transportation networks, to facilitate efficient export logistics. On a small-scale basis, MSMEs need to look for innovative methods of cloud warehousing and leveraging transportation network best suitable for the products of the company.Market Access: MSMEs needs to participate in existing / develop unified bodies to handle market access requests and sanitary/phytosanitary issues, ensuring smoother trade negotiations. Government is providing multiple forums in its "One District One Product" initiatives. There are various local, regional and national level trade bodies that are making the access to new markets and assist in macro-level negotiations.Brand Promotion: MSMEs are leveraging 'Brand India' to increase market visibility and penetration, focusing on value-added and indigenous products. Globally, India got a panache on its handicraft items, organic food products, textiles and pharma solutions. It requires more concentrated efforts and geographical region-specific approach by MSMEs to grow their brand further.To succeed, MSMEs need to build an open world and web of partnership that will grow over a period to reap the network effect. MSMEs is the resilient creed, and it will continue to flourish. The right question here are:How can we accelerate the pace of growth?How can we make the Indian product and services omni-present across the geographies that generate organic demand on its own?What are the key initiatives for symmetric information dissemination on market competition and product knowledge?How to create India a major sourcing destination for large markets globally?How to initiate research-backed, data-driven approach for future innovation that caters to the future requirements of the industry?With the strong buoyancy effect, MSMEs are witnessing a strong trajectory. To continue the momentum, MSMEs continue to need strong support from all the stakeholders around. The world is becoming a common playground and a level playing field is offered to MSMEs to speak out loud and perform. At the outset, the future looks bright with certain apparent speed breakers. Yet, as time will say and prove (as always) that we were, are and will be the clan that go beyond barriers and prove our worth.References:https://www.pib.gov.in/https://the-ken.com/story/upi-can-be-forever-or-free-not-both/https://msmedildh.gov.in/efc.htmlhttps://www.nimsme.gov.in/about-scheme/raising-and-accelerating-msme-performance-ramp-https://www.dgft.gov.in/CP/?opt=rosctlhttps://www.indiantradeportal.in/vs.jsp?lang=0&id=0,55,2322https://www.ecgc.inhttps://government.economictimes.indiatimes.com/news/economy/indias-software-and-it-services-exports-reach-200-billion-in-2023-24-report/119010552#:~:text=NEW%20DELHI%3A%20India's%20software%20and,new%20report%20said%20on%20Thursday.Author may be reached at eboard@icai.in
Ep. 238 — Supply Chain Finance: The Lifeblood of MSMEs in India
CA Journal
· September 2026
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Supply Chain Finance: The Lifeblood of MSMEs in IndiaSupply Chain Finance (SCF) has emerged as a critical solution to address the working capital challenges faced by Micro, Small, and Medium Enterprises (MSMEs) in India. By providing timely and flexible credit linked to supply chain transactions, SCF enables MSMEs to maintain business operations smoothly and foster their growth. This financing mechanism not only enhances liquidity but also offers an alternative source of credit, enabling suppliers to receive early payment on their invoices. It is especially beneficial for businesses with limited or no access to traditional banking channels. Additionally, the creditworthiness of a single large corporate entity within the supply chain serves as the foundation for empowering the entire ecosystem, allowing smaller businesses to access financing based on the strength of the larger partner's financial standing. Understanding SCF is essential for assessing the structure of transactions, ensuring accurate accounting treatment, and maintaining transparent financial disclosures, thereby mitigating potential risks related to financial misreporting."Liquidity is the lifeblood of business; Supply Chain Finance ensures it flows where it's needed most."IntroductionSupply Chain Finance (SCF) refers to a set of financial solutions that optimize the flow of working capital across the supply chain. The objective is to improve liquidity, reduce financial risks, and streamline the financial operations between buyers and suppliers. SCF leverages technology, financial institutions, and supply chain relationships to unlock the value of trade transactions.SCF is a financial arrangement that enables suppliers to receive early payment on their invoices, often at a lower interest rate. This short-term working capital arrangement helps businesses improve cash flow while reducing the risk of supply chain disruptions. By bridging liquidity gaps, SCF allows both buyers and suppliers to optimize their working capital and sustain smoother operations.In India, the relevance of SCF is underscored by a large number of MSMEs that often face persistent cash flow challenges. To mitigate these challenges, the government has implemented various policy measures, including the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Mudra loans, and the Trade Receivables Discounting System (TReDS). With continuous technological advancements and robust regulatory support, SCF is evolving as a crucial financial tool, reshaping the country's financial ecosystem and significantly empowering MSMEs to achieve sustainable growth.India is home to over 63 million MSMEs, often referred to as the growth engine of the nation's economy. These enterprises play a pivotal role in the country's economic framework, contributing approximately 30% to the GDP and 40% to exports. MSMEs have also generated employment opportunities for over 202 million individuals across the nation.Despite their substantial contribution, MSMEs face numerous challenges, with limited access to formal credit and financing being one of the most critical hurdles. To unlock their full potential and ensure sustained growth, it is imperative to strengthen policies and initiatives aimed at improving their access to finance.Ensuring timely and seamless access to finance is not just a convenience for MSMEs but a critical factor that directly impacts their survival and growth. In India, SCF is evolving rapidly, driven by technological advancements and strong regulatory support. SCF encompasses a range of financial instruments and solutions, including factoring, reverse factoring, inventory financing, and trade credit, all aimed at addressing the working capital needs of businesses.Supply Chain Finance vs. Traditional Working CapitalWhile traditional working capital financing is essential for daily operations, SCF offers a more dynamic, flexible, and cost-effective alternative, particularly benefiting smaller businesses within a supply chain. SCF enhances liquidity by enabling early payments on invoices and leveraging the creditworthiness of larger corporates in the supply chain, making it a more inclusive and tailored solution for modern supply chain needs. Since large corporates typically have strong credit ratings and financial stability, financial institutions can offer better financing terms (such as lower interest rates) to smaller businesses, as they are considered less risky due to the backing of the larger corporation's credibility. SCF solutions are generally more affordable than traditional working capital options. While working capital facilities provide greater flexibility, they also carry higher risks and higher origination costs. By assessing the payment risk between two parties in an open account transaction, SCF typically proves to be a less expensive option compared to other working capital financing methods.Role of the Reserve Bank of India (RBI) in Promoting SCFAs the financial regulator, the RBI has been instrumental in advancing SCF through initiatives like TReDS. The TReDS platform empowers MSMEs by facilitating seamless financing of trade receivables, thereby ensuring improved liquidity and stable cash flow.Section 43B(h) of the Income Tax Act: A Key Enabler for Promoting SCFThe provision under Section 43B(h) of the Income Tax Act plays a crucial role in ensuring timely payments to MSMEs, addressing a longstanding challenge in supply chains. By linking tax deductibility to payment timelines, this provision encourages businesses to adopt Supply Chain Finance (SCF) as a practical solution for managing working capital while adhering to legal requirements. For MSMEs, SCF provides a much-needed lifeline by unlocking liquidity and reducing dependence on delayed payments. On the other hand, for buyers, SCF offers a way to optimize cash flow without compromising on compliance or relationships with suppliers.Role of Financial Institutions in SCFFinancial institutions play a pivotal role in enabling and supporting SCF by providing the necessary funding and infrastructure that facilitates smoother transactions within the supply chain. Their involvement helps streamline the flow of capital between buyers and suppliers, ensuring that businesses, especially MSMEs, have access to working capital when they need it most. Banks and Non-Banking Financial Companies (NBFCs) offer a variety of SCF products tailored to meet the specific requirements of different industries and business sizes. The integration of digital platforms and FinTech solutions has significantly enhanced the efficiency and accessibility of SCF, enabling real-time transaction processing, better risk management, and wider adoption across India's business ecosystem.Key Supply Chain Finance Solutions: Receivables Solutions and Payables SolutionsReceivables Solutions involve monetizing a corporate's receivables, which are amounts due from their buyers or dealers. These solutions help companies optimize their working capital by converting credit sales into cash without waiting for the payment due dates. It is typically structured as an off-balance sheet solution, which means it does not add to the corporate's liabilities.Payables Solutions is a solution addressing traditional vendor financing gaps by offering competitive Working Capital Finance to the suppliers under a buyer-initiated program. They contribute to building an efficient & well-funded supply chain ecosystem for the buyer.Popular SCF Facilities Offered by Financial InstitutionsEnhancing liquidity and efficiency across the supply chain by addressing the unique working capital needs of different stakeholders. These facilities include Dealer Finance, Vendor Finance, TReDS, Purchase Bill Discounting, and Sales Bill Discounting.Dealer Finance Facility: Bridging the Gap between Dealers and SuppliersThe Dealer Finance Facility is a downstream financing solution designed to help dealers or distributors maintain adequate inventory levels by providing them with working capital. This capital enables them to purchase goods from large corporate manufacturers or suppliers. By addressing the working capital challenges faced by dealers, this facility enhances the overall efficiency of the supply chain.Target Stakeholders: Dealers, distributors, or retailers.Purpose: The primary objective is to finance inventory purchases, thus improving the cash flow for dealers.Initiator: The financing is typically initiated when the corporate (manufacturer/supplier) collaborates with financial institutions to extend credit facilities to dealers.Vendor Finance Facility: Bridging the Gap between Suppliers and Corporate BuyersThis facility is an upstream financing solution designed to help suppliers or vendors bridge the gap between delivering goods and receiving payments from large corporate buyers. By providing liquidity to suppliers, this facility ensures smoother cash flow, enhances supplier stability, and supports a resilient supply chain.Target Stakeholders: Suppliers or vendors.Purpose: To provide liquidity to vendors by enabling early payment for their invoices.Initiator: Typically, the corporate buyer initiates the facility to support suppliers and improve their cash flow.Trade Receivables Discounting System (TReDS): Empowering MSMEs with Liquidity and Financial InclusionTReDS is an online platform regulated by the Reserve Bank of India (RBI), designed to facilitate the financing of trade receivables for MSMEs. In the aftermath of the COVID-19 pandemic, delayed payments and unpaid invoices have become significant challenges for MSMEs, adversely affecting their liquidity and business operations. TReDS addresses this issue by providing MSME suppliers with the ability to discount their bills and invoices, offering timely access to funds at competitive interest rates.Target Stakeholders: MSME suppliers, large corporate buyers, and financial institutions.Purpose: To facilitate quick, transparent, and cost-effective invoice discounting for MSMEs, improving their working capital and liquidity position.Regulation: TReDS operates under the RBI guidelines, with recognized platforms such as RXIL, M1xchange, and Invoicemart, offering discounting services.Sales Bill Discounting: Unlocking Immediate Liquidity for BusinessesThis facility allows businesses to receive early payment by selling their accounts receivable (sales bills) to financial institutions at a discounted value. This facility is particularly beneficial for suppliers who need liquidity before the payment due date, helping to manage cash flow and reduce dependency on credit.Target Stakeholders: Suppliers with receivables.Purpose: To convert receivables into immediate cash before the payment due date.Type: Can be with or without recourse, depending on the agreement between the supplier and the financial institution.Purchase Bill Discounting: Facilitating Prompt Payments to SuppliersThe Purchase Bill Discounting Facility provides buyers with financing to pay their suppliers promptly, often at discounted rates. This financing solution helps buyers optimize their working capital while ensuring timely payments to their suppliers, thereby strengthening the entire supply chain ecosystem.Target Stakeholders: Buyers (corporates) and their suppliers.Purpose: To provide buyers with financing for their purchase bills, enabling timely payments to suppliers.Initiator: Typically initiated by buyers to optimize working capital and extend payment terms while ensuring supplier stability.Accounting Treatment of SCF Transactions under Indian Accounting StandardsSupply Chain Finance (SCF) transactions primarily impact the accounting for trade payables, trade receivables, and related financial liabilities. The accounting treatment depends on whether the transaction involves the buyer or the supplier, as well as whether the receivables are sold with or without recourse.Accounting Treatment of SCF Transactions for the Buyer's Books of Account:Reclassification of Trade Payables: Under an SCF arrangement, trade payables (operational creditors) are converted into a financing arrangement with the financial institutions. As a result, the liability is reclassified as a financial liability (financial creditor), such as a short-term loan or borrowing.Disclosure Requirements: If the SCF arrangement results in the reclassification of trade payables to borrowings, the nature, terms, and amounts must be disclosed in the financial statements. Additional disclosures regarding liquidity risk management and financing arrangements may also be required, depending on the specifics of the SCF transaction.Accounting Treatment of SCF Transactions for the Supplier's Books of Account:Early Payment Benefit for Suppliers: SCF allows suppliers to receive early payment for their receivables. The accounting treatment of the transaction depends on whether the supplier retains any liability after the receivables are discounted.Without Recourse: If the supplier sells the trade receivables to the financier without recourse, the trade receivables are derecognized from the supplier's books of accounts. In this case, the supplier no longer has any ongoing liability associated with the receivables.With Recourse: If the supplier sells the trade receivables with recourse (i.e., retains an obligation to repay the financier in the event of buyer default), the receivables may not be fully derecognized, and the supplier must continue to account for any potential liabilities.Disclosure Requirements for Suppliers: The supplier must disclose the amount of trade receivables sold and derecognized from its books. If the receivables are sold with recourse, the supplier must disclose the nature of the continuing involvement and any associated liabilities, including the potential obligation to repay if the buyer defaults.ConclusionSCF plays a crucial role in empowering MSMEs by providing them with timely access to the necessary capital to thrive in a competitive market. Chartered Accountants are instrumental in ensuring the financial transparency and compliance of SCF arrangements. Their expertise in accounting ensures that SCF transactions are accurately recorded, preserving the integrity of financial statements. Through their in-depth understanding, Chartered Accountants are integral to the successful implementation of SCF, enabling businesses to unlock their full potential. SCF serves as a key enabler of MSMEs' growth, playing a vital role in strengthening the overall financial ecosystem. Chartered Accountants, with their proficiency in accounting, financial reporting, and compliance, are ideally positioned to guide MSMEs in leveraging SCF effectively. This ensures sustainable business growth while maintaining the integrity and accuracy of financial statements.Author may be reached at gksoni92@gmail.com and eboard@icai.in
Ep. 239 — Innovation and Technology: Catalysts for a Resilient Indian MSME Sector
CA Journal
· September 2026
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Innovation and Technology: Catalysts for a Resilient Indian MSME SectorThe ways in which businesses are conducted have been greatly impacted by innovation and technology over the last couple of years. All businesses are adapting to the technology revolution. MSMEs are an important part of our economy, and it\'s paramount for them to adopt technology and transform themselves to reap the benefits of it. However, MSMEs are transforming themselves by leveraging technology, and with their skills and knowledge, they are well placed to play the role of change agents for MSMEs. In this backdrop, the present paper attempts to examine and present the significance and role of technological transformation and how it could be implemented.By Dr. Jyothi G.H, AcademicianOver the last five decades, the MSME sector has become a highly vibrant and dynamic sector of the Indian economy. By fostering entrepreneurship and creating large employment opportunities at a relatively lower capital cost, it significantly contributes to the country\'s economic and social development, next only to agriculture. The inclusive industrial development of the country is greatly aided by MSMEs, which complement large industries as ancillary units. MSMEs are widening their domain across sectors of the economy, producing a diverse range of products and services to meet the demands of the domestic as well as global markets.Innovation and Technology: Catalysts for a Resilient Indian MSME SectorThe ways in which businesses are conducted have been greatly impacted by innovation and technology over the last couple of years. All businesses are adapting to the technology revolution. MSMEs are an important part of our economy, and it\'s paramount for them to adopt technology and transform themselves to reap the benefits of it. However, MSMEs are transforming themselves by leveraging technology, and with their skills and knowledge, they are well placed to play the role of change agents for MSMEs. In this backdrop, the present paper attempts to examine and present the significance and role of technological transformation and how it could be implemented.By Dr. Jyothi G.H, AcademicianOver the last five decades, the MSME sector has become a highly vibrant and dynamic sector of the Indian economy. By fostering entrepreneurship and creating large employment opportunities at a relatively lower capital cost, it significantly contributes to the country\'s economic and social development, next only to agriculture. The inclusive industrial development of the country is greatly aided by MSMEs, which complement large industries as ancillary units. MSMEs are widening their domain across sectors of the economy, producing a diverse range of products and services to meet the demands of the domestic as well as global markets.However, in today\'s fast-paced and technology-driven world, Indian MSMEs face numerous challenges that require innovative solutions. These challenges include limited access to modern technologies, inadequate governance and management practices, inefficiencies in supply chain management, and limited financial inclusion. To remain relevant and competitive, Indian MSMEs need to embrace innovation and leverage technology to transform their operations and create sustainable growth.Role and Performance of the MSME Sector in IndiaMicro, Small, and Medium Enterprises (MSMEs) in India significantly impact the economy by creating employment with relatively low capital compared to larger industries and promoting rural and underdeveloped areas. As per the latest figures from the Union Budget 2025, there are approximately 6 crore (60 million) registered MSMEs in India, with 51.25% located in rural areas and 48.75% in urban areas. These enterprises cover diverse sectors: Trade (36.34%), Other Services (32.63%), and Manufacturing (31.02%).Among MSMEs, 99.47% are micro-enterprises, highlighting their central role in the sector. Ownership is predominantly male (79.63%), with women owning 20.37%, reflecting a male-dominated entrepreneurial landscape. Additionally, socially marginalized groups own approximately 66.27% of MSMEs: OBCs at 49.72%, SCs at 12.45%, and STs at 4.10%. MSMEs employ over 25 crore (250 million) people across the country, underscoring their pivotal role in job creation, with rural areas accounting for 44.85% and urban areas for 55.15% of total jobs. Micro-enterprises provide 96.96% of these opportunities, demonstrating their pivotal role in job creation. Women constitute 23.88% of the workforce within MSMEs.This sector also produces over 6,000 products, ranging from traditional items to high-tech goods. Major product categories include food and beverages, textiles, machinery, and chemical products. MSMEs support balanced regional development, promote social inclusion, and address unemployment challenges by empowering marginalized communities and generating jobs. Their role is crucial for India\'s growth, combining economic inclusion with extensive employment opportunities.Need for, and Significance of Innovation and Technology Adoption in MSMEsIn the context of the adoption of innovation and technology in MSMEs, which differ from one enterprise to another, it has become important for the following key reasons:Increasing Productivity and Efficiency: Technology enables MSMEs to optimize operations, automate processes, and reduce manual workload, leading to higher productivity and better resource utilization.Improving Product Quality and Market Expansion: Through technological advancements, MSMEs can enhance product quality, meet industry standards, and reach new markets with better customer appeal.Gain Competitive Advantage and Cost Reduction: By adopting technology, MSMEs can streamline costs, increase production speed, and position themselves more favorably against competitors.Environmental Sustainability: Embracing sustainable practices and eco-friendly technologies allows MSMEs to reduce their environmental footprint, aligning with global sustainability goals and appealing to eco-conscious consumers.Customization and Access to New Markets: Technology enables MSMEs to cater to specific customer needs through customized offerings, allowing them to penetrate niche markets and expand their reach.Creativity and Data-Driven Decision Making: Leveraging data analytics tools supports informed decision-making and encourages innovation, helping MSMEs stay responsive to market trends and consumer preferences.Export-Led Growth and Global Competitiveness: Technology allows MSMEs to improve product standards, making them competitive in the global market and supporting export-led growth.Enterprise Resource Planning (ERP): ERP systems enable MSMEs to manage business processes effectively, ensuring better coordination across various functions and improving operational efficiency.Enhance the Awareness of Intellectual Property Rights (IPR): Awareness of IPR is crucial for MSMEs to protect their innovations, secure competitive advantage, and promote a culture of creativity.Government of India\'s Commitment/Initiatives to Digitalize MSMEsThe Government of India has undertaken numerous initiatives to promote the digital transformation of Micro, Small, and Medium Enterprises (MSMEs). Recognizing the sector\'s vital role in the national economy, contributing 30% to the GDP and employing over 110 million people, the Government has prioritized digitalization to enhance competitiveness, foster innovation, and enable MSMEs to integrate into the global value chain. The Union Budget 2025-26 introduced several measures to strengthen the MSME sector by enhancing credit access, supporting first-time entrepreneurs, and promoting labor-intensive industries.Udyam Registration Portal: Streamlined MSME registration, enabling over 13 million enterprises to register seamlessly, reducing registration time by 75%.Champions Portal: An AI-enabled one-stop digital platform that has resolved over 1 million grievances, providing guidance and real-time assistance.MSME SAMADHAAN: Addresses delayed payment issues; has resolved 85% of registered cases, facilitating the recovery of over Rs. 45,000 crores in outstanding dues.TReDS (Trade Receivables Discounting System): A digital platform enabling MSMEs to discount trade receivables. It has facilitated transactions worth Rs.75,000 crores, benefiting over 35,000 MSMEs.GeM (Government e-Marketplace): Facilitates access to government procurement. Over 1.8 million MSMEs have onboarded, contributing to transactions worth Rs. 4 lakh crores.MUDRA Loans: Provides collateral-free financial support. About 30 million MSMEs have benefitted, with loans totaling Rs. 15 lakh crores disbursed.Make in India and Startup India Campaigns: Supported more than 50,000 startups with Rs. 20,000 crores in funding.MSME IDEA Hackathon: 1,000 ideas were submitted, and 100 digital solutions were funded and implemented.National E-Governance Plan (NeGP): Implemented more than 500 e-governance projects to streamline interactions with government services.Online Dispute Resolution (ODR): Approximately 50,000 disputes have been successfully resolved through digital ODR platforms.E-NAM (Electronic National Agriculture Market): Over 1,000 mandis have been integrated, benefiting over 1.5 million farmers and MSMEs in the agricultural sector.Technology Adoption in MSMEs - Enablers and Growth ProspectsWhile technology adoption offers substantial benefits, MSMEs often face challenges such as financial limitations, skill shortages, and organizational resistance to change. One of the biggest hurdles is the cost associated with adopting, maintaining, and upgrading technology systems (software licenses, hardware updates, employee training). The Union Budget 2025 brings encouraging developments for first-time entrepreneurs, including enhanced credit guarantee cover and proposed term loans of up to Rs. 2 crores, laying a foundation for long-term competitiveness.Resistance to change is another major challenge, fueled by fears of job displacement or unfamiliarity with new workflows, alongside compatibility issues with existing systems and a lack of technical standardization across MSMEs. However, the Union Budget 2025 emphasizes cybersecurity awareness, digital trust, and sustainability-focused entrepreneurship, opening new avenues for MSMEs to align with sustainable practices and strengthen operational resilience. Structured change management processes and strategic vendor partnerships can greatly support successful technology adoption.Policy Roadmap for a Future-Ready Indian MSME SectorFor Policy MakersEnhance Connectivity: Prioritize high-speed broadband in rural areas.Financial Incentives: Introduce tax incentives and grants for R&D.Digital Literacy: Launch comprehensive training programs.Regulatory Simplification: Streamline compliance requirements.Cyber-Security Investments: Build robust infrastructure and awareness.Access to Finance: Develop low-interest loans and venture capital.Foster Collaborations: Encourage partnerships between MSMEs, larger companies, and research institutions.For Industry AssociationsTraining and Workshops: Conduct sessions on tech adoption and digital marketing.Networking Opportunities: Organize events connecting MSMEs with tech providers and investors.Advocacy: Lobby for innovation-friendly policies.Knowledge Sharing: Disseminate success stories and best practices.Consultation Services: Guide MSMEs in evaluating and implementing tech solutions.Innovation Hubs: Establish collaborative R&D centers.For MSMEsDigital Skills Development: Provide up-skilling opportunities.E-Commerce Adoption: Leverage online platforms to expand market reach.Stay Informed: Keep abreast of technological trends.Culture of Innovation: Value creativity and new technologies.Scalable Technology: Opt for solutions aligned with long-term goals.Cyber-Security Practices: Protect digital assets and data.Collaborative Efforts: Partner with peers and industry associations.Utilize Government Support: Leverage available programs and incentives.ConclusionDespite some challenges owing to technological adoption and up-gradation, the government is determined to strengthen the MSMEs to contribute their full potential for the overall development of the country. Similarly, encouraging a culture of innovation and technology among MSMEs is essential for their long-term success and competitiveness. By way of implementing the above strategies and creating an environment that values innovation and technology, MSMEs can empower their employees to think creatively, take risks, and drive continuous improvement, ultimately positioning themselves for growth and competitiveness in the future.References:Hegde, N. (2018). The future growth model of micro, small and medium enterprises (MSMEs) in India. Management Practices in Start-Ups. Indus Business Academy.https://wadhwanifoundation.org/digital-transformation-a-catalyst-for-sme-growth-and-innovation/#:~:text=In%20conclusion%2C%20digital%20transformation%20is,in%20a%20dynamic%20global%20economy.Kathan, W., Matzler, K., Füller, J., Hautz, J., & Hutter, K. (2014). Open innovation in SMEs: a case study of a regional open innovation platform. Problems and perspectives in management, (12, Iss. 1 (contin.)), 161-171.Ministry of Micro, Small and Medium Enterprises, Annual Report, 2022-23, Government of India, New Delhi.https://msmedi.dcmsme.gov.in/https://presolv360.com/resources/odr-a-solution-for-msme-woes-of-delayed-payments/#:~:text=ODR\'s%20usefulness%20in%20India,reporting%20obligations%20around%20delayed%20payments.https://www.india.gov.in/website-national-e-governance-plan-negphttps://www.mudra.org.in/https://images.hindustantimes.com/images/app-images/2023/5/Roadmap-for-Digital-Technology-to-Foster-Indias-Msme-Ecosystem-Opportunities-and-Challenges.pdfAuthor may be reached at jyothiguntnur@gmail.com and eboard@icai.in
Ep. 241 — GIFT & SPICE - Subsidy Schemes for MSMEs
CA Journal
· September 2026
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Tech-Jus: Enhancing Access to Justice through Online Dispute ResolutionThe Indian judicial system is currently grappling with an extensive backlog of cases, which hinders the right of access to justice and significantly impacts economic growth and the ease of conducting business. As per the data available on the National Judicial Data Grid as on 20th May 2025, more than one crore civil cases are pending across the country. The Government of India enacted a central legislation, namely the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, to catapult the holistic growth of micro, small, and medium units and provide them with a competitive advantage. The MSMED Act provided a special framework for the resolution of delayed payment disputes faced by micro and small enterprises (MSEs) through alternative dispute resolution, including mandatory conciliation and statutory arbitration. It is pertinent to state that the legislature envisioned the adoption of the alternative dispute resolution methods through mandatory pre-arb conciliation and statutory arbitration in 2006, when such methods were not widely common or adopted.Alternative Dispute Resolution (ADR) methods offer several advantages over traditional dispute resolution, including cost-effectiveness, efficiency, flexibility, and greater control over outcomes. ADR methods are more efficient and less adversarial, allowing the parties involved to resolve disputes more expeditiously and privately, resulting in better preservation of business relationships.The MSMED Act introduced special provisions to address the power asymmetry between small businesses and large corporations. The special provisions include safeguards such as mandatory pre-arb conciliation to contain and settle the dispute for the maintenance of business relations between parties, the statutory arbitration without the requirement of an arbitration agreement, a quasi-judicial forum with members having experience in trade, commerce, industry to provide insights regarding the business models of micro and small enterprises, award of statutory compound interest in case of delayed payments, mandatory timelines, seventy-five percent deposit of arbitral award amount at the time of filing of appeal, disclosures in books of accounts, etc.The Ministry of MSME launched the MSME Samadhaan portal by deploying technological integration to facilitate the process of filing delayed payment references by micro and small enterprise sellers. The portal enables a limited e-filing process for MSEs and provides the facility of tracking cases. Subsequent to the initial filing process, all the other procedures and processes have largely remained physical. The learnings from the operationalisation of the MSMED Act and operational procedures have highlighted certain shortcomings, such as limited legal knowledge, a manual case management system, inadequate availability of physical, technical, and human infrastructure with the Facilitation Councils, lack of awareness regarding the special dispute resolution provisions of the MSMED Act amongst MSEs, lack of legal resources with the Facilitation Councils, additional administrative duties of the members of the Facilitation Councils, varied rules of procedures across states for the resolution of disputes, quality of arbitral awards, delays in the enforcement of arbitral awards, etc.The U.K. Sinha Committee report points out that despite the existence of rigorous legislative provisions, micro and small enterprises face delayed payments due to their low bargaining power, which adversely affects their working capital cycle and operational efficiency. The data collected by the Committee on average debtor days from 1997-98 to 2017-18 indicates that the average debtor days for MSEs is quite large and has consistently been over ninety (90) days. Unlocking the full potential of India's MSMEs through prompt payments report published by Global Alliance for Mass Entreprenuership (GAME) and Dun & Bradstreet (D&B), 2022 reported the finding that an estimated 5.9% of the gross value added (GVA) in the Indian economy INR 10.7 lakh crores - is locked up in delayed payments from buyers to MSME suppliers.The cost of litigation and delays in the disposal of delayed payment cases, coupled with systemic challenges associated with the dispute resolution framework, often act as an impediment to access to justice for micro and small enterprises. The bridging of these gaps requires new technological solutions through the integration of technology with the existing dispute resolution framework to effectively address the issue of delays and litigation costs.To strengthen the existing dispute resolution mechanism under the MSMED Act, 2006, the Ministry of MSME has re-imagined the overhaul of the existing system with technology disruption. The integration of technology with the traditional dispute resolution system has given birth to the idea of online dispute resolution. Online Dispute Resolution, as a form of alternative dispute resolution, refers to the use of technology to resolve disputes through various methods such as negotiation, conciliation, mediation, arbitration, etc.The intersection of law and technology under the guidance of the Supreme Court of India has resulted in the e-courts framework. The e-courts project has resulted in citizen-centric services, transparency in the justice delivery process, and an augmentation in judicial efficiency through automation and modernisation of court processes.Building on the e-courts framework that exists in the Indian judicial space, MSME Online Dispute Resolution Portal brings the entire dispute resolution to the doorstep of the small-scale supplier. MSME ODR Portal will facilitate dispute avoidance, dispute containment, and dispute resolution. The Portal will enable the ease of access to justice in a timely and cost-efficient manner through digital access, inclusion, and empowerment of Micro and Small Enterprises.MSME ODR Portal is conceived as a government-owned portal that would provide the facility of a digital guided pathway, negotiation, conciliation, and arbitration. While digital guided pathway and negotiation are voluntary processes, they would enable the parties to reach a speedier and cost-effective redressal of disputes before entering into the adjudication mechanism. The Portal provides the option of conducting settlement talks and exploring several options before the parties enter into the adjudication process under the MSMED Act, 2006. During these Digital Guided Pathway and Negotiation process, the parties can conduct negotiations digitally with a host of settlement options and ranges, thus allowing them to resolve their disputes quickly and in a cost-effective manner. The system also allows the parties to evaluate their cases before entering into the adjudication process to make an informed decision pertaining to the continuance of the adjudication process or the settlement of the matter.In the context of conciliation/mediation, the mediation proceedings would be conducted online in a secure environment, settlement agreements would be drafted, and the agreed-upon agreements would be executed online, through the portal. During the arbitration proceedings, the parties would file the entire pleadings, present evidence and cross-examine, appear in hearings, conduct arguments, and the arbitrator would send notices, pass the legally binding awards online, through the ODR Portal.The Online Dispute Resolution mechanism is not envisioned as just another portal, but would usher in an era of transformational reform that would make the ease of access to justice a reality for small businesses and bring in transparency, flexibility, efficiency, and convenience in the dispute resolution mechanism. Ultimately, it would provide a level playing field to the parties and enhance the trust and confidence of the parties in the legal system.Author may be reached at eboard@icai.in
Ep. 242 — Unlocking MSME Potential: A Goldmine for Small and Medium CA Practitioners
CA Journal
· September 2026
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Innovation and Technology: Catalysts for a Resilient Indian MSME SectorThe ways in which businesses are conducted have been greatly impacted by innovation and technology over the last couple of years. All businesses are adapting to the technology revolution. MSMEs are an important part of our economy, and it's paramount for them to adopt technology and transform themselves to reap the benefits of it. However, MSMEs are transforming themselves by leveraging technology, and with their skills and knowledge, they are well placed to play the role of change agents for MSMEs. In this backdrop, the present paper attempts to examine and present the significance and role of technological transformation and how it could be implemented.Over the last five decades, the MSME sector has become a highly vibrant and dynamic sector of the Indian economy. By fostering entrepreneurship and creating large employment opportunities at a relatively lower capital cost, it significantly contributes to the country's economic and social development, next only to agriculture. The inclusive industrial development of the country is greatly aided by MSMEs, which complement large industries as ancillary units. MSMEs are widening their domain across sectors of the economy, producing a diverse range of products and services to meet the demands of the domestic as well as global markets.However, in today's fast-paced and technology-driven world, Indian MSMEs face numerous challenges that require innovative solutions. These challenges include limited access to modern technologies, inadequate governance and management practices, inefficiencies in supply chain management, and limited financial inclusion. To remain relevant and competitive, Indian MSMEs need to embrace innovation and leverage technology to transform their operations and create sustainable growth.Role and Performance of the MSME Sector in IndiaMicro, Small, and Medium Enterprises (MSMEs) in India significantly impact the economy by creating employment with relatively low capital compared to larger industries and promoting rural and underdeveloped areas. As per the latest figures from the Union Budget 2025, there are approximately 6 crore (60 million) registered MSMEs in India, with 51.25% located in rural areas and 48.75% in urban areas. These enterprises cover diverse sectors: Trade (36.34%), Other Services (32.63%), and Manufacturing (31.02%).Among MSMEs, 99.47% are micro-enterprises, highlighting their central role in the sector. Ownership is predominantly male (79.63%), with women owning 20.37%, reflecting a male-dominated entrepreneurial landscape. Additionally, socially marginalized groups own approximately 66.27% of MSMEs: OBCs at 49.72%, SCs at 12.45%, and STs at 4.10%. MSMEs employ over 25 crore (250 million) people across the country, underscoring their pivotal role in job creation, with rural areas accounting for 44.85% and urban areas for 55.15% of total jobs. Micro-enterprises provide 96.96% of these opportunities, demonstrating their pivotal role in job creation. Women constitute 23.88% of the workforce within MSMEs.This sector also produces over 6,000 products, ranging from traditional items to high-tech goods. Major product categories include food and beverages, textiles, machinery, and chemical products. MSMEs support balanced regional development, promote social inclusion, and address unemployment challenges by empowering marginalized communities and generating jobs. Their role is crucial for India's growth, combining economic inclusion with extensive employment opportunities.Need for, and Significance of Innovation and Technology Adoption in MSMEsIn the context of the adoption of innovation and technology in MSMEs, which differ from one enterprise to another, it has become important for the following key reasons:Increasing Productivity and Efficiency: Technology enables MSMEs to optimize operations, automate processes, and reduce manual workload, leading to higher productivity and better resource utilization.Improving Product Quality and Market Expansion: Through technological advancements, MSMEs can enhance product quality, meet industry standards, and reach new markets with better customer appeal.Gain Competitive Advantage and Cost Reduction: By adopting technology, MSMEs can streamline costs, increase production speed, and position themselves more favorably against competitors.Environmental Sustainability: Embracing sustainable practices and eco-friendly technologies allows MSMEs to reduce their environmental footprint, aligning with global sustainability goals and appealing to eco-conscious consumers.Customization and Access to New Markets: Technology enables MSMEs to cater to specific customer needs through customized offerings, allowing them to penetrate niche markets and expand their reach.Creativity and Data-Driven Decision Making: Leveraging data analytics tools supports informed decision-making and encourages innovation, helping MSMEs stay responsive to market trends and consumer preferences.Export-Led Growth and Global Competitiveness: Technology allows MSMEs to improve product standards, making them competitive in the global market and supporting export-led growth.Enterprise Resource Planning (ERP): ERP systems enable MSMEs to manage business processes effectively, ensuring better coordination across various functions and improving operational efficiency.Enhance the Awareness of Intellectual Property Rights (IPR): Awareness of IPR is crucial for MSMEs to protect their innovations, secure competitive advantage, and promote a culture of creativity.Government of India's Commitment/Initiatives to Digitalize MSMEsThe Government of India has undertaken numerous initiatives to promote the digital transformation of Micro, Small, and Medium Enterprises (MSMEs). Recognizing the sector's vital role in the national economy, contributing 30% to the GDP and employing over 110 million people, the Government has prioritized digitalization to enhance competitiveness, foster innovation, and enable MSMEs to integrate into the global value chain. The Union Budget 2025-26 introduced several measures to strengthen the MSME sector by enhancing credit access, supporting first-time entrepreneurs, and promoting labor-intensive industries.Udyam Registration Portal: The Udyam Registration Portal has streamlined MSME registration, enabling over 13 million enterprises to register seamlessly. It has reduced registration time by 75%, simplifying access to government benefits and schemes. By fostering formalization, the portal has empowered MSMEs to secure better credit, market access, and policy support.Champions Portal: The Champions Portal, launched by the Government of India, serves as a one-stop digital platform to support MSMEs by addressing grievances, providing guidance, and enabling real-time assistance. The AI-enabled portal has resolved over 1 million grievances, significantly enhancing operational efficiency and ease of doing business.MSME SAMADHAAN: An initiative by the Government of India, it aims to address delayed payment issues for MSMEs by providing a digital platform to file and monitor complaints. As of now, the portal has resolved 85% of registered cases, facilitating the recovery of over Rs. 45,000 crores in outstanding dues.TReDS (Trade Receivables Discounting System): TReDS, introduced by the Government of India, is a digital platform enabling MSMEs to discount trade receivables, ensuring timely access to working capital. So far, it has facilitated transactions worth Rs.75,000 crores, benefiting over 35,000 MSMEs.GeM (Government e-Marketplace): It is a digital platform that facilitates MSMEs' access to government procurement opportunities. Over 1.8 million MSMEs have onboarded, contributing to transactions worth Rs. 4 lakh crores, and also contributed 40% of India's exports, showcasing the sector's potential on the global stage.MUDRA Loans: MUDRA (Micro Units Development and Refinance Agency) Loans provide collateral-free financial support to MSMEs, enabling access to credit for small businesses. About 30 million MSMEs have benefitted, with loans totaling Rs. 15 lakh crores disbursed.Make in India and Startup India Campaigns: The Make in India and Startup India campaigns promote innovation, entrepreneurship, and digital transformation among MSMEs. Presently, more than 50,000 startups have been supported, worth Rs. 20,000 crores in funding provided.MSME IDEA Hackathon: It encourages innovation by providing a platform for MSMEs to develop digital solutions for business challenges. 1,000 ideas were submitted. However, 100 solutions were funded and implemented.National E-Governance Plan (NeGP): It aims to improve service delivery to MSMEs through digital platforms and streamline interactions with government services. More than 500 e-governance projects have been implemented, enhancing transparency and reducing bureaucracy.Online Dispute Resolution (ODR): It enables MSMEs to resolve disputes digitally, reducing the need for physical hearings and speeding up the resolution process. Approximately 50,000 disputes have been successfully resolved through ODR platforms, benefiting MSMEs by saving time and costs.E-NAM (Electronic National Agriculture Market): It connects MSMEs in the agricultural sector to digital markets, enabling transparent and efficient trading of agricultural products. As of 2024, over 1,000 mandis have been integrated, benefiting over 1.5 million farmers and MSMEs.Technology Adoption in MSMEs - Enablers and Growth ProspectsWhile technology adoption offers substantial benefits, Micro, Small, and Medium Enterprises (MSMEs) often face a multitude of challenges and barriers in implementing new technologies. These obstacles can stem from financial limitations, skill shortages, and organizational resistance to change, making the journey toward digital transformation complex.One of the biggest hurdles is the cost associated with adopting, maintaining, and upgrading technology systems. Expenses such as software licenses, hardware updates, and employee training can place a strain on MSME budgets. The Union Budget 2025 brings encouraging developments for first-time entrepreneurs, including those from marginalized groups, by enhancing credit guarantee cover and proposing term loans of up to Rs. 2 crores. These measures, along with allocations for skill development, reflect a strong commitment to fostering innovation and inclusive growth. As enterprises embrace new technologies, there is a growing opportunity to build internal capabilities through training and up-skilling.Another major challenge is resistance to change. Employees may be apprehensive about adopting new technologies due to fears of job displacement, unfamiliarity, or discomfort in altering established workflows. Compatibility issues with existing systems further complicate the process, often requiring significant effort to achieve seamless integration. Despite government-backed digitization programs and incentives, the lack of technical standardization across MSMEs continues to be a barrier.The Union Budget 2025 emphasizes cybersecurity awareness and digital trust, signaling a positive step toward secure digital adoption. While practical implementation and compliance with industry-specific regulations and adherence to legal and ethical standards can be complex, they also encourage MSMEs to strengthen their operational resilience. Dependence on technology vendors, though a concern, presents an opportunity for enterprises to build strategic partnerships and enhance vendor management practices.Structured change management processes, when implemented, can greatly support successful technology adoption, helping enterprises integrate new tools more effectively. Environmental considerations are increasingly important, and while certain technologies may pose ecological challenges, Budget 2025's focus on green technology and sustainability-focused entrepreneurship opens new avenues for MSMEs to align with sustainable practices.Policy Roadmap for a Future-Ready Indian MSME SectorFor Policy MakersPolicymakers play a pivotal role in shaping an environment conducive to MSME growth and technological advancement. Key recommendations include:Enhance Connectivity: Prioritize the development of high-speed broadband, particularly in rural and underserved areas, to provide equal access to technology.Financial Incentives: Introduce tax incentives, grants, and funding programs to encourage MSMEs to invest in research, development, and the adoption of innovative technologies.Digital Literacy: Launch comprehensive digital literacy programs to equip MSME owners and employees with the skills necessary for effective technology utilization.Regulatory Simplification: Streamline regulatory processes and compliance requirements to minimize administrative burdens and facilitate technology adoption.Cyber-Security Investments: Build robust cyber-security infrastructure and conduct awareness campaigns to protect MSMEs from cyber threats and ensure data security.Access to Finance: Develop financial support mechanisms such as low-interest loans and venture capital to ease investments in technology.Foster Collaborations: Encourage partnerships between MSMEs, larger companies, research institutions, and startups to promote innovation and knowledge sharing.Policy Monitoring: Regularly assess the effectiveness of technology-related policies and programs, making necessary adjustments to maximize their impact.For Industry AssociationsIndustry associations can act as vital intermediaries to support MSMEs in their journey toward innovation and technological readiness. Their responsibilities should include:Training and Workshops: Conduct sessions on technology adoption, digital marketing, and other relevant areas to enhance MSME capabilities.Networking Opportunities: Organize events and conferences to facilitate connections between MSMEs, technology providers, investors, and subject matter experts.Advocacy: Represent MSMEs' interests by lobbying for policies that encourage innovation, technology adoption, and a favorable business ecosystem.Knowledge Sharing: Collect and disseminate success stories and best practices of MSMEs that have effectively implemented technological solutions.Consultation Services: Offer personalized guidance to help MSMEs evaluate their technology needs, choose appropriate solutions, and implement them efficiently.Innovation Hubs: Establish centers where MSMEs can collaborate on research, development, and technology-driven initiatives.For MSMEsMSMEs themselves must proactively embrace change and focus on building future-ready capabilities. They can achieve this by:Digital Skills Development: Provide employees with training and up-skilling opportunities to enhance digital proficiency.E-Commerce Adoption: Leverage online platforms and marketplaces to broaden customer reach and access new markets.Stay Informed: Keep abreast of technological trends, industry developments, and emerging innovations relevant to their operations.Culture of Innovation: Foster an organizational culture that values creativity and the adoption of new technologies.Scalable Technology: Opt for solutions that are scalable and aligned with long-term business goals.Cyber-Security Practices: Implement best practices for data protection and ensure the safety of digital assets.Collaborative Efforts: Engage in partnerships with other MSMEs, research institutions, and industry associations to share resources and knowledge.Utilize Government Support: Take advantage of government programs and incentives designed to assist MSMEs in technology adoption and innovation.ConclusionDespite some challenges owing to technological adoption and up-gradation, the government is determined to strengthen the MSMEs to contribute their full potential for the overall development of the country. Similarly, encouraging a culture of innovation and technology among MSMEs is essential for their long-term success and competitiveness. By way of implementing the above strategies and creating an environment that values innovation and technology, MSMEs can empower their employees to think creatively, take risks, and drive continuous improvement, ultimately positioning themselves for growth and competitiveness in the future.References:Hegde, N. (2018). The future growth model of micro, small and medium enterprises (MSMEs) in India. Management Practices in Start-Ups. Indus Business Academy.https://wadhwanifoundation.org/digital-transformation-a-catalyst-for-sme-growth-and-innovation/#:~:text=In%20conclusion%2C%20digital%20transformation%20is,in%20a%20dynamic%20global%20economy.Kathan, W., Matzler, K., Füller, J., Hautz, J., & Hutter, K. (2014). Open innovation in SMEs: a case study of a regional open innovation platform. Problems and perspectives in management, (12, Iss. 1 (contin.)), 161-171.Ministry of Micro, Small and Medium Enterprises, Annual Report, 2022-23, Government of India, New Delhi.https://msmedi.dcmsme.gov.in/https://presolv360.com/resources/odr-a-solution-for-msme-woes-of-delayed-payments/#:~:text=ODR's%20usefulness%20in%20India,reporting%20obligations%20around%20delayed%20payments.https://www.india.gov.in/website-national-e-governance-plan-negphttps://www.mudra.org.in/https://images.hindustantimes.com/images/app-images/2023/5/Roadmap-for-Digital-Technology-to-Foster-Indias-Msme-Ecosystem-Opportunities-and-Challenges.pdfAuthor may be reached at jyothiguntnur@gmail.com and eboard@icai.in
Ep. 243 — SME IPO: Path to Exceptional Growth for SMEs & Opportunities for Professionals
CA Journal
· September 2026
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SME IPO: Path to Exceptional Growth for SMEs & Opportunities for ProfessionalsThis article explores a powerful idea that India's next economic breakthrough can come from its Small and Medium Enterprises (SMEs), and Chartered Accountants (CAs) can play a leading role in making it happen through SME IPOs (Initial Public Offerings). While large companies dominate headlines, a quiet revolution is taking place in smaller towns and industrial hubs. Over 1,000 SMEs have already been listed on the SME platforms of BSE and NSE, raising more than 15,000 crores. Yet, this is only the beginning. With over 6.3 crore SMEs in India, the potential for future listings is vast.By CA. (Dr.) Sunil Gupta, Member of the InstituteThe article presents SME IPOs as a powerful tool for businesses to access capital, improve credibility, attract talent, and scale up without relying on loans or giving away control. It also highlights the wide-ranging benefits of going public—from better governance and valuations to long-term stability and visibility.Despite having the ideal skill set, most CAs are not actively involved in this space because of a lack of awareness and exposure. CAs are well-equipped to handle IPO-related work such as financial restatements, disclosures, due diligence, structuring, and ongoing compliance.Beyond IPO advisory, the article points out additional growth opportunities for CAs, including:Investing through Alternative Investment Funds (AIFs)Serving as Independent DirectorsOffering strategic and M&A advisoryBuilding peer review and audit quality firmsProviding financial clean-up and due diligence servicesThe article concludes with a message for CAs to think beyond compliance and become active participants in building India's capital markets. By guiding SMEs through the IPO journey, Chartered Accountants can not only grow their practice but also contribute meaningfully to the country's economic development.Introduction: A Call to Financial WarriorsIndia's most profound financial revolution is not unfolding in the corridors of stock exchanges or multinational boardrooms, but within the heart of the nation, in small factories, modest offices, and bustling shop floors. A quiet yet transformative wave is sweeping across the country. Small and Medium Enterprises (SMEs) are mobilising substantial capital, listing on stock exchanges, and rapidly evolving into economic powerhouses. Chartered Accountants with unparalleled expertise in finance, governance, and strategic business planning remain noticeably absent from the forefront of this movement. This is an opportunity for the Chartered Accountants to take the lead in driving a transformation of national significance.The Landscape: We're Just Getting StartedAs of December 2024, around 1000 companies have been listed on the BSE SME and NSE Emerge platforms. Collectively, these IPOs have mobilized around 15,000 crores, with a combined SME market capitalization exceeding 3 lakh crores, which is transformational. And this is only the beginning for the Indian market. As per government data, over 6.3 crore SMEs are currently registered in India.Assuming that just 1,00,000 of them are fundamentally strong and can be IPO-ready in the next 1-2 years, that is an ocean of untapped potential. Yet, today, we have just 1000 listed SMEs. Imagining the broader view of what would happen if even 1,00,000 SMEs went public? That's a 100-fold increase over current levels. That means the SMEs market cap would skyrocket to around 300 lakh crores.Placing this within a national context. Prime Minister Narendra Modi has laid out a bold vision to make India a $30 trillion economy by 2047, when the nation celebrates 100 years of independence. For this vision to be realized, SMEs cannot remain on the sidelines. They are not just support players, they must be growth engines, job creators, and capital market participants. It would not happen by chance, it requires professionals who understand the process, the paperwork, and the power of public funding. And no one is better equipped for that than a Chartered Accountant.The Kalpvriksha: IPOs as Growth MultipliersImagine the SME IPO as a Kalpvriksha, a mythical tree that fulfills wishes. But one can benefit from it only if one recognizes it, approaches it, and asks of it. Here are the fruits it offers:Brand Credibility: Instantly elevates your company's trust factor. A listed status enhances perception across customers, vendors, and regulators.Access to Non-Debt Capital: Raise growth capital without giving away control to private equity or drowning in interest-heavy loans.Liquidity Creation: Promoters, early investors, and even employees can monetize their holdings partially, without an exit.Shares as Collateral & Currency: Listed shares can be pledged for funding or used as acquisition currency for growth via mergers and partnerships.Greater Transparency, Greater Trust: Listing compels you to adopt systems, structures, and disclosures, fostering market confidence.Succession & Continuity: Attract the next-gen leadership and institutional talent, with governance structures that support long-term growth.Global Visibility & Investor Access: FPIs, HNIs, and strategic investors prefer listed companies. An IPO opens the gates to a global investor pool.Enhanced Valuations: Public markets value scalability and future potential, unlocking higher valuations than private deals.Attraction of Top Talent: Talented professionals prefer working with transparent, high-growth, and equity-rewarding organizations.Collective Manifestations: An IPO is not just a financial event—it aligns the dreams of founders, investors, employees, and customers, turning individual goals into a shared vision.The Problem: Why Most CAs Are Still Missing the OpportunityIPO advisory, a field that blends financial strategy, valuation, legal coordination, and business vision, is being dominated by merchant bankers, ex-bankers, and unregulated consultants. Many of these players lack the deep technical grounding that CAs possess. As the most qualified financial professionals in the country, Time is instructing Chartered Accountants to change their mindset.The future belongs to those who can think beyond forms and filings. The future belongs to those who can help clients unlock capital, drive valuation, and fuel national growth. The sooner we embrace it, the sooner we lead it.The OpportunityThe SME IPO ecosystem is a goldmine for professionals who can navigate financials, compliance, and capital strategy. Every SME that prepares for public listing needs a team, and at the heart of that team must be a CA who understands the mechanics and the mindset of capital markets. From preparing financials and reclassifying assets to coordinating with merchant bankers, valuers, registrars, and legal advisors, the Chartered Accountant is the glue that holds the IPO process together. The role of Chartered Accountants goes beyond numbers. CAs are not just certifying accounts, they are shaping narratives. CAs are not just signing reports, but rather helping to build investor trust, build empires.A single SME IPO engagement can include:IPO readiness auditsFinancial restatements and clean-upPre-IPO due diligenceStructuring of promoter holdingsDrafting DRHP financials and risk disclosuresSupporting valuation and pricing strategyPost-IPO governance and reportingEach of these is a natural extension of the CA's skill set. And more importantly, each creates a real impact on clients, on capital markets, and on your practice. This is where compliance ends, and transformation begins.Why is a Chartered Accountant perfectly positioned for the SME IPO? IPO advisory is not about flashy finance or celebrity investing. It's about detail, structure, credibility, and long-term trust. CAs bring:Integrity: Investors trust companies advised by credible professionals.Structure: Clean books and compliance are preconditions for listing.Storytelling with Substance: Turning financials into compelling investor narratives.Handholding: From GST reconciliations to ESOP plans, it's your game.Merchant bankers might design the issue. But it is the Chartered Accountant who is shaping the company underneath.The Mindset Shift: Moving Beyond LimitationsMany Chartered Accountants hesitate to explore new opportunities due to two prevailing concerns. The first is the belief, "I'm not a banker or a market expert." However, such expertise is not a prerequisite. Most CAs already possess a significant portion of the required skill set, and the remainder can be acquired with focused learning. The second concern is, "What if I lose my existing clients?" On the contrary, embracing this expanded role often enhances client relationships, as many are willing to pay a premium for guidance on IPO preparedness.This evolution is not about becoming someone else, it is about broadening professional horizons and amplifying impact. By stepping into this space, CAs don't merely transform businesses; they transform lives of their clients, and their own.How to Get Started: The SME IPO Game Plan for CAsStep by Step roadmap for Chartered Accountants for SME IPOStudy SME IPO frameworks—BSE/NSE guidelines, SEBI normsShadow a merchant banker or IPO advisor for 1-2 mandatesDevelop your own "IPO Readiness Checklist" for clientsPartner with CAs in T1/T2 cities for cross-regional executionJoin or start a CA-IPOs Focused Alliance to pool resourcesHost SME IPO awareness sessions—Position yourself as an expertBuild an investor network—You'll need it when clients ask for anchor investorsConsider listing your own clients: Start with 10-15 Cr turnover companiesGrowth Opportunities for Chartered Accountants via IPOThe SME IPO wave is a gateway to multifaceted growth opportunities, not just for the clients but for CA as a professional. Beyond IPO advisory, the evolving capital market landscape opens diverse avenues for CAs to expand their skills, influence, and revenue. Here's how:Investment via Alternative Investment Funds (AIFs): As a Chartered Accountant, your deep understanding of SMEs and their growth potential positions you uniquely to capitalise on this insight by investing through Alternative Investment Funds (AIFs). This approach offers a more strategic and informed investment avenue compared to the secondary market.Independent Director Roles: Post-IPO, companies require strong corporate governance. CAs with expertise in IPO processes are ideal candidates for Independent Director positions, offering strategic oversight and compliance leadership, while expanding their professional footprint.Peer Review and Quality Assurance Firms: With enhanced exposure to complex IPO engagements, you can establish or join peer review firms that specialize in high-quality audits and compliance for SMEs preparing to list. This niche builds CA's reputation as a quality and compliance expert.Financial Restatement Services: Many SMEs require financial restatements or clean-up before IPO readiness. Providing these services deepens client relationships and showcases your critical role in transforming companies into credible public entities.Strategic Growth Advisory: IPO advisory sharpens CA's business acumen. One can expand into broader strategic advisory roles covering business expansion, capital raising beyond IPOs, and corporate restructuring, offering end-to-end growth solutions.Merger & Acquisition (M&A) Advisory: SME IPOs often precede or follow mergers and acquisitions. CAs can leverage their financial expertise to lead or support M&A due diligence, valuations, and deal structuring, becoming indispensable in these high-stakes transactions.Due Diligence Expertise: Robust due diligence is critical for IPO success and investor confidence. Specializing in financial, operational, and compliance due diligence places you at the heart of transaction execution, enhancing your advisory credentials.By embracing these diverse growth avenues, Chartered Accountants can transform their career trajectory from compliance specialists to influential leaders in India's expanding SME ecosystem.Conclusion: Be the IPO Angel for the SMEsIndia's next economic transformation is unlikely to be led by the next unicorn. Rather, it will be powered by hundreds of sincere, ambitious SME founders who seek a clear roadmap, trusted guidance, and a single moment of courage to scale new heights. Chartered Accountants are uniquely positioned to provide that direction and mentorship. By embracing this opportunity, the profession stands not only to expand its own influence but also to ignite widespread prosperity, generate employment, and drive structural transformation across the nation.Once viewed primarily as guardians of compliance, Chartered Accountants must now rise as architects of capital and enablers of growth. This is a moment to transcend the traditional role—not merely to audit empires, but to help build them.As Robin Sharma, a well-acclaimed writer, wisely said, "Each day, life will send you little windows of opportunity. Our destiny is ultimately defined by how we respond to these windows of opportunity."The SME IPO revolution is one such window. It is time for the profession to step through it.Author may be reached at sunilguptaca@gmail.com and eboard@icai.in
Ep. 244 — Legal and Regulatory Challenges in FDI Dispute Resolution: Navigating Complexities through International Arbitration and Mediation
CA Journal
· September 2026
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Legal and Regulatory Challenges in FDI Dispute Resolution: Navigating Complexities through International Arbitration and MediationThis article examines the complexities of Foreign Direct Investment (FDI) dispute resolution, emphasizing the roles of international arbitration and mediation. It categorizes FDI disputes into contractual, regulatory, and investor-state, highlighting legal frameworks, including Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs). The article addresses jurisdictional and procedural challenges, such as forum selection, consent to arbitration, and sovereign immunity. Case studies like Yukos vs. Russia and Philip Morris vs. Uruguay illustrate these points. Mediation is underscored as a cost-effective, flexible alternative for resolving disputes amicably, preserving business relationships, and fostering sustainable global investments.IntroductionForeign Direct Investment (FDI) stands as a cornerstone of modern global business, facilitating cross-border capital flows that drive economic growth and technological advancement.As businesses expand internationally, the allure of new markets often comes with inherent risks, including potential disputes that can arise between foreign investors and host states.These disputes, rooted in divergent legal frameworks, regulatory environments, and socio-political contexts, underscore the critical need for robust dispute resolution mechanisms.Effective dispute resolution not only safeguards investor interests but also plays a pivotal role in maintaining confidence in FDI.In addressing the complexities of FDI dispute resolution, international arbitration and mediation emerge as indispensable tools.These mechanisms offer impartial forums where disputes can be resolved outside of national courts, often providing faster, more flexible, and enforceable outcomes tailored to the unique dynamics of cross-border investments.This article explores the legal and regulatory challenges inherent in FDI dispute resolution, emphasizing the pivotal role of international arbitration and mediation in mitigating risks and fostering a conducive environment for sustainable global investments.Understanding FDI DisputesFDI disputes encompass a spectrum of conflicts that can arise between foreign investors and host states, often revolving around contractual breaches, regulatory inconsistencies, or broader investor-state disagreements.These disputes, classified into contractual, regulatory, and investor-state disputes, highlight the diverse challenges faced in cross-border investments.Types of FDI DisputesContractual Disputes: At the heart of many FDI disputes lie contractual disagreements between investors and local partners or governments.These disputes typically arise from breaches of investment agreements, joint venture contracts, or commercial leases, where parties contest obligations, performance standards, or interpretations of contractual terms.Regulatory Disputes: Regulatory changes or inconsistencies pose significant risks to FDI, triggering disputes when new laws or policies affect investor operations or profitability.Such disputes often revolve around changes in taxation, environmental regulations, licensing requirements, or expropriation without adequate compensation, challenging the stability and predictability crucial for long-term investments.Investor-State Disputes: Perhaps the most complex and high-profile category, investor-state disputes arise when foreign investors invoke international law protections against host state actions perceived as unfair or discriminatory.These disputes typically involve claims of treaty violations under bilateral or multilateral investment agreements, such as breaches of fair and equitable treatment, national treatment, or expropriation without compensation.Case Studies of FDI DisputesThe Yukos Oil Company vs. Russia: The Yukos Oil Company\'s dispute with the Russian Federation serves as a poignant example of an investor-state dispute under international arbitration.Following Yukos\' dissolution and allegations of politically motivated actions by the Russian government, the case unfolded in various international forums, ultimately resulting in significant compensation awards to former Yukos shareholders.Philip Morris vs. Uruguay: In the realm of regulatory disputes, Philip Morris International\'s challenge against Uruguay\'s tobacco control measures highlights clashes over public health regulations versus investment protections.The case, adjudicated under the World Bank\'s International Centre for Settlement of Investment Disputes (ICSID), highlighted tensions between sovereign regulatory authority and investor rights under international treaties.Legal Framework for FDI Dispute ResolutionForeign Direct Investment (FDI) dispute resolution is governed by a complex interplay of international treaties, bilateral agreements, domestic laws, and established arbitration rules.Understanding this legal framework is essential for resolving the intricacies of disputes in the international business arena.Overview of International Treaties and AgreementsBilateral Investment Treaties (BITs): BITs are foundational agreements between two countries that establish reciprocal protections for investors and investments.These treaties typically include provisions on fair and equitable treatment, protection against expropriation without compensation, and mechanisms for dispute resolution through international arbitration.BITs aim to promote investment by providing legal certainty and safeguarding investor rights against arbitrary state actions.Free Trade Agreements (FTAs): Many FTAs include investment chapters that offer protections similar to BITs, enhancing market access and investment opportunities between member states.These agreements often incorporate mechanisms for resolving investment disputes, such as investor-state dispute settlement (ISDS) mechanisms, which allow investors to bring claims against host states directly.Multilateral Conventions: Institutions like the United Nations Commission on International Trade Law (UNCITRAL) and the International Centre for Settlement of Investment Disputes (ICSID), administer multilateral conventions that govern international investment disputes.These conventions provide procedural rules and frameworks for arbitration and mediation, ensuring consistency and enforceability in resolving disputes across jurisdictions.Role of Domestic Laws and International Arbitration RulesDomestic Laws: Host states\' domestic legal frameworks play a crucial role in FDI dispute resolution, as they define the scope of regulatory authority and compliance requirements.Investors must navigate local laws and procedures, which may influence the outcome and enforceability of international arbitration awards.International Arbitration Rules: International arbitration offers a neutral and efficient forum for resolving FDI disputes outside of national courts.Arbitration rules provided by institutions like the International Chamber of Commerce (ICC), UNCITRAL, and ICSID offer procedural guidelines and standards for conducting arbitrations, ensuring fairness, impartiality, and enforceability of awards.These rules allow parties to select arbitrators, determine procedural timelines, and enforce awards internationally through the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.Navigating the legal framework for FDI dispute resolution requires a nuanced understanding of international treaties, domestic laws, and arbitration rules.Effective management of these elements is crucial in safeguarding investor interests and promoting sustainable economic development through international investments.Complexity of Jurisdictional IssuesResolving FDI disputes involves addressing intricate jurisdictional challenges that arise from forum selection clauses, consent to arbitration, and issues of sovereign immunity.These complexities can significantly impact the outcome and enforceability of dispute resolution mechanisms.Challenges in Determining JurisdictionForum Selection Clauses: FDI contracts often include forum selection clauses specifying the jurisdiction or arbitration venue for resolving disputes.Interpreting these clauses requires careful consideration of language, intent, and enforceability under applicable laws, as they dictate where and how disputes will be adjudicated.Consent to Arbitration: Obtaining consent from all parties to arbitration is crucial for initiating proceedings.Issues can arise when one party disputes the validity of arbitration agreements or claims a lack of proper consent, leading to jurisdictional challenges that must be resolved before arbitration can proceed.Sovereign Immunity: Host states may invoke sovereign immunity to shield themselves from litigation or arbitration initiated by foreign investors.Resolving disputes involving sovereign entities requires careful analysis of international law principles and exceptions to immunity, such as commercial activities or specific waivers of immunity by the state.Case Studies Illustrating Jurisdictional ChallengesChevron vs. Ecuador: The Chevron vs. Ecuador dispute exemplifies jurisdictional challenges in investor-state arbitration.After Ecuadorian courts issued a $9.5 billion environmental damages ruling against Chevron, the company sought relief through international arbitration under the U.S.-Ecuador BIT.The case highlighted debates over jurisdictional boundaries, sovereign immunity, and the enforceability of foreign judgments in investor-state disputes.BG Group vs. Argentina: In BG Group plc vs. Argentina, jurisdictional issues arose from conflicting interpretations of an investment treaty\'s dispute resolution clause.Argentina argued that BG Group failed to comply with a local litigation requirement before seeking arbitration.The case underscored the importance of strict adherence to procedural prerequisites and the impact of such requirements on jurisdictional determinations.Procedural Challenges in FDI ArbitrationNavigating FDI arbitration involves overcoming procedural challenges that impact the efficiency, cost-effectiveness, and enforceability of dispute resolution outcomes.Understanding the procedural intricacies is essential for effectively managing FDI disputes.Step-by-Step Guide to FDI ArbitrationInitiation: FDI arbitration typically begins with the filing of a notice of arbitration by the claiming party, detailing the basis of the dispute and invoking relevant treaty protections or contractual rights.The respondent then responds, setting out its defence and potentially raising jurisdictional objections.Constitution of Tribunals: Arbitral tribunals are constituted based on agreements between the parties or arbitration rules.Tribunals consist of impartial arbitrators appointed by the parties or designated arbitration institutions.These arbitrators oversee proceedings, adjudicate disputes, and issue binding arbitral awards.Procedural Rules: Arbitration proceedings follow established procedural rules, such as those provided by institutions like the International Centre for Settlement of Investment Disputes (ICSID), the United Nations Commission on International Trade Law (UNCITRAL), or specific arbitration rules agreed upon by the parties.These rules govern procedural timelines, document submission, hearings, and the conduct of parties and arbitrators.Analysis of Procedural ChallengesDelays: FDI arbitration can be susceptible to delays due to procedural complexities, challenges in scheduling hearings, arbitrator availability, and the need for extensive document exchange and expert testimony.Delays can prolong dispute resolution timelines, impacting investor confidence and increasing costs.Costs: Arbitration costs, including arbitrator fees, legal expenses, administrative fees, and expert witness fees, can escalate significantly throughout the arbitration process.Parties must manage costs effectively to avoid financial burdens that may outweigh potential recovery or relief sought through arbitration.Enforcement of Arbitral Awards: While arbitral awards are generally enforceable under international conventions like the New York Convention, challenges may arise in enforcing awards against sovereign states or parties unwilling to comply.Enforcement proceedings may involve additional legal and procedural hurdles, particularly in jurisdictions with limited recognition of international arbitration awards.Importance of Mediation in FDI DisputesMediation offers a complementary and often preferable approach to resolve FDI disputes, emphasizing collaborative negotiation and mutually beneficial outcomes.Understanding the role of mediation in FDI disputes is crucial for fostering amicable resolutions and maintaining positive investor-state relationships.Role of MediationNeutral Facilitation: Mediation involves a neutral third-party mediator who facilitates discussions between disputing parties, helping them explore interests, identify common ground, and negotiate mutually acceptable solutions.Unlike arbitration, mediation does not result in binding decisions imposed by the mediator.Flexibility and Control: Mediation provides parties with greater control over the resolution process, allowing them to tailor solutions to their specific needs and circumstances.The informal and flexible nature of mediation encourages creative problem-solving and preserves business relationships.Time and Cost Efficiency: Mediation can be more time and cost-efficient compared to arbitration or litigation, as it avoids lengthy procedural formalities and reduces legal expenses.Parties can achieve quicker resolutions, minimizing disruptions to business operations and reducing financial burdens.Case Studies Demonstrating Successful Mediation OutcomesMalaysia Airlines vs. Boeing: The dispute between Malaysia Airlines and Boeing over delayed aircraft deliveries was successfully resolved through mediation.The mediation process allowed both parties to address their concerns, resulting in an amicable settlement that preserved their business relationship and avoided protracted litigation or arbitration.Siemens vs. Argentina: In the Siemens vs. Argentina case, mediation played a pivotal role in resolving a complex investor-state dispute arising from the cancellation of a government contract.Mediation facilitated constructive dialogue, enabling Siemens and Argentina to reach a settlement that balanced investor interests and state sovereignty.ConclusionNavigating the complexities of FDI dispute resolution requires a comprehensive understanding of legal frameworks, jurisdictional challenges, procedural intricacies, and the benefits of mediation.International arbitration and mediation serve as vital tools in addressing the diverse challenges faced by foreign investors and host states, promoting fair, efficient, and enforceable resolutions that enhance investor confidence and foster sustainable global investments.Embracing best practices in FDI dispute resolution, including clear contractual agreements, adherence to international treaties, and proactive engagement in mediation, can mitigate risks and ensure successful outcomes in the dynamic landscape of international business.By leveraging these mechanisms, stakeholders can navigate the complexities of FDI disputes, fostering a conducive environment for cross-border investments and economic growth.References:Blackaby, N., Partasides, C., Redfern, A., & Hunter, M. (2015). Redfern and Hunter on International Arbitration. Oxford University Press.Born, G. (2014). International Commercial Arbitration. Kluwer Law International.Schreuer, C. (2001). The ICSID Convention: A Commentary. Cambridge University Press.United Nations Commission on International Trade Law (UNCITRAL). (2010). UNCITRAL Arbitration Rules.International Centre for Settlement of Investment Disputes (ICSID). (2006). ICSID Convention, Regulations and Rules.New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. (1958).Author may be reached at eboard@icai.in
Ep. 245 — Corporate and Banking Fraud, PMLA, and Auditor's responsibility
CA Journal
· September 2026
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Corporate and Banking Fraud, PMLA, and Auditor's responsibilityCorporate and Banking fraud involves illegal activities conducted by individuals or companies in a dishonest or unethical manner to gain an advantage. This can include falsified accounting, misrepresenting products or services, and theft of assets. Corporate fraud has severe economic impacts on businesses, employees, and stakeholders. The PMLA (2002) imposes obligations on banking companies and intermediaries. The Companies Act 2013 also specifies the punishment. Auditors play a vital role in ensuring the integrity of financial statements. Their responsibilities include checking financial records, assessing internal controls, verifying compliance with laws and regulations, and detecting fraud.IntroductionCorporate and Banking fraud is a significant threat to the integrity of the business environment, undermining the confidence of investors, employees, and stakeholders. In India, the PMLA, 2002 is a robust legal framework to combat money laundering and related financial crimes. Inclusion of corporate fraud under Section 447 of The Companies Act, 2013 mainly through amendments introduced in The Finance Act 2018 in PMLA has further strengthened the Act\'s effectiveness in addressing fraudulent activities within corporations.The PMLA empowers authorities to attach and confiscate assets derived from corporate fraud, thereby preventing the dissipation of illicit gains. This legal measure aims to ensure that individuals and entities involved in corporate fraud are held accountable. Offences under Section 447 of the Companies Act 2013 deal with punishment for fraud. This shows the government\'s commitment to maintaining high standards of corporate governance and safeguarding the financial system from fraudulent practices.ObjectiveThis article aims to explore the intricate relationship between corporate fraud and the Prevention of Money Laundering Act (PMLA), 2002, and examine the definitions of fraud in different Acts. It will examine the impact of recent legal amendments in the PMLA by enhancing its effectiveness. The article aims to provide an understanding of corporate fraud. It will examine the inclusion of offences under Section 447 of The Companies Act, 2013, under The PMLA to address Money Laundering issues and the responsibility of an auditor while conducting the audit.Definition of Fraud as per Different ActsFraud is the intentional use of deceit, a trick, or some dishonest means to deprive another of his money, property, or a legal right. It involves falsification, whether through withholding vital information, lying, or faking documents.It is clarified that civil and criminal proceedings have different standards of proof, making determining culpability complex. In civil cases, the plaintiff must prove injury on the \"balance of probabilities,\" while criminal cases require proof beyond a reasonable doubt. Frauds are offenses and are convicted under IPC, now known as BNS, and punishment has been prescribed under the relevant Acts.i. Bharatiya Nyaya Sanhita, 2023The new Act \"Bharatiya Nyaya Sanhita, 2023\" (BNS) has replaced the Indian Penal Code of 1860, which doesn\'t explicitly define fraud. However, fraud can be identified and understood through various acts falling under sections of the BNS. These sections deal with as per details below and some activities of IPC falls as scheduled offences under PMLA also.Section 318 (Section 415 of IPC) is related to Cheating and specifies punishment, which may extend to seven years with a fine or with both.Section 318(4) (Section 420 of IPC) pertains to cheating and the dishonest inducement of property delivery. It specifies punishment, which may extend to seven years, and shall also be liable for a fine.Section 320 (Section 421 of IPC) pertains to actions involving the removal or concealment of property in a way that may be considered dishonest or fraudulent, aiming to prevent fair distribution among creditors. It specifies that punishment shall not be under six months but may extend to two years, with a fine or both.Section 321(Section 422 of IPC) pertains to the act of dishonestly or fraudulently preventing debt from being accessible to creditors and specifies punishment that may extend to two years, a fine, or both.Section 322 (Section 423 of IPC) pertains to the deceptive or fraudulent execution of a deed transfer that includes a false statement regarding the consideration and specifies punishment that may extend to three years, with a fine, or with both.Section 323(Section 424 of IPC) pertains to dishonest or fraudulent removal or concealment of assets and specifies punishment that may extend to three years, a fine, or both.ii. Sale of Goods Act, 1930According to The Sale of Goods Act, 1930 \"fraud\" encompasses specific acts by a party to a contract (or with their involvement) to deceive another party or their representative. These acts include: Presenting something as a fact that is not true, even if the person making the claim does not believe it to be true. Essentially, fraud involves deceit and an intention to mislead.The term \"fraud\" consists of two critical elements:Deceit: Intentionally misleading someone by providing false information.Harm to the Deceived Party: The Act of fraud resulting in harm to the party relying on the false information.iii. Indian Contract Act, 1872Under the Indian Contract Act, fraud refers to actions taken by a person or their agent with the intent to deceive another party or persuade them to enter into a contract. Such actions are considered fraudulent when there is an intention not to fulfill the contract. Fraud encompasses any of the following acts committed with the aim of deceiving another person or their agent or inducing them to enter into or create a contract.False suggestionActive concealmentPromise without intentionAny other act or omission intended to deceive the person to whom it is directed and the law specially declares to be fraudulent.The term \"false\" can be defined under various laws, but one common context in the Indian Contract Act of 1872 is any statement or act that is not true and is made to deceive someone.iv. Information Technology Act, 2002 (IT Act)The definition of \"fraud\" within the context of the IT Act in India related to the following activities, and the penalties for fraud-related offenses under the IT Act have also been specified in relevant sections of the Act. Specified provisions fall under scheduled offenses under PMLA.Tampering with Computer Source DocumentsHacking with Computer SystemReceiving a Stolen Computer or Communication DeviceUsing the Password of Another PersonCheating Using Computer ResourcesFraudulent Use of Electronic Signature or PasswordCheating by PersonationPublishing Private Images Without ConsentActs of Cyberterrorismv. The Companies Act, 2013Section 447 of The Companies Act 2013 addresses the punishment for fraud. It defines fraudulent acts as those performed with the intent to harm the interests of the company, its shareholders, creditors, or any other individual, regardless of whether these acts result in wrongful gain or wrongful loss. It specifies the punishment; if any person is found guilty of fraud involving a sum of at least Rs.10 lakh or 1% of the turnover of the company, whichever is lower, the person shall be sentenced to imprisonment for a term of not less than six months but which may extend to ten years. They shall also be liable to a fine which shall not be less than the sum involved in the fraud which may extend to three times the sum involved. If the fraud involves public interest, the term of imprisonment shall not be less than three years.It has also been provided that where the fraud involves a sum less than Rs.10 lakh or 1% of the company\'s turnover, whichever is lower, and not involving public interest. Any person guilty of such fraud shall be punishable for a term that may extend to 5 years or with a fine that may extend to fifty lakh rupees or with both.It has further been explained that fraud includes any activity with the intention to deceive, to ingenuine gain, or to injure the interests of the company, its stakeholders, or any other person.Method of FraudsDifferent types of methods are generally used by people to defraud stakeholders in different sectors. Some examples are as follows:Misrepresentation: Providing false or misleading information to investors or other stakeholders for personal gain or to manipulate perceptions.Embezzlement: Illegally misappropriating or stealing funds or assets from a company for personal use.Financial Statement Fraud: Deliberately manipulating financial reports or statements to deceive stakeholders about a company\'s financial performance or position.Insider Trading: Illegally trading stocks or securities based on non-public information can result in unfair advantages or losses for other investors.Kickbacks: Illicit payments made to individuals or entities as a reward for facilitating business transactions or contracts.Securities Fraud: Misleading investors about securities (stocks, bonds, etc.) to manipulate prices.Mortgage Fraud: Includes identity theft, falsification of income/assets, and property flipping.Bankruptcy Fraud: Concealing assets during bankruptcy proceedings.Over Invoicing: Taking invoices from vendors over the actual value.Fictitious Bills: Booking the fictitious bills without taking delivery.Straw Buyers: Using intermediaries to hide the true buyer\'s identity.Tax Fraud: Involves intentionally misrepresenting tax information to reduce tax liability.Insurance Fraud: Ranges from false claims to more elaborate schemes like staged accidents.Classification of Frauds as per RBI CircularRBI has issued Master Circular UBD.BPD. MC. No. 17 /12.05.001/2013-14 dated July 1, 2013, containing detailed information under which circumstances fraud will be treated and how the reporting shall be made. To ensure uniformity in reporting, frauds have been classified based mainly on the provisions of the Indian Penal Code, now known as BNS. However, cases of cash shortages and irregularities in foreign exchange transactions are to be reported as fraud if the intention to cheat/defraud is suspected/ proved. The following are also examples of bank fraud:Misappropriation and criminal breach of trust.Fraudulent encashment involves forged instruments, manipulation of books of account, and conversion of property.Unauthorised credit facilities extended for reward or for illegal gratification.Cheating and forgery.Any other type of fraud not coming under the specific heads as above.Other Terms Usedi. FalsificationFalsification is intentionally providing false information or altering the truth to defraud. It can occur in various contexts, including scientific research, legal documents, financial statements, and other situations.ii. ConnivanceConnivance is also used to refer to the act of deliberately allowing or being involved in wrongful or illegal behaviour without directly participating in it. It means turning a blind eye or giving silent consent to unethical actions. Corporate Scandals are examples of convenience. Executives know about unsafe practices in their company but do not address them, enabling the continuation of those practices. Connivance often results in the individual being held accountable for the wrongful acts they allowed to happen, even if they did not directly engage in those actions.iii. SiphoningIt involves misappropriating assets entrusted to someone for personal gain. In banking, \"siphoning of funds\" refers to the unauthorized movement of money from a bank account or financial system to another account or destination. This can happen through various means, such as creating ghost employees on the payroll or other deceptive techniques. The funds are often used for personal gain or illegal activities. RBI has also prescribed different limits for reporting fraud by banks to different authorities as per the jurisdiction.Section 448 of the Companies Act, 2013: Punishment for False StatementThis section addresses the penalties for making false statements. It states that if a person provides a statement in any return, report, certificate, financial statement, prospectus, or other document required by the Act or its rules, and that statement is false in any significant way—while knowing it to be false, or if they deliberately omit any important fact while knowing it to be significant—they shall be liable under Section 447. In simpler terms, if someone knowingly provides false information or omits important information in any official document related to a company, they can face legal consequences. Based on the severity of the false statement, the penalties for this offense may include fines, imprisonment, or both.Measures under PMLA and other ActsThe government has made several legal amendments to the PMLA, 2002 which have business implications. Corporate fraud under section 447 has been brought under PMLA. However, they impose additional compliance burdens on businesses. Major amendments are:The Central Government issued notification F.No. P-12011/12/2022-ES Cell-DOR dated March 07, 2023, and detailed virtual digital assets (VDAs) guidelines.Businesses, especially financial institutions and service providers of virtual digital assets, must adhere to stricter compliance requirements. This includes continuous due diligence regarding business relationships. Businesses dealing in cryptocurrencies and other VDAs must now maintain Know Your Customer (KYC) records and report suspicious transactions to financial intelligence units.The threshold for identifying beneficial owners has been reduced from 25% to 10%. This means businesses must identify and disclose individuals who own or control 10% or more of the company\'s shares, capital, or profit.The amendments have defined Politically Exposed Persons (PEPs) in accordance with the Financial Action Task Force suggestions. Businesses must now identify and monitor transactions involving PEPs, which include individuals entrusted with prominent public functions by a foreign country.Enhanced Disclosure Requirements: Non-governmental organizations (NGOs) and other entities must provide more detailed disclosures. Reporting entities like financial institutions and intermediaries are required to register details of non-profit organizations\' clients on the DARPAN portal of NITI Aayog and maintain these records for a specified period.In May 2023, the Ministry of Finance issued two notifications under PMLA to establish professionals as reporting entities.Besides, the Income Tax Act has also been amended, and tax has been imposed on gains from cryptocurrency.The Companies Act has been amended to report more disclosures regarding cryptocurrency, deviation of reporting of quarterly returns filed with banks, willful defaulters, utilizations of borrowed funds and premium and investment of funds received, including FDI for specific purposes, etc.The RBI issued notification RBI/DBR/2015-16/18 and DBR.AML.BC. No.81/14.01.001/2015-16 dated February 25, 2016, last updated on November 06, 2024, titled \'Master Direction Know Your Customer (KYC) Direction, 2016\', about avert money laundering.Auditors\' Responsibility for Consideration of Fraud in an Audit of Financial StatementsSection 143(12) mandates that if an auditor, during their duties, has reason to believe that the company\'s officers or employees have committed a fraud involving a prescribed amount or amounts, they must report it to the Central Government. The amended Rule 13 provides specific guidelines on the manner and timeline for reporting fraud. The auditor should follow the auditing standards, including the definition of fraud as per SA 240 and Section 447 of The Companies Act, 2013. As per SA 240, although the auditor may suspect or identify the occurrence of fraud, the auditor does not legally determine whether fraud has actually occurred. The determination of \"offence\" is a legal determination, and accordingly, the auditor may not be able to legally determine that an \"offence or suspected offence involving fraud\" has been or is being perpetrated against the company by its officers or employees.Paragraph A52 of SA 240 states that in evaluating and disposing of the misstatements identified, the auditor should consider the requirements of SA 450, \"Evaluation of Misstatements Identified during the Audit\". Misstatements arising from fraud will need to be communicated to the management and/or those charged with governance as required under paragraphs A21 to A23 of SA 450 and also reported to the Central Government as per the requirements specified in Companies (Audit and Auditors) Rules, 2014, as amended, in case the amount involved or expected to involve is individually Rupees One Crore or more. The auditor should comply with the relevant SAs with regard to illegal acts (e.g., SA 240 and SA 250, \"Consideration of Laws and Regulations in an Audit of Financial Statements\").Penalty on AuditorsIt is also pointed out that \"if an auditor has contravened such provisions knowingly or willfully intending to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than Rs.1 lakh but which may extend to Rs. 25 lakh.\" pursuant to the provisions to Section 147(2) in the context of punishment to auditors for contravention with the provisions of Section 143 of the Act.ConclusionAfter having reviewed the definitions of fraud, there should be loss or deceive to others to gain in general, increased compliances under the provisions of PMLA, compliances and disclosures requirements under schedule III of The Companies Act, 2013 for better corporate governance, the auditor is duty bound to take utmost care while auditing and finalizing the financial statements as per accounting standards and standards of auditing. In case of defaults, the auditor has to face the consequences of professional negligence and misconduct.Author may be reached at fcanarula@yahoo.com and eboard@icai.in
Ep. 246 — Rule 86A of CGST Rules: Safeguarding Revenue or Hindering Business? A Critical Analysis
CA Journal
· September 2026
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Rule 86A of CGST Rules: Safeguarding Revenue or Hindering Business?A Critical Analysis. Rule 86A of the CGST Rules, introduced to curb fraudulent Input Tax Credit (ITC) claims, empowers tax authorities to block ITC in specific cases. However, its application has led to legal controversies, particularly regarding negative blocking and the lack of statutory backing. Various High Courts have ruled differently on its validity, procedural fairness, and scope. While the rule aims to protect revenue, concerns over natural justice persist. This article critically analyses the rule's conditions, judicial interpretations, and practical implications, emphasizing the need for clear guidelines and a balanced approach to ensure fairness while preventing tax evasion.Rule 86A of the Central Goods and Services Tax (CGST) Rules, 2017 [Inserted vide Notification No. 75/2019-Central Tax dated 26-12-2019], was introduced as a measure to tackle the issue of fraudulent input tax credit (ITC) claims, especially those arising from fake invoices. This rule empowers tax authorities to block the use of ITC in a taxpayer's electronic credit ledger (ECL) under specific circumstances. However, the interpretation and application of Rule 86A have resulted in considerable legal challenges and divergent views among various High Courts. This article examines the key aspects of Rule 86A, including the conditions for its invocation, its consequences, and the major points of contention that have emerged, drawing from various case laws. While aimed at curbing fraudulent claims, the rule's implementation has led to significant operational disruptions for businesses, raising concerns over its fair application.Origin of Rule 86AThe GST Council in its 38th GST Council Meeting held on 18th December 2019 [Agenda Item 6(ii): Proposed amendments in the CGST Act, 2017], had decided to insert Rule 86A so as to block ineligible input tax credits and control the menace of fake invoices immediately. The insertion of Rule 86A was done to control the fraudulent availment of ITC and to block ineligible credits. Consequently, the Central Board of Indirect Taxes and Customs (CBIC) implemented the rule via Notification No. 75/2019-Central Tax, effective from December 26, 2019.Conditions for Invoking Rule 86ARule 86A authorizes a Commissioner or an officer authorised by him on his behalf who shall not be below the rank of Assistant Commissioner to block the debit of ITC from the Electronic Credit Ledger (ECL). This action can be taken if the officer has "reasons to believe" that the input tax credit available in the ECL has been fraudulently availed or is ineligible. The reasons to believe must be based on specific conditions outlined in the rule, which are:The ITC has been availed on the strength of tax invoices or debit notes issued by a registered person who is non-existent or not conducting business from the declared place.The ITC has been availed without the actual receipt of goods or services.The ITC has been availed on the strength of tax invoices or debit notes issued by a registered person, whose tax has not been paid to the government.The recipient of ITC has been found non-existent or not to be conducting any business from any place for which registration has been obtained.The recipient of ITC is not in possession of a valid tax invoice or other required documents.The reasons to believe must be based on verifiable evidence such as financial records, GST returns, or transaction history, rather than mere suspicion or presumption.In a nutshell, Rule 86A of the CGST Rules empowers the Commissioner or his subordinates to freeze the debit in the electronic credit ledger, provided he has reasons to believe that the credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible.Rule 86A of CGST Rules, 2017 is broadly divided into two parts:The opening part of the rule deals with the conditions required to be fulfilled in order to invoke the powers under the rule.The second part of the rule provides for the consequences in case Rule 86A is invoked.In other words, in case the conditions prescribed for the invocation of Rule 86A are not fulfilled, the officer cannot invoke the rule, and in such scenario, the consequences provided in the rule becomes ex facie inapplicable.Key RequirementsSeveral key conditions must be met before Rule 86A can be invoked:Availability of Credit: Input tax credit must be available in the electronic credit ledger on the date the competent authority decides to invoke Rule 86A.Reason to Believe: The authority must have a genuine reason to believe that the credit has been fraudulently availed or is ineligible. This reason must be based on credible information and not mere suspicion.Recording of Reasons: The reasons for such belief must be recorded in writing.Provisional Nature: The action taken under Rule 86A is provisional and temporary, pending further investigation.Controversies and InterpretationsThe implementation of Rule 86A has led to significant disputes, primarily centred on the following issues:Negative Blocking of ECL: A major point of contention is whether Rule 86A permits the creation of a negative balance in the ECL if the ITC is not available or has already been utilized. Several High Courts have ruled against negative blocking, holding that it is beyond the scope of Rule 86A and illegal. These courts emphasize that the rule is intended to block available credit, not to create a liability for future credit. The power under Rule 86A is to disallow debit of an amount equivalent to available credit, not to recover tax.The meaning of "Available": Courts have debated the meaning of "available" in the context of Rule 86A(1). Some argue that "available" refers only to the credit existing in the ECL at the time of the order, while others contend that it includes credit that was previously available but has already been utilized.Provisional vs. Recovery: It is well established that Rule 86A is a provisional measure for protecting revenue, not a mechanism for recovery of tax dues. Tax adjudication proceedings are governed by Sections 73 and 74 of the CGST Act.Guidelines for Invocation: Several High Courts have emphasized the need for the government to establish clear guidelines for invoking Rule 86A to prevent misuse and ensure fairness. The power should not be exercised in a mechanical manner but rather based on a careful examination of the facts.Validity of restriction imposed by Rule 86AAs per Rule 86A(3), the act of restricting debit of ITC from the ECL shall cease to have effect after the expiry of period of one year from the date of imposing such restriction. Hence, the Rule 86A can not be invoked for a period beyond one year from the date of imposing such restriction. In some cases, tax authorities have attempted to extend ITC blocking beyond one year by issuing fresh restrictions, a practice which has been challenged in courts as circumventing the statutory time limit.Governing Act for Rule 86A?It is worthwhile to note that, Rule 86A is without any enabling provision in the Statute. There is no specific provision in the GST Law, which empowers the GST department to exercise such powers. In absence of such enabling provisions, the legal validity of Rule 86A can definitely be challenged at higher forums. Unlike Section 73 and 74, which explicitly empower tax authorities to demand or adjudicate tax dues, Rule 86A lacks a corresponding provision in the CGST Act, raising questions about its legality.Personal Hearing before invoking Rule 86AIt may be noted that Rule 86A has no provision for personal hearing before invoking the blocking of ITC. While Section 73 mandates a show-cause notice before confirming a demand, Rule 86A allows blocking ITC without prior intimation, making it a stringent provision. Such a step is clearly in violation of principles of natural justice.The Hon'ble Karnataka HC in the matter of K-9-Enterprises, Kwality Metals Versus The State Of Karnataka, The Assistant Commissioner Of Commercial Taxes, LGSTO [2023 (8) TMI 170], para 29 had held that:It is in this background, I am inclined to follow the principle stated by the High Court of Bombay in Dee Vee Projects Ltd.'s case supra, wherein it is held that given the nature of power provided under Rule 86A though the statute does not provide for a personal hearing before passing any order under the said Rule, it has to be read into the provisions of the said Rule which is not expressly provided therein, so that a post-decisional or remedial hearing could be granted to the person/assessee affected by blocking of his electronic credit ledger.Para 30: Considering the scope, applicability and the manner of power exercised by the competent authority under Rule 86A of the Rules of 2017, it may not be feasible for the authority to have a normal pre-decisional hearing and since the nature of order passed under Rule 86A is provisional, it would be reasonable to consider granting a post-decision hearing to the petitioners which would comply with the principles of natural justice. Though post-decision hearing is not a substitute for pre-decisional hearing, in situations where pre-decisional hearing is likely to frustrate the interest and purpose of the Statute, the mechanism of post-decisional hearing will be the only alternative.Applying the above principles, one can infer that although the rule does not provide for a pre-decisional hearing, a post-decisional hearing could be considered by the tax authorities. This is to ensure the principles of natural justice are upheld, especially given the potential impact on business operations.The Court further held that-The first requisite of the Rule which is required to be considered by the competent authority is with regard to the basis of material available before taking any action for blocking of electronic credit ledger. The second pre-requisite is of recording the reasons in writing for invoking the powers under Rule 86A of the Rules of 2017.Unless the aforesaid two pre-requisites are fulfilled, the competent authority cannot invoke the powers under Rule 86A of the Rules of 2017 for the purpose of disallowing the debit of the determined amount to the electronic credit ledger or to block the electronic credit ledger even to the extent of amount fraudulently or wrongly availed by the petitioners/assessee.Negative Blocking of ITCOne common practice by the tax authorities is blocking of ITC beyond what is available in the ECL on the date of blocking. The entire ITC availed and utilised by the taxpayer in the past is blocked by the revenue even though such balance does not exist or there is NIL balance as on the date of the blocking of ITC. Such an act by the revenue authority causes prejudice to the taxpayer. In such circumstances and as a result of such negative balance, if the taxpayer would file return by claiming input tax credit, the taxpayers would be required to pay an additional amount of output tax under the provisions of the GST Act to the extent of negative balance of the input tax credit in the electronic credit ledger.In this regard, it is pertinent to discuss the following case laws which have dwelled upon the issue of negative blocking of ITC and its constitutional validity.Favour of the taxpayerIn the case of Samay Alloys India Pvt Ltd Versus State Of Gujarat [2022 (61) G.S.T.L. 421 (Guj.)] it was held that-The Rule 86A empowers the proper officer to disallow debit from the electronic credit ledger for an amount equivalent to the amount claimed to have been fraudulently availed. Accordingly, the rule provides for restriction on an amount and not on the very credit which is fraudulently availed. Accordingly, the rule can be invoked even when the credit fraudulently availed is utilised.The Revenue may legitimately argue that such an interpretation may make the entire Rule 86A toothless as parties can claim and immediately utilise the credit fraudulently availed by filing monthly returns. Accordingly, it may be practically impossible to invoke Rule 86A in large number of cases. This may be the actual implication of the present interpretation, however, the Government in its wisdom has framed Rule 86A and this rule is not framed to recover the credit fraudulently availed. In case where credit is fraudulently availed and utilised, appropriate proceeding under the provisions of Section 73 or Section 74, as the case may be, can be initiated. Secondly, Rule 86A is not the rule which provides for debarring the registered person from using the facility of making payment through the electronic credit ledger. In case the intention was to disallow future debits or credit in electronic credit ledger, the text of the rule would be entirely different.It was further held that heading of Rule 86A itself is suggestive of its scope and applicability. The heading reads "conditions of use of amount available in electronic credit ledger". It appears on plain reading of the heading itself that Rule 86A can be invoked only if the amount is available in the electronic credit ledger and not otherwise. It is a settled rule of interpretation that the section heading or marginal note can be relied upon to clear any doubt or ambiguity in the interpretation of the provision to discern the legislative intent.Another Landmark judgement in case of Best Crop Science Pvt. Ltd. v. Principal Commissioner 2024 SCC OnLine Del 6714 held that-Rule 86A (1) of the Rules does not contemplate an order, the effect of which is to require a taxpayer to replenish his ECL with valid availment of ITC, to the extent of ITC used in the past, which the Commissioner or an officer authorized by him has reasons to believe, was fraudulently availed or was ineligible. Such an interpretation would in effect amount to construe an Order under Rule 86A (1) of the Rules as an order for recovery of tax. This is obvious because the taxpayer would now have to incur a larger cash outflow for payment of taxes as he would be denied utilization of validly availed ITC, which he would require to accumulate to compensate for the ITC availed and utilized which the Commissioner or an officer authorized by him, has reasons to believe was fraudulently availed or was ineligible.Rule 86A of the Rules is not a machinery provision for recovery of tax or dues under the CGST Act. It is not a part of the scheme of the machinery provisions for assessment and determination of the tax and dues as payable under the CGST Act. It is an emergent measure for protection of revenue by temporarily not allowing debit of available ITC in the ECL, which the Commissioner or an officer authorized by him has reasons to believe has been wrongfully availed.Against the taxpayerIn the case of TVL. Skanthaguru Innovations Pvt. Ltd. Versus Commercial Tax Officer ((2024) 25 Centax 379 (Mad.)] it was held that-Thus, a conjoint reading of 1st and 2nd parts of Rule 86A would clearly reveal that the word "available in the ECL "referred in 1st part would mean that the amount available after the fraudulent availment of credit at any point of time, whether it was available in the ECL or utilised at the time of passing the blocking orders. Hence, the 2nd part of Rule 86A empowers the Authorities not to allow the debit of amount equivalent to the fraudulently availed credit for discharge of liabilities under Section 49. If it was already utilised, the Officials are also empowered to pass blocking orders to the extent of amount equivalent to such credit, which was already utilised, along with the unutilised fraudulently availed ITC amount available in the ECL at the time of passing the blocking orders.Further, in the provisions of Rule 86A, nowhere it has been stated that the negative blocking is prohibited. When the Statute has not stated anything in the statutory term, it has to be construed that the word "blocking" includes both positive and negative blocking. If the intention of the legislature is not to allow the negative blocking, they are supposed to have specifically prohibited the same by virtue of proviso or otherwise. In this case, no such prohibition is available and hence, in the absence of any such prohibition for negative blocking, the blocking referred in Rule 86A has to be construed for both positive and negative blocking. Therefore, the question of barring of negative blocking would not arise.Further in case of Basanta Kumar Shaw Versus Assistant Commissioner Of Revenue, Commercial Taxes & State Tax, Tamluk Charge [2022 (65) G.S.T.L. 436 (Cal.)], the Hon'ble HC held that-The word "available" occurring in Rule 86(1) cannot be read in isolation and it has to be read alonwith the remaining words which is "in the electronic credit ledger has been fraudulently availed or is ineligible", "has been fraudulently availed" would undoubtedly denote a situation which has occurred in the past. This becomes clear if we peruse the allegations contained in the SCN.The appellant has used the expression "negative blocking". We find no such expression in Rule 86A. It appears that such expression is used in common parlance among dealers. If the statute does not use the expression negative balance, such theory cannot be imported to justify the contention that there should be a positive balance to invoke Rule 86A. Such interpretation would render the rule redundant and it can be also rewarding the assessee at times. Thus, we are of the clear view that the Rule 86A(1) read in its entirety will clearly shows that there is no requirement under the Rule that the electronic credit ledger should contain sufficient balance for the purpose of blocking the credit by invoking the said rule.ConclusionRule 86A of the CGST Rules is an important tool to prevent fraudulent ITC claims. However, its implementation requires careful adherence to the stipulated conditions and principles of natural justice. The ongoing debates and varying interpretations across High Courts highlight the need for clear guidelines, proper application of mind, and a balanced approach by tax authorities. It is imperative for authorities to recognize that Rule 86A is a provisional measure and not a substitute for proper assessment and recovery proceedings under the CGST Act. Furthermore, the courts have consistently held that a negative blocking of the ECL is not permissible under Rule 86A.Going forward, the government should consider issuing detailed guidelines on the exercise of powers under Rule 86A, ensuring that blocking is based on objective criteria rather than discretionary judgment. Additionally, incorporating a mandatory review mechanism for blocked ITC cases would improve transparency and prevent arbitrary action.As the saying goes, "With great power comes great responsibility." Therefore, it is crucial that the powers granted under Rule 86A are exercised judiciously and only in cases where it is absolutely necessary.Authors may be reached at swapniljain88@gmail.com and eboard@icai.in
Ep. 247 — Adapting to Change: The Future Role of Valuers in the NEO Banking Era
CA Journal
· September 2026
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Adapting to Change: The Future Role of Valuers in the NEO Banking EraThe article examines how digital transformation, specifically NEO banking, will affect the banking valuation profession. Valuers\' methods evolve when financial organizations adopt digital-first approaches. This article discusses the pros and cons of this transformation, including the use of technology in assessment and valuers\' new roles. We examine how professional adaptability, legal changes, and human competence will affect valuers. Additionally, we advise ways to stay relevant in this fast-changing situation.IntroductionNEO Banking has transformed financial services with a digital approach. Neobanks\' cutting-edge technologies, cost-effectiveness, and user-centric design are changing customer expectations and service delivery. This significant change exposes a key challenge to conventional banking models in asset and property appraisal, which are vital to credit risk assessment and portfolio management. Valuers have traditionally guided lending and asset management in the banking sector with accurate and reliable evaluations. They protect the financial system from excessive lending and inadequate collateralization with their market dynamics and property assessment expertise. NEO banks are rejecting traditional physical branches in favour of flexible and data-focused platforms, forcing valuers to choose between conventional and innovative techniques. This article examines the valuer\'s future role in the dynamic financial scene, including its objectivity and importance. We will examine the benefits and challenges of this digital revolution for appraisers. This conversation will help valuers and financial stakeholders understand how to stay relevant and effective in NEO banking. It does this by assessing the landscape, considering future paths, and sharing adaptive approaches.The Rise of Neo BankingNEO banking is a cutting-edge financial service that involves digital-only banks. These banks operate exclusively online and do not have physical branches. They utilise modern technologies such as analytics, artificial intelligence, and machine learning to provide a smooth and convenient banking experience. NEO banking is characterised by its cost-effective operations, tailored client services, advanced technology, and a particular emphasis on catering to niche consumer categories that are not adequately covered by conventional banks.The emergence of NEO banking reflects the ongoing digitization developments that are transforming the financial industry. Over the past several years, NEO banks have experienced rapid and substantial expansion, gaining substantial portions of the market by offering enhanced efficiency and convenience. Their influence is diverse: they are compelling traditional banks to expedite their digital adaptations, shaping regulatory environments, and redefining customer service standards. Due to their significantly lower operating costs compared to regular banks, NEO banks are able to provide more appealing interest rates and fees, thus eroding the user base of conventional institutions.NEO banks differentiate themselves from traditional banks by prioritising specialised services tailored for the digital client. These services may encompass features such as instantaneous spending analysis, automated savings mechanisms, AI-powered personalised financial guidance, and a smooth cross-border transaction experience. Furthermore, the incorporation of external services via open banking application programming interfaces (APIs) establishes a network that can offer users a comprehensive financial centre. NEO banks distinguish themselves by prioritising technology-driven solutions, user-friendly interfaces, and flexible product offerings to anticipate and fulfil evolving consumer demands in the digital era.Indian Neo-banking Industry Overview, 2022The Indian neo-banking industry has grown at an exponential rate of 100% from 2017 to 2022. The increase in technology and internet penetration, the opening of new neo-banks, and customer awareness are a few of the major reasons behind this growth.Traditional Valuation in BankingThe Conventional Role and Responsibilities of ValuersValuers play a vital role in the field of conventional banking by assessing buildings and assets to establish their fair market worth. The banking industry heavily relies on these expert assessments as the foundation for their lending procedures, as the value of collateral is crucial for ensuring the security of loans. Valuers must consider a multitude of elements, such as location, condition, market trends, and local regulatory restrictions, in order to provide precise and dependable assessments.The importance of accurate valuations in risk assessment and asset managementThe valuers\' responsibilities go beyond simple evaluation to encompass offering knowledgeable guidance on property investment, risk mitigation, and capital gains techniques. The precise evaluations conducted by these experts are crucial in evaluating risk, as they determine the actual value of assets, reducing the danger of overestimating the security of loans. This helps prevent potential financial losses for the bank in the event of non-payment. Asset management heavily relies on valuations to create portfolios that accurately represent the actual values of assets. This ensures that investment decisions are based on solid information and that property assets are effectively managed. Valuers play a crucial role in ensuring the financial stability of banks by providing their expertise, which allows banks to make well-informed decisions based on the real value of assets.Valuations in the Digital AgeThe Influence of Technology on valuation processThe integration of technology with traditional procedures has brought about a transformative change for the valuation process in the banking industry, known as the digital age. The impact of technology is diverse, including the introduction of advanced tools like automated valuation models (AVMs) and the growing capabilities of artificial intelligence (AI). These innovations claim to improve the speed, efficiency, and objectivity of the appraisal process.Automation and Its Effects: From AVMs to AIConcurrently, artificial intelligence is making substantial progress in the field of valuation. AI systems have the capability to efficiently handle and evaluate vast amounts of data, encompassing live transactions, socio-economic metrics, and even satellite images, for the purpose of assessing property prices. They possess the ability to identify trends and gain insights that may escape even the most experienced appraisers. With the advancement of AI algorithms, banks are able to utilise predictive analytics to forecast future trends and make proactive strategic decisions.The balance between Technology in use and accuracy in ValuationsNevertheless, this advancement in technology also poses a significant dilemma: finding a middle ground between the effectiveness of automated solutions and the meticulous precision that seasoned appraisers offer. Although AVMs and AI are capable of processing vast amounts of simple values, the presence of human valuers remains essential, particularly in intricate situations where contextual comprehension and expertise are crucial. In the realm of commercial real estate, the distinct attributes of each property necessitate a combination of quantitative data analysis and qualitative, first-hand understanding in order to determine valuations.Hence, in light of the banking sector\'s embrace of the digital era, adopting a well-balanced strategy that leverages the capabilities of technology while upholding the distinctive worth of professional experience seems to be the sensible course of action for valuation procedures.Opportunities for Valuers in NEO BanksNew Valuation niches that can be explored by ValuersThe rise of NEO banks offers several prospects for appraisers who are open to adapting and exploring novel territories within the digitalized financial industry. Although automated technologies are capable of managing basic appraisals, there is still a growing demand for the assessment of intricate assets. This encompasses assets that possess distinctive attributes or are located in markets that lack uniformity, resulting in limited or less relevant standardised data. During such circumstances, the intricate discernment and region-specific expertise of a professional appraiser are invaluable and cannot be substituted.The increasing need for expertise in complex asset valuationFurthermore, NEO banks, with their data-driven and customer-centric models, require a higher level of complexity in comprehending and addressing market expectations. Valuers can enhance their positions by developing proficiency in emerging asset categories that are becoming increasingly popular, such as environmentally friendly technological facilities, digital currency collateral, or intangible assets like patents and trademarks. To effectively evaluate a wide range of assets, a profound comprehension of emerging markets and the factors that impact their worth is essential, both presently and in the foreseeable future.Potential advisory roles for valuers within NEO banksValuers can further establish their significance by taking up advisory positions. Valuers in the realm of NEO banks can serve as advisors, providing valuable insights that contribute to the creation of financial products or the adjustment of AVMs. Their proficiency can direct risk assessment algorithms to consider variables that may not be readily apparent solely through quantitative data. Valuers can offer strategic advice to NEO banks regarding portfolio diversification, investment opportunities, and market penetration plans, utilising their extensive expertise in real estate and asset valuation.Furthermore, there is unexplored potential in offering personal property and commercial valuation services within the NEO financial ecosystem. As digital platforms aim to offer comprehensive financial solutions, valuers can provide customised services that enhance confidence and individualization in banking procedures, hence strengthening the value proposition of NEO banks to their technologically adept customers.Challenges and Limitations for ValuersRisk of Automation in the valuation processThe use of automation in valuation confronts valuers with both advantages and disadvantages that must not be ignored. Automated valuation models (AVMs) and other data-driven approaches are expediting the valuation process while also posing a risk to the conventional duties of valuers. Although these systems are highly efficient at rapidly processing large volumes of data, they inherently lack the nuanced comprehension of local market conditions and the experiential expertise that experienced appraisers provide in intricate evaluations.The adaptation to digital compliance and regulatory standardsFurthermore, the swift integration of technology necessitates that appraisers consistently adjust to evolving digital conformity and regulatory criteria that are currently uncertain. Staying updated on changes in data privacy rules, cybersecurity measures, and compliance standards mandated by banking authorities might present difficulties. With the increasing complexity and integration of valuation models in digital banking systems, valuers need to come up with innovative approaches to stay relevant in this technology-driven regulatory landscape.Limitations of data-driven valuation methodsFurthermore, data-driven appraisal methodologies, while potent, possess intrinsic limits. Their operations heavily rely on the quality and extent of available data, which may not always encompass a complete perspective. In scenarios involving nascent or dynamic markets, there may be an inadequate historical dataset to provide precise forecasting. In addition, these models may encounter difficulties in including subjective elements of valuation, such as the calibre of construction, aesthetic appeal, or the influence of forthcoming developments and regulations.Although technology has made substantial advancements, it occasionally falls short in predicting human behaviour and market mood, which are frequently crucial in the process of determining value. Valuers must confront the task of combining their specialised knowledge with the progress of technology. In order to address these problems, it is essential to adopt a continuous learning strategy that focuses on acquiring knowledge about new valuation tools and processes as well as developing a comprehensive understanding of data analytics. By doing this, they can guarantee that the implementation of technology in values encompasses not only rapidity and quantity but also the preservation of the integrity and precision of valuations in the NEO banking age.Real-World Applications: Valuers in NEO BankingExploration of current NEO bank practices regarding valuationThe incorporation of valuers into the NEO banking system is becoming more apparent through various modern practices. NEO banks commonly utilise cutting-edge technology like big data analytics, automated valuation models (AVMs), and blockchain to optimise the valuation process. These tools are utilised to deliver immediate property valuations for mortgage approvals or to offer clients real-time estimations of asset value as part of their wealth management services. However, in this technologically advanced setting, the knowledge and skills of appraisers are utilised to verify and improve the results generated by algorithms, especially in cases of disputes or when dealing with unusual properties.Case studies of valuer adaptation and integration into digital bankingAn example of successful integration of valuers in NEO banking is their involvement in creating customised valuation models for distinct real estate industries, such as sustainable properties. Conventional automated valuation models (AVMs) may not accurately consider the extra value obtained from sustainable characteristics. However, valuers can collaborate with data scientists to improve the precision of these models. This will guarantee that NEO banks provide loans and mortgages that genuinely reflect the added value of a property\'s sustainable attributes.Anecdotes of valuers combating or succumbing to technological displacementFurthermore, appraisers are adjusting to digital banking by enhancing their technological proficiency. They acquire expertise in analysing data generated by AVMs and AI platforms, enabling them to provide additional services such as comprehensive market trend analysis and forecast insights for property investments. Nevertheless, certain transitions have encountered difficulties. Some valuers were reluctant to adopt technological improvements, which resulted in their conventional services being overshadowed by faster and more cost-effective automated solutions.The divergent encounters of acclimation and dislocation underscore the imperative for appraisers to progress in tandem with technology. As NEO banks expand their services, the valuers that succeed are those who enhance their appraisal expertise with strong technological knowledge, ensuring they remain essential agents in valuation, capable of providing insights beyond the scope of current algorithms and models.Integrating Valuers with NEO BankingStrategies for valuers to stay relevant: Education and collaborative tool developmentThe development of collaborative tools is another important avenue. Valuers are collaborating with fintech developers to establish hybrid valuation models that integrate the rapidity and impartiality of AVMs with the astute discernment of seasoned appraisers. These solutions seek to provide a context for data-driven insights by incorporating market intricacies and predictive analytics. Valuers contribute their sector experience to the development process, aiding in the building of more resilient and dependable valuation platforms that can improve the service delivery of NEO banks.The significance of the human element in valuation practicesIntegrating valuers into the NEO banking model highlights the importance of the human factor in valuation operations. Although technology has made significant progress, the subjective elements of valuation, such as comprehending client requirements, reading market mood, and offering customised advice, continue to be areas where human connection is irreplaceable. Valuers have the ability to understand and share the feelings of others, adhere to moral principles, and demonstrate a capability for solving intricate problems that current technology is unable to imitate.To capitalise on these human strengths, valuers are positioning themselves as consultants who offer more than just numerical assessments. They provide comprehensive valuation narratives that consider economic indicators, environmental impacts, and socio-political factors, delivering nuanced appraisals that align with the ethos and innovative spirit of NEO banking. By augmenting their traditional skill set with digital expertise and a consultative approach, valuers are not only surviving but thriving in the face of industry disruptions, cementing their role as critical to the future of banking.The Impact of Regulatory Changes on ValuationDiscussion on changing valuation regulations in NEO banksAs regulatory bodies adapt to rapid technological change, valuation regulations, especially for NEO banks, are changing. Unlike traditional banks, NEO banks have limits. Therefore, they must navigate an evolving set of regulations that expressly address their digital services and creative value-determining processes. Developing restrictions makes it difficult for valuers to stay put. These standards include data protection and algorithmic evaluation accuracy.How international standards affect valuations in NEO bankingInternational standards affect valuations in NEO bank since they handle global clients and must comply with cross-border regulations. The International Valuation Standards Council (IVSC) and other bodies provide regulations to standardise valuation techniques globally so that valuers may provide uniform, unambiguous, and widely accepted services across jurisdictions. As NEO banks interact with these expanding restrictions, valuers\' roles become more complex, requiring caution with international norms. Valuers must follow local and national legislation and worldwide financial sector guidelines to deliver solid, defendable, and universally recognised valuations.Professional Associations: Support Networks for ValuersThe role of professional bodies in helping valuers adjust to the NEO banking eraProfessional bodies help valuers adapt to new technology and methods in NEO banking\'s fast-changing market. These organisations define accreditation criteria, provide continuing education, and represent the profession in legislative and regulatory talks. They provide digital tool training, regulatory compliance workshops, and data-driven best practices. Professional bodies provide valuers with thought leadership on adjusting to digital platforms and comprehending AVMs and blockchain technology in their practice. These societies also create and maintain worldwide professional standards like the International Valuation Standards (IVS), which encourage valuation uniformity and quality across borders—essential in NEO banks\' global market.Initiatives for standardization in valuation practicesGiven the differences in valuation methods between locations and asset classes, these associations standardise valuation procedures. They enable valuers to deliver accurate, ethical, and universally applicable NEO banking services by developing universally accepted valuation metrics. These standardization efforts aim to reassure stakeholders and clients about the new digital banking ecosystem\'s valuations.ConclusionWe have seen potential muted by technology disruption in this discussion of valuers in the NEO banking era. Valuers must adapt to automation and data-centric techniques by embracing education, collaborating on tool development, and using their irreplaceable human insight. Modern technology and skilled valuers give NEO banking valuations an edge. This potent combination will uphold and advance valuation practice, keeping it robust, relevant, and resilient in the face of rapid digital disruption. Finally, valuers must be flexible and keep learning. Valuers may confidently face the challenges ahead and emphasize their important position in an era where human judgement and machine intelligence define the new frontier in banking valuation methods by committing to evolution.References:Harris, L. (1995, January). Banking policy in an era of financial change. International Review of Applied Economics, 9(3), 345-353.Porzecanski, A. C. (1981, March). The international financial role of U.S. commercial banks: Past and future. Journal of Banking & Finance, 5(1), 5-16.Dr V. R. Soumady. (2022, March 15). Are Neo Banks the Future Disruptors of Banking in India -A Perspective. International Journal of Advanced Research in Science, Communication and Technology, 97-102.E-Banking: Banking Solution In Modern Era. (2021, June 1). Elementary Education Online, 20(02).Sardar, S., & Anjaria, K. (2023, June 30). THE FUTURE OF BANKING: HOW NEO BANKS ARE CHANGING THE INDUSTRY. International Journal of Management, Public Policy and Research, 2(2), 32-41.Kumar, A., Srivastava, A., & Gupta, P. K. (2022, October 17). Banking 4.0: The era of artificial intelligence-based fintech. Strategic Change, 31(6), 591-601.Evans, P. M. (2000, December 1). A future for publishers serving technology industry markets: adapting to the opportunity of the Internet era. Aslib Proceedings, 52(10), 414-421.Kushiki, Y. (2010, May). The Future of Embedded Software: Adapting to Drastic Change. Computer, 43(5), 84-86.Sharma, J., & Patil, S. (2023). Neo-banking challenges and expansion in future. Prayukti Journal of Management Applications, 03(02), 55-64.Kumar, A., & Kalva, U. K. (2011, October 1). Role of Mobile Banking in Banking Sector in The Present ERA. Indian Journal of Applied Research, 4(4), 589-591.Authors may be reached at eboard@icai.in
Ep. 248 — Extended Producer Responsibility (EPR) for Plastics: Promoting a Circular Economy
CA Journal
· September 2026
00:00
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Extended Producer Responsibility (EPR) for Plastics: Promoting a Circular EconomyExtended Producer Responsibility (EPR) for plastics mandates that producers, importers, and brand owners (PIBOs) are accountable for the lifecycle of their plastic products, from production to post-consumer disposal. EPR aims to reduce environmental impact, drive recycling, and promote a circular economy. India\'s EPR framework, regulated by the Ministry of Environment, Forest and Climate Change, sets specific recycling, reuse, and end-of-life disposal targets for PIBOs over the coming years. By shifting waste management responsibility to producers, EPR encourages sustainable production practices and efficient waste management, fostering innovation, accountability, and compliance with national and global environmental goals.With rising global awareness around environmental sustainability, terms like \"recycling\" and \"reusing\" have become integral strategies in addressing plastic waste. However, tackling the growing challenges associated with plastic waste goes beyond simply recycling. Extended Producer Responsibility (EPR) is a policy-driven approach that holds producers accountable for the lifecycle of their products, fostering a circular economy that reintroduces products and materials back into the supply chain, minimizing waste. This article offers an in-depth overview of EPR, focusing on plastic waste, outlining its objectives, regulatory structure, compliance requirements, and implications for industry stakeholders.What is EPR?Extended Producer Responsibility (EPR) is a regulatory framework that assigns the responsibility of managing waste to the producers, manufacturers, importers, and brand owners involved in the production and supply of goods. Traditionally, disposal was seen as a responsibility of consumers or local authorities. EPR shifts this responsibility back to the companies that introduce products into the market, ensuring they address environmental impacts beyond the point of sale.This policy-based approach applies to various sectors such as plastic packaging, electronic waste, biomedical waste, and used tires, ensuring that producers take responsibility for the entire lifecycle of their products. By focusing on the collection, recycling, and responsible disposal of plastic waste, EPR helps to reduce environmental degradation and incentivizes producers to invest in eco-friendly designs and materials, thus fostering a more sustainable and circular economy. This article speaks specifically about EPR on Plastics.Key Objectives of EPREPR is aimed at driving systemic changes in the way industries and governments approach waste management. The primary objectives of EPR include:Minimizing Environmental Impact: By making producers accountable for the waste their products generate, EPR helps decrease the amount of plastic waste entering landfills and natural ecosystems, thus mitigating pollution.Promoting Eco-Friendly Product Design: EPR encourages producers to design products with environmental sustainability in mind. This may include using recyclable materials, reducing the volume of plastic used in packaging, or designing products that are easier to recycle.Supporting a Circular Economy: EPR promotes a circular approach to manufacturing and consumption by shifting from the traditional linear model (produce, use, dispose) to a system where materials are continuously cycled back into the production cycle. This approach helps reduce resource extraction and energy consumption.Reducing Government Burden: Shifting waste management responsibilities to producers alleviates the pressure on local governments and municipalities, enabling more efficient allocation of public resources.Enhancing Sustainable Consumption and Production: EPR encourages businesses and consumers to prioritize sustainability in production and consumption cycles, thereby embedding environmental responsibility into everyday practices.Regulatory Bodies and Framework in IndiaIndia\'s EPR framework, particularly for plastics, is regulated by the Ministry of Environment, Forest and Climate Change (MoEFCC) and implemented through the Central Pollution Control Board (CPCB), with additional support from State Pollution Control Boards (SPCBs). The main legislative frameworks include:The Environment (Protection) Act, 1986: This act provides the legislative foundation for environmental protection in India, enabling the government to set regulatory standards and enforce compliance, including for waste management.Plastic Waste Management (PWM) Rules, 2016: The PWM Rules were introduced to establish basic standards for handling plastic waste, with provisions requiring that producers, importers, and brand owners (PIBOs) manage the waste their products generate.Plastic Waste Management (Amendment) Rules, 2024: This amendment introduces specific targets for recycling, reuse, and disposal. The updated rules align with international best practices, aiming to significantly reduce plastic waste by setting progressive annual targets.Each of these regulatory elements plays a crucial role in establishing standards for the production, handling, recycling, and disposal of plastic waste. India\'s progressive regulations reflect a growing commitment to reduce plastic pollution and adopt sustainable waste management practices on par with global standards.Obligated Entities under EPR for PlasticsIn India, EPR obligations apply to a wide array of entities involved in the plastic production and distribution process. Each category of obligated entities is responsible for ensuring that the plastic waste generated by their products is managed according to EPR guidelines. These entities include:Producers of Plastic Packaging: Manufacturers involved in producing or utilizing plastic packaging materials, such as rigid containers or plastic films, are subject to EPR obligations. Small and microenterprises are generally exempt from stringent EPR requirements, while large-scale producers are held to comprehensive standards.Importers of Plastic Packaging: Importers who bring plastic materials or packaged goods into the Indian market are accountable for managing the resulting waste and must ensure that it is responsibly recycled or disposed of.Brand Owners: Companies that sell products under a registered brand name, including e-commerce platforms, retail chains, and supermarkets, are required to manage the plastic waste associated with their products.Plastic Waste Processors: Organizations responsible for collecting, segregating, and processing plastic waste are integral to the EPR system, as they handle waste management on behalf of producers and brand owners.Manufacturers and Importers of Plastic Raw Materials: These entities supply raw materials used in plastic production and play a role in ensuring that waste is managed appropriately throughout the supply chain.Manufacturers of Compostable and Biodegradable Plastics: While conventional plastics are subject to stringent recycling requirements, manufacturers of compostable or biodegradable plastics are encouraged to develop environmentally-friendly alternatives, contributing to a sustainable ecosystem.Single-Use Plastic (SUP) Manufacturers: Single-use plastics as plastic items intended for one-time use before disposal, such as cutlery, straws, and carry bags. SUP manufacturers face increasing restrictions and obligations under EPR, as these products contribute significantly to plastic pollution.Key Definitions in EPRUnderstanding the EPR framework requires familiarity with several key terms. Here are definitions of some of the most important concepts:Waste Management: Collection, storage, transport, reduction, reuse, recycling, and disposal of waste in an environmentally safe manner.Multilayered Packaging: Packaging with at least one layer of plastic combined with other materials such as paper, metal, or foil.Producer: Entities involved in the manufacturing or importing of plastic products.Brand Owner: Any individual or organization selling products under a registered brand name.Importer: An entity with an Importer-Exporter Code responsible for bringing plastic products into India.Plastic: Material primarily composed of polymers like polyethylene or polypropylene, commonly used in packaging.Single-Use Plastics (SUP): Plastic products intended for one-time use before disposal, such as straws, cutlery, and packaging materials. Due to their disposability, SUPs are a significant contributor to plastic waste and are heavily regulated under EPR policies.Plastic Waste: Discarded plastic materials that have served their intended use.Recycling: The process of transforming segregated plastic waste into new materials or products.These terms provide the foundational language needed to understand EPR regulations and the responsibilities each entity bears in managing plastic waste.Categories of Plastics under EPR GuidelinesEPR guidelines classify plastic packaging into specific categories to streamline regulation and ensure each type of plastic waste is managed appropriately. The categories include:Category I: Rigid plastic packaging (e.g., bottles and containers).Category II: Flexible plastic packaging, including single-layer or multilayer plastic sheets, covers, carry bags, sachets, and pouches.Category III: Multilayered plastic packaging that combines plastic with non-plastic materials.Category IV: Plastic sheets and carry bags made from compostable plastics.Category V: Biodegradable plastic items, including packaging materials and carry bags.Each category is assigned specific recycling and disposal targets, facilitating effective tracking and enforcement of EPR obligations.Compliance Process and ObligationsTo adhere to EPR regulations, obligated entities must undergo a series of steps, from registration to implementing recycling and disposal systems:File Registration: All obligated entities must submit Form I to register as a producer, importer, or brand owner with CPCB, detailing their product quantities and intended compliance actions.Collection and Recycling Systems: Producers are required to set up collection and recycling systems, either independently or in partnership with Producer Responsibility Organizations (PROs). PROs assist with the logistics of waste collection, segregation, and recycling.Third-Party Audits: Periodic audits, conducted by auditors approved by CPCB, ensure compliance with waste management obligations. Audit results are submitted online for transparent monitoring by authorities.Penalties for Non-Compliance: Entities that fail to meet recycling or reuse targets incur an environmental cess. For example, a ₹5,000 per metric ton cess applies to unmet recycling obligations, incentivizing strict compliance.Annual EPR Obligation Targets for Plastic Waste Managementa. Extended Producer Responsibility TargetThe Eligible Quantity in MT (Q1) shall be calculated as the average weight of plastic packaging material (category-wise) sold in the last two financial years (A), plus the average quantity of pre-consumer plastic packaging waste generated during the same period (B), minus the annual quantity (C) supplied to the entities covered under sub-clause 4 (iii) in the previous financial year, as per the formula given below:Q1 (in MT) = (A + B) - CIllustration:Suppose XYZ Ltd. is a producer registered under EPR law. It has sold rigid plastic packaging material of 13,000MT in FY 2022-23 and 15,000MT in FY 2023-24. Further, it has generated industrial waste of 400MT in FY 22-23 and 600MT in FY 2023-24. In the FY 2023-24, it sold plastic packaging material of 4,500MT to a registered brand owner DEF Ltd.The EPR liability for FY 2024-25 will be calculated as follows:(A) Average weight of plastic packaging material (category-wise) sold in the last two financial years = (13,000 + 15,000) / 2 = 14,000 MT(B) Average quantity of pre-consumer plastic packaging waste in the last two financial years = (400 + 600) / 2 = 500 MT(C) Annual quantity supplied to the entities covered under sub-clause 4(iii) in the previous financial year = 4,500 MTQ1 = (14,000 + 500) - 4,500 = 10,000 MTThus, the EPR liability of XYZ Ltd. for FY 2024-25 is 10,000 MT.b. Minimum Recycling Targets (excluding end-of-life disposal) of Plastic Packaging Waste(As a % of Extended Producer Responsibility (EPR) Target)Plastic packaging category2024-252025-262026-272027-28 and onwardsCategory I - Rigid plastic packaging50607080Category II - Flexible plastic packaging30405060Category III - Multilayered plastic packaging30405060Category IV - Plastic sheets and carry bags made from compostable plastics50607080c. Mandatory Use of Recycled Plastic in Plastic Packaging(As a % of plastic manufactured for the year)Plastic packaging category2025-262026-272027-282028-29 and onwardsCategory I - Rigid plastic packaging30405060Category II - Flexible plastic packaging10102020Category III - Multilayered plastic packaging551010These targets require producers to make progressive improvements in their waste management practices, thereby supporting India\'s commitment to a sustainable, circular economy.Illustration of EPR Liability Compliance for a Plastic Packaging ProducerIn continuation of the previous illustration:Production and Compliance: Company XYZ has a liability of 10,000 metric tons of plastic rigid packaging for FY 2024-25. To comply with EPR regulations, they register with CPCB, detailing their recycling and waste management plans in Form I.EPR Target for FY 24-25: With a EPR target of 100% for the current year, Company XYZ must recycle atleast 5,000 MT [Cat I-50% from table (b)] and treat end-of-life disposal of maximum 5,000 MT [balance qty], with total obligation of atleast 10,000 MT of plastic. If they manage only 9,000 MT, they fall short by 1,000 MT.Environmental Cess for Non-Compliance: For the unmet 1,000 MT, the company is liable for a cess of ₹5,000 per metric ton, amounting to a penalty of ₹5,000,000 (₹50 lakhs).This example demonstrates how EPR obligations enforce accountability and encourage producers to meet recycling targets.Challenges and Future ProspectsEPR holds immense promise, yet its implementation faces several challenges:Infrastructure Limitations: Many regions lack adequate recycling facilities, creating logistical barriers for producers aiming to meet recycling targets.Consumer Awareness: Effective recycling relies not only on producer responsibility but also on consumer participation. Increasing public awareness around recycling programs is essential.Investment Requirements: Compliance with EPR may require significant investment in redesigning products, waste management systems, and logistics.Despite these challenges, India\'s EPR framework is expected to evolve with technological advances, policy amendments, and international collaborations. Digital platforms, data tracking systems, and reporting mechanisms are emerging, enabling more efficient compliance and monitoring.Opportunities for Chartered Accountants and Compliance ProfessionalsThe expansion of EPR presents numerous opportunities for professionals in the areas of accounting, compliance, and consulting. Chartered Accountants and other professionals can contribute by conducting audits, managing compliance processes, and advising companies on fulfilling EPR obligations. With growing demand for expertise in EPR-related compliance, waste tracking, and sustainability reporting, this sector offers rewarding career opportunities for those invested in environmental governance and sustainability.ConclusionEPR for plastics signifies a transformative shift in waste management, promoting accountability throughout the lifecycle of plastic products. By embedding sustainable practices in manufacturing, distribution, and disposal processes, EPR not only helps companies achieve regulatory compliance but also allows them to play a proactive role in advancing the circular economy. Through effective waste management, industries in India can reduce their environmental impact and contribute to a sustainable, eco-friendly future.Embracing EPR is an opportunity to foster innovation, enhance brand reputation, and align business practices with global environmental goals, paving the way for a more sustainable future.References:The EPR Plastics Portal of CPCB (https://eprplastic.cpcb.gov.in) Plastic Waste Management (Amendment) Rules, 2024Author may be reached at akshayshet18@gmail.com and eboard@icai.in
Ep. 249 — Decoding Investor Behaviour: The Role of Personality Traits and Psychological Biases
CA Journal
· September 2026
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Decoding Investor Behaviour: The Role of Personality Traits and Psychological BiasesThis article explores how personality traits and psychological biases impact investor behaviour. It highlights how traditional financial theories, which assume rational decision-making, fail to account for the emotional and cognitive influences on investors. To explain these influences, behavioural finance introduces concepts like Prospect Theory and Behavioural Portfolio Theory. The article categorizes biases as mental and emotional, and discusses their effects on investment decisions. It also examines how personality traits from the Big Five framework affect susceptibility to these biases, emphasizing the importance of self-awareness and tailored financial advising.IntroductionThe dynamic landscape of stock investments and the investment behaviour of individuals are influenced by various factors. The \'why\' and \'how\' of investor behaviour have long intrigued scholars, academicians, and experts. Numerous behavioural anomalies have motivated further research in this domain. Stock markets and their growth trends are often considered a barometer or benchmark of a country\'s economic well-being.Theories like Prospect Theory and Behavioural Portfolio Theory attempt to explain the motivations and mechanisms behind investor behaviour. Studies conducted in developed markets have revealed the significant influence of emotional and cognitive factors on investment decision-making.The role of psychology in financial decision-making gained more relevance in the late 20th and early 21st centuries. Standard finance theories failed to explain the irrational behaviour of investors during financial bubbles and crises. These theories were based on principles of perfect rationality, self-interest, and perfect information, ignoring the influence of the human mind, emotions, and biases, which often lead to erroneous investment decisions. The assumption of investor rationality underpinning these theories began to be questioned.The notions of behavioural aspects of investment decision-making gained much momentum when researchers started considering the influence of behavioural psychology on investors. Behavioural finance, which deals with the application of psychological attributes in investment decision-making, emerged as a much-debated topic among researchers, especially during financial bubbles when the irrational behaviour of investors could not be explained by standard financial theories.Behavioural Finance: Micro and MacroBehavioural finance can impact individual investment decisions, falling under micro-behavioural finance. Behavioural aspects can also influence the market, leading to various anomalies under macro behavioural finance. Micro behavioural finance focuses on individual behaviour and different types of behavioural biases. These biases can be broadly classified as cognitive biases and emotional biases. Cognitive biases are caused by thinking processes and patterns, whereas emotional biases arise from impulses or intuitions. Since cognitive biases are caused by faulty reasoning, better information and advice can lessen their impact. Emotional biases, on the other hand, are difficult to correct since they are influenced by the mental state and emotional makeup of investors.Cognitive and Emotional BiasesCognitive biases represent deviations or errors in judgment or decision-making that arise from how the human brain processes information. These biases can be moderated through external support mechanisms and advisory services. Emotional biases, influenced by our feelings, perceptions, beliefs, and attitudes, occur when investors make decisions impulsively or without much objective analysis. Unlike cognitive biases, emotional biases are not the result of any mental or cognitive process, making them more difficult to moderate since they are deeply entwined with our personalities and emotional states. Investment decisions made under such emotional states may result in suboptimal outcomes.Common Biases in InvestmentThe biases included in this article reference the work of Pompian (2006):Overconfidence Bias (Cognitive): Overconfidence causes errors in judgment, manifesting as predictive overconfidence or certainty overconfidence. Predictive overconfidence occurs when investors make incorrect predictions about stock value, while certainty overconfidence happens when investors feel unjustifiably confident in the accuracy of their judgments or decisions.Representative Bias (Cognitive): Investors often categorize new information that is inconsistent with their perceptual framework into familiar categories, leading to misinterpretation of data and suboptimal investment decisions.Anchoring and Adjustment Bias (Cognitive): Investors often cling to certain arbitrary numbers, benchmarks, or price indices when making decisions, preventing objective assessment of new information and rational investment decisions.Availability Bias (Cognitive): Investors give more importance to information that is easily available to them through past experiences or matches their frames of reference, often resulting in substandard decisions and lower returns.Self-Attribution Bias (Cognitive): Successful investments are often attributed to the investor\'s intelligence or skill, while failures are attributed to external factors, affecting future decision-making and risk assessment.Illusion of Control Bias (Cognitive): This bias arises from the belief that humans can control or significantly influence outcomes, leading to overtrading and maintaining undiversified portfolios.Ambiguity Aversion Bias (Cognitive): Investors may avoid making decisions in situations of uncertainty or ambiguity, leading to a preference for familiar investments and home bias, limiting diversification opportunities.Mental Accounting Bias (Cognitive): Investors simplify complex decision-making by mentally separating investments into distinct groups, potentially leading to suboptimal allocation and lack of consideration for investment interactions.Confirmation Bias (Cognitive): This bias leads investors to selectively perceive information that confirms their existing beliefs while disregarding contradictory evidence, resulting in suboptimal decision-making.Hindsight Bias (Cognitive): Investors perceive past events as more predictable than they were, inflating their confidence in their predictive capabilities.Recency Bias (Cognitive): Investors give more weight to recent events or information, potentially neglecting longer-term fundamentals and valuations.Framing Bias (Cognitive): Decisions are influenced by how information or choices are presented, shaping perceptions and preferences even when the underlying facts remain unchanged.Endowment Bias (Emotional): Investors overvalue their investments simply because they own them, leading to emotional attachment and overvaluation.Self-Control Bias (Emotional): Investors prioritize immediate consumption over saving for future needs, struggling to delay gratification and allocate resources toward long-term goals.Optimism Bias (Emotional): Investors believe they are less likely to experience negative outcomes, overestimating their ability to make profitable investments while underestimating risks.Loss Aversion Bias (Emotional): The fear of loss has a stronger influence than the prospect of an equivalent gain, leading to holding onto losing investments and selling profitable ones prematurely.Regret Aversion Bias (Emotional): Investors hesitate to take decisive actions due to fear of suboptimal outcomes, prioritizing the avoidance of potential losses.Status Quo Bias (Emotional): Investors exhibit reluctance to change their current positions, maintaining existing holdings or strategies even when new opportunities arise.Herding Bias (Emotional): Investors follow the actions of others, influenced by instinct and emotions rather than objective analysis, leading to mimicking behaviours without independent research.Investor Behaviour and Personality TraitsTo understand the influence of personality on investor behaviour, it is essential to grasp the concept of personality and personality traits. Personality encompasses characteristics or qualities that distinguish one person from another. Psychological research has identified numerous personality traits, ranging from as few as three to as many as 4,000 in humans. One widely accepted theory is the Big Five personality trait theory, which categorizes personality into five core traits: Openness, Conscientiousness, Extraversion, Agreeableness, and Neuroticism.Openness reflects a person\'s inclination towards new experiences, curiosity, and unconventional ideas. Individuals high in this trait are adventurous and imaginative.Conscientiousness is characterized by thoughtfulness, organization, impulse control, and goal orientation. Those high in conscientiousness plan, adhere to schedules and exhibit disciplined behaviour, while those low in this trait may struggle with procrastination and disorganization.Extraversion is marked by emotional expressiveness, sociability, talkativeness, and assertiveness. Extroverts thrive in social settings, while introverts prefer solitude and quieter environments.Agreeableness involves kindness, affection, and altruism. Highly agreeable individuals prioritize harmonious relationships and empathy, while those low in agreeableness may be more competitive and assertive.Neuroticism is characterized by emotional instability and vulnerability to stress. High neurotics experience anxiety and mood swings, whereas emotionally resilient individuals demonstrate greater stability.Do Personality Traits Influence Investor Bias?Numerous research studies globally have explored the influence of personality traits on investor biases and decision-making. These studies provide compelling evidence of the significant impact of personality traits on investment behaviour.For instance, a study by Durand, Newby, & Sanghani (2008) established correlations between personality traits and investment decisions and performance, underscoring the importance of understanding how individual traits influence investment attitudes and risk preferences. Sari & Bayrakdaroglu (2016) identified that individuals with higher agreeableness are more susceptible to psychological biases, while those with higher neuroticism are less affected.Research by Sadi, Asl, Rostami, Gholipour, & Gholipour (2011) and Baker, Kumar, & Goyal (2018) further reinforced the association between personality traits and investor biases. These studies highlighted how specific dimensions from the Big Five framework shape investor behaviour and decision-making tendencies.ConclusionResearch worldwide consistently demonstrates a substantial correlation between personality traits and investor biases, significantly influencing investment decision-making. This relationship holds profound implications for financial advisors and wealth managers when designing investment portfolios and selecting asset classes for their clients.Self-awareness plays a crucial role in mitigating cognitive biases. By understanding their cognitive tendencies and emotional responses, investors can better navigate decision-making pitfalls. Moreover, awareness of one\'s personality traits can empower investors to recognize and avoid perceptual errors impacting their investment decisions.Financial advisors can leverage insights from personality psychology to tailor investment strategies aligning with clients\' personality traits and preferences. By fostering a deeper understanding of how personality influences investment behaviour, advisors can help clients make more informed and rational decisions, enhancing their financial well-being and achieving long-term investment objectives.References:Ahmad, F. (2020). Personality traits as predictor of cognitive biases: moderating role of risk-attitude. Qualitative Research in Financial Markets, 12(4), 465-484. https://doi.org/10.1108/QRFM-10-2019-0123Akhtar, F., Thyagaraj, K. S., & Das, N. (2018). The impact of social influence on the relationship between personality traits and perceived investment performance of individual investors: Evidence from Indian stock market. International Journal of Managerial Finance, 14(1), 130-148. https://doi.org/10.1108/IJMF-05-2016-0102Baker, H. K., Kumar, S., & Goyal, N. (2021). Personality traits and investor sentiment. Review of Behaioural Finance, 13(4), 354-369. https://doi.org/10.1108/RBF-08-2017-0077Brown, S., & Taylor, K. (2014). Household finances and the \"Big Five\" personality traits. Journal of Economic Psychology, 45, 197-212. https://doi.org/10.1016/j.joep.2014.10.006Bucciol, A., & Zarri, L. (2017). Do personality traits influence investors\' portfolios? Journal of Behaioural and Experimental Economics, 68, 1-12. https://doi.org/10.1016/j.socec.2017.03.001Donnelly, G., Iyer, R., & Howell, R. T. (2012). The Big Five personality traits, material values, and financial well-being of self-described money managers. Journal of Economic Psychology, 33(6), 1129-1142. https://doi.org/10.1016/j.joep.2012.08.001Durand, R., Newby, R., Tant, K., & Trepongkaruna, S. (2013). Overconfidence, overreaction and personality. Review of Behaioural Finance, 5(2), 104-133. https://doi.org/10.1108/RBF-07-2012-0011Frantz, A., Olivo, R. L. de F., Sales, G. A. W., & Silva, F. (2021). Toward enhanced excellence in Brazilian investment firms: the role of investors\' personality assessment tools. Benchmarking. https://doi.org/10.1108/BIJ-09-2020-0488Gambetti, E., & Giusberti, F. (2019). Personality, decision-making styles and investments. Journal of Behaioural and Experimental Economics, 80(February), 14-24. https://doi.org/10.1016/j.socec.2019.03.002Kourtidis, D., Chatzoglou, P., & Sevic, Z. (2017). The role of personality traits in investors trading behaviour: Empirical evidence from Greek. International Journal of Social Economics, 44(11), 1402-1420. https://doi.org/10.1108/IJSE-07-2014-0151Nga, J. K. h., & Ken Yien, L. (2013). The influence of personality trait and demographics on financial decision making among Generation Y. Young Consumers, 14(3), 230-243. https://doi.org/10.1108/YC-11-2012-00325Pak, O., & Mahmood, M. (2015). Impact of personality on risk tolerance and investment decisions: A study on potential investors of Kazakhstan. International Journal of Commerce and Management, 25(4), 370-384. https://doi.org/10.1108/IJCoMA-01-2013-0002Rabbani, A. G., Yao, Z., & Wang, C. (2019). Does personality predict financial risk tolerance of pre-retiree baby boomers? Journal of Behaioural and Experimental Finance, 23, 124-132. https://doi.org/10.1016/j.jbef.2019.06.001Strömbäck, C., Lind, T., Skagerlund, K., Västfjäll, D., & Tinghög, G. (2017). Does self-control predict financial behaiour and financial well-being? Journal of Behaioural and Experimental Finance, 14. https://doi.org/10.1016/j.jbef.2017.04.002Tauni, M. Z., Fang, H. X., & Iqbal, A. (2016). Information sources and trading behaiour: does investor personality matter? Qualitative Research in Financial Markets, 8(2), 94-117. https://doi.org/10.1108/QRFM-08-2015-0031Tharp, D. T., Seay, M. C., Carswell, A. T., & MacDonald, M. (2020). Big Five personality traits, dispositional affect, and financial satisfaction among older adults. Personality and Individual Differences, 166(June), 110211. https://doi.org/10.1016/j.paid.2020.110211Author may be reached at justyfca@gmail.com and eboard@icai.in',
Ep. 250 — Investor Education and Protection A Unique Approach by the Oldest Stock Exchange of Asia
CA Journal
· September 2026
00:00
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Investor Education and Protection: A Unique Approach by the Oldest Stock Exchange of AsiaThe Bombay Stock Exchange (BSE), established in 1875, is the oldest stock exchange in Asia and one of the world\'s leading financial hubs. With a rich history, it has been pivotal in shaping India\'s capital markets. The BSE offers a platform for trading in equities, derivatives, and other financial instruments. Its longevity and influence underscore its significance in global finance.The BSE Investor Protection Fund (IPF), established on July 10, 1986, aims to provide financial relief to investors when trading members default on their obligations to the Exchange. Over the years the objective has moved far beyond financial compensation, as the BSE IPF plays a crucial role in promoting investor education and awareness. It collaborates with and functions as per SEBI guidelines and its functioning is overseen by a Board of Trustees composed of public interest directors of BSE and a representative of a SEBI registered Investors Association. With the growing complexities of financial markets and an increasing number of retail investors entering the equity space, BSE IPF has taken proactive steps to ensure that investors are well-informed and equipped to make sound investment decisions. These initiatives are designed to educate and protect investors, ensuring they understand the risks and rewards associated with various financial products.Digital Initiatives for Investor AwarenessBSE IPF has recognized the power of digital platforms in reaching a large audience and has implemented several offline and online (digital) initiatives to enhance investor awareness. These efforts focus on disseminating valuable knowledge through accessible and user-friendly channels, making financial education available to all, regardless of location. Some of the digital initiatives are:Social Media Engagement: BSE IPF leverages BSE\'s popular handles on social media platforms such as Instagram, X (formerly Twitter), Facebook, YouTube, and LinkedIn to reach a wider audience. Through these channels, BSE IPF shares educational content and updates on market regulations. Infographics, short videos, and interactive posts help make complex financial topics easier to understand. Additionally, BSE IPF regularly runs awareness campaigns on social media as well as print and digital media to educate investors on key issues such as fraudulent schemes, investment risks, and regulatory updates.BSE\'s popular #ManeKiMano video series on various investor awareness topics was well-received by the general investors and applauded by the regulators.With the highest number of followers among all the MII\'s. BSE IPF boasts over million user engagement on its various Social Media handles, dedicated for investor awareness drives.BSE has also tied up with leading digital publications such as Economic Times and Lokmat to educate investors about investor protection, fraud, digital finance and basics of investing through their digital channels. These included podcasts, advertorials, Infographics, and short reels.Mobile Application: BSE recently launched a Beta version of its Investment Learning App, called Nivesh Mitra. This app is an initiative by BSE to help existing and potential investors learn about the Indian securities market. With features like risk profiling, asset allocation, virtual trading in equities and mutual funds, and educational content, it serves as an ideal platform for anyone looking to enhance their investment knowledge. As per SEBI guidelines, the market data used for educational purposes in the App is of T-90 days.Investor Awareness Programs (Physical and Online)BSE IPF has been conducting several physical and virtual awareness programs to educate investors about safe and informed investing practices.In FY 2025, BSE IPF has conducted around twelve thousand programs across the country over 75% of these in Tier II and Tier III cities. These programs are conducted all over India in the respective regional languages, to help investors understand the various nuances of investing in the stock market, mutual funds, and other financial products. These sessions cover topics such as financial planning, risk management, and understanding market trends. Majority of the programs are conducted in rural or semi urban areas aimed at educating investors about the importance of investing wisely and avoiding common pitfalls. These programs are often held in collaboration with schools, colleges, universities, police, CISF, CRPF, BSF, Army and Navy personnel, persons from disadvantaged strata of society, differently abled persons and government bodies.Celebration of World Investor WeekBSE IPF actively participates in and celebrates World Investor Week (WIW), a global initiative organized by the International Organization of Securities Commissions (IOSCO). During this week, BSE IPF organizes a series of activities aimed at raising awareness about investor rights and responsibilities, promoting financial literacy, and encouraging responsible investment behaviour.During WIW 2024, BSE conducts interactive online quiz campaigns every day of the week to both educate and engage the audience. The topics focused on investor awareness campaigns and the prevailing theme of WIW. For 2024-25, the theme was digital finance and technology, with sub-themes such as avoiding frauds and scams, and understanding the basics of investing. The online quiz initiative saw participation from approximately 23,000 individuals. Correct answers were highlighted and rewarded.Sixteen Nukkad Nataks were part of this campaign in Madhya Pradesh (Indore, Bhopal, Ujjain) and Nagpur, performed at various busy locations to spread the message of digital finance and prevention of online frauds.Online story telling competitions were organized with an aim of demystifying investment jargons or simplifying investment related terms the objective being, to create engaging stories that explain complex investment terms in simple language. Participants were asked to create a short video (max 2-3 minutes) that tells a story about an investment concept or terminology either in English or Hindi, on social media which saw more than 1300 people participating in this activity.BSE IPF\'s diverse initiatives, both digital and physical, aim to empower investors with the knowledge and tools needed to make informed and safe investment decisions. Through sustained efforts in raising awareness, educating the public, and celebrating global milestones like World Investor Week, BSE IPF continues to be a key player in fostering investor confidence and protecting investor interests in the Indian financial markets. This clearly demonstrates BSE\'s firm commitment to fostering informed and aware investors, leading to creation of a vibrant $5 trillion economy.Author may be reached at eboard@icai.in
Ep. 251 — Mergers and Acquisitions: Navigating the Complex Path to Corporate Growth and Global Success
CA Journal
· September 2026
00:00
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Mergers and Acquisitions: Navigating the Complex Path to Corporate Growth and Global SuccessThis article provides an in-depth analysis of Mergers and Acquisitions (M&A), focusing on recent global trends, major deals, and significant court rulings in India and abroad. It explores the strategic drivers behind M&A, such as technological disruption, globalization, and regulatory changes. The article also highlights key challenges, including integration issues, valuation risks, and geopolitical complexities. Drawing on case studies of successful and failed mergers, it offers lessons learned and insights for future transactions. Considering sustainability and innovation, the article outlines how M&A will continue to shape corporate growth and global competition.Mergers and Acquisitions (M&A) represent a crucial aspect of corporate finance, where companies seek growth, market expansion, or strategic advantages through consolidation or purchase. In essence, a merger is the combination of two companies to form a new entity, while an acquisition involves one company purchasing another. These transactions can reshape industries, redefine competition, and generate significant value for shareholders. The dynamic nature of M&A makes it a popular strategy among businesses to drive both organic and inorganic growth.In recent years, M&A activity has surged globally, driven by technological advances, globalization, and the increasing complexity of regulatory environments. For instance, technological disruption and the rise of digital platforms have accelerated M&A activity across the world, with deals increasingly targeting technology companies. Similarly, the impact of globalization has led to a rise in cross-border M&A deals as companies seek access to international markets, talent, and supply chains.The objective of this article is to explore M&A trends with a focus on recent data, significant deals, and critical court judgments in India and abroad. Furthermore, this article will delve into the challenges and risks that companies face during M&A transactions and how they can effectively navigate these issues.Unpacking the Fundamentals: Synergy, Valuation, and Types of Mergers and AcquisitionsKey Concepts in M&AThe core motivation behind M&A is to create value through synergy. Synergy occurs when the combined value of two companies exceeds the sum of their individual values. Synergy can manifest in various forms, including operational synergy (cost savings through economies of scale), financial synergy (lower cost of capital), and managerial synergy (improved decision-making).One of the critical aspects of M&A transactions is valuation. Valuation determines the fair price for the transaction and involves analysing various factors, such as the target company\'s financial health, market position, and growth potential. Companies use different valuation methods to assess the target\'s value, including discounted cash flow (DCF), comparable company analysis, and precedent transactions.Types of M&AHorizontal Mergers: Companies operating in the same industry combine to increase market share. For instance, the merger of Vodafone and Idea in India was driven by the need to consolidate in a highly competitive telecom market. This merger aimed to create a stronger entity that could compete with a dominant player in the Indian telecom sector.Vertical Mergers: These involve companies at different stages of the supply chain. A classic example is Amazon\'s acquisition of Whole Foods, where Amazon integrated its distribution capabilities with a retail business. This vertical merger allowed Amazon to gain a foothold in the grocery business and expand its reach in the retail sector.Conglomerate Mergers: Firms from unrelated industries merge. This type of merger diversifies business risks. An example of a conglomerate merger is the acquisition of the chemical giant DuPont by Dow Chemical. This merger combined two industry leaders from different segments of the chemical industry, allowing them to diversify their product offerings and reduce market risks.The Role of M&A in Financial GrowthM&A plays a vital role in fostering corporate growth. Companies use M&A to achieve economies of scale, expand geographically, and gain access to new technology or intellectual property. Financial growth through M&A is not limited to large corporations; small and medium-sized enterprises (SMEs) also participate in M&A to enhance their competitive position. For instance, tech start-ups often pursue M&A as an exit strategy, selling their business to larger companies looking to innovate quickly or enter new markets.Moreover, M&A transactions can generate significant value for shareholders by increasing the company\'s market capitalization. Research suggests that successful M&A deals can result in a 20% to 30% increase in the acquiring company\'s stock price within a year of the transaction. However, this value creation is contingent on several factors, including the successful integration of the two entities and the realization of anticipated synergies.Global M&A Trends: How Technology and Sustainability Are Shaping the Future of Corporate ConsolidationRecent Global M&A ActivityGlobal M&A activity has seen a remarkable surge, driven by low-interest rates, investor appetite for growth, and favourable economic conditions. In 2022, global M&A activity reached approximately $3.8 trillion, marking a significant recovery from the COVID-19 pandemic-induced slump. The technology sector led the charge, with tech-driven deals comprising around 30% of total M&A activity. The financial services and healthcare sectors also saw robust M&A activity as companies sought to capitalize on digitalization and increased demand for healthcare services.Table 1: Global M&A Activity (2020-2023)YearTotal Deal Value (USD Trillion)20203.620215.920223.820233.1Source: Bain and Company M&A Report 2023One of the key trends in global M&A is the increasing focus on sustainability and ESG (environmental, social, and governance) factors. Companies are now considering the impact of their M&A deals on the environment and society, with investors pushing for greater transparency and accountability in these areas. For example, the merger between Siemens and Gamesa to create Siemens Gamesa Renewable Energy is driven by the growing demand for renewable energy and the shift towards a greener economy.Key Drivers of Global M&ATechnological Disruption: The rapid pace of technological change has driven companies to acquire tech firms to stay competitive. The acquisition of Arm by Nvidia in 2020 for $40 billion is a prime example of tech-driven M&A. Similarly, Microsoft\'s acquisition of Nuance Communications for $19.7 billion in 2021 highlights the trend of tech giants acquiring smaller companies to strengthen their foothold in the area of Artificial Intelligence.Globalization: Cross-border M&A has flourished as companies seek to expand their global footprint. The acquisition of Refinitiv by the London Stock Exchange Group for $27 billion in 2021 exemplifies the growing trend of international deals. This acquisition allowed the London Stock Exchange to diversify its offerings and become a global player in the financial data and analytics space.Regulatory Changes: Regulatory landscapes vary by region, impacting M&A activity. The U.S., for instance, has seen increased scrutiny of big tech mergers by antitrust authorities, while in the European Union, competition regulations have shaped the contours of high-profile deals. In 2020, the European Commission blocked the proposed merger between Siemens and Alstom, citing concerns that the deal would reduce competition in the railway industry.Major Deals in Recent YearsNotable deals in the last few years include Microsoft\'s acquisition of Activision Blizzard for $68.7 billion in 2022 and the $43 billion merger between Discovery and WarnerMedia to form Warner Bros. Discovery. These deals reflect the growing convergence of technology and media, where content distribution and digital platforms are merging.In the pharmaceutical sector, the $39 billion acquisition of Alexion Pharmaceuticals by AstraZeneca in 2021 highlights the increasing importance of biotech and rare disease treatments in the healthcare industry. This deal allowed AstraZeneca to expand its presence in the rare disease market and strengthen its position as a global leader in biopharmaceuticals.India\'s M&A Landscape: Major Deals, Regulatory Developments, and Landmark Court JudgmentsOverview of M&A Trends in IndiaIndia\'s M&A landscape has evolved significantly in the past decade. From 2019 to 2023, Indian companies witnessed a surge in M&A activity, driven by liberalized FDI policies, the rise of unicorns, and consolidation in key industries like telecom, banking, and real estate. In 2022 alone, Indian M&A deals were valued at approximately $115 billion, making it one of the most active years in Indian corporate history.Case Studies: Major M&A Deals in Indian Corporate HistoryVodafone-Idea Merger (2018): This $23 billion merger was a landmark deal in the Indian telecom sector, driven by intense competition and the need for consolidation. The merged entity became the largest telecom operator in India by subscriber base, but it faced significant challenges post-merger, including regulatory hurdles and financial stress.HDFC Bank-HDFC Ltd Merger (2022): Valued at $40 billion, this was one of the biggest financial mergers in India, combining the country\'s largest mortgage lender with its largest private-sector bank. This deal exemplified the trend of consolidation in the financial sector as companies sought to create financial behemoths capable of competing on a global scale.Reliance-Future Group Deal (2020): Reliance Industries\' acquisition of Future Group\'s retail, wholesale, logistics, and warehousing businesses for $3.4 billion was a significant deal in the retail sector. However, the deal faced legal challenges from Amazon, which claimed that the transaction violated its rights under an earlier agreement with Future Group. This legal battle highlights the complexities involved in M&A transactions in India, particularly in the context of cross-border deals and contractual disputes.Recent Legal and Regulatory Developments in IndiaIndia\'s regulatory framework for M&A has undergone several changes in recent years. The Companies Act, 2013, and the Competition Act, 2002, serve as the primary legislation governing M&A. Recent amendments to the Competition Act introduced stricter provisions for mergers that could potentially harm competition. Additionally, the Insolvency and Bankruptcy Code (IBC) has facilitated distressed M&A, enabling companies to acquire assets through the insolvency resolution process.One of the most notable developments in recent years is the increasing scrutiny of foreign investments in India. The Indian government has introduced new rules requiring government approval for foreign investments from countries sharing a land border with India. This move is primarily aimed at curbing opportunistic takeovers of Indian companies during the COVID-19 pandemic.Judicial Perspectives on M&ASignificant Court Judgments Impacting M&AThe judiciary has played a pivotal role in shaping the M&A landscape in India and abroad. Landmark court judgments have influenced the regulatory framework and set precedents for future transactions.India:Vodafone-Hutchison Case (2012): The Supreme Court of India ruled in favour of Vodafone, holding that the transaction between Vodafone and Hutchison did not attract capital gains tax in India. This judgment had significant implications for cross-border M&A and tax structuring.Essar Steel Case (2019): The Supreme Court\'s decision in this case reaffirmed the primacy of financial creditors in insolvency resolution under the IBC, paving the way for ArcelorMittal\'s $6 billion acquisition of Essar Steel.International:AT&T-Time Warner Merger Judgment (2018): In the U.S., a federal court ruled in favour of AT&T\'s $85 billion acquisition of Time Warner, dismissing the government\'s antitrust challenge. This judgment reinforced the legality of vertical mergers in the media and telecom sectors.UK Competition and Markets Authority (CMA) Rulings: The CMA\'s rulings have been influential in preventing anti-competitive mergers. For example, in 2020, the CMA blocked the merger of JD Sports and Footasylum, citing concerns over reduced consumer choice.These judgments highlight the complex interplay between regulatory frameworks and judicial interpretations in shaping M&A outcomes. In India, the judiciary has played a crucial role in ensuring that M&A transactions adhere to legal and regulatory norms, particularly in cases involving tax disputes and insolvency resolutions.Challenges in M&A: Overcoming Integration Hurdles, Regulatory Complexities, and Geopolitical RisksCommon Challenges in M&AM&A transactions are fraught with risks and challenges, including:Integration Issues: Post-merger integration is one of the most critical challenges. Cultural differences, operational mismatches, and integration of technology systems can derail the success of a merger. The Daimler-Chrysler merger in 1998, valued at $36 billion, is a classic example of cultural clashes leading to the failure of the deal. Similarly, the integration of AT&T and Time Warner posed significant challenges, with critics pointing to the complexity of merging content creation with distribution.Regulatory Hurdles: Compliance with regulatory requirements is a significant challenge in cross-border M&A. Companies must navigate different legal frameworks and obtain approvals from multiple jurisdictions. For instance, the acquisition of ARM by Nvidia faced significant regulatory hurdles, with antitrust authorities in the U.S., UK, and EU scrutinizing the deal for potential anti-competitive effects.Valuation and Overpayment: Overvaluation of the target company can lead to financial strain. The AOL-Time Warner merger in 2000, valued at $165 billion, is one of the most notorious examples of overpayment leading to massive losses. Similarly, HP\'s acquisition of Autonomy for $11 billion in 2011 resulted in significant write-downs and legal battles due to allegations of accounting fraud by Autonomy\'s management.Geopolitical Risks: Cross-border M&A deals are increasingly influenced by geopolitical factors, such as trade tensions, sanctions, and changes in foreign investment policies. For example, the U.S.-China trade war has affected several high-profile M&A deals involving Chinese companies, with regulators in the U.S. blocking transactions on national security grounds.Case Studies of Success and Failure: Lessons from Iconic Mergers and AcquisitionsThe failure of the AOL-Time Warner merger is often cited as a lesson in the importance of realistic valuation and cultural alignment. Similarly, the merger between Daimler and Chrysler failed due to divergent corporate cultures and misaligned business strategies. These cases emphasize the importance of thorough due diligence and integration planning.Another example is the attempted merger between Pfizer and Allergan, valued at $160 billion in 2016, which is often cited as a case study in the impact of regulatory and policy changes on M&A transactions. Here\'s a detailed explanation of why this high-profile merger collapsed:The Tax Inversion Strategy: One of the primary motivations behind Pfizer\'s acquisition of Allergan was to benefit from a tax inversion. A tax inversion occurs when a U.S.-based company merges with a foreign company and relocates its headquarters to the foreign country to benefit from lower corporate tax rates. At the time, Pfizer was headquartered in the U.S., where corporate tax rates were relatively high, while Allergan was based in Ireland, which had a significantly lower corporate tax rate. By acquiring Allergan and moving its headquarters to Ireland, Pfizer aimed to reduce its tax burden, which would have resulted in substantial savings. This strategic move was not uncommon at the time, as several U.S. companies were pursuing tax inversions to enhance profitability.Regulatory Response: The deal, however, drew significant scrutiny from the U.S. government, which had been increasingly concerned about the growing trend of tax inversions. To address this, the U.S. Treasury Department introduced new regulations aimed at curbing such transactions. In April 2016, just months after the Pfizer-Allergan merger was announced, the U.S. Treasury unveiled a set of rules specifically designed to make tax inversions less attractive and more difficult to execute. These rules targeted the way inversions were structured, particularly by limiting the ability of U.S. companies to engage in so-called \"serial inversions\" (repeatedly acquiring smaller foreign firms to reduce tax obligations) and tightening the criteria for companies that sought to move their tax domicile overseas.Impact on the Pfizer-Allergan Merger: The new regulations directly affected the Pfizer-Allergan deal. Under the new rules, Pfizer could no longer achieve the tax benefits it had originally sought through the merger. The regulations made it financially unviable for Pfizer to proceed with the acquisition, as the anticipated tax savings were a central component of the deal\'s rationale. Moreover, the U.S. Treasury\'s move demonstrated the government\'s growing resolve to crack down on tax inversions, signalling that any similar deals would likely face significant regulatory hurdles in the future.Deal Termination: On April 6, 2016, Pfizer and Allergan officially announced the termination of their merger agreement. Pfizer cited the U.S. Treasury\'s new regulations as the primary reason for calling off the deal, acknowledging that the regulatory changes made the transaction less advantageous. The failure of the merger was a major blow to both companies, particularly Pfizer, which had hoped to use the deal to bolster its competitiveness and reduce costs. Allergan, for its part, received a $150 million breakup fee from Pfizer, as stipulated in the merger agreement. Despite the collapse of the deal, Allergan continued to pursue growth through other acquisitions and strategic initiatives.Broader Implications: The failure of the Pfizer-Allergan merger had broader implications for the M&A landscape, particularly for U.S. companies considering tax inversions. The U.S. government\'s actions signalled a shift in regulatory policy, making it clear that tax inversions would no longer be an easy route for reducing corporate taxes. As a result, many companies reconsidered or abandoned similar strategies, leading to a decline in tax inversion-related deals in subsequent years.This case also highlighted the importance of regulatory risk in M&A transactions. Companies engaged in cross-border deals must carefully evaluate the potential impact of regulatory and policy changes, particularly when their transactions are driven by tax or financial incentives. The failure of the Pfizer-Allergan merger underscored the fact that even well-structured deals can be derailed by unforeseen regulatory developments.The Road Ahead: How Innovation and ESG Factors Will Influence Future M&A TransactionsIn summary, mergers and acquisitions continue to play a crucial role in shaping the corporate landscape. While M&A offers significant opportunities for growth, it also presents substantial risks and challenges. The regulatory and judicial frameworks governing M&A have evolved to address these complexities, as seen in key judgments from India and abroad. Companies that can successfully navigate these challenges stand to benefit from enhanced market position, increased profitability, and greater competitive advantage.The future of M&A appears promising, particularly in sectors like technology, healthcare, and renewable energy. The M&A landscape will evolve through technology, global regulations, and sustainability, pushing companies to prioritize ESG-aligned deals. Companies are expected to pursue M&A as a strategic tool to gain access to new markets, innovate, and achieve growth in an increasingly competitive global environment. However, the success of M&A will depend on the ability of companies to effectively manage the challenges and risks associated with M&A, particularly in the areas of post-merger integration, regulatory compliance, and valuation.References:London Stock Exchange Group. (2021). \"Acquisition of Refinitiv.\"Supreme Court of India. (2012). \"Vodafone-Hutchison Case Judgment.\"European Commission. (2020). \"Siemens-Alstom Merger Block.\"Ministry of Corporate Affairs, India. (2022). \"Competition Act Amendments.\"AstraZeneca. (2021). \"Acquisition of Alexion Pharmaceuticals.\"Nvidia. (2020). \"Acquisition of ARM Holdings.\"Microsoft. (2022). \"Acquisition of Activision Blizzard.\"Competition and Markets Authority, UK. (2020). \"JD Sports and Footasylum Merger Ruling.\"The Economist. (2022). \"Global M&A Trends Post-Pandemic.\"Author may be reached at casampad@mail.ca.in and eboard@icai.in
Ep. 252 — Cyber Security: Why Accountants Need to be Vigilant
CA Journal
· September 2026
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Cyber Security: Why Accountants Need to be VigilantThe term \"security\" simply means to protect individuals, assets, and organizations from various threats. It is the state of being free from vulnerabilities, threats, and dangers in a general sense. Safeguarding the assets from potential threats is one of the primary duties of the management, and as an auditor (or an accounting professional), it is our responsibility to ensure and provide assurance to the stakeholders that an organization\'s assets of all kinds are well-protected from all possible threats. Further, an accountant provides a signature on the audit report and various other assurance documents which provide reasonable assurance to the stakeholders that an independent party has ensured the organization\'s interests are well protected. Now, we can only imagine the level of responsibility that the stakeholders have put on the shoulders of an accountant. It is, hence, the professional duty of an accountant to honour this responsibility and provide a reasonable assurance.A few decades ago, it was relatively easier to identify threats and put adequate control measures against them. Threats were mostly physical and visible to accountants as well, and it was relatively easier to measure the controls put in place while executing professional duty. However, with the advent of the personal computer and the internet, the definition of vulnerability and threat has transformed significantly. At present, existing physical threats and vulnerabilities persist, and the volume of vulnerabilities that are present in cyberspace is increasing manifold, and it is going to be an increasing trend further.Cyberthreats and CybersecurityThe Canadian Center for Cyber Security, 2022, defines \'cyberthreats\' as \"any activities that are intended to compromise the security of an information system by altering the confidentiality, integrity, and availability (CIA) of a system or information contained therein or disrupting digital life in general.\" Any activity intended to gain illegal access to an information system with malicious intent can be understood as a cyberthreat. When the threats materialize, it is known as a cyberattack. Actors (hackers, systems, malicious codes, etc.) who try to gain illicit access to an information system or a part of it for malicious activities with the intention to cause harm to the system are known as cyberthreats. Whereas \'cybersecurity\' is the practice of combating multifaceted problems (cyberthreats) in an information system with the intention to prevent cyberthreats from materializing their illicit activities and protecting the CIA of an information system (Syed, Khaver, & Yasin, 2019). Similarly, the International Standardization Organization (ISO) defines the term \'cybersecurity\' as \"the preservation of the CIA of the information or data in cyberspace (connection of people, software, services, and devices on the internet using any network).\" We can understand cybersecurity as the protection of data in the network space, be it internet or intranet or any other type of network, used to connect multiple devices and systems for communicating with each other.Present Status of Cyberthreats and Cybersecurity Around the WorldThe total monetary value of damages incurred by cybercrime around the world is going to be around $10.5 trillion by 2025. The loss and the cost of detecting and escalating a cyber incident are around $1.3 million and $1.58 million respectively. Thousands of cyber incidents related to identity theft, phishing, ransomware, DDoS, etc., occur around the world on a regular basis, and there are various incidents of breach of personal information and data every year (John & Swanston, 2024). Some of these attacks are on the company and some on an individual level, and these attacks are mostly intended for the purpose of soliciting an amount of money from the victim or through any other medium by using the information gathered during the incident.The number of workforces in the cybersecurity domain are in an increasing trend; however, there is still a shortage of highly skilled professionals in this domain. Furthermore, organizations have also started to set aside a budget for cybersecurity, and it is expected that this trend will follow in the coming years (National University, 2024). One might wonder why accountants even need to bother in this domain which doesn\'t seem to be in connection with the accounting profession. The fact is that there is a huge technological skills gap among accountants and this poses a risk to the accounting profession altogether (INAA Group, 2022). When accountants with gaps in skill sets perform their duty and if a significant or material aspect of the business is overlooked, it poses a serious threat to the business as well as the accountant.Importance of Security for an AccountantThere are five fundamental principles of ethics for professional accountants viz. integrity, objectivity, professional competence and due care, confidentiality, and professional behavior (The ICAI, 2019). Each of these principles is expected to be followed by every professional accountant while discharging their duties and responsibilities. If an accountant doesn\'t understand the security perspective of an organization, there is a high risk that the accountant might perform the duty without being professional. Concepts like going concern, materiality, professional biases, auditor\'s opinion, and reasonable assurance must all be tested during an engagement. Security here means the safeguarding of the assets of a company and protecting the human lives that the business of a company affects. Lapses in security can pose serious threats to fundamental accounting principles, increasing the high risk of accountants becoming biased, issuing an inappropriate opinion, or providing false assurance to the clients.Since the last decade of the 20th century, humankind started using internet and personal computers, which quickly gained widespread use and popularity. Thanks to companies like Microsoft, Apple, IBM, and many other pioneering innovators that made this possible. The world today would be much more different if the growth of information technology had been much slower than we experienced in the last few decades. While this may seem like a change that doesn\'t significantly impact the accounting profession; however, the concept of security has evolved. Earlier security would mean physical security of physical assets; however, in the present time, physical assets need to be protected along with logical assets, and cybersecurity. This is the reason why an accountant needs to understand the concept of cybersecurity and its impact on professional engagements.Tools for Accountants to Gauge the Cyberthreats and Assess CybersecuritySo far, we\'ve established that an accountant needs to understand the aspects of cyberthreats and cybersecurity during an engagement. Now, let\'s discuss in brief some of the tools and reference materials that will help in this process. An accountant is never expected to become a cybersecurity expert or a technology wizard, but they are expected to understand the basics and have adequate knowledge so they can seek assistance, if needed, from an expert and understand the expert\'s results or solutions. Some of the tools or techniques for an accountant are:A decade earlier, DISA or ISA was considered an added advantage and mandatory for conducting bank audits. However, the time has changed, and every accountant can leverage professional engagement and add value to the clients or service by taking this course. This is the first stepping stone towards understanding the various facets of an information system, cyberthreats, cybersecurity, etc.Having a basic understanding of various cybersecurity frameworks and best practices to test whether such practices are being applied at the client\'s business. However, the level of knowledge depends upon the nature of the business of the client. However, if we set aside clients engaged in the technology sector, a basic understanding would suffice for obtaining reasonable assurance. Frameworks like NIST Cyber Security Framework, ISO 27001, COBIT, CIS, etc. help an accountant to understand cybersecurity and its various aspects (Rayers, 2024).Understanding the concept of a Business Continuity Plan and Disaster Recovery Plan and educating the clients about this as well as helping the clients to formulate the plan for them is another tool for accountants to ensure that cyberthreats are reasonably taken care of by the client (Anders, 2019).Regular updates of ERPs and accounting software, transition into cloud computing, implementation of strict data encryption protocols and testing such protocols, reviewing security policy of the client, etc. are other techniques or tools that help accountants to estimate reasonably cyberthreats and cybersecurity measures (Juern, 2024).Being updated with the best practices and latest updates from the cyberworld is another way of being up to date with the latest information and insights.Teaming up with cybersecurity professionals to increase reasonable assurance during engagements.Small firms might not be able to invest heavily in cybersecurity-related matters. Hence, these firms may team up and come up with a better solution combined to protect themselves.Learning to use AI/ML tools that are useful in engagements; however, AI is a double-edged sword for accountants. While it provides new frontiers to deal with large volumes of data, analyzing patterns, etc., it may also attract newer threats at the same time. A solid understanding of AI is required for an accountant to be effective.The goal is to assess the assertions that might have a significant impact on the auditor\'s professional work and opinion, such as going concern or materiality. An accountant must stay aware of the latest information and tools to help during the engagement.Way Forward for the AccountantsNew threats emerge every day which directly or indirectly affect the accounting world and accountants. Accountants at the present time are bombarded with lots of unprecedented threats, putting a lot of pressure on them to learn to deal with such challenges. Leading the practice is not an option; however, accountants need to be smart and find a way around this situation. In cyber security proactiveness matters, it is the duty of the client as well as an accountant to take proactive actions to ensure cybersecurity and disclose them in the annual reports (Haapamäki & Sihvonen, 2019). Accounting world has networks and connections with every other world, and it has become imperative that a combined effort through regular communication and discussion between the clients, cybersecurity professionals, and accountants is necessary to protect valuable assets and information against any cyberthreats (Lehenchuk, Vygivska, & Hryhorevska, 2022).IFAC suggests that accountants upskill themselves, understand the relevant processes and technologies, develop awareness of the cyberworld, understand the business nature of their client, and establish multidisciplinary team to perform the engagement to be effective during the present and future times where the cyberthreats will be in the increasing trend, and need for highly motivated and capable accountants will arise (Tsen, 2019). Except for audit and assurance engagements, accountants can leverage their interest in technology and knowledge to uniquely help entities in finding effective and efficient cybersecurity solutions. The accountants can help in risk identification, design of system and adequate controls, testing the operating effectiveness of the cybersecurity controls, cybersecurity reporting to external stakeholders, and providing assurance on cybersecurity-related matters (Eaton, Grenier, & Layman, 2019). There are new opportunities arising for the accounting profession due to the unique training and skillset of accountants to the accounting profession, and accountants leveraging this information and equipped with the necessary skillset and mindset can expand the horizon of the practice as well.There is no alternative but to remain vigilant, stay updated, learn new skills, collaborate with multidisciplinary teams, and work alongside other professionals to develop new avenues for practice while providing reasonable assurance in current engagements. The time has come for accountants to come out and seek challenges and thrive in the new world. The bottom line for the future is to be open-minded, and constantly seek to learn new information and skills.ConclusionCyber threats are inevitable - the only way to maintain professionalism and perform with reasonable assurance during an engagement is by being proactive and vigilant against such threats. It is essential to ensure that reasonable controls are in place so that these threats do not materialize, or even if they do, their impact is minimized - ensuring that going concern and materiality are not affected. The average cost of cyber incidents has increased by 10% in 2024 and reached USD 4.88 Million, and the average cost savings is USD 2.22 Million for organizations using advanced cyber protection technologies in the prevention of cyber-attacks (IBM, 2024). One of the major root causes for data breaches is human error in the organizations, accounting for around 22% and IT failure accounts for 23%, and it is the responsibility of an accountant to assess the effectiveness of any training or awareness programs implemented by the organization and the effectiveness of IT operations.There is no way out, either accountants need to adapt or run out of practice areas, since everything is going to be under the radar of information technology and cyber threats will follow pursuit. Accountants need to learn to adapt quickly, as the threats are emerging at a speed hitherto unimaginable and if accountants the watchdog of the society, as the motto of The ICAI suggests - are not well-equipped to perform their duty then there will be a serious risk to the society at large.In conclusion, this article highlights the cybersecurity perspective and the role of accountants. Further, rigorous studies are necessary to scope the roles of different stakeholders in preventing cyber incidents and protecting the organizations. Similarly, studies on reducing human error and IT failures must be carried out extensively, as nearly 50% of cyber incidents occur due to an organization\'s internal incompetencies. The accounting profession must also assess the impact of such incidents on the reliability and effectiveness of the accounting assignments, and raise stakeholders\' trust alongside.References:Anders, S. B. (2019). Cybersecurity Tools for CPAs. The CPA Journal. Retrieved from https://www.cpajournal.com/2019/09/13/cybersecurity-tools-for-cpas-2/Canadian Center for Cyber Security. (2022). An introduction to the cyber threat environment. Ottawa: Communications Security Establishment. Retrieved from Canadian Center for Cyber Security: https://www.cyber.gc.ca/sites/default/files/ncta-2022-intro-e.pdfDeloitte, Charife, T., & Mossad, M. (2023). AI in cybersecurity: A double-edged sword. Retrieved from Deloitte: https://www2.deloitte.com/xe/en/pages/about-deloitte/articles/securing-the-future/ai-in-cybersecurity.htmlEaton, T. V., Grenier, J. H., & Layman, D. (2019). Accounting and Cybersecurity Risk Management. Current Issues in Auditing, 13(2), C1-C9. doi:https://doi.org/10.2308/ciia-52419Haapamäki, E., & Sihvonen, J. (2019). Cybersecurity in accounting. Managerial Auditing Journal, 34(7), 808-834. doi:http://dx.doi.org/10.1108/MAJ-09-2018-2004IBM. (2024). Cost of a Data Breach Report 2024. IBM. Retrieved from https://www.ibm.com/downloads/cas/1KZ3XE9DINAA Group. (2022, May 30). Addressing the So-Called \'Digital Skills Gap\' in Accountancy. Retrieved from Addressing the So-Called \'Digital Skills Gap\' in Accountancy: https://www.inaa.org/addressing-the-so-called-digital-skills-gap-in-accountancy/John, M., & Swanston, B. (2024, February 28). Cybersecurity Stats: Facts And Figures You Should Know. Retrieved from Forbes: https://www.forbes.com/advisor/education/it-and-tech/cybersecurity-statistics/#SourcesJuern, N. (2024, May 25). Cybersecurity Risk Management for Accountants: Essential Strategies, Compliance, and Future Trends. Retrieved from 7tech: https://www.7tech.com/2024/05/25/cybersecurity-risk-management-for-accountants-essential-strategies-compliance-and-future-trends/Lehenchuk, S., Vygivska, I., & Hryhorevska, O. (2022). Protection of accounting information in the conditions of cyber security. Problems of Theory and Methodology of Accounting, Control and Analysis, 2(52), 40-46.National University. (2024, August 6). 101 Cybersecurity Statistics and Trends for 2024. Retrieved from National University: https://www.nu.edu/blog/cybersecurity-statistics/Rayers, J. (2024, May 30). Top 11 cybersecurity frameworks in 2024. Retrieved from Connectwise: https://www.connectwise.com/blog/cybersecurity/11-best-cybersecurity-frameworksSyed, R., Khaver, A. A., & Yasin, M. (2019). What is Cybersecurity? Sustainable Development Policy Institute. Retrieved from https://www.jstor.org/stable/resrep29108.5The ICAI. (2019). The Fundamental Principles. In T. ICAI, Code of Ethics (p. 4). New Delhi: The ICAI.Tsen, S. (2019, May 16). Cybercrime Threatens Trust in Business How Accountants Can Help. Retrieved from IFAC: https://www.ifac.org/knowledge-gateway/discussion/cybercrime-threatens-trust-business-how-accountants-can-helpAuthor may be reached at rijal255@gmail.com and eboard@icai.in
Ep. 253 — The BOT Model in Software Outsourcing: A Strategic Approach
CA Journal
· September 2026
00:00
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The BOT Model in Software Outsourcing: A Strategic ApproachThe Build-Operate-Transfer (BOT) model is increasingly adopted in software outsourcing, providing companies with a structured method to expand operations, particularly in dynamic markets like India. By leveraging technology service providers\' expertise, companies can establish, operate, and eventually transfer new facilities, benefiting from retained domain knowledge, financial flexibility, and access to advanced technologies. This article explores about the emerging BOT model in the context of the burgeoning Global Capability Centers (GCCs) market in India, offering insights about the market trends, benefits, legal frameworks, billing models, and strategic considerations.The BOT model is becoming a pivotal strategy in software outsourcing, providing companies with a structured pathway to expand their operations, especially in dynamic and emerging markets like India. This model leverages the expertise of technology service providers in local markets to establish and operate new facilities before eventually transferring them to the client. Understanding the market trends and the increasing demand for Global Capability Centers (GCCs) in India is crucial for appreciating the relevance of the BOT model.GCC Trends and Market DemandAccording to reports from Zinnov and Nasscom, the GCC market in India is experiencing significant growth. The number of GCCs in India is projected to reach 2,400 by 2030, employing 4.5 million individuals compared to the current 1.9 million. Several key factors drive this growth:Establishment of Centres of Excellence (CoEs): GCCs are focusing on areas such as artificial intelligence (AI), cloud computing, engineering, data analytics, and cybersecurity. These CoEs serve as hubs for innovation and technological advancement, enabling companies to stay competitive in a rapidly evolving market.Transitioning from Cost Centers to Profit Centers: Many GCCs are moving beyond their traditional roles as cost centers. They are evolving into profit centers with a focus on generating new revenue streams. This shift involves leveraging advanced technologies and optimizing operations to contribute directly to the company\'s bottom line.Expansion of Functions: GCCs are increasingly expanding their functional scope to include support functions such as legal, marketing, and procurement. This diversification is supported by increased investments, allowing companies to centralize more of their global operations in India.Employee Value Proposition (EVP): There is a greater emphasis on EVP, focusing on enhancing organizational culture, nature of work, rewards, and compensation. This holistic approach towards employee engagement helps to attract and retain top talent, ensuring sustained growth and innovation. This also assures retention of domain knowledge within the organization and no dependency on third-party for same.Projected Growth and Financial ProjectionsNew GCC Setups: The number of new GCC setups is expected to increase from 70 per year to 115 per year.Cost Per Full-Time Equivalent (FTE): The overall cost per FTE is anticipated to rise from the current $29,100 to $37,760 by 2030.Market Size: The GCC market size in India is projected to reach $110 billion by 2030, reflecting a Compound Annual Growth Rate (CAGR) of 14%.Key Innovation HubsThe major cities driving this growth include Tier-I cities like Mumbai, Pune, Bengaluru, and Hyderabad, which are emerging as key innovation hubs. Additionally, Tier-II cities such as Vadodara, Nashik, Tirunelveli, and Coimbatore are witnessing significant GCC expansions. In the first half of 2023 alone, 18 new GCCs were established, with companies like Blackberry and Truecaller setting up their centers in India.What is the BOT Model?The BOT model in the domain of software outsourcing involves five main phases: Pre-Build, Build, Operate, Transfer & Hypercare. This model allows companies to leverage external expertise to establish and run their operations initially and then transition the ownership and management to themselves over time. In a BOT model, customers seek a technology service provider to shoulder responsibilities including hiring personnel, establishing processes, handling registration formalities, and setting up facilities and other infrastructure.This model offers customers the flexibility to opt for either a full-fledged BOT arrangement or a partial BOT, depending on their specific business needs and preferences.Pre-Build/Due Diligence: The service provider conducts thorough due diligence, assessing the customer\'s requirements, local regulatory landscape, and market conditions to lay a strong foundation for the project.Build: During this phase, the service provider sets up the necessary infrastructure, recruits talent, and establishes operational processes. Initial investments are often provided by the service provider, covering commitments related to third-party platforms, software, and contracts.Operate: The service provider operates the established entity, managing daily operations and ensuring efficient functioning. This phase is critical for stabilizing the operations and embedding best practices. Continuous support and training are provided to the customer associates in preparation for the transfer.Transfer: After a predefined period, the service provider transfers the fully operational setup to the customer. This phase includes hyper-care support to ensure a seamless transition, alongside ongoing maintenance services, Customers benefit from retained domain knowledge, financial flexibility, and advanced technology acquired during the operational phase.Benefits of the BOT Model to CompaniesAccording to some reports, there are more than 1500 GCC setups in India. Global Capability Centers (GCCs), formerly known as Captives, have been established by various means, including independently by customers, with consulting support, or via third-party suppliers using the BOT model. The benefits of using the BOT model for setting up GCCs include:Retained Domain Knowledge: Critical domain knowledge remains within the organization, reducing dependency on external IT vendors.Financial Flexibility: Companies can strategically allocate funds to capital expenditures, optimizing tax benefits and potential future sell-offs.Cost Management: Flexible fund management allows companies to adjust financial commitments as needed.Attrition Control: The stability and expertise of the technology service provider often result in lower attrition rates.Access to Advanced Technology: Companies gain access to the latest technologies and intellectual property through experienced partners.Regulatory Compliance: The service provider ensures efficient and lawful operations by handling local regulatory compliance.SLA-Driven Delivery: Service level agreements ensure consistent and reliable outcomes, enhancing operational efficiency.Expert Hiring Resources: Companies can tap into the service provider\'s network for hiring, accessing domain expertise and pre-trained resources.Risk Mitigation: The model helps minimize or transfer certain business risks, enhancing overall risk management strategies.Business Continuity Planning (BCP): Robust BCP models are developed, redistributing risks within different business portfolios.Data Security: Enhanced security measures safeguard customer interests and ensure data protection.Partnership Synergies: Strategic partnerships between the customer and the IT service provider offer additional benefits.Legal Entity Models in BOTSeveral legal entity models can be employed within the BOT framework, each offering varying levels of control, transparency, and financial implications. Some models are more preferred by customers and some by Information Technology (IT) vendors depending upon recovery model and investment requirements, such as:Joint Venture: This involves shared control and stake between the customer and the IT partner, offering complete financial transparency and later sale of the stake.Special Purpose Vehicle (SPV): A separate entity established for a specific purpose, allowing for a fixed-price deal.Separate Entity set-up by IT Partner: The IT partner sets up a subsidiary for the customer project, with shares to be purchased by the customer after an agreed period.Slump Sale: The undertaking is sold without individual valuations of assets or liabilities at the transfer stage. However, there is no need for a separate entity set up by IT Partner.Customer Entity: The entity is registered in the customer\'s name, with the IT partner providing consultancy support without any investment. All third-party contracts are entered in the name of this new entity. Hiring of employees is also done in the name of the new entity.Separate Unit Carved Out by IT Partner: The IT partner provides consultancy support and transfers separable vendor contracts/assets at a specified period. IT Partner may choose to do an initial investment. This can be one of the Virtual Captive models.These options offer different levels of control, transparency, and financial considerations. The choice depends on the specific needs, preferences, and agreements between the customer and the service provider. It is essential to carefully evaluate the legal, financial, and operational implications before planning.Additional Considerations for the BOT ModelWhile the BOT model offers numerous advantages, several key critical considerations must be addressed during the planning and execution phases. These Considerations are more important from the Service Provider\'s point of view:Local Tax Laws: Understanding direct and indirect tax implications is crucial for setting up and operating a GCC. This includes compliance with local tax regulations and ensuring tax-efficient structuring of operations.Local Regulations: Compliance with regulations such as FEMA and SEZ regulations in India, outsourcing laws in specific regions, data protection laws, and licensing requirements is essential.Market Sentiments on the Deal: Assessing market sentiments and stakeholder perceptions can impact the success of the BOT arrangement. This involves understanding the competitive landscape and potential challenges.Long-Term Commitments and Investments: Evaluating long-term commitments and investment requirements is critical. This includes infrastructure investments, technology upgrades, and workforce development.Safe Billing Models: Establishing safe billing models is important to recover the Service Provider\'s costs and ensure financial viability. Transparent and flexible billing arrangements can help manage financial risks for both parties.Exit Strategies and Termination Rights: Defining clear exit strategies and termination rights is vital for managing contingencies. This includes planning for potential scenarios where the BOT arrangement may need to be terminated or transitioned.Risk Assessment and Mitigation: Comprehensive risk assessment and mitigation strategies are essential to address diverse risks. Robust contractual terms and proactive risk management can safeguard the interests of all parties involved.Pricing Model at Various Phases of the BOT ModelThe BOT model encompasses several sub-stages, each of which is critical for the successful implementation and operation of the outsourcing strategy. Each phase has its pricing model to ensure financial efficiency and clarity:Pre-Build/Due Diligence: This initial phase is driven by comprehensive due diligence and is typically managed through fixed-price or milestone-based efforts.Build (Labour and Non-Labour Cost): During this phase, labour costs can be proposed to recover through fixed price or milestone-based efforts, while non-labour costs, such as infrastructure and technology investments can be agreed to be funded by the service provider and later recovered at transfer stage in a full-fledged model. This will be in case the customer chooses to go with a full-fledged BOT model.Operate: This phase ensures smooth day-to-day operations and can be managed through various pricing models, including Time & Material (T&M), capacity-based models, volume drive, or fixed price agreements depending on the nature of services offered.Transfer: This phase involves a detailed valuation of the setup, ensuring a transparent and fair transfer process. Key considerations include:Human Capital: A percentage of the fee can be recovered towards the building of human capital by the service provider. Typically, this can be a 2-3 month fee depending on the length of the operating period.Facility Deposits & Vendor Advances: Recovery of all open balances on the balance sheet with the cost of capital at the date of transfer is proposed and the same is pre-agreed in the agreement.Facility OPEX: Proposed recovery for build time unrecovered costs with cost of capital, plus unrecovered OPEX costs for partial capacity utilization. The same is recovered along with the Cost of capital at the time of transfer.Facility CAPEX: It means recovery with the cost of capital. At the time of the deal, there has to be a clear demarcation of the bill of material that needs to be procured as per required standard/ model. Based on the customer\'s requirements, all setup costs incurred by the service provider are recovered as part of the transfer fee, including the cost of capital and the service provider\'s administration fees. Infra CAPEX: Recovery of capital expenditure, including the cost of capital and administration fees of the service provider.Infra OPEX: Recovery of operational expenditure, including the cost of capital and administration fees of the service provider.Novation of Third-Party Contracts: Ensuring smooth transition and continuity of services.Transfer of Other Assets & Liabilities: Actual valuation, including employee retirement liabilities, dues, leave balance dues, etc.Facility Lease Transfer: Original contract to include a clause for renunciation rights or transfer of facility.Hyper-Care and Post-Transfer Support: After the transfer, ongoing support and hyper-care are provided to ensure a seamless transition. This support is typically managed through Time and Material (T&M) or capacity-based models with monthly payments, ensuring continued stability and efficiency.In a full-fledged BOT model, the customer prefers a transparent and open book policy for all investments done by the service provider. To avoid any ambiguity in the contract, it is advisable to clearly agree on the mechanism & percentage markup that the service provider can charge towards its efforts, consultancy, risk, and financing costs.In short, the BOT model represents a strategic approach for companies seeking to expand their operations and technological capabilities efficiently. By partnering with a technology service provider, businesses can mitigate risks, manage costs, and ensure compliance while benefiting from advanced technologies and expert resources. This model facilitates a smooth transition and positions companies for long-term success and growth in an increasingly competitive market. The rising demand for GCCs in India further underscores the importance and relevance of adopting the BOT model in today\'s global business environment.Opportunity for Finance professionalThe BOT model offers numerous professional opportunities for Accountants and Business Finance Managers (BFM), who can leverage their expertise to enhance the financial and operational success of such arrangements. Key areas where accountants and finance managers can contribute include:Strategic Advisory: Providing insights on investment appraisal, funding strategies, and exit planning supports for long-term financial stability.Contractual Negotiations & Drafting: BFMs can support drafting of contract, covering risk mitigation plans, committed investments on behalf of customers, recovery mechanisms, termination risks, etc.Compliance and Regulatory Assurance: Ensuring adherence to tax laws, financial regulations, and reporting standards is essential for the successful implementation of the BOT model.Financial Planning and Analysis: BFM plays a crucial role in budgeting, forecasting, and conducting cost-benefit analyses during the different phases of the BOT model.Risk Management and Mitigation: Identifying and managing financial risks, and establishing robust internal controls help safeguard the integrity of financial operations.Financial Reporting and Auditing: Accountants ensure transparency and accuracy in financial reporting and coordinate internal and external audits.Cost Management and Optimization: Effective cost tracking and identifying opportunities for cost savings are critical for financial efficiency and control perspective.Performance Measurement: Establishing KPIs and benchmarking against industry standards helps in evaluating financial performance and operational efficiency.Business Valuation: BFM can advise on the valuation method which can be agreed at the time of the contract stage. Accurate asset and business valuations ensure fair and transparent financial transitions during the transfer phase.Knowledge Transfer and Training: Accountants facilitate the smooth transition of financial knowledge and processes, ensuring sustainability post-transfer.From an auditor\'s perspective, the BOT model presents professional opportunities as given below:Compliance Audits: Evaluating the adherence to regulatory requirements, data protection laws, and contractual obligations between the service provider and the client.Financial Audits: Assessing the financial transactions, cost allocations, valuation mechanism and transfer pricing mechanisms during the Build, Operate, and Transfer phases.Operational Audits: Reviewing the efficiency and effectiveness of the operations set up by the service provider, including evaluating the quality of service, security measures, SLA risk and commitment, and any other contractual obligations having a risk of not fulfilling same and risk management processes.Transition Audits: Ensuring a smooth transfer of operations, people, licenses, agreements, assets, and knowledge from the service provider to the client, verifying that all contractual obligations are met.Auditors can leverage their expertise to provide assurance on these aspects, helping clients manage risks and ensure the success of the BOT arrangement.What is a Virtual Captive Center?A Virtual Captive Center is a hybrid outsourcing model where a local, third-party vendor sets up a captive center on behalf of a company. This arrangement involves the vendor providing all necessary technical infrastructure, talent, office resources, and other essential services while allowing the client to retain full control over how the operations are managed. The center operates much like the client\'s own office but is fully maintained by the vendor partner.Benefits and FeaturesClient Control: Despite being maintained by a vendor, the client retains full control over the operations, ensuring that business processes align with their specific requirements and standards.Operational Efficiency: Vendors bring expertise in managing infrastructure, talent, and resources, which can enhance the efficiency and effectiveness of the operations.Cost-Effectiveness: By leveraging local vendors, companies can reduce costs related to infrastructure and human resources while still maintaining high standards of operation.Flexibility and Transparency: This model offers a balance between control and risk, providing flexibility in operations and greater transparency in the business structure.Popularity and AdoptionThe virtual captive model is gaining popularity in India due to its potential to become a standard outsourcing model for the IT industry. It is particularly appealing because it offers the advantages of both captive and outsourced operations, combining the best of both worlds.Comparison with Other ModelsCaptive Operation: High control and low risk but typically higher costs and less flexibility.Build-Operate-Transfer (BOT): Balances control and risk between the client and service provider, offering flexibility, asset-sharing, and cost-efficiency.Dedicated Delivery Centre (DDC): Lower control and higher risk compared to virtual captives but can be more cost-effective.Full Outsourcing: Lowest control and highest risk, often leading to significant cost savings but potential challenges in quality and compliance.In short, Virtual Captive Centers represent an innovative approach in the outsourcing landscape, offering a strategic balance of control, flexibility, and cost-efficiency. They enable companies to maintain high standards of operation while leveraging the local expertise and resources of third-party vendors, making them an attractive option for businesses looking to optimize their operations in dynamic markets like India.Linking BOT Models with Virtual CaptivesBuild-Operate-Transfer (BOT) models and Virtual Captives share several similarities, making the transition between the two seamless for organizations looking to optimize their outsourcing strategies. Both models offer a balanced approach to risk and control, leveraging the expertise and infrastructure of local service providers while maintaining a significant degree of oversight by the client. In a BOT model, the service provider builds and operates the center for a pre-determined period before transferring ownership to the client. This phased approach aligns well with the principles of Virtual Captives, where the client\'s control over operations is paramount from the outset, but without the immediate need to manage infrastructure and talent directly. Both models ensure faster time-to-market, cost-effectiveness, and transparency, providing a compelling business proposition for firms aiming to minimize risks associated with traditional outsourcing while maximizing operational efficiency.References:https://analyticsindiamag.com/the-major-gcc-announcements-for-india-in-2023/https://www.ey.com/en_in/news/2023/06/india-gcc-market-size-to-reach-us-dollor-110b-by-2030Author may be reached at sarikanemani09@gmail.com and eboard@icai.in
Ep. 254 — Bank Sakhi Programme: Accelerating Inclusive Growth through Women Catalysts
CA Journal
· September 2026
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Bank Sakhi Programme: Accelerating Inclusive Growth through Women CatalystsThe Bank Sakhi model, a gender-specific iteration of India\'s BC model, seeks to revolutionize rural banking. It empowers the rural masses by extending services to underserved areas without physical bank branches. Bank Sakhis actively promote financial inclusion through personalized services and community engagement. Further, this programme has global significance as it aligns with multiple Sustainable Development Goals. In this context, this paper explores the objectives, functions, and milestones achieved by the Bank Sakhi Programme. Furthermore, it emphasizes the societal and individual benefits, shedding light on how the programme aligns with broader financial inclusion objectives and community development.The Business Correspondent (BC) model, introduced in 2006, aims to extend essential banking services, such as savings and loans, to underprivileged and unbanked populations. To achieve this, banks can engage third-party agents, including companies, retired bank employees, government agents of Small Savings Schemes, retired teachers, Self-Help Group (SHG) functionaries, and other authorized individuals or entities.BCs play a crucial role in financial inclusion by identifying borrowers, assisting in loan processing, disbursing small-value credit, collecting deposits, managing loan repayments, and facilitating the sale of micro-insurance, pensions, and remittance services. Additionally, they support the formation and monitoring of SHGs and Joint Liability Groups (JLGs), empowering communities with access to credit and financial stability.Bank Sakhi ModelThe Bank Sakhi model is a gender-specific adaptation of India\'s BC model (2006), designed to transform rural banking through women business correspondents. The female Banking or BC model, introduced in 2015-16, is endorsed by the National Rural Livelihood Mission (NRLM) and supported by the World Bank under the Digital Financial Inclusion (DFI) initiative focused on Lower Income States. As part of this initiative, the Bank Sakhi model has rapidly gained momentum across rural India, operating within a broad network that includes State Rural Livelihood Missions (SRLMs), Banks, and Community-Based Organizations (CBOs).As per the Deendayal Antyodaya Yojana- National Rural Livelihood Mission (DAY-NRLM), a Bank Sakhi is defined as an SHG member who supports the Branch Manager by working within a bank branch. Conversely, an SHG member who conducts banking transactions in the field using a laptop, desktop, mobile, or tablet is termed a BC Sakhi. The term Bank Mitra is used by the Department of Financial Services (DFS) and banks to describe existing BC Agents within the banking system. However, there are some SRLMs, where BC Sakhis are referred to as Bank Sakhis. Thus, the terms Bank Sakhi, BC Sakhi, and BC Agent are used interchangeably in the Indian financial landscape.Eligibility CriteriaTo qualify as a Bank Sakhi, the individual must be a woman SHG member for at least 12 months, preferably aged between 22 and 45, literate with a minimum 10th or 8th standard pass, and proficient in reading and writing. Moreover, a Bank Sakhi is expected to be a representative of her community, emphasizing a connection to the grassroots level, but should not hold any official position within a bank. The other prerequisite is a clean financial record with no history of defaulting with either the SHG or the bank. Lastly, proficiency in using a smartphone is a crucial requirement for effective engagement in the role of a Bank Sakhi.Capacity BuildingSRLMs, in collaboration with local banks, corporate BC agent network managers, and other financial institutions, provide comprehensive capacity-building, training, and back-end support to Bank Sakhis. Capacity-building efforts encompass initial training, continuous handholding, and regular monitoring of Bank Sakhis.Financial Support to Bank SakhisSRLMs extend financial assistance to Bank Sakhis through a combination of partial grants, incentives, and low-cost credit facilitated by community institutions. This support helps them cover initial investment needs, such as acquiring hardware devices and securing working capital for their first transactions.In general, Bank Sakhis earn a transaction-based commission from banks for delivering financial services, without any additional charges to customers. However, to ensure financial stability in the initial phase, many SRLMs also provide honorariums for the first few months until operations gain momentum and revenue streams become sustainable.Dual Authentication and Micro-ATMDual authentication is a security measure that requires approval from at least two designated SHG leaders, who serve as account signatories, to authorize financial transactions like withdrawals and fund transfers. A Micro-ATM is a device equipped with a printer and biometric reader, enabling SHGs to conduct financial transactions seamlessly. It allows SHGs to collect and deposit savings, transfer funds between group and individual accounts, and manage Cash Credit Loan accounts through dual authentication.Dual authentication and micro-ATMs help banks by boosting transactions, channeling funds, and handling low-value operations through Bank Sakhis. For SHG members, they save time, offer quick services, build credit history, and ensure transparency with instant receipts.Alignment of the Bank Sakhi Programme with Sustainable Development Goals (SDGs)The Sustainable Development Goals (SDGs), established by the United Nations in 2015, comprise 17 goals aimed at achieving a more just, equitable, and sustainable future. The Bank Sakhi Program supports this global framework by empowering rural women and promoting financial inclusion.SDG 1 (No poverty): The program tackles poverty by removing barriers to financial services for rural women. Secure saving options promote financial planning and provide a safety net for unforeseen circumstances.SDG 3 (Good health and well-being): Financial empowerment through Bank Sakhis also contributes to good health and well-being. Increased financial independence empowers women to prioritize healthcare for themselves and their families.SDG 4 (Quality education): The Bank Sakhi Programme contributes to quality education by enabling women to utilize their surplus income to provide better educational opportunities for their children.SDG 5 (Gender equality): The program advances gender equality by expanding women\'s financial access, workforce participation, and independence, while also reducing gender-based violence and enhancing autonomy.SDG 8 (Decent work and economic growth): The program promotes economic growth by empowering women entrepreneurs, boosting local economies, creating jobs, and enriching the workforce with diverse skills.SDG 10 (Reduced inequalities): By bridging the gender gap and empowering women to build wealth, the program enhances financial inclusion, thereby reducing economic inequality.Milestones Achieved in Bank Sakhi ProgrammeOne Gram Panchayat One BC SakhiThe \'One Gram Panchayat One BC Sakhi\' initiative, introduced by the DAY-NRLM under the Government of India in 2019, envisions deploying one Bank Sakhi in every Gram Panchayat by the end of 2023-24. The objective was to create a cadre of 1.25 lakh trained and certified women from SHGs to serve as BC Sakhis by 2023-24, ensuring last-mile financial inclusion in rural areas. The initiative surpassed its target with 1,27,074 BC Sakhis deployed across 27 states by 2023-24.Community Based Repayment Mechanism (CBRM)To ensure timely repayments by SHGs, the NRLM and SRLMs introduced CBRM, leveraging the active participation of Bank Sakhis to strengthen financial discipline. The number of Bank Sakhis engaged in CBRM steadily rose from 8,600 in 2017-18 to 45,387 in 2023-24.Role of BCs during the pandemicThe pandemic highlighted the need for women-centred financial inclusion, as women are more vulnerable to crises. During COVID-19, Bank Sakhis played a vital role in facilitating cash transfers and providing essential banking services, particularly in rural areas.Role of Bank Sakhis in accelerating PMJDYThe Pradhan Mantri Jan-Dhan Yojana (PMJDY) initiative has been highly successful, with 55 per cent of the 45.2 crore accounts being opened by women until 2023. PMJDY\'s success owes much to the BC model, with local BCs building trust and connecting communities to essential banking services in rural areas.JEEVIKA Bank Sakhi ProgrammeThe JEEVIKA Bank Sakhi Programme, led by Bihar Rural Livelihoods Promotion Society (BRLPS-JEEVIKA) trains SHG women to deliver banking services in rural areas. JEEVIKA Bank Sakhis outperform male and non-JEEVIKA agents, earning over ₹5,000 monthly within 6-9 months, making it a sustainable, empowering livelihood.Impact of the Programme on the Economy and SocietyServices to underserved population and capital accumulation: Bank Sakhis drive financial inclusion by serving remote and underserved communities, promoting financial literacy, encouraging savings, and channeling idle rural funds into formal financial systems.Enhanced loan repayment rates: As local representatives, Bank Sakhis assess community loan needs, recommend suitable schemes, and improve awareness of bank offerings, leading to better loan planning and higher repayment rates.Migration of low-value transactions to low-cost channels: Bank Sakhis reduce the operational burden on bank branches by handling routine transactions, enabling staff to focus on complex tasks, improving efficiency, and cutting costs.Secured financial services: Studies suggest that female agents demonstrate lower susceptibility to fraud, enhancing the security of the Bank Sakhi programme.Facilitates female customers: Many customers find female BC agents more patient and approachable, facilitating trust and better financial guidance.Impact of the Programme on Bank SakhisIncreased independence in social engagement: The Bank Sakhi program has empowered women, enhancing their autonomy and mobility.Enhanced participation in household decision-making: Bank Sakhis now play a greater role in family decisions, from medical and education expenses to asset purchases.Enhanced financial growth: Exposure to advanced financial services has deepened their understanding of various financial products, leading them to avail themselves of insurance, loans, and pension products.Improved skills and confidence: The Bank Sakhi initiative boosts women\'s confidence by equipping them with banking, record-keeping, and computer skills.Challenges Faced by Bank Sakhis and Strategic SolutionsDisparity in earnings and Gender Gap in BC Networks: Male BCs earn four times more than Bank Sakhis due to a limited range of services and balancing household duties. Solution: Train Bank Sakhis in high-revenue services, provide access to prime locations, and offer financial incentives.Mobility issues: Remote rural areas with limited or expensive transport place a financial strain on Bank Sakhis. Solution: Provide comprehensive risk coverage during travel and explore partnerships with local transportation for subsidized travel options.Societal expectations: Societal norms discourage prioritizing work over family. Solution: Conduct community sensitization programs to educate families about the invaluable role Bank Sakhis play.Perception as a \"Ladies Programme\": Some men view it as less relevant to their needs. Solution: Conduct structured awareness campaigns highlighting business potential and engage male allies.Business and Operational challenges: Challenges include lack of access to finance, cash withdrawal limitations, server disruptions, and biometric failures. Solution: Enhance liquidity, prioritize system upgrades, and provide dedicated helplines.The Way ForwardBuilding on the success of the BC model, banks should broaden BC services to include loans, insurance, pensions, and mutual funds. Mobile banking must also adopt secure joint account access, like Aadhaar Enabled Payment Services (AEPS)-based biometric authentication. Raising BC transaction limits will allow smoother fund transfers, and a mandate for at least 30% female BC agents in underserved areas will further strengthen financial inclusion.ConclusionThe Bank Sakhi Programme stands as a commendable initiative, making significant strides in promoting financial inclusion, particularly among women across diverse regions. Scaling and sustaining the programme requires collaborative efforts with banks, national payments councils, fintech, microfinance, civil society, and funding organizations both nationally and internationally.References:A Handbook on SHG - Bank Linkage. (2017). Deen Dayal Upadyay Antyodaya Yojana - National Rural Livelihoods Mission.Arora, A., Raman, A., Hernandez, E., Pinto, A., & Kumar, S. (2023). Study to Assess the Role and Impact of Women Self-Help Groups as Banking Agents in Bihar | CGAP.BCA Handbook. (2018). Assam State Rural Livelihoods Mission.Bureau, B. O. (2023). BC Sakhis Contributing Actively To Digital Transactions In Rural India, Says Experts. BW Businessworld.Guide for Replication of Bank Sakhi Model. (2016). Department of Financial Inclusion & Banking Technology, NABARD.Jain, P. (2020). Digital Sakhi: A digital financial inclusion initiative of rural women in India.Pinto, A. R., Arora, A., & Roy, S. (2020). Self-Help Group Members as Banking Agents for Deepening Financial Inclusion. World Bank.Trivikram. (2020). Frequently Asked Questions on BC Sakhi Implementation Model. DAY- NRLM.Vaid, R., & Geroge, A. (2023). Bank Sakhis: Pushing Digital Payments In Rural India - Forbes India Blogs.Vaid, R., Gupta, S., & George, A. (2023). Decoding the Sub-national Digital Payment Revolution in India. Asia Competitiveness Institute.Zaheer, S. (2022). Jumpstarting women participation in labour force: Reserve at least 30% banking correspondents for women. SBI Research Ecowrap.Author may be reached at abinaya131998@gmail.com and eboard@icai.in
Ep. 255 — Savers to Investors: India's 401(k) Moment and What it means
CA Journal
· September 2026
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Savers to Investors: India\'s 401(k) Moment and What it meansThe article discusses the shift in India\'s saving behaviour from fixed deposits to market-linked returns, highlighting significant implications for country\'s financial system, particularly the banking sector\'s Asset-Liability Management (ALM), capital markets, and long-term economic growth. Key trends include the mutual fund boom, direct equity participation, and the rise of Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs). Structural drivers such as a younger workforce, financial literacy campaigns, and fintech platforms are shaping this transformation. The shift supports long-term capital formation, it necessitates robust investor education and regulatory surveillance.In a small town in Gujarat, 58-year-old Mr. Patel walked into his bank branch to renew his fixed deposit. It was something he had done faithfully every year for over three decades. With interest rates hovering below 7%, he sighed, \"It\'s safer than the market. I sleep better.\"Just two blocks away, his 28-year-old nephew, Aarav, was checking the performance of his mutual fund SIPs on a sleek fintech app. \"The market\'s down a bit this week,\" he murmured, \"but I\'m in for the long haul.\" Aarav had also dabbled in stocks, used a robo-advisory tool to rebalance his portfolio, and was tracking inflation forecasts on various digital platforms.What separates Mr. Patel and Aarav is not just age, but the financial system they grew up with—and the comfort they seek from it.This anecdote isn\'t just a generational comparison. It reflects a seismic shift in India\'s saving behavior—a shift from fixed returns to market-linked returns, from guaranteed safety to calculated risk, from interest to ownership. And this shift has profound implications for India\'s financial system, particularly the banking sector\'s Asset-Liability Management (ALM), capital markets, and long-term economic growth.From Traditional Savings to Modern InvestmentsIndia\'s household sector has historically parked the bulk of its financial savings in fixed deposits, provident funds, and insurance. Over the last decade, India has witnessed a steady migration of household financial assets from physical and bank-dominated instruments toward capital market products.Key Trends:Mutual Fund Boom: As of March 2025, mutual fund Assets Under Management (AUM) stands at over INR 65 lakh crore, more than doubling in the last 5 years. SIP accounts have crossed 10 crore, with monthly inflows exceeding INR 25,000 crore.Direct Equity Participation: According to NSDL and CDSL data, the number of retail demat accounts crossed 18 crore in FY25, up from just 4 crore in FY20. A majority of these new investors entered post-COVID.Rise in PMS and AIFs: The AIF industry has grown 30% CAGR over the last 5 years, with HNIs increasingly opting for customized, higher-risk portfolios.Decline in FD Share: Bank deposit growth is now slower than mutual fund and equity account growth, with household preference tilting away from fixed-income instruments.The CatalystsMentioned below are the structural drivers that are responsible for behaviour transformation:Younger Workforce: India\'s median age is ~28. The new working population is digitally native, risk-tolerant, and return-conscious.Financial Literacy and Campaigns: Government and AMFI campaigns like \"Mutual Funds Sahi Hai\" have normalized market investing.Post-COVID Realizations: The pandemic forced many to re-evaluate wealth creation strategies. The market rally post-March 2020 created a generation of investors with strong first experiences.The Fintech FactorFintech platforms have played a transformative role in reshaping how India saves and invests. Discount brokers and wealth apps have:Eliminated friction in account opening and KYC processesMade investing intuitive and mobile-firstEnabled micro-investing (as low as INR 500)Created real-time visibility into performanceThis shift in user interface—away from traditional banks toward tech-first platforms—has significantly contributed to capital market participation.Behavioural Economics at Work: Nudging a NationThe power of nudges is evident in this success. This behavioural shift is not accidental—it\'s the result of smart product design coupled with regulatory support. Government initiatives such as NPS auto-enrolment and AMFI-led awareness have amplified this effect, subtly guiding retail savers toward long-term market participation.Impact on Banks: The ALM ConundrumFor banks, the steady outflow of retail deposits into mutual funds and equity investments poses serious implications for ALM. Here\'s why:Shorter Liability Tenure: With savers parking money in more liquid and better-yielding alternatives, banks face challenges in maintaining long-term deposit bases.Credit Growth Outpacing Deposits: As loan demand (especially from NBFCs, MSMEs, and infra) rises, deposit mobilisation is not keeping pace.Cost of Funds Pressure: Banks are having to offer higher interest rates or innovative products (like floating FDs) to retain customers.While capital markets channelise household savings into productive investments, the intermediation by banks—especially for infrastructure and long-gestation projects—still relies on stable deposits. This deposit erosion disrupts that cycle.Global ParallelsIndia\'s ongoing migration from bank deposits to market-linked savings is reminiscent of transitions observed in developed economies during their own phases of financial maturation. However, India\'s shift is happening at a much faster pace and under a very different set of socio-economic conditions.India\'s decisions to allow equity exposure in NPS (New Pension Scheme) and divert a portion of EPFO corpus into equities mirror the U.S. transition during the 1980s. The 401(k) revolution in the U.S. replaced defined benefit pensions with defined contribution plans, catalyzing long-term retail participation in stock markets. Similarly, India\'s NPS—combined with SIP culture—is fostering a pensioned equity investor base.Also, as seen in developed economies, when households gain confidence in markets, capital shifts become structural and self-reinforcing. However, India is still in the early stages of its capital market penetration curve. The scope for growth remains immense, especially as fintech, financialization of savings, and generational mindset shifts converge.The Hidden Continuity: Capital Markets Still Channelised Through BanksAn often-overlooked fact is that even as savers invest in mutual funds or equities, the underlying money often remains within the banking system:Mutual funds park liquid assets in bank instrumentsEquity purchases eventually flow into corporate accounts held with banksPayment gateways and UPI systems are bank-linkedThus, capital market participation doesn\'t mean capital exits the banking channel—but it does shift the tenure, structure, and stickiness of capital, complicating ALM models.A Boost to Capital FormationThough challenging for banks, the shift of savings toward capital markets is catalyzing a healthier capital formation process:Risk capital provision: Equity mutual funds, PMS, and AIFs channel household savings into businesses, especially startups and mid-sized enterprises, providing the much-needed risk capital (Equity) that banks traditionally avoid.Efficient capital allocation: Market-based systems promote better price discovery, governance, and resource allocation, rewarding efficient businesses with capital and punishing underperformance.Democratization of ownership: Retail investors now co-own India\'s top listed firms, enabling broader wealth creation and corporate accountability.Depth in markets: A deeper investor base creates liquidity, reduces volatility, and increases the resilience of capital markets.Regulatory Asymmetry: A Fair Concern?Banking sector proponents often criticize this behavioural shift by highlighting the regulatory burden disparity:Banks must maintain CRR, SLR, LCR, and NSFR ratiosMeet priority sector lending (PSL) obligationsFace stringent asset classification and provisioning normsIn contrast, mutual funds, PMS, and AIFs are not subject to these structural mandates. They are governed primarily by market risk frameworks, disclosure norms, and investment limits, which, while investor-focused, do not impose the same systemic responsibilities. This divergence has led to accusations of \"regulatory arbitrage\", where savers enjoy better yields and liquidity without the hidden systemic buffers that banks must carry.Adding to this complexity is the relative inexperience of new investors. A majority of post-COVID retail investors have only experienced bullish or sideways markets, especially during the liquidity-fuelled rally from 2020 to 2024. They have not yet witnessed a prolonged bear market or a deep cyclical correction, which may test their risk appetite, patience, and ability to stay invested. This raises a critical concern: if a major market correction occurs, retail outflows may spike, triggering redemption pressures on funds and further volatility.Therefore, while the shift to market-based savings supports long-term capital formation, it must be complemented by robust investor education and strong regulatory surveillance to prevent systemic risks and ensure sustainability.Banking vs Capital Markets: Complementary Roles in Economic DevelopmentWhile the shift in household behaviour may appear to pit banks against capital markets, both systems play distinct and complementary roles in fostering economic development.AspectBanking SystemCapital MarketsNature of CapitalDebt capitalRisk capital (equity + quasi-equity)Risk AppetiteLow (collateral-backed lending)High (returns vary with firm performance)Capital TenureTypically, shorter- to medium-termMedium- to long-termCustomer ProfileSMEs to Mid Corporates, working capital borrowersLarge Corporates, startups, long-term projects, individualsCapacity BuildingCredit discipline, financial inclusionCorporate governance, innovation financingCapital AllocationBank-led appraisalsMarket-led price discoveryBanks are essential for credit intermediation, providing working capital and facilitating trade finance, especially in regions and sectors where capital markets don\'t reach. On the other hand, capital markets are better suited to support innovation, scale-up, and long-gestation projects that need long-term risk capital.A key emerging reason for the shift toward capital markets is macroeconomic—investors are looking to hedge against inflation and currency risks. With FD rates often below real inflation and increasing awareness of global trends:Retail investors are exploring equities and gold ETFs as inflation hedgesThere\'s greater appreciation of real returns versus nominal interestCurrency depreciation concerns (especially in imported goods like fuel or electronics) are pushing savers to seek global exposure via Indian mutual fund FoFsThis marks a qualitative improvement in financial maturity, not just a quantitative shift in flows.The Role of CAs and Financial AdvisorsThis transition also redefines the role of Chartered Accountants and financial advisors. In this dynamic environment, CAs are uniquely positioned to:Help clients transition from savings to structured investments based on risk profiles and life stages.Advise MSMEs and corporates on tapping capital markets for equity or debt capital.Provide risk management frameworks for banks adapting to volatile liabilities.Bridge financial literacy gaps and enhance investor protection.Conclusion: Balancing the Twin EnginesIndia\'s financial system stands at a critical juncture. The behavioural shift among Indian savers is not a passing trend—it reflects a maturing financial ecosystem that values transparency, flexibility, and returns. For policymakers, this calls for a recalibration of financial regulation to ensure both banking and capital markets grow symbiotically. For banks, it\'s a nudge to innovate and redefine their role, perhaps moving beyond deposits into advisory, wealth management, and fintech partnerships.Most importantly, for the Indian economy, this shift heralds a new era of capital formation—one where households are not just savers but active participants in the nation\'s growth story. If managed prudently, this evolution can result in a complementary financial ecosystem where banks focus on credit intermediation and financial inclusion, while capital markets deliver risk capital and long-term growth financing together fuelling India\'s march toward Viksit Bharat by 2047.Author may be reached at goyal_deepak@hotmail.com and eboard@icai.in
Ep. 257 — How REITs are Transforming India's Capital Markets & Real Estate Sector
CA Journal
· September 2026
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How REITs are Transforming India\'s Capital Markets & Real Estate SectorIndia\'s real estate sector is experiencing a structural transformation, moving toward greater formalization, transparency, and efficiency. Real Estate Investment Trusts (REITs)—globally recognized as effective capital market instruments—are at the heart of this evolution. REITs have instituted new standards in governance, financial reporting, and investor access, thus reshaping how real estate is capitalized and consumed. REITs bring a much-needed bridge between capital markets and physical assets. This article evaluates the strategic significance of REITs in enhancing liquidity, transparency, and investor participation in yielding real estate assets. It highlights the role of finance professionals in enabling this transition and charts a roadmap for REITs as a mainstream investment instrument aligned with India\'s growth aspirations.India\'s real estate sector—contributing over 7% to the country\'s GDP—is a foundational pillar of economic activity and employment. Yet, for decades, it remained undercapitalized and largely informal.Historically, investments in real estate have been physical, illiquid, and accessible only to a select few. Developers faced limited access to low-cost capital, and investors struggled with information asymmetry and lack of exits. Institutional participation was sporadic, and financial discipline was often absent.This gap between real estate as an economic asset and its access to capital markets was a critical bottleneck. The introduction of REITs in India in 2014 by SEBI marked a strategic intervention aimed at professionalizing the industry and integrating it with mainstream financial systems.REITs: The Instrument and Its Evolution in IndiaREITs are collective investment vehicles that own and operate income-producing real estate across sectors such as commercial offices, retail, logistics, data centres and more. REITs originated in the US in the 1960s as a way to allow retail investors to efficiently invest in commercial real estate that is listed on the stock exchanges. In India, REITs allow investors to access the benefits of investing in real estate through a publicly traded unit. REITs are tax efficient vehicles that are required to distribute at least 90% of their cash flows to unitholders semi-annually. REITs provide distribution yields with in-built capital appreciation potential. REITs are regulated by SEBI and exhibit high levels of disclosure, transparency, and corporate governance.Globally, REITs have been instrumental in transforming real estate into a capital market-friendly asset class. They offer benefits such as:Liquidity through exchange listingsTransparency via regulatory oversightDiversification and fractional ownership of real estate assetsPredictable cash flows through mandatory dividend payoutsIn India, the first REIT, Embassy Office Parks, was listed in 2019, paving the way for others i.e. Mindspace Business Parks REIT, Brookfield India Real Estate Trust and Nexus Select Trust. As of March 2025, these 4 public REITs manage assets worth around 1.5 lakh crore. With more players expected, the REIT market is geared for a steady growth.Global Perspective - Evolution of REITs in Mature REIT MarketsWhile India\'s REIT journey is relatively new, much can be learned from mature global markets such as the United States, Japan, Singapore, Australia—each of which has witnessed significant economic impact from well-regulated REIT ecosystems which have provided investors with access to real estate assets, stable income and capital appreciation while mitigating the risks associated with direct real estate investments.In the United States, REITs have been instrumental in democratizing access to real estate wealth for over six decades. As of 2024, U.S. REITs manage assets worth more than $4 trillion, offering retail and institutional investors alike diversified exposure across residential, commercial, industrial, and specialty real estate. The combined equity market capitalization of U.S. listed REITs exceeds $1.2 trillion. The structure\'s stability, dividend mandates, and transparency have made REITs a staple in pension funds and retirement portfolios. In addition, the growth of private equity investment in real estate and an increasing appetite for alternative assets further fuelled interest in REITs.Japanese REITs, known as J-REITs, were launched in Japan in early 2000s. J-REITs have largely focussed on income generating assets in urban areas like Tokyo. J-REITs have attracted large investments from both domestic and international investors seeking exposure to Japan\'s real estate market. Over time, J-REITs have diversified into various sectors, including commercial, residential, and logistics properties. The combination of a growing economy, urbanization, and a favorable regulatory climate has positioned J-REITs as a vital pillar of Japan\'s real estate and investment landscape.Similar to Japan, Singapore REITs were also launched in early 2000s. A strong regulatory framework, transparent business environment, and strategic geographical advantages helped rapid growth of Singapore REITs. Singapore REITs attracted capital from across Asia and beyond. Singapore REITs have diversified portfolios across geographies beyond of Singapore.Globally REITs are significant contributors to the real estate market capitalisation. Globally around 58% of the listed real estate market capitalisation is attributable to REITs vs. around 10% in India.For India, benchmarking against these successful markets provides a clear path for evolution. Policy reforms, asset-class expansion, strengthening governance, are essential for maturing the Indian REIT market into a globally competitive platform.Key attributes of REITs in IndiaIn India, REITs are registered as trusts. Indian REITs are permitted to own income or rent generating real estate, such as offices, retail, etc. They are not permitted to own speculative landbanks. Indian REITs must have at least 80% (by value) of their assets completed and income or rent generating. They can raise debt upto a maximum of 49% of the value of REIT assets (net debt / total enterprise value). Further REITs are mandated to distribute at least 90% of their net distributable cash flows (called NDCF) to their unitholders at least semi-annually. Given the regularity of income distribution, these instruments provide stability of cashflows to the investors coupled with growth.Despite being just 6 years old since the first REIT was launched, REITs have gained significant traction from all classes of investors including foreign and domestic institutional investors, HNIs, individuals, etc. REITs provide the several advantages to investors vs. the traditional physical real estate investments:Professional Management: REITs are professionally managed by experienced real estate and/or fund management professionals. Given their real estate experience these professionals are better equipped to make investment and divestment decisions, offer superior property management solutions that can help enhance value of the REIT portfolio.Liquidity: REITs are listed on recognised stock exchanges like NSE, BSE. Trading lot is 1 unit, which enables an investor to even buy just 1 unit of any REIT. This helps easy entry and exit for retail investors to invest in REITs. This liquidity offers multiple strategic benefits: it allows investors to rebalance portfolios dynamically, facilitates market-driven valuations with real-time price discovery and democratization of premium assets. For developers, it offers a powerful capital recycling tool by monetizing income-generating assets, freeing funds for new investments.Corporate Governance: Indian REIT Regulations are in line with the international REIT regulations having largely mirrored Singapore REITs Regulations. Strong governance framework, robust disclosure requirements, have helped build investor trust in these instruments.Regular income generation: Given REITs are required to distribute atleast 90% of their net distributable income as distributions, these instruments provide regular income streams to the investors and therefore are generally preferred by investors who seek regular income.Growth: Besides regular income, these instruments offer growth through appreciation in the price of the stock. Real Estate assets are appreciating assets. Commercial yielding assets generally are backed by long term lease contracts with certain periodic escalations. Growth coupled with regular income makes REITs more attractive investment instruments than income instruments like fixed deposits, debt mutual funds or government securities.Diversification: REITs have assets across markets in India. This offers diversification in the portfolio which is otherwise not available if the investors are directly investing in physical commercial assets. This diversification helps mitigate the risk on account of investment in a single asset or a single market.Resilience: Office asset class demonstrated a high degree of resilience during the pandemic. Despite the challenges posed by the pandemic, this asset class continued to earn the rental income and therefore was able to continue to make distributions to its unitholders.Hedge against volatility: These instruments exhibit low price volatility compared to conventional equity instruments. These instruments are therefore considered as hedge against volatility. Given these attributes, these instruments are well suited for investors who prefer lower risk vs. traditional equity instruments.All these benefits make these instruments good investment opportunity for investors with moderate risk return profile and another asset class in their portfolio allocation.Fostering Transparency and GovernanceREITs are governed by SEBI\'s strong regulatory framework, which fosters transparency and investor protection.Listed REITs are required to disclose:Quarterly financials and performance of the REITHalf yearly report similar to annual report giving information regarding the assets in the portfolio, asset valuation, leasing status, development updates, borrowing details, etc.Stock Performance, Material litigations, Risk factors, etc.This high level of disclosure strengthens investor confidence and aligns Indian practices with global benchmarks. It also brings an element of predictability and comparability to performance, which is crucial for making investment decisions and attracting institutional capital.Finance professionals play a pivotal role here—ensuring timely, accurate disclosures; driving financial discipline; and embedding governance principles into asset management. CFOs and finance controllers must align internal reporting systems with REIT-level requirements to meet investor expectations.A Strategic Financing Avenue for Asset Owners and ManagersFor asset owners, REITs offer an efficient capital recycling tool. Income-generating assets can be acquired by the REITs, releasing capital for new development / Investment while Sponsors can retain a stake in the monetized asset through units.This model yields multiple benefits for developers of real estate assets:Reduced reliance on bank borrowings and high-cost capitalLower balance sheet leverage and improved creditworthinessFocus on core development capabilities instead of asset managementAsset owners with significant real estate portfolios could explore REIT structures to monetize yielding assets. As India matures in its REIT journey, we are likely to see REITs with a variety of real estate asset classes gain ground. These models offer alternatives suited to India\'s diverse real estate landscape.Fuelling Urban Infrastructure and Economic GrowthBeyond capital markets, REITs have macroeconomic significance. The capital raised through REITs is often redeployed into new developments, directly contributing to creation of infrastructure like office parks, urban hubs, retail centres and logistics corridors, to support economic growth of the country as well as employment generation.This accelerates:Job creation in construction and allied industries through direct and indirect employmentInfrastructure development in Tier 1 and Tier 2 cities, also helping the government\'s initiative of creating smart citiesUpgradation of urban infrastructure and commercial assets into institutional-grade propertiesAdditionally, REIT-backed developments tend to adhere to higher operational and environmental standards, setting benchmarks for the broader sector.From a public policy standpoint, REITs can support India\'s goals of urbanization, economic growth, and infrastructure expansion—all critical to achieving its 2030 $10 trillion economy vision.Expanding the Investment Universe: Retail ParticipationRetail investor interest in REITs is gaining traction, particularly as financial literacy improves and digital platforms enable easier access. The structure of REITs—low investment thresholds, regular distributions, and exchange liquidity—makes them attractive alternatives to traditional fixed-income or real estate products.For retail investors, REITs offer:Stable income through dividend payoutsInflation hedge as rental escalations keep pace with inflationDiversification into real estate without owning physical assetsTax-efficient returns, based on the composition of payoutsWith appropriate investor education, REITs can become a cornerstone of retail portfolios—especially for those seeking steady yields with moderate risk. Financial planners and wealth managers are increasingly including REITs in model portfolios, further mainstreaming the asset class.To illustrate REITs\' transformative impact on retail participation, consider the experience of a typical urban investor. For instance, an investor looking to diversify beyond mutual funds and equity markets can now consider investing in REITs with as little as ₹10,000-15,000. This enables them to access a slice of rent-yielding, Class A commercial real estate—an opportunity that would previously require a large upfront capital outlay.This accessibility and transparency are key contributors to REITs steadily emerging as a preferred investment alternative for creating long-term wealth and meeting financial goals.Embracing SustainabilityEnvironmental, Social, and Governance (ESG) principles are becoming central to capital allocation decisions. REITs, due to their scale and governance requirements, are uniquely positioned to drive ESG integration in real estate.Major Indian REITs are:Largely green certified (LEED, IGBC, EDGE)Tracking energy, water, and waste metrics portfolio-widePromoting diversity, health, and safety in their operationsPublishing annual sustainability reports aligned with GRI or SASB standardsAs a CFO, embedding sustainability into capital expenditure, reporting, and performance frameworks is both a compliance and strategic priority. Investors—especially global institutions—are now demanding ESG-linked disclosures and performance commitments as a precondition for funding.REITs are now embedding ESG in their financing plans as well. Green Bonds, Sustainability Linked Bonds, etc. are now gaining traction with REITs. This sustainable financing is not only furthering the cause of creating a sustainable environment but also making lenders contribute to sustainability.The Role of Finance ProfessionalsThe evolution of REITs opens up new arenas for chartered accountants, finance and compliance professionals. Key areas of opportunity include:Capital structuring: Optimizing capital mix, financing structures, etc.Regulatory compliance: Navigating SEBI rules and regulations, investor reporting, etc.Valuation and due diligence: Supporting valuations for half-yearly reportings, valuations for asset acquisitions, etc.Risk and internal controls: Ensuring REITs operate within prescribed guidelinesInvestor communications: Maintaining trust through clear, transparent disclosuresFinancial and Compliance professionals are uniquely positioned to support the REIT ecosystem—whether as in-house professionals, consultants, advisors, etc. Their expertise shall help build and support a robust REIT market in India.Key Takeaways: How REITs Are Transforming India\'s Capital Markets & Real Estate SectorAspectKey PointsReal Estate LandscapeReal Estate Sector contributes significantly to India\'s economic growth (c. 7% to India\'s GDP) and employment generationWhat Are REITs?REITs are Investment vehicles for income-generating real estate assets allowing investors to access the benefits of investing in real estate through a publicly traded unit and providing regular distribution yields with in-built capital appreciation potentialREIT BenefitsRegular cashflows in form of distributions, growth potential, tax efficient, liquidity, transparency, diversificationListed Indian REITEmbassy Office Parks REIT, Mindspace Business Parks REIT, Brookfield India Real Estate Trust, Nexus Select Trust.Global ComparisonU.S., Japan, Singapore, Australia have mature REIT markets with over 1000 REITs with Market Capitalization of over USD 2 TrillionSource: European Public Real Estate Association, December 2024Regulatory FrameworkREITs in India are mandated to invest at least 80% of their value in completed, rent or income generating propertiesAtleast 90% of the net distributable cashflows should be distributed atleast half yearly.Leverage cannot exceed 49% of the gross assets of the PortfolioInvestment OpportunitiesREITs are listed on stock exchanges, allowing them to be bought and sold like equity shares.You can invest with as little as one unit of a REIT.There are currently four REITs available, of which three are focused on office spaces across various markets in India, while one is a Shopping Centre REIT with assets spread throughout India.Investor ParticipationREITs have seen encouraging participation from both institutional and non-institutional investors. Institutional participation has been amongst others, from FPIs, Mutual Funds, Insurance Companies, Pension Funds, etc. (Around INR 52200 Crore has been raised since listing till Dec 2024 from these Institutional Investors) Non-Institutional participation is largely from HNIs, Individual Investors.Source: Indian REITs association, December 2024Macroeconomic ImpactEconomic Growth, Driving Employment Generation, Tech growth in India, Institutionalize Real Estate, Improving the depth of Capital Market, Supporting Urban Infrastructure DevelopmentSustainability FocusREITs have undertaken various ESG Initiatives such as green building certifications, raising funds through green bonds, sustainability-linked bonds, embedded sustainability in project development, etc.Role of Finance ProfessionalsCorporate Finance, Compliances, Risk Management, Investor Relations, Project Funding, M&As, Financial Reporting, FP&A, etc.Future PotentialExpanding asset classes like warehousing, data centers, retail, hospitality.India\'s REIT Growth PathIndia has over 400 msf of Grade A REITable office space. Currently around 126 msf is within the REIT Portfolio. Similarly on the Retail asset class, currently around 10 msf is held by within REITs with the potential to grow 7x to 70 msfSource: Colliers, Wall Street research, June 2023 / Indian REITs association, December 2024Journey aheadIndia\'s REIT journey is still in a nascent phase. While there are over 50 million Mutual Fund unitholders, REITs still have just about 0.25 million unitholders. This suggests the huge ground for REITs to cover in terms of its investor reach. Also, of the 450 million sq. ft. plus of Grade A REITable office stock, only around 115 msf is currently in the REITs. This holds huge potential for adding more Grade A assets into the REITs and help the growth of this product.Unlocking the next wave of growth will require coordinated efforts across policy, regulation, and market development.Key enablers include:Expansion of the asset classes that can come into REITsInvestor education and awareness programmes to boost participationDigital infrastructure for seamless investment, tracking, and reportingAs India targets deeper capital markets, REITs will form a critical link between infrastructure, real estate, and financial assets thereby helping improve the depth of capital markets in India.Emerging Asset Classes that could help the growth of REITs in IndiaWhile office spaces have so far dominated Indian REIT portfolios, some of these asset classes could help further the growth of REITs in India:Warehousing & Logistics: With India\'s booming e-commerce and supply chain optimization, Grade A warehouses are becoming viable REIT assetsData Centers: The digital economy\'s backbone, data centers offer long-term leases and mission-critical infrastructure—perfect for stable REIT income streams.Retail & Hospitality: As consumer sentiment strengthens and tourism rebounds post-pandemic, there is potential to build REITs around shopping malls and hotels. While cyclical in nature, hybrid models combining retail and hospitality assets with core office properties could help diversify risk.An evolving REIT ecosystem will require asset owners / asset managers to ensure each new asset class meets the return and transparency standards expected of REITs.REITs represent a pivotal shift in how India views, invests in, and manages real estate. They are more than just investment vehicles they are instruments of change that bring about liquidity, professionalism, and transparency in a sector that is one of the largest contributors to India\'s economic growth and employment.For finance professionals, REITs offer a powerful platform to apply their expertise, drive transformation, and shape the future of real estate finance. As custodians of trust, compliance, and strategy, the financial community has a central role in nurturing this nascent but high-potential asset class.By embracing REITs, India takes a significant step toward aligning its real estate sector with global best practices and building a more inclusive, efficient, and transparent capital market ecosystem.Author may be reached at eboard@icai.in
Behavioral Portfolio Management: Exploring Emotional Influences in Financial Decision-MakingBehavioral finance integrates psychology and finance, recognizing that emotions and biases influence investment decisions. Concepts like loss aversion, overconfidence, and framing effects can lead to irrational choices, deviating from traditional financial models that assume rational behaviour. This field emphasizes the impact of psychological factors on investor behaviour, market anomalies, and asset pricing. Portfolio management strategies, such as Behavioral Portfolio Management (BPM), incorporate these insights to capitalize on market inefficiencies created by emotional investors. This approach contrasts with traditional Modern Portfolio Theory (MPT), which assumes rational investor behaviour. By understanding these psychological influences, individuals can make more informed financial decisions, and institutions can improve market models and regulations.By Dr. Seena M. Mathai, AcademicianIn recent years, the field of behavioral finance, which integrates psychology and finance, has gained prominence as researchers investigate the influence of emotional factors on investment decisions. This interdisciplinary approach demonstrates that psychological elements, such as fear, greed, cognitive biases, and collective behaviour, can lead to non-rational financial decisions. By examining psychological phenomena such as loss aversion, overconfidence, and framing effects, investors may be able to make more rational choices. While extant research has introduced concepts such as the affect heuristic and somatic marker hypothesis, there remains a need for additional empirical studies to determine the precise impact of various emotions on real-world investment behaviours.In the field of behavioral economics, financial portfolios serve a crucial function by elucidating the impact of psychological factors on investment decisions. Behavioral finance employs insights into investor psychology to facilitate the construction of rational and efficacious portfolios. A financial portfolio comprises a diverse array of investments, including equities, fixed-income securities, and mutual funds, aggregated to achieve specific financial objectives. The allocation of investments across various asset classes, termed diversification, is fundamental for risk mitigation and potential return enhancement. An optimal portfolio achieves equilibrium between risk tolerance and anticipated returns. Multiple portfolio classifications exist, such as growth portfolios oriented towards long-term capital appreciation, income portfolios focused on consistent revenue generation, balanced portfolios that integrate both approaches, and tax-efficient portfolios designed to minimize tax liabilities. In essence, a well-structured portfolio tailored to individual requirements and risk preferences constitutes a fundamental component of a robust financial strategy.Harry Markowitz\'s Modern Portfolio Theory (Dai, 2024) provides a mathematical framework for optimizing investment portfolios. It emphasizes the importance of risk reduction through diversification. According to MPT, investors should evaluate an investment\'s risk and return characteristics in relation to its impact on the entire portfolio, rather than in isolation. By strategically selecting and combining assets, investors can maximize returns for a given risk level. This quantitative approach to portfolio construction has significantly influenced investment management practices.Behavioral Portfolio Management (BPM) is emerging as a novel paradigm in investing, challenging MPT\'s traditional approach. BPM aims to exploit market inefficiencies created by emotional investors by understanding and utilizing behavioral biases. It focuses on the impact of behavioral factors in stock selection, manager selection, and market timing, offering an alternative perspective on portfolio construction and management. Irrational behaviours influence crowd psychology and cognitive biases. Identifying such irrational patterns helps mitigate stock market anomalies. Researchers have developed the behavioral portfolio model, an extension of the capital asset pricing model, to account for behavioral biases. This model explains why investors pursue multiple objectives, such as future family needs, retirement savings, and emergency funds. Applying behavioral finance principles can improve policy-making by developing optimal portfolios and strategies that manage investor emotions and minimize risk (Antony, 2019). The adoption of BPM may lead to enhanced long-term investment outcomes. For all investors, behavioral portfolio management is crucial in mitigating the effects of emotional biases such as fear and greed. By comprehending and regulating these emotions, investors can make more rational decisions, avoiding impulsive actions such as panic selling or pursuing speculative stocks. This approach is particularly relevant in the Indian context, where emotional factors frequently influence investment decisions.BPM leverages behavioral factors to construct superior portfolios by exploiting emotional biases that cause price distortions. Research findings suggest that investors should be cognizant of their cognitive biases, while financial advisors and policymakers should develop strategies to mitigate the impact of these biases on investment decisions (Almansour et al., 2023) and stock prices reflect all available information. However, behavioral finance theory argues that stock prices can be influenced by psychological and emotional factors. This study aims to examine the impact of behavioral finance factors on investment decisions in the Saudi equity markets through the mediating variable of risk perception. An online questionnaire was distributed to 150 individual investors, out of which 134 were returned and ready for analysis. The data is analyzed using structural equation modeling (SEM). This framework can be applied to various aspects of portfolio management, including portfolio construction, manager selection, stock selection, and market timing. Emotions, while often perceived as irrational, play a significant role in decision-making, influencing risk assessment, social interactions, and moral judgments. Recognizing and managing these emotional biases is essential for making informed investment decisions.Emotions in decision makingEmotions significantly influence decision-making, both positively and negatively. Consistent patterns across various fields reveal their impact on judgments and choices. Emotions affect interpersonal relationships (Ekman, 2004), sleep patterns (Harvey, 2008), financial decisions (Lerner et al., 2004; Rick & Loewenstein, 2008), psychological well-being (Kring, 2010), and life satisfaction (Ryff & Singer, 1998). These theories and effects form the basis for understanding human decision-making and behaviour, as posited by Herbert Simon. Emotions shape thoughts and behaviours, often swaying decisions. Different emotional states influence attention to public issues, judgment of populations and characters, and advocacy coalitions (Phelps et al., 2014; Pierce, 2021). Our emotional landscape is constantly changing, affected by the information processed during decision-making (Asutay & Västfjäll, 2022). Emotions involve multiple cognitive assessments, with primary evaluations varying in certainty. In ambiguous situations, risk factors regulate emotional appraisals, complicating the affect-decision-making interplay. Decisions are often made under pressure (Porcelli & Delgado, 2017). Fear can trigger both risk-averse and risk-seeking behaviours. In uncertainty, fear may reduce impulsive behaviour, while in specific contexts, it can increase risk-taking tendencies (Wang et al., 2023). Shaped by prior experiences, emotions assign value to options, thereby guiding our selections. Research in consumer behaviour further underscores the predominance of emotion over information in brand assessment and purchase intention. Consumers primarily depend on emotions rather than logical analysis when evaluating outcomes (The Role of Emotions in Purchase Decisions Highly. Digital, 2024). Emotions can function as quick information processors, enabling rapid judgments and decisions. When confronted with a situation, our emotional reaction can swiftly indicate whether it is advantageous or detrimental. This quick evaluation, often occurring subconsciously, allows for prompt reactions to potential threats or opportunities. For example, if we suddenly face danger, like an oncoming vehicle, our fear response triggers immediate action, such as leaping out of harm\'s way. This swift reaction, driven by emotion, can be life-preserving. Likewise, in a favourable scenario, such as receiving a job offer, our enthusiasm may prompt us to quickly accept before the chance disappears. However, while emotions can be advantageous in time-critical situations, they may also result in impulsive choices that might not serve our best interests. Thus, it is crucial to strike a balance between emotional responses and rational thinking.It is noteworthy, however, that excessive fear and anxiety can result in suboptimal decision-making and avoidance behaviours (Wu et al., 2023). Achieving equilibrium between emotional awareness and logical reasoning is essential for effective risk evaluation. Emotions such as empathy and compassion play a crucial role in facilitating social interactions and collaborative efforts. Empathy enables individuals to comprehend and experience the emotions of others, fostering a sense of connection and trust. Compassion, conversely, motivates individuals to assist those in need, reinforcing social bonds. These emotional responses contribute to the formation of robust social relationships, which are essential for overall well-being and survival. By promoting cooperation and mutual assistance, social bonds enhance the capacity to address challenges and achieve collective objectives. In decision-making contexts, empathy and compassion can influence choices by increasing attentiveness to others\' needs and emotions (Chung et al., 2021). This can result in more collaborative and equitable decisions, promoting social cohesion and harmony.Emotions can significantly influence decision-making processes, often leading to the utilization of heuristic methods or cognitive shortcuts. When experiencing intense affect, individuals may rely on intuition rather than systematic analysis. This approach can be advantageous in situations requiring rapid decision-making but may result in suboptimal outcomes, particularly when emotions are intense or misleading. Risk Assessment: Emotions play a crucial role in shaping risk perception. For instance, fear can promote risk-averse behaviour, reducing the propensity to engage in uncertain activities. Conversely, enthusiasm and positive affect can encourage risk-taking behaviour, increasing the likelihood of engaging in high-risk endeavours. Understanding these emotional influences on risk perception is essential for making informed decisions in financial, health-related, and interpersonal domains.Emotions are fundamental to social interactions and collaborative efforts. Empathy, for example, enables individuals to comprehend and relate to others\' affective states, thereby strengthening social bonds. Compassion motivates prosocial behaviour, fostering altruistic actions. These emotions contribute to the development of trust, cooperation, and social cohesion, which are critical for effective social interactions and collective decision-making processes.Emotions such as guilt, shame, and empathy significantly influence moral judgments and ethical conduct. Guilt can serve as a motivator for corrective actions, while shame may promote adherence to social norms and avoidance of behaviours that could lead to social exclusion. Empathy can inspire altruistic behaviour and promote principles of fairness and justice. Understanding the role of these emotions in ethical decision-making can contribute to the development of a more robust moral framework and facilitate more principled decision-making.Fundamental Concepts in Emotion and Decision-MakingAppraisal TheoryAppraisal theories (Moors, 2017) suggest that emotions stem from evaluating situations. When encountering a stimulus, individuals assess its impact on well-being, eliciting an emotional reaction. For instance, perceiving a threat may evoke fear, influencing decision-making. This framework underscores the cognitive aspects of emotions, emphasizing the role of interpretation in shaping emotional experiences. In investment decision-making, appraisal theory is crucial. Positive market conditions, like rising stock values, can generate contentment and enthusiasm, leading to overconfidence and increased risk-taking. Conversely, negative events, such as falling prices, may induce fear and anxiety, resulting in hasty selling and risk aversion.Intense emotions impair rational decision-making, leading to impulsive actions like hurtful remarks during disputes. Cognitive biases exacerbate emotional reactions. Confirmation bias causes investors to seek information aligning with their views, distorting market understanding. Loss aversion, feeling losses more intensely than gains, hampers logical decisions. Anchoring bias occurs when initial information disproportionately influences evaluations, making it hard to consider alternatives despite contradictory evidence; for example, a low initial job offer can anchor expectations below market value. Confirmation bias involves seeking information validating existing beliefs while ignoring conflicting data, often reinforced by emotional investment, leading to biased judgments. For instance, believing in an investment\'s worth may cause an individual to focus on positive news and overlook negative information. These emotional responses affect investment decisions through herd behaviour, driven by emotional contagion, leading to crowd-following without independent analysis. Emotional reactions to market fluctuations can lead to poor market timing, such as buying high and selling low, and impact risk tolerance, resulting in suboptimal portfolio allocations.Somatic Marker HypothesisThe somatic marker hypothesis (Damasio, 1996) provides a neurobiological explanation for how emotions influence decision-making processes. This theory posits that emotional experiences from the past affect our choices by associating positive or negative valences with various options. These associations, termed \"somatic markers,\" manifest as physiological responses such as fluctuations in heart rate or skin conductance, which are correlated with specific emotional states. When confronted with a decision, these somatic markers can influence our choices by indicating potential benefits or risks associated with different alternatives.In the context of investing, emotional factors including fear, greed, and regret can significantly impact investor behaviour. Positive market developments may elicit enthusiasm and overconfidence, potentially leading to impulsive purchases and excessive risk-taking. Conversely, negative events can provoke fear and anxiety, possibly resulting in precipitous selling and risk aversion. To mitigate these emotional biases, investors can implement behavioral portfolio management techniques, including emotional intelligence training, portfolio diversification, and consultation with financial professionals. These strategies can assist investors in making more rational and informed decisions.Affect-as-Information TheoryThe affect-as-information theory (Clore & Bar-Anan, 2007) posits that individuals utilize their current affective state as a source of information to inform their judgments and decisions. When experiencing a positive mood, individuals tend to exhibit increased optimism and receptivity to novel ideas. Conversely, a negative mood may result in heightened pessimism and risk aversion. This concept proposes that emotions can function as a heuristic signal, facilitating expeditious and efficient decision-making. However, it is imperative to recognize the potential biases that may arise from an overreliance on affective information.In the domain of investment, this theory suggests that investors may depend on their affective states to evaluate market conditions and make investment decisions. Positive emotions, such as enthusiasm and optimism, can result in overconfidence and risk-seeking behaviour. Conversely, negative emotions like fear and anxiety may lead to risk aversion and impulsive decision-making. By comprehending the influence of emotions on investment choices, investors can become more cognizant of their biases and make more rational decisions.The Dual-Process ModelThe dual-process model (The Role of Emotions in Purchase Decisions Highly. Digital, 2024) posits that human cognition functions through two systems: System 1, which is rapid, intuitive, and emotional, and System 2, which is deliberate, logical, and slower. In the context of investing, System 1 can precipitate impulsive decisions based on emotions such as fear, greed, and regret. Conversely, System 2 promotes rational decision-making, risk management, and long-term planning.To mitigate the negative effects of System 1, investors can employ various techniques. Developing emotional intelligence can assist investors in recognizing and managing their affective states. Cognitive behavioral therapy can aid in identifying and addressing negative thought patterns. Enhancing financial literacy through education can improve critical thinking skills. Consulting professional advisors can provide objective guidance and help avoid precipitous decisions. By understanding the dual-process model and implementing these approaches, investors can make more informed and rational choices, ultimately improving their long-term investment outcomes.The aforementioned theories provide substantial insights into the psychological factors that influence investment decisions. These concepts emphasize the significance of emotions, cognitive biases, and decision-making processes in determining investor behaviour.To mitigate the adverse effects of emotions on investment outcomes, one may implement behavioral portfolio management strategies. Such approaches encompass developing emotional intelligence, diversifying investments across various asset classes, employing dollar-cost averaging techniques, adjusting portfolio allocations, and seeking guidance from financial professionals. By comprehending the intricate relationship between emotions and cognitive processes biases, investors can make more rational and informed decisions, ultimately improving their long-term investment outcomes.ConclusionThe field of behavioral finance has emerged as a significant area of study, bridging the gap between traditional finance theories and real-world investor behaviour. This interdisciplinary approach combines insights from psychology, sociology, and economics to provide a more comprehensive understanding of financial decision-making processes. By acknowledging the influence of cognitive biases, emotions, and social factors on investment choices, behavioral finance challenges the assumptions of rational investor behaviour that underpin classical financial models.The implications of behavioral finance extend far beyond academic circles, impacting various aspects of the financial industry and policy-making. Financial institutions now incorporate behavioral insights into their product design, marketing strategies, and risk management practices. Policymakers and regulators utilize behavioral finance principles to develop more effective consumer protection measures and market regulations. As research in this field continues to evolve, it promises to enhance our understanding of market anomalies, asset pricing, and investor behaviour, ultimately leading to more robust financial models and improved decision-making frameworks for both individual investors and financial professionals.References:Almansour, B., Elkrghli, S., & Almansour, A. (2023). Behavioral finance factors and investment decisions: A mediating role of risk perception. Cogent Economics & Finance, 11. https://doi.org/10.1080/23322039.2023.2239032Antony, A. (2019). Behavioral finance and portfolio management: Review of theory and literature. Journal of Public Affairs, 20. https://doi.org/10.1002/pa.1996Asutay, E., & Västfjäll, D. (2022). The continuous and changing impact of affect on risky decision-making. Scientific Reports, 12(1), 10613. https://doi.org/10.1038/s41598-022-14810-wChung, Y. W., Im, S., & Kim, J. E. (2021). Can Empathy Help Individuals and Society? Through the Lens of Volunteering and Mental Health. Healthcare, 9(11), 1406. https://doi.org/10.3390/healthcare9111406Clore, G., & Bar-Anan, Y. (2007). Affect-as-information. Encyclopedia of Social Psychology, 14-16.Dai, L. (2024). Empirical analysis of optimized portfolio allocation based on Markowitz and index models. Finance & Economics, 1(5), Article 5. https://doi.org/10.61173/kz021e65Damasio, A. R. (1996). The somatic marker hypothesis and the possible functions of the prefrontal cortex. Philosophical Transactions of the Royal Society of London. Series B, Biological Sciences, 351(1346), 1413-1420. https://doi.org/10.1098/rstb.1996.0125Ekman, P. (2004). Emotions revealed. BMJ, 328(Suppl S5), 0405184. https://doi.org/10.1136/sbmj.0405184Harvey, A. G. (2008). Sleep and Circadian Rhythms in Bipolar Disorder: Seeking Synchrony, Harmony, and Regulation. American Journal of Psychiatry, 165(7), 820-829. https://doi.org/10.1176/appi.ajp.2008.08010098Kring, A. M. (2010). The Future of Emotion Research in the Study of Psychopathology. Emotion Review, 2(3), 225-228. https://doi.org/10.1177/1754073910361986Lerner, J. S., Small, D. A., & Loewenstein, G. (2004). Heart Strings and Purse Strings: Carryover Effects of Emotions on Economic Decisions. Psychological Science, 15(5), 337-341. https://doi.org/10.1111/j.0956-7976.2004.00679.xMoors, A. (2017). Appraisal Theory of Emotion (pp. 1-9). https://doi.org/10.1007/978-3-319-28099-8_493-1Phelps, E. A., Lempert, K. M., & Sokol-Hessner, P. (2014). Emotion and decision making: Multiple modulatory neural circuits. Annual Review of Neuroscience, 37, 263-287. https://doi.org/10.1146/annurev-neuro-071013-014119Pierce, J. (2021). Emotions and the policy process: Enthusiasm, anger and fear. Policy & Politics, 49. https://doi.org/10.1332/030557321X16304447582668Porcelli, A. J., & Delgado, M. R. (2017). Stress and Decision Making: Effects on Valuation, Learning, and Risk-taking. Current Opinion in Behavioral Sciences, 14, 33-39. https://doi.org/10.1016/j.cobeha.2016.11.015Rick, S., & Loewenstein, G. (2008). Intangibility in intertemporal choice. Philosophical Transactions of the Royal Society B: Biological Sciences, 363(1511), 3813-3824. https://doi.org/10.1098/rstb.2008.0150Ryff, C. D., & Singer, B. (1998). The Contours of Positive Human Health. Psychological Inquiry, 9(1), 1-28. https://doi.org/10.1207/s15327965pli0901_1The Role of Emotions in Purchase Decisions-Highly. Digital. (2024, September 26). https://highly.digital/why-we-buy/the-role-of-emotions-in-purchase-decisions/Wang, L., Chen, S., & Xiao, W. (2023). Effect of real-world fear on risky decision-making in medical school-based students: A quasi-experimental study. Frontiers in Behavioral Neuroscience, 17, 1030098. https://doi.org/10.3389/fnbeh.2023.1030098Wu, J., Peng, J., Li, Z., Deng, H., Huang, Z., He, Y., Tu, J., Cao, L., & Huang, J. (2023). Multi-domain computerized cognitive training for children with intellectual developmental disorder: A randomized controlled trial. Frontiers in Psychology, 13, 1059889. https://doi.org/10.3389/fpsyg.2022.1059889Author may be reached at eboard@icai.in
Ep. 259 — Impact of Selective Economic Indicators on Stock Market Volatility in India
CA Journal
· September 2026
00:00
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Impact of Selective Economic Indicators on Stock Market Volatility in IndiaThis study investigates the combined effects of Foreign Direct Investment (FDI), trade balance, and consumer confidence on stock market volatility in India from 2009 to 2023. Using descriptive statistics, correlation analysis, and stepwise regression, the research reveals that trade balance is the most significant predictor of market volatility, showing a positive correlation. Surprisingly, FDI and consumer confidence demonstrate negligible direct impacts on volatility when trade balance is accounted for. The regression model explains 77.1% of the variance in volatility, emphasizing trade balance\'s crucial role in market dynamics. These findings highlight the complex interplay of macroeconomic factors on stock markets and suggest the need for further research to identify additional influential variables.The intricate relationship between macroeconomic factors and stock market performance has been a focal point for economists, policymakers, and investors. This study investigates the interplay of Foreign Direct Investment (FDI), trade balance, and consumer confidence, analyzing their combined effects on stock market volatility in India from 2009 to 2023. By examining these three key variables, the study aims to provide a comprehensive understanding of market dynamics in one of the world\'s fastest-growing economies.FDI is recognized as a critical driver of economic growth and market development. Its impact on stock markets, however, varies across economies and periods. For instance, Chettri et al. (2022) observed a positive long-term effect of FDI on stock market development in Nepal, while Shah (2014) identified FDI as a crucial determinant of India\'s Nifty index. Conversely, Malcus and Persson (2018) found no strong contemporaneous relationship between FDI and stock market development in Sweden, highlighting the context-dependent nature of this relationship. Trade balance, another key macroeconomic indicator, also influences stock market behaviour. Antonakakis et al. (2018) noted that the relationship between trade balance and stock prices in the United States evolved from positive to negative over time. Kim (2019) revealed significant interdependencies between stock markets and trade balances across multiple countries, underscoring the importance of this factor in global market dynamics. Consumer confidence, often measured by the Consumer Confidence Index (CCI), significantly shapes market sentiment. Ferrer et al. (2012) observed a positive correlation between consumer confidence and stock market performance, although this relationship can fluctuate during periods of market turmoil. Jansen et al. (2003) found a consistent impact of stock market performance on consumer confidence in the European Union, suggesting a bidirectional relationship. While numerous studies have examined the individual effects of these factors on stock markets, there is a notable gap in understanding their combined impact on market volatility. This study bridges this gap by employing descriptive statistics, correlation analysis, and stepwise regression to analyze the integrated effects of FDI, trade balance, and consumer confidence on stock market volatility in India. By focusing on India, a major emerging market with a rapidly evolving economic landscape, this research offers valuable insights into stock market volatility dynamics in developing economies. The findings will contribute to existing literature and provide practical implications for policymakers, investors, and financial analysts. This integrated analysis aims to unravel the complex relationships between these macroeconomic variables and stock market volatility, paving the way for a more nuanced understanding of market behaviour and informing more effective economic policies and investment strategies.Relevance and Practical ImplicationsThis study is highly pertinent to Chartered Accountants and allied professionals, offering actionable insights into the dynamic interplay between Foreign Direct Investment (FDI), trade balance, and consumer confidence in stock market volatility in India. By identifying trade balance as a crucial predictor of market fluctuations, this research equips professionals with the knowledge to anticipate market trends and make informed decisions. The findings can guide new strategies in financial planning, risk management, and policy-making, helping practitioners navigate the complexities of globalization, competition, and technological advancements in the financial sector.Contemporary Issues in Market Volatility and Professional PreparednessRecent years have seen significant market volatility due to various global events, underlining the necessity for Chartered Accountants and allied professionals to continuously update their knowledge and skills. The table below/graph highlights some key instances of market turbulence and their causes, emphasizing the implications for financial planning, risk management, and regulatory understanding. Staying informed about these developments enables professionals to better navigate the complexities of the financial landscape, ensuring robust decision-making and strategic planning in a rapidly evolving environment.Table-1: Key Events Impacting Market VolatilityDateEvent/IssueCauseImplications for ProfessionalsMar 2020COVID-19 PandemicGlobal health crisisNeed for agile financial planning and risk managementJan 2021GameStop Short SqueezeRetail investor frenzy, social mediaUnderstanding of market manipulation and regulationFeb 2022Russia-Ukraine ConflictGeopolitical tensionGeopolitical risk assessment and international financeMar 2023Silicon Valley Bank CollapseBank management failuresImportance of financial oversight and crisis managementSource: Collected and compiled by the author from World Bank, Reserve Bank of India, Trading Economics, Organization for Economic Co-operation and Development (OECD), National Stock Exchange of India, and Investing.com.Table-1 outlines key market volatility events, their causes, and implications, underscoring the need for Chartered Accountants to enhance skills in financial planning, risk management, and regulatory awareness.Figure-1 illustrates significant spikes in market volatility linked to the COVID-19 pandemic, GameStop short squeeze, Russia-Ukraine conflict, and Silicon Valley Bank collapse, highlighting the importance of updated professional knowledge.MethodologyThis study examines the impact of three key macroeconomic factors—Foreign Direct Investment (FDI), trade balance, and Consumer Confidence Index—on stock market volatility in India from 2009 to 2023, using the VIX Index as a measure. The research employs a comprehensive quantitative approach, utilizing descriptive statistics, correlation analysis, and stepwise regression through Statistical Package for Social Sciences (SPSS) software. Data on FDI (% of GDP), Trade Balance (billion USD), Consumer Confidence Index, and VIX Index (percentage) is gathered from reputable sources including the World Bank, Reserve Bank of India, Trading Economics, OECD, National Stock Exchange of India, and Investing.com. Descriptive statistics provide an overview of the dataset\'s characteristics. Correlation analysis explores relationships between variables and identify potential multicollinearity. Finally, an OLS regression model quantifies the effects of the independent variables on stock market volatility as shown in Figure-2. This methodological approach aims to offer a thorough understanding of how these macroeconomic factors interact and influence stock market volatility in India, providing valuable insights for investors, policymakers, and financial analysts. The regression equation is specified as follows:VIX Index = $\beta_{0}$ + $\beta_{1}$ FDI + $\beta_{2}$ Trade Balance + $\beta_{3}$ Consumer Confidence Index + $\epsilon$where $\beta_{0}$ is the intercept, $\beta_{1}$, $\beta_{2}$, and $\beta_{3}$ are the coefficients for the respective independent variables, and $\epsilon$ is the error term. The regression results will provide insights into the significance and magnitude of each independent variable\'s effect on stock market volatility. Diagnostic tests are also performed to validate the assumptions of the regression model, ensuring the reliability and robustness of the findings.ResultsTable-2: Descriptive Statistics of Variables MeanStd. DeviationNIndia VIX Yearly Average19.83075.64915Trade Balance-135.733.53615FDI Inflows (USD Billion)55.15917.30615Consumer Confidence Index (CCI)98.0476.798815Source: Author\'s CalculationThe India VIX Yearly Average, representing stock market volatility, has a mean of 19.8307 with a standard deviation of 5.649 as witnessed in Table-2. The Trade Balance shows a negative mean of -135.7 billion USD, indicating a trade deficit, with a standard deviation of 33.536 billion. FDI Inflows has an average of 55.159 billion USD annually, with a standard deviation of 17.306 billion. The Consumer Confidence Index (CCI) has a mean of 98.047 and a standard deviation of 6.7988. These statistics provide an overview of the central tendencies and variations in the macroeconomic indicators and stock market volatility in India during the study period.Table-3: Correlation of the VariablesVariableIndia VIX Yearly AverageTrade BalanceFDI Inflows (USD Billion)Consumer Confidence Index (CCI)India VIX Yearly Average1.0000.521-0.1510.009Trade Balance0.5211.000-0.1360.013FDI Inflows (USD Billion)-0.151-0.1361.000-0.949Consumer Confidence Index (CCI)0.0090.013-0.9491.000Significance (1-tailed)India VIX Yearly Average 0.0230.2950.487Trade Balance0.023 0.3140.481FDI Inflows (USD Billion)0.2950.314 0.000Consumer Confidence Index (CCI)0.4870.4810.000 N (Sample Size)15151515Source: Author\'s CalculationIn Table-3, India VIX shows a moderate positive correlation (0.521) with Trade Balance, significant at the 0.05 level. This suggests that as the trade deficit increases, market volatility tends to rise. Interestingly, FDI Inflows have a weak negative correlation (-0.151) with VIX, while the Consumer Confidence Index (CCI) shows a negligible correlation (0.009) with VIX. Notably, there\'s a strong negative correlation (-0.949) between FDI Inflow and CCI, significant at the 0.01 level. This indicates that as FDI increases, consumer confidence tends to decrease substantially. The analysis reveals complex interrelationships among these macroeconomic factors and stock market volatility, with trade balance emerging as the most correlated variable to market volatility.Table-4: Results of Stepwise Regression AnalysisModelRR SquareAdjusted R SquareF ChangeSig. F ChangeDurbin-Watson1.821.771.8154.837.0371.759Source: Author\'s CalculationIn Table-4, the model exhibits an R-value of 0.821, signifying a strong correlation between the predictor (Trade Balance) and the dependent variable (India VIX Yearly Average). An R Square of 0.771 indicates that 77.1% of the variance in India VIX is attributable to Trade Balance. The Adjusted R Square of 0.815 adjusts for the number of predictors in the model. The Durbin-Watson statistic of 1.759, being close to 2, suggests an absence of significant autocorrelation in the residuals.Table-5: Results of Variance AnalysisModelSum of SquaresdfMean SquareFSig.Regression121.1851121.1854.837.027bResidual325.7251325.056 Total446.90914 a Dependent Variable: India VIX Yearly Averageb Predictors: (Constant), Trade BalanceSource: Author\'s CalculationTable-5 shows the results of variations among the variables and the F-statistic of 4.837 with a significance level of 0.027 (p<0.05) indicates that the regression model is statistically significant. This means that Trade Balance is a significant predictor of India\'s VIX Yearly Average.Table-6: Results of CoefficientsModelUnstandardized Coefficients BStd. ErrortSig.Collinearity Statistics ToleranceVIF1 (Constant)31.7435.5695.700.000 Trade Balance.088.0402.199.0471.0001.000a Dependent Variable: India VIX Yearly AverageSource: Author\'s CalculationIt is clear from Table-6 that the constant (intercept) is 31.743, representing the expected India VIX value when the Trade Balance is zero. The coefficient for Trade Balance is 0.088, suggesting that for every 1 billion USD increase in trade deficit, the India VIX is expected to increase by 0.088 percentage points. This relationship is statistically significant (p=0.047<0.05). The VIF of 1.000 indicates no multicollinearity issues.Table-7: Results of Excluded VariablesModelBeta IntSig.Partial CorrelationCollinearity Statistics ToleranceVIF1 FDI Inflows (USD Billion)-.082-.330.747-.095.9811.019Consumer Confidence Index (CCI).0026.009.993.0031.0001.000a Dependent Variable: India VIX Yearly Averageb Predictors in the Model: (Constant), Trade BalanceSource: Author\'s CalculationBoth FDI Inflow and Consumer Confidence Index (CCI) were excluded from the model (Table-7). Their non-significant t-statistics and high p-values (0.747 and 0.993 respectively) suggest that they do not contribute significantly to explaining the variance in India VIX beyond what is already accounted for by Trade Balance.DiscussionThe stepwise regression analysis reveals that among the three macroeconomic variables studied (Trade Balance, FDI Inflows, and Consumer Confidence Index), only Trade Balance emerges as a significant predictor of stock market volatility in India, as measured by the VIX Index. The positive relationship between Trade Balance and VIX suggests that as India\'s trade deficit increases, stock market volatility tends to rise. This finding aligns with the earlier correlation analysis, which showed a moderate positive correlation between Trade Balance and VIX.The omission of Foreign Direct Investment (FDI) Inflows and the Consumer Confidence Index (CCI) from the model suggests that these variables do not exert a significant direct influence on stock market volatility when trade balance is included as a factor. This finding is noteworthy, especially considering the robust negative correlation identified between FDI Inflows and the Consumer Confidence Index during the correlation analysis. The findings underscore the intricate relationship between macroeconomic variables and stock market volatility in India. Trade Balance stands out as the most significant factor. However, the model\'s R-squared value indicates that other unexamined factors likely influence stock market volatility. This highlights the necessity for further research to uncover additional variables that could deepen our comprehension of stock market dynamics in India.ConclusionThe study analyzes the impact of Foreign Direct Investment (FDI), Trade Balance, and Consumer Confidence Index on stock market volatility in India from 2009 to 2023 using descriptive statistics, correlation analysis, and stepwise regression. Results indicate that Trade Balance is the most significant predictor, with a positive correlation to market volatility. Conversely, the FDI and Consumer Confidence Index show negligible direct impacts on volatility. The regression model explains 77.1% of the variance in volatility, emphasizing Trade Balance\'s role in market dynamics. These findings highlight the complexity of macroeconomic influences on stock markets, necessitating further research to identify additional influential variables.References:Ali, M. (2021). Impact of Macroeconomic Variability on the Stock Market Volatility of Bangladesh. BİLTÜRK Journal of Economics and Related Studies, 3(2), 66-86. https://doi.org/10.47103/bilturk.837413Anagnostopoulos, A., Atesagaoglu, O., Faraglia, E., & Giannitsarou, C. (2019). Foreign direct investment as a determinant of cross-country stock market comovement.Antonakakis, N., Gupta, R., & Tiwari, A. K. (2018). Time-varying correlations between trade balance and stock prices in the United States over the period 1792 to 2013. Journal of Economics and Finance, 42, 795-806.B. Raval, V., & Kumar Chakrawal, A. (2023). \"An analysis of impact of foreign direct investment on Asian stock markets: With special reference to bsesensex and szse component index\". PARIPEX INDIAN JOURNAL OF RESEARCH, 37-38. https://doi.org/10.36106/paripex/0604451Chettri, K. K., Bhattarai, J. K., & Gautam, R. (2022). Foreign direct investment and stock market development in Nepal. Asian Journal of Economics and Banking, 7(2), 277-292.Chinzara, Z. (2011). Macroeconomic uncertainty and conditional stock market volatility in South Africa*. South African Journal of Economics, 79(1), 27-49. https://doi.org/10.1111/j.1813-6982.2011.01262.xFerrer, E., Salaber, J. M., & Zalewska, A. A. (2012, July). Sensitivity of consumer confidence to stock markets\' meltdowns. In Midwest Finance Association 2013 Annual Meeting Paper.Jansen, W. J., & Nahuis, N. J. (2003). The stock market and consumer confidence: European evidence. Economics letters, 79(1), 89-98.Jung-ho Kim., Thomas Tsoeke & Kwabla Agorsor. (2019). The Key Drivers of VAT Revenue in the Economic Community of West African States. International Area Studies Review, 23(1), 3-29. 10.21212/IASR.23.1.1Malcus, R., & Persson, M. (2018). The impact of foreign direct investment on the stock market development in Sweden.Okonkwo & Jude, J. (2019). Volatility of stock return and selected macroeconomic variables: Evidence from Nigeria stock exchange. International Journal of Academic Research in Business and Social Sciences, 9(6). https://doi.org/10.6007/ijarbss/v9-i6/5934Paramati, S. R., Gupta, R., & Hui, A. (2016). Trade and investment linkages and stock market long-run relationship. Australian Economic Papers, 55(2), 149-169.Shah, D. M. (2013). Flows of FIIs and Indian stock market. Available at SSRN 3353659.Tiwari, A. K., Abakah, E. J. A., Bonsu, C. O., Karikari, N. K., & Hammoudeh, S. (2022). The effects of public sentiments and feelings on stock market behavior: Evidence from Australia. Journal of Economic Behavior & Organization, 193, 443-472.Tuğba Dayıoğlu, Yılmaz Aydın. (2019). Relationship Between the Volatility of Stock Returns and the Volatility of Macroeconomic Variables: A Case of Turkey. American Journal of Theoretical and Applied Business, 5(2), 40-46.Authors may be reached at kumarsanjeebdey@gmail.com, adityasahoo007@gmail.com and eboard@icai.in
Ep. 260 — An analysis of Stock Markets Integration and Dynamics of Volatility Spillover
CA Journal
· September 2026
00:00
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An analysis of Stock Markets Integration and Dynamics of Volatility SpilloverThe purpose of this research study is to determine whether Indian stock market investors can diversify their portfolios into other economies. To understand this, the study examined four global stock market indices viz. NASDAQ, SSE, DAX, and N225, in addition to the NSE-500. The outcomes of the study revealed that both, in the short term and long term, stock market volatility spills over from the Indian stock market to the stock markets of other selected nations. Consequently, the study suggests that the US, China, Germany, and Japan cannot serve as destinations for portfolio diversification for Indian stock market investors.By Tejesh H R, AcademicianIntroductionAs globalization, liberalization, and technological progress continue to reshape the interconnected global economy, the significance of understanding the integration of stock markets and the dynamics of volatility spillover become increasingly evident. The stock market integration helps to know the extent to which securities markets from different countries move together, reflecting the growing interdependence of financial markets worldwide. Volatility spillover, on the other hand, is the transmission of volatility shocks across markets, influencing price movements and risk perceptions beyond their originating market. The significance of studying stock market integration lies in its implications for portfolio diversification, risk management, and the allocation of capital across borders. Additionally, portfolio managers see emerging markets as promising destinations for diversifying funds (Kumar et al., 2017) and reaping the benefits of portfolio diversification (Vo et al., 2018). However, international investors often lack adequate understanding of emerging market dynamics, leading to herding behavior that can spike stock return volatility (Watson et al., 2012). Moreover, volatility in the stock market can stem from national and global events such as the 2008 global financial crisis or the 2019 COVID-19 pandemic, resulting in spillover effects observed in returns and volatility, typically associated with increased risk (Diebold et al., 2009). These risks prompt investors to shift their investments from financial markets to safer alternatives, exerting downward pressure on the stock market. Nevertheless, in high-volatility scenarios, investors unwilling to move their funds anticipate higher returns to compensate for the additional risk.As markets become more integrated, the traditional benefits of diversification may diminish, as relationships between assets increase, potentially exposing investors to higher levels of systemic risk. Moreover, understanding the drivers of stock market integration can shed light on the mechanisms through which economic and financial connections are formed and evolve over time. Volatility spillover, meanwhile, presents challenges and opportunities for market participants. On one hand, increased volatility spillovers can amplify market confusion and contagion, leading to rapid and widespread fluctuations in asset prices. Considering these economic dynamics, this research is driven by the following three questions:Do changes in global financial markets move the direction of the Indian stock market?Is the growth of the Indian financial market driven solely by its past performance, or are there external financial factors involved?Does volatility in Indian stock market returns spill over to other global markets?If the volatility remains limited within India and doesn\'t influence other chosen markets, these selected global financial markets could serve as alternatives for portfolio diversification. Hence, knowing the importance of understanding volatility spillover and associated investment risks in financial markets, an attempt has been made to investigate the dynamics of stock market integration and volatility spillover among selected global stock markets.Research MethodologyData and SampleThis study examined the impact of asymmetric volatility spillover from the Indian stock market to selected global markets. The analysis focused on the NSE-500 Index, representing the Indian stock market, alongside four global market indices, namely NASDAQ (USA), SSE (China), DAX (Germany), and N225 (Japan). The daily time series data, spanning from March 2006 to March 2024, was sourced from Yahoo Finance.Analytical TechniqueTo achieve the research objective, the study employed several econometric models:Granger Causality Test: To determine the causality between the markets.Vector Autoregression (VAR): To analyse the dynamic relationship among the markets.Dynamic Conditional Correlation (DCC): To examine the time-varying correlation between the Indian market and the selected global markets.Limitations of the StudyThis study acknowledges several limitations that may influence the interpretation and generalizability of the results:The study merely focused on the volatility spillover from the Indian stock market to selected global markets, without exploring spillover in the opposite direction.The research is limited to four specific global indices, which might not represent the full spectrum of diversification opportunities.The chosen econometric models are robust but might not have captured all possible relationships or patterns.Broader economic or geopolitical factors influencing volatility spillover are not considered.The influence of regulatory changes during the study period was not explicitly analyzed.Data AnalysisTable 1: Summary statistics of selected indices NSE-500NASDAQSSEDAXN225Part A: Descriptive Statistics:Mean0.0640.0630.0360.0410.036Min-14.674-11.983-12.239-11.940-16.069Max16.22312.4129.45514.41114.645Standard Deviation1.4711.4931.6571.4731.566Skewness-0.440-0.402-0.3280.011-0.154Kurtosis16.56912.1298.19112.73612.291Jarque-Bera13289.3704331.62214999.52013675.78029259.390Prob.0.000***0.000***0.000***0.000***0.000***Part B: Correlation Analysis:NSE-5001.000 NASDAQ0.293***1.000 SSE0.278***0.132***1.000 DAX0.431***0.606***0.178***1.000 N2250.424***0.246***0.306***0.420***1.000Part C: Augmented Dickey-Fuller (ADF) Test:At level0.5470.5190.0980.3920.054First Difference0.010.010.010.010.01Note: ***, ** and * denote statistical significance at 0.01%, 1%, and 5% level, respectively.Table 1 presents the results of the descriptive and correlation analyses, as well as the unit root test. Looking at the minimum (Min) and maximum (Max) values of daily returns across chosen global financial markets, we observe that NSE-500 exhibits the varied range, reflecting a wide range of returns. The variability for all the indices are notably larger compared to their respective means, suggesting a high level of volatility in these markets. With the exception of DAX, the value of skewness is negative for all of the selected indices\' return series. This implies that the distributions are tilted toward the left side of the curve, making them asymmetrical. On the other hand, the fact that the Kurtosis value exceeds three for all the indices suggests that the data has thinner tails than a normal distribution. These results are further confirmed by the significant p-value of the Jarque-Bera test. Almost all the return series are either weakly or moderately associated with each other, and none of them are neither strongly nor negatively associated. Lastly, the results of the Automatic Data Format (ADF) test confirm that the return series for all the indices exhibit stationarity after taking the first difference.Table 2: Granger causality testNull hypothesist valuesProb.NSE-500 does not granger cause NASDAQ24.9960.000***NSE-500 does not granger cause SSE0.0080.930NSE-500 does not granger cause N2252.7140.100NSE-500 does not granger cause DAX5.9570.015*NASDAQ does not granger cause NSE-5001.0590.304NASDAQ does not granger cause SSE0.1810.671NASDAQ does not granger cause N2250.0010.976NASDAQ does not granger cause DAX0.9530.329SSE does not granger cause NSE-5000.1010.751SSE does not granger cause NASDAQ0.4700.493SSE does not granger cause N2252.1340.144SSE does not granger cause DAX1.4150.234N225 does not granger cause NSE-5003.0990.078.N225 does not granger cause NASDAQ13.0870.000***N225 does not granger cause SSE1.6020.206N225 does not granger cause DAX16.2860.000***DAX does not granger cause NSE-5001.7340.188DAX does not granger cause NASDAQ3.2140.073.DAX does not granger cause SSE1.2220.269DAX does not granger cause N2250.1880.665Note: ***, ** and * denote statistical significance at 0.01%, 1%, and 5% level, respectively.The results of the Granger causality test conducted on various pairs of stock market indices are depicted in Table 2. These tests aim at assessing whether the returns from Indian financial market (NSE-500) are useful in predicting the returns of chosen global markets or vice versa (Khan, 2023). It is evident that around 80% of the total pairs show no causality between each other, implying that there is no significant directional influence between those particular indices. However, N225 and NSE-500 confirm the existence of bi-directional causality between NASDAQ and DAX.Table 3: Estimated results of Multivariate Vector Auto Regression (VAR) model on NSE-500 CoefficientPr(>|t|) CoefficientPr(>|t|)const0.4360.912DAX.110.0680.000***NSE-500.110.9420.000***NSE-500.120.0240.560NASDAQ.110.1750.000***NASDAQ.120.0650.015*SSE.11-0.0770.008**SSE.120.0520.077.N225.11-0.0270.000***N225.120.0180.700DAX.12-0.0160.381NSE-500.15-0.0480.204NSE-500.13-0.0410.123NASDAQ.150.0070.059.NASDAQ.13-0.0320.177SSE.15-0.0030.930DAX.14-0.0320.092.N225.150.0210.002** DAX.15-0.0160.280Residual standard error89.41Adj. R20.9994R20.9994p-value0.000***Note: ***, ** and * denote statistical significance at 0.01%, 1%, and 5% level, respectively.Table 4: Variance decomposition results on NSE-500PeriodNSE-500NASDAQSSEN225DAX11.0000.0000.0000.0000.00020.9720.0230.0010.0010.00330.9550.0360.0020.0010.00740.9350.0490.0030.0010.01250.9250.0540.0040.0020.01660.9190.0570.0040.0020.01870.9150.0580.0050.0020.01980.9120.0590.0050.0030.02090.9100.0610.0060.0030.021100.9080.0620.0060.0030.022Source: Author\'s calculation.The multivariate vector autoregression model is used to examine if the returns of the Indian market are influenced by its own past returns or the past returns of selected global indices. The VAR analysis involves selecting a suitable lag order as a requirement. To determine the optimum lag order, the Akaike Information Criterion (AIC) values are used, identifying a lag order of five as most appropriate. The results from Table 3 show that the current return of the NSE-500 index is significantly influenced by its own past two returns (lag one and two), as well as the past returns of all the selected global indices at lag one. Notably, the immediate past returns of SSE and N225 have a negative effect on NSE-500. With the exception of lag order three, at least one other index\'s past returns are significant at different orders, irrespective of their signs.The fluctuations in past values of the NSE-500 index have a significant impact on its current value, whereas the variance in past values of other financial markets has a negligible effect on the current values of NSE-500. This suggests that it is primarily the past variance within the Indian market that influences its current value, rather than external market forces from other nations. These findings are in line with previous studies by Sharma et al. (2019) and Khan (2023).Table 5: Estimated results of Dynamic Conditional Correlation (DCC) model CoefficientPr(>|t|) CoefficientPr(>|t|)[NSE-500].mu0.0010.000***[SSE].alpha10.1080.000***[NSE-500].ar10.1710.470[SSE].beta10.9390.000***[NSE-500].ma1-0.0980.683[N225].mu0.0010.002***[NSE-500].omega0.0000.053.[N225].ar1-0.4380.015*[NSE-500].alpha10.1180.000***[N225].ma10.3920.033*[NSE-500].beta10.8690.000***[N225].omega0.0000.489[NASDAQ].mu0.0010.001***[N225].alpha10.1070.000***[NASDAQ].ar10.9420.000***[N225].beta10.8700.000***[NASDAQ].ma1-0.9680.000***[DAX].mu0.0010.000***[NASDAQ].omega0.0000.770[DAX].ar1-0.6430.000***[NASDAQ].alpha10.1120.000***[DAX].ma10.6590.000***[NASDAQ].beta10.8670.000***[DAX].omega0.0000.526[SSE].mu0.0000.328[DAX].alpha10.1020.000***[SSE].ar1-0.0060.993[DAX].beta10.8770.000***[SSE].ma10.0090.991[Joint]dcca10.0050.001***[SSE].omega0.0000.931[Joint]dccb10.9840.000***Note: ***, ** and * denote statistical significance at 0.01%, 1%, and 5% level, respectively.The dynamic conditional correlation analysis is applied to examine the integration between the selected financial markets and to measure the volatility spillover from India to other markets. The results of this analysis are presented in Table 5. The alpha1 values, signifying short-term volatility, and the beta1 values, representing long-term volatility spillover, are both positive and statistically significant. This suggests that volatility persists across all the indices. Additionally, when we sum the short and long-term volatility values for each index, the result is less than 1. This implies that volatility remains persistent and tends to worsen over time. The positive and significant values for dcca1 and dccb1 indicate that there is integration between the Indian and other global financial markets. This suggests that fluctuations in the Indian market impact and spill over into the global financial markets. These results align with previous findings from Bonga-Bonga (2018) and Khan (2023). Therefore, when there is a decline in the Indian financial market, it may trigger decays in other markets as well. So, investors might consider avoiding investments in these markets and explore diversification options in other financial markets for their portfolios.ConclusionIn this research study, we examined the integration and volatility spillover between the Indian stock market and selected global stock markets using a daily time series spanning 2006 to 2024. The results of the Granger causality test revealed no significant causality among majority of pairs. Subsequently, the findings of VAR model show that the Indian financial market is primarily influenced by its own recent movements, as well as recent movements in selected indices. On the other hand, the past variance within the Indian market influences its current value, rather than external market forces from other nations. The significant alpha, beta and joint coefficients suggest that volatility in the Indian financial market spills over to the selected global markets. This confirms the presence of volatility spillover from the Indian financial market to global financial markets, indicating integration between these financial markets.References:Bonga-Bonga, L. (2018). Uncovering equity market contagion among BRICS countries: an application of the multivariate GARCH model. The Quarterly Review of Economics and Finance, 67, 36-44. https://doi.org/10.1016/J.QREF.2017.04.009Diebold, F. X., & Yilmaz, K. (2009). Measuring financial asset return and volatility spillovers, with application to global equity markets. The Economic Journal, 119(534), 158-171. https://doi.org/10.1111/j.1468-0297.2008.02208.xKhan, I. (2023). An analysis of stock markets integration and dynamics of volatility spillover in emerging nations. https://doi.org/10.1108/JEAS-10-2022-0236Kumar, S., Haque, M. M., & Sharma, P. (2017). Volatility spillovers across major emerging stock markets. Asia-Pacific Journal of Management Research and Innovation, 13(1-2), 13-33. https://doi.org/10.1177/2319510X17740043Singh, A., & Singh, M. (2016). Inter-linkages and causal relationships between US and BRIC equity markets: an empirical investigation. Arab Economic and Business Journal, 11(2), 115-145. https://doi.org/10.1016/j.aebj.2016.10.003Vo, X. V., & Ellis, C. (2018). International financial integration: stock return linkages and volatility transmission between Vietnam and advanced countries. Emerging Markets Review, 36, 19-27. https://doi.org/10.1016/j.ememar.2018.03.007Watson, J., & Wickramanayake, J. (2012). The relationship between aggregate managed fund flows and share market returns in Australia. Journal of International Financial Markets, Institutions and Money, 22(3), 451-472. https://doi.org/10.1016/j.intfin.2012.02.001Author may be reached at hrtejesh@gmail.com and eboard@icai.in
Ep. 261 — Predicting the Unpredictable: Credit Loss Provisioning Under Ind-AS 109
CA Journal
· September 2026
00:00
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Predicting the Unpredictable: Credit Loss Provisioning Under Ind-AS 109Ind AS 109 introduced a significant shift in credit loss provisioning by adopting the Expected Credit Loss (ECL) model. This forward-looking approach requires entities to estimate and recognize credit losses based on anticipated future events and conditions, rather than solely relying on past events. The ECL model is calculated by considering factors such as the probability of default, loss given default, and exposure at default. By proactively recognizing potential credit losses, this standard enhances the transparency and financial stability of institutions. However, its implementation presents challenges, including the need for robust data analytics, sophisticated modelling techniques, and sound judgment in estimating future credit risks.By CA. Unnat Asit Parghi, Member of the InstituteThe Forward-looking Expected Credit Loss under Ind-AS 109 represented a regime change in the Loan Loss Provisioning as against the reactive approach as prescribed under the Accounting Standards regime. Further, the same is also considerably different from the IRACP Norms as prescribed by the Reserve Bank of India. Ind-AS 109 talks about the Expected Credit Loss model instead of the Incurred Credit Loss model. ECL provides the framework not only based upon the past and current information but also expected credit losses based upon past experiences. Ind-AS 109 does not prescribe any methodology for computing ECL, however, entities are expected to provide for the losses in accordance with the asset size, intricacy, and risk profile of the company. Let\'s dive into each aspect of the Loan Loss Provisioning under the ECL Model.Classification of Financial Assets under Ind-AS 109Under Ind-AS 109 & Ind-AS 32, asset classification principles hinge on an entity\'s business model for managing financial assets and the contractual cash flow characteristics of the assets. Three main categories for financial asset classification are as below:i. Amortised CostCriteria: A financial asset is classified at amortized cost if both conditions are met:The asset is held within a business model whose objective is to hold financial assets to collect contractual cash flows.The contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.Measurement: Measured at amortized cost using the effective interest rate (EIR) method, with impairment losses recognized as needed.ii. Fair Value Through Other Comprehensive Income (FVOCI)Criteria: A financial asset is classified at FVOCI if both conditions are met:The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.The contractual terms of the financial asset give rise to cash flows that are SPPI.Measurement: Changes in fair value are recognized in Other Comprehensive Income (OCI), except for impairment gains or losses and interest revenue, which are recognized in profit or loss.iii. Fair Value Through Profit or Loss (FVTPL)Criteria: A financial asset is classified at FVTPL if:It does not meet the criteria for classification at amortized cost or FVOCI, orIt is designated as an FVTPL upon initial recognition to eliminate or significantly reduce an accounting mismatch.Measurement: Measured at fair value, with changes in fair value recognized in Profit or Loss.Financial Assets and Items Subject to ECLFinancial Assets measured at Amortised Cost (e.g. Trade Receivables, Loans)Financial Assets measured at FVOCILease Receivables (Ind AS 116)Contract Assets (Ind AS 115)Loan Commitments not classified as financial liabilities at FVTPL (e.g. Guarantees)Financial guarantee contracts (if not designated at FVTPL) require impairment based on the ECL model.The ECL model does not apply to:Equity instruments (measured at FVOCI or FVTPL), as they do not have contractual cash flows.Financial assets are measured at FVTPL, since changes in fair value already account for credit risk dynamically.Approaches for calculation of ECLInd-AS 109 does not prescribe how to derive the ECL; the methodology used could vary based upon the type of assets, complexities involved & information available at the time of the provisioning. Here\'s the overview of the approaches that can be used:General ApproachThe General Approach is applied to most financial assets subject to ECL unless they qualify for the simplified approach. It involves a 3-stage impairment model:Stages of Credit Risk and ECL Recognition:Stage 1 (Performing Assets):Stage 2 (Underperforming Assets)Stage 3 (Credit-Impaired Assets)Key Components of the General Approach:Probability of Default (PD): Likelihood that the borrower will default.Loss Given Default (LGD): Expected loss if a default occurs, as a percentage of exposure.Exposure at Default (EAD): Outstanding amount at the time of default.Formula: PD X LGD X EAD X Discounting FactorSimplified ApproachThe Simplified Approach is mandatory for:Trade receivables, contract assets, and lease receivables that do not contain a significant financing component.Optional for trade receivables and contract assets with a significant financing component.FeaturesNo need to track changes in credit risk or classify assets into stages.Lifetime ECL is always recognized from initial recognition.Typically involves creating a provision matrix that uses historical credit loss experience, adjusted for forward-looking factors (e.g., economic conditions).Example of a Provision MatrixAging BucketDefault Rate (%)Provision Amount (₹)Current1%10,0001-30 days overdue3%30,00031-60 days overdue7%70,000Segmentation of the Loan PortfolioSegmentation involves grouping financial assets with similar risk characteristics to estimate credit losses more accurately and efficiently.Purpose of Loan Portfolio SegmentationReflects the different levels of credit risk inherent in various types of loans.Ensures that ECL estimates are tailored to the specific characteristics of each segment.Enhances accuracy by aligning with historical and forward-looking data.Factors for SegmentationSegmentation is typically based on the following criteria:Type of BorrowerType of LoanPurpose of LoanGeographic or Sectoral FactorsRisk Attributes like Credit Risk Rating, Loan to Value ratio.By appropriately segmenting the loan portfolio, entities can enhance the precision of ECL estimates and provide more meaningful financial reporting under Ind AS 109.StagingStaging of financial assets under Ind AS 109 refers to categorizing financial assets into three distinct stages based on changes in credit risk since initial recognition. This staging determines how ECL are measured and recognized, aligning impairment provisions with the degree of credit risk.Stages of Financial AssetsStage 1: Performing AssetsCriteria: Financial assets where there has been no significant increase in credit risk (SICR) since initial recognition.ECL Measurement12-month ECL: Losses expected from defaults occurring within 12 months after the reporting date.Reflects the probability of default in the next 12 months, regardless of the expected life of the asset.Interest Income CalculationBased on the gross carrying amount (before deducting impairment allowance).Stage 2: Underperforming AssetsCriteria: Financial assets with a significant increase in credit risk since initial recognition but not yet credit impaired.ECL MeasurementLifetime ECL: Losses expected over the entire remaining life of the asset.Assesses the likelihood of default over the asset\'s full term.Interest Income CalculationBased on the gross carrying amount (before impairment).Stage 3: Credit-Impaired AssetsCriteria: Financial assets that are credit-impaired, typically involving one or more of the following:Significant financial difficulty of the borrower.Breach of contract, such as a default or past-due event.High probability of bankruptcy or financial reorganization.Concessions granted to the borrower due to financial difficulty.ECL MeasurementLifetime ECL: Calculated based on expected losses for the asset\'s remaining life.Incorporates detailed, borrower-specific information.Interest Income CalculationBased on the net carrying amount (gross carrying amount minus impairment allowance).Staging & ECL RecognitionStageCredit RiskECL RecognitionInterest CalculationStage 1Low Risk, No SICR12-month ECLGross Carrying AmountStage 2SICR but not credit impairedLifetime ECLGross Carrying AmountStage 3Credit-impairedLifetime ECLNet Carrying AmountSignificant Increase in credit riskA Significant Increase in Credit Risk (SICR) under Ind AS 109 occurs when the credit risk of a financial instrument has risen substantially since its initial recognition. SICR is a critical trigger for reclassifying financial assets from Stage 1 (Performing) to Stage 2 (Underperforming) under the Expected Credit Loss (ECL) model.Indicators of SICRSICR assessment combines quantitative, qualitative, and backstop measures. These include:Quantitative IndicatorsChanges in Probability of Default (PD)Credit Rating DowngradesQualitative IndicatorsAdverse Changes in Financial ConditionsOperational or Sectoral RisksForbearance or Restructuring MeasuresAdverse Business DevelopmentsBackstop IndicatorsDays Past Due more than 30 daysRegulatory TriggersAssessing SICRSICR assessment involves:Comparison to Initial RecognitionForward-Looking InformationRebuttable PresumptionsExamples of SICRScenarioSICR?ReasonBorrower\'s credit rating downgraded two levelsYesIndicates increased credit risk.Loan is 35 days past dueYesPast due > 30 days triggers SICR presumption.Temporary delay due to processing issuesNoEvidence suggests no increase in credit risk.Significant economic downturn affecting industryYesForward-looking risk factors identified.Probability of Default (PD)Probability of Default (PD) is a key component of the Expected Credit Loss (ECL) model. It measures the likelihood that a borrower will default on their financial obligation over a specified time horizon. PD is essential for estimating credit losses and reflects both historical experience and forward-looking factors. PD is the probability that a counterparty will fail to meet its debt obligations, leading to a default event.Stages and Use of PDStagePD HorizonPurposeStage 112-Month PDAssess potential credit losses for assets with no significant credit risk increase.Stage 2Lifetime PDReflect increased likelihood of default due to significant credit risk.Stage 3Lifetime PDRepresent credit-impaired assets, requiring more detailed and borrower-specific analysis.PD Estimation TechniquesPD can be estimated using a combination of the following methods:Historical Data Analysis:Analyse historical default rates for borrowers or similar risk groups.Use internal or external credit risk rating systems to estimate default likelihood.Logistic RegressionThe Logistic Regression method is a widely used statistical technique for modelling the Probability of Default (PD) in credit risk analysis. It is particularly effective because it predicts probabilities (values between 0 and 1) and handles binary outcomes, such as whether a borrower defaults (1) or does not default (0).The model estimates the probability of default, expressed as:$$ P(Default) = \\frac{1}{1 + e^{-(\\beta_{0} + \\beta_{1}X_{1} + ... + \\beta_{n}X_{n})}} $$Where:$\\beta_{0}, \\beta_{1}, ..., \\beta_{n}$ are the coefficients (to be estimated).$X_{1}, X_{2}, ..., X_{n}$ are the predictor variables.Proportional Hazard ModelsProportional Hazard Models (PHM), particularly the Cox Proportional Hazard Model (Cox Model), are another sophisticated approach used for estimating Probability of Default (PD) in credit risk modelling. These models are based on survival analysis, which is typically used to analyse time-to-event data, such as the time until a borrower defaults. The Proportional Hazard Model is specifically useful when the focus is on estimating the hazard rate (the risk of default) as a function of covariates (borrower-specific characteristics, economic factors, etc.). The model assumes that the hazard rate (default risk) at any time is a function of baseline hazard and covariates.The hazard function for an individual i is given by:$$ h(t|X_{i}) = h_{0}(t)exp(\\beta_{1}X_{i1} + \\beta_{2}X_{i2} + \\dots + \\beta_{n}X_{in}) $$Where:$h(t|X_{i})$ is the hazard rate (risk of default at time t for borrower i).$h_{0}(t)$ is the baseline hazard function (default risk at time t for an average borrower with $X_{1} = X_{2} = \\dots = X_{n} = 0$).$X_{1}, X_{2}, ..., X_{n}$ are the covariates (predictor variables such as borrower-specific characteristics and macroeconomic factors).$\\beta_{1}, \\beta_{2}, ..., \\beta_{n}$ are the coefficients estimated by the model.The hazard rate represents the instantaneous probability of default at any given point in time, conditioned on the borrower surviving up to that time.Markov Chains:A Markov Chain is a statistical model that describes a sequence of possible events (states) in which the probability of each event depends only on the state attained in the previous event. This makes it particularly useful for modelling stochastic processes like credit risk, where the future state (e.g., whether a borrower defaults) depends on the current state (e.g., the borrower\'s credit rating).In the context of PD estimation, Markov Chains are used to model the transition probabilities between different credit states (e.g., healthy, overdue, defaulted) over time.The model divides the credit quality of loans into discrete states, such as:Healthy (not yet in default)At Risk (loans that are overdue but not yet defaulted)Defaulted (loans that have defaulted)Other modelling techniques like Decision Trees, Credit Scoring Models, Bayesian Models, Discriminant Analysis, Merton Model, Machine Learning Models, etc. can also be used in the estimation of PD.Key Considerations in PD EstimationChoosing the correct model for PD estimation under the ECL framework is a critical decision for financial institutions. The model must be able to accurately assess the likelihood of default while complying with the regulatory and accounting standards set by IND-AS 109. Here are key steps and factors to consider when selecting a model for PD estimation under ECL:Understand the Data CharacteristicsData Availability and QualityA model\'s ability to handle multivariate data (numerical and categorical) and temporal features (e.g., time-series data) is importantModel Complexity and InterpretabilitySimplicity vs. ComplexityRegulatory Requirements - Regulatory standards may demand that models be interpretable, particularly when justifying credit loss provisionsSegmentation and Risk CharacteristicsRisk SegmentationLoan Type - Secured / UnsecuredForward-Looking ConsiderationsComputational and Implementation ConstraintsScalabilityImplementation CostsModel Integration with Risk Management FrameworkUltimately, the model chosen should provide an optimal balance of predictive accuracy, regulatory compliance, operational feasibility, and interpretability to ensure that PD estimation is robust, transparent, and adaptable to changing economic conditions.Loss Given Default (LGD)Loss Given Default (LGD) refers to the potential loss a lender or investor incurs if a borrower defaults on a loan or credit facility. It is defined as the amount of loss that remains after accounting for any recoveries from the defaulted loan, usually expressed as a percentage of the total exposure at default (EAD).LGD Estimation ProcessHistorical DataUse historical loss data to estimate the potential recoveries and default severity. This data might include past loan defaults, collateral liquidations, and recoveries in similar economic conditions.Discounted Cash Flow ApproachIf there is an expected recovery over time, the LGD can be calculated using a discounted cash flow (DCF) approach, where future expected recoveries are discounted to the present value.In summary, Loss Given Default (LGD) is a crucial parameter under Ind-AS 109 for determining the Expected Credit Loss (ECL) for financial assets. The LGD estimation considers factors such as collateral value, recovery costs, loan structuring, and the economic environment. The accuracy of LGD estimation is vital for financial institutions to properly assess the credit risk and ensure the appropriate provisioning for potential losses.Exposure at default (EAD)Exposure at Default (EAD) represents the total value of a financial asset or portfolio at the time of a borrower\'s default. EAD helps estimate the potential financial loss an entity might incur due to credit defaults, which is essential for determining appropriate provisions for credit risk.EAD = Loan Balance + Accrued Interest + Any Undrawn CommitmentsWhere:Loan Balance is the current outstanding loan amount.Accrued Interest is the interest that has been accumulated but not yet paid.Undrawn Commitments represent any unused portion of a revolving credit facility (e.g., unused credit on a credit card or line of credit) that could be drawn by the borrower before default.Other Aspects to be kept under consideration while calculating ECLIn addition to the key components such as PD, LGD, and EAD, there are several other aspects that need to be considered while calculating ECL under Ind-AS 109. These include, the use of forward-looking information, macroeconomic factors, and credit risk mitigation factors, among others. Below are the important additional considerations to be kept in the mind while calculating ECL under Ind-AS 109:Forward-Looking InformationUnder Ind-AS 109, the calculation of ECL requires the use of forward-looking information. This means that the financial institution should not only rely on historical data but should also take into account expected future conditions that may affect credit risk. These conditions can be macroeconomic factors or any other relevant information that might impact the borrower\'s ability to repay.Macroeconomic scenarios: Variables like GDP growth, inflation rates, unemployment levels, and interest rates can have a significant impact on the creditworthiness of borrowers and on the ECL estimation.Scenario Analysis: Financial institutions are encouraged to consider a range of scenarios, including base, optimistic, and pessimistic scenarios, when determining the PD, LGD, and EAD. This helps to adjust the ECL for both positive and negative future outcomes.Historical information: Historical data, while still valuable, must be adjusted to reflect the anticipated future conditions in line with the financial institution\'s internal credit models.Use of Credit Risk Mitigation (CRM) TechniquesWhen calculating ECL, institutions should consider the impact of any credit risk mitigation (CRM) techniques, such as collateral or guarantees. These techniques reduce the potential loss given default (LGD), thus affecting the overall ECL.Collateral: The value of collateral should be assessed regularly, and its potential recovery value should be taken into account while estimating LGD. Collateral types, such as real estate, cash, or receivables, will influence the recovery rate.Guarantees: If there are third-party guarantees (e.g., corporate guarantees, government guarantees, or personal guarantees), the potential recovery from these guarantees should be considered in the calculation of LGD and, subsequently, the ECL.Netting off: In some cases, institutions may offset liabilities or recoveries from collateral against the gross exposure, depending on the applicable legal framework and contractual terms.Cross-collateralization: If multiple exposures are backed by the same collateral, the impact of such arrangements should be considered when calculating the ECL.Accounting for Prepayments and RepaymentsWhen calculating ECL for loans that are subject to prepayment (e.g., mortgages), financial institutions must account for the possibility that the loan may be repaid before default. As the prepayment reduces the EAD while. Also, for the amortizing loans or revolving credit facilities expected repayment schedules shall be considered as Balance and exposure might change over the time.Loan Modifications and RestructuringIn cases of loan modifications or restructuring (e.g., forbearance, repayment extensions, or changes in loan terms), the institution should reassess the credit risk of the asset and its corresponding ECL.Modification impact: Loan modifications might reduce or increase credit risk. If the modification results in a significant increase in credit risk, the asset may move to Stage 2 or 3.Default assessment after modification: After a restructuring, it is important to reassess the asset\'s credit risk and adjust the PD and LGD based on the new terms.In conclusion, the calculation of Expected Credit Loss (ECL) under Ind-AS 109 is a comprehensive process that requires a detailed assessment of credit risk across different stages of a financial asset\'s life cycle. It involves not only key components like PD, LGD, and EAD but also the integration of forward-looking information, macroeconomic factors, and credit risk mitigation strategies. The application of a forward-looking, probabilistic approach ensures that provisions for credit losses remain reflective of both current and anticipated market conditions. By considering factors such as staging, loan modifications, and the impact of prepayments, financial institutions can arrive at an accurate and realistic ECL estimation, which helps maintain sufficient reserves against potential credit losses, thus enhancing financial stability and regulatory compliance.Author may be reached at ca.unnatparghi@gmail.com and eboard@icai.in
Ep. 262 — Issues in availing GST Exemption on Composite Supply of Operation & Maintenance Work Contract to the Government
CA Journal
· September 2026
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Issues in availing GST Exemption on Composite Supply of Operation & Maintenance Work Contract to the GovernmentIn the interest of general public, the GST Law provided exemption for composite supply to the Government involving predominantly supply of services, where the value of supply of goods constitutes not more than 25 per cent in relation to an activity to perform a function entrusted to a Panchayat or Municipality. However, litigations have surged in view of taxing the operation & maintenance activity under divisible works contract, which also consist of construction activity, under the notion being treated as indivisible works contracts. Another issue is whether exemption available to the main contractor is also available to the sub-contractor or not. If the subcontractor charges GST, the main contractor cannot claim input tax credit of the same, as the outward supply is exempt. In such case, it would result in an additional cost to the contractor as well as to the consumer, which will defeat the purpose of exemption, in turn, defeating the objective of public welfare. The Service Tax Law also had provision for exempting sub-contractors when they executed works contract for the main contractor availing of the exemption. On similar lines, the Government needs to issue a relevant clarification to put an end to litigation surrounding the matter.BackgroundThe 25th GST Council Meeting held on 18-01-2018 has proposed to amend Entry Serial No. 3 of the Exemption Notification No. 12/2017-Central Tax (Rate) dt. 28-06-2017 to expand the scope of pure service and include composite supplies where the principal supply is of service and involves both services as well as materials. For example-Water supply for domestic, industrial and commercial purposes [Sl. No. 5 of the Twelfth Schedule of Article 243W of the Constitution]: A contract for the purification of water given to an external agency involving mainly purification services with some portion of supply of materials like alum, chlorine, water treatment agents etc.Public health, sanitation conservancy and solid waste management [Sl. No. 6 of the Twelfth Schedule of Article 243W of the Constitution]: A contract for the maintenance of compactor machines used for garbage disposal given to an external agency involving both maintenance services as well as the supply of damaged spare parts.Provision of urban amenities and facilities such as parks, gardens, playgrounds [Sl. No. 12 of the Twelfth Schedule of Article 243W of the Constitution]: A contract for maintenance of parks/gardens given to an external agency involving both maintenance service as well as supply of damaged items like decorative litter bins, display boards etc.Insertion of Entry 3A to Notification No. 12/2017 for exemption of composite supply:As per the decision of the 25th GST Council Meeting, the Entry Serial No. 3A has been inserted in Notification No. 12/2017- Central Tax (Rate) dt. 28-06-2017 (vide amendment Notification No. 2/2018-Central Tax (Rate) dt. 25-01-2018) for exempting the composite supply of goods and services in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply provided to the Central Government, State Government, Union territory, local authority, or a Governmental authority or Government Entity by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under Article 243W of the Constitution.However, the words \"Governmental Authority\" or \"Government Entity\" have been omitted w.e.f. 01-01-2022 vide Notification No. 15/2021 - Central Tax (Rate) dt. 18-11-2021, read with amendment Notification No. 22/2021- Central Tax (Rate) dt. 31-12-2021. Therefore, the exemption is no longer available for composite supply to a Government Authority or Government Entity w.e.f. 01-01-2022. On analysis of the above notification, the following conditions are to be fulfilled for availing exemption:Composite Supply in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply.The recipient should be the Government or a Local Authority (to Governmental Authority or Government Entity for the period from 25-01-2018 to 31-12-2021).Service activities are provided in relation to the function entrusted to the Panchayat or Municipality under Article 243G/243W of the Constitution.In this regard, the ingredients of Entry Serial No. 3A of Notification No. 12/2017- Central Tax (Rate) dt. 28-06-2017, as amended, are explained below-a. Composite SupplyAs per Sec 2(30), \"composite supply\" means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.As per section 2(90), \"principal supply\' means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary. The tax liability on the value of composite supply of goods or services shall be based on the principal supply, either taxable or non-taxable.There are conflicting decisions in allowing exemption for composite supply to the Government/Government Authority. The West Bengal GST AAR vide Order No. 07/WBAAR/2022-23 dt. 18.08.2022 in the case of Berhampur Warehousing Private Limited held that the composite supply of services by way of milling of food grains into flour (atta) to the Food & Supplies Department, Govt. of West Bengal for distribution of such flour under the Public Distribution System is eligible for exemption under entry serial no. 3A of Notification No. 12/2017-Central Tax (Rate) dt. 28.06.2017, as amended, since the value of goods involved in such composite supply does not exceed 25% of the value of supply.b. List of Services entrusted to the Panchayat under Article 243GAgriculture, including agricultural extension.Land improvement, implementation of land reforms, land consolidation, and soil conservation.Minor irrigation, water management, and watershed development.Animal husbandry, dairying, and poultry.Fisheries.Social forestry and farm forestry.Minor forest produce.Smallscale industries, including food processing industries.Khadi, village, and cottage industries.Rural housing.Drinking water.Fuel and fodder.Roads, culverts, bridges, ferries, waterways, and other means of communication.Rural electrification, including the distribution of electricity.Non-conventional energy sources.Poverty alleviation programme.Education, including primary and secondary schools.Technical training and vocational education.Adult and non-formal education.Libraries.Cultural activities.Markets and fairs.Health and sanitation, including hospitals, primary health centres, and dispensaries.Family welfare.Women and child development.Social welfare, including the welfare of the handicapped and mentally retarded.Welfare of the weaker sections, and in particular, of the Scheduled Castes and the Scheduled Tribes.Public distribution system.Maintenance of community assets.c. List of Services entrusted to the Municipality under Article 243WUrban planning, including town planning.Regulation of land-use and construction of buildings.Planning for economic and social development.Roads and bridges.Water supply for domestic, industrial, and commercial purposes.Public health, sanitation, conservancy, and solid waste management.Fire services.Urban forestry, protection of the environment, and promotion of ecological aspects.Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.Slum improvement and upgradation.Urban poverty alleviation.Provision of urban amenities and facilities such as parks, gardens, and playgrounds.Promotion of cultural, educational, and aesthetic aspects.Burials and burial grounds; cremations, cremation grounds; and electric crematoriums.Cattle pounds; prevention of cruelty to animals.Vital statistics, including registration of births and deaths.Public amenities, including street lighting, parking lots, bus stops, and public conveniences.Regulation of slaughter houses and tanneries.Exemption for Composite Supply of Operation & Maintenance Work Contracti. In case of Divisible ContractFor example, the State Government or Local Authority awards a works contract in respect of a Water Supply Project to the contractor with the scope of work for the construction, supply, installation, and commissioning of Water Treatment Plant on a turnkey basis and also for the operation & maintenance activity of the Water Treatment Plant for five years upon completion of construction of such Plant. A single agreement was entered into for two separate activities with two separate considerations-one for the completion of the water treatment plant on turnkey basis.another for the operation and maintenance activity of the water treatment plant for 5 years.The question would arise as to whether the operation & maintenance activity is a part of the turnkey project or amounts to separate activity under a divisible contract. In case a single contract is entered into with two separate considerations for two separate activities of Works Contract, it would be treated as a divisible contract. In case, two separate contracts are entered into, and each contract contains a \"Cross-fall breach clause\", it would be treated as an indivisible contract though separate contracts are entered into. In an indivisible contract, the whole contract becomes void in case one activity of the contract is not performed. The Cross-fall breach clause means any breach in one contract would automatically be classified as a breach of the other contract. In this regard, it is pertinent to refer to the decision of the West Bengal AAR in the case of IAC Electrical Pvt Ltd., vide order no. 05/WBAAR/2018-19 dt. 28/05/2018 wherein the provisions relating to the Cross-fall breach clause have been dealt with in detail. Hence, the contract for construction, supply, installation etc., of the Water Treatment Plant does not affect the operation & maintenance activity of the said Plant under the Divisible Contract. The scope of the operation & maintenance activity will start and operate only after the completion of the construction activity of the Water Treatment Plant.Accordingly, both the activities are not related to each other and the scope of one activity is different from the scope of another activity. After completion and commissioning of the Water Treatment Plant, the activity of operation & maintenance of the said Plant would start. Hence, the Contract of construction of the Water Treatment Plant activity and the operation & maintenance activity are to be considered as separate contracts. In such a situation, the operation & maintenance activity shall be exempt from GST subject to the fulfilment of the ingredients specified under entry serial no. 3A of the Notification No. 12/2017-Central Tax (Rate) dt. 28.06.2017, as amended.The above view has been further confirmed in the case of Suez India (P.) Ltd., vide Order No. 17/WBAAR/2021-22 dt 31-12-2021 wherein the AAR, West Bengal held that the contract of design, construction, and operation & maintenance of water distribution networks for municipal bodies would be amounting to a composite supply being an indivisible single contract which has two or more supplies of goods or services or both naturally bundled and supplied in conjunction with each other for a single lump sum amount. However, two separate contracts were signed: one for construction of water distribution networks and another for operation & maintenance work, along with a letter of acceptance. The AAR observed that the scope of work as per the contract would include supply, laying, installation and commissioning of distribution network along with operation & maintenance for which a single letter of acceptance has been issued wherein there is no split of contract value. Therefore, it would qualify as a works contract and attract 12% GST.In the above case, GST exemption is not available to the operation & maintenance activity, since there is no split of contract value though two separate contracts were signed under a single Letter of Acceptance. Hence, in order to avail of the exemption, separate consideration must be mentioned for each activity in a divisible contract, and it must not contain a \"Cross-fall breach clause\".ii. Independent Contract for Composite Supply of Operation & Maintenance workThere is no dispute in availing exemption in case of an independent contract with separate consideration for composite supply of operation & maintenance work being awarded and that fulfills the ingredients of entry serial no. 3A of Notification No. 12/2017-Central Tax (Rate) dt. 28-06-2017.Exemption to Sub-ContractorAnother dispute is regarding whether the composite supply allotted by the main contractor to the subcontractor is also exempted from GST. Logically, GST should be exempted when the work is awarded to the sub-contractor by the main contractor since the ultimate customer is the Government/Government Authority. Moreover, in the Service Tax Regime, the works contract service provided by the sub-contractor was exempt when service was provided by the main contractor and was exempt as per Notification No. 25/2012-ST dt. 20-06-2012 as amended. However, as per the language of Entry serial no. 3A of GST Notification No. 12/2017- Central Tax (Rate) dt. 28-06-2017 as amended, the composite supply with a value of supply of goods less than 25% to the Government/Government Authority is exempted, but it does not make any mention of the supplies made by the sub-contractor to the main contractor as shown below-Sl. NoChapter, Section, Heading, Group or Service Code (Tariff)Description of ServicesRate (per cent.)Condition(1)(2)(3)(4)(5)\"3AChapter 99Composite supply of goods and services in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply provided to the Central Government, State Government, Union territory, local authority or (omitted the words Government Authority or Government Entity w.e.f 01-01-2022) by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.NilNilIn this regard, it is pertinent to refer to the decision of the 25th GST Council Meeting, as per which the GST rate of the main contractor and sub-contractor has been brought at par. Thus, against Entry serial no. 3 in Col. 3 for item (ix) & (x) of Notification No.11/2017-Central Tax (Rate) dt. 28-06-2017 as amended vide Notification No. 01/2018-Central Tax (Rate) dt. 25.01. 2018, the sub-contractors are included for claiming a lower rate of tax, provided that their services have been procured by the main contractor in relation to a work entrusted to it by the Government or a Government Authority, as the case may be, as reproduced below-Sl. No.Chapter, Section or HeadingDescription of ServiceRate (per cent.)Condition(1)(2)(3)(4)(5)3Heading 9954 (Construction services)(ix) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (iii) or item (vi) above to the Central Government, State Government, Union territory, a local authority, (omitted the words \"Government Authority\" or \"Government Entity\" w.e.f. 01-01-2022)6 (omitted w.e.f. 18-07-2022)Note: Item/Entry no. (ix) under Serial No. 3 in column no. (3) and (4) omitted w.e.f. 18-07-2022 vide Notification No. 03/2022- Central Tax (Rate) dt. 13-07-2022. (x) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (vii) above to the Central Government, State Government, Union territory, a local authority, (omitted the words Government Authority or Government Entity w.e.f. 01-01-2022)2.5 (6% w.e.f. 18-07-2022 vide Notification No. 3/2022 Central Tax-(Rate) dt. 13-07-2022) Though the CGST Act does not define the word \"sub-contractor,\" Notification No.11/2017- Central Tax (Rate) dt. 28-06-2017 as amended makes a mention of a sub-contractor whose services are procured by a main contractor. Thus, the provisions of the GST Act clearly identify a sub-contractor as a supplier of works contract services to the main contractor. Hence, the \'Nil GST Rate\' as per exemption Notification No. 12/2017-Central Tax (Rate) dt. 28-06-2017, as amended, is also to be applied to the services provided by a sub-contractor to the main contractor in respect of operation & maintenance activities, considering the analogy of the decision of the 25th GST Council Meeting, as per which the GST rate of the main contractor and sub-contractor has been brought at par.However, the Telangana AAR, in the case of Immense Construction Company vide order No. 23/2023 dt 13-11-2023, held that the services provided by the subcontractor to the main contractor are not covered by the GST exemption since there is no mention of sub-contractors making the supply of such services to a contractor under Entry serial no. 3A of Notification No. 12/2017-Central Tax (Rate) dt. 28-06-2017, as amended. The exemption is not a general exemption but is subject to conditions specified therein, namely, that the supply has to be made to the Government or a Local Authority etc.ConclusionAfter considering the above detailed analysis, it may be concluded that the composite supply of operation & maintenance work contracts to the Government is entitled to exemption. Otherwise, it causes injustice to the assessee and the ultimate customer in case the exemption is denied. It is also to be noted that the decisions of judiciary authorities / apex courts are yet to be made available in respect of the above exemption. However, in case of a composite supply by the sub-contractor to the main contractor, the issue is not free from litigation in view of action of the Department\'s action to levy GST on the composite supply of operation & maintenance work awarded to the subcontractor by the main contractor. It is an appropriate time for the Government to come out with a Circular clarifying the position of law to avoid litigation and make the law for easier for business.Author may be reached at rangaswamy_singa@yahoo.co.in and eboard@icai.in
Ep. 263 — Enhancing GST Compliance: Navigating the New Automated Return Scrutiny System
CA Journal
· September 2026
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Enhancing GST Compliance: Navigating the New Automated Return Scrutiny SystemThe Central Board of Indirect Taxes and Customs (CBIC) aims to streamline compliances in the Goods and Services Tax (GST) regime, given the fact that most cases pending in the legal forums are related to data mismatches with a very few arising from the interpretation of law. Due to technological advancements, CBIC has been using advanced artificial intelligence and analytics to monitor mismatches. This is part of the CBIC\'s plans to use more data analytics to improve compliance. Additionally, CBIC has taken a significant leap towards ensuring tax compliance with the introduction of an automated return scrutiny system. This system is designed to meticulously monitor discrepancies in tax liabilities and input tax credits (ITC), mirroring the precision of the Income Tax Department\'s Computer Assisted Scrutiny Selection (CASS). By leveraging artificial intelligence and analytics, CBIC aims to flag inconsistencies and streamline the process of tax collection.The focus of the automated scrutiny system is to reconcile differences between the details reported in GSTR-1 (monthly statement of outward supplies) and GSTR-3B (monthly summary of outward supplies and input tax credit). Additionally, the system compares the ITC available as per GSTR-2B (auto-drafted ITC statement) with the ITC claimed in GSTR-3B. Discrepancies in these forms can trigger automated notices, prompting taxpayers to provide corrections or explanations within a stipulated time frame.In any self-assessment-based regime of taxation, tax returns are the first line of verification and scrutiny for tax authorities. Accordingly, tax liability mismatches between GSTR-1 and GSTR-3B and ITC mismatches between GSTR-2B and GSTR-3B are one of the indicative parameters for identifying GSTINs by the GST authorities for the purpose of scrutiny of returns. Accordingly, two pivotal rules have been instituted to bolster this scrutiny mechanism, i.e., Rule 88C and Rule 88D in the CGST (\"Central Goods and Services Tax\") Rules, 2017 as amended from time to time. Rule 88C addresses the variances in self-assessed tax liabilities between GSTR-1 and GSTR-3B. Let us read on to understand this......Rule 88CSection 75(12) of the CGST Act, 2017 permits the recovery of self-assessed tax without issuance of show cause notice under section 73 or 74 of CGST Act, 2017. Accordingly, CBIC vide Notification No. 26/2022-Central Tax dated 26.12.2022 inserted rule 88C in the CGST Rules, 2017 to prescribe the manner of dealing with difference in self-assessed tax liability declared in GSTR-1 and tax liability paid in GSTR-3B. As per rule 88C, if the tax liability declared in GSTR-1 is more than tax liability paid in GSTR-3B by such amount and such percentage, then Form DRC-01B will be issued to taxpayer to either pay the differential tax or explain the difference within the time limit of 7 days.In view of the above, GSTN developed a functionality in Form DRC-01B to enable the taxpayer to pay the differential tax liability or explain the difference in GSTR-1/IFF & 3B returns electronically on the common portal. The salient features of the functionality are as below:Form DRC-01B is applicable to various types of taxpayers, including regular taxpayers (including SEZ units and SEZ developers), casual taxpayers, and taxpayers who have opted composition scheme.The functionality compares the liability declared in GSTR-1/IFF with the liability paid in GSTR-3B for each return period. If the declared liability exceeds the paid liability by a predefined limit or the percentage difference exceeds the configurable threshold, taxpayer will receive an intimation in the form of DRC-01B.Form DRC-01B is divided into two parts - Part A and Part B. Part A is the system generated intimation from GSTN which details out the difference in liability under each head of GST and Part B is for taxpayer to provide reply against the intimation.Once DRC-01B is issued, the taxpayer will have two options in Form DRC-01B Part B either pay differential tax along with interest under Section 50 of the CGST Act, 2017 through DRC-03 (Part B part 1) and/or provide reason for mismatch in liability reported and paid (Part B part 2).Part B part 2 contains list of 4 pre-set reasons for explanation of difference and there is an option for selecting \'Any other reason\'. Detailed explanation must be provided for the selected option.Pursuant to rule 88C of CGST Rules, 2017, the taxpayer will have 7 days to provide an explanation or pay differential tax, failing which recovery of tax will be initiated against taxpayer under Section 79 of the CGST Act, 2017.DRC-01B will be issued after GSTR-1 and 3B are filed. If a satisfactory explanation has not been provided and if the differential tax has not paid off then taxpayers will not be able to file GSTR-1 for subsequent tax periods as per rule 59(6)(d) of the CGST Rules, 2017.Now, let us look at rule 88D and understand....Rule 88DCBIC vide Notification No. 38/2023-Central Tax dated 04.08.2023 has inserted rule 88D in the CGST Rules, 2017 to prescribe the manner of dealing with difference in ITC available in GSTR-2B and that availed in GSTR-3B. As per section 73 of the CGST Act, 2017 read with rule 88D, if the ITC availed in GSTR-3B is more than ITC available in GSTR-2B by a pre-defined limit or a percentage difference, then Form DRC-01C will be issued to taxpayer to either pay the differential ITC availed or explain the difference within the time limit of 7 days.In view of the above, GSTN has issued an advisory \"Online Compliance Pertaining to ITC mismatch - GST DRC-01C\" dated 14th November 2023 in complete alignment with the objective of the CBIC to allow availment of ITC in accordance with \'matching concept\' i.e., ITC claimed by the recipient of supply is matched with the GST paid by the supplier in relation to that supply.The advisory re-iterates the provision of rule 88D of the CGST Rules, 2017 and prescribes the manner of dealing with difference in ITC available in GSTR-2B and that availed in GSTR-3B. This functionality is live on the portal. The salient features of the functionality are as below:Form DRC-01C is applicable to various types of taxpayers, including regular taxpayers (including SEZ units and SEZ developers), casual taxpayers, and taxpayers who have opted composition scheme.The functionality compares the ITC available in GSTR-2B with the ITC availed in GSTR-3B for each return period. If the availed ITC exceeds the auto-populated ITC by a predefined limit or the percentage difference exceeds the configurable threshold, taxpayer will receive an intimation in Form DRC-01C.Form DRC-01C is divided into two parts - Part A and Part B. Part A is the system generated intimation from GSTN which details out the difference in ITC availed under each head of GST and Part B is for taxpayer to provide reply against the intimation;Once DRC-01C is issued, the taxpayer will have two options in Form DRC-01C Part B either pay differential tax of excess ITC availed along with interest under section 50 of the CGST Act, 2017 through DRC-03 (Part B part 1) and/or provide reason for mismatch in ITC availed (Part B part 2).Part B part 2 contains list of 8 pre-set reasons for explanation of difference and there is an option for selecting \'Any other reason\'. Detailed explanation must be provided for the selected option.Pursuant to rule 88D of CGST Rules, 2017, the taxpayer will have 7 days to provide a satisfactory explanation or pay differential tax, failing which recovery of tax will be initiated against taxpayer under section 73 or section 74 of the CGST Act, 2017.DRC-01C will be issued after GSTR-3B is filed. If a reply is not provided within 7 days, then taxpayers will not be able to file GSTR-1 for subsequent tax periods as per rule 59(6)(e) of the CGST Rules, 2017.Although introduction of these functionalities by GSTN provides a standardised approach for taxpayers to explain the difference in liability between their GSTR-1 and GSTR-3B returns and difference in ITC as per GSTR-2B and GSTR-3B electronically on the common portal rather than correcting the same during the filing of Annual Return, but ever since the introduction of these online functionalities by GSTN, taxpayers have started obtaining notices in Form DRC-01B and DRC-01C to explain the difference in self-assessed tax liability declared in GSTR-1 and tax liability paid in GSTR-3B and difference in ITC availed in GSTR-3B and auto-populated in GSTR-2B respectively. GSTN has also proactively issued to detailed step-by-step instruction manual, FAQs and advisory for understanding these functionalities.Predefined limit and the percentage differenceBased on research on the issue, an interesting piece of information has been observed, i.e., the predefined limit and the percentage difference between tax liability reported in GSTR-1 and tax paid in GSTR-3B finds a place in the agenda (Agenda Item 7(xi), Para 7) for 48th Council Meeting dated 17th December 2022 and has been placed in the meeting for GST council\'s approval. Basis perusal of minutes of the meeting (Point 8.11), it is observed that this limit and provision of rule 88C were discussed and approved by GST council to issue notices where difference in tax liability reported in GSTR-1 and tax paid in GSTR-3B is more than 20% as well as more than Rs. 25 lakhs.Similarly, the predefined limit and the percentage difference between GSTR-2B and GSTR-3B ITC amounts finds a place in the agenda (Agenda Item 3(viii), Para 4) for 50th Council Meeting dated 11th July 2023 and has been placed in the meeting for GST council\'s approval. Basis perusal of minutes of the meeting (Point 4.36), it is observed that the predefined limit and the percentage difference between GSTR-2B and GSTR-3B ITC amounts has been discussed, recommended and approved by GST council to be 20% and Rs. 25 Lakh limit respectively.However, the big question remains that the predefined limit and the percentage difference between GSTR-1 and GSTR-3B liability amounts and GSTR-2B and GSTR-3B ITC amounts limit has not prescribed anywhere under GST Act or Rules and even in the \"Advisory\" and \"Comprehensive manual on Rule 88 C and Rule 88 D\" and a question arises therefore if it is open to challenge by the taxpayers?In this regard, it we have observed that the phrase used in the above mentioned Rules is \"by such amount and such percentage, as may be recommended by the Council\" unlike the words \"as may be notified by the Government, on the recommendations of the Council\" or \"Government may, by notification, on the recommendations of the Council\" used at various other places in the GST law which specifically requires CBIC to issue Notification on recommendation of the Council for various purposes.Therefore, from the reading of the rule, it appears that CBIC may not be required to separately notify the above limits and instead, the same can be internally recommended and communicated by the Council. It may be akin to internal instructions.Conclusion and implicationsThe automated return scrutiny system is likely to lead issuance of more notices and hence returns must be prepared with utmost care and diligence. Also, it is important to regularly check GST dashboard and update the e-mail IDs as the notices will be issued on GST portal.Currently, all the taxpayers have an option to amend the auto-populated outward supplies or inward supplies in GSTR-3B. Additionally, Invoice Management system (\"IMS\") has been introduced to enable taxpayers to take actions for ensuring accurate ITC claims.IMS functions as a mechanism that allows taxpayers to align their invoices with those provided by their suppliers, thereby verifying the correctness of their ITC claims. Initially introduced as an advisory practice, it appears that over time, the Government is inclined to make this procedure compulsory by introducing a feature that locks auto-populated data of ITC in GSTR-3B.The 55th GST council meeting has also recommended to provide legal framework in respect of generation of Form GSTR-2B based on the action taken by the taxpayers on IMS to further streamline the compliance process.GSTN portal has issued an advisory dated 17th October 2024 which states that values auto-populating in GSTR-3B will be hard locked (non-editable) as per auto-populated values from GSTR-1/1A and GSTR-2B. Tentative timeline provided was January 2025 tax period onwards. However, this seems to be a distant reality as GSTN portal vide advisory dated 27th January 2025 deferred the implementation of hard locking of figures citing various requests from the trade seeking time to adapt to this change. Nonetheless, Tax payers need to prepare for the same!!Author may be reached at capsushilkumar@rediffmail.com and eboard@icai.in
Ep. 264 — Disruptions in the adoption of Fintech
CA Journal
· September 2026
00:00
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Disruptions in the adoption of FintechFinTech includes use of software, applications, and other resources so as to help people manage tasks like pay bills, receive loans, buy insurance, online banking, money transfers, and even investing funds using mobile and computer in a convenient manner. FinTech or financial technology is taking over the traditional financial industry since its introduction in the world of technology. Factors like poor financial system and financial crisis in the world provided a space for technology to enter into the finance sector. The sector is now at a point where the discipline of Fintech is about to have a significant impact on the business model and procedures. CAs need to continuously learn and adapt to new fintech and accounting technologies to remain relevant which can be a challenge, especially for older professionals or smaller firms with limited resources. However, these challenges also present opportunities for CAs to adapt, leverage their expertise, and remain competitive in a changing financial landscape.Technology impacts the way of performing almost all the functions in the modern world. It has automated processes, making execution and operations simple. Information can be acquired much faster but relatively at lower cost. New technologies are being tested and integrated into the financial sector at a fast pace. Due to the intervention of technology, financial regulation has become more uniform. With the use of Information Technology applications, a vast range of operations can be carried out efficiently with improved quality.Due to a number of driving factors, such as technological advancement, business innovation expectations (market), cost-saving objectives, and customer demands, the term \"FinTech\" has gained popularity. FinTech innovations and applications are reshaping the financial services industry as well as responsibilities and accountability of financial professionals. Due to these digital innovations, Chartered Accountants who were previously responsible for ensuring true and fair financial reporting, compliance, and governance now have to navigate a more challenging environment in which regulatory framework is becoming more sophisticated. The responsibility lies on the shoulders of Chartered Accountants to help their clients in meeting their legal obligations by bridging the gap between technology solutions and regulatory expectations.There is a wide range of activities in fintech from mobile payments to money transfers, peer-to-peer lending to crowd funding, and block chain to crypto currencies. The most significant and fastest-growing segment in fintech is payment. Access to mobile devices, data networks, and applications has made it possible for fintech businesses to entice traditional banking consumers away from legacy banking platforms, which is a key factor in this rise. Along with payments, the fintech industry comprises other segments based on the various activities performed by fintech companies.The fintech industry is grouped into four key areas i.e. Financing, Asset Management, Payments and other fintechs which are depicted in Figure 1. Secure and transparent transactions can be ensured using decentralized ledger system of blockchain technology. Its applications in fintech include facilitating faster cross-border payments, enhancing fraud prevention, and supporting smart contract automation. By leveraging blockchain, fintech companies can create trust and reduce transaction costs.FinancingFinancing activities include crowdfunding, credit, and factoring. Crowdfunding raises funds through small contributions from many investors, mainly via the internet, benefiting small and medium businesses often underserved by traditional banks. Technology advancements are transforming customer behavior and their view of financial services. FinTech focuses on providing customer-centric financial solutions, redesigning traditional services to be more personalized, transparent, and accessible digitally. It offers alternatives to conventional financial services. For CAs, staying updated with fintech and accounting technologies is essential for continuous learning and adaptation.Asset ManagementAsset management in fintech, known as Robo-Advisory or Digital Wealth Management, uses algorithms to create low-cost, customized investment portfolios based on investor risk tolerance, goals and preferences. This poses challenges for CAs, who must be proficient in fintech tools, data analytics, and AI-based financial management software to advise clients on investment decisions, risk management, and financial health. CAs can help clients select fintech platforms or robo-advisors based on their financial needs and guide them on the risks and benefits of automated asset management.PaymentsPayments is the most dynamic and transforming segment of fintech, offering faster, secure, and convenient options like mobile wallets, digital platforms, cryptocurrencies, and P2P systems, disrupting traditional methods and promoting financial inclusion. There is a need for assistance from Chartered Accountants in helping businesses and customers navigate the financial, technological, and regulatory challenges in this quickly changing fintech payment environment. They ensure financial accuracy, risk management, and compliance, and assist businesses in analyzing costs such as card processing and cross-border fees, recommending strategies to minimize fees and optimize cash flows.Other FintechsBesides financing, asset management, and payments, the fintech sector encompasses a variety of other fintechs such as Insurtech, which provides digital platforms for buying insurance, filing claims, and managing policies; Proptech, which offers platforms for buying, renting, and managing properties digitally; and Regtech, which helps companies comply with financial regulations through automation and analytics. Many more innovations continue to emerge within the fintech landscape. Needless to say, Chartered Accountants (CAs), with their expertise in finance, tax, compliance, and advisory services, can play a pivotal role in the fintech industry.Fintech, thus, offers the financial sector a wide range of options and benefits.Challenges in the Adoption of FintechFintech poses both opportunities and challenges for Chartered Accountants in India. The rapidly evolving nature of fintech have transformed the way financial transactions are processed, reported and regulated. The key challenges in adoption of fintech are as follows:Fintech RegulationsOne of the biggest challenges in the usage of technology for financial services is to design an appropriate policy framework. There are a lot of implications in the use of technology by participants of financial markets. On the one hand, Fintech has the potential to deliver financial services efficiently, offering a wide range of services and promoting financial inclusion. However, on the other hand, there is a set of risks regarding policy formulation which needs proper attention from the policy makers. Challenges such as unregulated third-party providers, insufficient user knowledge, and compromises in integrity by new business entrants in the financial market pose risks and lead to unethical practices. Establishing a single, practical structure that can be applied to all known and emerging technological advancements and transformations in the finance industry is difficult, as the fintech industry is evolving at a faster pace than regulations, creating uncertainties regarding new laws. To address this, CAs should embrace continuous learning to stay updated on financial regulations. Maintaining close communication with regulatory bodies such as RBI, SEBI, and ICAI, providing feedback, and offering suggestions for refining fintech regulations, can be a great help. Through ICAI, they can also advocate for a more dynamic regulatory environment that adapts to rapid technological changes in finance. Additionally, CAs can also help their clients in integrating RegTech tools for data management, fraud detection, and Know Your Customer (KYC) processes. Regular participation in seminars, webinars and conferences can further help them to stay updated.Cyber SecurityCyber security is another major concern that Fintech companies need to address. These companies face various cyber security challenges such as maintaining data security from collection to proper storage mechanisms, ensuring data sharing in a seamless manner, managing digital identities for consumers and business houses, and preventing cross-platform malware infection. Since fintech companies handle highly sensitive financial data, any breach of this information can be hazardous to the stakeholders. According to a report issued by the Maharashtra government, such breaches & cyber-attacks can lead to reputational damage, financial losses, intellectual property theft, and loss of customer confidence. Further, it may expose companies to legal liabilities.The growing desire to digitize and automate market processes for improved efficiency, increased participation, and higher revenue is a widespread trend across all markets. While this trend has the potential to be beneficial, such as streamlined processes, increased speed, and fewer errors, it can also pose risks if not planned and implemented with cybersecurity in mind. Additionally, people may develop a false sense of security and place their trust in the system, which cyber criminals would take advantage of (Mckensey & Company, 2016).As financial services embrace technology and customers increasingly opt for digital payment methods, the risks of online fraud, data breaches, virus attacks, and identity theft are expected to rise. To effectively tackle the growing cybersecurity challenges, CAs can play a crucial role. Considering their skills in governance and auditing, they are well-positioned to counter cyber risks by proposing mitigation strategies. CAs should actively conduct comprehensive cybersecurity audit for financial institutions and fintech companies. Auditing cloud service providers used by fintech companies will be of great help in ensuring they are implementing best practices with regards to encryption, access controls, data storage policies, and regular back-ups.Data ProtectionData protection is a matter of significant concern and has gained substantial attention over time, especially in this digital age. Nowadays, privacy has become a major focus as millions of people have been affected by numerous large-scale data breaches. Therefore, it is crucial that businesses carefully examine their privacy compliance obligations to make sure they remain lawful. Data privacy does not only mean restricting the information shared with an entity but also establishing protocols for everyday online activities. To manage this huge volume of data, an organization has to face lot of challenges, such as cost incurred in creating a framework and protecting stakeholders\' data. Data asset protection is highly demanding due to the exponential expansion of the aforementioned data, which is created and added every single second and necessitates the protection of an ever-growing volume of data. A violation of the same frequently incurs exorbitant costs and revenue losses, as well as the potential loss of goodwill. India has had numerous significant data breaches in recent years. The data of 80,000 Covid-19 patients was exposed in a 2023 database breach at the Delhi State Health Mission, while a staggering 66.9 crore people were impacted by a Cyberabad data theft. 4.5 million customers were affected by the Air India 2021 hack, and 190,000 applicants were harmed by the CAT exam breach. The police examination data leak in 2019, followed by the data breaches at the brokerage firm Upstox and Domino\'s India in 2021, highlighted the critical need for strong data protection laws and cybersecurity protocols to preserve personal information in the digital era.To address data security challenges in fintech, CAs should help clients design risk management policies focused on digital security, legal compliance, and third-party vendor management. They should advise on creating data breach response plans, ensuring timely notification and corrective actions. Regular training on data privacy and phishing prevention for employees and customers is essential. Fintech businesses can also be assisted with background checks on third-party providers to ensure safety standards. By combining proactive measures with privacy preservation, security threats can be mitigated and investor confidence can be restored. Regular risk audits should be a key part of their services.Trust and customer adoptionTrust and customer adoption present significant obstacles for fintech firms due to several factors. Skepticism and resistance to change are common as fintech operates outside traditional finance, leading to hesitancy from customers accustomed to conventional banking. Compared to traditional financial institutions, fintech startups frequently lack a solid reputation, which makes it difficult to win over customers\' trust. Another barrier is that clients don\'t know about what fintech solutions are. Fintech companies that lack physical locations and in-person encounters, find it difficult to develop personal ties with their clients. Risk perception is also a factor as customers may view fintech solutions as riskier due to their novelty.To overcome challenges, fintech companies must prioritize transparency, security, customer education, and strong support. Building trust requires consistent performance, prompt issue resolution, and showcasing reliability. Collaboration with regulators, industry partnerships, and positive customer experiences also help. Chartered Accountants (CAs) can ensure fintech firms adopt transparent, ethical practices and implement internal controls that meet regulatory standards, boosting credibility. They can also assist in customer education initiatives by explaining benefits and security features to reduce hesitancy.Scalability and InfrastructureAs their clientele expands, fintech companies frequently experience rapid growth. In order to accommodate the growing volume of transactions and data processing needs, scalable infrastructure is essential. However, providing scalability is challenging, because doing so requires huge investments in additional servers, storage space, network bandwidth, and software licenses to handle the expanding workload. Scalability and cost-effectiveness are two factors that are difficult to balance. Moreover, for handling consumer privacy with respect to sensitive data and regulatory compliance, it is essential to ensure safe and scalable data storage. Fintech firms face a problem in implementing scalable and secure storage solutions while upholding data availability and integrity. Additionally, fintech businesses leverage cloud computing for its scalability and flexibility. However, managing and optimizing cloud resources effectively remains a significant challenge. Fintech companies must also comply with complex regulatory frameworks concerning areas like security, data protection, and privacy.Investing in scalable infrastructure, utilizing cutting-edge technology, working with technology partners, and placing a strong focus on data security and compliance are all necessary to address these issues. In this regard, the role of a CA could be to ensure that these companies comply with stringent statutes related to data privacy, especially with regards to safe and expandable storage mechanisms for sensitive information. Strategic financial planning and cost-effective investment decisions can be of immense help to these companies.Market CompetitionThe fintech sector has grown quickly, creating a crowded and intensely competitive market. It is difficult to stand out with so many firms contending for market share and customers\' attention, and a distinctive value proposition. In this intensely competitive fintech market, finding new customers and retaining existing ones is a constant challenge. Building partnerships and collaborations with established financial institutions is the need of the hour due to competitive dynamics and potential resistance from existing competitors, which is a tough task to accomplish. Price competition is another crucial factor in the fintech sector. The temptation to provide competitive pricing while preserving profitability is common for fintech companies. It can be difficult to reconcile reasonable pricing, long-term company strategies, and revenue growth, especially when going up against larger, more established rivals.Fintech companies must create holistic strategies that prioritize innovation, differentiation, client acquisition, and partnerships in order to overcome these obstacles. Prioritizing regulatory compliance, making investments in marketing and customer relationship management, and adjusting to changing consumer demands are all necessary. Agile, innovative, customer-centric, and strategic decision-making are essential for success in the cut throat financial industry. CAs can help fintech firms by conducting detailed financial analysis, ensuring financial regulation compliance and optimizing pricing strategies. They can also advise the firms on efficient investment of their funds in areas such as marketing, innovation and retention of clients.Financial InclusionFintech depends on digital technology and internet connectivity, yet some areas or disadvantaged groups do not have access to these resources. As a result, initiatives to promote financial inclusion are hampered in their adoption and use of fintech services. Fintech may also face difficulties due to less educated communities, social attitudes, cultural conventions, and traditional financial practices. Companies in the fintech industry must be aware and respectful of the cultural background of the communities they serve. Collaboration between fintech companies, policymakers, regulators, and stakeholders is necessary to address these issues. User-friendly interfaces, financial education, encouraging policies, infrastructure development, and trust-building through open practices are all a part of it. Fintech firms can help increase financial access and foster financial inclusion by proactively addressing these issues. CAs can offer solutions for controlling the risks associated with expanding inclusive services, providing insurance against fines and additional expenses, and supporting expansion plans that help prevent or minimize income dilution in order to negotiate these and related unfavourable conditions. This is accomplished by supporting the development of sound financial strategies and empowering businesses to create models that prioritize cost-effective expansion while embracing financial inclusion.ConclusionIn conclusion, the fintech industry is rapidly disrupting traditional financial services, offering more effective, accessible, and customer-focused solutions. This change is not without its share of difficulties, though. Challenges, such as regulatory compliance, cybersecurity, data privacy, customer trust, scalability, and financial inclusion must be addressed. Collaboration between fintech firms, regulators, and stakeholders is crucial for balancing innovation with consumer protection.If the sector stays dedicated to openness, consumer protection, and responsible innovation, it has the ability to democratize finance, improve accessibility, and foster economic empowerment. It is essential for finance professionals, particularly Chartered Accountants, to embrace new fintech trends through continuous learning. Chartered Accountants (CAs) have a major role in supporting fintech companies by embracing new trends, implementing strong risk management practices, ensuring compliance, and guiding scalability. They also help foster partnerships, advise on pricing strategies, and promote financial literacy to build customer trust and long-term business success.References:ET Insights. (n.d.). Top 7 Data Breach Incidents in India. Retrieved from https://etedge-insights.com/?s=Top+7+Data+Breach+Incidents+in+IndiaGovernment of Maharashtra. (2023). Report on Cyber Security Challenges in Fintech.Institute of Chartered Accountants of India (ICAI). (n.d.). Fintech Compliance and Certification Programs.SEBI and RBI Guidelines on Fintech Regulation. (n.d.). Policy Frameworks for Financial Technology Innovations.Drummer Daniel (2016). Mckinsey & Company. Retrieved from https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/FinTech%20Challenges%20and%20Opportunities/FinTech Challenges%20and%20Opportunities.ashxAuthors may be reached at nancy.gulati@yahoo.co.in, neelam1988ece@gmail.com, ca.jainmukta@gmail.com and eboard@icai.in
Ep. 265 — Forensic Audit: A Tool for Fraud Detection and Prevention in the Banking Sector
CA Journal
· September 2026
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Forensic Audit: A Tool for Fraud Detection and Prevention in the Banking SectorIndian banks face challenges due to an increasing number of frauds and the associated amounts in various banking operations. Addressing these issues is vital for strengthening customers\' trust and loyalty in the banking system, which is essential for ensuring financial stability. In essence, forensic audit in the banking sector serves as a crucial mechanism for maintaining the integrity and stability of financial institutions, thereby reinforcing confidence in the system. By identifying and addressing fraudulent activities, these audits foster a secure and transparent banking environment that is essential for the well-being of the broader economy. Against this backdrop, this article puts an effort to highlight the significance and role of forensic audit as a potent tool for addressing the growing fraud menace in the banking sector.By Dr. Dileep Kumar S. D., AcademicianIntroductionThe Indian banking sector has witnessed a notable rise in the value and number of fraud cases in various banking operations, based on the date of reporting and occurrence. This trend underscores the complex interplay of numerous factors—both controllable and uncontrollable, internal and external, as well as micro and macro-economic or non-economic influences. While these incidents pose significant threats to banks, such as reputational, operational, and business risks, they also highlight opportunities for the sector to strengthen its systems, trust and enhance the loyalty of customers. However, the fact that the number of frauds in various banking operations reported in the Indian banking sector increased from Rs. 795 Cr in 2004-05 to Rs. 13,930 Cr in 2023-24 accounting for an increase of Rs. 13,135 Cr, representing a 16.52 times fold growth with a compound annual growth rate (CAGR) of 15.34%. During this period, on the other hand, the number of reported frauds increased from 2,435 to 36,075, accounting for an increase of 33,640 cases, marking an overall growth rate of 13.81 times and a CAGR of 14.43%.From the above, it is clear that the increase in frauds amount involved in various banking operations is higher than that in the number of frauds. Furthermore, the amount of fraud reached the highest levels of Rs. 1,66,576 Cr in 2019-20 and 1,18,417 Cr in 2020-21, which are also the highest in the 20-year period. Of course, during the last two years 2022-23 and 2023-24, the amount involved in frauds declined continuously and reduced to Rs. 13,930 Cr, which is appreciable. However, the number of frauds registered a continuous increase during this 20-year period. These aspects become clear from the Figure - 1.It may be noted that the alarming number of frauds and amounts involved in various banking operations require special attention and preventive measures. Hence, forensic audit plays a pivotal role in identifying and preventing fraud in our banking sector.Reasons/Factors Responsible for Increasing Frauds in BanksAs already mentioned, several factors contribute to the increasing incidence of fraud in banks. The factors are diverse, differing from one bank to another, from one person to another, from one purpose of operations to another, etc. Understanding these reasons is crucial for developing effective preventive measures and enhancing the overall security of the financial system. The rise of digital technologies and online banking has introduced vulnerabilities, making banks more susceptible to cybercrimes like phishing, malware, and ransomware attacks. Complex financial products and global transactions increase fraud risk by creating loopholes that are difficult to monitor. Inadequate internal controls, employee collusion, and insufficient training can further expose banks to fraud. Frequent staff turnover and poor security continuity exacerbate these risks. Additionally, regulatory non-compliance, lenient oversight, and economic downturns can foster fraudulent activities. Aggressive sales targets, customer data breaches, and cross-border transactions complicate fraud prevention. The situation of crisis also disrupts security protocols, creating opportunities for exploitation.A major banking fraud in India, among the largest in history, involved fraudulent transactions worth billions of rupees. The scam was orchestrated by individuals in collusion with certain bank employees who misused financial instruments like Letters of Undertaking (LoUs). These LoUs, guarantees issued by a bank to facilitate foreign exchange, were fraudulently issued without proper collateral or reporting in the bank\'s core systems. This enabled the perpetrators to access significant funds from overseas banks, which were not repaid. The fraud came to light during a routine transaction when discrepancies were identified between the bank and another financial institution seeking payment against one such LoU. An internal investigation followed, and a forensic audit was conducted to unravel the scheme. The audit revealed that the fraudulent activities spanned several years, bypassing internal systems and evading detection during regular audits. The forensic team traced the flow of funds, identified the key conspirators, and quantified the financial losses. Subsequent investigations by law enforcement agencies led to arrests of implicated bank officials and legal actions against the primary offenders. The case prompted regulatory changes, including stricter controls on the issuance of LoUs and enhanced internal risk management practices. It highlighted systemic weaknesses in internal controls and called attention to the critical role of forensic audit in uncovering fraud, ensuring accountability, and strengthening the integrity of financial institutions.Methods and Techniques of Forensic AuditForensic audits are a specialized field of auditing that requires the application of various methodologies and techniques to detect, investigate, and document financial fraud and misconduct. Some of the key methodologies and techniques used in forensic audits are presented in the figure given below, along with a brief analysis of each:Forensic Accounting: Forensic accounting involves the examination of financial records, statements, and transactions to identify discrepancies, irregularities, or fraudulent activities. Forensic accountants may uncover embezzlement schemes by identifying unauthorized transactions, falsified records, or hidden accounts. They may reveal how a company inflated its earnings by manipulating revenue recognition or expense reporting.Data Analytics: Data analytics can identify procurement fraud by analyzing purchase orders, invoices, and payment records for unusual trends, such as consistently awarding contracts to the same vendor or split payments to avoid approval thresholds. Banks use data analytics to detect money laundering by analyzing customer transaction patterns and flagging those that fit the profile of illegal activities.Digital Forensics: Digital forensics is crucial in cases of hacking, phishing, or ransomware, where auditors need to trace the source of the breach and determine the extent of data theft or financial loss. Forensic experts may recover files or communications showing unauthorized sharing of proprietary information, aiding in legal actions.Interviewing and Interrogation: Interviews with employees may reveal inconsistencies in accounts or point to individuals who had the motive and opportunity to commit fraud. Forensic auditors might use interrogation techniques to break down stories that suggest collusion between employees or between the company and external vendors.Document Examination: Document examination can uncover fake invoices used in billing schemes, where the fraudster submits false invoices for payment. In cases where legal documents are altered to benefit one party, forensic auditors can provide evidence of the forgery.Background Checks and Due Diligence: Before engaging with a vendor, due diligence can prevent fraud by identifying companies with a history of fraud or legal issues. Background checks on company executives can reveal past involvements in fraud, helping to prevent Ponzi schemes or other investment scams.Benefits and Impact of Forensic Audit in the Banking SectorForensic audit offers a wide range of specific benefits that go beyond the scope of traditional financial audits. By focusing on the detection, investigation, and prevention of fraud, forensic audits play a critical role in safeguarding the financial integrity of organizations. Below are the key benefits of forensic audits:-Proactive Identification of Risks: Forensic audit helps in the early identification of potential fraud risks by analyzing financial transactions, accounting records, and employee behavior for unusual patterns or discrepancies. Techniques like data analytics and forensic accounting can highlight anomalies that may indicate fraudulent activities before they escalate into significant issues.Real-Time Monitoring: In some cases, forensic audit involves continuous monitoring of transactions and processes, allowing for the detection of fraud as it occurs. This is particularly beneficial in industries with high transaction volumes, such as banking and retail.Reduction in Fraud Losses: Early detection is crucial in minimizing financial losses. By identifying fraud at an early stage, forensic audit can prevent further damage, enabling organizations to take swift corrective action.Tracing and Reclaiming Stolen Assets: Forensic audits are instrumental in tracing the flow of funds and identifying assets that have been misappropriated or hidden. Through techniques like digital forensics and document examination, forensic auditors can track the movement of funds across accounts, jurisdictions, and even different financial institutions.Legal Support for Asset Recovery: The evidence gathered during a forensic audit is often critical in legal proceedings aimed at recovering stolen assets. Forensic auditors provide detailed reports and expert testimony that can support claims in court, increasing the likelihood of successful asset recovery.International Cooperation: In some cases involving cross-border fraud, forensic audits facilitate cooperation between different legal and financial systems. Forensic auditors may work with international law enforcement agencies to locate and recover assets that have been transferred to foreign jurisdictions.Identification of Control Weaknesses: Forensic audits often reveal gaps or weaknesses in an organization\'s internal controls that allow fraud to occur. By understanding how fraud was perpetrated, organizations can take steps to strengthen these controls, reducing the likelihood of future incidents.Implementation of Robust Anti-Fraud Measures: Following a forensic audit, organizations can implement more effective anti-fraud measures, such as segregation of duties, tighter access controls, and enhanced oversight of financial processes. These measures create a more secure environment and act as a deterrent to potential fraudsters.Enhanced Monitoring and Reporting: Forensic audits often lead to the development of more rigorous monitoring and reporting mechanisms. For example, automated systems can be implemented to flag suspicious transactions and regular forensic reviews can be scheduled as part of the organization\'s ongoing risk management strategy.Preparation for Litigation: Forensic audits provide organizations with the evidence needed to pursue legal action against fraudsters. The detailed documentation and expert analysis offered by forensic auditors strengthens the organization\'s case, whether in civil litigation or criminal prosecution.Regulatory Adherence: Many industries are subject to stringent regulatory requirements regarding financial reporting and fraud prevention. Forensic audits ensure that organizations comply with these regulations by identifying and rectifying any non-compliance issues before they lead to penalties or legal action.Reputation Management: By proactively addressing fraud and demonstrating a commitment to ethical practices, organizations can protect and enhance their reputation. Forensic audits show stakeholders that the organization takes fraud seriously and is taking steps to maintain transparency and accountability.Psychological Impact on Employees: Knowing that forensic audits are regularly conducted can serve as a strong deterrent for employees who might otherwise consider engaging in fraudulent activities. The presence of a robust forensic audit framework signals to employees that fraud will be detected and punished.Creation of a Fraud-Aware Culture: Forensic audits contribute to the development of a fraud-aware culture within the organization. Employees are more likely to adhere to ethical standards and report suspicious activities when they understand the consequences of fraud and the likelihood of detection.Benchmarking Best Practices: Forensic audits provide insights into industry best practices for fraud prevention and detection. Organizations can benchmark their own controls and processes against these practices, continuously improving their fraud prevention strategies.Validation of Financial Statements: Forensic audits validate the accuracy and integrity of financial statements by identifying and correcting fraudulent entries or misrepresentations. This ensures that financial reports provide a true and fair view of the organization\'s financial position.Enhanced Credibility with Stakeholders: Accurate financial reporting enhances the credibility of the organization with stakeholders, including investors, regulators, and creditors. This can lead to increased trust, better access to capital, and more favorable terms in financial transactions.Conducting Forensic Audits - A Few Challenges and Solutions/Best PracticesA Few ChallengesBanks deal with a vast number of transactions daily, often involving multiple currencies, jurisdictions, and financial instruments. This complexity can make it difficult to trace fraudulent activities, especially when sophisticated methods are used to conceal them.Forensic audits often require access to sensitive customer data and confidential bank records. Ensuring the security and privacy of this data while conducting the audit is a significant concern, especially with strict data protection regulations like GDPR.Resistance from bank employees, especially if they are implicated in fraudulent activities, can hinder the forensic audit process. Employees may withhold information, tamper with records, or otherwise obstruct the investigation.Banks often operate across multiple jurisdictions, each with its own legal framework. Conducting a forensic audit that spans different countries can be complicated by varying laws, regulations, and standards of evidence.With the rise of digital banking and cryptocurrencies, tracing transactions has become more challenging. Fraudsters can exploit these technologies to move funds quickly and obscure the audit trail.There is often a lack of standardization in forensic audit practices across the banking sector, which can lead to inconsistencies in how audits are conducted and the results they produce.Forensic audits can be time-consuming and resource-intensive, especially in large banks with extensive operations. The pressure to complete audits quickly can sometimes lead to incomplete investigations.Gathering sufficient and admissible evidence during a forensic audit can be challenging, especially when dealing with complex fraud schemes or uncooperative individuals.Solutions/Best PracticesImplement advanced data analytics tools capable of handling large datasets and identifying patterns across complex transactions. Techniques like machine learning and artificial intelligence can be used to detect anomalies that might indicate fraud.Ensure that forensic auditors are well-trained in the specific financial instruments and products used in the banking sector. This expertise will enable them to better understand and analyze complex transactions.Implement strict data handling protocols that ensure data encryption, access controls, and secure storage. Only authorized personnel should have access to sensitive data, and all activities should be logged and monitored.Secure support from top management to reinforce the importance of the forensic audit and ensure cooperation from all levels of the organization. Clear communication about the objectives and benefits of the audit can help mitigate resistance.Work closely with legal and regulatory experts in each jurisdiction to navigate different legal requirements. Establish collaborations with international law enforcement and regulatory bodies to facilitate information sharing and cooperation.Develop a unified legal strategy that considers the different jurisdictions involved. This might include engaging local legal counsel to ensure that the audit adheres to local laws and can be used effectively in legal proceedings.Invest in digital forensics expertise within the audit team. These specialists can track digital transactions, recover deleted data, and analyze blockchain transactions to trace the movement of funds.Implement real-time monitoring tools that can track digital transactions as they occur. This can help auditors identify suspicious activities more quickly and take action before funds are moved out of reach.Encourage the adoption of industry standards and best practices for forensic audits in the banking sector. Frameworks such as ISO 37001 (Anti-Bribery Management Systems) can provide guidance on standardizing forensic audit processes.Ensure that forensic auditors undergo continuous training to stay updated with the latest standards, technologies, and methodologies in the field.ConclusionThe surge in banking fraud in India calls attention to the urgent need for stronger fraud prevention measures. Forensic audits play a crucial role in identifying, investigating, and preventing financial crimes, thereby protecting the integrity of the banking system. The recent bank scam illustrates the importance of robust internal controls and forensic audits in detecting and addressing fraud. To mitigate these risks, banks must prioritize implementing advanced data analytics, improve regulatory compliance, and foster a culture of fraud awareness. Strengthening oversight and incorporating forensic audits can enhance operational resilience, restore customer trust, and maintain financial stability in the sector.References:https://www.gjimt.ac.in/wp-content/uploads/2017/10/3_Monika-Aggarwal-and-Gurpartap-Singh_Training-in-Forensic-Audit-in-the-Banking-Sector.pdfhttps://www.rbi.org.in/https://www.taxmann.com/post/blog/importance-of-forensic-audit-in-todays-eraPaymaster, B. (2021). Forensic Audit: A Tool for Fraud Detection and Prevention in Nigerian Banks.Reserve Bank of India, Report on Trend and Progress of Banking in India, 2022-23, Mumbai.https://www.business-standard.com/industry/banking/bank-frauds-rise-166-in-fy24-to-over-36-000-cases-shows-rbi-annual-report-124053001237_1.htmlAuthor may be reached at dileepsd87@gmail.com eboard@icai.in
Ep. 266 — Navigating the Neobank and Fintech Landscape: A Deep Dive into Digital Disruption in Finance
CA Journal
· September 2026
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Navigating the Neobank and Fintech Landscape: A Deep Dive into Digital Disruption in FinanceIn the fast-evolving landscape of financial services, two terms have gained significant prominence in recent years: Neobanks and Fintech. These entities are at the forefront of digital disruption, reshaping the traditional contours of banking and finance. This comprehensive article delves into the world of Neobanks and Fintech, exploring their origins, key features, impact on the financial industry, and the future they herald.Understanding NeobanksNeobanks, or digital banks, are financial institutions that operate exclusively online without brick-and-mortar branches. They leverage technology to provide a range of banking services in a cost-effective and user-friendly manner. From the perspective of a Chartered Accountant (CA), the landscape of Neobanks and Fintech holds profound implications for financial professionals. This section explores how CAs navigate this evolving terrain, offering insights into the opportunities, challenges, and the role of technology in reshaping the accounting and financial advisory domain.Evolution of NeobanksTrace the historical context and emergence of Neobanks, from their inception to their exponential growth in the digital era. The global banking sector is undergoing a profound transformation, driven by technological advancements, changing consumer behaviors, and the rise of digital innovation. This article explores the key trends, challenges, and opportunities shaping the future of global banking, with a keen focus on the impact of digitization and technological disruption.Key Features and Services:Digital-First Approach: Neobanks prioritize digital channels, offering a user-friendly experience through mobile applications and online platforms. This approach eliminates the need for customers to visit physical branches, making banking more convenient and accessible.Innovative Services: Beyond traditional banking services, neobanks often introduce innovative features. These may include real-time transaction notifications, automated budgeting tools, and personalized financial insights, enhancing the overall customer experience.Agile and Scalable: Neobanks leverage agile technology infrastructure, allowing them to adapt quickly to market trends and scale operations efficiently. This agility enables them to respond promptly to customer needs and preferences.Lower Fees and Transparent Pricing: Many neobanks operate with lower overhead costs compared to traditional banks, allowing them to offer competitive or even fee-free services. Transparent fee structures contribute to customer trust and satisfaction.Global Accessibility: Neo banks often provide services that facilitate international transactions at lower costs than traditional banks. This global accessibility appeals to users who frequently engage in cross-border activities.Fintech UnveiledFintech, short for financial technology, has emerged as a dynamic force reshaping the landscape of the financial industry. This article delves into the core concepts of fintech, exploring its origins, key components, and the transformative impact it has had on traditional financial services. Fintech refers to the innovative use of technology to deliver financial services in more efficient, accessible, and customer-centric ways. This encompasses a wide range of applications, including mobile banking, digital payments, blockchain technology, robo-advisors, and more. The goal of fintech is to leverage technological advancements to enhance financial processes and services, ultimately providing users with a seamless and user-friendly experience. Key Components of Fintech are listed below.Digital Payments: Fintech has revolutionized the way people make transactions. From mobile wallets to contactless payments, digital payment solutions offer speed, convenience, and security.Blockchain and Cryptocurrencies: The advent of blockchain technology has given rise to cryptocurrencies like Bitcoin and Ethereum. Fintech companies leverage these decentralized systems for secure, transparent, and efficient financial transactions.Robo-Advisors: Fintech has automated investment advisory services through robo-advisors. These digital platforms use algorithms to provide personalized investment advice, making wealth management more accessible to a broader audience.Peer-to-Peer Lending: Fintech platforms facilitate peer-to-peer lending, connecting borrowers with individual lenders. This disintermediation of traditional banking allows for quicker loan approval processes and potentially lower interest rates.Insurtech: The intersection of technology and insurance, known as insurtech, has resulted in streamlined processes, improved risk assessment, and personalized insurance solutions.The Intersection of Neo Banks and FintechThe convergence of neobanks and fintech represents a powerful synergy, reshaping the financial landscape and challenging traditional banking norms. This article explores the intricate relationship between these two innovative forces, examining how they collaborate to offer cutting-edge financial services and redefine the customer experience. As neobanks and fintech collaborate, traditional banking institutions face increased pressure to adapt. The competitive landscape shifts, prompting traditional banks to enhance their digital offerings, reduce fees, and improve overall customer experiences to stay relevant. While the collaboration between neo banks and fintech presents numerous benefits, challenges such as regulatory compliance, cybersecurity, and establishing customer trust remain critical considerations. Striking the right balance between innovation and security is crucial for sustained success.The intersection of neobanks and fintech marks a pivotal moment in the evolution of the financial industry. Together, they create a dynamic ecosystem that challenges traditional banking norms, fosters innovation, and ultimately provides consumers with more choices and enhanced financial experiences. As this collaboration continues to mature, it is likely to shape the future of banking, with an emphasis on agility, innovation, and customer-centric solutions.Impact on Traditional BankingThe advent of neobanks and fintech has ushered in a digital revolution, profoundly impacting traditional banking institutions. This article explores the multifaceted effects of these technological advancements on the established banking sector, from increased competition to the transformation of customer expectations and the imperative for adaptability. Neobanks and fintech startups have intensified competition within the financial industry. Traditional banks face challenges in retaining customers as tech-savvy users increasingly opt for digital alternatives. To stay relevant, traditional banks are compelled to undergo digital transformations, adopting modern technologies to enhance their services. Legacy systems are being upgraded or replaced to meet the speed and agility offered by neobanks and fintech. Some traditional banks are choosing to collaborate with fintech companies, adopting elements of the digital banking model. Hybrid banking models, combining the strengths of traditional and digital banking, are emerging to cater to a diverse customer base.The competitive landscape has incentivized traditional banks to prioritize innovation in product offerings and customer engagement strategies. Partnerships with fintech firms allow traditional banks to tap into external expertise and keep pace with industry innovations. The integration of fintech solutions requires careful navigation of regulatory frameworks. Traditional banks must adapt to evolving regulations, ensuring compliance while embracing innovative technologies. The customer-centric approach of neobanks and fintech has influenced traditional banks to prioritize customer experience, fostering deeper connections and loyalty. The impact of neobanks and fintech on traditional banking is profound, requiring established institutions to embrace digital transformation, rethink business models, and adopt a customer-centric mindset. As the financial industry continues to evolve, collaboration and innovation will be key to navigating the challenges and seizing the opportunities presented by this dynamic digital landscape.Fintech Innovations: Transforming Accounting PracticesIn the digital era, financial technology (fintech) innovations are reshaping traditional accounting practices, offering efficiency, accuracy, and enhanced insights. This article explores how fintech is transforming the field of accounting, from automating mundane tasks to introducing advanced analytics and blockchain solutions. Fintech tools automate routine accounting tasks such as data entry, reconciliation, and invoicing. Automation reduces the risk of human error, streamlining processes and allowing accounting professionals to focus on more strategic activities. Cloud-based accounting solutions provide real-time collaboration and access to financial data from anywhere. These platforms offer scalability, ensuring that accounting systems can adapt to the evolving needs of businesses. Fintech incorporates Artificial Intelligence (AI) and Machine Learning (ML) for advanced financial analysis. Predictive analytics help in forecasting, trend analysis, and identifying potential financial risks, providing valuable insights for decision-making. The integration of cryptocurrencies allows businesses to accept digital currencies as a form of payment. Fintech enables the accounting of cryptocurrency transactions and ensures compliance with evolving regulatory standards.Robotic Process Automation (RPA) automates repetitive tasks, improving efficiency in areas like data extraction, report generation, and compliance checks. Fintech-driven RPA enhances accuracy and reduces the time required for financial processes. Regulatory technology (Regtech) solutions help businesses stay compliant with evolving financial regulations. Fintech-driven Regtech automates compliance processes, reducing the risk of non-compliance and associated penalties. Fintech innovations are ushering in a new era for accounting practices, offering unprecedented efficiency, accuracy, and strategic insights. As businesses increasingly adopt these technologies, the accounting profession is evolving to embrace a more dynamic, data-driven, and digitally connected future. The ongoing collaboration between fintech and accounting promises to shape a landscape where financial professionals can focus on strategic decision-making, leveraging advanced technologies to navigate the complexities of the modern financial world.Regulatory Compliance in a Digital AgeAs the financial landscape undergoes rapid digitization, regulatory compliance becomes both a cornerstone and a challenge for businesses operating in the digital age. This article explores the evolving role of fintech in addressing regulatory compliance requirements, highlighting both the solutions it offers and the challenges it poses.Fintech solutions employ automation to monitor and ensure adherence to complex regulatory frameworks. Automated compliance checks and alerts help businesses stay up-to-date with changing regulations, reducing the risk of non-compliance. Fintech emphasizes secure data management practices, including encryption and secure cloud storage. Secure handling of sensitive information ensures compliance with data protection regulations and builds trust with regulators. Fintech enables real-time reporting, allowing businesses to generate accurate and up-to-date compliance reports. Timely reporting enhances regulatory transparency and responsiveness. The fast-paced evolution of fintech poses challenges in keeping compliance processes aligned with new technologies. Regulatory bodies face the task of understanding and adapting to emerging fintech innovations. The collection and processing of vast amounts of data by fintech solutions raise concerns about data privacy and compliance with privacy regulations. Striking a balance between innovation and privacy protection is a critical challenge. In the digital age, fintech serves as a powerful ally in navigating regulatory compliance, offering solutions that automate, streamline, and enhance adherence to complex financial regulations. While challenges exist, the ongoing collaboration between fintech innovators and regulatory bodies is crucial for establishing a regulatory framework that fosters innovation while maintaining the integrity and security of the financial ecosystem. As technology continues to advance, finding the right balance between innovation and regulatory compliance remains a dynamic and evolving process.Client Engagement and Advisory ServicesThe digital era has ushered in a paradigm shift in client engagement and advisory services within the financial industry. This article explores the transformative impact of fintech on how financial professionals interact with clients, deliver advisory services, and build lasting relationships in a rapidly evolving landscape. Fintech has given rise to digital advisory platforms that offer automated, algorithm-driven investment advice. These platforms provide clients with personalized investment strategies, real-time market insights, and portfolio management services. Robo-advisors, powered by fintech algorithms, enable efficient and cost-effective portfolio management. Clients benefit from automated investment decisions based on their financial goals, risk tolerance, and market conditions. Mobile fintech applications empower clients to engage with their financial advisors anytime, anywhere. Instant access to account information, financial insights, and communication channels strengthens the advisor-client relationship.Fintech solutions automate communication through personalized alerts and notifications. Advisors can keep clients informed about market developments, portfolio performance, and relevant financial news. Fintech explores VR and AR applications for immersive client experiences. Virtual meetings, interactive financial simulations, and augmented data visualization enhance the overall advisory experience. Fintech\'s integration into client engagement and advisory services has redefined how financial professionals deliver value to their clients. The combination of automation, real-time data access, and innovative technologies fosters a more personalized, efficient, and secure advisory experience. As the financial industry continues to evolve, the ongoing collaboration between fintech and advisory services holds the promise of further advancements, providing clients with even more sophisticated and tailored financial guidance.Challenges and Ethical ConsiderationsWhile fintech has brought about significant advancements in client engagement and advisory services, it is not without its challenges and ethical considerations. This article explores the potential pitfalls and ethical dilemmas that arise as financial professionals leverage fintech to enhance their services in the digital era. Fintech relies heavily on data to provide personalized services, raising concerns about the privacy of sensitive financial information. Striking a balance between personalization and respecting client privacy is a critical ethical consideration. Fintech applications are susceptible to cyber threats, including data breaches and identity theft. Maintaining robust cybersecurity measures is crucial to protect client information and maintain trust in digital advisory services.The increasing reliance on automation and digital interfaces may lead to a lack of human connection in client-advisor relationships. Balancing technological efficiency with maintaining a personalized and empathetic client experience is a challenge. Fintech operates in a complex regulatory environment with varying standards across jurisdictions. Ensuring compliance with evolving regulations while adopting innovative technologies poses a continuous challenge. Clients may lack the financial literacy needed to fully understand complex fintech-driven investment strategies. Ethical considerations include providing accessible educational resources and ensuring clients comprehend the risks involved. As fintech continues to reshape client engagement and advisory services, addressing challenges and ethical considerations is paramount. Striking a balance between innovation and ethical practices ensures that financial professionals can harness the benefits of fintech while maintaining the trust, transparency, and integrity required in the evolving landscape of digital financial services. Ethical decision-making and a commitment to responsible fintech adoption are essential for the long-term success and sustainability of client-centric advisory services.Future Trends and ProspectsThe dynamic intersection of fintech and client advisory services continues to evolve, presenting exciting opportunities and challenges. This article explores the future trends and prospects that are likely to shape the landscape of client engagement and advisory services within the rapidly advancing fintech ecosystem. AI and machine learning algorithms will become more sophisticated, enabling even greater personalization in financial advice and services. Predictive analytics will empower advisors to offer tailored recommendations based on individual client behaviors and preferences. Fintech-driven advisory services will increasingly incorporate Environmental, Social, and Governance (ESG) criteria. Sustainable investing options and tools will emerge to meet the growing demand for socially responsible financial strategies. The importance of cybersecurity will continue to grow, prompting the development of more advanced security measures. Fintech companies will prioritize protecting client data and financial information through innovative cybersecurity technologies.Focus on Financial Wellness and EducationFintech-driven advisory services will place a heightened emphasis on promoting financial wellness and education. Tools and resources aimed at enhancing client financial literacy and well-being will become integral to advisory offerings. The future of fintech-driven client engagement and advisory services holds immense promise, driven by advancements in technology, changing consumer preferences, and regulatory adaptations. As the industry continues to evolve, financial professionals and fintech innovators alike must remain agile, ethical, and adaptive to leverage these trends and prospects for the benefit of clients and the broader financial ecosystem. Embracing these developments will contribute to a more resilient, inclusive, and sophisticated landscape for client advisory services in the years to come.ConclusionIn conclusion, the confluence of fintech and client engagement within advisory services is ushering in a transformative era for the financial industry. The evolution is characterized by innovation, efficiency, and an unwavering commitment to meeting the diverse needs of clients in the digital age. Fintech innovations, ranging from robo-advisors and blockchain technology to artificial intelligence and augmented reality, are reshaping how financial professionals interact with clients. Automation has streamlined processes, providing real-time insights and personalized recommendations, while blockchain ensures transparent and secure transactions. The integration of advanced technologies, coupled with a focus on financial wellness, has created a dynamic landscape that promises to revolutionize the traditional advisory model. However, this transformation is not without its challenges and ethical considerations. Data privacy concerns, algorithmic bias, and the need for robust cybersecurity measures underscore the importance of responsible and ethical fintech adoption. Striking the right balance between technological efficiency and maintaining a human touch in client relationships is crucial for long-term success.Looking ahead, future trends suggest a trajectory towards even greater personalization, the integration of decentralized finance, and the incorporation of quantum computing. The industry is poised to address environmental and social responsibility through sustainable investing, while continuous regulatory evolution ensures compliance in an ever-changing landscape. In essence, the future of fintech-driven client engagement and advisory services holds tremendous promise for creating a financial ecosystem that empowers individuals, fosters financial well-being, and adapts to the ever-evolving needs of clients in the digital era.Author may be reached at cavishalgupta22@gmail.com and eboard@icai.in
Ep. 267 — Unlocking the Value through Demerger and Hive-offs
CA Journal
· September 2026
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Unlocking the Value through Demerger and Hive-offsIn the dynamic business environment, companies continually seek ways to unlock hidden value and enhance operational efficiency. Demergers and hive-offs have emerged as powerful corporate restructuring strategies to achieve these goals. A demerger involves dividing a company into distinct entities, each with its own focus, while a hive-off transfers a specific business unit into a new, independent entity. These approaches can improve market perception, streamline operations, and increase shareholder value by creating more agile and specialized companies. However, successful execution requires meticulous planning, including strategic planning, due diligence, regulatory approvals, and effective communication. Challenges include navigating legal complexities, managing financial implications, and maintaining stakeholder trust. By leveraging these strategies, companies can isolate high-performing units, drive growth, and better align with market opportunities. This article explores the intricacies, benefits, and challenges of demergers and hive-offs, providing valuable insights for corporate executives and investors aiming to enhance corporate success.By Suman Goel, Author is expert in Corporate Advisory and FundingIntroductionIn today\'s fast-paced and dynamic business environment, strategic processes involving demerger and hive-off enable companies to stay ahead in the competitive world. A demerger involves the division of a company into two or more separate entities, each with its own distinct identity and operational focus. This process not only helps in refining business strategies but also allows for a clearer valuation and improved market perception. On the other hand, a hive-off involves the transfer of a business unit or division into a new, independent company. This separation enables the parent company to streamline its operations while the newly formed entity can focus on its specialized market segment, driving growth and innovation.The potential benefits of demergers and hive-offs are substantial. From enhancing shareholder value and operational efficiency to fostering a more robust and transparent corporate structure, these strategies can be transformative. However, the path to successful execution is fraught with challenges, including legal and regulatory hurdles, financial implications, and the need for effective communication with stakeholders.This article delves into the intricacies of demergers and hive-offs, exploring their processes, benefits, and challenges. Through detailed analysis and case studies, we aim to provide a comprehensive understanding of how these strategies can be leveraged to unlock value and drive corporate success. Whether you are a corporate executive, investor, or simply interested in corporate finance, this exploration will shed light on the powerful tools of demerger and hive-off, guiding you on how to harness their potential to achieve strategic objectives.Understanding DemergerA demerger is a strategic corporate restructuring mechanism in which a company divides itself into two or more separate entities, each functioning independently with its own management and resources. This aims to enhance the focus and operational efficiency of each business unit, enabling them to better address their specific markets and achieve optimal performance.Types of DemergersSpin-offsIn a spin-off, a parent company distributes new shares of a subsidiary to its existing shareholders, resulting in a separate, independent company.This process often leaves the parent company with no ownership stake in the newly formed entity.Split-offsA split-off involves the parent company offering its shareholders the option to exchange their shares in the parent company for shares in a new, separate entity.Unlike a spin-off, shareholders must choose to exchange their shares, and those who do not opt for the split-off retain their shares in the original company.DemutualizationThis type of demerger typically occurs in mutual organizations, such as insurance companies or cooperatives, converting them into publicly traded companies.Process of DemergerExecuting a demerger involves several critical steps, each requiring meticulous planning and execution:Strategic Planning: Assessing the rationale behind the demerger, defining its scope, and outlining strategic objectives.Due Diligence: Conducting thorough due diligence to identify potential liabilities, assets, and operational details to be transferred to the new entity.Regulatory Approval: Securing necessary approvals from relevant regulatory bodies, such as the Securities and Exchange Board of India (SEBI) or the Ministry of Corporate Affairs (MCA), in compliance with the Companies Act, 2013.Valuation and Structuring: Determining the valuation of the demerged entity and structuring the transaction to ensure fairness and clarity for all stakeholders.Implementation: Finalizing the demerger plan, including the transfer of assets, liabilities, and contracts, and executing the share distribution to shareholders.Communication and Execution: Effectively communicating the demerger plan to all stakeholders, including employees, shareholders, and customers, to ensure a smooth transition.Benefits of DemergerA demerger offers several strategic advantages that can significantly enhance a company\'s value and operational effectiveness:Enhanced Focus on Core Business Areas: By separating non-core or underperforming units, the parent company and the new entity can concentrate on their primary business areas, fostering growth and innovation.Improved Operational Efficiency: Demergers streamline operations, reduce complexity, and enhance management focus, leading to greater efficiency and productivity in each entity.Better Valuation and Market Perception: A well-executed demerger can enhance the market valuation of both the parent company and the demerged entity, improving investor confidence and market perception.Challenges in DemergerDespite its advantages, a demerger presents several challenges that must be carefully managed:Legal and Regulatory Hurdles: Navigating the complex legal and regulatory landscape can be challenging, requiring compliance with various laws, such as the Companies Act, 2013, and obtaining approvals from regulatory authorities.Financial Implications: The demerger process involves significant financial considerations, including costs related to restructuring, valuation, and transaction execution. Additionally, tax implications must be carefully analyzed to optimize financial outcomes.Employee and Stakeholder Management: Managing the expectations and concerns of employees, customers, and other stakeholders is critical. Effective communication and support mechanisms are essential to maintain morale, retain talent, and ensure business continuity during and after the demerger.Understanding Hive-offsWhat is a Hive-off?A hive-off is a strategic corporate restructuring mechanism whereby a specific business unit or division is separated from the parent company and transferred to a newly established, independent entity. Unlike a demerger, which typically involves the division of the entire company into multiple entities, a hive-off focuses on isolating a particular segment of the business. This process allows the parent company to streamline its operations, while the new entity can concentrate on its core activities, thereby fostering growth and innovation in a more focused environment.Key distinctions between a hive-off and a demerger:S. No.BasisDemergerHigh-off1.ScopeA demerger generally results in the creation of multiple new entitiesA hive-off typically involves the transfer of a single business unit or division2.Shareholder ImpactIn a demerger, shareholders receive shares in the newly formed entities, leading to a more distributed ownership structureIn a hive-off, the parent company usually retains control over the new entity\'s shares3.ObjectiveDemerger aims to create a broader portfolio of independent entitiesHive-off primarily targets enhancing the operational focus and market positioning of a specific business unitProcess of Hive-offExecuting a hive-off involves several critical steps, each requiring meticulous planning and adherence to regulatory guidelines:Strategic Planning: Identifying the business unit or division to be hive-off, assessing its strategic value, and defining the objectives of the hive-off.Due Diligence: Conducting comprehensive due diligence to evaluate the financial, operational, and legal aspects of the business unit, ensuring a clear understanding of its assets, liabilities, and market potential.Regulatory Approval: Obtaining necessary approvals from relevant regulatory bodies, such as the Securities and Exchange Board of India (SEBI) or the Ministry of Corporate Affairs (MCA), in compliance with the Companies Act, 2013. This may involve filing detailed documentation and securing the consent of shareholders and other stakeholders.Valuation and Structuring: Determining the fair market value of the business unit to be hive-off and structuring the transaction to ensure transparency and fairness for all parties involved. This may include appointing valuation experts and legal advisors to facilitate the process.Implementation: Finalizing the hive-off plan, including the transfer of assets, liabilities, and contracts, and executing the share distribution or capital allocation to the new entity. This step also involves updating corporate governance structures and operational frameworks.Communication and Transition: Effectively communicating the hive-off plan to all stakeholders, including employees, customers, suppliers, and investors, to ensure a smooth transition and maintain business continuity. This may involve stakeholder meetings, informational sessions, and detailed communication strategies.Benefits of Hive-offA hive-off offers several strategic advantages that can significantly enhance a company\'s value and operational efficiency:Unlocking Hidden Value: By isolating a specific business unit, a hive-off can reveal previously unrecognized value, allowing the new entity to attract targeted investments and growth opportunities.Streamlined Operations: Hive-offs enable the parent company to focus on its core activities, reducing complexity and enhancing operational efficiency. The new entity, free from the parent\'s constraints, can implement targeted strategies and achieve faster growth.Increased Investor Appeal: A hive-off can enhance the market appeal of both the parent company and the new entity. Investors often find the distinct focus and growth potential of the new entity appealing, potentially leading to increased investment and shareholder value.Challenges in Hive-offDespite its advantages, a hive-off presents several challenges that require careful consideration and management:Valuation Difficulties: Accurately valuing the business unit to be hive-off can be complex, requiring expertise in financial analysis and market assessment. Determining a fair value that reflects the unit\'s true potential and market conditions is crucial.Execution Risks: The hive-off process involves various execution risks, including operational disruptions, integration challenges, and potential resistance from stakeholders. Effective planning and risk management are essential to mitigate these risks.Market and Stakeholder Perception: Managing the perceptions of the market, employees, customers, and other stakeholders is critical. Ensuring clear communication, maintaining stakeholder confidence, and demonstrating the strategic rationale behind the hive-off are vital to its success.Strategic ConsiderationsWhen contemplating a demerger or hive-off, it is crucial for companies to evaluate several strategic, financial, and regulatory factors. This section explores the key considerations that guide the decision-making process, including when to consider these strategies, methods for valuation and financial analysis, and the legal and regulatory framework governing these actions.When to Consider a Demerger or Hive-off?Key Indicators and Strategic ReasonsCompanies may consider a demerger or hive-off for various strategic reasons, often driven by the need to enhance operational focus, unlock value, or address underperformance. Key indicators that suggest the appropriateness of a demerger or hive-off include:Operational Inefficiencies: When specific business units are not performing optimally or are dragging down the overall performance of the parent company, a hive-off can isolate these units, allowing both the parent and the new entity to streamline operations.Market Dynamics: Changes in market conditions, such as emerging opportunities in niche markets or shifts in consumer demand, may necessitate the creation of specialized entities that can respond more effectively to these dynamics.Strategic Realignment: Companies seeking to refocus on their core business areas or divest non-core assets may find a demerger or hive-off beneficial. This realignment helps in enhancing shareholder value and improving market positioning.Regulatory or Tax Considerations: In some cases, regulatory changes or tax incentives may make demergers or hive-offs more attractive. For instance, changes in tax laws or regulatory frameworks may offer financial advantages for restructuring.Valuation and Financial AnalysisMethods for ValuationAccurate valuation is essential for a successful demerger or hive-off. The following methods are commonly employed:Discounted Cash Flow (DCF) Analysis: This method estimates the present value of future cash flows generated by the business unit. It is particularly useful for assessing the intrinsic value based on the unit\'s projected cash flows and risk profile.Comparable Company Analysis (Comps): This approach involves comparing the business unit to similar entities in the market, using multiples such as Price/Earnings (P/E), Enterprise Value/EBITDA (EV/EBITDA), or Price/Sales (P/S). This method provides a market-based valuation benchmark.Precedent Transaction Analysis: This method examines historical transactions involving similar business units to gauge the market value. It considers the premiums paid and valuation multiples observed in past deals.Financial Impact AssessmentConducting a thorough financial impact assessment is critical to understanding the potential effects of a demerger or hive-off. This assessment should include:Cost-Benefit Analysis: Evaluating the direct and indirect costs associated with the demerger or hive-off, including transaction costs, legal fees, and potential restructuring costs, against the expected benefits such as increased operational efficiency and market valuation.Financial Projections: Developing detailed financial projections for the parent company and the new entity post-restructuring. This analysis should cover revenue, profit margins, cash flow, and capital expenditure requirements to ensure the sustainability and growth potential of both entities.Legal and Regulatory FrameworkKey Laws and RegulationsUnderstanding the legal and regulatory landscape is crucial for ensuring compliance and facilitating a smooth restructuring process. Key regulations include:Companies Act, 2013: This act governs the process of demergers and hive-offs in India, outlining the procedures, requirements, and approvals necessary for a legal and compliant restructuring.SEBI Regulations: The Securities and Exchange Board of India (SEBI) regulations, particularly those related to the Listing Obligations and Disclosure Requirements (LODR), impact the disclosure and governance standards for listed companies undergoing demergers or hive-offs.Compliance RequirementsEnsuring compliance with all relevant laws and regulations is vital. Key compliance requirements include:Board Approval: Obtaining approval from the board of directors of the parent company and the new entity. This typically involves detailed presentations, discussions, and formal resolutions.Shareholder Approval: Seeking approval from shareholders through a special resolution, requiring a majority vote at a general meeting. This process ensures that shareholders are adequately informed and have a say in the restructuring.Regulatory Filings: Filing the necessary documentation with regulatory authorities, including the Registrar of Companies (RoC), SEBI, and stock exchanges. This includes the draft scheme of arrangement, explanatory statements, and other relevant documents.Tax Considerations: Consulting with tax advisors to understand the tax implications of the demerger or hive-off, including the impact on capital gains, stamp duty, and transfer pricing regulations.Impact on StakeholdersDemerger and hive-off strategies have significant implications for various stakeholders, including shareholders, employees, customers, and suppliers. A comprehensive understanding of these impacts, coupled with effective management, is essential for the successful execution of such restructuring initiatives.ShareholdersHow Demerger and Hive-off Affect Shareholder Value?Demerger and hive-off strategies can materially affect shareholder value, often enhancing it by creating more focused and efficient entities. The impact on shareholders is manifested through:Value Creation: By isolating profitable or strategically significant business units, demergers and hive-offs can uncover previously latent value, thereby increasing the market capitalization of both the parent company and the newly formed entity. This separation often leads to more attractive investment opportunities, thereby enhancing shareholder value.Market Perception: A well-executed demerger or hive-off can positively influence market perception, reflecting favorably on management\'s strategic vision. This improved perception can lead to a re-evaluation of the stock, with the newly formed entities being valued based on their distinct performance metrics and growth potential.Communication and TransparencyMaintaining effective communication and transparency is critical to preserving shareholder trust and confidence:Pre-Announcement Communication: Engaging shareholders through detailed disclosures and presentations prior to the formal announcement is essential for setting appropriate expectations. This should include a clear explanation of the rationale, anticipated benefits, and outcomes of the demerger or hive-off.Post-Announcement Engagement: Regular updates and comprehensive information should be provided through shareholder meetings, investor briefings, and detailed reports. Such transparency helps address concerns and sustain shareholder confidence throughout the restructuring process.EmployeesManaging Change and TransitionThe human element is pivotal in the success of a demerger or hive-off. Effectively managing this change requires a well-structured strategy to address employee concerns and facilitate a smooth transition:Change Management Strategy: A robust change management plan, encompassing clear communication, training programs, and support mechanisms, is essential. This plan should outline the impending changes, timelines, and available support systems to assist employees during the transition.Leadership and Support: Effective leadership and management support are crucial in navigating the uncertainties associated with restructuring. Regular town hall meetings, individual consultations, and feedback mechanisms are vital for addressing employee concerns and maintaining morale.Ensuring Employee Morale and RetentionSustaining employee morale and retention during the transition is critical for maintaining productivity and organizational culture:Incentives and Benefits: Providing retention packages, career development opportunities, and performance incentives can aid in retaining key talent. Customizing these incentives to address employee concerns can enhance commitment to the new entity.Support Systems: Establishing support systems, such as counselling services, employee assistance programs, and effective communication channels, is crucial for helping employees adapt to the changes. Ensuring that employees feel valued and supported is key to maintaining morale and reducing turnover.Customers and SuppliersContinuity of ServiceMaintaining continuity of service during a demerger or hive-off is essential for preserving customer trust and satisfaction:Operational Planning: Formulating detailed operational plans to ensure uninterrupted service delivery and minimize disruptions is crucial. This includes safeguarding supply chains, customer service, and product delivery mechanisms from being adversely affected by the restructuring.Customer Communication: Proactively informing customers about the changes, their implications, and the measures taken to ensure service continuity is vital. Clear communication through various channels helps maintain customer confidence and satisfaction.Managing Relationships During TransitionMaintaining strong relationships with suppliers and other business partners is essential for a smooth transition:Supplier Engagement: Early engagement with suppliers to discuss changes, negotiate new terms, and ensure continuity of supply chains is necessary. Building and sustaining strong relationships through regular dialogue and collaboration can help mitigate potential risks.Partnership Assurance: Reassuring suppliers and business partners regarding the stability and continuity of business relationships post-restructuring is crucial. This involves providing updated contracts, terms of engagement, and clear communication about future business strategies.ConclusionUnlocking value through demerger and hive-off strategies offers a strategic avenue for companies aiming to enhance operational focus, streamline business processes, and maximize shareholder value. These restructuring mechanisms provide a framework for isolating high-performing or strategically significant units, thereby fostering increased efficiency and facilitating targeted growth.The effective implementation of a demerger or hive-off can deliver substantial benefits, including enhanced operational agility, improved market perception, and the creation of more specialized entities. However, the successful execution of these strategies necessitates a thorough examination of various factors, including the optimal timing for restructuring, precise valuation, comprehensive financial impact assessments, and strict adherence to legal and regulatory frameworks.Moreover, managing stakeholder relationships with diligence is crucial. Ensuring transparent communication with shareholders, engaging proactively with employees, and maintaining uninterrupted service for customers and suppliers are fundamental to navigating the complexities of these transitions. Addressing the concerns and needs of all stakeholders effectively can mitigate risks and contribute to the overall success of the restructuring process.In summary, while demergers and hive-offs present valuable opportunities for unlocking latent potential and driving strategic growth, their success is contingent upon meticulous planning, strategic execution, and robust stakeholder management. Companies that approach these initiatives with a clear strategy and a commitment to transparency and effective communication are well-positioned to fully realize the benefits of these transformative strategies and achieve sustained success in a dynamic market environment.References:\"Corporate Restructuring: Lessons from Experience\" by Michael Jensen, focusing on the strategic rationale and outcomes of demergers and hive-offs.Reports from consulting firms like McKinsey & Company, Bain & Company, or Deloitte on corporate restructuring strategies, focusing on demergers and hive-offs.Market analysis and research reports from Bloomberg and Reuters on the latest trends and impacts of demergers and hive-offs in various sectors.Case studies on successful demergers and hive-offs from leading companies, such as General Electric\'s demerger of its healthcare division or Siemens\' hive-off of its energy business, which can provide practical insights into the process and outcomes.Author may be reached at sumangoel78@gmail.com and eboard@icai.in
Ep. 269 — The Transformative Impact of Technology Adoption amid changing Economic Conditions
CA Journal
· September 2026
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The Transformative Impact of Technology Adoption amid changing Economic ConditionsThe Indian insurance industry has recently experienced significant growth and transformation because of several technological adoptions such as Insurance Technology and Regulatory Technology. Additionally, economic uncertainty due to several policy reforms and stress in the financial markets impact the individual consumers\' demand, insurance market, and the performance. In this backdrop, the study attempts to analyse, first, how technology adoptions impact the Indian insurance industry, and secondly, how it helps achieving the \'Insurance for all\' mission. Finally, it aims to empirically assess the relationship between technological adoptions and the market performance of the Indian insurance industry in the backdrop of economic policy uncertainty and financial stress.IntroductionThe Indian insurance market has recently experienced a significant growth trajectory and undergone a massive transformation (graph 1) as a result of advanced technological adoption such as Insurance Technology (InsurTech) and Regulatory Technology (RegTech). InsurTech uses technology to modernize and transform the traditional insurance industry. It revolutionizes how insurance policies are created, underwritten, and managed. By offering personalized insurance products tailored to individual risk profiles and lifestyle choices, InsurTech enhances customer engagement. Additionally, it leverages real-time data analysis to improve pricing accuracy and risk assessment, which helps reduce potential fraud and losses for insurance companies. By using RegTech to automate costly human functions and do routine processes more intelligently and cost-effectively, compliance professionals can respond to changing regulatory demands and focus on higher-order activities to become more valuable business partners and advisers.Both technologies have disrupted business operations and other associated activities by changing how we perceive the service delivery systems of consumers (Lin and Chen, 2020). Moreover, competition has grown due to new product launches, and regulation remains a barrier for many firms and needs to be followed for good underwriting practices. The Indian insurance industry has been significantly influenced by InsurTech, leading to significant enhancements in consumer experience, operational efficiency, product innovation, and regulatory compliance (Sarkar, 2021). However, RegTech makes a vital contribution to the automation of compliance, operational competitiveness, risk management, economic policy uncertainty as well as market return in the insurance sector (Buckley et al., 2020). Additionally, uncertainty arises from the economic environment (graph 2) due to several reforms in fiscal and monetary policy that also influence the insurance industry. Moreover, financial stress in the country also impacts consumer demand, investment styles of investors, and the insurance market performance. In this backdrop, the study attempts to analyze, first, how the technology adoptions impact the Indian insurance industry (Section 2), and secondly, how \'InsurTech\' as a technological innovation helps achieve the \'Insurance for all mission (Section 3). Finally, the study aims to empirically assess the relationship between technological adoptions and the market performance of the Indian insurance industry in the backdrop of economic policy uncertainty and financial stress (Section 4). Therefore, the study intends to show how technological adoptions are intertwined with regulatory changes and economic disruptions to bring about a revolution in the Indian insurance sector, thereby offering some important insights to industry players, investors, researchers, and so on.Role of Technology Adoptions on Indian Insurance IndustryTechnology adoptions in the Indian insurance industry include Insurance technology (InsurTech) and Regulatory Technology (RegTech). InsurTech utilizes technology that upgrades and adds value to the insurance services and customers. On the other hand, RegTech relies on emerging technologies that use digital tools and techniques for improving the compliance requirements of organizations. Both of these technologies influence the insurance industry\'s performance (Stoeckli et al, 2018), which are explained in a nutshell below:How InsurTech impact the Indian Insurance Industry?Consumer Experience: Insurtech has transformed the insurance customer experience. Digital platforms with user-friendly interfaces now manage policies, register claims, and more. It allows products to be customised according to an individual\'s needs, while chatbots and AI-guided tools provide quick assistance, increasing customer satisfaction.Operational Efficiency: Insurtech has automated underwriting, document processing, and risk assessment, improving efficiency and lowering costs in the insurance sector. Insurtech solutions leverage advanced analytics to provide consumer behaviour, risk assessment, and fraud detection, which improves underwriting choices and operational efficiency.Product Innovation: Insurtech enables the production of new insurance products including usage-based, on-demand, and peer-to-peer insurance, quickening product innovation. It has also created affordable micro-insurance solutions for underserved regions using digital distribution methods. It uses IoT and sensor technology to monitor and prevent risks, which leads to personalised insurance policies based on real-time data and customer behaviour.Regulatory Compliance: The insurance sector relies on Insurtech to enforce regulations. It automates regulatory compliance operations, minimising manual errors and improving transparency. Automated InsurTech ecosystems use advanced algorithms, data analytics, and constant assessment to detect and prevent fraud.How RegTech impacts the Indian Insurance Industry?Compliance Automation: The implementation of RegTech streamlines compliance procedures, assuring timely conformity to rules. It automates reporting, reducing errors and improving audit readiness.Risk Management: RegTech employs sophisticated analytical methods to boost risk assessment, bolster fraud detection, maintain compliance with cybersecurity regulations, and safeguard data privacy.Operational Efficiency: RegTech streamlines operational procedures through automation, resulting in cost reduction, increased productivity, and the establishment of an effective data management system. This technology enables the creation of scalable systems and the implementation of agility in response to regulatory changes.Consumer Trust and Loyalty: RegTech improves transparency, data security, compliance with regulations, and customer-focused services, while also promoting trust and loyalty in the insurance sector.Role of InsurTech in achieving \"Insurance for All by 2047\" Mission by IRDAIThe following Table 1 shows the key initiatives, corresponding actions, and means of InsurTech that lead to achieve the \"Insurance for All by 2047\" Mission.Table 1: Role of InsurTech in Achieving \"Insurance for All by 2047\" MissionKey InitiativesActionsMeansIncreased Customer AwarenessDrives awareness of insurance benefits and products.Development of mass awareness programs.Utilizing social media and digital marketing strategies for broader outreach.Innovative, Affordable, and Simplified OfferingsFocuses on affordability and simplified product offerings.Uses technology to meet unmet needs.Introducing sustainable and environment-friendly insurance solutions.Enhanced Customer Experience and TrustFocus on seamless customer journeys, personalization, and transparency.Enhanced service quality.Integration of AI technologies for personalized customer interactions and support.Strengthened Distribution with Deeper ReachExpands reach, improves productivity, and opens new distribution channels. Focus on reaching rural customers.Implementing blockchain for secure and transparent distribution networks.Regulatory EnablersUtilizing digital infrastructure and working with regulators to enable innovation.Facilitating partner collaboration.Advocacy for regulatory reforms supporting InsurTech innovation.Compliance and DesignEmbracing compliance governance by design, ensuring adherence to regulations.Contributing to a supportive regulatory framework.Leveraging RegTech solutions for streamlined compliance processes.Profitability and SustainabilityFocus on profitability leading to sustainability, crucial for offering affordable insurance solutions.Embracing partnerships for sustained success.Incorporating ESG principles for long-term environmental and social impact.Innovative Initiatives for InclusionImplementing mass awareness programs and innovative inclusion initiatives.Building diverse solutions for specific opportunities.Incorporating gamification and community-based insurance solutions.Impact AI-Driven Health InterventionsUse of AI-driven health interventions to reduce claim costs and improve outcomes.Implementing predictive analytics for early disease detection.Inclusion for all StakeholdersCollaboration to drive inclusive insurance solutions.Embracing partnerships for inclusivity.Implementing diversity and inclusion initiatives within InsurTech companies.Source: Compiled from BCG Report (2023, 2024)Impact of Technology Adoption and Market Performance of Indian Insurance Industry: Do Economic Policy Uncertainty and Financial Stress matter?To estimate the impact of technology adoptions on the market performance of the Indian insurance industry in the backdrop of economic policy uncertainty and financial stress, the following hypotheses have been framed:$H_{01}$ InsurTech does not significantly impact insurance industry performance in India.$H_{02}$: Economic uncertainty influences the relationship between InsurTech and Insurance Industry performance in India.$H_{03}$: Financial Stress influences the relationship between InsurTech and Insurance Industry performance in India.The necessary data has been collected, every month, from various sources including investing.com India, the EPU website, BCG Reports, and ARIC. The variables include Insurance return, i.e., the monthly market return on NSE Insurance, EPU, the index of value of economic policy uncertainty, InsurTech, which is the funding in Insurance technology, and FS, which is the monthly Financial Stress indicator in India. The study period is from January 2014 to April 2024. The following estimations are done using the Ordinary Least Square (OLS) regression technique.The descriptive statistics of the concerned variables are given below in Table 2.Table 2 presents the descriptive statistics that help us understand the data better. These statistics include the mean, median, and standard deviation, as well as the maximum and minimum values for each variable in the study. Additionally, the table reports the skewness and kurtosis values.Table 2: Descriptive StatisticsInsurance ReturnInsurTechEPUFinancial StressMean3.0616616.82485.276-0.934Median2.9766367.77077.609-1.056Standard Deviation8.6962089.80830.9720.660Minimum-6.6703.64032.909-2.000Maximum28.17910686.220148.8260.225Kurtosis1.8193.540-0.722-0.742Skewness1.196-0.9370.4810.373Source: Compilation of the Secondary Data using Stata 17Skewness measures how much the data deviates from a symmetrical normal distribution. In a normal distribution, skewness ranges from -0.5 to 0.5. A value of 0.5 indicates a distribution that is slightly skewed to the right, while a value of -0.5 indicates skewness to the left. If the skewness is greater than 1 or less than -1, the distribution is considered highly skewed in the respective direction.Kurtosis measures the presence of outliers in the data. A kurtosis value of 3 indicates a normal distribution (mesokurtic), values less than 3 suggest fewer outliers (platykurtic), and values greater than 3 indicate a distribution with more outliers (leptokurtic).Economic Uncertainty, Tech-Adoption, and Insurance Industry PerformanceEconomic policy uncertainty arises from any reform undertaken by the government in a nation\'s fiscal and monetary policies. This section aims to estimate if the Tech-adoption (measured through the Insurtech funding) can have any impact on the market return on NSE Insurance. In addition, we also find if economic policy uncertainty influences the relationship between InsurTech and the market return of the insurance industry. The following regression equations have been estimated and the results are shown below:$$ Insurance\\ Return_{t} = \\alpha + \\beta_{1} * (InsurTech_{t}) + \\epsilon_{t} \\quad \\dots Eq. (1) $$$$ Insurance\\ Return_{t} = \\alpha + \\beta_{1} * (InsurTech_{t}) + \\beta_{2} * EPU_{t} + \\epsilon_{t} \\quad \\dots Eq. (2) $$$$ Insurance\\ Return_{t} = -\\alpha + \\beta_{1} * (InsurTech_{t}) + \\beta_{2} * EPU_{t} + \\beta_{3} * (InsurTech_{t} * EPU_{t}) + \\epsilon_{t} \\quad \\dots Eq. (3) $$From Table 3, we find that InsurTech funding and economic uncertainty independently positively influence the market return of NSE Insurance (Models 1 and 2). Therefore, it affirms that higher investment in insurance technology boosts the performance of the insurance industry in India. However, the positive and significant interaction term of InsurTech and economic policy uncertainty (InsurTech*EPU) in Model 3 reconfirms the findings in prior models. This suggests that when policy uncertainty is high in the economy, people are more likely to invest in shares of insurance companies. At the same time, increased uncertainty tends to lower investors\' confidence. This drop in confidence can reduce their investable funds due to lower disposable income and prompt them to seek safer investment options. As a result, people often turn to insurance companies, which in turn boosts the performance of the insurance industry. Therefore, we find the resilience of the insurance industry which continues to generate higher returns during the period when economic uncertainty is high. We may infer that Economic policy uncertainty often forces businesses to seek innovative solutions to navigate unpredictable environments. This urgency can accelerate the adoption of InsurTech solutions, driving digital transformation within insurance companies. Moreover, enhanced risk management, diversified offerings, better collaboration, innovation, etc. can be the reason for sustained performance. On economic grounds, it can be inferred that greater tax incentives prompt investors to invest more in insurance as a part of fiscal policy. On the part of monetary policy, lower interest rates, and ample liquidity encourage more investment in insurance and innovation.Table 3: InsurTech, Economic Uncertainty, and Insurance Industry PerformanceDependent Variable: NSE Insurance PerformanceVariablesModel 1Model 2Model 3CoefficientsP-ValueCoefficientsP-ValueCoefficientsP-ValueInsurTech0.047 (.002)0.0000.045 (.003)0.0000.039 (.012)0.005EPU1.403 (.493)0.009-0.174 (1.045)0.869InsurTech*EPU0.005 (.0001)0.67Intercept8.695 (4.347)0.0011.247 (.625)0.0115.452 (2.726)0.569Adj. R-Squared0.4120.2350.517Source: Compilation of the Secondary Data using Stata 17 (Standard Errors are reported in the parenthesis)Financial Stress, Tech-Adoption, and Insurance Industry PerformanceFinancial stress poses a difficulty in meeting the basic financial requirements (Park and Mercado, 2014). In this section, how financial stress (FS) impacts the insurance market performance amid technology adoption (InsurTech) has been estimated through the following regression equations (4 to 6), and the results are shown below.$$ Insurance\\ Return_{t} = -\\alpha + \\beta_{1} * (InsurTech_{t}) + \\epsilon_{t} \\quad \\dots Eq. (4) $$$$ Insurance\\ Return_{t} = \\alpha + \\beta_{1} * (InsurTech_{t}) + \\beta_{2} * FS_{t} + \\epsilon_{t} \\quad \\dots Eq. (5) $$$$ Insurance\\ Return_{t} = \\alpha + \\beta_{1} * (InsurTech_{t}) + \\beta_{2} * FS_{t} + \\beta_{3} * (InsurTech_{t} * FS_{t}) \\quad \\dots Eq. (6) $$Table 4 illustrates the results of how technology adoption, specifically through InsurTech funding, impacts the overall performance of the Indian insurance market, as measured by the returns of NSE Insurance. The table also explores whether financial stress affects the relationship between InsurTech and insurance market returns.The findings indicate that both InsurTech funding and financial stress have a positive impact on the returns of NSE Insurance (as shown in Models 4 and 5). This suggests that increased investment in innovation and technology enhances the performance of the insurance sector in India. Additionally, the positive and significant interaction term between InsurTech and financial stress (InsurTech*FS) in Model 6 supports these results. This implies that during times of significant financial stress, the insurance industry still generates positive returns. It seems that people are more inclined to purchase insurance products to protect themselves from unexpected events during such periods. Moreover, they are likely to invest in shares of insurance companies as a safer investment option.This phenomenon contradicts the traditional scenario where financial stress limits the ability to invest in insurance and poses a threat to technology and innovation. Therefore, we attribute this reason to the greater resilience of the Indian insurance industry which continues to perform well, with the help of tech innovation i.e., InsurTech amid acute financial stress. Moreover, in India, financial stress is expected to drive technological innovation, as insurance companies continue to launch new products that can cater to the changing requirements of consumers. This allows for diversification of product offerings and geographical reach which can mitigate the risk arising from financial stress. This might induce investors to prefer the Indian insurance market as a safe destination for investment.Table 4: InsurTech, Financial Stress, and Insurance Industry PerformanceDependent Variable: NSE Insurance PerformanceVariablesModel 4Model 5Model 6CoefficientsP-ValueCoefficientsP-ValueCoefficientsP-ValueInsurTech0.047 (.002)0.0000.062 (.007)0.0140.013 (.006)0.056FS4.319 (2.605)0.1120.025 (.448)1.082InsurTech*FS0.005 (.002)0.000Intercept8.695 (4.347)0.0010.011 (5.899)2.2680.470 (.985)0.725Adj. R-Squared0.4120.2160.618Source: Compilation of the Secondary Data using Stata 17 (Standard Errors are reported in the parenthesis)Conclusive Opinion and Scope for Further ResearchThe study finds a greater amount of resilience in the market performance of the Indian insurance industry in the backdrop of economic uncertainty and financial stress. The relationship between technology adoptions (InsurTech and RegTech) and the market performance of the Indian insurance business is highly magnified due to the economic policy uncertainty and financial stress. The Tech-adoption, i.e., InsurTech has significantly enhanced consumer experiences, operational efficiency, and product innovation, resulting in increased profitability in the insurance industry in India. The interconnection between economic policy uncertainty and InsurTech indicates a greater tendency to invest in insurance companies during times of high uncertainty, positively affecting the insurance sector. Similarly, we also find a greater demand for and investment in insurance shares during the period characterized by high financial stress. And the industry continues to perform well during this turbulence.To conclude, financial stress and economic policy uncertainty, while posing several challenges, can drive the insurance industry towards greater adoption of InsurTech solutions, resulting in accelerated digital transformation, enhanced risk management, improved customer engagement, market adaptability, regulatory compliance, and investment in innovation. Such positive impacts collectively strengthen the market performance of the insurance sector in India, demonstrating a strong resilience in insurance market performance, and the potential of InsurTech to provide stability and growth in times of uncertainty and stress.The study reveals a significant connection between technological adoptions, financial stress, and economic uncertainty in the insurance industry. The findings may be useful for corporate stakeholders, policymakers, and investors in understanding the interactions of the performance of the Indian insurance industry within economic policy uncertainty and financial stress. These findings, we believe, are important in forming wise choices for the survival of the Indian insurance sector. The future study could consider specific macroeconomic events of uncertainty and stress and evaluate their impact on performance.References:BCG Report (2023). \"India Insurtech Landscape and Trends - Driving towards Insurance for All\". retrieved from https://www.bcg.com/publications/2023/india-insurtech-landscape-and-trends#BCG Report (2024). India InsurTech Landscape and Trends. retrieved from http://www.bcg.comBuckley, R. P., Arner, D. W., Zetzsche, D. A., & Weber, R. H. (2020). The road to RegTech: the (astonishing) example of the European Union. Journal of Banking Regulation, 21, 26-36.CB Insights (2024). State of InsurTech Report Global recap. retrieved from https://cbinsights.comIRDAI reports (2024). Retrieved from https://www.irdai.gov.inLin, L., & Chen, C. (2020). The promise and perils of InsurTech. Singapore Journal of Legal Studies, (Mar 2020), 115-142.Park, C. Y., and R. Mercado. 2014. Determinants of Financial Stress in Emerging Market Economies. Journal of Banking and Finance. 45. pp. 199-224.PwC Report (2023). Financial RegTech Insights. retrieved from https://www.pwc.in/industries/financial-services/fintechSarkar, S. (2021). The Evolving Role of Insurtech in India: Trends, Challenges and The Road Ahead. The Management Accountant Journal, 56(12), 30-37.Stoeckli, E., Dremel, C., & Uebernickel, F. (2018). Exploring characteristics and transformational capabilities of InsurTech innovations to understand insurance value creation in a digital world. Electronic markets, 28, 287-305.Umasankar, M., Desai, K., & Padmavathy, S. (2023). Insuretech: Saviour of insurance sector in India. In Emerging Trends and Innovations in Industries of the Developing World (pp. 1-6). CRC Press.Authors may be reached at nehakollipara322@gmail.com and eboard@icai.in
Ep. 270 — Toward a BRICS Currency: Reducing India's Reliance on the US Dollar
CA Journal
· September 2026
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Toward a BRICS Currency: Reducing India\'s Reliance on the US DollarThis research focuses on the BRICS countries\' efforts to minimize their reliance on the US dollar as the world\'s reserve currency, particularly following the 2007-2008 financial crisis. It looks at incentives, de-dollarization attempts, and intra-BRICS trade restrictions. A proposed BRICS currency backed by gold may minimize reliance on the US dollar, increase financial autonomy, and defy sanctions. The cautious approach taken by India indicates its support for a multipolar monetary system. Challenges include coordination, policy alignment, infrastructure, global acceptance, and geopolitical resistance. BRICS collaboration is hampered by ongoing boundary issues, notably between India and China. The study highlights the potential transformation of global finance and geopolitics.IntroductionSince the global financial crisis of 2007-2008, the US dollar has been questioned more than ever about its supremacy and its leadership position in the financial world. Since this crisis originated in the US, questions were raised about the reliability of the United States leadership and the wisdom of maintaining the dollar\'s dominance in the global financial system. As a result of this crisis, developing nations also gained more prominence and influence in global affairs. (Lund et al., 2018).In 2009, Russian President Dmitry Medvedev convened the first BRIC (Brazil, Russia, India, and China) Summit in Yekaterinburg, to find solutions to \"navigate the crisis and establish a more equitable international system, as well as discuss the parameters for a new financial system to establish a more equitable international system and establish a more equitable financial system\". (Liu & Papa, 2022)Following South Africa\'s membership in BRIC in 2010, these five nations formed BRICS, achieving policy coordination in more than 70 issue areas of concern (Kirton and Larionova, 2018; XII BRICS Summit Moscow Declaration, 2020). The most prominent achievements of the BRICS have come in terms of financial cooperation, notably the founding of the New Development Bank (NDB), the Contingent Reserve Arrangement (CRA), and several other financial coordinating instruments. These initiatives have had a major impact on the global economy, providing liquidity and stability to emerging markets. BRICS has also made significant strides in trade cooperation and other forms of economic cooperation. (Duggan et al., 2021)Review of LiteratureLiu & Papa. (2022) found that the BRICS countries have made major efforts to decrease currency risk and circumvent US sanctions through de-dollarization. The authors built a framework called \'Pathways to De-dollarization\' to examine the institutional and market processes established by BRICS nations at the BRICS, BRICS Plus, and sub-BRICS levels. They found the coalition\'s leaders and adherents, assessed its strength, and analysed how BRICS recruits new members. According to the research, the BRICS\' coalitional de-dollarization initiatives have created critical infrastructure for a prospective non-dollar global financial system. This means that, while implementing a unified currency among these nations would be difficult, there is a growing desire among BRICS members and other developing countries to reduce their reliance on the US dollar.Aggarwal. (2020) The paper highlights that the de-dollarization of intra-BRICS trade faces three primary challenges: 1) the absence of an independent credit monitoring mechanism within the Contingent Reserve Arrangement (CRA), 2) The fluctuation in currencies causing uncertainty during conversions, 3) and the absence of a neutral commodity exchange. To address these issues and to promote the use of BRICS currencies, a phased solution based on smart contracts has been proposed. This approach involves developing more efficient intra-BRICS exchanges, inter-bank financial markets, incorporating smart contracts for trade finance, currency hedging, and commodity trading. BRICS traders act as counterparties to contracts in this closed ecosystem, reducing speculative risks and fostering trust among BRICS central and commercial banks. This promotes the use of national currencies in commercial transactions. Finally, the goal of these exchanges is to reduce the need for IMF-linked arrangements and de-dollarize currency swaps inside the CRA, while also potentially stabilizing exchange rates by raising demand for BRICS currencies. Furthermore, smart contracts may improve confidence in different BRICS finance flows, including reciprocal intra-BRICS infrastructure investments and loans.Objective of the StudyThe goal of the paper is to look at the potential implications and advantages of a BRICS currency on the financial system, international trade, and the geopolitical landscape, as well as the motivations for the BRICS countries\' interest in creating a common currency and the challenges and opportunities that such a currency would present.The US Dollar DominanceThe US dollar has been the world\'s primary reserve currency for decades. This pre-eminence confers major economic and geopolitical advantages on the United States. The majority of international transactions, including commodity trading such as oil, are performed in US dollars. As a result, governments throughout the world must keep considerable dollar reserves to enable international commerce, giving the United States a disproportionate influence in global finance and politics. (Arslanalp et al., 2022)Figure:1 Foreign Currency Assets of IndiaYearForeign Currency Assets (in million USD)2001-02510922002-03718042003-041074142004-051355472005-061451152006-071919532007-082991472008-092415972009-102547162010-112742912011-122600212012-132596822013-142763322014-153171802015-163359522016-173461232017-183993432018-193853172019-204421862020-215379532021-225406792022-23509691Source: Reserve Bank of IndiaFrom fiscal year 2001-02 through fiscal year 2022-23, India\'s Foreign Currency Assets, measured in millions of US dollars, have followed a dynamic trend. Starting at $51,092 million in 2001-02, their assets grew rapidly until reaching a significant $299,147 million in 2007-08. The global financial crisis of 2008-09, on the other hand, had a significant influence, producing a drop of $241,597 million. The years that followed saw a period of recovery and instability as India\'s Foreign Currency Assets reacted to changing global economic conditions. From 2015-16 onwards, these assets had a constant increase, topping $500 billion in 2020-21 at $537,953 million. The most current information for 2022-23 shows relative stability at $509,691 million as depicted in Fig. 1.Many emerging economies, like India, use the buildup of dollar reserves to control currency rate volatility and offer a cushion against financial shocks. The US dollar\'s dominance in India\'s foreign currency assets reflects the dollar\'s worldwide standing as a major reserve currency and international commerce medium. This reliance on the US dollar exposes the Indian economy to the risks associated with currency volatility and changes in US monetary policy. This highlights the significance of diversifying India\'s foreign currency holdings and decreasing its reliance on the US dollar.The BRICS CurrencyThe BRICS currency is a proposed inter-country currency involving the countries of Brazil, Russia, India, China, & South Africa. The BRICS currency is intended to provide a united and stable currency to promote economic growth and development. The proposed currency would facilitate BRICS nations\' transactions, commerce, and investments. Despite their combined GDP leadership, the BRICS economies remain vulnerable to the US currency. The introduction of a new currency would minimize reliance on the US dollar and other major currencies. (Tisch, 2023)Brazil\'s President presented the suggestion for a BRICS currency at a BRICS meeting in Johannesburg. The goal is to lessen their reliance on dollar exchange rate volatility. If a BRICS currency were to be developed, its value would most likely be based on a basket of the five-member nations\' currencies. The BRICS countries would need to agree on the specific makeup of the basket, although it would most likely contain the Brazilian \"Real\", Russian \"Ruble\", Indian \"Rupee\", Chinese \"Yuan\", and South African \"Rand\". And the BRICS currency will most likely be gold-backed and sponsored by the BRICS alliance.The Benefits of a Potential BRICS CurrencyThe idea for a BRICS currency, which is supported by the BRICS member countries, offers various possible benefits that might have a substantial influence on the global financial environment. While the program is still in its early stages, these benefits give strong grounds for the BRICS countries to investigate it further.Reduced Dependence on the US Dollar: One of the main reasons for the BRICS currency is to reduce dependency on the US dollar. The BRICS countries, like many others, have long been exposed to the US dollar\'s dominance in international commerce and banking. They hope to diversify their assets and lessen sensitivity to swings in the market value of the US dollar by launching an alternative currency. (Koffler, 2023)Enhanced Financial Independence: A BRICS currency would provide member countries more financial autonomy. It would enable countries to conduct international commerce, resolve settlements, and engage in financial activities without the requirement for Western financial institutions\' intermediation or the usage of the US currency. This increasing autonomy is especially important when negotiating global economic issues and geopolitical conflicts. (Gupta, 2023)Resilience Against Sanctions: Financial restrictions implemented by Western countries have had a direct impact on the BRICS members. A shared currency might provide a barrier against such bans, allowing commerce and financial activities to go uninterrupted even in the face of external pressure. (Cele & Bowker, 2023)Facilitation of Intra-BRICS Trade: A unified currency among the BRICS members would facilitate commerce inside the group. It would eliminate the need for currency conversion and the related costs, making commerce between member countries more appealing. This might lead to stronger economic cooperation and group cohesion. (Shetty, 2023)Geopolitical Influence: The establishment of a BRICS currency reflects the bloc\'s expanding global power. As the movement gets pace, it calls into question the supremacy of Western nations and the international financial system based on the US currency. This change in the balance of power might have far-reaching geopolitical consequences. (Lippman, 2023)Financial Inclusion: The BRICS currency might help emerging economies gain greater financial inclusion. It would let these countries participate more actively in global financial transactions, trade, and investment, levelling the playing field and eliminating Western financial institutions\' dominance. (Savage, 2023)Currency Stability: By cooperating to construct and maintain a shared currency, the BRICS countries may jointly contribute to its stability. They may better coordinate monetary policies, regulate inflation, and handle economic difficulties, building trust in the new currency. (Singh, 2023)Global Multipolarity: The BRICS currency project is consistent with the larger trend of multipolarity in international affairs. It opposes the idea of a unipolar world ruled by a single currency and advocates for a more equitable allocation of economic power across states. (Fofack, 2023)India\'s Stance on BRICS CurrencyIndia\'s stance on the prospective establishment of a unified currency among the BRICS members has been ambiguous. While Brazil, Russia, China, and South Africa have expressed interest in developing a BRICS gold-backed currency, India has remained cautious and non-committal.External Affairs Minister, Dr. S Jaishankar has stated that India has no intention of adopting a BRICS currency. He highlighted that the rupee will remain a national priority for India in the near future. Rather than looking for a new currency, India\'s major priority is to strengthen its existing national currency, the Rupee.India\'s ambivalence arises from the country\'s unique economic and geopolitical position within the BRICS group. India aspires to safeguard and promote its national interests as one of the world\'s fastest-growing major economies and a crucial player on the international stage. It is reluctant to adopt actions that may erode its control over monetary policy and currency management.In addition, India\'s cautious attitude is consistent with its aim for a multipolar international order. Rather than advocating for a single alternative currency, India appears to want a diverse and balanced international monetary system in which various currencies, including the Rupee, play important roles.In essence, India\'s ambiguous position on the BRICS currency reflects the country\'s complicated economic and strategic reasons. While India recognizes the need for more financial autonomy and alternatives to the US dollar, it is wary of handing over control of its national currency and monetary policy to a supranational institution.Challenges Looming AheadCoordination and Trust Building: Creating a unified currency backed by gold necessitates a high level of cooperation and confidence among the BRICS countries. Each member country has its own economic interests, monetary policies, and economic development levels. Reaching an agreement on major issues concerning the new currency will be a difficult and time-consuming task.Monetary Policy Alignment: To secure the stability of a gold-backed currency, the BRICS countries\' monetary policies must be aligned. This involves coordinating the management of inflation, interest rates, and exchange rates. It will be a difficult balancing act to achieve such convergence while respecting each nation\'s autonomy over its monetary policy. (Zharikov, 2023)Infrastructure and Technology: The introduction of a new currency needs the creation of a strong financial infrastructure and technological systems to support its issuance, distribution, and management. To ensure the currency\'s seamless operation, the BRICS nations will need to invest considerably in these areas. (Zharikov, 2023)Global Acceptance: Gaining worldwide approval for the new currency is a daunting task. Because of the US dollar\'s established role in international commerce and banking, it is the currency of choice for many nations. Convincing countries to use the BRICS currency in international transactions will necessitate significant effort and diplomacy. (Koffler, 2023)Economic Stability: To inspire trust in the new currency, the BRICS members must secure the stability of their economies. This involves dealing with challenges like budgetary restraint, trade imbalances, and banking sector reforms. (Singh, 2023)Geopolitical Resistance: Western governments are expected to oppose the move to challenge the supremacy of the US dollar. Economic sanctions and geopolitical conflicts might be used to hinder the currency\'s success. (Lippman, 2023)Border Disputes and Geopolitical Tensions: India and China, two prominent BRICS members, have been embroiled in a longstanding border dispute in the Himalayan region. This dispute has led to sporadic military clashes, most notably in the Galwan Valley in 2020, resulting in casualties on both sides. The ongoing tensions and lack of a comprehensive resolution to the border issue create a complex backdrop for BRICS cooperation. (Doshi, 2023)ConclusionThe BRICS nations have emerged as crucial participants in a period characterized by shifting tides of global finance and the search for greater financial autonomy. The idea for a BRICS currency backed by gold is a significant move toward eliminating reliance on the dollar & altering the international financial landscape.This study has shown the rationale behind the BRICS countries\' desire in establishing a unified currency, highlighting possible benefits such as less reliance on the dollar, more financial independence, and resistance to sanctions. It has also shed insight on India\'s cautious position, which is steeped in complicated economic and geopolitical reasons.However, significant hurdles lie ahead, including the need for cooperation among varied member states, monetary policy alignment, infrastructural development, and global acceptability. Furthermore, geopolitical opposition and current border issues highlight the challenges of BRICS collaboration.ReferenceAggarwal, P. (2020). On de-risking and de-dollarizing intra-BRICS trade via smart contracts. BRICS Journal of Economics (1, Issue 4, 54-69). https://doi.org/10.38050/2712-7508-2020-1-4-6Arslanalp, Eichengreen, & Simpson-Bell. (2022). Dollar Dominance and the Rise of Nontraditional Reserve Currencies. IMF BLOG. Retrieved October 22, 2023, from https://www.imf.org/en/Blogs/Articles/2022/06/01/blog-dollar-dominance-and-the-rise-of-nontraditional-reserve-currenciesCele, S., & Bowker, J. (2023, June 1). BRICS Nations Say New Currency May Offer Shield From Sanctions. Bloomberg.com. https://www.bloomberg.com/news/articles/2023-06-01/brics-nations-say-new-currency-may-offer-shield-from-sanctionsDoshi, T. (2023, August 29). BRICS+6 Vs. G-7: The Quest For Multipolarity. Forbes. https://www.forbes.com/sites/tilakdoshi/2023/08/29/brics6-vs-g-7-the-quest-for-multipolarity/Duggan, N., Hooijmaaijers, B., Rewizorski, M., & Arapova, E. (2021, December 17). Introduction: \'The BRICS, Global Governance, and Challenges for South-South Cooperation in a Post-Western World.\' International Political Science Review, 43(4), 469-480. https://doi.org/10.1177/01925121211052211Fofack. (2023, August 23). Piece by piece, the BRICS really are building a multipolar world. Atlantic Council. Retrieved October 22, 2023, from https://www.atlanticcouncil.org/blogs/new-atlanticist/piece-by-piece-the-brics-really-are-building-a-multipolar-world/Gupta. (2023, June 7). BRICS Expansion Plan And Launching Of BRICS Currency To Decrease Influence Of US Dollar: Gaurav Gupta.Koffler, R. (2023, September 23). Blame the BRICS for the end of the dollar\'s global domination. New York Post. https://nypost.com/2023/09/23/how-the-brics-are-ending-the-dollars-global-domination/Larionova, M., & Kirton, J. J. (Eds.). (2018). BRICS and global governance. New York: Routledge.Lippman, H. (2023, October 20). BRICS+ De-Dollarization: Economic or Geopolitical Problem? The National Interest. https://nationalinterest.org/feature/brics-de-dollarization-economic-or-geopolitical-problem-207005Liu, Z., & Papa, M. (2022). Can BRICS De-dollarize the Global Financial System? (Elements in the Economics of Emerging Markets). Cambridge: Cambridge University Press. https://doi.org/10.1017/9781009029544Lund, Mehta, Manyika, & Goldshtein. (2018). A decade after the global financial crisis: What has (and hasn\'t) changed? McKinsey Global Institute. Retrieved October 22, 2023, from https://www.mckinsey.com/industries/financial-services/our-insights/a-decade-after-the-global-financial-crisis-what-has-and-hasnt-changedMayamiko Biziwick, Nicolette Cattaneo & David Fryer (2015) The rationale for and potential role of the BRICS Contingent Reserve Arrangement, South African Journal of International Affairs, 22:3, 307-324, https://doi.org/10.1080/10220461.2015.1069208Pawson, N. (2023, August 22). How much is the BRICS currency likely to be worth? The South African. https://www.thesouthafrican.com/news/how-much-is-the-brics-currency-likely-to-be-worth-breaking-22-august-2023/Reserve Bank of India. (n.d.). DBIE. https://dbie.rbi.org.in/DBIE/dbie.rbi?site=homeSavage, R. (2023, August 24). What is a BRICS currency and is the U.S. dollar in trouble? Reuters. https://www.reuters.com/markets/currencies/what-is-brics-currency-could-one-be-adopted-2023-08-23/SHETTY. (2023, June 20). BRICS currency: Is it a feasible idea? Observer Research Foundation. Retrieved October 22, 2023, from https://www.orfonline.org/expert-speak/brics-currency-is-it-a-feasible-idea/Singh, B. R. (2023, August 9). Path to a BRICS currency is challenging. Business Line. https://www.thehindubusinessline.com/opinion/path-to-a-brics-currency-is-challenging/article67177273.eceTisch, A. (2023, July 28). BRICS And BRACS. Forbes. https://www.forbes.com/sites/andrewtisch/2023/07/28/brics-and-bracs/?sh=3dde93374511XII BRICS Summit Moscow Declaration. (2020, November 17). Ministério Das Relações Exteriores. https://www.gov.br/mre/en/contact-us/press-area/press-releases/xii-brics-summit-moscow-declarationZharikov, M. V. (2023, March 2). Digital Money Options for the BRICS. International Journal of Financial Studies, 11(1), 42. https://doi.org/10.3390/ijfs11010042Author may be reached at jitendrakumar512@gmail.com and eboard@icai.in
Ep. 271 — Launch 'IBC' or 'OEC' – A Global Opportunity for Practicing Professionals
CA Journal
· September 2026
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Launch IBC or OEC – A Global Opportunity for Practicing ProfessionalsIn ancient times, there were many eminent Indian Universities, namely, Nalanda University, Takshashila University, Vallabhi University, Vikramshila University, Jagaddala University, etc. At that time, the Indian education system was a great heritage. Many foreign students registered for these universities from different countries, like Tibet, China, Korea, Central Asia, Egypt, Iraq, Greece, Syria, Turkey, etc. Eminent teacher Chanakya wrote the book \'Arthashastra, which was a symbol of the thought process of finance. Presently, the Government of India has evolved a new platform in the Indian education system as \'global connect\' through the formation of the International Financial Services Centres Authority (IFSCA), which is a statutory body under the IFSCA Act, 2019 of the Government of India. The four pillars of Indian financial regulations, like the Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI), Insurance Regulatory Development Authority of India (IRDAI), and Pension Fund Regulatory Development Authority of India (PFRDAI) have contributed to this global shift. With the advancement of technology and booming economic growth in India, this paradigm shift is highly significant throughout the world. In this scenario, a new scope of practicing professionals like, CA, CMA, CS, and Lawyers, has emerged.The IFSCA has been formed to regulate financial matters appropriately and expand different financial products, services, etc. from the Indian economy to the rest of the world. The first International Financial Services Centre (IFSC) was established at Gujarat, popularly known as Gujarat International Finance Tec (GIFT) City in 2019. After that, the authority incorporated different business activities under IFSC, likeBanking Sector: Indian as well as foreign banks can set up an Indian Banking Unit (IBU) to deal with lending- borrowing currency, expand derivative markets, etc., under one and unique standard through which India will get a smooth global connect.Insurance Sector: In collaboration Indian and foreign insurance companies can set up an IFSC Insurance Unit (IIU) to do activities like inbound and outbound insurance & reinsurance activities.Capital Market and Asset Management: An Offshore unit may be set up by an investment adviser\'s company, different stock exchanges, brokers, trust service providers, etc. The main activity may be Trade Equity Indices, Currencies, Commodities, etc. on a single platform, Investment Advisory and Portfolio Management Services globally.Aircraft Leasing: India has reached a prestigious position in the domestic aviation market. In the near future, this industry could reach the highest position in the world. Hence, foreign aircraft companies can set up their business on the platform of IFSC.Ship Leasing: Due to the natural costal position of India, ship leasing companies can do their business under the global umbrella IFSC.Education Sector: For connecting foreign educational universities or foreign education institutions with GIFT- IFSC, the Authority has notified regulations, namely, IFSCA (Setting Up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022.Educational Hub\"An investment in knowledge pays the best interest.\" – Benjamin FranklinAfter keeping in mind the noble quote by a great American polymath, it is clear that if investment is made in knowledge through expansion of the education sector, then a great amount of positive return will be awaiting worldwide. The IFSCA has established a global finance hub and also fixed many objectives, like training, skill development, and pooling talent from human resources. To fulfill these objectives, it is necessary to know the global standards, financial management structures, bookkeeping-accounting methodology, procedural parts of tax, including indirect taxes, world banking scenarios, modern technology, etc. The authority has already declared GIFT IFSC as an International Educational Centre.The IFSCA has also notified the IFSCA (Setting Up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022 on 12.10.2022. The IFSCA always boosts up to open International Branch Campus (IBC) or Offshore Education Centre (OEC) in IFSC respectively.Here, IBC can be opened by any foreign universities that have a global ranking and/or subject ranking within the top 500 as per the latest Quacquarelli Symonds (QS) World Universities ranking. The OEC can be opened by any reputed Foreign Educational Institution. Some criteria should be maintained to establish the IBC and OEC:The formation of IBC or OEC may stand alone, or any other form approved by the IFSCA.The university or institution can provide proof of funding to ensure to run the centre on a continuous basis. That means sustainable development will be ensured by foreign universities.The university or institution can apply as per a specific format and approval will be given by the Authority.To provide a degree, diploma, or certificate in any course or programme in Financial Management, FinTech, Science, Technology, Engineering, Mathematics, and related or allied disciplines.It is necessary to emphasize a research-oriented programme in the above-mentioned disciplines. The main focus of this research is to enhance inner thinking for the benefit of the world economy. Research is the only thing that can change the shape of the entire world. It is great news that IFSCA has approved Deakin University, Australia, to open IBC in two courses, namely, Master of Cybersecurity (Professional) and Master of Business Analytics. Several interactions were held with various foreign universities in the UK, the US, and Australia. They have expressed their interest in establishing the IBC or OEC.Benefits of Investment by Foreign Universities or InstitutionsAs per Quacquarelli Symonds (QS) Global India Initiative –\'A focal point of many in international higher education, India is on a spectacular ascent\'.The Indian economy is now at a booming stage. The Gross Domestic Product (GDP) rate of India was 8.4 % in the 3rd quarter of the Financial Year (FY) 2024, which is remarkable throughout the world GDP ranking. India reached at the 5th position in the world in the GDP ranking. The following benefits can be earned by foreign educational institutions in terms of profits as well as wealth by the opening IBC and OEC at GIFT-IFSC.To establish a friendly relationship with high growth Indian economies, as the GDP rate of India is 8.4%. In this way, a well-defined smooth market will be reached by foreign institutions.India holds the 1st position as per the countries in the world population (2024) statistics. So, a smoothly increasing number of young Indian students are awaiting. Hence, foreign institutes can get a good number of youths to do the course, as this will show a good profitable indicator. Indian human resources are very talented, and the foreign universities will get this innovative talent as one of the key stakeholders.The foreign universities or institutions will get an innovative ecosystem because India holds the 40th rank out of 132 economies in the Global Innovation Index 2023.The foreign universities or institutions will get a good number of professional faculty members from different professional bodies, like the Institute of Chartered Accountants of India (ICAI), the Institute of Cost Accountants of India (ICMAI), and the Institute of Company Secretaries of India (ICSI).Foreign universities or institutions can tie up as a partner with big Indian corporate financial houses. Hence, good corporate support will be ensured by the Indian corporate environment.Foreign universities or institutions can easily form IBC or OEC with the simplified liberalization policy in India. All types of facilities will be provided by the Authority.The IFSCA maintains a transparent process of registration for starting IBC-OEC. The foreign education institutions may get clear and good governance from the Authority.For the purpose of operating the IBC or OEC, the Authority mentioned a minimum deposit and a fees structure in terms of USD. So, with the minimum investment, a foreign university or institution can establish an IBC or OEC.Benefits to Indian IntellectualsOperating IBC or OEC by foreign universities or institutions, Indian pupils will get the following benefits:Opportunity to absorb world-class education and training programmes. With the help of these programmes, Indian talent will be converted into sharpened talent. Innovative ideas can be generated in the youth\'s mind. Hence, the Indian economy can find superior, qualitative, and knowledgeable human resources.The Authority also included in this policy to develop the executives via executive education in different disciplines.After the implementation of these IBC or OEC projects, low financial pupils can fulfill their dream to study in India with foreign institutions. The IFSCA acts as a bridge between foreign institutions and ordinary pupils. This bridge can fill the gap between dreams and reality.Financial professionals can get a broad opportunity to gather knowledge about global standards and systems, hence they can become accustomed to the world financial hub. They will get an innovative financial market where the range of financial products is huge in number.With this system, CA, CMA, CS, and lawyers can develop their practice worldwide. They can expand their practice in the field of financial management, taxation, governance, and law throughout the world. Ultimately, they can share their core knowledge as well as acquire valuable information globally.The members of these institutes are getting good employment opportunities from the IFSCA for the topmost posts.With the policy of IFSCA, a smooth global connection can enrich Indian intellectuals to do a wide range of research in the field of finance, tax, engineering, logistics, legal etc.The students shall get the same recognition of these certificates as it would be conducted by the parent entity (foreign university or institution) in their own jurisdiction. It implies that the certificates will carry the same value anywhere in the world.Comprehensive Growth of India via IFSCAThrough Foreign Direct Investment (FDI), 100% investment is allowed in the Indian education sector via an automatic route. As per FDI statistics, it has been observed that FDI equity inflow from April 2000 to September 2024 in the education sector is Rs. 83,550 crore. From this data, it is necessary to enrich foreign universities or institutions to open IBC and OEC in India via IFSCA. This strategic policy will help the inclusive growth of the Indian economy. Some parameters of inclusive growth are discussed below:Employability: Employability in the education sector will be increased with this model and the standard of living of human beings will automatically upsurge. This growth enhances Indian GDP.Assured Quality Enhancement: Due to the IFSCA policy to open IBC and OEC, the Indian educational institutions will rethink their systems. Indirectly, this policy will improve the quality of existing Indian education.Single Umbrella: Through GIFT- IFSC, the government can accumulate all the study abroad consultants under a single platform. Then it will be easier to invite foreign institutions to GIFT IFSC for the opening of IBC or OEC.Impact on Foreign Exchange (Forex) Reserve: Due to IFSCA\'s innovative policy of global connect through the establishment of IBC or OEC, it should be a positive impact on foreign exchange reserves. Hence, the overall growth of the Indian economy will also be impressive.Generation of Small Business: Many small businesses, like canteen, cafeteria, binding house, photocopier showroom, telecommunications, internet cafe, designing house etc., can be developed surrounding of projected IBC or OEC. This will help to develop overall earning capabilities of small-scale entrepreneurs.Enhancement of Banking Sector: Due to the digital Indian economy, the banking sector has also expanded its business in relation to the IBC or OEC establishment. A good number of human resources will be connected with global connectivity initiatives. So, there is expected to be a huge volume of bank transactions related to this establishment. The share market of the banking sector could be restructured throughout the world.Earning Foreign Currency: Through the initiative taken by the government of India, it will be obvious that the flow of foreign currency should be an increasing trend. This implies that the growth of the Indian economy should be one step forward in the world GDP ranking.Key Role and Opportunities of the Finance & Governance Professionals in IndiaThe CAs, CMAs, CS, and lawyers are the vital legal pillars in India as finance and governance professionals. These professionals play a dynamic role in the appropriate execution of the IFSCA policy regarding the formation of IBC or OEC in GIFT IFSC. Now this article explains the key role of these cherished professionals:Strategic Budget Preparation: On the behalf of foreign investors, practicing professionals can prepare a progressive cum strategic budget after considering long term risk-return policy.Enhance ESG: The term Environmental, Social, and Governance (ESG) is a buzzword in all segments throughout the world. The professionals like CAs, CMAs, CS, and lawyers are the most proficient in maintaining ESG in IBC or OEC atmospheres.Innovative Financial tools: The professionals should develop different financial tools through which the investors can expand their educational venture in GIFT city easily.Bookkeeping, Accounting, and Auditing Services: The Indian practitioners have wide opportunities to meet global standards of bookkeeping, accounting, and auditing services and expand their practicing areas. They can develop flawless practice principles by incorporating different software like ERP, SAP, etc.International Tax Management: International tax is a vital functioning area of development of IBC or OEC. The expert tax professionals, like CAs, CMAs, can easily grasp the entire tax system.Contact Drafting: The framework of opening IBC or OEC, it is necessary to draft a suitable contract. Here, the specialized legal practitioners like CS, Lawyers play a pivotal role in formulating contract drafting in a highly professional manner.Sustainable Counselling Services: The Indian professionals are always ready to counsel and consult all types of stakeholders related to IBC and OEC for smooth business functions.Formulation of Different Compliances: The Indian professionals can formulate different compliances to be maintained by the foreign body for the operating and execution part of IBC or OEC in this \'Global Connect\' initiative.Inspection: In case of inspections by the Authority at any time, the inspection team may take the help of these professional experts.ConclusionWith the high rising economic growth in India, various opportunities are waiting in the hands of foreign universities or institutions. The Indian education industry is in a booming stage at present. The Government of India has taken a strategic initiative through the IFSCA Act, 2019. After that, the IFSCA has notified the International Financial Services Centres Authority (Setting up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022. The major beneficiaries of this initiative are foreign universities, foreign institutions, Indian youth populations, hardcore financial professionals, the members of CA, CS, and ICMAI. This initiative also provides employment opportunities, motivates entrepreneurship, earning more and more foreign currencies, global liaison in terms of finance, skill, talent etc. If all the policies or activities of IFSCA work properly, then India will reach the highest position in all aspects throughout the world. The demand for Indian professionals will increase in numerous ways. In the immediate imminent, time will be a new challenge for every Indian professional due to greater opportunities throughout the world.References:International Financial Services Centres Authority, https://ifsca.gov.inListof AncientIndian Universities, SNS, New Delhi, (2022), https://www.thestatesman.com/education/list-ancient-indian-universities-1503075194.htmlTop 5 Ancient Universities of India for learning in Ancient India and Their Astonishing History, Paul G. (2022), https://trueindichistory.com/top-5-ancient-universities-of-india/Ancient institutions of learning in the Indian subcontinent https://en.wikipedia.org/wiki/Ancient_institutions_of_learning_in_the_Indian_subcontinentHistory of accounting, https://en.wikipedia.org/wiki/History_of_accountingTop 50 Motivational Quotes for Students to Study Hard, Indian Foundation, https://www.sakalindiafoundation.com/blog/motivational-quotes-for-students/QS Global India Initiative, https://www.qs.com/for-institutions/qs-global-india-initiative/GDP of India: Current and historical growth rate, India\'s rank in the world, Forbes India (2024), https://www.forbesindia.com/article/explainers/gdp-india/85337/1Countries in the world by population, Worldometer (2024), https://www.worldometers.info/world-population/population-by-country/Global Innovation Index, PIB, (2023), https://www.drishtiias.com/daily-updates/daily-news-analysis/global-innovation-index-2023Quarterly Fact Sheet Fact Sheet on Foreign Direct Investment (FDI)Inflow (2024), https://dpiit.gov.in/sites/default/files/FDI_Factsheet_30May2024.pdfAuthor may be reached at palash2008123@gmail.com and eboard@icai.in
Ep. 272 — Burnout Beneath the Surface: The Unseen Mental Health Challenges Facing Our Professionals
CA Journal
· September 2026
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Burnout Beneath the Surface: The Unseen Mental Health Challenges Facing Our ProfessionalsIn today\'s high-pressure world, Chartered Accountants and other professionals often push their mental health to the sidelines in pursuit of excellence, unaware that the very drive for success can lead to burnout. This article explores the unseen mental health challenges faced by professionals, revealing that high workloads and low social support can significantly contribute to stress and exhaustion that might lead to long-term damage to their health and relationships. Drawing on research and real-life experiences, and the expertise of the author, this article highlights that burnout isn\'t just about fatigue-it\'s a gradual process that can be prevented. By embracing practices like mindfulness, establishing healthy routines, and fostering supportive work environments, professionals can maintain long-term well-being without sacrificing success.By CA. Disha Varma, Member of the InstituteImagine a world where the most accomplished professionals, those who seem to have it all together, like Chartered Accountants are, in fact, quietly collapsing under the weight of their own success. These are the individuals who drive finances, businesses, and economies. Yet, in their pursuit of perfection and efficiency, they often sideline something equally important: their mental health.For many Chartered Accountants, self-care isn\'t just a luxury; it\'s an afterthought. \"I don\'t have time,\" they might say, as deadlines loom. Or perhaps it\'s a belief that vulnerability is a weakness: \"That\'s for weak people,\" they might tell themselves. And then there\'s the overwhelming weight of it all—an endless list of tasks, deadlines, and expectations and the inevitable thought: \"One more thing to do?\"But what happens when this unrelenting drive to perform reaches a breaking point? Numerous scholarly studies in the last decade shed light on this very dilemma. It reveals that the high workload and low levels of social support that are so common in the accounting profession are not just inconveniences they are the very conditions that set the stage for burnout. Yet, perhaps most revealing of all, the study suggests that the solution to this crisis may lie not in working harder or longer, but in something far less intuitive: the simple act of pausing to practice mindfulness and relaxation coupled with practical and sustainable solutions.In a profession that values efficiency above all else, this might seem counterproductive. But as we will see, taking time to slow down might be the very thing that allows high-performing professionals to stay at the top of their game and feed their ambitions and drive.A successful doctor reached out to me one day for a consultation to 10X his work. He was a specialist dedicated to both his practice and researching cancer and autoimmune conditions. And yet, despite his obvious talent and passion, he felt overwhelmed and distracted by the chaos within his own mind. His goal was ambitious: to scale his impact tenfold. But he soon realized, while answering some staggering questions during his strategy consultation with me, that his greatest obstacle wasn\'t the complex diseases he dealt with, but the unseen exhaustion that had begun to take a toll on his mental and emotional health.He wasn\'t burned out yet, but his energy had quickly drained. He was stretched thin, exhausted, and disconnected from his work in ways that were affecting both his professional efficacy and his personal relationships. How can someone like him so driven, so capable—feel so exhausted? How can a successful doctor, who understands the science of the human body, ignore the basic rhythms of health and wellness? The answer lies in what happens beneath the surface.The Elastic Band Theory: How Burnout Sneaks Up on YouThink of burnout like an elastic band. The more you stretch it, the thinner it becomes. Stretch it too far, and it snaps. But when you stretch it gradually, almost indistinguishably, it\'s easy to overlook the fact that the band is being pushed past its limit. That\'s the danger. Burnout doesn\'t come with a warning sign. It creeps in like the heat in the water for the proverbial frog. At first, everything feels manageable. You keep going, even as the water heats up, unaware that you\'re slowly being cooked alive.And it\'s this very gradual nature of burnout that makes it so dangerous. A high achiever might not notice until the damage is done. They might push through, ignoring the quiet signals their body and mind send them—until one day, the wear and tear is too much.Take the case of a young Chartered Accountant (CA), whose tragic death from cardiac arrest brought national attention to the pressures of the profession. It sparked a conversation on work culture, yet we must ask: how often do we, as professionals, fail to recognize the signs of burnout before it\'s too late?Burnout: More than just ExhaustionBurnout doesn\'t discriminate. It affects whether you are just starting your career, at the peak of your success, or leading a team. Whether you are a doctor, a CA, or anyone in between. In fact, burnout might hit hard for the very people who are most dedicated to their work. Like that doctor, they have a passion that blinds them to the need for self-care.Have you compromised on sleep for the sake of work? Missed meals because of looming deadlines? Ignored physical activity? Take unprescribed painkillers for headaches or back pain without thinking twice? Do you find yourself irritable, unable to engage in the activities that once brought you joy? If the answer is \"yes\" to any of these, then you are not alone. And you are certainly not weak in feeling this way.We all face peaks and valleys in our professional lives. There are times when we push ourselves to the brink of exhaustion to meet deadlines or achieve goals. That\'s normal. But what\'s not normal is when we lose sight of our own health until our bodies start protesting, whether through high blood pressure, persistent pain, or worse.The World Health Organization (WHO) defines burnout as \"factors influencing health status or contact with health services.\" In the ICD-11 (International Classification of Diseases) by WHO, \"Burnout is a syndrome caused by chronic workplace stress that hasn\'t been effectively managed. It is characterized by three core elements:Feelings of energy depletion or exhaustion.Increased mental distance from one\'s job, or feelings of negativity or cynicism related to work.Reduced professional efficacy.\"After having worked with 1000s of corporate professionals and entrepreneurs, helping them achieve excellence across their career and relationships, personal and professional, here are my top 5 practical solutions to avoid burnout:1. Establish Routines that Anchor YouThe key to staving off burnout lies in consistency. Our body, much like the earth, thrives on rhythm. The three main rhythms you must nurture are: sleep, nutrition, and physical activity.Imagine each one as a pillar holding up your mental and physical health. If one pillar weakens, the other two soon follow. A consistent sleep schedule, balanced nutritious meals, and at least 20 minutes of daily physical activity form the BIGGEST antidote to burnout. These are not luxuries or optional; they are the very foundation of your energy.When you treat these basics as non-negotiables, they become your most powerful defense against the slow erosion of burnout.2. Create a Culture of Communication and Connection at home and at workMost professionals carry the burden of burnout in silence. We fear that admitting stress is a sign of weakness or failure. But the truth is, burnout is often a result of not expressing stress when it first arises. We need to create cultures—whether in our companies or homes—where communication is not just about outcomes, but also about the energy levels and well-being of everyone involved.Imagine an ecosystem where leaders, employees, and colleagues speak freely about their needs for rest, support, and recovery. This is how organizations thrive in the long run. Instead of glorifying the hero who works long hours, we should elevate the hero who balances productivity with self-care. This cultural shift, if widely adopted, can save countless careers from the brink of collapse.3. Find a Mentor and Build Your CapabilitiesWhen you are on the verge of burnout, it\'s easy to fall into the trap of helplessness and feel like a victim of the toxic culture around you. But burnout is not an inevitable part of success. It is a sign that something needs to change. And that change can come in the form of growth.A mentor can help navigate through this by developing leadership capabilities that will not only allow you to grow in your career but also build a culture of growth and support. They can help you identify blind spots—those areas where you might not even realize you need support. With guidance, you can learn to integrate health and wellness into your life in ways that enhance, rather than detract from, your career. Instead of juggling between work, health, and family, you\'ll learn to live an integrated life, where success in one area fuels success in another.This is the difference between balance and integration. Balance implies a trade-off, while integration allows you to amplify your energy in all aspects of life, and a great mentor will personalize this integration for you, along with you.4. Breathe: Tap into Your Body\'s IntuitionBurnout often begins when we stop listening to our bodies. We ignore the signs—muscle tension, fatigue, irritability and push forward, thinking we can power through. But in doing so, we lose touch with our body\'s natural rhythm.Breathwork—specifically practices like pranayama—can help restore that connection. When practiced daily, even for just ten minutes, pranayama has been shown to regulate the autonomic nervous system, improve cardiovascular health, and restore balance.Think of pranayama as a tool to tune into your body\'s signals before they escalate into chronic pain or disease. Simply for 5 minutes at least, practice pranayama and then for 5 minutes at least, lie down in the most comfortable position, close your eyes and listen to your body, meditate inside your body & out of your mind like notice the rhythm of your breath, feel your heart beating in your chest, pay attention to any sensations or feelings or subtle pains in your body etc. Over time, this practice enhances your awareness of how various foods, activities, and stressors affect your body. The more you practice, the more you can calibrate your energy and vitality, maintaining the balance you need to thrive.5. Invest in High-Quality RejuvenationNot all forms of relaxation or \"de-stressing\" are equal. Low-quality rejuvenation activities like binge-watching TV, scrolling reels non-stop, or using addictive substances to numb the stressors offer only fleeting relief. They don\'t engage your body\'s full potential to heal and reset.Instead, focus on high-quality activities that nurture your entire being. Engaging in physical activities like running, yoga, or dancing, or pursuing your passion in your favorite sports, or immersing yourself in creative pursuits like painting or playing a musical instrument, singing, or dancing, or any art form for that matter, are superior forms of rejuvenation. These activities stimulate both your mind and body, encouraging long-term health benefits by promoting a balanced nervous system.Quality relaxation has a lasting effect on your brain and well-being. Low-quality relaxation only delays the inevitable.Conclusion: Resetting Before You SnapWhat\'s chilling about burnout is that it does not announce itself with loud alarms. It\'s a slow fade. You don\'t feel burned out right away; at first, you feel like you are just getting things done. But gradually, you begin to feel less and less engaged with your work. And before long, the effects are deeply felt in your physical, emotional, and social life. But the good news is, with awareness, intention, and care, burnout can be mitigated, if not entirely avoided.By nurturing your rhythms of sleep, nutrition, and physical activity, communicating openly about stress and energy, finding a mentor to guide your growth, turning into your body\'s signals, and choosing high-quality rejuvenation, you can maintain the vitality needed for long-term success. And in all honesty, your family deserves you at your best and deserves you with great energy levels, as ultimately, your well-being is the fuel that powers everything you do for your family. Just as a tree needs strong roots to grow tall, your family thrives when you are strong and healthy, because everything you do starts with you.The key is not to wait until the elastic band snaps. It\'s to recognize when it\'s being stretched too far and to act before the damage becomes irreversible.So take a step back. Listen to your body. Reset before you reach the breaking point. The only thing that should ever burn is your passion-not your health.Author may be reached at cadishavarma@gmail.com and eboard@icai.in
Ep. 273 — Agentic AI: Transforming the Future of Chartered Accountancy in India
CA Journal
· September 2026
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Agentic AI: Transforming the Future of Chartered Accountancy in IndiaArtificial Intelligence with the help of Generative AI models has already started automating the routine tasks in Finance and Accountancy by generating accounting entries, texts and suggestions for classification of transactions. However, this is just the tip of the iceberg, as the next big breakthrough which is making news around the corner is Agentic AI—an autonomous, decision-making software bot, or commonly referred to as AI agent. These AI Agents are going to be game-changers for Chartered Accountants who are diving deep into AI. This article will explore how artificial intelligence is evolving from Generative AI to Agentic AI, and ultimately toward General Intelligence. Additionally, it will cover how a Chartered Accountant can leverage these transitional phases of AI to excel in this rapidly emerging and evolving technological era.By CA. Jawed Mohammad, Member of the InstituteThe Dawn of AI in Accountancy, Audit and Finance in IndiaIndian Accountancy has already adopted Robotic Process Automation (RPA) in completing day-to-day repetitive tasks which are based on predefined rules. However, a new era of Agentic AI has begun, which is well ahead of its time compared to RPA. Unlike RPAs, Agentic AI can learn from patterns to make independent decisions while adapting to new challenges. We have seen that RPAs work properly on structured data only, whereas Agentic AI can work on unstructured data as well, like PDFs, scanned documents, emails etc. So, in a nutshell, RPAs can auto fill responses, perform repetitive tasks, whereas Agentic AI can extract, summarize, and analyze data to fill responses. It can also give us feedback and acknowledgments in real-time while adapting to ever-changing situations. Furthermore, AI agents can be created to debug/fix errors in real-time while executing tasks.We are presently witnessing the era of Generative AI (tools like Chat GPT, Deepseek, Gemini, Google AI Studio, Notebook.Lm, Gamma.app, Napkin AI etc.) which does help us on the basis of pre-trained models integrated with Natural Language Processing (NLP), but it lacks autonomy and decision-making. Most of these Generative AI tools involves LLMs (Large Language Models) which have interfaces for generating texts, prompts, graphs, images, videos etc. on the basis of the given input only. It also lacks the ability to think independently and generate results based on pre-trained data or reinforcement learning. For instance, ChatGPT can give us a draft reply of any notice, but it cannot actually log in to the account and submit the reply to the notice, once finalized. Further, if we prepare a PPT using Gamma.app, we still have to manually share it with our team. Whereas, AI agents can upload the prompt to Gamma.app for PPT generation and once finalized, a second AI agent, in this flow, can email this PPT to our team while composing the body of the email for team\'s review.Therefore, the need for an AI tool is felt that can go across websites, link all workflows, act on our behalf, make decisions within the liberty we set firsthand. This is exactly why we need an AI Agent. This phase of developing need-based AI agents is called Agentic AI. So, from Generative AI to Agentic AI, the world around us is transforming, and AI is moving a step ahead.Now imagine an AI Agent that prepares tax computations and automatically updates them with every single amendment/update simultaneously. Also, just think about an AI Agent which can download the returns from an email inbox, analyze the return data with the help of LLM, and then, if it passes the compliance test, proceed to the return filing portal and actually file the return. Sounds amazing, doesn\'t it? This is the real power of Agentic AI, which we Chartered Accountants can embrace and leverage to the fullest. We can create a series of AI agents and interlink them to work in a seamless flow. Additionally, we can integrate APIs of different AI tools within this workflow. The sky is the limit for this Agentic AI use cases.It will give us a first-mover advantage if we start exploring Agentic AI now, because, going forward, Agentic AI is also going to be outclassed by Artificial General Intelligence (AGI). AGI is the ultimate future of AI, which we have explored up till now. In other words, we can say that if AI is the entire universe, then AGI is the Observable Universe up to which we can comment.Agentic AI: The Need of the Hour in the Indian ContextAgentic AI works by integrating NLP, Machine Learning, Reinforcement Learning and Data Analytics so that it can make a Multi Agent System. A group of these AI agents then make an AI Agent Flow, which works as a combined package to achieve the desired result and to execute a given task. As a Chartered Accountant, if someone has their target set, then a flow can easily help them to execute the process for achieving that target. Now, this target can be data analysis or forecasting by using LLMs, credit appraisal by calling APIs of different AI tools in market trends and checking the financial health of the borrower.Now, imagine an accounting prospect where one AI agent is using RAG (Retrieval-Augmented Generation) to extract data from unstructured scanned PDFs, then another AI agent is working at the back-end to arrange all the extracted data in a DBMS. Then comes the third agent, which is automatically posting entries from this DBMS to an ERP or Accounting Software, and meanwhile, there is a fourth agent which is continuously updating and reclassifying the data on the basis of Accounting Standards and Income Tax/GST amendments. How easy can this entire accounting process be? Simply from rough scanned images of invoices, banks statement and other documents, we are preparing a complete financial statement, that too in compliance with applicable Accounting Standards. This is the future of AI in the Indian Accounting System.However, this evolution is not going to reduce the work, in fact, it will enhance the efficiency and accuracy of the accounting work. Therefore, CAs offering accounting services will now have their virtual assistant who will do the tedious and laborious work of data entry. Ultimately, CAs will have more time to ponder upon the correct classification of transactions, the alignment of financial statements with applicable accounting standards, and they can present the finalized results in a much better way. Therefore, Agentic AI can be a boon for Chartered Accountants and thousands of Accounting Assistants whose work is going to be very easy. Also, with the help of saved time from data entry and data extraction from scanned images, CAs majorly offering accounting services can now provide deeper insights into financial statements, can proactively detect errors in real time, and can focus on other important avenues of practice like advisory, assurance, and compliances.As such, the truth is always as it was i.e., AI is not going to replace anyone, but people using AI will surely replace those who are not using it. So, there will always be people who will supervise the AI Agents. Also, there will always be people who will analyse the work done by AI. Therefore, CAs must learn how to give correct input to AI models so that our target is achieved. For that, CAs must initially start using Large Language Models (LLMs) to get used to interacting with AI. Once we get the basic idea of how AI responds to our queries, we can move further towards agentic AI. So, the next step in our learning should be focusing on how we can make AI agents flow. We can start with simple flows like email automation using AI. Moreover, we have a lot of online videos where we can learn about Generative AI and Agentic AI as well. ICAI is also offering AI CA Level -1 batches to train the members in using AI in our practice. Thereby, through continuous learning, attending webinars, checking out videos on AI, and allotting a few hours weekly to learn AI, it can surely upskill us and keep us up to date with this quickly evolving AI world.Practical Use Case where Agentic AI can be used for Chartered AccountantsRevolutionizing Tax ComplianceAlmost every CA in practice has one thing in common, and that is tax compliance work. Be it a traditional old CA Firm of \'70s-\'80s or a young, new age CA of Gen-z, all of them have tax compliance-related work in some way or another. So, Agentic AI is surely going to help a lot in tax compliance, right from the beginning of collection of data for tax return filing to summarizing and organizing the data in a proper schema for filing. Then, we can run our accuracy tests on this data with the help of another agent, and finally, when all agents pass this data to the final uploading agent, it will seamlessly upload the same and authenticate the filing on our behalf. Therefore, unlike generative AI, which can only give us information related to tax compliance, Agentic AI moves a step further by analyzing and submitting the returns as well, thereby completing the task.Enhancing Audit EfficiencyIn an audit environment, if AI agents are introduced, CAs can be equipped with a real time and continuously evolving risk assessment system, as these AI agents can perform compliance testing, identify anomalies and exceptions, automate control testing, and also, provide us real time exceptional reports. If an AI agent is created which can continuously validate the entire dataset in line with internal controls and predefined policy frameworks of the company, then the coverage of the audit can be drastically enhanced, instead of only relying on sampled data, and more accurate results regarding deviation from the required compliance can be found out easily. For example, during the audit under the GST Act, we can easily deploy an AI agent which will scan the entire database to detect if any ITC has been claimed on invoices involving blocked credits u/s 17(5) of the CGST Act 2017.Also, for bank audits, we can create an AI agent which can easily identify the abnormal financial transactions like roundtripping, piggybacking etc. This agent will help find anomalies and exceptions by entirely scanning a large dataset of bank transactions, thereby covering another audit aspect, and we can find out possible frauds during the bank audit using Agentic AI.AI agents can also help us automate control testing by regularly monitoring and testing internal controls and flagging deviations in real time. For example, take a payroll audit: An AI agent will continuously check the entire payroll transactions, and it can easily find out ghost employees based on historical trends and other predefined check-fields. Now, if any ghost employee exists or if any salary is authorized beyond limit, then a weakness in internal controls can be easily identified.Therefore, auditing in an Agentic AI environment will surely enable continuous risk monitoring, early detection of anomalies and deviations. Also, it will allow us to have overall more robust compliance testing.Staying Up to date with Amendments and Latest Regulatory FrameworksIt is a matter of fact that a CA needs to update their knowledge every day and the very basic reason behind this continuous learning is the ever-changing tax laws, amendments in various Acts, bills etc. However, many of us might miss some of this plethora of amendments and updates. Therefore, AI Agents will come into the picture here, which will keep alerting us every now and then on the updates across Indian Laws/Acts/Bills. Now, we can design our agent in such a manner that, based on our historical chats with LLMs, the AI agent will identify our area of interest or our core fields of practice where we are more interested in getting updates. Also, there are a lot of AI tools out there in the market which even convert these amendments and updates into podcasts and audio-visuals for us to grasp this knowledge in whatever manner suits us best. Imagine a recent bill of around 100 pages, and one cannot find time to read it all. In this case, one can simply create an AI Agent which will automatically pull the latest bill/act from the web, and with the help of AI tools like Notebook.LM, create a podcast of it and start playing it whenever your phone connects to your car-play. How easily we can utilize the time from leaving home to reaching office. One can listen to the entire podcast and at least have a bird\'s-eye view of a bill of around 100 pages in just 15-20 minutes.However, there will always be a need for HITL (Human-in-the-Loop), as an AI agent integrated with Generative AI tools, indeed, can convert the information into interactive podcasts, etc. but the responsibility of interpretation of the same lies with the CA who is an expert in this domain. Therefore, AI agents can be used to streamline the process of pulling information from the web and converting the same into podcasts, etc. but interpreting this podcast and judging the content of this podcast will entirely be the call of the end user i.e. CA.Also, as of now, it is well established that AI can produce inaccurate outputs, so while interpreting the information related to any Act/Law/Bill etc., we need not to completely depend on the output provided by AI. In fact, there will always be a need for review of the same.Marking the virtual presence of a CAIn the field of this rapidly evolving technological era, a CA also needs to mark his/her virtual presence. It is now the need of the hour that we should educate and inform our clients in an interactive and engaging way, which will in turn result in better input data that we get from our clients and more tax compliance. But the bigger challenge lies in the process of making the information interactive and engaging for the clients. Many of us might not be used to creating audio-visuals of the information which may engage our target audience. Therefore, now, with the help of AI tools, we can create agents which will transform this information into more engaging and interactive audios, visuals, graphics, or animations. All we need to do is to create an agent by programming it to trigger whenever there is an update which we need to pass onto our clients. It will make those ready interactive graphics, flowcharts, visuals etc.Now, once the output is prepared by an AI agent, it can be directly submitted to us by the Agent for review. After a complete review, when this information in an interactive mode seems fit for broadcast, then another AI agent will broadcast it to all our client\'s groups, social media etc. Imagine how our virtual presence is going to be impactful and right on time. Therefore, the entire process from selecting the information which needs to be passed on, to creating a script out of it, and then finally creating an audio-visual out of this script can, though, be automated using AI agents, but every single step in this entire process will require a HITL for review, since whatever information we are broadcasting will have to be well interpreted as per the law of the land, and should have been reviewed for originality and accuracy also. As such, it can be summarized that AI agents will make the process of marking our digital presence easy and fast while keeping the authenticity and accuracy of the information true to the law by involving review checks at every single step.The list above is only just illustrative and not exhaustive, one can imagine hundreds or thousands more use cases of Agentic AI for CAs. However, it is also to be emphasized that Agentic AI, when working with autonomy, should also be harnessed at the same time. It is very evident that issues like Data Privacy, Accountability, and Bias risk are inherent in Artificial Intelligence across the globe as of now. So, these possible threats can be minimized by signing SLA (Service Level Agreements), reviewing before final authentication, and regular monitoring of AI Agents etc.Ethical Considerations and Societal ImpactSince we have discussed how AI can be used more and more in our practice and how we can generate content and data, it is also important that we as Chartered Accountants should consider the work ethics and social impact of AI also. Following ethics and the code of conduct is not new to our fraternity, as we are already following our code of ethics issued by ICAI. However, AI gives us the liberty to freely flow in the ocean and we can dive deep into it, which may result in an adverse social and work impact, if handled negligently. Therefore, the use of AI with the highest ethical standards and the code of conduct is expected from every Chartered Accountant, so that the data privacy of our clients can be ensured. CAs are the custodian of clients, data, and we need to evaluate every possible adverse outcome, before we give anything to AI for processing. Hence, it is highly recommended that the use of AI in our practice be adopted only after taking due care of all the possible threats and risks associated with it, like a breach of data privacy, AI bias, hallucination, full autonomy etc.Need for embracing this transformation and AI-driven future for Chartered AccountantsThe transformation of AI from Generative to Agentic itself is a great shift in the field of technological advancement, but the bigger picture is yet to come when AI will further transform from Agentic to General Intelligence. Therefore, we Chartered Accountants should fasten our seat belts for this amazing roller coaster ride, where if we learn it with interest, then it will surely give us that advantage of cashing in on maximum benefits out of it. Time is quickly reaching a point where machines will ease the work for most of the CAs, but the only condition is that one should embrace this technological shift by updating themselves, so kick start today itself. Imagine the day when AGI will make decisions as a financial strategist or automate the audit process by 80-90%. In that era, we must retain the command of the AGI. Presently, ICAI is leaving no stone unturned to make its members understand that AI is the need of the hour, and every CA should start investing in it right from the Level-1 AI CA course.Therefore, the road ahead is clear for Chartered Accountants to include the use of AI in our daily routine practice so that we become used to it initially and then we can embrace Agentic AI to start preparing projects for ease of practice. Thereby, we all shall be prepared to welcome AGI, and we will reign over it for a better AI-driven future.Author may be reached at jawedmchouhan@gmail.com and eboard@icai.in'
Ep. 274 — Tech-Driven Governance and Regulation: The 'Reg-Tech Revolution'
CA Journal
· September 2026
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Tech-Driven Governance and Regulation: The \'Reg-Tech Revolution\'The Reg-Tech Revolution explores how technology is revolutionizing governance and compliance. Regulatory Technology, widely known as Reg-Tech, is presently a jargon in the global financial and regulatory group. A sub-division of FinTech that mostly focuses on technology that assists in controlling governance and regulatory concerns effectively and efficiently to a greater extent. For a better understanding, we can say that technology is a key enabler to ensure that companies completely comply with all the statutory regulatory requirements.In the years 2006-2010, the financial world was in disorder and facing the worst financial crisis since the period of worldwide economic depression between 1929 and 1939. More and more complex regulations have impacted everyone\'s compliance cost. Companies are dealing with more strict regulations, more challenges, and more complexity. Regulators also imposed heavy penalties and fines for non-compliance. In these circumstances, companies are looking for the foremost solution that helps them to reduce their compliance cost, time, efforts, and majorly compliance risk. The technology used for regulation and governance restructured the entire framework of regulations in a decade. Through a precise examination of emerging technologies and their applications, the article will reveal how Reg-Tech is not only enhancing regulatory processes but also fostering a new paradigm in governance. The primary objective of the article is to understand what exactly Reg-Tech is and how it simplifies regulation and compliance more than ever before.By CA, Shubham Dosi, Member of the InstituteWhat is Reg-Tech?Regulatory Technology (Reg-Tech) is the supervision of governance and regulatory processes within companies through technology. The key functions of Reg-Tech include regulatory reporting, monitoring, and compliance. It consists of a company that helps businesses comply with all the statutory regulations and requirements effectively. To understand better, Reg-Tech is a group of tech-based companies that resolve challenges that appear through automation. The rise in automation with technology has increased cyber-attacks, deceptive activities, and data security challenges, which impact firms and companies adversely. With the use of Machine Learning (ML) and Deep Learning technology, Reg-Tech controls the risk of non-compliance which generally occurred earlier. Reg-Tech not only reduces the risk of compliance but improves the credit score of a company, improves compliance cost, secures data, and reduces human efforts or time required to control risk.Reg-Tech consists of a similar kind of companies that use technology fairly renowned as \"Software as a Service (SAAS)\" to help businesses comply with statutory requirements without spending huge financial or operational costs. Reg-Tech is the requisition of emerging technology to enhance the way companies or firms supervise their regulatory compliances. Reg-Tech entities are now focusing on emerging Artificial Intelligence, Machine Learning, Artificial Neuron Networks, Blockchain, and similar technologies to ensure the capability of digital evolution in the world of regulatory compliance. Regulatory updates and additions have been mandated drastically in the past few years, and penalties for non-compliance are more severe than earlier. These challenges have brought in a new industry called Regulatory Technology, which encloses an extensive range of tools and applications to help the entity to perform their business operations in a more structured, efficient, and compliant manner. Regulatory bodies and financial institutions get together to build a robust platform using cloud computing technology wherein end-users can quickly confirm the requirement and compliances applicable and relevant to them. Reg-Tech seeks to regulate transactions real-time placed online or through automation and prevent non-compliance with any statutory requirement. Any deviation is imparted to the entity to analyze and control any deceptive and fraudulent activity that takes place. Companies identify potential threats to avoid financial loss and minimize the risk and cost linked with respective threats. The global Reg-Tech Investment in 2021 has already reached above USD 18.9 billion as per the Fintech Global report.How Reg-Tech differs from FinTechAs the Regulatory and Financial Industry pioneer, the terms \"Reg-Tech\" and \"FinTech\" are used commonly everywhere, but what exactly do these terms mean, and how different do they work? Financial Technology (FinTech) is defined as a technology enabler, application, or software that improves or automates financial services. The common vision of the FinTech industry is to automate the usage of finance operations in a tech-driven era. Over the past few years, the Financial Industry has grown rapidly, and we have seen extremely revolutionary reforms and decisions taken in favor to identify sufficient opportunities in the Fin-Tech era, whose preliminary objective is to reduce dependency on humans. Further, we can say that the objective of the FinTech industry is to enhance the capability and potential to generate higher financial synergy. Transactions like transferring money through Unified Payment Interface (UPI), Algorithm Trading, Digital Banking, Blockchain, etc., are foremost and leading instances of FinTech for better understanding.Regulatory Technology (Reg-Tech) refers to the use of technology to ensure compliance with regulations and statutes. It is a subcategory of FinTech that focuses on leveraging technological solutions to streamline regulatory management. Reg-Tech systems help organizations mitigate regulatory and financial risks by efficiently monitoring, managing, and ensuring adherence to compliance requirements. Rather than permit the use of financial services, Reg-Tech ensures compliance with applicable financial regulations. Reg-Tech includes everything that helps to improve regulatory compliance, data management processes, risk profile management, KYC data management, risk mitigation, etc. For better understanding, let\'s take an example of the real world to understand how Reg-Tech works and how Reg-Tech reduces compliance risk. If we talk about the electronic Know Your Customer (e-KYC) process by banks, stock brokerage firms, credit rating agencies, etc., they verify the identities of the person who would like to do banking transactions, trading on stock exchanges, or CIBIL checks, respectively.FinTech and RegTech are closely related and adjacent to each other. Somewhere, Reg-Tech behaves like a sub-division of FinTech. Simply, we can say FinTech is the use of technology to provide financial solutions and returns, but all financial solutions entail compliance and regulations, which is the division of RegTech. FinTech processes financial flow very effectively and efficiently, and RegTech can be used to assess risk, review KYC, control suspicious transactions, and regulate the applicable statute of the processed transactions. With the collaboration of FinTech and RegTech, entities can reduce their financial cost and regulatory risk precisely.Benefits of RegTechWhile we are in the context of the revolution in the Financial as well as Regulatory industry with technology, we have seen the global economy rapidly moving towards a tech-based, data-driven economy, enhancing technology in every sector, revolutionizing all the sectors widely, including regulatory space in the financial sector. Now, companies believe in immediately preventing, detecting, and correcting unlawful events and non-authorized activities in an organization at all levels. Reg-Tech is an entirely technology-enabled regulatory process that assists in executing and accomplishing error-free regulatory compliance. In this current RegTech era, everyone is looking at the results of regulatory compliance coming out through technology. Everybody believes that the authenticity of results coming via technology would always be more accurate and perfect as compared to results derived through the manual (human) process. Technology has been a crucial enabler for expansion in the RegTech industry. Let\'s take a look at certain detailed advantages that are generally acceptable for Reg-Tech:Risk Management: By following systematic Reg-Tech applications and tools, organizations can control their inherent risk. Companies can identify, mitigate, and prevent their critical risk. The risk might be related to data security, cyber-attack, policy breach, legal threats, fraud, etc. Reg-Tech typically warns the concerned person or employee whenever identifying or detecting any non-compliance or suspicious activity, so the concerned person can manage circumstances promptly without incurring any cost and loss. With the help of Reg-Tech, companies need not worry about updates or changes in regulations. The system automatically upgrades and makes necessary changes in the process, which makes an effective control on mitigating compliance risk. Reg-Tech has the capability to understand obligations and the impact of risk that may arise because of manual processes or human interventions. Reg-Tech has capabilities to identify and compute specific errors and findings in a way that human and manual systems cannot.Accountability and Accuracy: Often, not everyone is liable for any non-compliance that occurred in a company irrespective of the materiality of that non-compliance, and it\'s very difficult to identify the right person who should be held liable for such an incident. Reg-Tech tools are capable of setting responsibility and always deciding the accountability of the respective person at the time any unpredicted circumstances arise. It\'s very significant for every company to at least identify the reason behind non-compliance and set the accountability of connected persons. This is an era where everyone believes in accurate data with zero error and to achieve accuracy in regulatory compliance. Reg-Tech has proven itself to be a diamond in a mine.Centralized Regulatory Process: Today, companies maintain their data at a centralized location. Even financial transactions are recorded and processed at a centralized level. For compliance with legal requirements, companies are trying to fulfill them at the centralized level. For instance, nowadays, banks are beginning to open new saving accounts either with digital KYC or with digital verification, which reduces their risk to maintain or collect a hard copy of KYC. The same KYC can be stored at the central digital level, which is always available for re-check and verification with a single click. With Reg-Tech, companies can manage their regulatory filings and make sure everything is recorded at a centralized location. Reg-Tech permits companies to maintain and establish their effective controls economically, smoothly and faster.Resource Optimization: Reg-Tech helps to cut operational costs and time connected with regulatory compliances for companies and helps to improve efficiency at a drastic level. By making compliance and regulatory processes easier and more economical, companies can utilize those excess fund and resource for expansion and for other relevant areas. Through technologies like automation, robotic applications, Artificial Intelligence based chat boxes, and real-time compliance, companies are making well-versed governance environments in their organization. Automation in any process helps to improve the quality of output results, improve efficiency, reduce recurring compliance or operational cost, and, foremost, result meet the benchmark.Scaling solutions: Reg-Tech derives an ability to utilize resources very effectively without sacrificing the quality of results. Irrespective of volume, scale, and region, the RegTech works independently to make efficient control to reduce the risk of non-compliance. Cross-border transactions with absolute compliances are feasible just because of RegTech. RegTech enhances the scale of operations, allowing for enlarging business cycles and setting the benchmark to accomplish governance and regulations. RegTech allows companies to move away from the complexity that arises under regulatory matters; technology-driven enablers handle such situations and make an effective roadmap to control regulatory risk.The Future of Reg-TechReg-Tech has started to grow over the past few years with a remarkable expansion in the usage of tools and applications of technology. The use of technology to simplify and modernize the regulatory and compliance process in the financial sector pursues to be a fast-growing, moving, and expanding sector. As increasingly regulated businesses globally, many Financial Institutions and Tech companies come together to regulate compliance with adequate technology. RegTech companies have the potential to build such a robust platform that helps companies to ensure compliance with all the applicable statues and regulations with permanent compliance cost reduction and reduced operational risk. Regulators now welcome regulatory reporting and compliance execution through web options and many Reg-Tech-based companies focusing on transforming legacy data in acceptable digital format.Reg-Tech is the tool of advanced technology to regulate and govern related activities with the vision to move from manual work to digital and computational models and, thereby, obtain improvements in efficiency and effectiveness. Many companies are adopting such effective technology tools and applications to enhance regulatory compliance and reduce compliance risk and cost. Many companies are following the approach to automate compliance-related tasks and manage data on the digital platform. The demand for technology such as Machine Learning, Blockchain, cloud computing, etc., is growing widely, and such technology helps to expand the FinTech, Reg-Tech, and SupTech industry globally. The willingness of the management and legal team to emphasize technology to overcome an error that arises in the manual process has played a vital role in the development of Reg-Tech.Reg-Tech could be especially influential in crossing over the interval between regulators and companies while safeguarding the interest of the common public. Regulators can successfully implement audit tools and scrutinize audit trails to protect customers\' interests widely. The appreciable thing with RegTech is that it performs results in a much better way with the collaboration of technology, regulation, and governance. A prominent illustration of governance with technology is that we are seeing in our routine life i.e. \"Digital-India\" initiative, which focuses to transform India into a digitally regulated empowered economy. The essential elements of the initiative are to build robust Digital Infrastructure for Unified Payment Interface (UPI), E-Governance services, Unique Identification Numbers ([Aadhaar Redacted]), Aarogya Setu and for many others. There are renowned tools and solutions of Reg-Tech which are accepted globally for Financial Transactions Monitoring, Identity Verification, Risk and Compliance Monitoring, Statutory Reporting, Data Analytics and Management etc.Limitations of Reg-TechFrankly speaking, maximum compliance initiatives can\'t be implemented without a certain challenge, and Reg-Tech is not an exception to this. The foremost limitation of Reg-Tech is the lack of expertise in compliance integration. Sometimes, companies have a strong technology base to support but are weak in compliance command. Few companies have sound financial positions but lack the technology experts to build user-friendly tools or applications. When companies come to resolve users\' concerns, they may feel the gap in skills and experience. Another critical barrier in Reg-Tech is one-time implementation cost and recurring maintenance and update costs because the fees and charges of consultants might be very high due to the availability of limited experts and extraordinary demand.One more potential threat to the presence of data security, data safety, and privacy protection is that no one can assure that there will not be any cybersecurity risk, policy breach, or fraud on the digital platform. The risk of using the same technology within a peer group always raises a question on technology upgradation and the sooner you get in, the sooner you will get out of the race in terms of technology, which may create a question mark on long-term resistance in the industry. To control this risk, it\'s always advisable to continuously focus on upgrading with the latest technology and retaining expert knowledge in the entity. Many times, companies have to build or modify existing algorithms as per revision in compliance or regulations, which may result in incurring additional costs and time to perfectly implement such compliance.Conclusive Opinion\"Governance with Technology\"Over the past many years, we have seen legal compliances and regulations drastically change, including the severe penalty provisions for non-compliance. But parallelly, revolution in the technology sector transposes the entire regulatory industry and makes the easiest and safest path for companies to comply with all the statutory requirements. Nowadays, the government is also focused more on effective governance in any organization rather than creating hurdles for organizations using critical and complex provisions in laws. Effective governance and controls in any organization imply that the organization has appropriate and adequate controls that help to build a synergy of regulations and set trust in the heart of every stakeholder. In an era of FinTech, every company must keep concentrating on implementing effective technology tools to regulate finance and the regulation process. Focus could be to reduce duplicated information and provide meaningful real-life examples and tools and show how the tools supported managing exceptions.Referencehttps://www.financierworldwide.com/the-future-of-regtech-a-skyrocketing-industryhttps://bcubeanalytics.com/blog/post/top-benefits-of-Reg-Tech-for-compliancehttps://www.investopedia.com/terms/r/Reg-Tech.aspAuthor may be reached at shubham.mng@gmail.com eboard@icai.in
Ep. 276 — Supercharging Traditional Forensic Techniques with AI
CA Journal
· September 2026
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Supercharging Traditional Forensic Techniques with AIDeception is fraud's oldest tool, yet modern technology has turned deception into a sophisticated art form." The frauds in early times were about simply forging documents and stealing money. Now fraud has changed its face from such simple acts of misfeasance to manipulating algorithms and exploiting the informational technology system that forms the bedrock of the delivery of services. The 2022 incident at a major healthcare institution in Delhi highlighted the importance of robust cybersecurity measures, as it temporarily required a shift to paper-based prescriptions due to system encryption. Similarly, a significant financial institution in Pune experienced an unauthorized transfer of Rs. 81 crores of funds, emphasizing the need for strengthened security frameworks to safeguard digital transactions. The list of such incidents is endless, but these two incidents remind us of how fragile our systems are, and how new-age forensic professionals need to learn the technology. Financial Crime committed using high tech has now become an everyday menace that both victim and law enforcement agencies are struggling to overcome. AI is improving life every day, but fraudsters are not far behind, using technology to create a new breed of frauds.The era of technology has changed for good. Service delivery has changed significantly, from Web 1.0, where we had static pages to Web 2.0, wherein interaction among users was hallmark. Now we are moving to the era of AI. The new buzzword in the AI domain is Agentic AI, which can make automatic decisions. Auditing as an industry has been sluggish due to change in technology. Barring global consulting firms, Indian firms are wary of investing in technology, but that has to change. Gone are the days of manual verification of inventory; IoT (Internet of Things) devices are changing the rules of the game. The evolution continues to this day, but it is no longer following a linear trajectory. It is dynamic, responsive, and disruptive. As technology advances from basic automation toward intelligent, autonomous agentic systems, the terrain of financial transactions is also going through a dramatic transformation.When fraudsters swiftly adapt to these innovations, they exploit not just the vulnerabilities in digital payment gateways but also manipulate advanced platforms such as blockchain, cryptocurrency transactions, and smart contracts.Global corporations have started integrating blockchain into their core business processes. As a consequence, it also introduces a unique complexity to audit trails and forensic investigations. Take, for instance, smart contracts that automate payments and contractual obligations in real-time. This makes auditors face entirely new challenges in establishing accountability and verifying the authenticity of transactions. We may be comfortable with our spreadsheets for now, assuming such scenarios remain limited in India presently, but they\'re rapidly gaining traction and will soon dominate the financial outlook.The Two-Fold ProblemAs criminals upgrade and evolve with newer strategies, organizations deploy increasingly sophisticated anti-fraud systems. Chartered Accountants and forensic practitioners, as a result, face a twofold adaptation challenge here.First is to understand the deeply advanced digital infrastructures that their clients now operate on, andThe second and most important aspect is to embrace technology within their own forensic methods to match them.A large-scale aircraft manufacturer, whose corruption investigation required analyzing nearly 60 million documents using AI-assisted methods. Similar investigative volumes and complexities will soon become the norm even within India\'s corporate fraud investigations, forcing the necessity to shift toward tech-enhanced forensic capabilities. Rather than viewing this seismic shift as a threat or a \'challenge\', forensic professionals can harness technology as their superpower, an enabler. Leveraging existing human expertise and augmenting it digitally using AI and machine learning tools can transform practitioners into agile, digitally adept detectives. It is precisely this integration of \'human judgment and technological precision\' that this article aims to explore deeply, offering a practical roadmap to bridge the digital demands of the financial fraud community.Let\'s acknowledge the growing challenge of tech-driven fraud and the fact that organizations are rapidly adapting by integrating AI-driven solutions across risk management, internal controls, and advanced fraud detection systems. As organizations evolve, it becomes essential for forensic practitioners to do the same. But where does the challenge arise for them? Why are traditional investigation methods no longer sufficient?This is where data plays a crucial role. Today, even simple forensic reviews generate vast amounts of data in multiple formats. The disputed sum may be as small as one or two crore rupees, yet an overwhelming volume of data is produced, including emails, encrypted communications, payment ledgers, bank statements, invoices, and other structured and unstructured documents. Manually sifting through thousands or even millions of such records-while adhering to the strict deadlines and accuracy demands of forensic engagements is not just inefficient but virtually impossible.Traditional approaches were designed for a time when accounting was paper-based, transactional volumes were limited, and documents were systematically archived. While these methods were once a mark of expertise, they are now struggling to keep pace, creating vulnerabilities that tech-savvy fraudsters can exploit.Ultimately, such old, traditional methods just need to evolve, simply because we must now triangulate data from various divergent sources in order to examine, analyze, and extract valuable insights, something called data blending. Yet, how exactly can forensic professionals practically implement data blending to identify and investigate fraud?It means cruising through two separate but interconnected categories of data: structured and unstructured. Structured data is clearly organized numerical or transactional records. It can be your general ledger entries, financial statements, vendor invoices, payment records, and so on. In this realm, forensic analysis leverages statistical anomaly detection tools, such as Benford\'s Law, to identify irregularities.Unstructured data, on the other hand, relates to qualitative information, like textual data. These are the unorganized data we discussed, like emails, chat logs, contracts, and even voice recordings form part of unstructured data. These do not neatly fit into tables or spreadsheets. Manually sifting through this information is labour-intensive and error-prone. With AI technologies, the traditional investigative approaches can now be augmented for both types of data, scaling the depth of analysis.Augmenting Structured DataWhen we talk about structured data, one highly effective technique to illustrate is Benford\'s Law, a statistical principle widely discussed in financial fraud contexts. Benford\'s Law has been a trusted method to detect anomalies in transactional data in accounts payable or general ledger entries by checking if the occurrence of first-digit frequencies conforms to preset patterns. That is, numbers beginning with digits like 1 and 2 occur significantly more often than those starting with 8 or 9. Forensic professionals traditionally use this concept (\"first two-digit test\"), computing their frequency distribution and comparing these to the expected Benford probabilities. Financial records, including ledger balances, expense reports, invoice amounts, and sales numbers, all follow this structure. So, if a dataset deviates from Benford\'s predicted distribution, it can be a sign of data tampering or fraudulent manipulation. It works well when dealing with medium-sized datasets of 2,500-5,000 records. But in contemporary financial settings, where businesses execute millions of transactions every day across several departments and business divisions, it suffers. Here, there is a scalability issue. Since fraud doesn\'t occur uniformly and it often happens within specific vendors, regions, or payment methods, this traditional Benford analysis of the entire company\'s data might overlook irregularities in one department or business unit.To overcome this, a concept of Benford Subset Divergence Analysis (BSDA), a method that uses AI to analyze financial data dynamically, can quickly examine thousands of smaller subsets, such as:Individual vendors or groups of suppliersSpecific geographic regionsDifferent payment methods (NEFT, RTGS, cheque, etc.)Particular general ledger (GL) accounts or document categoriesRather than running Benford\'s Law once across an entire dataset, the BSDA approach can analyze different subsets across a multi-billion-dollar transactional dataset in minutes, an efficiency inconceivable through manual analysis alone.Traditional methodConsider the case of a multinational corporation that processes millions of journal entries annually. Forensic professionals suspect potential fraud, such as fictitious entries or rounding anomalies, but manually analyzing the data is impractical due to its volume and time constraints. In the traditional scenario, the practitioner prepares the data by extracting, say, one million journal entries from the general ledger and applies Benford\'s Law to analyze the first two digits of each transaction amount. Then, using spreadsheets, they calculate the frequency of each digit combination (10 to 99) and compare it to the expected distribution.They identify deviations where actual frequencies exceed or fall below the expected range, such asSpikes at 20 and 21: Transactions starting with these digits occur more frequently than expected.Valleys at 90-99: Transactions in this range are underrepresented, suggesting potential rounding or threshold manipulation.Here, the limitations that they may face would beDeviations spread across the dataset, making it hard to pinpoint specific fraud risks.Manually filtering data by vendor, department, or geography to identify anomalies is time-consuming.Small but significant frauds within subsets (e.g., a single department or vendor) may be \"washed out\" in the aggregate data.AI MethodNow, if the same dataset is loaded into an AI-powered fraud detection tool and configured to perform the BSDA, it may find the specific vendor showing the deviations in transactions starting with 20 and 21. Let\'s call him Vendor X. The tool can pinpoint hidden/specific deviations as follows.For the spike at 20: 12% of Vendor X\'s transactions start with 20, compared to the expected 4.5%.For the spike at 21: 10% of transactions start with 21, compared to the expected 4.1%.The AI tool can also identify \"more-like-this\" transactions (popularly called predictive analytics) across other vendors and GL accounts, which may reveal any fraud ring involving multiple entities. Additionally, transactions under specific GL may also reveal any unusual patterns, suggesting potential data manipulation.Based on this, the investigation can be targeted by better focusing on Vendor X and related subsets, uncovering -Fictitious entries by creating fake invoices below the threshold of Rs. 20000.Rounding anomalies of Rs. 20000 and Rs. 21000Duplicate transactions as double payments.Here, this AI-augmented approach of Benford\'s Law could handle complex datasets across multiple dimensions and also predict similar patterns across the dataset.Some use cases of BSDA are as follows.Fake Beneficiaries: Fraudulent recipients exploiting government subsidy programsInvoice Splitting: Divided invoices inflating infrastructure project costsFalse GST Refunds: Shell companies claiming illegitimate GST refunds.Election Funding: Manipulated funds compromising electral transparencyMSME Anomalies: Irregularities in MSME loans indicating potential fraud.Stock Schemes: Manipulative stock practices harming market fairness.Labyrinth of Unstructured DataWhile AI-driven BSDA is a powerful tool to address numerical anomalies within structured datasets, forensic investigations today extend beyond numbers alone. Investigators often face massive volumes of unstructured information like emails, chat logs, and digital invoices, which makes manual review both impractical and time-consuming. It is only natural that an AI model capable of using both structured and unstructured information is the answer. Multimodal AI, as they are referred to, integrates and analyses data from various sources and formats, such as text, images, and audio. Now you may think of it as an LLM like GPT. But GPT is founded on Generative AI wherein it is used to create new data or content and can process all these file formats. Multimodal AI, on the other hand, also can integrate these multiple types of data. Think of it like a cook and a star chef. Gen AI is a cook who can give you a recipe based on your available ingredients and preferences. But Multimodal AI is a star chef who can understand a picture of your fridge contents and suggest a recipe while listening to your instructions and adjusting cooking times based on heat sensors or even the season!In the financial fraud world, multimodal AI is capable of giving a holistic view of a transaction, simultaneously reviewing structured invoices/payments, unstructured vendor emails, WhatsApp conversations, recorded phone calls, CCTV footage indicating vendor and employee meetings, and so on. What used to be achieved through keyword searches using forensic toolkits, rudimentary speech-to-text tools, or cross-referencing emails to voice chats is now achieved using multimodal. Global financial services companies are already employing such models, stepping up their fraud detection game.The core components of the model are given below.Components of Multimodal AIAdvanced NLPAnalyzes text for sentiment and intentAudio ProcessingTranscribes and enhances audio while identifying speakersGraph-based CorrelationLinks entities across different communication formsAdvanced Natural Language Processing (NLP) for text analysisIt shows the capability of analysing emails and chats beyond keywords, detecting sentiment, intent, and coded language.For example, \"medicine delivery\" in an email could be flagged as a drug trafficking euphemism based on context.Audio processing with speaker recognitionAI transcribes voice chats in real-time and also enhances the audio quality by removing background noise and identifying speakers using vocal biometrics, cross-referencing against databases or prior samples.Graph-based correlationAI constructs relationship networks, linking entities like people, devices, and events across emails, voice chats, and metadata.A call mentioning \"meet at 5\" could be tied to an email with a location, visualised instantly.But how is this technology relevant to practitioners? In a hypothetical scenario, imagine investigating a Rs. 500 crore corruption scandal involving politicians, bureaucrats, and shell companies. We are presented with terabytes of emails, WhatsApp chats, and intercepted voice calls. But in this case, these are all fed into a multimodal system.The NLP flags all the coded bribe terms such as \"facilitation fee,\" \"expediting payment,\" \"consultancy charges,\" or \"special handling charges.\"The audio AI identifies a politician\'s voice in a callGraph analytics links the call to an email scheduling a payoff.Integrates any subtle linguistic cues and emotional tone that might indicate bribery negotiations or suspicious dealings.Establish critical timelines or suspicious interactions, secret meetings, previously unnoticed between persons.Within hours, the model produces a clear timeline of events, maps interactions among parties involved and shell companies, and provides investigators with actionable \"evidence clusters.\"Potential Use Cases: Blending Structured and Unstructured DataShell companyEmail and chatsInvoice & transactionsSatellite imagesLoan fraudCustomer callHandwritten applicationsCCTV footageStock market manipulationSocial media sentimentNetwork mappingTransaction patternCorruption & BriberyEmail and chatsCCTV and audio recordsEntity relationshipsIs the scenario far-fetched?While this might sound like science fiction, law enforcement agencies across the world are already employing such models. Global regulatory agencies use multimodal AI to analyze complex financial crimes and terrorism cases. Multimodal AI is already being explored extensively beyond finance. Ecological research, for instance, employs models like the TaxaBind framework, integrating text-based taxonomy data, geographic coordinates, and satellite imagery, clearly showcasing multimodal AI\'s effectiveness in synthesizing diverse data streams into insights.Recent developments in the Indian scenario illustrate tax authorities considering a review of various digital sources, including emails, social media activities, online investments, and financial transactions to detect tax evasion, which may be a potential use case of such integrated models. Such scenarios, if they materialize, considering the data protection laws, would require authorities to integrate vast volumes of structured and unstructured data effectively, though challenging with traditional models. In these cases, emerging approaches, such as multimodal AI, might become a necessary tool to enable investigators to analyze data seamlessly across various formats.Importantly, technology transcends borders, and data knows no jurisdictions. It is becoming impossible to analyze these developments through a country-specific lens, given their interconnectedness. As organizations across the world adopt such cutting-edge digital models for risk and fraud management, forensic practitioners can no longer afford to lag. Practitioners need to actively understand and incorporate such novel methods to stay competitive and indispensable. Instead of being overwhelmed by technological advancement, we are in a unique position to welcome it and use our knowledge and expertise superpowered with AI to detect new-age financial crimes.Ultimately, the future of forensic investigations lies in a harmonious marriage of human judgment and technological accuracy. It is the technology itself that is transforming practitioners from mere number-crunchers into highly capable digital detectives, preparing us to tackle financial frauds head-on in this data-centric world.References:Prajapat, R. K. & Nigrini, M. J. (2023). Benford Subset Divergence Analysis (BSDA) for AI-Driven Fraud Detection. Forensic Data Science Journal.TaxaBind Research Group. (2023). Integrating Multimodal AI for Ecological Data Analysis. Journal of Computational Sustainability.IBM. (n.d.). Structured vs. unstructured data: What\'s the difference? IBM. Retrieved from https://www.ibm.com/think/topics/structured-vs-unstructured-dataRegional Training Institute, Kolkata. (n.d.). Using Benford\'s Law in Audit: Research Paper. Indian Audit & Accounts Department. Retrieved from: https://cag.gov.in/uploads/research_paper/RES-2-Benford-05ebe241db89494-32544853.pdfIBM. (n.d.). What is Multimodal AI? IBM Research. Retrieved from: https://www.ibm.com/think/topics/multimodal-aiACFE. (2022). Innovation update: Uncover suspicious transactions. Fraud Magazine. Retrieved from https://www.acfe.com/fraud-magazine/all-issues/issue/article?s=2022-novdec-innovation-update-uncover-suspicious-transactionsAuthors may be reached at durgesh.pandey@gmail.com and eboard@icai.in
Decentralized Ledger Technology and Financial Fraud: Unveiling Forensic TechniquesThis article investigates how technology is transforming financial crimes in the digital world, turning traditional financial systems upside down. It discusses forensic methods to detect money laundering operations and the new red flags that pose a challenge to the existing ecosystem, prompting the necessity for sophisticated detection tools to fight emerging financial crimes. The rapid expansion and widespread adoption of cryptocurrencies have brought new opportunities and challenges to the financial market. Among them is the growing abuse of digital currencies to facilitate criminal activities, such as money laundering. The article examines some of the methods criminals use to exploit the anonymity, decentralization, and international nature of blockchain technology to launder money with cryptocurrencies.IntroductionThe rise of blockchain technology has led to new challenges in combating financial crime, including money laundering. With the increasing digitalization of transactions, new-generation crimes are disrupting traditional financial systems and regulatory systems. This article discusses the forensic techniques needed to identify such emerging crimes and the red flags indicating possible illicit transactions in decentralized financial systems. Also, the cryptocurrencies have transformed the way money is managed to enable fast, decentralized, and borderless transfer. Cryptocurrencies such as Bitcoin, Ethereum, and Monero are widely used not only for legitimate transfers but also for illegal ones, such as money laundering. Most cryptocurrencies conceal individuals\' identities, enabling them to transfer money without anyone knowing their real-life identities. Criminals find this aspect appealing since it enables them to conceal who they received the illegally obtained money from. The global character of cryptocurrencies also presents a jurisdictional issue. Money launderers in one nation can route money into wallets in another nation, in exchanges or DeFi protocols in an unregulated or poorly regulated jurisdiction. This ability to bypass mainstream banking infrastructure, combined with the rapidity of crypto technologies, presents serious challenges to financial regulators and law enforcers.As more people use digital money, the criminals are finding new ways to misuse them. This means that countries must work together to come up with regulations, better monitoring tools for blockchain transactions, and help investigators build skills. Non complaint exchanges, Cryptocurrency Platforms in High-risk Regions, Defi, cryptocurrency mixing, peer to peer platforms, privacy coins, and cross-chain transactions make it difficult for law enforcement. This article examines how cryptocurrencies are being used for money laundering, summarizes issues for investigations.Problem DomainMoney laundering is the process of concealing where illicit money originates so that it appears legal. Cryptocurrencies have created new means of money laundering with their:Decentralized Nature: No central authority controls transactions, reducing oversightPseudonymity: Transactions are secured by alphanumeric wallet addresses rather than identifiable individuals.Global Accessibility: Funds can be transferred globally instantly without the obstacle of regulation.Anonymity Tools: Privacy-oriented cryptocurrencies such as Monero and Zcash, coupled with mixing services, conceal transaction routes.Studies from Chainalysis indicate that cryptocurrency money laundering has increased between 2019 and 2023. The value of money laundered rose from $11.1 billion in 2019 to a peak of $31.5 billion in 2022 before declining to $22.2 billion in 2023. The increase is caused by the rapid expansion of the cryptocurrency market, the growth of decentralized finance (DeFi) platforms, and the anonymity of certain crypto transactions. Criminals take advantage of these features to obscure the source of illicit funds, posing challenges for regulators in tracing them. The decline in 2023 was partly due to more robust global efforts by authorities and stronger anti-money laundering (AML) regulations targeting cryptocurrency exchanges and wallets. The trend indicates the evolving risks and the need for more robust compliance regimes in the crypto market.Forensics Investigation StrategiesCryptocurrency money laundering forensic analysis involves blockchain analysis, whereby the investigators track suspicious transactions with tools to trace illicit funds. Machine learning algorithms detect unusual patterns of transactions, while law enforcement collaborates with financial intelligence units to freeze and seize the laundered money. Undercover operations and darknet monitoring also assist in the identification of criminals utilizing crypto for illicit activities. Although, some common tactics and red flags for identifications is shown in table 1 below.Table 1: Shows some common crypto based money laundering and red flags identificationS.no.Crypto-based money laundering can be carried out throughDetailsCommon Red Flags Identifications1.Non-compliant or Unregulated Exchanges. (Non-regulated Cryptocurrency Platforms)Note: The following tools can assist in conducting further investigations and examinationscoinmarketcap.comcoingecko.comNon-compliant exchanges often do not need any KYC documents or customer due diligence (CDD) information from accounts users. Offenders can operate under a covering of extra anonymity.It has no KYC/CDD data requirement.There are exchanges that lack anti-money laundering policies or have very low standards.These Exchanges impose no restrictions or limits on trading activity.Such Exchange enables customers to finance accounts even in case they had originally received crypto assets directly from the mixer services or tumblers.(Note: tumblers services are also known as mixer service)Example tool name: Tornado Cash.2.Cryptocurrency Exchanges in Sensitive Jurisdictions.(Cryptocurrency Platforms in High-risk Regions)Note: The following tools can assist in conducting further investigations and examinationscoinmarketcap.comcoingecko.comMainly countries and regions in high-risk zones, where money laundering and terrorist activities are majorly occurring. (Countries on the high risk of FATF\'s list, recently Nepal is also added in the FATF list.)Exchange registration or legal status details are vague or ambiguous.Such exchanges have headquarters in a jurisdiction having no AML regulation.Such exchanges provide no information about the location of the exchange.Primarily they perform overseas registration.These transactions have a phone number/office information/other addresses in a riskier country.3.Use of Money Mules or Fake Documents on Genuine Exchanges.(Misuse of Authentic Exchanges Using Money Mules and Fake Credentials)Note: The following tools can assist in conducting further investigations and examinations.Darkwebservices/Onion services or Tor servicesA money mule is someone who transfers or moves illegally attained money on behalf of someone elseForged or fake documents may be extremely difficult to distinguish from authentic documents. (there are many channels and platforms in darkweb (offensive), where such services can be avail)Documents appearing to be forged, or stolen documents.Foreign nationals in groups can open several accounts simultaneously.Using fake KYC, IP addresses, and emails.Crypto coins pass through mixers or tumblers prior to being transferred to the mule\'s wallet ultimately.4.Defi -DEXs (Decentralized finance and decentralized exchange)Note: The following tools can assist in conducting further investigations and examination.Defipulse and DefiprimeDefi, Decentralized finance offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts on a blockchain.The users are fully in charge of their funds using self-custody wallets.Decentralized exchanges, or DEXs, on Ethereum are smart contract-based. This enables users to trade one crypto asset for another in real time.DEXs can be employed by criminals to avoid rules and regulations.No compliance controlsA user suddenly acquires numerous crypto assets from an account that is associated with a DEX and attempts to liquidate immediately.The client cannot provide any form of evidence or say where they had obtained the funds from and why they were processing transactions on a DEX.5.Peer to Peer (P2P) Platforms.Note: Mentioned below are the examples of tools that can assist in conducting further investigations and examinations.Localbitcoin, binance, paxful, hodlhodlPeer-to-Peer (P2P) platforms connect buyers and sellers directly. This allows transactions to happen without middlemen like banks or brokers. These websites offer more options, reduced costs, and allow customers to interact directly among themselves on the terms.Large volumes of crypto assets exchanged on exchanges for fiat from wallets of P2P platforms and subsequently transferred into bank accounts do not appear to have any rational explanation for occurring.Crypto funds may originate from such sources as the dark web or mixers.RaaS (multiple ransomware services, darkweb is offering multiple RaaS)6.Defi MixerNote: The following tools can assist in conducting further investigations and examinationsTornado CashTo evade detection, criminals have routinely sought to make use of crypto asset \"mixers\". Mixer Services: These services are tough to trace, as crypto is transfered into multiple wallets, making it difficult to trace)A customer regularly receives money from a DeFi mixer and refuses or is unable to explain where the money is coming from.7.Crypto ATMsCrypto ATMs offer a suitable path for moving cash from one counterpart to a wallet, to another person located away.Crypto Funds are from crypto asset ATMs in which crypto assets are not heavily regulated or not regulated at all.ATM issuers that do not ask for KYC data.No KYC and CDD required from the customers.Apart from these, some tactics used by the cyber criminals include, money laundering through NFT, Mixer services, gambling services, privacy coins, darkweb services, money laundering through gaming services and money laundering through cross chain bridges.Table 2: Some commonly used crypto investigations tools with features are as belowS.noInvestigation ToolFeatures1.ChainalysisChainalysis Reactor is a blockchain money flow visualization software.They trace risky, suspicious bitcoin transactions from onion markets and fraudsters, plus sanctioned addresses are identified by Chainalysis KYT (Know Your Transaction).It comes with a clean interface for viewing and verifying crypto transactions.2.TRM LabsTRM Investigator is an easy-to-use bitcoin explorer. Crypto and transaction flows can be displayed.Transaction monitoring monitors blockchain wallets so that fraud can be prevented.It also gives risk scores to transactions according to anomalous behaviour and patterns.3.Cipher TraceIt determines banks and VASPs\' high-risk expenses and reveals risks related to most VASPs and other virtual asset groups.It accommodates both open and closed-source data and employs specific groupings to accurately gather and collate various signs.ConclusionCryptocurrencies have potential and threats for the global money system as well. They provide more access to financial services for individuals and promote innovation but also provide new means for criminals to conceal illicit proceeds in decentralized networks, anonymous accounts, and cross-border flows. Effective anti-money laundering (AML) operations in the realm of cryptocurrencies require:Increased global regulatory cooperation.Utilizing blockchain analysis tools for tracing illicit money flows.Stringent KYC/AML laws for providers and exchanges.Ongoing training for police and regulators to keep them informed of new technology.As cryptocurrencies increasingly become part of the global financial system, balance between regulation and innovation will have to be established to avoid being used for money laundering and other financial vices.References:Crypto money laundering report available at https://www.chainalysis.com/blog/money-laundering-cryptocurrency/Loss due to crypto scam available at https://www.reuters.com/technology/losses-crypto-scams-grew-45-2023-fbi-says-2024-09-09/Digital currencies, pose higher risk available at https://www.ukfinance.org.uk/news-and-insight/blog/do-digital-currencies-and-cryptocurrencies-pose-higher-risk-money-launderingVirtual Assets Red Flag Indicators of Money Laundering and Terrorist Financing. Available at https://www.fatf-gafi.orgDo Digital Currencies and Cryptocurrencies Pose Higher Risk of Money Laundering? Retrieved from: https://www.ukfinance.org.ukHow criminals leverage non-compliant crypto exchanges for money laundering. https://www.idnow.io/blog/how-criminals-leverage-crypto-money-laundering/Author may be reached at pranay.iet@gmail.com and eboard@icai.in
Ep. 278 — Ironclad your internal fraud investigations
CA Journal
· September 2026
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Ironclad your internal fraud investigationsDespite a robust system of internal controls and governance, no organisation can stake claim to be immune from fraud. In fact, even the coso guidance suggests that 'collusion' and \'management override of controls' are few of the limitations of an internal control framework. These limitations mean that management is capable of overriding internal controls and perpetrate fraud and that personnel can avoid or skip internal controls to engage in collusive behaviour.The Associate of Certified Fraud Examiners (ACFE) 2024 Report to the Nations on occupational fraud also states that more than half of occupational frauds occur due to lack of internal controls or an override of existing internal controls and also states that 43% of occupational frauds were detected by a tip (whistleblower complaints / WB complaints).Organisations faced with dealing with WB complaints are often faced with various conundrums on the best approach of dealing with these matters.On one hand, there are organisations who do not hesitate from engaging the best of the external forensic experts and lawyers to help him navigate these matters while on the other hand, certain organisations prefer to deal with these matters in-house either with support from their internal specialist teams (such an internal audit / investigation units) or representatives chosen from their business units.For organisations in the latter category, this choice may be driven by various factors such as need to balance the cost of investigation, maintaining confidentiality by limiting circulation of information outside the organisation, making the best use of the knowledge residing within the organisation etc.In case cases, given the potential reliance on the results of such investigation by external bodies/ agencies such as statutory auditors or law enforcement authorities, it is vital that common potholes encountered while investigating these matters internally are effectively managed.Forensic Accounting Investigation Standards (FAIS) 110 defines an investigation as \'a critical examination of facts, records, documents and other forms of evidence for a specific purpose, such as an alleged legal, ethical or contractual violation with respect to transactions or event.The purpose of the Investigation is to examine facts and circumstances and gather evidence to prove or disprove hypotheses formulated regarding alleged legal violations, unethical conduct or the possibility of a fraud by suspected individuals.Where the mandate requires the need to gather and evaluate evidence for a specific purpose, such as to help establish possible fraudulent intent, or to identify possible suspects of fraud, the concept of Investigation shall apply.This article does not go into the merits of the decision whether to outsource the investigation or to perform it with help internal experts.It is the responsibility of the organisation to evaluate the pros and cons of each approach and decide the best course of action in the organisation\'s interests.The purpose of this article is to put forth few of the aspects to be considered by the organisation in the course of their decision making should the organisation decide to pursue the matter internally.As with all such matters which can potentially impact the financial statements, more importantly in relation to fraud, organisations should engage in proactively keeping their statutory auditors informed of the incident and the organisations proposed approach.Management has the primary responsibility for preventing and detecting fraud in an organization.Accordingly, although investigation of whistle-blower complaints is the responsibility of management and should be owned up by them, it is always recommended that inputs from the statutory auditors (audit firm/ auditor) may also be sought in relation to the scope of investigation and the proposed work steps to avoid any misgivings at a later date which can potentially delay the audit closure process.As part of the scoping exercise, the auditor may also be able to provide valuable suggestions to the organisation based on his experience in dealing with such matters on other audits which also helps in meeting the auditor\'s requirements.At times, this can also make the organisation\'s investigation process more robust.Additionally, statutory auditors have certain obligations in relation to fraud under the Standards on Auditing and Companies Act and ensuring that the auditors are timely informed of such matters assists the organisation in supporting the auditor to sufficiently meet the obligations enforced upon them under the law and under the applicable auditing standards.More specifically, reporting obligations cast on the auditor under section 143(12) of the Companies Act and form ADT-4, require the auditor to comment whether he is \'satisfied with the steps taken by management\' in relation to frauds.It is in the interest of the organisation that the investigation approach should be agreed with the auditor considering these reporting requirements and he should be satisfied with the steps taken.Any conclusion by the auditor to the contrary will likely be detrimental since the matter may invoke additional scrutiny from the regulator (e.g. Ministry of Corporate Affairs) upon filing of the ADT-4 form by the auditor.A harmonious and collaborative approach with the auditor as opposed to being siloed or adversarial, will be beneficial to the organisation.Based on evaluation of the facts and circumstances, should the auditor express any concerns with regard to investigating the matter internally, the organisation should endeavour to address these concerns with suitable steps and responses.Effective governance in whistleblower investigations is critical for maintaining organizational integrity and addressing management override of controls.The inherent tension between oversight bodies, such as the Board of Directors and Audit Committee, and management can complicate the adherence to FATE principles: Fairness, Accountability, Transparency, and Explainability.To mitigate these challenges, organizations should adopt several key structural safeguards:Direct Reporting Lines: Establish a direct reporting line for investigators to an independent board sub-committee to ensure unbiased oversight.Dedicated Budget: Allocate a specific budget for whistleblower investigations that is controlled by the Audit Committee, ensuring that resources are available without management interference.Protected Communication Channels: Implement secure channels for whistleblowers to report concerns without fear of retaliation.Concurrent Reporting: Require concurrent reporting of findings to external auditors and regulators to enhance transparency.Dual-Key Decision System: Utilize a \"dual-key\" system for critical decisions in investigations to prevent unilateral actions that could compromise integrity.Documentation Protocols: Maintain clear documentation protocols to ensure all investigative steps and findings are recorded systematically.Additionally, modern technology can further reinforce these principles through various controls:Automated Audit Trails: Implement automated audit trails and system-generated logs to track all actions taken during investigations.Immutable Records: Use tamper-evident evidence trails to ensure data integrity.Access Control Matrices: Utilize access control matrices and version control systems to manage who can view or alter investigation-related documents.Blockchain Documentation: Leverage blockchain secure and transparent technology for documentation of reports and findings.System Metadata: Employ system-generated metadata and automatic backup systems to protect data integrity.Privileged Access Management (PAM): Implement PAM systems for real-time alerts on unauthorized access attempts.Security Information and Event Management (SIEM): Use SIEM platforms for comprehensive logging of activities related to investigations.Now that we have laid out the broad background and context of this article, as you may have guessed by the title, now let us explore some aspects which can help us plug some gaps or in other words \'ironclad\' your internal fraud investigations.By no means this is an exhaustive list and learned members who are more experienced may possibly have a much tighter iron lock around their internal investigations!Areas of FocusBoard or Audit Committee mandateInvestigation team compositionEvaluation of allegationConfidentialityExternal expertsInvestigation reportFace findingConclusioni. Obtain mandate from Board or Audit CommitteeMatters in relation to whistleblower complaints are by no means easy to deal with.It is difficult for any such investigation being handled internally to be successful without a supportive tone at the top and the concurrence of those charged with governance (TCWG) namely the Board of Directors and the Audit Committee (if any).Internal investigations require composition of the right team with the appropriate skill sets as well as support from various functions in the organisation to provide the necessary data/information (e.g. electronic data which needs to be provided by the information technology team, copies of documents/vouchers which needs to be provided by the finance team, copies of legal contracts which needs to be given by the legal team, ability to summon individuals for interviews etc).In order to garner timely support from these various functions, a clear mandate from TCWG with regard to the internal investigation will be vital.Such mandate may be provided for each investigation or an omnibus approval depending on the TCWG\'s preference.Without such support, power and authority to conduct the investigation, the investigation team will be akin to a toothless tiger!In large organisations, investigation are handled internally by investigation units which are likely directly under the purview of TCWG hence this condition is met.ii. Composition of the investigation teamCompetence and objectivity are paramount qualities for an internal investigation team.Competence is important since without the right skill sets and experience, the entire investigation process will turn out to be infructuous as the matter will not be properly investigated with the merit that it deserves.Objectivity simply means that the individuals should not be biased while conducting the investigation.When it comes to internal investigations, various biases can creep in and when it comes to maintaining objectivity, at times perception may matter more than reality!What could be some of the biases that could creep in? Consider a situation where the members of the investigation team are from the same department that the alleged individuals are working in.In case of highly technical matters, having some member of the same department who has the relevant competence and expertise may possibly have its merits, this approach is also fraught with the perils of the likely favouritism that can creep in while investigating the matter.Another example could be how close are present or past informal relationships between the alleged individuals and the investigation team members.There are no bright lines in this evaluation, and it would all depend on observation and perception by various people in the organisation.As a corollary, is there any informal evidence that the alleged individuals and the investigation team members have a bone to pick with each other?In both such cases, it will be difficult to argue that the matter is being handled in an objective manner.Another important aspect of competence is also to be able to identify whether there are any areas where the investigation team members do not have the skill sets needed to investigate.If there is such a case, then the organisation may need to consider supplementing the team with support from external agencies having specialised skill sets.Refer section f) for more on this topic.iii. Evaluating Allegations: A Structured FrameworkOnce the investigation team is formed, it\'s time to get down to the brass tacks.To effectively evaluate allegations while protecting whistleblowers and maintaining organizational integrity, a structured framework is essential.This framework should include initial assessment protocols, whistleblower protection measures, information gathering processes, allegation validation methods, technology infrastructure, and resource and timeline management.Initial Assessment ProtocolThe initial assessment should clarify the subject matter and specificity of the allegations.A preliminary risk assessment should categorize allegations based on potential impact and credibility, documenting any initial red flags or corroborating evidence.Whistleblower Protection FrameworkEstablish secure communication channels, anonymous reporting mechanisms, and clear confidentiality and non-retaliation policies.Create information firewalls, monitor for retaliation, and designate a Whistleblower Protection Officer separate from the investigation team.Information Gathering ProcessUse structured templates to capture allegation details and explore discussions with the whistleblower if possible.Provide multiple communication channels with security measures, clear documentation protocols, and a secure storage system with restricted access.Allegation Validation FrameworkUse an evidence assessment checklist to verify basic facts and assess internal controls.Review historical patterns and cross-reference with existing compliance data.Technology InfrastructureImplement a secure case management system with audit trails, automated logging, and data analytics tools.Use a secure document management system with version control and access control matrices.Ensure regular backup and archiving protocols.Resource Planning and Timeline ManagementIdentify dependencies, potential challenges, and resource availability.Create a detailed investigation timeline with milestones and a resource allocation matrix.Develop contingency plans for resource constraints.FATE Principles ImplementationFairness: Use standard evaluation criteria, document decision-making, and apply protection measures equally.Accountability: Assign responsibilities clearly, report status regularly, and document key decisions.Transparency: Maintain clear communication, provide regular updates, and document evidence methodology.Explainability: Document evaluation criteria, explain decisions clearly, and provide regular status reports.Trust Preservation MeasuresShare information on a \"need-to-know\" basis, communicate with affected departments without compromising the investigation, and establish protocols for handling false allegations.Maintain documentation standards and provide confidentiality training.Quality Control MeasuresConduct peer reviews of investigation planning, assess progress regularly, and ensure independent reviews of critical decisions.Perform documentation quality checks and provide regular updates to relevant stakeholders.iv. Sufficient and appropriate proceduresA proper scope of work document along with planned procedures should be prepared by the investigation team.The planned procedures should be in sufficient detail and should be mapped to each of the allegations.This mapping will ensure that all facets of the highlighted concerns are suitably addressed.This activity will also help the investigation team ascertain potential reliance on any external experts where the relevant skillsets are not available with the investigation team.See section on \'Relying on external experts for specialised areas\'FAIS 330 suggests some indicative list of work procedures that can be referred to.For example:Identify the nature of evidence required to confirm the allegations/possible violation.Collect various data, information, facts and documents pertaining to the subject matter.Look for fraud indicators (\"red flags\") such as any unusual or suspicious circumstances, suspicious transactions, unusual trends or patterns, etc.Collect available evidence using a regular \"masked audit\" approach.Conduct discreet enquiries to corroborate evidence and identify those involved.Evaluate allegations and segregate opinions from verifiable facts.Perform basic financial analysis to quantify the extent of loss/damage.FAIS 320 may also be relevant in this regard which highlights that evidence gathered in the investigation should be both reliable and relevant.v. Maintain confidentialityUnlike in the case of investigations outsourced to external agencies, for investigations handled internally there are special considerations regarding ensuring confidentiality.When matters are handled by external agencies, the relevant data is essentially handed over them and all analysis is performed by the agencies on their electronic devices or at their offices.On the contrary, when this is done in-house, all relevant data gathered and analysed for the investigation is stored on the team member\'s official computers or organisations repositories.Relevant communications may be shared via the official email communication channels.You may agree that any leakage of information prior to the completion of investigation may jeopardise the situation and compromise on various elements.There could be malafide attempts to delete data or cohesive attempts to not participate in meetings.Considering this, it becomes important to assess the relevant access controls around storage and access of the information analysis, documents containing interim findings, internal notes or confidential minutes of discussion etc.Some aspects which can be considered in this regard are:Have the team members been sensitised of the requirements for maintaining confidentiality?Have they been sufficiently guided and coached on the good practices in this regard?Are they comfortable in following in these practices and have they clearly understood the implications of not complying?Are the team members storing any investigation related findings on any common drive?What are the access controls surrounding this common drive?Even if the team members are not storing any data on common folders, are there any automated backup mechanisms on shared repositories which get triggered at periodic intervals and can potentially compromise the access controls?Who has access to these backup data?In case the investigation team comprises any senior members, are their emails handled by their assistants and is there a risk of information compromise at their end?With the advent of social media, it not too difficult to validate aspects of the competence of the experts via public domain information.In addition, the organisation may consider asking for credentials and references if needed.Background checks can also be performed in case any of the above options do not yield satisfactory results.All these aspects need to be evaluated upfront and if there is an increased risk of leakage of information, these potential weaknesses should be plugged suitably.Many of these challenges may vary in severity and impact depending on the manner in which the operational aspects of the investigation are conducted and various policies and procedures around information security.vi. Relying on external experts for specialised areasFAIS 230 defines an \'Expert\' as an individual or a person representing an entity, possessing special skills or domain expertise, along with relevant experience and expertise in a particular area, field or discipline.In case the internal investigation team does not possess certain specialised skill sets for relevant aspects of the investigation and if such skills are not available with any other department inhouse, it can consider seeking assistance from external experts.Assistance from these experts could be taken for complex areas such as digital evidence review, cyber investigation, handwriting experts, forged documents review, interpretation of laws and regulations (legal experts) etc.Similar to the attributes expected from internal investigation team members that we examined in section b) of the article, these are also relevant for evaluation of suitability of external experts.For example, evaluation of competence and independence.In case of external experts, one should also consider whether the same agencies had previously worked under the direction of the alleged individuals on previous unrelated engagements for the organisation which may potentially impede their ability to conduct the review in an unbiased manner.Irrespective of the professional competence of the external experts, it is always the organisations responsibility to evaluate the sufficiency and appropriateness of the work performed by the expert and ensure that it meets the requirements of the organisation.Using an expert is just an arrangement to manage the skill gap and does not in any way reduce the responsibilities of the organisation.More often than not, the work done by the expert may culminate in deliverables in the form of a written report.Unless considered prejudicial to the interests of the organisation, a written report should be insisted from the expert.It should be ensured that the report is comprehensive and contains at a minimum, details of the agreed scope, procedures performed, evidence gathered, findings.A detailed review of the deliverables to ensure the following:that work performed is aligned to the agreed scope;limitations / caveats in the report do not impact the conclusion;assumptions on the basis of which work is performed are appropriate and agreed upfront;the work procedures performed are robust and comparable to industry standards;the report is clear, detailed and self-sufficient with all the relevant appendices containing details of the evidence that was relied upon.These may include screenshots, tables containing analysis, photos, minutes of interviews etc.vii. Written investigation reportSimilar to the aspects explored for an external expert, no investigation can be considered to be complete unless the facts are clearly laid out in a written report.This report is crucial since it will form an important part of the investigation and will be relied upon by various stakeholders.The pointers discussed above in point f) are also relevant for the investigation report drafted by the investigation team.The investigation report should be reviewed and adopted by TCWG.Often it is found that for investigations conducted internally the group investigation teams, there is reluctance from the group in sharing the results or findings with the local organisation.It is important that the TCWG of the organisation which is impacted should have unfettered access to the investigation results and these results should also be shared with local management.The Board and management are responsible for the financial statements and providing appropriate representations to auditors.Unless they are made aware of the results of the investigation, they will not be able to fulfil such responsibilities cast upon them under the laws and regulations.viii. Ensure fact finding and stay clear from organisational influencesThe purpose of an investigation is to ensure that relevant facts are clearly drawn out and the conclusions are based on these facts.It is common human behaviour to often allow inherent biases to influence the outcome or the way the same facts are interpreted.Even within an organisation, it is not unreasonable to expect that at times there could be pressure on the investigation team to dilute the findings in order to favour someone.The investigation team should be steadfast in their mandate and should not buckle to any pressure by anyone.Any interference in the investigation should not be taken lightly and should be completely discouraged.Any attempts to do so should be promptly highlighted by the investigation team to the sponsors (TCWG).The TCWG may be able to provide suitable guidance and advice to the team to be able to handle such situations.It is also at this stage that the role of an independent governing body in the organisation becomes important.TCWG (Audit Committee and the Board of Directors) supported by management can undertake the responsibility of interpreting the facts and coming to a conclusion with regard to the veracity of the allegations and culpability of the alleged individuals.The TCWG will thus be able to provide an independent interpretation of the facts and act as an effective mitigant against any potential management biases in concluding the allegations.ix. Regulatory interventionsFAIS 240 explains that there are various laws and regulations which may apply in the course of an investigation.In case of bribery related matters, impact of non-compliance to the relevant anti-bribery laws may need to be examined.While Prevention of Corruption Act (PCA) or the Indian Penal Code (IPC) is applicable in India, among the prominent overseas acts in this regard are the Foreign Corrupt Practices Act (FCPA), UK Bribery Act (UKBA).Interpretation of these laws and regulations is a complex affair and more likely that the organisation may seek external assistance to help them navigate these turbulent waters.As a collateral damage, matters of these non-compliances may also involve regulatory inquiries or scrutiny involving submission of data or depositions.There could be regulatory scrutiny even otherwise for example in case of fraud involving significant sums of money, evasion of taxes, potential money laundering etc.The organisation may need to engage with legal experts or seek appropriate legal advice under their office of general counsel as deemed fit.ConclusionThe author has tried to examine few key aspects which are helpful to consider in an internal investigation.However, dynamic as this area is, there are newer methodologies arising from time to time and every organisation has do its best to be one step ahead of the game and be at the forefront of preventing or detecting fraud within the organisation.Author may be reached at eboard@icai.in
Ep. 279 — Decoding the Blueprint for FinTech Triumph in India: Exploring Key Success Factors
CA Journal
· September 2026
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Decoding the Blueprint for FinTech Triumph in India: Exploring Key Success FactorsIn the era of global digital transformation, FinTech start-ups have emerged as global pioneers, leveraging technology to revolutionize financial services and acquire widespread acclaim. Through an in-depth analysis of funding patterns, regulatory environments, target demographics, product portfolios, customer uptake rates, and competitive frameworks, the study seeks to furnish strategic insights that could propose the triumph of FinTech ventures across India\'s digital landscape.The term FinTech is an abbreviation for Financial Technology which includes a range of products, technologies, and business models that are changing the way financial services work. These advancements bring benefits and improve the efficiency of monetary transactions. Specifically, FinTech refers to emerging startups that are revolutionizing the sector. They cover areas such as cashless payments, asset management, crowdfunding platforms, robo advisors, algo trading, Insurance Technology (InsurTech), Regulatory Technology (RegTech), and virtual currencies (cryptocurrency). This industry has the potential to disrupt practices significantly and is reshaping the financial landscape through innovative approaches with the power of emerging technologies.In India, the Fintech industry has emerged as a rapidly growing sector. This growth is driven by government reforms, increased internet and smartphone usage, as well as significant investments in various sectors adopting FinTech. As of 2021, the value of the FinTech market stands at $50 billion. Experts predict it will reach $150 billion by 2025 with a market estimated to be around $1.3 trillion by the same year. FinTech companies in India cover a range of financial technology services, including lending, InsurTech, Wealth Tech and payment solutions. India\'s FinTech sector is the 2nd largest in the world attracting global investors and it ranks second among the most funded startup sectors in India. Currently, there are over 3000 registered FinTech startups operating in the country. Despite its growth, challenges such as uncertainty, market saturation, cyber security threats, compliance & regulatory issues, scarcity of skilled talent and low financial literacy persist within the Indian FinTech sector.Objectives of the StudyTo study the factors contributing to the success or failure of FinTech in the Indian landscape.To suggest strategies for growth and success of FinTech in the Indian environment.The study explores funding patterns, regulatory frameworks, target markets, product offerings, and customer adoption rates of Fin Techs in India. Further, it also examines the competitive landscapes of five such start-up initiatives in India. It incorporates secondary data on the aforesaid factors from various government reports, reputed newspapers, and research articles. By understanding the relationship between these factors and entrepreneurial outcomes, this study could contribute to the development of strategies that enhance the overall success of Fintech ventures in India.Evolution of FinTech over the yearsThe history of India\'s FinTech market reflects a dynamic evolution fuelled by technological advancements and changing regulatory landscapes. Initially, digital payment solutions like NEFT and RTGS laid the groundwork. However, the sector witnessed a transformative surge with the advent of mobile technology, which birthed mobile wallets and payment apps like Paytm, PhonePe, and Google Pay. The demonetization drive in 2016 further accelerated digital adoption, propelling the rise of UPI-based payments.The growth of modern banking has been underpinned by technology-based banking, identified as the dual foundations in the Indian context. The rapid expansion of mobile networks in previously underserved areas and communities has played a significant role in this advancement over the past decade. Payment banks have emerged as an additional option alongside online and mobile banking, contributing to improved operational efficiency and reduced costs associated with serving customers in rural and semi-urban areas. Additionally, this intersection between Information Systems (IS) and financial services is strengthened by financial technology companies (FinTechs) that originated in the digital realm.Taking a closer look at the FinTech market, the number of FinTechs increased from approximately 12,000 in 2018 to 26,000 in November 2021 (Statista, 2021a). Furthermore, FinTech adoption rates have notably risen in various countries, such as the USA and the UK (Insider Intelligence, 2021; Statista, 2021a). Investments in these ventures saw a substantial increase before the COVID-19 pandemic, reaching 215.1 billion US Dollars in 2019 (Statista, 2021b). The latest data indicates that investment volumes surpass the pre-pandemic levels (226.5 billion US Dollars in 2021) and appear to continue growing in 2022 (107.8 billion US Dollars in the first half of 2022) (Statista, 2021b). Consequently, the FinTech market remains an appealing business sector for investors, founders, and customers. Nevertheless, the failure rates for FinTechs are high, standing at around 75% overall (The Fintech Mag, 2022), and even reaching 87% in Germany within 3 to 6 years after establishment (Stuckenborg & Leker, 2019). The concept of a \"FinTech Bubble\" that might burst has been associated with the past, suggesting uncertainties in the survival of these companies (Dratva, 2020, p. 66). Challenges faced by FinTechs include market or product risks (Buckley & Webster, 2016) and valuation losses, as seen in the case of Klarna (Fintech Magazine, 2022), making it imperative for them to navigate these challenges for long-term market presence. Achieving success factors (SFs), especially in the initial years, is crucial for (new) FinTechs to remain attractive to investors and customers, contributing to their survival (Stuckenborg & Leker, 2019).As of February 2024, India had over 14,726 crore digital transactions, which is a 90-fold increase from 2012-13. This accounts for nearly 46% of the world\'s digital transactions. The number of transactions is estimated to increase to over 3,43,235 Crore by 2027.Pattern of FinTech Funding in IndiaThe funding aspects of FinTech startups in India have been dynamic and have seen significant growth in recent years. Here are some general trends that were observed in the FinTech funding landscape of the country over the years.Investment Growth: The FinTech industry in India has attracted huge fundings from both domestic as well as global investors. Multiple funding rounds reflect investors\' confidence in this sector. With the growing popularity of digital platforms, investors are eager to support technology-oriented startups to boost their credit scoring and risk appetite. Even regulatory agencies like RBI also support the funding of these innovative startups.Diverse Funding Sources: FinTech startups have attracted funding from various sources based on the stage of growth. Venture capital, angel investors, corporate investment, private equity funding, government grants and subsidies, crowdfunding, IPOs, and debt financing are some funding resources available to FinTech startups in India.Global Expansion: Investors from all around the globe have shown interest in funding startups in India to tap into the marketing opportunities in the country. Cross-border investments have tremendously contributed to the internationalization of the Indian Fintech firms.Focus on Specific Segments: Investment focus within the FinTech sector tends to center around particular segments, with notable concentration in areas like digital payments, online lending, robo-advisors, blockchain, and InsurTech. The preferences for these segments may undergo shifts over time, influenced by evolving market dynamics and changing consumer demands.Unicorn Growth: Some FinTech startups have achieved unicorn status, reaching valuations of over $1 billion. This reflects the high expectations and potential investors see in certain FinTech ventures.Stages of growth in FinTech fundingsFinTech funding has undergone a drastic leap over the years since its inception in the country. In this view, the researchers have classified, in the following model, the growth of Fintech Funding across various stages.Fig 1: Model representing pattern of FinTech funding over the yearsPre-Emergent phase: In the nascent phases of the FinTech industry, especially prior to 2010, funding levels were comparatively modest. Only a handful of trailblazing startups secured financial backing from angel investors, venture capital firms, and government initiatives. However, during this period, the overall investment landscape had not yet reached the robustness that would characterize later stages of FinTech development.Emergence and Growth: Between 2010 and 2015, there was a notable surge in funding within the FinTech sector. Growing recognition of technology\'s potential to disrupt conventional financial services sparked heightened investor interest. This period saw a proliferation of investments in digital payments, peer-to-peer lending, and startups focusing on personal finance management, indicating a substantial shift toward innovative financial solutions.Global Acceptance: Fintech funding transitioned into a stage of worldwide expansion, marked by a growing trend of cross-border investments and the emergence of FinTech hubs across diverse regions. Attaining unicorn status became increasingly achievable for prosperous FinTech enterprises, and funding rounds reached unprecedented levels. Substantial investment flowed into digital banking, InsurTech, and solutions based on blockchain technology, indicating a broadening scope of interest and diverse areas of innovation within the FinTech landscape.Maturity Stage: With the maturation of the FinTech sector, funding exhibited a shift towards diversification across a wider array of segments. While digital payments remained a focal point, significant investments extended to burgeoning areas such as Wealth Tech, InsurTech, RegTech, and embedded finance. The onset of the COVID-19 pandemic acted as a catalyst, expediting the adoption of digital financial services and leaving a discernible impact on the prevailing trends in funding within the sector.Present Developments and Future Potential: The forthcoming path of FinTech funding is anticipated to be influenced by continuous technological advancements, regulatory shifts, and the dynamic evolution of consumer behaviors. There is a likelihood that investment focus will pivot towards areas such as artificial intelligence, decentralized finance (DeFi), and FinTech solutions with a sustainability focus. These emerging trends are expected to capture increased attention and investment within the evolving landscape of the FinTech sector.Regulatory framework of FinTech in IndiaThe regulatory agencies are keeping a strict vigilance over Fin Techs in India, right from the financial, technical, and safety aspects concerning customer privacy and sensitive information.Reserve Bank of India: The RBI has implemented guidelines and regulations concerning payment and settlement systems, digital lending, and various other FinTech activities.SEBI: FinTech startups engaged in crowdfunding, robo-advisory and other security related activities come under vigilance of the SEBI.IRDAI: The InsurTechs in India come under the purview of IRDAI.Ministry of Finance: The MoF shapes the entire regulatory environment surrounding FinTechs in India.Ministry of Electronics and Information Technology: The technological aspects of Indian FinTechs are regulated under the MeitY.NPCI: The FinTechs involved in digital payments are interacting with the mechanisms under NPCI.UIDAI: FinTechs dealing with Aadhaar based authentication need to comply with the UIDAI.Marketing Strategies for FinTechsThe target market for FinTech (financial technology) can vary depending on the specific products and services offered by a FinTech company. However, in general, FinTech companies often target the following broad categories of customers:Consumers: FinTechs attract general customers willing to ease out availing financial services. Further, they also support customers\' financial literacy and cater to advisory needs to tactfully manage their finances.Small and Medium-sized Enterprises (SMEs): FinTechs generally target SMEs by offering them funding, and alternative loan options overcoming complications of availing and dealing with bank loans. They also offer accounting and payment management solutions to the SMEs.Investors: FinTechs offer AI solutions to investors catering to their need for superior portfolio management and investment advice. They aim at offering investors with the safest risk return arrangements for their investment solutions.Financial Institutions: FinTech companies offer modern business-to-business (B2B) solutions to traditional financial institutions, including banks and insurance companies, to enhance their technological capabilities, improve efficiency, and reduce costs.Corporate Clients: FinTech firms offering treasury management solutions, such as automated cash flow forecasting and liquidity management, may target corporate clients seeking advanced financial tools.Product Offerings by FinTechs in IndiaThe financial services offered by FinTech are exhaustive. Based on the significant impact on financial sector, FinTech product innovations are categorised under the following categories:Table 1: Product Offering by FinTechs in IndiaFintech InnovationsProducts offeredPayments Clearing and SettlementMobile and Internet based paymentsBlockchain/Digital CurrenciesDeposits Lending and Capital RaisingDistributed LedgerCrowdfundingPeer to Peer LendingBlockchain/Digital CurrenciesMarket ProvisionsDistributed LedgerSmart ContractsCloud ComputingAggregatorsInvestment ManagementSmart ContractsE-TradingAI AdviceData Analytics and Risk ManagementAI and RoboticsHuge DatabaseSource: World Economic Forum 2019Customer Adoption of FinTechsIndia has emerged as a global leader in FinTech adoption across the globe over the years. It has gracefully embraced the technology-based solution to boost the pace of digital growth and development while mitigating the associated risks. Fig 4. represents global FinTech adoption of 10 major countries where India stands firmly in the second place.Strategies for growth and success of Fintech in the Indian environmentThe rapid evolution of FinTech in India has been driven by technological advancements, changing consumer behaviour, and supportive regulatory policies. To ensure sustained growth and success in this dynamic environment, following collaborative models are suggested between FinTech startups and traditional financial institutions that shall leverage each other\'s strengths. These partnerships help FinTech firms gain access to large customer bases, regulatory expertise, and financial backing, while financial institutions benefit from cutting-edge technology, agility, and innovation.Table 2: Collaborative models between Fintech startups and Financial InstitutionsCollaborationsTypesStrategic CollaborationsJoint Ventures: For creation and delivery of innovative products and servicesStrategic Alliances: Project collaborations, resource pooling, crafting joint solutionsPlatform IntegrationAPI Integration: Application Programming Interface allows integration of financial services to existing systemsWhite Label Services: Rebranding existing Financial Products by fintech startups under their own nameCorporate VenturingInvestment: By Financial InstitutionsAcquisitions: Financial institutions may acquire FinTech startups to adapt the changing market dynamicsInnovation Hubs and AcceleratorsInnovation Labs: Hubs for experimentation, idea generation, and development of new technologies and solutionsAccelerator Programs: Funding Mentorship, Funding resources and expertiseRegulatory SandboxesControlled Testing: Controlled environment for testing FinTech productsCollaborative solutionsPartnershipsCross Selling: Cross sell products between traditional financial services and FinTech startupsReferral Programs: Complementary service offerings and referring each other\'s products and servicesData CollaborationAccurate Risk Assessment solutionsPersonalised Tailored financial servicesConclusionThe success of FinTech startups in India is influenced by several key factors, including government support and policies, understanding the Indian consumer, digital payments and financial inclusion, technological innovation and security, and competition and regulatory compliance. The growth of FinTech in India is driven by several factors, including a strong talent pool, increasing collaboration between banks and fintech companies, widespread internet penetration, and increased internet speed and coverage. The future of FinTech in India is bright, with the industry set to play a significant role in the country\'s economy and financial inclusion efforts. The blueprint for FinTech triumph in India hinges on understanding and leveraging key success factors. With a rapidly evolving landscape, embracing technological innovation and customer-centric solutions is paramount. Collaboration between FinTech startups, traditional financial institutions, and regulatory bodies fosters an ecosystem conducive to growth. Moreover, addressing infrastructural challenges and ensuring widespread digital literacy are essential for inclusive expansion. Adaptability to regulatory changes and maintaining robust cybersecurity measures are imperative for sustained success. By prioritizing innovation, collaboration, inclusivity, and regulatory compliance, India\'s fintech industry is poised for unprecedented growth and transformative impact on financial inclusion and economic development.References:https://fastercapital.com/content/Starting-a-successful-fintech-business-in-India.htmlhttps://www.emerald.com/insight/content/doi/10.1108/978-1-80455-562-020231014/full/htmlhttps://www.linkedin.com/pulse/fintech-booms-india-factors-driving-growth-disruption-t-nihar-prasadhttps://www.investindia.gov.in/team-india-blogs/t/bfsi-fintech-financial-serviceshttps://www.investopedia.com/terms/f/fintech.aspStatista. (2021a) Number of Fintech startups worldwide from 2018 to November 2021a, by region. Retrieved March 11, 2023, from https://www.statista.com/statistics/893954/number-fintech-startups-by-region/Statista (2021b) Total value of investments into Fintech companies worldwide from 2010 to 1st half 2021b (in billion U.S. Dollars), Retrieved March 11, 2023, from https://www.statista.com/statistics/719385/investments-into-fintech-companies-globally/Fintech Magazine. (2022). Struggling to scale? Fintech decacorns and the downturn. Retrieved March 11, 2023, from https://fintechmagazine.com/banking/struggling-to-scale-fintech-decacorns-and-the-downturnStuckenborg, L., & Leker, J. (2019). The survival of the German Fintech market: An accounting-based valuation. The Journal of Entrepreneurial. Finance, 21(1), 57-92. https://doi.org/10.57229/2373-1761.1334Dratva, R. (2020). Is open banking driving the financial industry towards a true electronic market? Electronic Markets, 30(1), 1-3. https://doi.org/10.1007/s12525-020-00403-wAuthors may be reached at nazreenparveen8@gmail.com, nomamidutta@gmail.com and eboard@icai.in
Ep. 280 — Unleashing the Power of Automation: A Guide for CAs to Thrive in the Digital Age
CA Journal
· September 2026
00:00
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Unleashing the Power of Automation: A Guide for CAs to Thrive in the Digital AgeThe CA profession is undergoing a digital revolution. Automation technologies like Robotic Process Automation (RPA), Artificial Intelligence (AI), blockchain, Internet of Things (IoT), Cloud computing, big data, cyber security, etc. are transforming how CAs work. By automating repetitive tasks like data entry, reconciliations, computation of income and regulatory filings, and report generation, CAs can achieve significant gains in efficiency and accuracy. This free up valuable time for more strategic activities like client service, business advisory, and specialized services. Implementing automation requires careful planning and addressing challenges like upfront costs, employee resistance, and data security concerns. However, the long-term benefits outweigh the initial hurdles. Firms can adopt a phased approach, starting with pilot projects and employee training.The future of automation in CA practice is bright. AI-powered insights, cognitive automation, and automated client interaction are on the horizon. By embracing these advancements, CAs can evolve into \"augmented CAs\" leveraging technology to become more efficient, insightful, and strategic partners for their clients. Automation is not a threat, but a powerful tool for the transformation and continued success of the CA profession.In an era where technology is reshaping every industry, the field of Chartered Accountancy (CA) is no exception. The integration of automation within CA practice not only enhances efficiency but also enables practitioners to focus on high-value tasks. This article explores the transformative potential of automation in CA practice, covering its benefits, challenges, implementation strategies, and future prospects along with a few case studies.Understanding Automation in CA PracticeAutomation in CA (Chartered Accountancy) practice represents a significant shift in how accounting professionals manage and execute their tasks. Traditionally, many accounting functions involved manual efforts, such as data entry, reconciliations, report generation, and compliance checks. However, with the advent of advanced technologies, these labour-intensive processes are increasingly being automated, leading to substantial improvements in efficiency, accuracy, and productivity.Here are streamlined examples of how SAP and Tally use automation for better visibility:SAP in Supply Chain ManagementAutomated Task: Inventory ManagementReal-Time Data Integration: SAP integrates with ERP and WMS systems to provide real-time visibility into inventory levels across the supply chain.Automated Replenishment: Automatically generates purchase or production orders based on inventory thresholds, ensuring optimal stock levels without manual intervention.Tally in Financial ManagementAutomated Task: Financial ReportingAutomated Bookkeeping: Records financial transactions like sales and purchases automatically by integrating with bank accounts and payment gateways.Real-Time Financial Reports: Generates balance sheets, profit and loss statements, cash flow statements, and aging analysis in real-time for up-to-date financial insights.Robotic Process Automation (RPA) is a cornerstone of this transformation. RPA involves the use of software robots to automate repetitive, rule-based tasks. For instance, RPA can handle data extraction from invoices, perform account reconciliations, and update financial records in real-time, significantly reducing the time and effort required for these processes. This not only speeds up operations but also minimizes the risk of human error, ensuring greater accuracy in financial reporting.Case Study: Implementing Robotic Process Automation (RPA) in a CA Practice FirmBackgroundA Chartered Accountancy (CA) practice firm, specializing in auditing, tax consulting, and financial advisory services, faced challenges with repetitive and time-consuming tasks. These tasks included data entry, invoice processing, compliance checks, and financial report generation. The firm aimed to enhance productivity, accuracy, and client satisfaction by implementing Robotic Process Automation (RPA).ObjectivesIncrease Efficiency: Automate routine tasks to allow accountants to focus on higher-value activities.Reduce Errors: Minimize manual errors in data processing and reporting.ImplementationAfter evaluating multiple RPA solutions including UI Path, Blue Prism and Automation Anywhere. The firm selected a tool that offered ease of use, strong document processing capabilities, and seamless integration with existing systems. The automation journey began with identifying key processes such as tax return preparation, invoice processing, compliance checks, and financial report generation. Following the selection of the most suitable tool, workflows were developed to streamline tasks like data extraction from financial documents, automated data entry, and financial report generation. As a result, the firm achieved a 60% reduction in time spent on automated tasks and a significant decrease in errors related to data entry and report generation, enhancing overall efficiency and accuracy.Popular RPA ToolsUI Path:a. Overview: UI Path is a leading RPA tool known for its ease of use and extensive capabilities. It offers a visual process designer, pre-built activities, and strong integration with various applications.b. Key Features: Visual workflow design, AI integration, robust security features, and a large community for support.Blue Prism:a. Overview: Blue Prism is a highly scalable RPA tool, favored for its strong security and governance features, making it suitable for complex and regulated environments.b. Key Features: Centralized control, secure credential management, and extensive integration options.Artificial Intelligence (AI) and Machine Learning (ML) further enhance CA practices by enabling more complex analytical tasks. AI can analyze vast amounts of data to identify patterns and anomalies that might be missed by human accountants. For example, AI-powered audit tools can scrutinize transactions to detect fraudulent activities or discrepancies, providing deeper insights and enhancing audit accuracy. ML algorithms, on the other hand, can predict financial trends and outcomes based on historical data, aiding in strategic decision-making and planning.Few handy tools are:Kira Systems:a. Overview: Kira Systems is an AI-powered document review and analysis platform. It is particularly useful for CA firms handling large volumes of contracts and documents, as it can quickly extract and analyze data.b. Relevance to CA Firms:Automated Data Extraction: Extract relevant information from financial documents, contracts, and agreements efficiently.Compliance Checks: Identify key clauses and ensure compliance with regulatory standards.Due Diligence: Perform faster and more accurate due diligence during audits and mergers & acquisitions.MindBridge Ai Auditor:a. Overview: MindBridge Ai Auditor is an AI-powered auditing platform that enhances traditional audit procedures by identifying anomalies and potential risks in financial data.b. Relevance to CA Firms:Risk Identification: Automatically detect unusual transactions and potential fraud, reducing audit risks.Data Analysis: Analyze large datasets quickly and accurately, improving audit efficiency.Audit Assurance: Enhance audit quality with AI-driven insights and detailed reports.Blockchain technology is also making inroads into the accounting profession. Known for its robust security and transparency, blockchain can be used to create immutable financial records, facilitating secure and verifiable transactions. This technology is particularly useful in areas such as asset management and audit trails, where maintaining the integrity and traceability of records is crucial.List of some handy tools are as follows:Hyperledger Fabric:a. Overview: Hyperledger Fabric is a permissioned blockchain framework hosted by The Linux Foundation. It is designed for use in enterprise contexts and provides a modular architecture that allows for plug-and-play components.b. Relevance to CA Firms:Audit Trails: Create immutable audit trails for financial transactions, enhancing transparency and trust.Smart Contracts: Automate compliance checks and contractual obligations with smart contracts.Data Security: Ensure the security and integrity of financial records through a decentralized ledger.Ethereum:a. Overview: Ethereum is a decentralized platform that enables the creation and deployment of smart contracts and decentralized applications (dApps). It is widely used for developing blockchain-based applications.b. Relevance to CA Firms:Smart Contracts: Automate complex financial agreements and compliance procedures.Decentralized Applications: Develop custom dApps for various accounting and auditing needs.Transparency: Enhance transparency in financial transactions and reporting.Benefits of AutomationAutomation in Chartered Accountancy (CA) practice significantly enhances efficiency and accuracy by handling repetitive tasks like data entry, ledger maintenance, and reconciliations swiftly and accurately, reducing human error. This allows accountants to focus on tasks requiring professional judgment, improving overall productivity and reputation. Cost savings are substantial as automation reduces the need for manual labor, lowering operational costs in areas like payroll processing and tax calculations. These savings can be invested in strategic initiatives, with automation\'s reduction of errors further minimizing compliance costs. Enhanced compliance and security are also key benefits, with automated systems ensuring adherence to regulatory updates and incorporating advanced security protocols, resulting in reliable financial data management. Improved client service is another major advantage, as automation frees up accountants to provide personalized advice and strategic insights, enhancing client satisfaction and loyalty. Overall, automation leads to faster, more accurate service delivery, strengthening client relationships and positioning firms as trusted advisors.Challenges in Implementing AutomationImplementing automation in Chartered Accountancy (CA) practice faces several challenges, starting with significant initial investment costs. Acquiring technologies like RPA, AI, and ML involves high expenses for software, hardware, installation, customization, and staff training. Small and medium-sized firms, in particular, may find these costs daunting. A thorough cost-benefit analysis is essential to justify these investments, considering long-term savings from reduced labor costs, increased efficiency, and fewer errors.Resistance to change is another major hurdle, as employees may fear job displacement or struggle to adapt to new systems. Effective change management strategies, including transparent communication, training, and involving employees in the transition process, are crucial to overcoming this resistance.Data privacy and security concerns also pose significant challenges, given the large volumes of sensitive financial information handled by automated systems. Firms must implement robust security measures, comply with regulations like General Data Protection Regulation (GDPR), and establish clear data governance policies to protect this information and build client trust.Technical challenges arise from integrating new technologies with existing legacy systems, which may lead to operational disruptions. Careful planning, IT infrastructure assessment, and collaboration with experienced professionals are necessary to ensure seamless integration and address compatibility issues. Establishing a robust support system is essential to manage technical issues during and after integration.Strategies for Effective ImplementationComprehensive Planning: A thorough implementation plan is vital for the successful integration of automation in Chartered Accountancy (CA) practice. This plan should clearly define the goals, timelines, and resources needed for the transition. Identifying which processes to automate is the first step; typically, these are repetitive, time-consuming tasks such as data entry, payroll processing, and report generation. Setting clear milestones and deliverables ensures that the project stays on track and allows for progress monitoring. Detailed planning also involves risk assessment and contingency planning to address potential challenges proactively.Employee Training and Engagement: Investing in employee training programs is essential to equip staff with the skills necessary to effectively use new automation technologies. Training should cover both the technical aspects of the tools and their practical applications in daily tasks. Engaging employees throughout the transition process can significantly reduce resistance to change. Involving them in decision-making, seeking their input, and addressing their concerns fosters a sense of ownership and collaboration. This inclusive approach can help build a culture of innovation and continuous improvement within the firm.Choosing the Right Technology: Selecting the right automation tools is crucial to meet the firm\'s specific needs. This involves evaluating various software solutions based on their features, scalability, and flexibility. Firms should consider the long-term benefits of the tools, such as their ability to integrate with existing systems and support future growth. It\'s also important to assess the vendor\'s reputation, customer support, and the cost of implementation and maintenance. Choosing the appropriate technology ensures that the firm can achieve its automation goals without facing unnecessary disruptions.Pilot Testing: Conducting pilot tests before full-scale implementation is an effective strategy to identify potential issues and areas for improvement. A pilot test allows the firm to evaluate how well the new technology integrates with existing systems and workflows on a smaller scale. Feedback from this phase is invaluable for making necessary adjustments and refinements. It helps in fine-tuning the processes, addressing any technical glitches, and ensuring that employees are comfortable with the new tools. Successful pilot testing paves the way for a smoother and more confident transition to full automation.Case Studies and Success StoriesCase Study 1: Streamlining Tax Compliance for a Growing E-commerce Company (ABC e-commerce)Challenge: ABC e-commerce, a rapidly growing online retailer, faced significant challenges in managing tax compliance due to its extensive transaction volume across multiple states. This resulted in complex Goods and Services Tax (GST) working and filing requirements. The manual process of processing and filing GST returns was:Time-consumingProne to errorsRequired a dedicated staff member to manageSolution: ABC e-commerce implemented an automated tax compliance software solution designed to address these challenges effectively.Implementation Details:Integration with Accounting System:i. The software was integrated seamlessly with ABC e-commerce\'s existing accounting system.ii. This integration enabled automatic collection and categorization of sales data based on the transaction location.Automated Tax Calculation:i. The software automatically calculated the applicable sales tax rates for each transaction, considering the varying GST rates across different states.Pre-filled Tax Forms:i. The system generated pre-filled tax forms based on the categorized and calculated data.ii. This significantly reduced the manual effort and chances of errors.Electronic Filing:i. The software facilitated the electronic filing of GST returns with state authorities.ii. This ensured timely compliance and reduced the administrative burden on the staff.Case Study 2: Boosting Client Service and Profitability for a Mid-Sized CA Firm (Reliable Accountants)Challenge: ABC and Associates, a mid-sized CA firm with a diverse client base, struggled to balance client service with profitability. While they prided themselves on personalized client relationships, the time spent on routine tasks like bookkeeping and financial report generation limited their capacity for high-value services like strategic consulting and financial planning.Solution: ABC and Associates implemented a suite of automation tools including:ICAI PMS software: This helped them in: (i) Assignment management (ii) Work allocation and tracking (iii) Timesheet recording (iv) Variance and profitability analysis (v) Leave management (vi) Expense management (vii) Meeting management (viii) Mobile-based attendance managementCloud-based bookkeeping software: This allowed clients to securely upload their financial documents, automatically categorizing transactions and generating real-time financial reports.Automated report generation tools: Standardized financial reports were automatically generated based on client data, eliminating manual formatting and ensuring consistency.Data visualization tools: Client reports were enhanced with interactive data visualizations, allowing management to gain deeper insights into their financial performance.Table 1: Statistical benefits of automation in CA practiceMetricBenefit (% improvement)Increase in Operational Efficiency25% at leastImprovement in Accuracy20% at leastIncrease in Client Satisfaction15% at leastReturn on Investment (ROI) from Automation30% at leastImpact on ProfitabilityUp to 30%Future Prospects of Automation in CA PracticeThe landscape of the CA practice is undergoing a significant transformation fuelled by automation. While the initial wave has focused on streamlining routine tasks, the future holds even greater possibilities for enhanced efficiency, deeper client service, and a more strategic role for CAs.Here\'s a glimpse into what the future of automation holds for CA practices:AI-powered Insights and Automation: Artificial Intelligence (AI) will play a critical role in automating complex tasks like fraud detection, risk assessment, and even audit procedures. AI will analyze vast datasets to identify patterns and anomalies, providing CAs with deeper insights and allowing them to focus on areas requiring human judgment and strategic intervention.Cognitive Automation and Decision-Making: Cognitive automation tools will go beyond mimicking human actions to understand context and intent. This will enable CAs to automate complex decision-making processes, such as tax optimization strategies and financial forecasting while retaining control over critical business decisions.Automated Client Onboarding and Communication: The client onboarding process will become entirely automated, streamlining data collection, document verification, and even personalized communication through chatbots. This will free up CAs to focus on building deeper relationships with clients from day one.Focus on Specializations and Niche Services: Automation will free up CAs to specialize in niche areas like forensic accounting, international tax planning, or valuation services. This will allow them to command higher fees and establish themselves as subject-matter experts.Rise of the \"Augmented CA\": The future will see the emergence of the \"augmented CA\" a professional who leverages automation tools to become more efficient, insightful, and strategic in their approach to client service. CAs will need to develop a strong understanding of technology to best utilize its capabilities and remain relevant in the evolving business landscape.ConclusionIn conclusion, automation is not a passing fad but a transformative force reshaping the CA landscape. While initial concerns regarding job displacement may arise, the reality is that automation empowers CAs to excel in a more strategic and value-driven role. By embracing automation, CAs can free themselves from the shackles of mundane tasks, dedicating their expertise to areas like strategic tax planning, risk assessment, and providing proactive business insights. This shift allows them to build stronger client relationships, acting as trusted advisors and partners in driving business growth.The future of the CA profession is undoubtedly intertwined with the intelligent application of technology. As AI and cognitive automation tools continue to evolve, CAs who embrace lifelong learning and technological fluency will be best positioned to thrive. Firms that invest in automation not only enhance efficiency and profitability but also demonstrate a commitment to innovation and staying ahead of the curve. This forward-thinking approach will attract and retain top talent, ensuring the continued success of the CA profession in the digital age.Ultimately, the power of automation lies in its ability to augment, not replace, human expertise. As CAs leverage these tools, they can unlock a future of greater efficiency, deeper client connections, and a more strategic role in driving business success. This transformation presents a tremendous opportunity for CAs to solidify their position as invaluable advisors in the ever-evolving financial landscape.Authors may be reached at eboard@icai.in
Ep. 281 — Understanding Behavioural Biases and their Impact on Mutual Fund Investment Decisions: A Systematic Literature Review
CA Journal
· September 2026
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Understanding Behavioural Biases and their Impact on Mutual Fund Investment Decisions: A Systematic Literature ReviewPooled investments, or mutual funds, offer investors economies of scale from inexpensive and diversified portfolios that are frequently distinguished by fund style. They also give investors access to liquidity. The present study is descriptive in nature and it critically surveys the literature on behavioural biases of retail investors and fund managers and impact of the same on their investment decisions and risk taking. The study points out that both herding and window dressing occurs, and fund manager also displays home bias and overconfidence, which lead to increased risk taking and turnover. The disposition effect and performance related incentive fee cause manager to further increase risk.IntroductionAccording to SPIVA Year-End Report for 2023, a whopping 74 per cent of actively managed mid and small-cap funds failed to outperform their benchmark indices (Exhibit 1). The report thus posed a serious question about the effectiveness of the actively managed funds.Indians exhibit a higher level of bias since the Indian financial market is considerably less established (Quddus, 2022). The institutional context of the Indian Mutual Fund business is unique and relatively unexplored. The present study is focussed towards understanding the behavioural biases and its impact on mutual fund investment decisions.Literature Reviews on Behavioural Biases and Investment DecisionsIn case of behavioural finance, theories argue that stock prices can be influenced by psychological and emotional factors. Investment decisions are also influenced by risk perception and are significantly positively related to one another. The perception of risk is significantly positively impacted by herding, disposition effect, and blue-chip bias. However, overconfidence has a significant positive impact on investment decision, but not on risk perception (Almansour, 2023). Eight major biases which can affect investment decisions can be categorised in the following manner:Table 1: Selected literature reviews on behavioural biases and its impact on mutual fund investment decisionsSI. No.ReferenceBiasesMajor findingsImpact on Investment Decision1(Odean, 1999)DispositionDisposition bias is estimated as a difference between the fraction of realized gains and fraction of realized losses. Rapid winner liquidation may be associated with subpar fund performance.An investor or fund manager may have a tendency to cling onto losing equities for an extended period of time, while selling winning stocks fast. Investors thus make a mistake of choosing high front-end load funds and overestimate anticipated holding periods.2(Candraningrat I. R., 2018)FramingInvestors who are given positive information framing will predict stock prices higher than investors given negative information framing.An investor with narrow framing bias does not pay attention to the overall effect of the judgement of buying and selling the assets.3(Alexander Puetz, 2011)OverconfidenceOverconfident investors subsequently trade more which showcases the false beliefs related to their abilities.The fund manager trades frequently or prefers speculative stock, which leads to poor performance.4(Massa, 2006)Home or LocalInvestors prefer geographic proximity as it offers familiarity and low cost for acquisition of information.Fund managers may prefer the stock of companies which are geographically close to his or her home. This leads to an exposure of locally managed mutual funds without putting any importance on its performance and cost.5(Kartasova, 2014)Snake BiteThis causes fear to take risks that prevents investors from profit lock which may affect investment return.Fund managers may weigh their decision more heavily towards the events of recent past.6(Koch, 2017) & (Kumar & Jarwal, 2022)HerdingOut of a sample of 2700 funds between 1989 and 2009, it was identified that only leading funds outperform over several subsequent quarters. In a recent study, herding bias is a short run phenomenon and herding is more prevalent in developing nations during crisis period.The pervasiveness of herding bias among fund managers is more prevalent in the events of economic crisis and bubbles.7(Ormos & Timotity, 2016)AnchoringIt causes investors to rely on immediate and recent price changes.Fund managers put emphasis on first piece of information while making decisions.8(Wang, 2012)Window-dressingIt was found that 9.4% of almost 54,000 transactions in the sample are based on window dressing. The paper also suggests that past poor performance leads to window dressing because of increased employment risk and window dressed fund enjoys subsequent cash inflows which in turn suggests that investors are misled by it.Fund managers undertake cosmetic adjustments to the portfolio just before the declaration date in order to make it more attractive to the investors.Source: Author\'s Compilation from various literatureResearch MethodologyThe study is descriptive in nature and to address the research objective, a secondary survey has been applied using \"Google Scholar\", \"Semantic Scholar\" and \"Bielefeld Academic Search Engine (BASE)\". To study about behavioural biases and their impact on Mutual Fund investment decisions, a literature review has been undertaken along with bibliometric analysis. \"Behavioural Biases\", \"Investment Decisions\", \"Mutual Funds Investment\" and \"Actively Managed Funds\" were considered to be the keywords for downloading and fetching relevant publications for this purpose. A total of 52 research works have been downloaded after removing the duplicates in \"Zotero\". Uncertainty of not choosing a relevant paper has been corrected by adopting three stage strategy which are database searching, abstract study, and citation checking. \"Research Rabbit\", which is an AI powered tool, has been used to check for similar papers to ensure that the downloaded papers are specific towards the objective of the study. A network analysis has been undertaken using VOS viewer on downloaded papers based on \"Title\", \"Keywords\" and \"Abstract\" data. The papers were downloaded and fetched last on $25^{th}$ May 2024, therefore any publication after the above-mentioned date has not been taken into consideration. Also, 9 Scopus indexed research papers out of a total of 52 selected research works were selected (Refer Table 2) based on their number of citation and recency to understand behavioural biases and its impact on mutual fund investment decision making.Analysis and Findingsa. Bibliometric AnalysisAn analysis has been carried out to identify the repeatedly used keywords or phrases in the title or abstract of the papers. The analysis of the keywords highlights that there exists a uniform pattern in the selection of keywords used, especially in the title and the abstract. Out of the total 1235 terms or phrases, 103 met the threshold limit of 4 minimum number of occurrences. For each of these 103 terms, a relevance score has been calculated. The most relevant terms have been selected based on this score. By default, in VOS viewer, 60 per cent of the terms been selected which comes to 62. Major 6 clusters were formed. These clusters have been depicted below by the network formed by applying \"Association Strength\" method of \"Normalization\". The clusters with their constituents have been tabulated as follows:Table 2: Cluster and its ConstituentsCluster NumberTotal ItemsFour Major Items in the ClusterLinksTotal Link StrengthOccurences115AnalysisBehaviourBehavioural BiasFund Manager4138364628131546739314202034212Equity Fund ManagerHerd BehaviourHeuristicInvestment Decision Making1010132473354626545415311Disposition EffectEquity Mutual FundOverconfidenceProfessional Investor153127249299223815516549Mutual Fund InvestorMistakePsychologyApplication271838191342582258281312558EvidenceHerdingTradingStock Price41232921257268217115131413565MarketMemberPension Fund TrusteeOption466665639613211526465(Source: VOS viewer \"Network Visualization\")b. Impact on Retail InvestorsInvestors who view their investment portfolio to serve various purposes exhibit different behaviour in their use of individual stock versus mutual funds. It has been observed that investors pay less attention to hidden management costs and are more attentive to obvious fees like front-end loads. Investors who stay in less affluent and less educated societies or have such neighbours tend to select high expense funds. Investors who are busy more likely to choose mutual funds than individual equities, and households with higher levels of personal and professional responsibilities and less free time are more likely to choose mutual funds.c. Impact on Fund Managers or Institutional InvestorsIt has been identified that sophisticated investors i.e. those who are better informed, have higher income and better experience make good use of mutual funds, whereas behaviourally biased investors buy mutual fund for frequent trading and prefer high expense funds and active funds rather than indexed funds. A study of large sample of US actively managed equity mutual funds during the year 2003-2009 explained that superior past performance boosts managerial overconfidence. The researcher identified inverted U-shaped relationship between fund manager overconfidence and subsequent investment performance.d. Behavioural Biases in Investment Decisions and Strategies for MitigationIn recent times, research has focussed on how to reduce investor biases. Some of the studies proposed in these directions are using gamification approach (Dhawan, 2020), or usage of Artificial Intelligence (Chartier, 2021) or agent-based modelling. It was well established that in the future, an investor\'s behaviour would become such an integral part of finance that any financial modelling without it would make the model incorrect (Thaler, 1999). Further, the literatures revealed that investors\' decision gets biased by the form of presentation of financial reporting, pro-forma and GAAP disclosure. Interestingly, one study states that wealthy investors and large institutions do not show behavioural biases while investing as they have information advantage.One study identified that both top and bottom performing managers showcase 40% increased risk in the second half of the year (relative to minimum risk level) (Hu, 2011). Incentive fee which are related to performance also affects manager behaviour. Research work suggests that effective fee rates are convex over lower ranges of performances. The researchers examined the manager\'s age, average composite SAT score from their undergraduate program, and whether or not they held an MBA to ascertain whether the characteristics of fund managers affect mutual fund performance. Compared to managers who attended less selective undergraduate institutions, mutual fund managers who attended more selective ones performed better. The researchers strongly suggest that stock-picking ability exists. Additionally, the researchers suggest that managers with the \"best\" attributes may outperform the market on average, and that younger managers are more sensitive to performance when it comes to managerial turnover. Studies have demonstrated that there is an enhanced exchange of information between fund managers and the CEO, CFO, and chairman of the company in pre-existing social networks.ConclusionSeveral behavioral biases that fund managers\' face are well shown by empirical research. There is window dressing and herding going on, and the manager exhibits home bias and overconfidence as well, which increases risk-taking and turnover. Managers take on more risk due to the disposition impact and performance-related incentive fees, but they also contribute to somewhat better risk-adjusted performance. The cross-section of fund returns can be effectively explained by both manager and fund characteristics. Risk-taking in reaction to prior performance is convex, even U-shaped; that is, it is lower among mid-ranked managers and higher among both good and poor performers. Nonetheless, it is evident that a solitary time series of returns is typically associated with several managers throughout time, each of whom may possess distinct behavioral biases and attributes.References:Alexander Puetz, S. R. (2011). Overconfidence Among Professional Investors: Evidence from Mutual Fund Managers. Journal of Business Finance & Accounting, 684-712.Almansour, B. Y. (2023). Behavioral finance factors and investment decisions: A mediating role of risk perception. Cogent Economics & Finance.Candraningrat, I. R. (2018). Influence of Framing Information and Disposition Effect in Decision of Investment: Experimental Study on Investor Behavior at Indonesia Stock Exchange Representative on Denpasar, Bali. International Review of Management and, 59-68.Kartasova, G. R. (2014). Influence of \"Snake-Bite\" Effect on Investment Return Rate: Lithuanian Example. Mediterranean Journal of Social Sciences.Koch, A. (2017). Herd behavior and mutual fund performance. Management Science, 3849-3873.Massa, M. &. (2006). Hedging, familiarity and portfolio choice. The Review of Financial Studies, 633-685.Odean, T. (1999). Do Investors Trade Too Much? AMERICAN ECONOMIC REVIEW, 1279-1298.Ormos, & Timotity. (2016). Market microstructure during financial crisis: Dynamics of informed and heuristic-driven trading. Finance Research Letters, 60-66.Quddus, K. &. (2022). Are professional fund managers less likely to sell winners? Evaluating how attention allocation impacts behavioural biases. IIMB, Management Review, 29-43.Wang, X. (2012). Prevalence of Mutual Fund Window Dressing. SSRN Electronic Journal.Author may be reached at eboard@icai.in
Ep. 282 — A Comprehensive Analysis: The Impact of Internal Audit Function Elements on Sustainability Audits
CA Journal
· September 2026
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A Comprehensive Analysis: The Impact of Internal Audit Function Elements on Sustainability AuditsThe purpose of the study is to examine the impact of internal audit function components like risk valuation, business environment knowledge and evaluation, internal audit efficiency, assurance and representations, strategies, principles, arrangements and techniques in sustainability audits. The existing studies review supports that the internal audits and sustainability audits are related component of organizational governance and risk management. By leveraging the synergies between the two, organizations can increase their ability to identify risks, seize opportunities and achieve sustainability goals while enforcing stringent internal controls and compliance standards.The Institute of Chartered Accountants of India (ICAI) lauds SEBI\'s move, highlighting the commitment to Environmental, Social, and Governance (ESG) goals and capacity building within the profession. Industry experts considered this a significant step in improving the ESG reporting quality, enhancing transparency and fostering sustainable practices. The \"long-term value creation\" process for the organization and its stakeholders is ultimately accelerated by the internal audit and sustainability teams working together to help in establishment of a culture of accountability, transparency and continuous improvement.Corporate sustainability is based on a company\'s ethical business practices and value system. Previous research specify that companies that are engrossed in sustainability reporting and activities to signal effectiveness, stimulate employees and aid in process control. The importance of this kind of action in corporate sustainability is becoming more widely recognized. Assuring sustainability is still in its infancy even despite of the growing demand for assurance to boost reliability therein and an increase in the studies recording the expansion of sustainability is maintained in order to reduce the possibility of legal ramifications for environmental misconduct and negative public perceptions of unsustainable operations (Corazza, Truant, Scagnelli, & Mio, 2020; Hoffman, 2018).The scope of internal auditing has included sustainability or reflection on the growing importance of environmental, social and governance (ESG) factors in business operations.Internal AuditThe concept of internal audit involves an efficient, documented procedure to gather audit evidence and evaluate it objectively to ensure compliance with audit criteria, enhancing the Quality Management System and Organizational Performance. Internal audit serves as a vital tool to verify organizational practices, ensuring that they align with quality objectives and relevant standards, ultimately enhancing product or service quality to meet client needs. It is considered a type of internal economic control with business entities, focusing on efficiency, productivity and cost-effectiveness to improve the accounting system and overall operations of the organization. The effectiveness of internal audit is contingent upon well-organized internal audit systems, auditor\'s activities and audit processes within an enterprise (Kataria & Sharma, 2024).Beyond the control assurance, internal auditors significantly enhance organizational performance and management decision making. By identifying efficiencies and recommending improvements, they enable managers to make better-informed decisions that can lead to superior organizational outcomes. Internal audit and process improvement initiatives should not be limited to examine only financial aspects. Instead, they should also include other areas such as operational efficiency, regulatory compliance, risk management, technology processes and overall organizational effectiveness. This broader scope can help identify and improve non-financial processes that also contribute to an organization\'s success. This advisory function is a vital aspect of their rule extending the impact of internal auditing from compliance and risk mitigation to being a catalyst for strategic improvements and innovations. The scope of internal auditing has expanded to include sustainability or reflection on the growing importance of environmental, social and governance (ESG) factors in business operations. The extent to which internal auditors are involved in sustainability related issues can be influenced by these several factors. Governance structure that prioritizes sustainability, management\'s commitment to sustainable practices and the extent of sustainability reporting are pivotal in determining the level of involvement by internal auditors in the following areas. These objectives are key to all activities and are critical for improving control and management within organizations. The role of internal audit is expanding to fulfill stakeholders\' expectation and enhance the overall performance of the organization.Verification of conformity: Internal audit checks if the company\'s activities match its policies, programs and legal requirementsAdequacy of information: Internal audit review whether the financial and non-financial information available is sufficient to accurately understand what is happening within the organization.Protection and Prevention: Goal is to safeguard the company\'s assets as shown on the balance sheet and to find ways to prevent fraud and lossesContinuous improvement: Internal audits continuously monitor and critique the auditing process itself to make it better.Supporting Development and Change: Internal auditing aids in the company\'s development and helps in achievement of goals and encourages organizational changes.Corporate Social Responsibility (CSR): Internal audits can also support CSR initiatives by providing assurance and helping to develop CSR strategiesRisk Assessment and Management: It is crucial to correctly identify and manage risks and opportunities that could impact the effectiveness of internal audits.Best Practices for Conducting Effective Internal Audit by Chartered AccountantsDefining Audit effectiveness: Davies (2009), Carcello, Hermanson, and Raghunandan (2005), and Van Gansberghe (2005) have identified several key indicators and factors that determine the effectiveness of an internal audit. These factors include: (i) concept of ownership (ii) organization of governance framework (iii) improve professional efficiency (iv) law (v) conceptual framework (Gramling, Maletta, Schneider, & Church, 2004). This involves setting clear criteria to measure the success of audits.Internal Audit Intelligence: This concept refers to the combination of thorough knowledge and a focus on being skeptical during audits. Auditors need to be well-rounded in their knowledge and always question the information and processes they are reviewing. This helps in making better decisions and following best practices.Aiming for Excellence: Striving for excellence in Internal audit can greatly benefit an organization not just in meeting today\'s needs but also in ensuring long-term survival and success. Excellence means continually improving and adapting audit practices to add value.Key Factors for Effective Auditing: The skills and competencies of the audit staff along with how well they communicate with the audit committee significantly impact the effectiveness of the audits. Effective communication and skilled auditors are crucial for a successful audit process.Quality Assurance Programs: Developing a program to ensure and improve the quality of internal audit is essential. This involves setting standards for the audit process that align with internationally recognized benchmarks and criteria.Balancing Standards and Expectations: Internal auditors often face the challenge of meeting both the professional standards set for audits and the expectations of the management. Balancing these can be difficult but is necessary for effective auditing.Sustainability AuditA sustainability audit could be referred to as a sustainability assessment or review, a methodical analysis of an organization\'s procedures, practices and guidelines to ascertain how they affect the economy, society and environment. Sustainability audits have a wider focus than traditional financial audits which are mainly concerned with financial performance. They also consider social responsibility, environment stewardship and economic viability. The sustainability audits are comprehensive evaluations that extend across entire supply chains reflecting the broad ESG impacts of an organization and supporting the nature of sustainable business practices. The key areas include energy usage, waste management, water conservation, carbon emissions and resource efficiency. It also evaluates compliance with environmental laws, environmental footprint reduction and supply chain sustainability. Social aspects such as employee welfare, diversity and community engagement are considered as well as ethical sourcing practices. Economic factors like financial viability, cost-effectiveness and long-term sustainability strategies are reviewed. Finally, governance structures, risk management practices and overall corporate social responsibility are also critical components of sustainability audits.SEBI, the market regulator in India has specified a \"glide path\" for the mandatory \"reasonable assurance\" of Core Business Responsibility and Sustainability Reporting (BRSR Core) which is a novel ESG framework for listed companies. Starting from financial year 2023-24, the top 150 listed companies must comply, with the threshold gradually increasing to the top 1000 listed entities by 2026-27. The BRSR, a framework introduced in India for companies to disclose their sustainability practices to focus on ESG factors. The BRSR core emphasizes 49 parameters for ESG reporting, aiming for standardized disclosures to aid investment decisions. SEBI has updated its BRSR format to incorporate new key performance indicators (KPIs) and directed boards of companies to ensure no conflict of interest with assurance providers. The phased approach will standardize ESG disclosure, promote trust among stakeholders and facilitate informed decision-making in India\'s business landscape.The industry in which an organization operates also plays a crucial role, as different sectors face unique sustainability challenges and need to comply with different standards. Additionally, the extent and nature of sustainability reporting by a company can affect the depth and scope of sustainability audits. Organizations that publicly report their sustainability practices are likely to undergo more rigorous and detailed audits, driven by the need to substantiate the claims made in these reports.Is Internal Audit and Sustainability Audit Similar?Both types of audits support accountability and transparency but internal audits are broader in examining the overall organization while sustainability audits are specifically focused on advancing responsible environmental and social practices. The details of the differences have been reported in the table 1.Table 1: Difference Between Internal Audit and Sustainability AuditBasis of DifferenceInternal AuditSustainability AuditScope and FocusIt typically focuses on evaluating an organization\'s internal controls, compliance, financial reporting, risk management and operational efficiency. It aims to ensure that the organization is operating effectively, efficiently and in line with policies and regulations.It evaluates an organization\'s ESG performance. This includes assessing areas such as energy consumption, waste management, social impact, carbon emissions, labor practices and ethical governance.ObjectiveThe primary objective of this is to provide assurance to management and the board that the organization\'s processes are effective, risks are managed and regulatory compliance is maintained.It aims to assess and report on the organization\'s sustainability practices, promoting improvements in ESG areas to support long-term environmental and social responsibility and compliance with sustainability standards.StakeholdersInternal Audit findings are typically reported to senior management, the board and sometimes to regulatory bodies.Sustainability Audits are important to a broader group including investors, customer and communities, as these audits address transparency in sustainability practices.Regulatory InfluenceInternal Audits are required by law or regulatory authorities to ensure that organizations comply with financial regulations and standards. They help in identifying any risks, errors or frauds that could impact financial reporting. In many industries, regular internal audits are mandatory to maintain regulatory compliance, avoid legal penalties and provide stakeholders with confidence in the organization\'s financial health and integrity. Essentially, internal audits ensure that financial operations are being conducted properly and in line with the law.Sustainability audits are voluntary but are now becoming important as global standards for ESG reporting are established. Organizations conduct sustainability audits to assess their impact on the environment, society and ethical governance. These audits help companies to improve their sustainability practices and demonstrate transparency to investors, customers and stakeholders. As regulations around ESG reporting grow stricter, sustainability audits are becoming more formalized and required by certain regulatory bodies. The goal is to promote responsible practices and ensure organizations contribute positively to the environment and society.Source: Authors StudyImpact of Internal Audit Function on Sustainability AuditThere is a positive correlation between the presence of an internal audit function and the robustness of sustainability reporting practices within an organization. This relationship is particularly strong with regard to economic and social sustainability indicators. When internal auditors are engaged in sustainability matters their expertise in verification and control assurance can lead to more comprehensive and reliable sustainability reporting. For instance, internal auditors can verify whether a company\'s carbon emissions or waste reduction claims are accurate by reviewing data, tracking systems and procedures. They also help organizations follow proper controls such as regulatory requirements for environmental or social reporting. By applying their skills in risk management and internal controls, auditors can enhance the reliability and transparency of sustainability reports. This leads to build trust with the stakeholders, ensuring that the company meets its environmental social commitments. This not regulators not stakeholder requirements but also business operation over the long term by aligning audit processes with the business goals and adapting to a changing environment. Internal audit functions play a crucial role in enhancing an organization\'s sustainability and financial robustness through a variety if mechanisms. The impact of internal audit on sustainability audit is influenced by various factors and contribution of them across different dimensions are as follows.Management Support and External Reporting: The involvement of internal audits in environmental and social aspects largely depends on the support from management and the level of external reporting of sustainability information. Organizations that emphasize sustainability in their external communications typically see a more pronounced role of internal auditing in these areas. This support enables internal auditors to extend their assurance and consulting services to cover ESG aspects, ensuring that the company\'s sustainability efforts are both effective and transparent.Internal audit effect on financial performance: Internal audits contribute to strengthening a company\'s financial performance. This is achieved through various consulting services and assurance activities that help improve reliability in financial reporting and operational efficiencies. By addressing and mitigating risks, internal audits help create a more stable financial environment conducive to growth and sustainability.Integrated Audit Management and Business Sustainability: The effectiveness of integrated audit management, which encompasses the audit of both financial and non-financial aspects of a business is influenced by several internal capabilities, including human resources, technology and quality management. Effective integrated audit practices ensure that the organization can sustain its business operation over the long term by aligning audit processes with the business goals and adapting to a changing environment.Continuous Audit Environment: In an environment where audits are conducted continuously, statutory auditors tend to place greater reliance on the work performed by internal auditors, especially when existing controls are effective. A continuous audit approach allows for real time monitoring and assessment, enhancing the reliability of financial reporting and operational practice.Internal Audit Quality and Control Deficiencies: The quality and skills of internal audit personnel significantly affect the occurrence and severity of deficiencies in internal control. Competent internal auditors are able to identify, assess and suggest improvements for control weaknesses, thereby reducing the risk of errors and fraud.Internal Auditors Compliance with Standards and Financial Reporting Quality: Acquiescence with the \"International Standards for the Professional Practice of Internal Auditing (ISPPIA)\" is crucial. Organizations that adhere to these standards generally experience higher quality in financial reporting. This compliance ensures that the internal audits are carried out with a high degree of professionalism and adherence to globally recognized best practices, thereby enhancing the reliability and credibility of financial reports.Role of Internal Auditors in Sustainability AuditsThe present section has been categorized into different dimensions as the role of internal auditors in sustainability audit involves various key duties, challenges and best practices.I. Key Responsibilities of Internal Auditors in Sustainability AuditsInternal auditors play a crucial role in sustainability audits by ensuring that an organization\'s sustainability efforts are effective and aligned with goals. They assess compliance with environmental regulations, corporate social responsibility standards and sustainability policies. Auditors evaluate the accuracy of sustainability initiatives and identify areas for improvement. Additionally, internal auditors ensure that sustainability practices are integrated into the company\'s overall risk management framework. By providing unbiased assessments, they help organizations improve performance, minimize risks and ensure continuous improvement in sustainability efforts.II. Contribution of Internal Auditors to Sustainable Business PracticesThe effectiveness of internal audits along with risk management processes and a focus on sustainability positively impacts sustainability audits. This underscores the importance of internal audits in promoting sustainable practices. For example, A manufacturing company conducts the regular internal audits to assess its energy consumption, waste disposal and environmental impact. Through risk management, auditors can identify areas with high energy consumption and waste production which could lead to regulatory fines or damage to the company\'s reputation. By integrating sustainability goals into their audit processes, the company can create strategies to reduce energy and adopt more sustainable waste management practices. Internal auditor monitors these changes and assesses their effectiveness. Over the time, company reduces costs, complies with environmental regulations and strengthens its commitment to sustainability and shows how audits and risk management processes support sustainable practices and drive positive outcomes.The capabilities of human resources, technology and quality management all play roles in making the internal audit process crucial for integrated audit management and sustainable business outcomes.The effectiveness of audit committee and internal audit functions are closely linked to better sustainability reporting, especially concerning economic and social aspects.The effectiveness of the audit committees and internal audit functions is crucial for ensuring that companies report accurately and transparently under the BRSR guidelines, especially regarding economic and social aspects. The BRSR framework helps companies disclose sustainability practices, focusing on ESG factors. The audit committee and internal audit functions ensure accurate, transparent reporting particularly on economic and social aspects. They oversee compliance, risk management and sustainability policies, ensuring that reports meet BRSR requirements, boosting transparency and trust.Best Practices for Internal Auditors to Ensure Effective Sustainability AuditsInternal auditors need to adopt new ways of thinking and acting to play a comprehensive role in governance, supporting sustainability and improving ESG practices. They should move beyond their traditional roles and become drivers of change within their companies, which requires new skills, attitudes and competences. Developing new skills in areas like corporate culture, social responsibility, ethics, cybersecurity and risk management is essential for internal auditors to help their companies achieve their goals and improve sustainability practices.Table 2: Skills/Training Required for Internal Auditors to handle the Sustainability AuditsSkill/Training AreaImportanceComponentsCommunication SkillsCrucial for stakeholder interaction and clear reportingListening, interpersonal skills, clear communicationRisk Assessment and ManagementEssential for evaluating ESG risksUnderstanding and integrating ESG risksTechnical and IT SkillsNecessary for handling digital tools and data analyticsProficiency in data analytics, digital reporting toolsSoft SkillsVital for managing relationships and ensuring smooth audit processesNegotiation, collaboration, influencingKnowledge of Sustainability StandardsImportant for compliance and best practicesISO standards, Global Reporting InitiativeFormal Education and CertificationsCrucial for staying updated with industry standardsCourses and certifications in sustainability and environmental managementProfessional Development ProgramsEnhances skills and knowledge through ongoing learningWorkshops, seminars, peer-to-peer learningPractical ExperienceHelps apply theoretical knowledge effectivelyReal-life audit scenarios, academic modulesSource: Authors StudyBy developing these skills and engaging in continuous training, internal auditors can effectively handle sustainability audits and contribute to the accurate and reliable reporting of sustainability initiatives.Contribution of Sustainability Audit to Internal Audit EffectivenessThe study reveals that the formation of an audit department, acquisition of a permanent internal auditor, providing suitable logistics, training personnel on the value of internal audit and using internal auditing standards and principles enhance sustainability audit effectiveness. The effectiveness of the internal audit function is positively associated with sustainability reporting practices, indicating the role of internal audit in driving sustainability-oriented strategies.ConclusionThe existing literature supports that the internal audits and sustainability audits are related aspects of organizational governance and risk management even though they have different goals and areas of concentration. The impact of internal audit on sustainability performance is influenced by factors such as management support, external reporting of sustainability information and internal audit function characteristics. Sustainability audit contributes to the effectiveness of internal audit processes by emphasizing the importance of sustainability reporting practices and the role of internal audits in driving sustainability-oriented strategies. The key differences between internal audit and sustainability audit lie in their focus areas and indicators.Best practices for integrating internal audit and sustainability audit include adopting environmental auditing as a mandatory audit, training internal auditors in environmental auditing and focusing on environmental performance improvement. Organizations can improve their capacity to recognize risks, take advantage of opportunities and accomplish sustainability goals while uploading strict internal controls and compliance standards by utilizing the synergies between the two. The establishment of a culture of accountability, transparency and continuous improvement through collaboration between internal audit and sustainability teams ultimately propels the creation of long-term value for the organization and its stakeholders.References:Berhanir, I. (2023). The Role of Internal Audit in the Enterprise Management System. Modern economics, Vol. 37, Iss: 1, pp 11-16.Carcello, J., Hermanson, D., & Raghunandan, K. (2005). Factors associated with US public companies\' investment in internal auditing. Accounting Horizons, 19(2), 69-84.Corazza, L., Truant, E., Scagnelli, S., & Mio, C. (2020). Sustainability reporting after the Costa Concordia disaster: A multi-theory study on legitimacy, impression management and image restoration. Accounting, Auditing & Accountability Journal, 33(8).Gramling, A., Maletta, M., Schneider, A., & Church, B. (2004). The role of the internal audit function in corporate governance: A synthesis of the extant internal auditing literature and directions for future research. Journal of Accounting literature, 23, 194.Hoffman, A. (2018). The next phase of business sustainability. Stanford Social Innovation Review, 16(2), 34-39. https://doi.org/10.2139/ssrn.3191035.kataria, k., & sharma, D. (2024). BEYOND INTERNAL AUDIT: THE ADVANCED SCOPE OF FORENSIC AUDITING. The Management Accountant, https://icmai.in/upload/Institute/Journal/TMA_October.pdf.Panhwar, A., Rehman Memon, A., Naeem, A., Kandhro, A., Zainulibad, S., Qaisar, S., & Panhwar, A. (2022). Internal Audit. In Six Sigma and Quality Management. DOI: https://www.researchgate.net/publication/364232647_Internal_Audit/fulltext/63402a6b76e39959d6a7c406/Internal-Audit.pdfVan Gansberghe, C. (2005). Internal auditing in the public sector: A consultative forum in Nairobi. Kenya, shores up best.Authors may be reached at abhishekbhu008@gmail.com and eboard@icai.in
Ep. 283 — Assessment of the Role of Present Regulatory Framework of Executive Compensation in India: An Exploratory Study
CA Journal
· September 2026
00:00
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Assessment of the Role of Present Regulatory Framework of Executive Compensation in India: An Exploratory StudyThe executive remuneration in India is subject to diligent corporate governance. The regulatory framework of executive compensation was constituted by the Companies Act, 2013. The Organisation for Economic Co-operation and Development (OECD) has observed that related party transactions (RPT) create a problem in case of family-owned business where the recommendations of the remuneration committee are allegedly ignored. Nevertheless, the Indian corporate regulations along with contemporary amendments and necessary synchronizations with international corporate practices, have been effectively controlling the exorbitant executive remuneration. This exploratory study has attempted to critically assess the role of regulatory framework in India that controls the executive compensation.IntroductionRisk preference and executives\' ability to take risk has crucial effects on executive compensation. These effects can sometimes be positive, negative, or insignificant. Especially for financial institutions, risky decision-making of deutsch the executives is expected only if equity interests are aligned with the executive remuneration. The Reserve Bank of India has also recommended that executive compensation must be subject to effective corporate governance and monitoring, effective alignment with judicious and restrained risk-taking, and effective supervisory control of stakeholders. Moreover, the establishment of a Remuneration Committee (RC) has also been recommended for non-governmental banking institutions (Reserve Bank of India, 2012).The remuneration of executives has been comprehensively controlled and regulated by the Companies Act, 2013. The term \"remuneration\" has been described as -\"any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under Income-tax Act, 1961\" (Ministry of Corporate Affairs, 2013; p.11).The Companies Act, 2013, states that the principal managerial personnel of a public limited company will be remunerated according to the recommendations of the Nomination and Remuneration Committee made to the Board of Directors [Section 178(1)]. Section 197 of the same Act states that there is a mandate for the listed companies to disclose the ratio of employees\' median salary and the remuneration of each director. In addition to that, the restriction imposed in the 1956 Act under Section 309 on receiving commission and remuneration from the subsidiary company has been removed in the 2013 Act; however, the Board report should reflect the remuneration received [Section 197 (14)]. This act has liberalised the administrative procedures of seeking permission from the central government for any special resolution taken for managerial salary determination.This article primarily encompasses two major areas pertinent to executive remuneration corporate governance and managerial remuneration issues. The following section will illustrate these features of the Indian legal framework with necessary details.Corporate Governance and Associated Indian Regulations - An OverviewThe following sub-sections are going to provide an overview of the relevant corporate governance issues in the Indian context:i. Appointment and Other Liabilities of DirectorsIn India, the Companies Act, 2013, has laid down the provisions of governance in corporate domain. Section 149(1) of this Act states the increment of directors\' number from 12 to 15. One director of the Board must be the resident of India for a minimum period of 182 days [Section 149(3)]. Moreover, the inclusion of one-woman director has also been prescribed in Section 149(1) (Ministry of Corporate Affairs, 2013).The Companies Act, 2013, has made an attempt to maintain ethical governance practices and in view of that, Section 166(2) has laid down the provision of good governance by saying \"whole of the Board is required to act in good faith in order to promote the objects of the company for the benefits of its members as a whole, and in the best interest of the company, its employees, the shareholders, the community, and for the protection of the environment.\" In addition to that, ethical practices are further boosted as the Act lays down that whoever is unable to be elected as a director in a general meeting will not be qualified to be appointed by the Board of Directors as an additional director (Section 161).ii. Role of Nomination and Compensation CommitteeEvery listed company has got a need to set up a nomination and remuneration committee. Other companies having paid-up capital of 100 crore INR or more or having aggregated outstanding loans or borrowing or debentures or deposits surpassing 200 crore INR also need to set up a remuneration committee. The role of the remuneration/compensation committee is highly influential and crucial as it reviews, formulates, and recommends the company strategies and policies to the Board of Directors about \"remuneration for directors, key managerial personnel and other employees, criteria for determining qualifications, positive attributes, and independence of director [Section 178(1)]\". Compensation committee plays a pivotal role in the supervision of the entire employee stock option scheme (Securities and Exchange Board of India, 2009).iii. Appointment of Key Managerial PersonnelThe executive compensation remains dependent on profitability of any organisation. Assuming a linear relationship between company profit and key managerial personnel\'s remuneration, the Companies Act, 2013 has laid down that the overall limit of executive compensation is set at 11% of the profit for the financial year (Ministry of Corporate Affairs, 2013).The age criteria for the key managerial personnel have been revised in the 2013 Act. However, the predecessor of this Act, The Companies Act, 1956, stated the lower age limit of the key personnel appointment was 25. This limit has been relaxed to 21 years. In addition to that, the upper age limit has also been stretched in the 2013 Act and it prescribes that an individual over the age of 70 can also be appointed as key functionary of the organisation. According to Section 203, the appointment of the key managerial personnel like managing director, chief executive officer, managers, chief financial officer, as well as company secretary is mandatory for every listed company and every other company which has a paid-up share capital of 5 crores or more. In addition to that, appointment or re-entry at the same time for an individual in multiple capacities of chairperson, managing director, or chief executive officer has been barred in the same section.Compensation of ExecutivesThis is perhaps the most significant section of this article discussing the remuneration practices of executives as guided by Indian regulations. Such remuneration practices are principally guided by two sets of legal guidelines i.e. the Companies Act, 2013 as well as Securities and Exchange Board of India Guidelines, 1999 (updated up to September 3, 2009). In our ambit of discussion thus far, we have cited the evidently linear relationship between profit earning of the organisation and healthy executive compensation, irrespective of controlling factors such as country or economic diversities. Now, the question is relevantly raised as to how an inadequate degree of profit impacts executive remuneration. Section 197 of the 2013 Act provides necessary explanation to this question. This section explains the applicability of provisions of managerial remuneration restricted to public limited companies only. In order to maintain transparency, it has been made mandatory for the listed companies to unveil the ratio of compensation of each director to median remuneration of general employees.Apparently, the precursor of the 2013 Act i.e. the 1956 Act, was comparatively stringent, as Section 309 of the old Act restricted the managing director or whole-time director of a subsidiary company from obtaining commission from the holding and subsidiary companies simultaneously. However, the 2013 Act has obliterated the aforementioned restriction, but such benefit should be declared in pertinent reports [Section 197(14)] (Ministry of Corporate Affairs, 2013).Remarkably, the definition of remuneration has evolved in the 2013 Act. Section 2(78) has defined remuneration as \"any money or its equivalent given or passed to any person for service rendered by him and includes perquisites as defined under the Income-tax Act 1961\" (Ministry of Corporate Affairs, 2013, p. 11). In the previous Act of 1956, under Section 200, any remuneration paid to top-notch executives without tax component was restricted. The present Act of 2013 carries the same spirit as the above-mentioned definition which involves direct tax attachment to compensation components (Ministry of Corporate Affairs, 2013). Moreover, executive compensation is also defined as \"the total cost incurred by the company towards employee compensation including basic salary, dearness allowance, other allowances, bonus and commissions including the value of all perquisites provided, but does not include:The fair value of option granted under an Employee Stock Option Scheme; andThe discount at which shares are issued under an Employee Stock Purchase Scheme\" (Securities and Exchange Board of India, 2009, p. 1)According to Section 198 or the 2013 Act, the allowance and deductions pertaining to executive remuneration should be accounted for calculating the profit (Ministry of Corporate Affairs, 2013). This provision of the Act strengthens the proposition that executive remuneration affects a firm\'s financial performance.i. Regulatory Guidelines on Employee Stock Option Scheme (ESOS) and Employee Stock Purchase Scheme (ESPS)The Securities and Exchange Board of India has provided these guidelines on executive compensation in India under Section 11 of the Securities and Exchange Board of India Act, 1992. In the previous section, the definition of executive compensation as explained by the Securities and Exchange Board of India (SEBI, hereon) has been provided.SEBI specifies the definition of ESOP as \"option given to the whole-time Directors, Officers, or employees of a company which gives such Directors, Officers, or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price\" (Securities and Exchange Board of India, 2009, p. 1). ESOS or employees stock option scheme refers to a scheme which allows the organisation to grant stock option to employees. On the other hand, ESPS or employee stock purchase scheme allows the employees to purchase share as a part of the public issue. The term \"market price\" refers to \"the latest available closing price prior to the date of the meeting of the Board of Directors in which options are granted/shares are issued, on the stock exchange on which the shares of the company are listed\" (Securities and Exchange Board of India, 2009, p. 3). SEBI further explains the term \"share\" as equity shares and the securities which can be converted into equity shares.The eligibility for ESOS has already been explained in the preceding section and ineligibility is extended to an employee who is the promotor or belonging to the promotor group of the company as well as a director who holds more than 10% of the outstanding equity shares, either by himself or through relationships. We have already illustrated the role of compensation committee in the prior section and would now try to shed light on the role of shareholders. In order to ratify an ESOS for offering to employees, shareholders must approve the scheme through a special resolution in the general meeting (Securities and Exchange Board of India, 2009).An adequate quantum of corporate governance has been ascertained with respect to ESOS and disclosure report by the Board of Directors which contains intricate details like \"options granted, pricing formula, options vested, options exercised, the total number of shares arising as a result of exercise of option, option lapsed, variation of terms of options, money realised by exercise of options etc.\" (Securities and Exchange Board of India, 2009, p. 11).On the other hand, ESPS resembles ESOS in terms of eligibility, shareholder approval, vesting schedule and other identical parameters.Critical Appreciation of Regulatory Framework of Executive Compensation in IndiaThe Ministry of Corporate Affairs (MCA) is the principal government body which administers the Companies Act with the current 2013 version. Of late, the Companies (Amendment) Act, 2015, has come into force as well. The Companies Act is enforced by the Company Law Board (CLB). The other primary body regulating the security market since 1992 is SEBI. Therefore, corporate operations in India are under constant monitoring by multiple regulatory bodies (Pande & Kaushik, 2011).There has been a conflict between regulations laid down by the MCA and SEBI. For example, Clause 49 or Equity Listing Agreement and the 2013 Act have some overlapping mandates regarding the appointment and tenure of service of the independent directors as well as the grant of stock options for independent directors (Ministry of Corporate Affairs, 2013). However, to avoid this conflict, the Standing Committee of the Parliament in its final report in August 2010, recommended that for establishing \"minimum benchmarks\", SEBI should be allowed to act according to their jurisdictional extent (Pande & Kaushik, 2011, p. 17).Corporate governance is the presumed panacea to curb every corporate malpractice. Beyond its therapeutic nature, corporate governance is used to align different corporate exercises to socioeconomic ethical standards of the country. The Confederation of Indian Industries (CII) has introduced the practice as a voluntary method to ascertain the values and ethics in Indian corporations; however, soon it got mandatory status through Clause 49 of the Equity Listing Agreement which consists of eight attributes of corporate governance like Board of Directors, Audit Committee, Remuneration of Directors, Board Procedure, Management, Shareholders, Report on Corporate Governance, and Compliance. In the later half of 2009, voluntary guidelines were prescribed by the Ministry of Corporate Affairs (Pande & Kaushik, 2011).The main objective of corporate control in organisations is to ascertain appropriate executive remuneration practices. This \"control\" is exercised through an adequate corporate structure, especially referable to the role of directors as well as composition of the Board of Directors. In an attempt to ensure gender diversity, the attempt to incorporate female directors in the Board has been made in the Companies Act, 2013. The most significant feature of this Act is the number and functions of independent directors. These directors are also held responsible along with the members of the Board of Directors if any malpractice takes places.In light of the occurance of financial frauds, SEBI has incorporated several corrective measures including disclosure of pledged shares, peer review, compulsory dematerialization of promoter holdings etc. (Securities and Exchange Board of India, 2003).Executive remuneration is reported to be ineffectively managed by family-owned firms. Organisation for Economic Co-operation and Development (OECD) has highlighted the disadvantages of related party transactions (RPT), which are attributable to organisations being managed by a family or multiple families integrated together through relationships. In such companies, the shareholders force the remuneration committee to accept reckless recommendations about executive compensation (Organisation for Economic Co-operation and Development (OECD), 2014).Even though the presence of structured legislations for executive compensation in India is observed, the mismatch in the payment structure between private and public sectors in India is evident. The private sector is paying exorbitantly high remuneration to its public sector counterparts (Sridhar, 2021). The regulatory control on executive remuneration in India has been criticized for being too normative, with limited scope for shareholders to share their opinions on the issue of hefty managerial compensation (Khurana, 2022). However, the Companies Act, 2013, has guided the establishment of the \"Nomination and Remuneration Committee (NRC)\" with active participation of independent directors in corporate governance matters including executive compensation (Kishore, 2021).Over the years, Indian corporate regulations, with relevant amendments and necessary alignment with international corporate practices, have been handling executive remuneration as well as related corporate governance issues efficiently. However, the instrumentality of the regulatory system is not beyond question, and recent studies have shown little impact of corporate governance on the growth of the financial market in India. Moreover, the effective implementation of the governance system could possibly induce the growth of the Indian economy (Guha, Samanta, Majumdar, Singh, & Bharadwaj, 2020).References:Guha, S. K., Samanta, N., Majumdar, A., Singh, M., & Bharadwaj, A. (2020). Evolution of corporate governance in India and its impact on the growth of the financial market: an empirical analysis (1995-2014). Corporate Governance, 19(5), 945-984.Ministry of Corporate Affairs. (2013). The Companies Act. New Delhi: Government of India.Organisation for Economic Co-operation and Development (OECD). (2014). Improving Corporate Governance in India: Related Party Transactions and Minority Shareholder Protection. OECD Publishing.Khurana, K. S. (2022). Enhancing Shareholders\' Say on Executive Compensation in India - A Regulatory Roadmap. Corporate Governance in India: Changing Landscapes, 200 -214.Kishore, V. S. (2021). Say What on Pay? - A Comparative Evaluation of the Impacts of the Regulatory Reforms and COVID-19 on Executive Compensation in the UK, US and India. NMIMS Law Review; (2021) 1, 12-39.Pande, S., & Kaushik, K. V. (2011). Study on the State of Corporate Governance in India: Evolution, Issues, and Challenges for the Future. New Delhi: Tought Arbitrage Research Institute.PricewaterhouseCoopers (PwC) India. (2013). Companies Act, 2013. https://www.pwc.in/assets/pdfs/services/ras/companies-act-setting-up-new-standards-for-corporate-governance.pdfReserve Bank of India. (2012). Guidelines on Compensation of Whole Time Directors / Chief Executive Officers / Risk takers and Control function staff, etc. Mumbai: Reserve Bank of India.Securities and Exchange Board of India. (2009, September 3). Securities and Exchange Board of India Guidelines, 1999. Retrieved June 5, 2015, from SEBI: http://www.sebi.gov.inSridhar, I. (2021). Study of Executive Compensation of Public and Private Sector Enterprises in India - impact on Corporate Governance. International Journal of Public Sector Performance Management; Vol. 7, No. 2, 236-249Authors may be reached at arindam122074@gmail.com, aamirjafar@gmail.com, diptayan.bhattacheryya@gmail.com and eboard@icai.in
Ep. 284 — Vicarious Liability of Directors in Corporate Laws - Analysis and Synthesis
CA Journal
· September 2026
00:00
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Vicarious Liability of Directors in Corporate Laws - Analysis and SynthesisVicarious liability, being derived and imputed, largely arises due to status occupying the position of directorship. The disqualifications of directors contained in Section 164(2) of the Companies Act, 2013, brings the concept of vicarious liability and related disqualifications. Court rulings under various corporate laws, from time to time, on the director\'s liability rests on certain tests to be put in place to decide whether they are responsible and accountable. The main issues that take us further on the vicarious liability are: What \'tests\' to be put in place to determine the responsibility vis-à-vis the liability of directors? Whom to be prosecuted for vicarious liability: the Company or the Directors? When does the directors\' liability become vicarious? Should they necessarily give \'consent\' or \'dissent\' in deliberations? Are offences by companies vast and very vicarious?The Board of Directors (BOD) occupies a pivotal position in the hierarchy of a corporate structure, with larger expectations of the stakeholders expecting them to act as trustees, fiduciary agents, and key financial decision-makers of their investment in the company. The provisions of the Companies Act, 2013, relating to the director\'s roles and responsibilities are somewhat diversified and not crystal clear. Court rulings under various corporate laws have established certain tests to determine whether directors are responsible and accountable. The classification of directors under various designations under the Companies Act, 2013, also adds different dimensions to the practicality of the problems. The appointment of Independent Directors to the Board composition raises several questions relating to their position and liability. The notion that Independent Directors not only seem to be independent but are also seen to be independent, is put under test from time to time. The issues that take us further are: Whether the Board is \'collective responsibility\' or \'individual responsibility\' of the director? Is the role and responsibility of directors being well defined?Vicarious liability A legal concept where one person is held responsible for the actions of another applies to directors primarily because of their position and status as directors within a company. The directorship coupled with vicariousness makes their position as \'titanic ship\' at times of turbulence while managing the affairs of the company, safeguarding assets and driving the company in the larger interest of stakeholders, and also being socially responsible. Though a director is appointed through a process and procedure at the general meetings of the company, the important point is that the \'consent\' to act as a director necessarily be given and filed by the director concerned with the Registrar of Companies. The consent sent conveys the message that it is voluntary and not by mere abstraction or manifestation of the law. The disqualifications of directors contained in Section 164(2) of the Companies Act, 2013, brings the concept of vicarious liability and further disqualifications.1. The Companies Act, 2013Section 2(60) (vi) - Who is an \'Officer\' in default?For the purpose of any provision in this Act, an \"officer who is in default\" includes, among others, every director who is aware of a contravention of any provision of this Act, either by virtue of the receipt of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance. (This implies that the meetings of the company can be used as evidence to determine liability of non-executive directors in such cases).Section 149(12) - Company to have Board of DirectorsNotwithstanding anything contained in this Actan independent director, anda non-executive director who is neither a promoter nor a key managerial personnel,shall be held liable, only in respect of such acts of omission or by a company which had occurred:with his knowledge, attributable through Board processes,with his consent or connivance, ordue to his failure to act diligently.Although the Code of Conduct (Schedule IV to the Companies Act, 2013) prescribes Independent Director\'s roles, the scope of their duties and responsibilities has increasingly come to imply that they are expected to be aware of all actual or suspected violations or fraud.Section 164 (Disqualifications of Directors)Apart from other parameters stated in sub-section (1), two important parameters under sub-section (2) are:\"No person who is or has been a director of a company whicha) has not filed financial statements or annual returns for any continuous period of three financial years; orb) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so. Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment\".The words used in the sub-section are \'not filed\' or \'failed\'. While failure to file returns is a compliance factor, the failure to repay deposits and the interest thereon is a commercial and financial matter, which the Board and its directors, as a whole, are expected to understand and address. Ignorance of law in these circumstances is non-excusable and will be met with vicarious liability where directorship will be questionable for a period of five years from the date of default, not only in the said company but also in other company.Section 166 (Duties of Directors)Directors \"shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company\" and \"shall not assign his office\", such that no one as a delegatee can further delegate.Section 179 (Powers of Board)The Board of Directors can exercise all such powers for which the company is authorised and can take actions within the company\'s authority. Except the powers mentioned in sub-section (3) of section 179—such as the power to borrow money, power to invest the funds of the company and power to grant loans or provide guarantee or security for loans, no other powers can be further delegated to any sub-committee of directors. The Board, as a whole, and each director as an individual, hold vicarious responsibility for understanding the sensibilities of its powers which are not omnibus.Tests for Vicarious LiabilityFactual: When he is in charge?Legal: When he is responsible to Principal?A case of vicarious criminal liability cannot succeed unless the prosecution satisfies both the principles of vicarious liability.The Supreme Court in K.K. Ahuja v. V.K. Arora, 10 SCC 48, 2009, analysed the two terms often used in vicarious liability provisions, i.e., \'in charge of\' and \'responsible to\'. It was held that the \'in charge of\' principle presents a factual test and the \'responsible to\' principle presents a legal test. A person would be considered \'in charge of\' the company\'s business if the person is in overall control of its day-to-day operations. A case of vicarious criminal liability cannot succeed unless the prosecution satisfies both the principles of vicarious liability.Supreme Court\'s Observations on Liability of Directors:Whether Vicarious liability can be automatically imputed on the directors in the absence of a statutory provision to the effect? A constitution bench of five Judges in Standard Chartered Bank and Others v. Directorate of Enforcement, (2005) 4 SCC 530 had held that a company could be prosecuted and convicted for an offence that requires a minimum sentence of imprisonment. However, the constitution bench categorically clarified that it is not expressing any opinion on the question of whether a corporation could be attributed with requisite mens rea to prove the guilt. The Supreme Court categorically laid down that, \"When the company is the offendor, vicarious liability of the directors cannot be imputed automatically, in the absence of any statutory provision to that effect.\" It is a cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides for it.Whether a Corporate Body can be prosecuted for committing an offence under the Indian Penal Code? The question of punishing a corporation was deliberated in a criminal case filed by Iridium India Telecom Ltd. against Motorola Inc., SC Criminal Appeal No.688 of 2005. A division bench of the Supreme Court had laid down that the criminal intent of the \"alter ego\" (an alternate self-distinct from the original personality) of the company, referring to the group of individuals guiding the company\'s business, would be imputed to the company. The SC held that a corporation can no longer claim immunity from criminal prosecution on grounds that it lacks mind or mens rea.On whom does liability depends upon? \"Liability depends on the role one plays in the affairs of a company and not on designation or status.\" In the S.M.S. Pharmaceuticals Limited v. Neeta Bhalla, 8 SCC 89 (2005), the Supreme Court held that liability arises from being \'in charge\' of and \'responsible\' for the conduct of the business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. Conversely, a person not holding any office or designation in a company may be liable if he satisfies the main requirement of being in-charge of and responsible for the conduct of business of a company at the relevant time.Company or Directors - Who shall be responsible?The Supreme Court in Sunil Bharti Mittal v. Central Bureau of Investigation and Others, AIR 2015 SC 923 or (2015) 4 SCC 609, was faced with the issue of when can a director/person in charge of the affairs of the company be prosecuted for an offence committed by the company. Given the artificial nature of companies and corporations, it is the employees and executives that act as its agents. Executives are the ones who make the major decisions on behalf of the company. They can easily control the acts and omissions of the company on a short-term and long-term basis. It is vital to have laws, regulations, and principles governing the actions of these executives so that they do not violate the law without fear of repercussions and do not evade punishment. The Court relying upon the decision in Iridium India Telecom Ltd. against Motorola Inc. (Iridium) stated that the principal of attribution is applied to impute criminal intention to the company on account of criminal intention of its alter ego and cannot be applied in a reverse scenario to make the directors liable for offences committed by the company.When can Individual directors be made liable?The Supreme Court in Shiv Kumar Jatia v. State of NCT of Delhi, CA. No. 1263 of 2019, quashed the criminal proceedings that were initiated only on the ground that the accused was the managing director of the company and that he was the only non-independent executive director of the company. The Court in this case reaffirmed its views set forth in the case of Sunil Bharti Mittal v. Central Bureau of Investigation, holding that, in the absence of any vicarious liability provision, individual directors can be accused only if there is sufficient evidence to prove their active role coupled with criminal intent.2. The Negotiable Instruments Act, 1881Is prosecution of a company a condition precedent? The Supreme Court in Aneeta Hada v. Godfather Travels and Tours (P) Ltd., (2012) 5 SCC 661, while adjudicating a dispute under the Negotiable Instruments Act, 1881, ruled that the prosecution of a company is a condition precedent if its officer-in-charge is responsible for the conduct of its business to be prosecuted.Are directors criminally liable if they were not involved in the day-to-day affairs of the company? An example of the vicarious liability provision can be seen under Section 141 of the Negotiable Instruments Act, 1881, which provides that \"every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.\" According to a Supreme Court judgment, liability under section 138/141 of the Negotiable Instruments Act only arises if the directors were involved in the day-to-day functioning of the enterprise.3. The Competition Act, 2002Whether a director can simultaneously proceed along with that of the company or a conviction on the company is a condition precedent to proceed against the director? The Competition Commission of India (CCI) in Monsanto (Monsanto Holdings Pvt Ltd and Others Vs. CCI & Others (W.P. (C) 1776/2016 & 3556/2017) observed that:a) Under the Indian law, numerous statutes impose vicarious liability for the acts of the company upon its directors and other officers in key managerial positions.b) Such provisions generally contain an exception stating that the director shall not be held vicariously liable for the acts of the company if he is able to prove that the alleged act was committed without his knowledge and negligence and he has exercised all due diligence to prevent the offence.c) Vicarious liability is attached on the officer-in-charge responsible for the conduct of business of the company by fiction of law in spite of the fact that such person may or may not have been directly responsible for the commission of such offence by the company.d) A person vicariously liable for acts of the company may be prosecuted simultaneously with the company.e) The Competition Commission of India is not required to first record a conviction against the company to proceed against the directors.4. The Foreign Exchange Management Act, 1999Section 42 of the Foreign Exchange Management Act, 1999, provides that \"where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.\" In both instances, there is no distinction between the Executive Director and the Non-Executive Director in imposing the liability.5. The Insolvency and Bankruptcy Code, 2016The Latest SC Ruling on Director of a Company in IBC, 2016: Merely because a person is a director of a company does not imply that he is aware of its day-to-day functioning. There is no universal rule that a director of a company is in charge of its everyday affairs. (Susela Padmavathy Amma Vs. Bharati Airtel Ltd. SC, March 19, 2024)To Conclude: Is Vicarious A Precarious?The list of statutes furthering vicarious liability in the Law of Torts is unending. The Concept of Vicarious Liability on the part of the company and its directors is fraught with many complexities. The Law on Liability of Directors is not clear, not to say it is not correct. Summons and Notices have become the Order of the Ordeal.The principles reiterated by Lord Denning in Bolton (H.L.) (Engg) Co. Ltd. v T.J. Graham & Sons Ltd. are no doubt worth pondering:\"A company may in many ways be likened to have a human body. They have a brain and never centre which controls what they do. They also have hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind and will of the company and control what they do. The state of mind of these managers is the state of mind of the company and is treated by law as such. So, you will find in these cases where the law requires personal fault of the manager will be fault of the company. That is made clear in Lord Haldane\'s speech in Lennard\'s Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. (AC at pp 713, 714). So also, in criminal cases where the law requires a guilty of mind of the directors or managers will render the company themselves guilty\".In short, but not so sweet to conclude, \'Vicarious is Precarious\'.Authors may be reached at padmanabh1999@gmail.com, drptgiridharan@gmail.com and eboard@icai.in
Ep. 286 — Loans through Business Rule Engines- Audit Process
CA Journal
· September 2026
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Loans through Business Rule Engines - Audit ProcessSanction of loans through Business Rule Engines (BREs) has been evolving in recent years in many Banks/Financial Institutions. This article delves into the aspect of workings of BREs and their nitty-gritties, discussing key inputs, decision-making functions, and audit methodologies.IntroductionTraditionally, to sanction a loan, banks conduct due diligence on the borrower, verify relevant documents like KYC and balance sheets, perform pre-sanction inspections, and assess loan eligibility through different methods. Finally, the loan is sanctioned by an appropriate authority following laid-down structures and regulatory norms.Over time, banks transitioned from manual assessment to spreadsheet-based calculations, and later introduced Loan Management Systems for the entire loan life cycle. Post-disbursement, CoreBanking Solutions handle accounting, follow-up, and recovery.With increasing loan volumes, manual appraisal introduced potential discretion-based biases and inconsistencies.Business Rule EnginesTo ensure consistency, banks have adopted Business Rule Engines (BREs), often aided by Fintechs. A Business Rule Engine in banking is a software system that defines, manages, and executes business rules governing banking decisions. BREs can be updated in real-time to implement uniform rules, ensuring better consistency, speed, and accuracy.Key Inputs Used in BREsDepending on loan types, lending policies, and regulations, the key inputs used by a BRE include:A. Customer Information & Verification: Personal details, contact information cross-checked via Aadhaar data (with consent), mobile number verification, address confirmations, and AML/CFT screening. Financial details such as income, expenses, assets, and liabilities verified via third-party services, APIs, and bank statements. Loan-specific details and collateral information for secured loans.B. Behavioral Patterns & Logic: Credit utilization from statements, payment history and credit bureau data, credit inquiries, loyalty factors, and internal lending criteria (e.g., credit score thresholds and EMI-to-income ratios).Key Functions of a BRE in the Loan ProcessAutomation of Decisions: Assessing creditworthiness based on predefined rules.Regulatory Compliance: Ensuring adherence to AML, KYC, and Data Protection guidelines.Dynamic Rule Management: Allowing business users to modify rules based on regulatory changes.Risk Management: Applying rules to detect unusual credit or transaction patterns.Audit of Loan AccountsAs banks shift toward automated lending via BREs, auditors must adapt. The audit aims to review whether automated decisions comply with internal bank policies, regulatory requirements, and industry best practices. Key audit aspects include:1. Understanding the Policy of the Bank/FIReviewing actual rule sets used for 'Go / No Go' decisions, including credit score benchmarks, loan-to-value ratios, TOL/TNW, collateral requirements, and compliance with fair lending and AML/CFT guidelines.2. Audit ObjectivesChecking legal/policy compliance, verifying BRE rule application, evaluating performance regarding false positives/negatives, and confirming audit trail availability.3. Capturing the Logs for ReviewCapturing detailed decision logs containing borrower credentials, decision outputs ('Go', 'No Go', or review), rationale, and timestamped audit trails.4. Verification of Rule ExecutionTesting random loan samples for proper rule application against established thresholds, identifying conflicting rules, and investigating manual exceptions.5. ComplianceVerifying adherence to AML, CFT, KYC, and data privacy laws, ensuring Personally Identifiable Information (PII) is encrypted, and checking automated disbursement controls.6. Audit Report and Follow-upDocumenting review methodologies, findings, and recommendations to establish continuous monitoring and improvement mechanisms.Way AheadThe roadmap for auditing BREs involves adopting new strategies and technologies:Integration of Advanced Analytics and AI: Using AI and ML tools to manage increasing complexities.Real-Time Auditing: Transitioning from periodic audits to real-time evaluation.Enhanced Focus on Ethics: Ensuring decision rules do not discriminate against any individual.Integration with Blockchain: Guaranteeing transparency and immutability of loan decisions.Collaboration: Fostering teamwork between IT, business, and audit teams.Conclusion: Future of BRE AuditsAs BREs integrate with AI, blockchain, and real-time tools, audits must become automated, continuous, and adaptive to ensure financial decisions remain efficient, ethical, fair, and compliant.Author may be reached at ndsvnrao@gmail.com and eboard@icai.in
Ep. 287 — Climate Risk and Climate Finance
CA Journal
· September 2026
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Climate Risk and Climate FinanceClimate change and the resultant climate risks and damage are ubiquitously seen. These effects cannot be sufficiently quantified, particularly due to data inaccuracies. However, there are estimates on the volume of climate finance required to address climate change and climate risk issues. The impact of climate change, estimates on the losses, climate finance requirements, and the volumes deserve conceptual analysis. It is comprehensible that the objectives of climate finance are mostly directed towards reducing or containing the ongoing climate changes rather than recouping the total climate damage that has occurred thus far. Funds are certainly in shortage, resolve is suboptimal, and other resources are scarce. Due to these challenges, the approach to reduce the ongoing climate damage is appreciable. Furthermore, the forms in which climate finance is provided are critical to determining whether climate finance will achieve the desired objectives. This article endeavours to present a conceptual analysis and highlights the need for grant based climate finance to achieve better results while also suggesting the way forward to address climate risks in an improved manner.IntroductionAlmost all the countries around the world are facing a common problem in the form of climate change The issue is not usual or gradual climate changes due to natural evolution, but rather the unusual climate changes caused directly or indirectly by human beings in the name of advancements and development These unusual climate changes are due to reckless approaches, over exploitation of natural resources, high levels of pollution, population explosion, erosion of forest cover, excessive mining or excavation of soils and mountains, extinction of several living creatures, etc Unusual climate changes result in unendurable risks Due to the involved risks and dangers, the world at large is deliberating and working on the measures to address unusual climate changes The impact of climate risks, referring to a few major instances with costs, the agreed and actual contribution from developed countries to developing countries, and the composition of climate finance warrant at least a brief critical discussion to highlight the significance of the conceptImpact of climate change & climate risksUncontrollable calamities, irreversible environmental losses, untimely rains, scorching heat and heat waves, extinction of certain flora and fauna, and deaths of human beings and other living creatures are the consequences of climate changes The results of adverse climate changes include heat stress, pollution, crop losses, undernutrition, natural calamities and many other disasters Additionally, there are several other impacts that affect cultures, heritage, mobility, biodiversity, territory, indigenous knowledge, and poverty Any unusual climate change causes climate risks and may pose dangerous threats to the world People are affected not only by climate change but also by the impacts of climate action The green transition requires restructuring economies and radical shifts in some sectors to move to carbon neutrality If not designed and implemented properly, mitigation and adaptation policies could significantly widen inequalities, within and between countries Therefore, the design, structure, funding and manner of implementing measures also play a key role in addressing climate risks Climate finance targets could influence the volume and pace of measures to address climate risks and these are deliberated at designated forums such as the COPWelcome COP29The awaited UN Climate Meetings of United Nations Environment Programme (UNEP), scheduled from 3rd to 13th June 2024, had its deliberations as expected This event was considered a critical preparatory meeting for the upcoming 29th Conference of the Parties (COP29) of the United Nations Framework Convention on Climate Change (UNFCCC), which was held in November 2024 Since deliberations in the June 2024 meeting will influence the decisions at COP29, where new climate finance targets will be set, climate change and related aspects are high on the global agendaClimate finance is needed for mitigation and adaptation by all nations committed to reducing greenhouse gas emissions Developed nations are expected to meet the climate finance requirements of other countries committed to the objectives of the UNFCCCClimate change incidents and costsClimate changes and climate risks determine the volume of the required climate finance According to a publication by the World Health Organization (WHO), climate change could cause about 250,000 additional deaths per year, and about 3.6 billion people live in areas vulnerable to climate changeWHO states that the annual costs of direct damage to health would range between US $2 billion to $4 billion by the year 2030 These costs do not include those associated with agriculture, water, sanitation, and other sectors related to health In fact, if the costs of damage which are indirect and caused from the latter sectors are also included, the volume of annual costs would be much higher Besides causing huge annual costs both directly and indirectly, climate changes play a key role in causing natural disastersAccording to a report by a Zurich insurance company titled \'Climate loss and damage cost $16 million per hour\', the economic losses due to global natural disasters in 2023 aggregated to US $380 billion The World Economic Forum (WEF) states that between the years 2000 and 2019, the world incurred cumulative losses and damages of US $2.8 trillion due to climate change, translating to US $16 million per hour The WEF also states that the global annual cost due to climate change affecting infrastructure, property, agriculture and human health is expected to range between US $1.7 trillion to US $3 trillion by 2050Climate FinanceThere is unanimity on the need for climate finance as the main source to address climate change issues \"Climate finance\" refers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate changeClimate finance flow and volumeIt is public information that developed countries have caused much more climate damage than developing countries Therefore, it is almost unanimously agreed that most of the climate finance requirements for developing countries should be contributed by developed countries As the convention continues, the COP15 of UNFCCC determined that by 2020, the goal of annual contributions from developed countries to developing countries should be US $100 billion This funding is required for climate action towards achieving the climate goals established in the Paris agreement, which is an international treaty on climate change mitigation, adoption, and financeHowever, a report by the United Nations Conference on Trade and Development (UNCTAD) finds that $100 billion is a fraction of what is needed to support developing countries to achieve the stated climate goalsClimate finance has various channels and forums One of the key entities is the Global Environment Facility (GEF), formed in the year 1991 as a multilateral environment fund to support climate change issues GEF operates the financial mechanism of United Nations Framework Convention on Climate Change (UNFCCC) With the guidance of UNFCCC, GEF decides policies, programme priorities, and eligibility criteria for funding climate finance GEF manages several funds, including the Green Climate Fund, the Special Climate Change Fund, the Least Developed Countries Fund, the Long-term Climate Finance and the Adaptation Fund GEF has been performing as per its mandate for the benefit of its 186 member countries However, GEF\'s budget of US $5.25 billion for five years i.e., 2022 through 2026 is paltry compared to the actual total requirement Therefore, more such funds and higher budgets are needed to meet the huge and increasing needs of climate financeThe world bank claims that it is the largest provider of multilateral climate finance According to a report by the Bretton Woods Project, the World Bank Group has provided significant amount of climate finance The volume and purpose for which climate finance is made available are more important than which agency leads in channelling these funds There is also a need to set new finance targets to meet the increasing climate finance needs At COP26 in 2021, the process began for setting new finance targets by the end of the year 2024 through technical expert dialogues (TED) If consensus is reached by the end of 2024, the new finance targets for climate finance will be revealed at COP29Purpose of climate financeThe objective of climate finance is to support projects and activities that address climate damage If sufficient funds are extended in the form of climate finance, the ongoing climate damage could be contained while also working to avoid further damages Such endeavours could create a trend of declining climate damage and potentially necessitate lower climate finance in the future If the purposes are not solely to address climate damage, neither the current damage nor the future potential damage could be effectively managedClimate finance from developed countries is intended to support developing countries, benefiting both developed and developing nations Therefore, climate finance is required at the minimum for mitigation and adaptation purposes Mitigation purpose facilitate funding for projects such as renewable energy and energy efficiency Adaptation purposes facilitate funding for projects creating resilient infrastructure and climate friendly agricultureClimate related projects often have lower returns, making them commercially less attractive and necessitating higher-cost debt Projects with higher cost debt create debt stress on other projects and even on the economy If climate finance helps retire existing higher-cost debt and avoids the need for higher-cost debt for new climate projects, then these climate projects will have more scope to fruition Therefore, climate finance should also be provided to retire some debt of the developing countries to provide relief from their debt stressForms of climate financeClimate finance from developed countries is intended to support developing countries, benefiting both developed and developing nations Ideally, climate finance should not carry any interest cost, have no repayment obligations, and be in the form of pure grants Since developing countries often face capital scarcity, unless climate finance is provided as pure grants, they may not have the latitude to spend the amount for climate purposes In fact, the Paris Agreement\'s letter and spirit include the provision that climate finance shall be in the form of grants with conditions directing the spending solely for climate purposesHowever, as per information in the public domain, approximately 70 percent of climate finance is in the form of loans, with only the remaining balance in the form of grants Even more concerning is that a significant share of these loans is non-concessional In the first place, non-concessional loans for climate purposes may not be availed by developed countries and secondly, even if they avail them, the debt burden could be higher resulting in a compromise of yet other projects involving climate risks There are also apprehensions that some of the climate finance is not additional and may replace existing commitmentsDetails from the Bretton Woods Project reveal the forms in which climate finance is provided Although these details specifically pertain to the climate finance provided by the World Bank Group, the trend has been consistent across various sourcesLimitations on quantifying climate damageClimate change is occurring globally, affecting both developed and developing countries However, the adverse impact of climate change is more significant in developing countries Despite this, the impact of climate change and associated risks cannot be accurately quantified for either developed or developing nations The inability to effectively and completely quantify the loss and damage from climate change and climate risks is a primary drawback in planning programs to counteract these changes Due to diversity in climate risk portfolios, their immeasurability makes periodic monitoring and evaluation extremely difficult Additionally, data integrity poses a problem due to the universal nature of the issueDebt and climate finance for developing countriesDeveloping countries are at a disadvantage when it comes to combating climate change due to their limited resources In contrast, developed countries are better equipped to provide financial support for climate risks, owing to their advanced practices and stronger financial positions The challenges faced by developing countries include insufficient funds to adopt alternative and safer practices, a lack of public awareness about climate change, and limited resources for low-return, climate-friendly projects Additionally, these countries often struggle with mobilizing funds for climate finance Many developing nations are already burdened with significant debt and find it difficult to service their existing obligations Given their financial constraints, taking on additional debt for climate-related initiatives is impractical As a result, these countries may be compelled to neglect climate change, exacerbating their vulnerability to its impacts This situation underscores the need for developed countries to contribute more significantly to climate finance for developing nations, benefiting both parties in the processApproaches towards climate financeFor centuries, insufficient attention was paid to climate change, resulting in significant damage Although recent efforts have increased focus on climate finance, this funding may still fall short of addressing the full scope of climate challenges Mobilizing and spending climate finance alone is not enough It needs to be clubbed with measures avoiding or minimizing the activities causing climate changes Such measures may certainly cause huge inconvenience to the presently existing comforts and conveniences of the people These measures may also stifle the ongoing development and advancements, be they technological or infrastructural The measures may call for additional taxes and duties, and additional safety measuresAll the countries, all human beings, and all components on the earth are stakeholders of the climate Therefore, climate change issues should be tackled with a sequential and concerted effort than with disconnected and isolated efforts of various stakeholders Human beings should ensure that the efforts benefit all stakeholders and should implement the same in a concerted approachThe sequence should be in the order of quantification of the climate risks and damages, identifying the sources and reasons of climate change, identifying the ways and means to discontinue the ongoing activities causing climate change, estimating the climate finance required for implementing the measures, mobilizing the required amounts of climate finance, endeavouring to reinstate or recoup climate changes, undertaking projects that could avoid further climate change damages, and finally measuring the outcomes of the implemented projects This should be a continuous process until the overall desired outcomes are achievedConclusionClimate change has been causing huge risks, but all of the risks and damages could not be adequately quantified Select incidents, details of which are referred, reveal how alarming the adverse impacts, loss of lives, and damages to properties are The institutional deliberations under the aegis of the United Nations are in the right direction but the actions of the suggested measures appear to be lagging Until now, the purposes for which climate finance is provided is appropriate and there need not be any apprehensions towards the purpose However, between the mitigation and adaptation which should receive priority and what proportion should be allocated to which segment deserves a judicial approach From the developments until now, it appears that the distribution is not optimal In any case, the need to address climate change risks and mobilize climate finance cannot be overstated It is ubiquitously felt across the countries and sections of people Climate risks must be addressed in a planned and phased manner These measures should not stifle the economic development of the least developed countries (LDCs), economic growth of the developing countries, and the stability of the developed countries Towards this, the mobilization of climate finance and addressing climate risks must be undertaken in a judicial and a sustainable mannerWhen measures are implemented to contain or avoid climate changes, they may or may not benefit the current generation but will surely benefit the future generations The climate finance spend should balance between mitigation and adaptation measures Further, it is not uncommon that when such measures are implemented, there could be significant impact on the sustenance of the current lives Therefore, to the extent possible, the pace, direction, and magnitude of such measures should balance between the present life and future lifeClimate finance should be mobilized in a timely manner, in sufficient volumes, and from affluent countries, should be disbursed timely, meant for genuine climate related projects, and measurable projects Competent agencies should handhold developing countries and LDCs in implementing climate related projects To ensure ownership of all the stakeholders, in addition to public finance, private finance should also be encouraged as much as private parties are involved in the implementationThe form of climate finance should be predominantly in grants, and if inevitable, on concessional terms and convertible to grants on performance outcomes Climate finance should also be used to promote the awareness on risks and damages due to climate changes Climate finance should be subject to suitable climate audits The climate finance related guidelines by several multilateral agencies including the UN Group, the World Bank Group, OECD, etc., should be completely codifiedCOP29 should take note of the existing anomalies, the developing and developed countries should be transparent in raising and deliberating the issue along with statistics and plan to increase the targets to the extent required The revised targets could be more ambitious if required so that the catch-up program can be implemented In fact, the climate finance planned could be directed on the distribution towards the mitigation and adaptation measures as well than merely stating the targets of climate finance Further, since the loan form of climate finance would not help the developing countries meet their requirements and indeed has the risk of dissuading them against focusing on climate measures, it is imminent that developed countries extend grant-based climate finance and also streamline their fund delivery and support mechanisms towards the developing countriesIt is only by prioritizing equitable, accessible, and effective climate finance that we can hope to mitigate the far-reaching impacts of climate change and secure a sustainable future for allReferences:https://www.un.org/en/desa/climate-change-and-social-inequalityhttps://unfccc.int/topics/introduction-to-climate-financehttps://www.weforum.org/agenda/2023/10/climate-loss-and-damage-cost-16-million-per-hourhttps://unfccc.int/sites/default/files/resource/docs/2009/cop15/eng/11a01.pdfhttps://unctad.org/news/climate-finance-goal-works-developing-countrieshttps://www.brettonwoodsproject.org/2024/04/the-world-bank-and-climate-finance-success-story-or-a-new-era-of-green-structural-adjustment/www.brettonwoodsproject.orgAuthors may be reached at yerramr@gmail.com, okkishore@yahoo.co.in and eboard@icai.in
Ep. 288 — Union Budget 2025-26: Growth, Reforms and Fiscal Prudence
CA Journal
· September 2026
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Union Budget 2025-26: Growth, Reforms and Fiscal PrudenceThe Union Budget for the year 2025-26 was presented at a time of global economic uncertainty, supply chain disruptions, weak demand, geopolitical tensions and unpredictable inflation. Global uncertainties, trade disruptions and inflation risks could impact economic stability in India. However, the Indian economy has shown resilience, with an estimated GDP growth of 6.4 percent for FY25, supported by strong agricultural output, rising rural demand and a steady services sector. Looking ahead, India faces both opportunities and challenges. While the manufacturing sector in India is facing slowdown, fiscal discipline and a surplus in services trade can help in maintaining macroeconomic stability in the economy.The budget focuses on sustainable and inclusive growth and emphasises on investment, private sector participation and rural consumption. Fiscal consolidation is on priority to ensure that deficit targets align with long-term stability. Beyond short-term economic management, the budget reinforces India\'s long-term vision of \'Viksit Bharat,\' promoting reforms in agriculture, MSMEs, infrastructure and innovation to drive sustained economic growth. The budget introduces transformative reforms in six domains: taxation, power sector, urban development, mining, financial sector and in designing regulatory frameworks.Growth Projections for IndiaGrowth estimates for FY 2025-26 are between 6.5 percent and 7 percent. The Asian Development Bank provides the highest projection at 7 percent. The Organisation for Economic Cooperation and Development (OECD) forecasts a steady 6.8 percent. Both, the World Bank and the Reserve Bank of India (RBI) predict a moderate 6.7 percent growth. The International Monetary Fund (IMF) presents the most conservative estimate at 6.5 percent, reflecting a slightly cautious stance. Overall, these projections suggest a positive growth outlook for India.Financial Aspects of the Budget for 2025-26The budget relies on borrowings, corporation tax, income tax, and goods and services tax as key revenue sources. Non-tax receipts, excise duty, and customs duty play relatively smaller roles while non-debt capital receipts remain minimal.There is a gradual increase in the gross tax revenue of the union government, rising from 10 percent of GDP in 2014-15 to a projected 11.9 percent in 2025-26. Direct tax receipts have steadily grown, while indirect tax receipts have remained relatively stable. The trend indicates a broadening tax base and enhanced revenue mobilization leading to fiscal stability.Regarding expenditure, the budget sets aside the largest share to meet states\' share in taxes and duties, reflecting constitutional obligation for vertical devolution. Interest payments account for 20 percent highlighting significant debt servicing obligations of the government. Four items (Defence, Finance Commission Transfers, Other Expenditure and Centrally Sponsored Schemes) receive 8 percent each. Economic Subsidies are set at 6 percent, indicating controlled spending.Trends in three major budgetary subsidies show that the food subsidy has declined from 7.61 percent in 2021-22 to 4.02 percent in 2025-26. Fertilizer subsidies showed fluctuation and a declining trend while petroleum subsidies remain minimal, increasing slightly in 2024-25 due to LPG subsidisation. Trends in expenditure on subsidy reflect government efforts towards rationalisation of subsidies while maintaining essential support.Total expenditure as a percentage of GDP peaked in 2020-21 to 17.7 percent, primarily due to increased government spending during the COVID-19 pandemic. Since then, it has been on a steady decline and projected to be 14.2 percent in 2025-26. Revenue expenditure rose to 14.4 percent of GDP in 2020-21 before gradually decreasing to 9.8 percent in 2025-26, reflecting fiscal prudence and adherence to fiscal discipline as mandated in the revised FRBM Act. Meanwhile, effective capital expenditure has shown a steady increase, growing from 2.6 percent of GDP in 2019-20 to a projected 4.3 percent in 2025-26.A Progressive Budget Shaping the Path to Viksit BharatThe budget reiterates government\'s commitment for accelerating growth, ensuring inclusive development and strengthening the private sector, while enhancing the spending power of the middle income class. The vision of \'Viksit Bharat\' envisages zero-poverty, quality education, affordable healthcare, skilled labor with meaningful employment, increased women\'s economic participation and positioning India as the world\'s food basket. The development journey is driven by four engines: agriculture, MSMEs, investment and exports; powered by reforms and guided by inclusivity towards the destination of Viksit Bharat.Agriculture as the First EnginePrime Minister Dhan-Dhaanya Krishi Yojana: Targets 100 districts with low productivity, focusing on enhancing yields, sustainable agriculture, irrigation and credit availability, benefiting 1.7 crore farmers.Rural Prosperity and Resilience: Multi-sectoral program covering 100 agri-districts in Phase-1 to address rural underemployment through skill development, investment and technology.Mission for Aatmanirbharta in Pulses: A six-year mission focusing on Tur, Urad and Masoor to ensure procurement support for farmers.Other agricultural initiatives: Comprehensive program for fruits and vegetables, special Makhana Board in Bihar, National Mission on High Yielding Seeds, marine fisheries framework for Andaman & Nicobar and Lakshadweep, Mission for Cotton Productivity, Kisan Credit Card loan limit enhancement from Rs. 3 lakh to Rs. 5 lakh, and a new urea plant in Assam.MSMEs as the Second EngineThe budget proposes to revise classification criteria of MSMEs by increasing investment and turnover limits. Credit guarantee cover will increase from Rs. 5 crore to Rs. 10 crore and for startups from Rs. 10 crore to Rs. 20 crore, boosting total credit for MSMEs by Rs. 1.5 lakh crore over five years. Micro enterprises will benefit from customized credit cards with a Rs. 5 lakh limit. A new Fund of Funds with a government contribution of Rs. 10,000 crore will support startups, alongside a scheme supporting 5 lakh first-time entrepreneurs from women, SC, and ST communities. A National Manufacturing Mission will drive Make in India and promote clean tech manufacturing.Investment as the Third EngineThe budget upholds the uptrend in capital expenditure, with infrastructure ministries presenting a three-year Public Private Partnership (PPP) pipeline and Rs. 1.5 lakh crore allocated for state capital expenditure incentives. A second Asset Monetization Plan (2025-30) will generate Rs. 10 lakh crore for new projects. Key missions include the Nuclear Energy Mission (targeting 100 GW by 2047, with Rs. 20,000 crore for Small Modular Reactors), revamping shipbuilding policies with a Rs. 25,000 crore Maritime Development Fund, expanding the UDAN Regional Connectivity Scheme, SWAMIH Fund 2 worth Rs. 15,000 crore for stressed housing units, and tourism development.Export as the Fourth EngineProposes an Export Promotion Mission jointly operationalised by Ministries of Commerce, MSME and Finance to facilitate export credit and cross-border factoring support. Bharat TradeNet (BTN) will create a digital platform for trade documentation. A national framework for Global Capability Centres (GCCs) will guide state policies.Education, Skill and Social SectorEnhanced nutrition support under Saksham Anganwadi and Poshan 2.0, setting up 50,000 Atal Tinkering Labs, broadband connectivity via BharatNet, Bharatiya Bhasha Pustak Scheme, five National Centres of Excellence for skilling, infrastructure expansion in IITs, a Centre of Excellence in AI for education, and adding 10,000 medical UG/PG seats. Extension of Jal Jeevan Mission to 2028, Urban Challenge Fund of Rs. 1 lakh crore, revamping PM SVANidhi, and providing identity cards and healthcare to gig workers.Proposed Reforms in the BudgetProposed regulatory reforms ensure business ease through trust-based governance, including a High-Level Committee for Regulatory Reforms and Jan Vishwas Bill 2.0 (decriminalizing over 100 legal provisions). Financial sector reforms include raising FDI limit in insurance from 74% to 100% for companies investing entirely in India. Customs reforms focus on tariff rationalization and exemptions for lifesaving drugs and critical minerals. Taxation reforms raise the personal income tax exemption threshold to Rs. 12 lakh (Rs. 12.75 lakh for salaried taxpayers) and rationalize TDS and TCS threshold limits.Fiscal OutlookA clear fiscal consolidation trend is visible, with the fiscal deficit projected to decline steadily from 9.2 percent in 2020-21 to 4.4 percent by 2025-26, aligning with the FRBM Act. The primary deficit is estimated to decline from 6.2 percent in 2020-21 to 0.8 percent in 2025-26, reflecting reduced borrowings.ConclusionThe Union Budget 2025-26 lays a strong foundation for India\'s economic growth by balancing fiscal prudence with strategic investments in agriculture, MSMEs, infrastructure and exports. With a clear vision and structured reforms, the budget paves the way for India\'s transformation into a global economic powerhouse.References:Govt. of India. Union Budget 2025-26, Ministry of FinanceGovt. of India. 2025. Economic Survey 2024-25, Ministry of FinanceMusgrave, A. Richard & Peggy B. Musgrave. 1989. Public Finance in Theory and Practice, 5th Edition, McGraw-Hill Book CompanyRangarajan C. & D.K. Srivastava. 2005. Fiscal Deficits and Government Debt: Implications for Growth and Stabilisation, Economic & Political Weekly. JulyRao, M.G. 2000. Tax Reform in India: Achievement and Challenges, Asia Pacific Journal, Vol 7, No. 2Sury, M.M. 1990. Government Budgeting in India, Commonwealth Publishers, DelhiAuthor may be reached at eboard@icai.in
Ep. 289 — Four Engines of Development: An Analytical Study of Union Budget 2025-26 towards Viksit Bharat 2047
CA Journal
· September 2026
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Four Engines of Development: An Analytical Study of Union Budget 2025-26 towards Viksit Bharat 2047An important milestone in India\'s path to Viksit Bharat 2047 is the Union Budget 2025-2026, which exemplifies the goal of inclusive, sustainable, and self-reliant growth. The budget emphasizes agriculture, MSMEs, investment, and exports as the four main drivers of economic reform, with a predicted GDP increase of 10.1%. Important programs like the Mission for Aatmanirbharta in Pulses, the Prime Minister Dhan-Dhaanya Krishi Yojana, and the growth of Made in India are designed to increase financial inclusion and production. To ensure that economic benefits reach every segment of society, especially farmers, women, youth, and the poor, the budget also allows significant funds for infrastructure, digital innovation, and job creation. A targeted 4.4% fiscal deficit upholds fiscal responsibility, while tax relief will benefit both individuals and corporations, promoting economic expansion. The budget lays the foundation for India to become a $5 trillion economy by 2030 by promoting technological innovation, industrial growth, and sustainable development, thereby strengthening its position as the world\'s most prosperous nation.IntroductionViksit Bharat, the government\'s motto, embodies its mission to end poverty, improve access to high-quality education, increase access to healthcare, and provide economic opportunity for all. Accelerating growth through investments and reforms is one of the budget\'s main topics, along with enhancing private sector contribution, encouraging resource use, exports, and production self-sufficiency, and providing social security and direct tax breaks to India\'s growing middle class. The predicted GDP for FY 2025-2026 is Rs. 356,97,923 crore, 10.1% more than the NSO-released Revised Estimates for FY 2024-2025 of Rs. 324,11,406 crore. The release of this budget is associated with India\'s ongoing resilience and strong economic performance in the face of an uncertain global economic climate.India towards Viksit Bharat 2047: Key Priority Areas in the Union Budget1. Spurring Agricultural Growth and ProductivityInspired by the success of the Aspirational Districts Program, the government will work with states to implement the \"Prime Minister Dhan-Dhaanya Krishi Yojana\". The initiative will cover 100 districts with below-average credit characteristics, moderate crop intensity, and low production. Its five main objectives include enhancing agricultural productivity, implementing crop diversification and sustainable agriculture techniques, increasing post-harvest storage at the panchayat and block levels, improving irrigation facilities, and making long-term and short-term loans more accessible, benefiting 1.7 crore farmers.2. Building Rural Prosperity and ResilienceThe government will launch a six-year \"Mission for Aatmanirbharta in Pulses,\" focusing on Tur, Urad, and Masoor with procurement support from central agencies (NAFED and NCCF). Other measures include the Comprehensive Programme for Vegetables & Fruits, National Mission on High Yielding Seeds, five-year Mission for Cotton Productivity, integration of post offices with banking services, the Makhana Board in Bihar, and Enhanced Kisan Credit Card (KCC) loans with a Rs. 5 lakh ceiling for 7.7 crore farmers.3. Taking Everyone Together on an Inclusive Growth PathAssistance programs for underserved populations have been enlarged through direct benefit transfers (DBT), housing projects, and increased financial inclusion to ensure growth benefits are distributed to all societal segments.4. Boosting Manufacturing and Supporting MSMEsThe National Manufacturing Mission seeks to support clean technology, electric vehicles, and renewable energy development. MSME support features include:Updated MSME Categorization: Turnover and investment restrictions for micro enterprises increased to Rs. 10 crores and Rs. 2.5 crores respectively.Credit Guarantee Expansion: Increased from Rs. 5 crores to Rs. 10 crores for MSMEs, and from Rs. 10 crores to Rs. 20 crores for startups.Micro-Enterprise Credit Cards: 10 lakh micro-entrepreneurs with a Rs. 5 lakh limit.Fund of Funds for Startups: A Rs. 10,000 crore fund supporting early-stage companies.First-Time Entrepreneur Support: Term loans up to Rs. 2 crores for 5 lakh SC/ST and female entrepreneurs.Employment-Led Enabling Development: A focus product strategy for the footwear and leather industry aiming to create jobs for 22 lakh people, earn Rs. 4 lakh crore in revenue, and increase exports by over Rs. 1.1 lakh crore.5. Investing in People, Economy, and InnovationKey investments include the Urban Challenge Fund (Rs. 1 lakh crore), power sector distribution reforms linked to an extra 0.5% GSDP borrowing capacity, extension of the Jal Jeevan Mission until 2028, Rs. 25,000 crores from the Maritime Development Fund, Rs. 1.5 lakh crore in 50-year interest-free loans to states, and 50,000 Atal Tinkering Labs.6. Securing Energy SuppliesA Nuclear Energy Mission with an outlay of Rs. 20,000 crores will operationalize at least five domestically developed Small Modular Reactors (SMRs) by 2033, targeting at least 100 GW of nuclear energy by 2047.7. Promoting ExportsInitiatives include the Export Promotion Mission, Bharat Trade Net (centralized digital trade documentation), air cargo warehousing support, National Framework for Global Capability Centres (GCCs) in tier-2 cities, MUDRA Homestay Loans, and expanded E-Visa / medical tourism (\"Heal in India\").8. Nurturing InnovationThe Gyan Bharatam Mission will document manuscript heritage, Rs. 20,000 crores allocated for private sector-driven R&D, a second Gene Bank for Crops Germplasm with 10 lakh germplasm lines, and PM Research Fellowships in IITs and IISc.Overview of the Fiscal Budget and Tax ReformsThe fiscal deficit to GDP is anticipated to be 4.4% in FY 2025-2026, and the revenue deficit is projected at 1.5%. Gross tax revenue is estimated to grow by 11.1%.Tax reforms place a strong emphasis on the middle class by revising personal income tax: no income tax is required on total income up to Rs. 12 lakhs annually (Rs. 12.75 lakh for salaried taxpayers due to the standard deduction of Rs. 75,000). TDS and TCS thresholds are rationalized, including doubling the senior citizen interest deduction ceiling to Rs. 1 lakh and raising the annual TDS rent limit threshold. Basic Customs Duty (BCD) is completely exempted on 36 life-saving medications, cancer drugs, and essential minerals like cobalt and lithium-ion battery scrap.ConclusionThe Union Budget 2025-26 presents a comprehensive and forward-looking economic framework addressing structural reforms, fiscal stability, and socioeconomic justice. By balancing financial restraint with economic growth, the budget sets the stage for a developed and globally competitive country by 2047.References:https://www.firstpost.com/india/union-budget-2024-poor-youth-farmer-and-women-in-sitharamans-10-focus-areas-13858458.htmlDr. Rajeev Kumar (2024) Budget 2024-25: A Blueprint for Inclusive Growth and Economic Stability, The Chartered Accountant, Volume 73, No. 02, August 2024.https://pib.gov.in/PressReleaselframePage.aspx?PRID=2098352https://www.indiabudget.gov.in/D.K. Srivastava and Rangarajan C. (2005). Fiscal Deficits and Government Debt: Implications for Growth and Stabilization, Economic & Political Weekly. Julyhttps://www.indiabudget.gov.in/doc/Budget_at_Glance/budget_at_a_glance.pdfhttps://www.indiabudget.gov.in/doc/frbm1.pdfhttps://www.thehindu.com/business/budget/budget-2025-26-key-takeaways-in-charts/article69167182.eceGovt. of India. 2025. Union Budget 2025-26 Documents for various years, Ministry of Financehttps://www.etvbharat.com/en/!bharat/union-budget-2025-highlights-changes-in-income-tax-rates-major-investments-in-agriculture-msmes-among-others-enn25020103405Govt. of India. 2024-25, Economic Surveys, Ministry of Finance/Indian budgetAuthor may be reached at akkimaruthi@gmail.com and eboard@icai.in
Ep. 290 — Finance Bill 2025 - TDS & TCS
CA Journal
· September 2026
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Finance Bill 2025 - TDS & TCSThe Union Budget 2025-26 is the first full-year budget of the Modi 3.0 Government. It aims to balance fiscal prudence with taxpayer relief amid concerns over rising freebies and fiscal discipline. It introduces rationalized tax provisions, eases compliance burdens, and incentivizes economic growth, recognizing taxpayers\' contributions. Nani Palkhivala\'s philosophy of fair taxation resonates with this approach-taxation should foster prosperity, not oppression. Modern fiscal policy focuses on broadening the tax base and increasing incomes rather than raising tax rates, ensuring self-generating revenues. The goal is a just, efficient system that supports governance, business, and economic progress.Budget Blues and EconomyThe Finance Bill 2025 provides major relief to taxpayers by raising the tax-free income threshold from Rs. 7 lakhs to Rs. 12 lakhs, significantly increasing disposable income. Reduction in tax rates benefits taxpayers across the board, boosting consumption, driving investments, and strengthening capital markets. By discouraging tax evasion and improving compliance, this reform supports a transparent and efficient tax system.TDS & TCSThe Finance Bill 2025 introduces significant reforms to the Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) provisions, aiming to simplify and streamline tax compliance and alleviate difficulties. The key amendments proposed can be broadly classified into:Rationalization of TDS and TCS ThresholdsReduction in TDS and TCS RatesElimination of Higher TDS and TCS Rates for Non-FilersDecriminalization of Certain TCS OffensesUnless otherwise stated, the changes are applicable from April 1, 2025, i.e., for F.Y. 2025-26 and onwards.Rationalization of ThresholdsThe Finance Bill, 2025 proposes to increase certain thresholds for determining the applicability of TDS and TCS provisions to reduce the administrative burden on business enterprises. Key threshold changes include:Interest on securities (Sec 193): Increased from Nil / Rs. 5,000 to Rs. 10,000/- for individuals/HUFs.Interest other than securities (Sec 194A): Increased from Rs. 50,000 to Rs. 1,00,000/- for senior citizens; from Rs. 40,000 to Rs. 50,000/- for banks/cooperative societies/post offices; and from Rs. 5,000 to Rs. 10,000/- in other cases.Dividend (Sec 194): Increased from Rs. 5,000 to Rs. 10,000/- for individual shareholders.Mutual Fund Units (Sec 194K): Increased from Rs. 5,000 to Rs. 10,000/-.Winnings from Lottery / Horse Race (Sec 194B / 194BB): Prescribed for each transaction rather than aggregate during the financial year.Insurance Commission (Sec 194D): Increased from Rs. 15,000 to Rs. 20,000/-.Commission/Brokerage (Sec 194H): Increased from Rs. 15,000 to Rs. 20,000/-.Rent (Sec 194-I): Prescribed on a per-month basis at Rs. 50,000/- per month or part of a month (replacing the Rs. 2,40,000/- annual threshold).Professional/Technical Fees & Royalty (Sec 194J): Increased from Rs. 30,000 to Rs. 50,000/-.Enhanced Compensation (Sec 194LA): Increased from Rs. 2,50,000 to Rs. 5,00,000/-.Omission of TCS on Sale of Specified Goods - Section 206CFrom April 1, 2025, the provisions of collecting TCS under section 206C(1H) on the sale of goods exceeding Rs. 50 lakhs will not be applicable, aligning with Section 194Q.TCS Relaxations on LRS and EducationThe Finance Bill 2025 proposes that TCS provisions will not apply on remittances made under the Liberalised Remittance Scheme (LRS) for pursuing education if financed by a loan obtained from a specified financial institution. Furthermore, the threshold to apply TCS on LRS remittances and overseas tour program packages is increased from Rs. 7 lakh to Rs. 10 lakh.TCS on Forest ProduceClarity is provided by defining \"forest produce\" under State Acts or the Indian Forest Act, 1927, covering specific forest produces under forest leases with a 2% TCS rate.Rate ReductionsThe TDS rate on insurance commission u/s 194D is reduced from 5% to 2%.For securitization trusts (Sec 194LBC), the TDS rate for individuals/HUFs (currently 25%) and other persons (currently 30%) is proposed to be reduced uniformly to 10%.Non-Filers\' TDS (Omission of Sections 206AB & 206CCA)The Finance Bill 2025 proposes to omit sections 206AB and 206CCA with effect from April 1, 2025, eliminating the requirement to verify whether a payee/payer has filed income tax returns, thereby easing compliance burdens.TCS DecriminalizationA proviso is inserted into Section 276BB to decriminalize prosecution for delayed payment of TCS if the tax collected is deposited into the Government Treasury before the prescribed time for filing the quarterly statement.ConclusionThe Finance Bill 2025 offers much-needed compliance relief by rationalizing rates and procedural requirements for TDS and TCS, supporting economic growth, business sustainability, and ease of doing business.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 291 — The Finance Bill 2025 - GST Amendments
CA Journal
· September 2026
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The Finance Bill 2025 - GST AmendmentsThe Finance Bill, 2025 has introduced significant amendments in the GST laws based on the recommendation of GST Council. The Bill which is part of Union Budget 2025 aimed at simplifying compliance, reducing tax burdens, and fostering economic growth. The GST changes emphasize rationalizing credit provisions, easing return filing, and enhancing tax governance mechanisms. Also, the Bill has proposed changes in GST laws for ensuring trade facilitation. As India strides toward becoming the world\'s third-largest economy, the Economic Survey 2024-25 is forecasting GDP growth between 6.3% and 6.8% for coming year. This optimism is anchored in the nation\'s robust economic fundamentals.IntroductionSince its inception in 2017, GST has revolutionized India\'s indirect tax regime by dismantling inter-state trade barriers, digitizing compliance, and broadening the tax base. This year\'s Economic Survey also highlights a 12% year-on-year growth in GST collections, reflecting improved compliance and formalization. However, challenges such as input tax credit disputes, interpretational ambiguities, and tax evasion persist. The proposed changes are categorized into retrospective amendments, prospective amendments effective from 1st April 2025, and prospective amendments effective from a date to be notified.1. Amendments Proposed Retrospectively from 1 July 2017Supply of goods warehoused in a SEZ or FTWZ: Entry (aa) in paragraph 8 of schedule III of the CGST Act, 2017 is inserted to provide that the supply of goods warehoused in a SEZ or FTWZ to any person before clearance for exports or to the DTA shall be treated neither as a supply of goods nor services. No refunds will be provided for any GST collected on these transactions prior to the amendment.Replacement of 'Plant or Machinery' with 'Plant and Machinery' in Section 17(5)(d): Proposed with retrospective effect from July 1, 2017, superseding any contrary judicial rulings. This amendment nullifies the Supreme Court\'s ruling in Chief Commissioner of CGST v. M/s. Safari Retreats Private Limited & Ors.2. Amendments Proposed Effective from 1st April 2025Inter-State RCM transactions covered under ISD mechanism: Section 2(61) and Section 20 of the CGST Act, 2017 are amended to explicitly provide for the applicability of the Input Service Distributor mechanism regarding inter-state procurements of services attracting reverse charge (under IGST Sections 5(3) and 5(4)).3. Amendments Proposed Effective from a Date to be NotifiedTrack and Trace Mechanism for specified commodities: Insertion of Section 148A in the CGST Act, 2017 introducing Unique Identification Marking (UIM) using barcodes, RFID tags, or other technologies. Penalties for non-compliance are established under new Section 122B (Rs. 1,00,000 or 10% of disputed tax, whichever is higher).Amendment in definition of "Local Authority": Section 2(69) is amended to replace "municipal or local fund" with "municipal fund or local fund" along with clarifications to reduce litigation.Deletion of provisions relating to time of supply for vouchers: Sections 12(4) and 13(4) of the CGST Act, 2017 are deleted following Circular No. 243/37/2024-GST (dated Dec 31, 2024), ensuring GST applies only when the voucher is redeemed, eliminating double taxation.Mandatory Input Tax Credit Reversal on Credit Notes: Section 34(2) is amended to give statutory backing to the Invoice Management System (IMS), ensuring real-time reconciliation.Implementation of Invoice Management System: Section 38 is amended to provide a legal framework for generating inward reports based on taxpayer actions in the IMS.Pre-Deposit reduction for Appeals related to Penalty: Sections 107(6) and 112(8) are amended to reduce the pre-deposit requirement to 10% for appeals before the appellate authority or GSTAT when the dispute pertains exclusively to a penalty demand without any associated tax demand.ConclusionBudget 2025 reaffirms GST as a cornerstone of India\'s fiscal architecture, balancing compliance ease with revenue security.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 292 — Union Budget 2025-26: Boosting MSMEs and Empowering Youth for Economic Growth
CA Journal
· September 2026
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Union Budget 2025-26: Boosting MSMEs and Empowering Youth for Economic GrowthThe Micro, Small, and Medium Enterprises (MSME) sector is the backbone of the Indian economy, contributing significantly to employment generation, industrial output, and exports. The Union Budget 2025-26 has introduced a series of reforms aimed at redefining MSMEs, enhancing financial support, and promoting technological and market access to foster growth. Additionally, the budget includes various initiatives to empower the youth through skill development, entrepreneurship programs, and employment opportunities. This article explores the implications of these budgetary changes, highlighting how they are poised to transform the MSME landscape in India while benefiting the youth population.By CA. Harsh Goel, Member of the InstituteIntroductionMSMEs play a crucial role in India\'s economic development, accounting for nearly 30% of the GDP and generating employment for millions. The government\'s focus in the Union Budget 2025-26 has been on addressing challenges like inadequate access to credit, limited market exposure, and outdated technology through policy interventions and financial incentives.Revised MSME ClassificationThe Union Budget 2025-26 modifies the MSME classification criteria to allow businesses to scale operations without losing their MSME status:Micro Enterprises: Investment up to Rs. 2.5 crore; Turnover up to Rs. 10 crore.Small Enterprises: Investment up to Rs. 25 crore; Turnover up to Rs. 100 crore.Medium Enterprises: Investment up to Rs. 125 crore; Turnover up to Rs. 500 crore.Budgetary Initiatives for MSMEs and Youth DevelopmentMSME Development InitiativesPMEGP: Allocation increased from Rs. 1,918 crore (RE 2024-25) to Rs. 2,954 crore (BE 2025-26).PM Vishwakarma Scheme: Increased from Rs. 4,000 crore to Rs. 5,100 crore.GECL for MSMEs: Allocated Rs. 9,000 crore in 2025-26 to help maintain liquidity.PLI Scheme: Budget increased from Rs. 5,777 crore to Rs. 9,000 crore.Fund of Funds 2.0 (DPIIT): Newly introduced with a budget allocation of Rs. 2,000 crore.Improved Access to CreditMicro and small business credit guarantee cover raised from Rs. 5 crore to Rs. 10 crore, allowing an extra Rs. 1.5 lakh crore in credit over five years.Guarantee cover for startups trebled from Rs. 10 crore to Rs. 20 crore.Customized credit cards providing Rs. 5 lakh in credit for microbusinesses registered on the Udyam portal (target of 10 lakh cards in the first year).Youth Development InitiativesPM YASASVI: Allocation increased from Rs. 1,381 crore to Rs. 2,190 crore.Skill India Programme: Budget increased to Rs. 2,700 crore.NATS: Funding raised from Rs. 750 crore to Rs. 1,178 crore.EMRS: Allocated Rs. 7,089 crore for tribal education.Khelo India Initiative: Budget increased to Rs. 1,000 crore.New Employment Generation Scheme: Allocated Rs. 20,000 crore in 2025-26 to boost job creation.ConclusionThe Union Budget 2025-26 reflects a well-structured approach towards strengthening MSMEs and empowering youth through increased financial outlays and focused policy initiatives, paving the way for a robust and self-reliant economy.References:Government of India. (2025). Union Budget 2025-26: Policy Announcements and Impact Report.Ministry of Finance. (2025). Economic Survey 2024-25.Ministry of Micro, Small & Medium Enterprises. (2024). Annual Report on MSMEs.NITI Aayog. (2025). Digital India and MSME Growth Report.Reserve Bank of India. (2025). Credit Flow and Financial Support for MSMEs.Startup India. (2025). Youth Entrepreneurship Development Initiatives.Author may be reached at harsh.goel@mail.ca.in and eboard@icai.in
Ep. 294 — Year-End Compliances under GST Law - 31.03.2025
CA Journal
· September 2026
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Year-End Compliances under GST Law - 31.03.2025As we are approaching the closure of the financial year 2024-25, taxpayers must give utmost priority to their Goods and Services Tax (GST) compliance to facilitate a smooth transition into the new fiscal year. This period presents a critical opportunity to complete essential compliance tasks. By fulfilling these obligations, taxpayers can minimize the risks associated with non-compliance while enhancing their overall operational efficiency. To effectively prepare for the upcoming financial year, taxpayers should conduct a comprehensive reconciliation of their sales turnover, input tax credits, and other financial records. This process involves verifying the accuracy of all transactions and promptly addressing any discrepancies that may arise. By adopting these strategic measures, organizations can strengthen their financial position and ensure seamless adherence to GST regulations in the new fiscal year.By CA. Deepak Aggarwal, Member of the InstituteThe article has divided the activities on the basis of categories for easy understanding.1. Annual Aggregated Turnover (AATO)Under GST law, there are a lot of activities that are dependent on the Annual Aggregated Turnover (AATO), businesses need to make sure to calculate their annual aggregated Turnover before doing the following activities:Opting for Composition Scheme: As per rule 3(3) of the CGST Rules, 2017, every registered person who wishes to opt for the composition scheme shall furnish Form GST CMP-02 before the end of the financial year i.e., before 31st March 2025.Mandatory preparation of E-invoice: As per rule 48(4) read with Notification No. 13/2020 Central Tax dated 21.03.2020 (As amended), the registered person shall prepare an e-invoice for the supply of goods or services or both to the registered person or exports, whose aggregate turnover is more than Rs. 5 Cr in any preceding financial year from FY 2017-18 onwards. To check the applicability for FY 2025-26, AATO needs to be checked from FY 2017-18 to FY 2024-25. However, an exception is provided to some registered persons from the generation of e-invoices. Further, from 01.04.2025 onwards, a registered person having an annual aggregate turnover of more than 10 cr. is required to generate an e-invoice within 30 days as per the advisory issued by the GSTN dated 5th November 2024.Dynamic QR Code: As per the sixth proviso to rule 46 read with Notification No. 14/2020-Central Tax dated 21.03.2020 (As amended), an invoice shall have a Dynamic Quick Response (QR) Code if the registered person who is issuing the invoice having AATO more than Rs. 500 Cr in any preceding financial year from FY 2017-18 onwards. For checking applicability for FY 2025-26, AATO needs to be checked from FY 2017-18 to FY 2024-25. However, an exception is provided to some registered persons from having dynamic QR code on the invoice.Mandatory Registration: A person needs to make sure that if at the end of the FY 2024-25, his/her turnover crosses the threshold limit or is involved in such activities where compulsory registration is required, he/she has to apply GST Registration.Filing of ITC-04: ITC-04 needs to be filed by the registered persons on a yearly or yearly basis depending on the AATO. Registered persons having an AATO of up to 5 Cr are required to file ITC-04 on an annual basis and those having an AATO of more than 5 Cr are required to file ITC-04 on a half-yearly basis.HSN Code: As per rule 46 of the CGST Rules, the HSN Code is required to be mentioned on the Tax Invoice. However, as per Notification No. 12/2017- Central Tax dated 28.06.2017 as amended by 78/2020 Central Tax dated 15.10.2020 and 90/2020-Central Tax dated 01.12.2020, if the AATO is up to Rs. 5 Cr then 4-digit HSN code is required if supply is made to the registered person. If AATO is more than 5 Cr, a 6-digit HSN code is required, in both cases registered as well as unregistered recipient. In the case of some specified supplies, an 8-digit HSN code is required. The HSN code for FY 2025-26 is dependent on the turnover of FY 2024-25.QRMP Scheme: Quarterly Returns with Monthly Payment (QRMP) scheme for Q1 of FY 2025-26 may be opted for from 01st Feb 2025 to 30th April 2025, if Annual Aggregate Turnover does not exceed Rs. 5 Cr.2. Important ReconciliationsIt is essential to reconcile the turnover (including both taxable as well as exempt turnover) as well as Input Tax Credit as reported in GST returns along with the books of accounts. Therefore, following reconciliations are required to ensure proper compliance with:Reconciliation of Turnover: Turnover needs to be reconciled among turnover reported in different tables of GSTR-1, Table 3 of GSTR-3B, and turnover as per books of accounts (GSTR-1 Vs. GSTR-3B Vs. Books of Accounts), it includes amendments, debit notes as well as credit notes. Such reconciliation must be prepared rate-wise and HSN-wise separately for the following:Taxable TurnoverExempted TurnoverNil-rated TurnoverNon-GST supplyTaxable under RCMReconciliation of ITC availed and reversal: Reconciliation: ITC availed in Form GSTR-3B needs to be reconciled with the Books of accounts. Further, a review of the Electronic Credit Reversal and Re-claimed Statement (ECRS) is also required to re-avail the credit parked in ECRS upon fulfilling the condition.3. Transactions liable to RCMRCM Invoice: As per section 31(3)(f) of the CGST Act read with rule 47A of the CGST Rules, if the supplier is unregistered then an invoice shall be issued by the registered person (recipient) within a period of 30 days from the date of receipt of goods or services or both. Therefore, the registered person needs to make sure of the following:RCM invoice must have been preparedTaxes must have been discharged, and corresponding ITC (if eligible) must have been availedRegistered SupplierUnregistered SupplierSelf-InvoiceNoYesPayment VoucherYesYesIt is important to note that in case taxes were not discharged on inward supply taxable under reverse charge, do not discharge through Form DRC-03. Discharge only through Form GSTR-3B so that corresponding ITC can be availed.As per para 2.7 of Circular No.211/5/2024-GST dated 26.06.2024, \"in case, the recipient issues the invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax. Further, in cases of such delayed issuance of invoice by the recipient, he may also be liable to penal action under the provisions of Section 122 of the CGST Act\".Important Reconciliation: Inward supply, on which tax is paid by the recipient under reverse charge, is not reported in GSTR-1. It is only reported in GSTR-3B and GSTR-9. Therefore, reconciliation needs to be prepared on the basis of the amount reported in GSTR-3B and showing in the books of accounts.RCM liability ReconciliationRCM ITC availedFurther, a review of RCM Liability/ITC Statement is also required along with books of accounts.GSTR-3BTable 3.1(d) - RCM LiabilityTable 4A(2) - Import of supplyTable 4A(3) - Inward supply liable to reverse charge other than import of goods or servicesGSTR-9Table 4G - RCM LiabilityTable 6C - Inward supply received from unregistered persons liable to reverse chargeTable 6D - Inward supply received from registered persons liable to reverse chargeTable 6F - Import of services (excluding inward supplies from SEZs)4. Cross Charge Vs. ISD RegistrationCross Charge: Cross Charge is applicable in case of internally generated services, therefore in the case of distinct persons, registered persons need to make sure that whether the invoicing has been done by one distinct person to another distinct person. Such an issue is also clarified by the Circular No. 199/11/2023-GST dated 17.07.2023.ISD Registration: The word \"Input Service Distributor\" has been defined in section 2(61) of the CGST Act. This is substituted vide the Finance Act 2024 and is applicable with effect from 01 April 2025. Further, such definition is also amended by the Finance Bill 2025 to incorporate the inward supply u/s 5(3) & 5(4) of the IGST Act, 2017, and applicable with effect from 01st April 2025.5. Other PointsNew invoice series: The registered person needs to make sure to apply a new unique series for the Tax Invoice, Debit Note, Credit Note, Delivery Challan, Bill of Supply, Invoice-cum-bill of supply, etc.Other Income: Taxpayers need to make sure regarding other income showing in books of accounts which is subject to GST. For example, profit on the sale of cars, etc.Special Transactions: There are some transactions that are not reflected in profit & loss accounts as not related to the ordinary course of business. A registered person needs to be extra cautious regarding such transactions. Examples of such transactions are the sale of fixed assets.Refund: Refund needs to be applied within the time period of 2 years from the relevant date as provided under GST law. Therefore, taxpayers need to be more cautious regarding filing of application of refund which is getting time barred near to closure of the financial year.TDS and TCS Credit Received: As per Section 51 of the CGST Act, TDS @ 2% (1%- CGST & 1%-SGST) is required to be deducted by the deductor and as per Section 52 of the CGST Act, TCS @ 0.5% is required to be collected by the E-commerce operator. All the TDS deducted and TCS collected amounts are reflected in the electronic cash ledger after successfully accepting the same in the TDS and TCS credit received option. Such balances must be reconciled with the balance lying in books of accounts.Filing of LUT: Filing of Letter of Undertaking (LUT) is an important aspect before making any zero-rated supply in the FY 2025-26.Reconcile GST ledger balances with the Books of Accounts: The balances appearing in the electronic ledgers on the GST portal need to be reconciled with the balances reflected in the books of accounts and if there is any difference then that needs to be dealt with accordingly.Declaration by GTA (Goods Transport Agency): As per Notification No. 11/2017 Central Tax (Rate) dated 28.06.2017 as amended by 06/2023-Central Tax (Rate) dated 26.07.2023, if a GTA wants to shift from a forward charge mechanism to reverse charge mechanism for FY 2025-26 then he has to file a declaration between 1st January 2025 to 31st March 2025.Reversal of ITC as per rule 37: As per rule 37 of the CGST Rules, the amount of input tax credit needs to be reversed if the recipient fails to make payment to the supplier within 180 days. The recipient needs to reverse the amount along with interest.Reversal of ITC as per rule 37A: As per rule 37A of the CGST Rules, the amount of input tax credit needs to be reversed if the supplier fails to file GSTR-3B. So, the taxpayers need to prepare the list of suppliers who have not filed their GSTR-3B and ask them to furnish the return to avoid reversal of ITC.Reversal of ITC as per rule 42/43: The taxpayer needs to make sure that reversal of ITC is also required to be calculated on a yearly basis as per rules 42 & 43 of the CGST Rules. Two scenarios are possible:The amount already reversed is less than such amount the difference amount needs to be reversed.The amount already reversed is greater than such amount a difference amount may be availed.The time limit for availing ITC as per section 16(4) is $30^{th}$ November 2025 for FY 2024-25. However, it is important to note that the last return for availing ITC or reversing ITC without interest as per rule 42/43 is the September month return following the end of the financial year.References:(No explicit references listed in source)Author may be reached at daggarwal346@gmail.com and eboard@icai.in
Ep. 295 — Impact of GST on Business: A study of perception of Chartered Accountants of Punjab
CA Journal
· September 2026
00:00
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Impact of GST on Business: A study of perception of Chartered Accountants of PunjabThe implementation of Goods and Services Tax (GST) is a landmark in the history of Indian taxation since independence. This new GST law has made revolutionary reforms in the existing taxation system and impacted the economy and business transactions in various ways. This research has been undertaken with the purpose of understanding the perception of Chartered Accountants regarding the impact of GST on businesses in India. The data for the study was collected from 209 respondents and the results revealed that Chartered Accountants have a positive perception about the influence of GST on business and opine that GST has impacted the business by enhancing financial feasibility, procedural effectiveness, and ease of doing business.IntroductionGST was introduced in India on 1st July 2017 by making the 101st amendment and inserting Article 246A in the Constitution. GST has simplified the existing tax structure in India by subsuming various central taxes such as excise duty, service tax, and state taxes such as Central Sales Tax (CST), Value-Added Tax (VAT), and numerous other indirect taxes (Rajesekaran & Pavithran, 2020). It also resulted in the ease of doing business as it has removed various barriers to the free movement of goods and the factors of production from one state to another. It has transformed the whole country into a unified economic market.GST is a multistage tax levied on value addition and has the provision of an Input Tax Credit (ITC) mechanism which allows the set off of the input tax paid against the output tax liability. This ITC mechanism has resulted in eradicating the cascading effect (Revathi, Madhushree & Sreeramana, 2019) and a reduction the tax burden on consumers (Lincy & Kanthi, 2019). GST law has lowered procedural and compliance costs and reduced corruption and tax evasion by bringing more transparency in the taxation system (Tondon & Tondon, 2017). GST implementation in India has been beneficial for various sectors of society in the short run and will be much more beneficial for all sectors of society in the long run (Deepaware & Dwivedi, 2022).Review of LiteratureA number of studies have been conducted in India to evaluate the impact of GST on various aspects of the Indian economy. Sharma and Indapurkar (2020) investigated the awareness and perception of small traders regarding GST and found that there is the lack of initiatives taken by the government to sensitize and educate respondents regarding the new tax laws. Agrawal (2019) concluded in his study that there is the reduction in the transportation cost and prices of goods due to GST implementation in the case of FMCG companies. Sharma & Singh (2018) conducted a comprehensive study on the industry and concluded that respondents are finding GST procedures complex and time-consuming. Das (2020) executed research to understand the perception of consumers about the impact of GST on prices and found that the majority of consumers hold a neutral opinion regarding reduced prices of goods and services in post-GST era. Kiran and Somasekharan (2019) observed in their study that the majority of businessmen are satisfied with the software equipped to handle GST procedures but hold the opinion that GST has not resulted in a change of MRP as projected in the GST policy document.Relevance of the studyGST is a remarkable step towards a comprehensive indirect tax reform in the country. Since its implementation, GST has been deliberated across various stakeholders. The review of the literature on GST has highlighted that there has been a wide gap between the vision of the government and the way this law has been perceived by the different stakeholders. Among these stakeholders, Chartered Accountants are privileged to be well-versed with the scope of GST implementation in India. They are actually involved in the execution of GST and act as a major conduit between government and taxpayers. Therefore, when it comes to analysing the impact of GST on business it is a judicious decision to include the perspective of Chartered Accountants. A number of studies have been conducted on GST to date but most of them intended to explain the importance of GST for the economy and taxpayers. The researcher has come across no study that evaluates the opinion of Chartered Accountants regarding GST implementation with a focus on the business sector. Therefore, the study has been undertaken to study the perspective held by Chartered Accountants with regard to their perception of how GST has contributed to the growth and expansion of business in India. The study further explores how gender, age, and experience of Chartered Accountants influence their perception of GST.Objectives of the studyTo study the impact of GST on financial feasibility in business as perceived by Chartered Accountants and its relation with the demographic characteristics of the respondents.To study the impact of GST on the procedural effectiveness of business as perceived by Chartered Accountants and its relation with the demographic characteristics of the respondents.To study the impact of GST on ease of doing business as perceived by Chartered Accountants and its relation with the demographic characteristics of the respondents.HypothesesDemographic characteristics of Chartered Accountants influenced their perception regarding the impact of GST on financial feasibility in business.Demographic characteristics of Chartered Accountants influenced their perception regarding the impact of GST on the procedural effectiveness of business.Demographic characteristics of Chartered Accountants influenced their perception regarding the impact of GST on ease of doing business.Research MethodologyThis descriptive research has been conducted on the Chartered Accountants practicing in the State of Punjab. The sample respondents (209) have been randomly selected.Table 1: Sample distributionGroupGenderAgeExperienceTotal MaleFemale21-3535-50Above 500-1010-2020-30Above 30 N1387168677447289143209%663432.532.135.422.513.443.520.6100(Source: Compiled data)Table 1 shows that data for the study has been collected from 66% male Chartered Accountants. Almost equal representation has been made from the age groups. 43.5% of respondents fall in the experience group 20-30 years followed by 22.5% with less than 10 years of experience.The impact of GST on business in India has been evaluated on a 5-point Likert scale developed by the researcher. The scale intends to cover the impact of GST on following three parameters:Financial feasibility: It covers the impact of GST on the cascading effect of taxes, tax burden, prices for goods and services, cost of doing business, working capital requirement, and overall profitability of the business.Ease of doing business: It includes the statements related to clarity in GST rates of goods and services, movement of goods from one state to another, delivery time involved in the case of goods, stock transfers between distinct persons, and scope for expansion of business.Procedural Effectiveness: It encompasses the opinion of Chartered Accountants with respect to the procedure for registration & invoice preparation, the process for payment of taxes, the refund process and processing time involved, compliance time and compliance costs, etc.The collected data has been analysed with respect to demographic characteristics (gender, age and experience) using statistical tools viz, t-test and ANOVA.Table 2: Descriptive statistics for total sample StatisticStd. ErrorFinancial feasibilityMean3.5837.06920 Median3.8000 Std. Deviation1.00035 Minimum1.00 Maximum5.00 Skewness-.628.168 Kurtosis-.509.335Procedural effectivenessMean3.5549.05567 Median3.4200 Std. Deviation.80484 Minimum2.00 Maximum5.00 Skewness.165.168 Kurtosis-.345.335Ease of doing businessMean3.9046.04668 Median3.7100 Std. Deviation.67483 Minimum2.28 Maximum5.00 Skewness.448.168 Kurtosis-.881.335(Source: Compiled data)ResultsThe descriptive statistics in the case of all variables (financial feasibility, procedural effectiveness, ease of doing business) covered in the study are depicted in Table 2. The mean score for financial feasibility is 3.58, procedural effectiveness mean score is 3.55, and ease of doing business mean score is 3.90 with standard deviations of 1.00, 0.80, 0.67, and median 3.80, 3.42, 3.71 respectively. The skewness for financial feasibility, procedural effectiveness, and ease of doing business is -.628, .165, .448 and the standard error of skewness is .168. The negative values of skewness indicate negatively skewed data and positive values indicate positively skewed data. The value of kurtosis was -0.509, -0.345, -.881, and the standard error of kurtosis was .335. The negative value of kurtosis indicated that the distribution curve is platykurtic. The values of kurtosis and skewness for all variables fall within the satisfactory array of -2 to +2 (Bachman, 2004). Besides, the standard error of skewness and kurtosis also falls within the acceptable range of -1.96 to +1.96 (Peat & Barton, 2008). As all the values lie within the norms, hence, it can be interpreted that data used in the study is normally distributed. This lays down the foundation of applying parametric tests (t-test, ANOVA).Table 3: Descriptive statistics and t-statistics - Financial feasibility with respect to genderGroupNMeanS.Dt-statRemarksMale1383.5739.94021 Female713.60281.11483-.197Non-significantTotal2093.5549.80484 (Source: Compiled data)The results in Table 3 indicate that the opinion of male and female Chartered Accountants is similar (Male: Mean=3.57, Female: Mean=3.60) regarding financial feasibility. The application of the t-test also signifies the non-existence of differences in the perception of male and female Chartered Accountants of Punjab with regard to the influence of GST implementation on financial feasibility in the business sector (t=-0.197, p>.000).Table 4: Descriptive statistics and F-statistics - Financial feasibility with respect to ageGroupNMeanS.DF-statRemarks21-35684.1824.63691 35-50673.6866.97311 Above 50742.9405.9273537.624SignificantTotal2093.5549.80484 (Source: Compiled data)Table 4 depicts that young Chartered Accountants have the highest level of perception regarding financial feasibility (21-35: Mean = 4.18) in comparison to others (35-50: Mean=3.69; Above 50: Mean=2.94). The use of the F-test indicates that there exists a significant difference in age-based perception of Chartered Accountants of Punjab with regard to the influence of GST implementation on financial feasibility in the business sector (F=37.624, p<.000).Table 5: Descriptive statistics and F-statistics - Financial feasibility with respect to experienceGroupNMeanS.DF-statRemarks0-10474.0511.81344 10-20283.49291.15660 20-30913.4308.968814.675SignificantAbove 30433.45581.02104 Total2093.5549.80484 (Source: Compiled data)Table 5 depicts that fresh Chartered Accountants have the highest level of perception regarding financial feasibility (0-10: Mean=4.05) in comparison to experienced Chartered Accountants. The use of the F-test highlights that there exists a significant difference in the experienced-based perception of respondents of Punjab with regard to the influence of GST implementation on financial feasibility in the business sector (F=4.675, p<.000).On the basis of the above results (Table 3 to 5) hypotheses \'Demographic characteristics of Chartered Accountants influenced their perception regarding the impact of GST on financial feasibility in business\' stands accepted only for the age and experience of respondents.Table 6 Descriptive statistics and t-statistics - Procedural effectiveness with respect to genderGroupNMeanS.Dt-statRemarksMale1383.4717.81465 Female713.7165.76536-2.099SignificantTotal2093.5549.80484 (Source: Compiled data)The results in Table 6 depict the higher perception among female Chartered Accountants regarding procedural effectiveness. (Male: Mean=3.47, Female: Mean=3.72). The application of the t-test also indicates that there exists a significant difference in the perception of male and female Chartered Accountants of Punjab with regard to the influence of GST implementation on procedural effectiveness in the business sector (t=-2.099, p<.000).Table 7: Descriptive statistics and F-statistics - Procedural effectiveness with respect to ageGroupNMeanS.DF-statRemarks21-35683.8691.79669 35-50673.6527.69503 Above 50743.1776.7624315.771SignificantTotal2093.5549.80484 (Source: Compiled data)Table 7 depicts that young Chartered Accountants have the highest level of perception (21-35: Mean = 3.87) regarding procedural effectiveness in comparison to others (35-50: Mean=3.65; Above 50: Mean=3.18). Further F-test indicates that there exists a significant difference in age-based perception of Chartered Accountants of Punjab with regard to the influence of GST implementation on procedural effectiveness in the business sector (F=15.771, p<.000).Table 8: Descriptive statistics and F-statistics -Procedural effectiveness with respect to experienceGroupNMeanS.DF-statRemarks0-10474.1402.74946 10-20283.4943.50797 20-30913.4056.8210813.127SignificantAbove 30433.2705.68211 Total2093.5549.80484 (Source: Compiled data)Table 8 depicts that less experienced respondents have the highest level of perception (0-10: Mean = 4.14) regarding procedural effectiveness in comparison to more experienced respondents. Further, the F-test highlights that there exists a significant difference in the experienced-based perception of Chartered Accountants of Punjab with regard to the influence of GST implementation on procedural effectiveness in the business sector (F=13.127, p<.000).On the basis of the above results (Table 6 to 8) hypotheses \'Demographic characteristics of Chartered Accountants influenced their perception regarding impact of GST on procedural effectiveness in business\' stands accepted.Table 9: Descriptive statistics and t-statistics -Ease of doing business with respect to genderGroupNMeanS.Dt-statRemarksMale1383.9278.67869 Female713.8596.66974.691Non-significantTotal2093.5549.80484 (Source: Compiled data)The results in Table 9 depict the same level of perception among male and female respondents. (Male: Mean = 3.93, Female: Mean=3.86) regarding ease of doing business. The use of a t-test indicates that there exists no significant difference in the perception of male and female Chartered Accountants of Punjab with regard to the influence of GST implementation on ease of doing business (t=0.691, p>.000).Table 10: Descriptive statistics and F-statistics - Ease of doing business with respect to ageGroupNMeanS.DF-statRemarks21-35684.0932.68442 35-50673.8457.68239 Above 50743.7846.629034.208SignificantTotal2093.5549.80484 (Source: Compiled data)Table 10 depicts that young Chartered Accountants have the highest level of perception (21-35: Mean = 4.09) in comparison to others (35-50: Mean=3.85 Above 50: Mean=3.78) regarding ease of doing business. F-stat indicates that there exists a significant difference in age-based perception of Chartered Accountants of Punjab with regard to the influence of GST implementation on ease of doing business (F=4.208, p<.000).Table 11: Descriptive statistics and F-statistics - Ease of doing business with respect to experienceGroupNMeanS.DF-statRemarks0-10474.3291.63124 10-20283.6036.59468 20-30913.8630.6622210.445SignificantAbove 30433.7247.59394 Total2093.9046.67483 (Source: Compiled data)Table 11 depicts that fresh Chartered Accountants have the highest level of perception (0-10: Mean = 4.32) regarding ease of doing business in comparison to experienced Chartered Accountants. F-test highlights that there exists a significant difference in the experienced-based perception of Chartered Accountants of Punjab with regard to the influence of GST implementation on ease of doing business (F=10.445, p<.000).On the basis of above results (Table 9 to 11) hypotheses \'Demographic characteristics of Chartered Accountants influenced their perception regarding impact of GST on ease of doing business\' stands accepted only for the age and experience of respondents.DiscussionThe results have highlighted that the majority of Chartered Accountants believe that GST has positively impacted the business sector in terms of financial feasibility, procedural effectiveness, and ease of doing business. Respondents have a strong positive perception about the influence of GST on financial feasibility in business. Thus, it can be inferred that GST has mitigated the cascading effect, reduced the tax burden, cut down the cost of doing business, decreased the working capital requirements, and has led to improved overall profitability of the business houses. Chartered Accountants agree with the notion that GST has improved procedural effectiveness as it has introduced simplified procedures for registration, preparation of invoices, payment of taxes, filing of returns and claiming refunds, facilitated cross-verification of returns, and has also reduced compliance time and compliance cost for the business units. In terms of ease of doing business, respondents hold the opinion that the implementation of GST in India helped in the free inter-state movement of goods and the factors of production, eliminated ambiguity between goods and services, reduced the delivery time for goods, eased the expansion of business, relieved the business operations for multi-state organizations and cut down the scope for litigations between the taxpayer and the government.Comparing the perception of Chartered Accountants on the basis of their gender, age, and experience it has been found that both male and female respondents have similar perception regarding the influence of GST on financial feasibility and ease of doing business but in the case of procedural effectiveness in business female respondents have high perception than male respondents. Age and experience are found to be the crucial factors influencing their perception. It has been observed that young Chartered Accountants are more positive about the impact of GST on financial feasibility, procedural effectiveness, and ease of doing business in comparison to Chartered Accountants of upper age groups. Also, fresh Chartered Accountants have been found more optimistic about how GST has influenced the various components of business than experienced Chartered Accountants.ConclusionThe study has been conducted with the purpose of understanding Chartered Accountants\' perception regarding the extent of influence created by GST implementation on financial feasibility, ease of doing business, and procedural effectiveness in the business sector. A wide range of opinions has been collected by approaching to both male and female Chartered Accountants falling in different age groups and having varied levels of experience. The study has concluded that GST has improved financial feasibility, procedural effectiveness, and ease of doing business for the businessmen. The perception of Chartered Accountants who play a key role in the successful and widespread implementation of GST has been found quite positive. The positive perception of Chartered Accountants indicates that GST has played a significant role in improving efficiency and effectiveness of business units which will eventually escalate the overall development of the Indian economy.Implications of the studyThe study has wider implications for businessmen, consumers in general, and policy-makers in particular. The study put stress on the need to improve the GST provisions to further enhance the perception of different stakeholders. Reviewing GST slabs, technical structure of the GST portal, the process for claiming refund, the return filing process, provisions related to the Input tax credit, and complex HSN structure would improve the impact of GST on financial feasibility, ease of doing business, procedural effectiveness for the business sector.Limitations and direction for future researchThe study is restricted to understanding how far the objectives of GST as laid down in the policy document have been accomplished. This has been done by covering the opinion of Chartered Accountants who are experts in this specific field and act as mediators between the businessmen and government. Future studies can cover the opinions of other stakeholders like consumers, businessmen, government. The study does not cover the implementation issues in GST which itself is a broad topic to be covered in further studies. The impact of GST on various indicators of national growth can also be covered by future studies in this field.References:Agrawal, M. (2019). Study of the Leading Sectors of Indian Economy after GST Implementation - A Literature Review. Indira Management Review, 13(0), 86-100.Ahmed, S.S.R., & Annapoorani, K. (2019). Public awareness and perception towards goods and Service tax -A study with special reference to Chennai City. The International journal of analytical and experimental modal analysis, XI(X), 1850-1861.Ameen, N. O. (2020). Consumer perception towards Goods and Services Tax A Study with special reference to restaurants in Chennai city. European Journal of Molecular & Clinical Medicine, 7(11), 6475-6481.Das, A. (2020) Genesis of Goods and Services Tax (GST) in India: Consumers\' Perception towards its Implementation, with Special Reference to Guwahati City, Assam, International Journal of Management, 11(12), 1657-1665.Deepaware, N., & Dwivedi, S. (2022) GST in India: Impact on Indian Economy. International Journal of Novel Research and Development, 7(12), 338-344.Kiran, A., & Somasekharan, T. M. (2019). A study on the impact of GST in FMCG sector: A consumer review. International Journal of Research and Analytical Reviews, 6(1), 213-224.Lincy, N.L., & Kanthi, K. P. (2019). A Study on Retailer\'s Perception towards Goods and Services Tax with special reference to Palakkad Town. Iconic Research and Engineering Journals, 3(2), 351-355.Rajasekaran, R., & Pavithran, P. (2020). An Analysis of GST Collection of India with special reference to calender year (2019-20). International Journal of Innovative Research in Technology, 6(12), 9-13.Revathi, R., Madhushree, L. M., & Sreeramana, A. (2019). Review on Global Implications of Goods and Service Tax and its Indian Scenario. Saudi Journal of Business and Management Studies, 4(4), 337-358.Shah, V.K., & Aggarwal, J. (2019). An Empirical study of Attitude of Chartered Accountants of Ahmedabad City towards implementation of GST. Research Review International Journal of Multidisciplinary, 04 (01), 391-395.Sharma, R., Indapurkar, K. (2020). Awareness and Perception regarding GST among Small Traders, Retailers and Shopkeepers. Mukt Shabd Journal, IX (IV), 1953-1959.Sreekumar, P. G., & Chithra, R. (2018). A Study on the Impact of GST in FMCG Sector with Special Reference to Palakkad District, Kerala. IOSR Journal of Business and Management (IOSRJBM), 20(9), 53-58.Tandon, N., & Tandon, D. (2017). Analytics of Goods and Services Taxation Engima in India. Journal of Madhya Pradesh Economic Association, XXVII(I).Uppal, A., Wadhwa, B., Vashisht, A., & Kaur, D. (2019). GST: Awareness and perception of small business persons\' (SBPs). International Journal of Innovative Technology and Exploring Engineering, 8(7), 243-248.Authors may be reached at ca.jyotisoi@gmail.com and eboard@icai.in
SUSTAINABILITY
Ep. 296 — Integrated Reporting: Trends in India and Professional Opportunities
CA Journal
· September 2026
00:00
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Integrated Reporting: Trends in India and Professional OpportunitiesThis article presents the trend of voluntary adoption of Integrated Reporting (IR) by Indian corporates from FY 2015-16 through FY 2022-23. This period marks significant growth in IR adoption, however, companies need to follow the IR framework properly to reap the full benefits of it. The article highlights key insights on the compliance of the IR framework by Indian firms for FY 2022-23, derived through in-depth content analysis, with a particular emphasis on the business model, materiality, and its integration within annual reports. It concludes with the professional opportunities for CAs in India in the domain of IR.IntroductionSince its inception in 2010, Integrated Reporting (IR) has emerged as the latest form of stakeholder communication by listed entities across the globe. Today over 2,500 companies across 75 countries adopted this advanced reporting for stakeholder communication. India witnessed the first IR in 2016 when only one firm voluntarily issued an IR. However, since then number of firms adopting IR witnessed a steady growth. As of 31st March 2023, 96 non-financial firms across industries have voluntarily issued Integrated Reports. This growth in IR was mainly driven due to perceived reporting benefits which promote value creation, sustainable business practices, and enhanced stakeholder communication.Mishra et al., (2022), reveals that critical components that shape this perception are concise, effective & transparent reporting, enabling enhanced decision-making. However, these perceived benefits are subject to the quality of IR. Devarapalli et al., (2024), found that although the quality of Integrated Reporting Information (IRI) improved in 2021 compared to 2020, individual items did not show significant variation. Soriya & Rastogi, (2023) explored that robust IR practices can bolster the issuer\'s capacity to attract capital from markets by appealing to investors. These research findings reaffirm that the advantages of IR depend on how well the reports adhere to the IR framework standards.The IR framework comprises important parameters like integrated thinking, value creation amongst the six capitals, and information interconnectivity which distinguish IR from traditional reporting. An IR reflects these parameters majorly through disclosures like value creation or business model diagram, materiality assessment process & materiality matrix. An adequate depiction of value creation or business model diagram along its key elements like input, process, output, and outcomes, disclosure regarding the materiality assessment process, and presentation of materiality matrix are key differentiators for checking the quality of IR.Amongst this backdrop, this article discusses the trends in the voluntary adoption of IR by Indian corporates over the years, and the compliance towards the integrated reporting framework with emphasis on connectivity of information and materiality through content analysis of the IR. We further present the potential professional opportunities in the domain of IR.Integrated Reporting FrameworkAs per the definition by The International Integrated Reporting Council (IIRC) \"integrated report is a concise communication about how an organization\'s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation, preservation or erosion of value over the short, medium and long term\" (IIRC, 2021). The integrated reporting framework is the fundamental document that lays the foundation of IR. The important aspects as per the framework are integrated thinking and value creation amongst the six capitals with its interconnected functioning. The IR framework defines integrated thinking as \"the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects\". The fundamental concept of value as per the IR framework includes creation, preservation, and erosion across the six capitals on which any organization depends. These capitals are financial, manufactured, intellectual, human, social and relationship, and natural capital. The preparation and presentation of IR are assisted by seven guiding principles (Table 1). These principles assist the organization in deciding the content of the report and towards its proper presentation.Table 1: Guiding Principles of IRStrategic focus and future orientationOrganization\'s ability to create value in the short, medium and long termConnectivity of informationHolistic picture of the combination, interrelatedness and dependenciesStakeholder relationshipsNature and quality of the organization\'s relationships with its key stakeholdersMaterialityInformation about matters that substantively affect the organization\'s ability to create valueConcisenessSufficient context to understand the organization\'s strategy, governance, performance and prospectsReliability and completenessInclude all material matters, both positive and negative, in a balanced wayConsistency and comparabilityShould be consistent over time and enable comparisonThe Rise of Integrated Reporting in IndiaThe Securities and Exchange Board of India (SEBI) in its circular dated 6th Feb 2017, provided an advisory to the firms on following the principles of Integrated Reporting (SEBI, 2017). It allowed the voluntary adoption of Integrated Reporting for listed firms. With just one company in 2016, there has been a consistent increase in the number of firms voluntarily issuing IR over the period, except for FY 2022-23, where the increase was lower. This shows that Indian firms have preferred to provide financial and non-financial information to their various stakeholders beyond the mandatory reporting requirements and also meet global reporting expectations. For FY 2022-23, there were 96 firms that issued voluntary IR. A further breakup indicates that the manufacturing industry dominates over the services industry in adapting to integrated reporting.The major reason would be its operationally higher impact on the environment and social aspects as compared to the service industry. An overview of the number of companies involved in IR across different sectors highlights the construction materials sector being the highest among all the sectors.There is no mandatory requirement for the assurance of non-financial information forming part of the IR. However, firms can voluntarily get the report assured to further enhance the credibility of the disclosure. There is an increasing trend in the firms opting for external assurance of the IR.Meeting the IR Framework RequirementsThere has been a significant increase in the number of Indian non-financial firms issuing voluntarily integrated reporting. These reports must adhere to the IR reporting framework to ensure the objectives of such reporting are achieved. Although there are high-quality informative integrated reports, the fact that a few reports do not comply with the basic framework requirements can\'t be denied. We carried out a primary investigation of the IR issued in FY 2022-23, focusing on the presence of a business model diagram, one of the vital content elements and materiality, a crucial guiding principle for the preparation and presentation of IR.1. Primary Investigation: Business Model Diagram & Materiality Matrix\"Business Model\" aims towards the value creation over the short, medium, and long term. It is described with the key elements of inputs, business activities, outputs, and outcomes. The materiality matrix depicts the material issues identified by an organization through a materiality assessment process involving various stakeholders. These are the matters that substantively affect the organization\'s ability to create value over the short, medium, and long term.Out of the 96 reports examined, 14 reports (around 15%) did not disclose the business model diagram and 29 firms (around 30%) did not report the materiality matrix. The lack of these disclosures can make it difficult for stakeholders to understand the company\'s business and how it creates value. Further, such disclosures are highly recommended to improve transparency and accountability, and they could also help the company to identify and address its most important sustainability challenges.For the reports which have provided business model diagrams and materiality information, we carried out more in-depth content analysis. The aspects covered include:business model-related presentationoutput and outcomes contentsmateriality assessment-related informationintegration of IR in Indian Annual Reports2. Business/Value Creation Model related presentationAs per the IIRC framework, the business model diagram and explicit identification of key elements are two of the crucial aspects towards enhancing the effectiveness and readability of the business model. In this section, we present our findings basis in-depth content analysis aspects of the relevant sections within the IR.The business model diagram provides a quick snapshot to understand the organization\'s system of transforming inputs towards creating value. Table 2 summarizes the best practices, followed by observations that have a scope for improvement.Table 2: Best Practices of Business Model DiagramNavigationThe IR report includes a business model on the content page of the report with a hyperlink.The business model diagram had hyperlinks for navigating to detailed information.PositioningThe business model was positioned in the initial section of the report, providing a better understanding of the organizationReadabilityThe diagram was placed adequately on one page aiding clear and logical understandingSource: Authors\' compilationBelow are the common observations which have a scope of improvement:no information about the business model on the content page of the report;the business model diagram being presented towards the lagged part of the report; andthe diagram goes across two to three pages, thus impacting the readability and understanding.3. Output and Outcome ContentsAcross all the IRs where a business model diagram has been provided, inputs regarding the six capitals have been provided along with the presence of business activities, strategies etc. The major challenge identified was with the information provided in the reports regarding output and outcomes.As per the IIRC framework, outputs are organizations\' key products and services (e.g. for a steel company, tonnage of steel production can be output) with the possibility of other outputs like by-products and waste depending upon their materiality. Outcomes are internal (e.g. cash flows, employee satisfaction) and external consequences (e.g. customer satisfaction, $CO_2$ emission) for the six capitals, with both positive and negative possibilities.There was a huge variation observed in this aspect of the business model diagram observed in the 77 reports (Table 3) majorly related to data diversity, lack of negative outcomes, and inconsistency across reports.Table 3: IR for Output and Outcome StudyTotal IR with Business Model82Output and Outcome reported together(04)Output title repeated(01)IR reports investigated on output and outcomes77Source: Authors\' compilationThe primary focus of the reports was on quantitative data, mostly KPIs (Key Performance Indicators) related to the six capitals (financial, manufactured, intellectual, human, social and relationship, natural). However, some reports also include qualitative information, typically presented as factual statements. Scrutiny on referring to earlier year reports revealed instances of repetition of similar statements over years. Table 4 demonstrates the inconsistency across reports where outputs are reported quantitatively, with outcomes described qualitatively (most common), both outputs and outcomes reported quantitatively, outputs and/or outcomes missing entirely and a mix of quantitative and qualitative data for both outputs and outcomes. The variations existed among both early adopters and those newly implementing IR.Table 4: Variation in Output and OutcomesOutputOutcomesNosQuantitativeQualitative32Product/ServicesQuantitative18Not ProvidedQuantitative9QuantitativeQuantitative7QualitativeQuantitative6QuantitativeNot Provided3QualitativeNot Provided1QuantitativeProduct/Services1 77Source: Authors\' compilationA significant concern of the IR was the tendency to report only positive outcomes. Negative outcomes, if any, are often absent, which is a common area of improvement across IRs.4. Materiality AssessmentThe materiality determination process comprises identification, evaluation, prioritization and determination of information to be disclosed. This section discusses the major observation on the materiality-related disclosure of the Indian IRs where major reports have provided the material issues under three categories i.e. environment, social, economics & governance.Best Practices in Materiality Assessment (IR)A few IRs under study demonstrated a strong approach to materiality assessment. This was evident through several key aspects. First, the report outlined a comprehensive process for identifying material issues, involving detailed research and stakeholder engagement activities such as interviews, focus groups, and surveys. Second, each identified issue was evaluated based on its significance to both the company\'s success and stakeholder concerns. The report then categorized these material issues under environmental, social, and governance (ESG) themes for better organization. Furthermore, a materiality matrix was likely presented, visually prioritizing the issues based on their impact (low, moderate, or high). Importantly, the IR went beyond simply disclosing these material matters. It also demonstrated how these issues connect to the company\'s six capitals, operational boundaries, and their impact on stakeholders. Finally, the report provided information on how the company addresses each material issue, outlining its strategies and actions taken. This transparency strengthens the overall materiality assessment and emphasizes its role as a foundation for effective IR.Additional ObservationsMost reports incorporated an economic pillar alongside the standard ESG (environmental, social, and governance) pillars, providing a more comprehensive view of materiality. Some companies based their current assessment on previous years\' exercises, validating them through internal discussions. Certain topics, like sustainable supply chains, digitalization, community engagement, and occupational health & safety, emerged as common themes across the ESG matrix, indicating differences in organizations\' approaches towards these issues.Practices with a scope of improvementThere are reports where the materiality issues contain very generic disclosure. This depicts a lack of regular engagement with the stakeholders and can be evidenced basis the below observations. There were reports where the materiality assessment was carried out internally only. Some reports have not provided any information regarding the materiality assessment exercise however materiality assessment information has been provided. A report has shown that the material issues were identified during the FY 2014-16, which might no longer be relevant for the issued IR. The same report has shown \"operational efficiency\" as a material issue twice and thereafter described community development. A report has mentioned carrying out materiality assessment every three years. Further on, only 3 material issues were disclosed with no issues reported under governance factors.Major Material IssuesHere is a summary of the findings on material issues across the studied IRs:A total of 1,298 material issues were identified across reports, including repetition across the firms.Social aspects (42%) were the most common material issue category, followed by environment (33%) and economics/governance (25%).Common material issues included:Governance: Corporate Governance, risk management, ethicsEnvironment: Waste Management, climate change, water managementSocial: Safety and Human Rights, diversity, inclusionThe findings suggest that social issues are of primary concern to companies, followed by environmental and economic/governance issues. This highlights the importance of social responsibility for businesses. Safety, waste management, and human rights emerged as the most common material issues across all categories, indicating their widespread significance.Integration of IR in Indian Annual Reports:There\'s significant variation in how well companies integrate their IR section with other report sections like financial statements and management discussions. Some companies achieve strong integration by aligning IR narratives with financial metrics, risk assessments, and strategic priorities from other sections. This fosters a holistic view of performance and strategy. However, not all reports exhibit this level of integration. In some cases, the IR section remains isolated, presenting high-level information without strong connections to details in other sections. This lack of integration can lead to a fragmented understanding for stakeholders, making it difficult to see how strategies translate into financial and operational outcomes. Enhancing IR integration is crucial for transparency and allows stakeholders to gain a clearer understanding of the impact of strategic initiatives on financial and operational performance.Professional Opportunities in IRAmidst the rise of IR in India, with evidence of high-quality reporting along with scope for improvements, possibilities for Chartered Accountants (CAs) who develop the necessary skills can\'t be ruled out. By embracing IR principles, CAs can position themselves for diverse and rewarding career paths in both practice and industry.CAs in Practice: CAs in practice can leverage their existing client base to promote IR\'s benefits and guide implementation. Their financial expertise is crucial for ensuring strong links between financial and non-financial data in reports, making them more user-friendly for stakeholders. Additionally, CAs can expand their assurance services by assuring the non-financial disclosures that are a core part of IR. Upskilling and collaborating with non-accounting professionals strengthens their offerings.CAs in Industry: Within companies, CAs can play a vital role at various levels. In leadership, they can champion \"integrated thinking,\" fostering strategic value creation, the foundation of effective IR. Mid-level CAs can execute IR preparation by developing methods to effectively capture non-financial information for accurate reporting. Finally, CAs in the investment sector can leverage their IR knowledge to better value companies based on non-financial data and business value creation models, enabling them to identify sustainable investment opportunities and manage wealth more effectively.ConclusionIntegrated reporting has gradually emerged as a preferred mode of one-stop document for corporate communication to its various stakeholders. Since 2016, when the first IR was issued in India, there were 96 listed non-financial firms that have issued voluntary IR in FY 2022-23. This growth story is evidence of responsible business by Indian listed firms and a transformational shift from traditional reporting to integrated reporting. Although Indian IR fulfils the framework requirements, there exists a wide scope of improvement majorly in areas like business or value creation model diagram, clarity between output and outcomes, adequate materiality assessment procedure, presentation of materiality matrix with deeper insights on material issues and connectivity of information. The growth of IR and its inherent challenges create opportunities for Indian CAs. By embracing IR principles, Indian CAs would not only contribute towards improvement in the IR regime but can embark on professional growth in this global reporting arena.References:Devarapalli, S., Mohapatra, L. M., Jreisat, A., Tripathy, S., & Mohamad, S. Al. (2024). Exploring the disclosure quality of integrated reporting in India. International Journal of Managerial and Financial Accounting, 16(1), 98-118. https://doi.org/10.1504/IJMFA.2024.135356IIRC. (2021). Framework.IIRC. https://integratedreporting.org/wp-content/uploads/2021/01/InternationalIntegrated Reporting Framework.pdfMishra, N., Nurullah, M., & Sarea, A. (2022). An empirical study on company\'s perception of integrated reporting in India. Journal of Financial Reporting and Accounting, 20(3-4), 493-515. https://doi.org/10.1108/JFRA-03-2020-0081SEBI. (2017). Integrated Reporting by Listed Entities https://www.sebi.gov.in/legal/circulars/feb-2017/integrated-reporting-by-listed-entities_34136.htmlSoriya, S., & Rastogi, P. (2023). The impact of integrated reporting on financial performance in India: a panel data analysis. Journal of Applied Accounting Research, 24(1), 199-216. https://doi.org/10.1108/JAAR-10-2021-0271Authors can be reached at ca.ajay.lunawat@gmail.com, ca.dipti.lunawat@gmail.com and eboard@icai.in
SUSTAINABILITY
Ep. 297 — Sustainability Reporting, Auditing and Assurance: A path to the Green Economy
CA Journal
· September 2026
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Sustainability Reporting, Auditing and Assurance: A path to the Green EconomyEnvironmental concerns, social responsibility, and ethical governance practices (ESG) have increased the focus of businesses towards transparent accounting and reporting on the company\'s sustainability efforts. Even investors increasingly integrate ESG factors into their decision-making, while consumers are more willing to support brands committed to responsible practices. Regulatory bodies are also implementing stricter environmental and social reporting requirements. To navigate this evolving landscape, companies require comprehensive and transparent sustainability reporting mechanisms. Sustainability reporting again needs to be followed by sustainable audit and assurance to maintain the authenticity of reports. This article explores the crucial roles of audit and assurance in strengthening the credibility and reliability of sustainability reporting, ultimately fostering trust with stakeholders, and driving positive environmental and social change.IntroductionSustainability means meeting the needs of the present without compromising the ability of future generations to satisfy their needs. It strives for the long-term health of our planet and its inhabitants. Sustainability can be achieved by reducing current consumption, conserving energy, and water, consuming less meat and creating awareness of sustainability among others. Sustainability is not just about the environment; it is about creating a future where environmental, social, and economic well-being are interconnected and mutually reinforcing. By prioritizing sustainability, we can ensure a healthier planet, a more just society, and a stronger economy for all in the long run.Three main pillars of sustainability are Environment, Social and Economic Sustainability which focuses on:Table 1: Main pillars of sustainabilityEnvironmentSocial & HumanEconomicProtecting the natural world by using resource wisely, reducing pollution, and conserving biodiversityCreating a just and equitable social by dealing with issue like poverty, education and health careJob creation, economic growth, and resource allocation to establish a strong and stable economyThese pillars ensure a balanced and resilient approach to the development and progress of the economy. However, to ensure the success of these pillars, governance of an organization plays an important role. Governance refers to the policies, structures, and processes adopted by the organization to make strategic decisions in order to ensure transparency, ethical practices, and compliance with regulations.Sustainability ReportingSustainability reporting is the practice followed by companies for communicating environmental, social, and governance (ESG) efforts and performance to stakeholders. In order to report sustainability impacts, the Global Sustainability Standards Board (GSSB) developed the widely used standards, commonly known as GRI Standards, in 2016. To maintain consistency in Sustainability Reporting, IFRS trustees formed an International Sustainability Standards Board (ISSB) in November 2021 to develop standards of sustainability disclosures aiming at broader stakeholder needs. Two accounting standards issued by ISSB in June 2023 which became applicable from January 1, 2024 are:IFRS S1: General Requirements of Disclosure of Sustainability related Financial informationIFRS S2: Climate related DisclosuresFurthermore, to facilitate the endeavours of these International Boards and boost sustainability practises among enterprises, SEBI introduced a new reporting requirement in May 2021 for ESG disclosures under the BRSR (Business Responsibility and Sustainability Report). These disclosures aim to help investors make informed decisions and encourage companies to consider social, governance, and environmental impacts. Filing of the BRSR has been made mandatory for the top 1000 listed companies from the financial year 2022-2023. MCA also prescribed disclosure requirements in the Annexure 3A of the \"Report of the Committee on Business Responsibility and Sustainability Reporting\". The BRSR needs to be filed online as a part of the annual report through platforms like BSE/NSE in the XBRL format.The information which an organization is required to disclose can be categorized under the following sections:Section A: General Disclosures covering company details, products/services, operations, employees etc.Section B: Management and Process Disclosures corroborates the adherence of the NGRBC principles and core elements through policies and processes of the companies.Section C: Principle-wise Performance Disclosures validate the performance of companies while complying with the principles and core elements through their key processes and decisions.BRSR is aligned with the nine principles of the National Guidelines on Responsible Business Conduct (NGRBCs). The nine principles of NGRBCs are provided in Table 2:Table 2: Nine principles of NGBRCPrinciplesBusinesses are required toPrinciple 1conduct and govern themselves with integrity and in a manner that is ethical, transparent, and accountablePrinciple 2provide goods and service in a manner that is sustainable and safePrinciple 3respect and promote the well-being of all employees, including those in their value chainsPrinciple 4respect the interests of and be responsive to all its stakeholdersPrinciple 5respect and promote human rightsPrinciple 6respect and make efforts to protect and restore the environmentPrinciple 7when engaging in influencing public and regulatory policy, do so in a manner that is responsible and transparentPrinciple 8promote inclusive growth and equitable developmentPrinciple 9engage with and provide value to their consumers in a responsible mannerThe European Union has also introduced Corporate Sustainability Reporting Directive (CSRD) in January 2023 including many listed SMEs and few non-EU companies generating over 150 million euros in the European market. Several sustainability reporting models and frameworks are used by organizations worldwide to communicate their environmental, social, and governance (ESG) performance. Few notable ones are presented in Figure 2.Figure 2: Sustainability reporting models and frameworksGlobal Reporting Initiative (GRI)Sustainability Accounting Standards Board (SASB)Integrated Reporting Framework (IR)Carbon Disclosure Project (CDR)Task Force on Climate-related Financial Disclosures (TCFD)UN Global Compact (UNGC) Communication on Progress (COP)ISO 26000Triple Bottom Line (TBL)Sustainable Development Goals (SDGs)Circular Economy FrameworkCradle to Cradle (C2C)As per the Guidance Note of SAE 3000 (Revised), the decision-making process of several stakeholders gets affected by the sustainable information provided by the Sustainability Report.To strengthen sustainability reporting in India, the Institute of Chartered Accountants of India (ICAI), constituted the Sustainability Reporting Standards Board (SRSB) to formulate the \"Sustainability Reporting Maturity Model (SRMM)\" in 2020. The major aim of the Board is to identify and create new opportunities for Chartered Accountants in the growing field of sustainability reporting, develop detailed guidance for conducting audits of Integrated Reports with both financial and sustainability information, publish informative materials on key topics within the sustainability domain to equip professionals with the latest knowledge, engage with international and national bodies, as well as regulators, to advocate policies and regulations for the promotion of sustainable development goals. The \"Sustainability Reporting Maturity Model Version 1.0\" (SRMM) was developed based on the BRSR scoring system. This innovative model allows companies complying with BRSR to assess their own sustainability reporting practices.The integration of sustainability reporting into the annual report enables companies to present a more comprehensive picture of their performance and their commitment to responsible business practices. It facilitates transparency and credibility leading to improved risk management and decision making. Sustainability reporting, thus, ultimately, results in the development of the country both financially and economically by improving the country risk profile, increasing job creation and efficiency, reducing environmental costs, improving public health, increasing foreign aid and grant opportunities, and boosting the tourism industry.Table 3: BRSR scoring mechanism for each level of maturityLevelLevel 1Level 2Level 3Level 4StageFormative StageEmerging StageEstablished StageLeading by ExampleBRSR Score (percentage of Grand Total Score)Up to 25%>25% and Up to 50%>50% and Up to 75%>75%ExplanationThe Organisation are at the initial level of reporting and are in the process of identifying the need and responsibility of BRSR.Try to establish policies/ systems for data collection and disclosures.The Organisation realize the value of BRSR and responds to it by setting up robust mechanism for reporting, etc.The functions/ policies/ systems for such reporting are still to be formalised/ focussed.The organisation is working towards established enhancing internal controls, data collection and disclosures.The organisations have established formal function/ policies system for BRSR.Involved in compliance functions etc., and focus increasing on qualitative aspects.The organisations strive for more than compliance and work towards being a market leader.Strategically differentiating by enhancing disclosures vis a vis innovative methods/ techniques employed.(Source: Sustainability Reporting Maturity Model (SRMM)* version 1.0 issued by ICAI)Sustainability AuditAs per the Auditor Guidance Notes from the EMEA Accounting, Accounting and Education Committee (AAEC), a worldwide association of separate and independent accounting and advisory firms, sustainability reports should be followed by sustainability audits.Key points to be checked at the Sustainability AuditA sustainability audit dives deep into a company\'s environmental, social, and governance (ESG) practices. The main key areas are:I. Environmental: The audit is focused on evaluating the company\'s efficiency in resource utilization and its efforts towards resource conservation. Energy & water usage, air and water emissions, raw material sourcing, and waste disposal practices are all scrutinized. Compliance with environmental regulations and the company\'s commitment to reducing its environmental footprint are also assessed. A company\'s impact on natural habitats and its efforts to conserve biodiversity are also assessed through the company\'s supply chain practices and their impact on ecosystems.II. Social: The audit assesses the company\'s respect for human rights throughout its operations and supply chain by examining the fairness in labour conditions, worker safety, diversity, inclusion within the workforce, and living wages. The audit evaluates the company\'s relationship with the communities and its social impact on it. This involves looking at responsible marketing practices and product life cycle considerations.III. Governance: The audit assesses the company\'s leadership structure, board composition, and ethical practices. This includes looking for transparency in decision-making and accountability for the company\'s sustainability reporting. The audit ensures the company adherence to relevant reporting frameworks and provides stakeholders with a clear picture of its ESG performance.Thus, a sustainability audit provides a comprehensive assessment of a company\'s ESG performance and identifies areas for improvement. This empowers companies to operate more responsibly, build trust with stakeholders, and contribute to a sustainable future.Table 4: Steps to conduct Sustainability AuditThe following steps should be followed to conduct a Sustainability Audit:Planning and Scoping: This stage involves defining the audit\'s objectives, scope, and timeframe. Key stakeholders are identified, and relevant data is gathered. Information systems are studied. Linking the consideration of materiality and engagement risks to the nature, timing and extent of procedures.Applying procedures: Data relevant to ESG metrics is collected from various sources within the company through inquiry, inspection, site visits, interviews etc.Analysis: This data is then analysed to assess the company\'s performance across different sustainability aspects.Findings and Recommendations: The audit team evaluates the collected data and prepares a report outlining the company\'s strengths, weaknesses, opportunities, and risks related to sustainability. Recommendations for improvement are also provided.Management Response: The company\'s management reviews the audit report and develops a plan to address the identified issues and implement the recommended actions.Sustainability Assurance ReportSustainability reports comprise of both qualitative and quantitative disclosures. Assurance of these reports enhances the credibility of these reports. Sustainable Assurance Report is a more comprehensive report as compared to general audit reports. The AA1000 Assurance Standard (AA 1000AS v3), an internationally recognized standard, can be used alongside other recognized frameworks to enhance the quality and robustness of the assurance process.As per AA 1000AS v3, there can be two types of assurance namely Type I and Type II Assurance. While Type I focuses solely on the adherence of the four core principles of AA1000 i.e., Inclusivity, Materiality, Responsiveness, and Transparency, Type II goes beyond adherence to principles and delves into the credibility of the reported sustainability information. The decision to choose between Type I and Type II depends on the specific context and desired level of assurance like level of stakeholders, materiality of sustainability impacts, and maturity of the organization in sustainability reporting. In case of a higher level, Type II will be preferred.An assurance statement, as per AA 1000AS v3, discloses information under two categories: They are:Assurance InformationIntended users of the Assurance StatementResponsibilities of the reporting organisation and assurance providerReference to the AA 1000AS v3 and other assurance standard(s), if usedDescription of the scope, subject matter, the type, and level of assurance providedReference to criteria usedDescription and sources of disclosures coveredDescription of methodologyLimitations and approach used to mitigate limitationsNotes on the independence and competencies of the assurance providerName of the assurance providerDate and place of performancePerformance Related InformationFindings and conclusions regarding adherence to the AA1000 Accountability Principles of Inclusivity, Materiality, Responsiveness, and Impact (in all instances).For Type 2 assurance, findings and conclusions concerning the reliability and quality of specified performance information.A more concise standardized format was also laid down by SSAE 3000. The International Auditing and Assurance Standards Board is in the process of developing an International Standard on Sustainability Assurance (ISSA) 5000 proposing general requirements for Sustainability Assurance Engagements applicable for any sustainability assurance engagements which will be superseding the existing ISAE 3000 (Revised), Assurance Engagements other than audits or reviews of Historical Financial Information and ISAE 3410, Assurance Engagements on Greenhouse Gas Statements issued by IAASB of IFAC.Based on the existing international standards, ICAI has issued the Standard on Sustainability Assurance Engagements (SSAE) 3000 dealing with the assurance engagements on Sustainability Information effective for the periods ending on or after March 31, 2024 which can be applied in addition to other laws/regulations applicable to any entity. ICAI has also constituted the Sustainability Assurance Maturity Model (SAMM) to achieve the goal of Sustainability Reporting and Assurance in compliance with SSAE 3000 by assessing the maturity of an organization\'s sustainability assurance processes. The criteria for assessing maturity includes the independence and competence of assurance providers, the scope and rigour of assurance procedures, the level of integration of assurance findings into decision-making processes, the transparency and credibility of assurance statements, and the effectiveness of assurance in enhancing stakeholder trust and confidence in the organization\'s sustainability performance. The models aim to help organizations benchmark their sustainability assurance practices, identify areas for improvement, and develop strategies to enhance the quality, credibility, and impact of their sustainability disclosures.Pre-requisites for the audit and assurance engagementAn assurance practitioner is expected to have the following pre-requisites for the procurement of assurance engagement:Be a member of a firm that applies Standard on Quality Control 1 issued by ICAI, or other professional requirements, or requirements in law or regulation, that are at least as demanding as SQC 1;Possess competence in assurance skills and techniques developed through extensive training and practical application; andPossess sufficient competence in the underlying subject matter and its measurement or evaluation to accept responsibility for the assurance conclusion.Benefits of Sustainability Audit and AssuranceEnhanced decision-making: The audit provides valuable data and insights that can guide strategic decision-making towards more sustainable practices.Risk mitigation: Identifying and addressing ESG risks proactively can help companies avoid potential liabilities and reputational damage.Improved stakeholder engagement: A strong sustainability audit demonstrates a company\'s commitment to ESG issues, fostering better relationships with investors, employees, customers, and communities.Cost savings: Sustainability audits can identify areas for resource efficiency and waste reduction, leading to potential cost savings.Competitive advantage: Companies with strong sustainability practices can gain a competitive edge by attracting environmentally and socially conscious investors, customers, and talent.Hurdles on the Road to Sustainability Audit and AssuranceSustainability audits and assurance, while offering valuable insights into a company\'s ESG performance, can present their own set of challenges. Many organizations and their accounting professionals lack adequate knowledge and training on sustainability frameworks, standards and reporting methodologies. This gap can lead to incomplete or inaccurate data/disclosures, non-compliance with global standards and missed opportunities to leverage sustainability initiatives for competitive advantage. Ultimately, this will hinder the audit process and create hurdles on the path of the auditors to assess the performance accurately.Overcoming HurdlesDespite these challenges, effective strategies through adequate training programmes, workshops, and certifications for enhancing the knowledge of sustainability reporting among the concerned team can ensure a successful sustainability audit. As promulgated by the International Federation of Accountants (IFAC) through effective designing of regulatory frameworks, aligning sustainability disclosure with financial reporting based on the globally accepted standards, integrating sustainability assurance with financial statement audit engagements, and transitioning to reasonable assurance engagements can ensure trust and confidence in sustainability disclosure. While challenges exist, sustainability audits are a valuable tool for companies to assess their ESG performance, identify risks and opportunities, and demonstrate accountability to stakeholders. By addressing these challenges, companies can leverage sustainability audits to build trust and navigate the evolving landscape of ESG practices.Role of a CA in Sustainability Reporting, Audit and AssuranceChartered Accountants (CAs) play a crucial role in ensuring the credibility and accuracy of sustainability reporting. Their expertise in accounting principles, data analysis, financial reporting, risk management, and strategic planning makes them valuable assets in navigating the complexities of ESG (environmental, social, and governance) disclosures. Their brief role as an accountant and auditor is:As an AccountantData Management and AnalysisData Gathering and Organization: CAs play a vital role in collecting, analyzing, and organizing data relevant to ESG metrics. This includes energy consumption, waste generation, water usage, diversity metrics, and employee wellbeing data.Internal Controls: CAs can help to establish and maintain strong internal control systems to ensure the accuracy and reliability of sustainability data through setting up of clear data collection procedures, verification processes, and maintaining a strong audit trail.Standardization and Frameworks: CAs can guide companies in complying with the different standards and frameworks (like GRI, SASB) ensuring comparability and reliability of the reports.Cost Management: By analyzing sustainability data, CAs can identify areas for improvement in resource efficiency and waste reduction which can lead to potential cost savings.Setting ESG TargetsGoal Development: CAs can assist companies in setting realistic, achievable and measurable ESG goals, aligned with global standards. These ESG targets can be linked to the financial performance to ensure better productivity.Metrics and KPIs: By developing appropriate metrics and key performance indicators (KPIs), CAs can assist in tracking progress towards ESG goals.Accountability and governance: To ensure compliance with ESG related regulations and standards, ESG committees can be formed. Regular reviews and updates on ESG performance should also be initiated.MIS ReportingMIS Reports increase efficiency by automating repetitive tasks and reduce errors, thereby generating more accurate and reliable reports. Timely decision making and up-to-date information can be extracted as per the requirement of the stakeholders. With the integration of MIS into their reporting processes, CAs can provide data driven, comprehensive insights to present a holistic view of the company\'s performance with improved transparency.As an AuditorAssurance and Verification: Sustainability auditors provide independent assurance on the fairness and accuracy of a company\'s sustainability report by assessing the company\'s internal controls, identifying any material misstatements, and providing an opinion on the overall reliability of the reported information. This enhances the credibility and transparency of the sustainability report, giving stakeholders greater confidence in the information presented.Risk Management: The audit process can help identify potential risks associated with a company\'s ESG practices, allowing for better risk management strategies.Collaboration with Sustainability Auditors: CAs can collaborate with external sustainability auditors to ensure a comprehensive assessment of the company\'s ESG practices thereby bridging the gap between financial and sustainability reporting.Improvement Recommendations: Auditors may provide recommendations for improvement in the company\'s sustainability reporting processes and data collection methods, leading to more robust and informative reports in the future.Investor Relations: CAs can help companies communicate their sustainability efforts effectively to investors who are increasingly integrating ESG factors into their investment decisions.With the increase in the demand for sustainability expertise and tech enabled solutions, Chartered Accountants will play a vital role in ensuring the credibility and effectiveness of sustainability reporting.ConclusionSustainability reporting is not just about environmental responsibility; it is a strategic economic move. By promoting sustainable practices within companies, a country can position itself to attract investment, create jobs, enhance its brand reputation, and build a more resilient and prosperous economy for the future. A sustained commitment to ESG principles is crucial for reaping the economic and financial rewards. Governments can play a crucial role in promoting and incentivizing sustainability reporting by establishing clear policy frameworks and regulations. Additionally, the role of Chartered Accountants cannot be denied, as they ensures the quality and integrity of sustainability reporting and audits. They work together with the company and the Government to provide stakeholders with a clear and reliable picture of a company\'s environmental, social, and governance performance.References:https://kpmg.com/be/en/home/insights/2021/04/rc-have-you-considered-auditing-your-organization-sustainability.htmlhttps://agn.org/insight/audit-of-sustainability-reports/https://www.indiafilings.com/learn/national-guidelines-on-responsible-business-conduct/https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdfhttps://taxguru.in/sebi/business-responsibility-sustainability-reporting-brsr.html#google_vignettehttps://pib.gov.in/Pressreleaseshare.aspx?PRID=1568750https://resource.cdn.icai.org/15366Link1.pdfhttps://ifacweb.blob.core.windows.net/publicfiles/2023-08/IAASB-International-Standard-Sustainability-Assurance-5000-FAQ_1.pdfhttps://www.ifac.org/knowledge-gateway/contributing-global-economy/discussion/sustainability-assurancehttps://www.iaasb.org/consultations-projects/sustainability-assurancehttps://www.iaasb.org/publications/international-standard-assurance-engagements-isae-3000-revised-assurance-engagements-other-audits-orhttps://www.icai.org/post/icai-leads-in-sustainability-reporting-benchmarking-srmmhttps://www.iaasb.org/focus-areas/understanding-international-standard-sustainability-assurance-5000https://www.globalreporting.org/standards/https://www.accountability.org/standards/aa1000-assurance-standard/https://www.icai.org/post/icai-leads-in-sustainability-reporting-benchmarking-srmmhttps://kb.icai.org/pdfs/69633srsb55592.pdfhttps://www.ifac.org/knowledge-gateway/discussion/icai-releases-sustainability-reporting-maturity-model-srmm-version-10Author may be reached at pinkyagarwalca@gmail.com and eboard@icai.in
TECHNOLOGY
Ep. 298 — Exploring the Cyber Security Frontier: Insights into the Current Landscape
CA Journal
· September 2026
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Exploring the Cyber Security Frontier: Insights into the Current LandscapeIn today\'s technology-driven business environment, it is paramount to understand the landscape of cyber security. This article delves into the expansive domain of cyber security, delineating its defensive and offensive dimensions. While exploring a spectrum of tools, it underscores the critical need for both service providers and businesses to grasp the intricacies of cyber security in light of our reliance on diverse applications.By CA. Anjali Ganotra, Member of the InstituteNavigating Through Cyber Security FrontierAs digital ecosystems continue to evolve, navigating the cyber security frontier becomes increasingly imperative for safeguarding assets and maintaining operational integrity. The Cyber Security Landscape refers to the current state and dynamics of cyber security. It encompasses various threats, technologies, challenges, practices, regulations, and trends which give shape to cybersecurity. It includes risks faced by societies, organizations, and individuals in the digital age.Components of Cyber Security Landscape are:Rapidly involving Threat Landscape: It is characterized by constantly evolving array of threats including malware, ransomware, phishing attacks, and zero-day exploits, etc.Technological Advancements & Challenges: Artificial Intelligence, Machine learning, and Internet of things are some of the technological advancements that are transforming the cyber security landscape. With these technologies, they not only offer new opportunities for innovation but also introduce new vulnerabilities and challenges that need to be addressed.Regulatory Compliance Requirements: Regulatory bodies around the world are developing a framework of regulations, compliance requirements, and standards to safeguard data privacy. Regulations are being developed to protect critical infrastructure and mitigate risks.Cyber Security Skill Shortage: It is a growing field for professionals. It needs skills and expertise to address the complex challenges. Organizations are investing in training, recruitment, and retention efforts to build and maintain cyber resilient workforce.Emerging Threat Vectors: A few years back, 5G network was launched. We have advanced in technology and continue to make further progress. Thus, new threat vectors are also emerging. It includes cloud-based threats, supply chain attacks, and attacks targeting new technology and quantum computing.Global Collaboration and Threat Intelligence sharing: Since these attacks are related to technology, therefore, they are borderless attacks. It requires global collaboration and threat intelligence-sharing among governments and regulators. Collaborative efforts are required to mitigate these kinds of risks.Cyber Resilience and Incident Response: This matter came into highlight after a cyber-attack on AIIMS in November 2022. The hospital\'s digital patient system was attacked, which resulted in server outages and data breaches. This incident raised questions about the effectiveness of the hospital\'s incident response system. In case of attacks like this, after an investigation we can judge who bears the flag of liability. However, if the restoration process takes time even after the attack, who will shoulder that responsibility? It was thereby realized that incident response and restoration of work need to be treated equally important.Thus, spreading awareness and educating about the same is the need of the hour. Majorly, Cyber Security Landscape can be divided into two parts: Defensive and Offensive.Defensive LandscapeThe government increasingly relies on digital assets for the storage of critical information. Similarly, individuals and businesses use a lot of digital assets for the smooth conduct of business and transfer of sensitive information. For the maintenance of privacy, tools are required with upgraded technology. Thus, a robust mechanism is required to protect this data and the reputation of the government and businesses. Regulatory compliances are also made for the protection of critical information.Some of the tools used in defense of cyber security threats are:1. FirewallA firewall is a network security device. It controls the inbound and outbound traffic. It inspects the data packets based on predetermined rules and regulations. It tracks the state of active connections and allows only legitimate traffic to pass through. It helps in preventing hijacking and packet spoofing. It also performs deep packet inspection to analyze the content in the application layer. Some firewalls include Virtual Private Network (VPN) as well.Work from home or remote working is a very common concept that emerged during pandemic. As a result, employees are required to access critical information and documents of the organization from remote locations. This created the need for a Firewall in the VPN to filter the packets before they enter the private network layer of the organization. A firewall ensures that a data packet that does not satisfy the conditions will not be able to enter and harm the network. Let\'s picturize a scenario: A corporation has an online customer portal. It interfaces with an SQL database containing sensitive customer data. The web application has several input fields. These are directly used in constructing SQL queries. The security measures used are focused on primary defenses and do not monitor web application attack patterns. The cyber-criminal discovers that the customer portal does not sanitize user input for SQL commands. They insert an SQL segment into the input field and expose the database contents. In this kind of case, we require an extension of the Firewall i.e. Web application Firewall. These are designed specifically to protect and monitor HTTP traffic between applications and the internet. It detects and differentiates between genuine and automated BOT traffic.2. Intrusion Prevention Systems (IPS)Similarly, there are Intrusion Prevention Systems (IPS) which are network security appliances. They monitor network traffic to detect and prevent identified threats. IPS can be network-based or host-based. It alerts us to abnormal behavior and traffic patterns. It blocks the traffic that resembles malicious pattern. It can drop data packets and reset connections as an immediate response to curb threats.3. Secure Web Gateways (SWG)Now suppose, there is a digital marketing company that has a distributed network and relies on cloud-based services and frequent internet usage. Employees are aware of cyber security breaches as well. Due to the intensive search of data, they often browse various websites. Popular online news that employees were frequently visiting becomes compromised. As a result, mal-advertisements containing malicious scripts are served. An employee by default clicked that advertisement. A script runs and malicious software is silently downloaded. Now the employee\'s computer is affected due to an unpatched browser vulnerability. After that, the malware begins communicating with the command and control server. This type of compromised ad network requires a tool known as Secure Web Gateways (SWG).It is a security solution that offers protection against online threats. It helps in categorization and filtration of web content. It also monitors and controls the usage of bandwidth. It acts as a barrier between the user\'s devices and the internet. It blocks access to harmful and inappropriate websites, thus, protecting the user\'s device from unauthorized access.4. Content Disarm & ReconstructionSometimes, a malicious code can also be embedded in digital documents without hindering the content\'s usability. To avoid such kind of threat, a cyber security approach known as Content Disarm & Reconstruction is used. It is a multilayered defense that works alongside traditional antivirus to enhance protection. It processes files seamlessly without disrupting user workflows. It integrates with email gateways, web proxies, and end-point solutions for a cohesive security strategy.5. Email Security Solution & enabling DMARC & DKIMLet\'s analyze a different case! Heard of E-mail spoofing? What does spoofing mean? How can it affect an organization?Spoofing refers to imitation/manipulation to create a false impression of a trusted source. Suppose cyber criminals have researched about the company and created an ID, let\'s say abc@xyz.co, which is similar to the original ID of the CFO which is abc@xyz.in, and was able to enter the internal source network of the company. A mail was received by an employee from the spoofed ID to transfer funds to a vendor for a confidential contract. The mail was drafted in the same manner as the CFO used to. Also, it came from an internal source network, so the employee was unable to recognize that it could lead to fraud. The employee transmitted the funds as directed. In this kind of situation, Email Security Solution & enabling DMARC & DKIM could have helped the organization from email spoofing.6. Endpoint Protection PlatformLet\'s explore another scenario. A mid-size company was using the same E-Mail ID for internal as well as external communications. Employees are equipped with laptops issued by the company. A mass mailing worm is initiated when an employee clicks an email appearing to be similar to a known vendor. In these types of cases a tool known as Endpoint Protection Platform (EPP) is required. EPP is a comprehensive security solution designed to detect, prevent, and respond to threats on end-point devices. End-point devices include desktops, laptops, tablets, and smartphones as well. EPP encrypts data stored on end points to protect it from unauthorized access. It monitors the network traffic and blocks the user with unauthorized access trying various attempts to enter into the network.7. Endpoint Detection and Response (EDR)A more robust tool is required to avoid, protect against, and respond to a ransomware attack exploiting a zero-day vulnerability that has bypassed the efficiency of EPP. The ransomware might encrypt the critical document and then it can exfiltrate data to attackers and demand a ransom for the decryption key. This creates a demand for a more extensive tool than EPP, i.e., Endpoint Detection and Response (EDR). It analyzes the behavior and actions of the files. It enables automated and manual responses to identified threats such as isolating affected end-points.8. Mobile Device ManagementIs it not very common to lose our phone in coffee shops or auto rickshaws? Now, what to do if a sales representative has lost his phone in coffee-shop. The device contained cached credentials and a persistent login to the CRM system. The finder of the phone guesses the simple 4-digit PIN. After a few trials, he was able to access the device. He explored the CRM application and accessed confidential customer data. To prevent this kind of threat, a software tool known as Mobile Device Management can be helpful. It ensures the security of mobile devices used within the organization. It enables the remote deletion of sensitive data if the mobile device is lost. It provides reports on device status. It can be used to separate personal and business data and secure corporate information.9. Network Access Control (NAC)Another situation can be when an employee\'s personal laptop becomes infected with malware or virus at home. He might have used it in an open-source network. Now he brings that laptop to the office and connects to the corporate network. The malware uses the network connection. It propagates itself across the corporate network. It exploits the vulnerabilities and accesses unauthorized information. This kind of situation can be avoided with the help of a cyber security tool known as Network Access Control (NAC). It grants access based on user roles & responsibilities. It provides controlled access for visitors. It isolates non-compliant devices for corrective measures. It also offers a real-time view of devices and safeguards the organization.10. Data Loss Prevention (DLP)Delving Into another situation, when employees are not happy with the company they develop hatred. A disgruntled employee who has access to proprietary blueprints and research data can provide valuable intellectual property or engineer plans to a competitor to tarnish the reputation of the company. To avoid such kind of situation a Data Loss Prevention (DLP) tool can be helpful. It locates and categorizes sensitive data across the enterprise. It monitors the flow of data within, into, and out of the organization. It can trigger alerts and automated responses upon detection of a violation of policy.11. Honeypots and HoneynetsTo prevent crime, one must anticipate and address challenges by putting oneself in the shoes of the attacker. Our next tool is based on this philosophy only i.e., Honeypots and Honeynets. These are decoy systems and networks designed to attract, detect and analyze malicious activities. It mimics legitimate assets and real systems. These are closely monitored for any suspicious activity. It acts as a sacrificial target to distract attackers from valuable assets. It is used for understanding the tactics of attacker and enhancing incident response activities.12. Patch ManagementSimilarly, we have another tool such as Patch Management. Many times, the software we use, including taxation software, becomes outdated and requires patch management. It refers to upgradation of the software to secure the vulnerabilities which could have been exploited in the previous version.13. Secure Configuration ManagementNext, we have Secure Configuration Management. It is a systematic process of maintaining a secure configuration for software, hardware, and network devices within an organization\'s network. It establishes a secure baseline configuration. It generates reports for insight into the security posture and configuration status of IT assets.The aforementioned examples illustrate a selection of defensive cyber security tools.Offensive Cyber SecurityOffensive cyber security refers to taking anticipatory actions to prevent problems. It refers to a proactive approach for protecting computer systems, networks & data by simulating real-world attacks. It involves deliberately launching controlled attacks to identify vulnerabilities, weaknesses, and security flaws before malicious hackers can exploit them.Some of the techniques that can be used in this process are:1. Penetration TestingIt can be divided into internal and external testing techniques. The primary goal of this technique is to assess the security posture of the organization\'s digital assets by simulating real-world attacks in a controlled manner. The process comprises of defining the objectives, timing, and scope of the test. Then authorization from stakeholders is required. Necessary tools and resources are assembled. Schedule for test is decided in consultation with stakeholders to minimize the loss of operations. Active and passive reconnaissance of systems are done. Information is gathered about systems. Active scanning and probing of open ports are done. Then automated and manual vulnerability inspections and analytical tools are used to identify the potential security misconfigurations in the system. An attempt to gain unauthorized access and escalate privileges is made. After gaining access, an attempt to remain in the network through backdoors and collect critical information is made. Whether the attempt is successful or not, findings are documented and reported in both the cases for further analysis. Thus, it helps to ensure that appropriate safeguards are in place.2. Ethical HackingIt is also known as White-Hat testing. It is part and parcel of penetration testing. In this, the hacker deliberately bypasses the security controls and exploits vulnerabilities in the systems, network, and applications with the permission of system owners.3. Red TeamingRed teaming is a cyber security practice that involves a holistic, adversarial approach and scenario-based planning in simulating real-world cyber-attacks to assess an organization\'s security posture, readiness, and preparedness. It is one step ahead of penetration testing. It involves multiple attack vectors. It may target not only technical systems but people, processes and physical security controls. It results in comprehensive reports. It documents the findings, observations, and lessons learned. It also includes recommendations for improvement.4. Social EngineeringSocial engineering is a tactic that manipulates an individual into divulging confidential information and providing access to restricted systems. It involves exploiting human psychology. Social engineers use various techniques such as pretexting, phishing, baiting, and tailgating to gather information. It bypasses traditional technical security tools. By understanding the tactics implied by social engineers, organizations can implement pro-active measures to safeguard the systems, networks, and applications.5. Physical Security TestingIt aims to evaluate the effectiveness of physical security controls. It involves penetration tests, security audits, and vulnerability assessments to identify weaknesses. For example: testing the effectiveness of surveillance cameras, motion sensors, and alarm systems and evaluating the resilience of physical barriers (e.g. fences, gates, barriers) against forced entry tampering attempts.6. Wireless Security TestingIt focuses on assessing the security of wireless networks, devices, and communication protocols to identify vulnerabilities and weaknesses in Wi-Fi points, routers, and wireless clients. It involves conducting spectrum analysis to detect rogue access points and interference sources.7. Threat Intelligence and Research ToolIt involves collecting, analyzing, and interpreting data about potential and current threats. Once data is collected, it is analyzed to identify patterns, trends, and indicators of compromise. It involves integration with various security tools such as (SIEM) Security Information and Event Management systems, (IDS) Intrusion Detection System, (IPS) Intrusion Prevention Systems, (EDR) Endpoint Detection and Response, and threat intelligence platforms. It enhances situation awareness to make informed decisions.8. Reverse EngineeringIt is used to dissect the malicious software. Security analysts reverse engineer malware samples to understand the behavior, identify command and control mechanisms, and develop detection and mitigation techniques. It is used to reconstruct events, recover deleted data, analyze system artifacts, and trace the actions of attackers during incidents. In case of hardware security analysis, this technique helps to uncover hardware back tools and identify chain attacks.9. Post-Exploitation TestingPost-exploitation testing tools are software frameworks used to validate the extent of compromise and damage caused by successful cyber attacks. These are used to escalate the privileges. It establishes persistence on compromised systems by implanting backdoors, rootkits, or persistent malware payloads. It moves laterally and escalates the scope of attack. Examples of post-exploitation testing tools include Metasploit Framework, Cobalt Strike, Empire, Power Shell Empire and Covenant etc. These tools provide a wide range of facilities to simulate real-time attacks.It is important to note that these tools must be used ethically with appropriate authorization to avoid legal violations.References:(No explicit references listed in source)Author may be reached at caganotraanjali@gmail.com and eboard@icai.in
MSME
Ep. 299 — Nurture a New or Small to Medium - Size CA Firm for a New Era
CA Journal
· September 2026
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Nurture a New or Small to Medium - Size CA Firm for a New EraICAI has almost 1,00,000 active CA firms registered, out of which 75,000 are proprietorships and 25,000 are partnership firms. With approximately 3.97 lakh members and 8.62 lakh students, ICAI has cemented its status as the undisputed leader in the global accounting profession. CAs willing to start a new CA firm need to take care of various aspects in order to be successful in the long run. The entrepreneur perspective, adoption of new product lines, and use of the latest technology are a few of the many ways to be successful in CA practice.An Indian Chartered Accountant has countless opportunities. There is a growing need for young Chartered Accountants due to the expansion of the Indian economy. In order to promote the country\'s economic progress, ICAI set forth an ambitious vision that by 2047, 30 lakh new Chartered Accountants would be needed in India. CAs can choose either to launch their own practice or work in the industry. To flourish in the field of CA practice, however, one must embrace novel and unconventional strategies in this digital era. In past, growing one\'s profession required a strong foundation of networking, collaborations, and referrals. But, in this digital era, for new or small to medium-sized CA firms in addition to carrying out one\'s professional duties, it is imperative to ensure that the factors listed below receive the attention they demand.The Entrepreneur PerspectiveEven though ICAI prohibits doing business along with CA practice, it is not against the rules to think like a business-person when running a CA firm. According to the well-known book \"E-Myth Revisited: Why Most Small Businesses Don\'t Work and What to Do About It,\" one must create and preserve a balance between the roles of manager, entrepreneur, and technician in order to succeed in a new profession or business.New or small to medium-sized CA practice generally struggle to strike a balance between the aforementioned responsibilities and frequently prioritize the technician part (the professional side), overlooking other crucial components or viewpoints that are necessary to ensure the entity\'s success. Therefore, in addition to carrying out one\'s professional duties, it is imperative to ensure he fulfils the roles of an entrepreneur and manager.New and Innovative Product LinesDue to the emergence of start-ups, millennials, and Gen-Z entrepreneurs, the product\'s scope has changed. A young CA starting a new CA firm is traditionally advised to concentrate on bank concurrent audits, internal audits, and tax audits. However, the startup revolution\'s transformation of the business landscape and the resulting growth of the entrepreneurial culture have given rise to a plethora of new products, such as startup CFO services, accounting outsourcing, business valuation, payroll and accounting functions on subscription, loan syndications, subsidy facilitation services, and more. By enabling CA firms to aggregate, ICAI is already working on capacity expansion initiatives to meet the increasing demand from worldwide markets for outsourced accounting functions. Young CAs can start firms in this area, which would in turn make India a sought after hub for worldwide outsourced accounting services.Receivable ManagementThe primary cause of a new or small to medium-sized CA practice closure, if one exists, would be its failure to timely collect receivables. It is also very regrettable that some of the receivables take up to a year to realize. On this note, it is important to make sure that every engagement is set up with a collection of 50% in advance and the remaining 50% on the issue draft document. Only after full payment has been received should final deliverables be made available. For a new CA firm, converting a client\'s annual fees to a monthly subscription will also guarantee consistent cash flows. To make sure that there is never a payment default, the monthly subscription fees can even be connected to Electronic Clearing Services (ECS).Managing the TalentDifferent generations typically hold diverse perspectives about the workplace. Employees from Generation Z, in particular, may not think in the same way as their Baby Boomers, Gen-X, or even Millennial colleagues. The primary talent pool for a new CA firm or small to medium-sized firm consists of articled assistants in the 17-21 years age range, called Gen Z. When compared to previous generations, Gen Z employees\' goals, methods, and motivational factors have undergone substantial shifts. To make the most use of and retention of talent feasible, we must comprehend their preferences and aspirations and make the required adjustments to the workplace culture.Adoption of latest technologyIt is very essential that the latest technology is adopted within the organization as well as for the services provided to the customers.Numerous CA practice management software programs guarantee the seamless adoption of processes inside the CA firm. Technology can be used in the following areas: document and record management, attendance tracking, human resource management, receivables collection, and much more. Many of the young entrepreneurs prefer a shift from the traditional accounting software to the cloud based software like ERP Next, Busy, Zoho, and many more. CAs that are able to accept and adjust to these cutting edge accounting software programs will be able to draw and keep the new generation of tech-savvy clients.Additional technologies include machine learning algorithms that deliver tax-efficient techniques and simulate various tax scenarios using real-time financial data. AI-powered advisory systems offer customized tax assistance based on unique situations, while AI-assisted drafting tools, such as those powered by ChatGPT, provide precise responses to tax notifications by emphasizing relevant sections and case laws. These represent some of the latest advancements in technology tools for taxation.Because the majority of these software are available for subscription purchase rather than ownership, it is quite appealing for new or small to medium-sized CA firms to embrace and adapt technology with such ease.Proactive and Customer-friendly but not DependentThe traditional CA practices adopted more of a passive approach where the customers needed to follow-up and complete their annual and tax compliances. However, today\'s customer who dwells on convenience and options prefer an active approach from the CAs who can fulfil their requirements with convenience and ease. So it is essential to create a proactive culture in the organization where the requirements of the customers are foreseen and given due care.A new or small to medium-sized CA firms should provide adequate information, follow-up, value additions, and a proactive approach while dealing with the new breed of customers. Timely delivery of service, i.e., regular reminders on the due dates, adequate care, and deadline adherence to any statutory notices, etc., are some of the steps to ensure that new generation CA firms create a culture of proactiveness and customer friendliness. However, at the same time, new CA firms should ensure that they are not customer dependent. If the firms tend to be customer dependent, there will be high negotiation in fees as well as difficulty in realizing the payments. Instead, firms should have a suitable arrangement to add a specific number of new clients in a year considering an annual attrition of 20% in the client base.Be a Strategist with a Vision and MissionEnsure that the vision and mission statements of your organization are properly understood and practiced inside the organization. Make sure that the strategies and techniques for success adopted are sensitive to the changes in technology and the nature of work stay current. Make sure that the finance and accounting fields\' prospects in blockchain technology, AI, Power BI, and other cutting-edge technologies are effectively made use of.Being the leader of a new or small to medium-sized CA firm, along with keeping yourself updated with ICAI regulations and opportunities provided by ICAI, you should also be knowledgeable of industries in which most of your clientele is concentrated. Keep yourself updated with the latest technologies and problems faced by them and provide innovative products that can solve their problems in accounting & finance.Digital Branding within the ambit of ICAI RegulationsAny business or profession that does not adopt technology in this century will not survive and will be disrupted in the future. The same holds true for new or small to medium-sized CA firms. They should necessarily adopt digital branding in their practice within the ambit of ICAI regulations. A Chartered Accountant in practice shall be deemed guilty of professional misconduct if he solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview. However, there are methods within the ambit of ICAI guidelines by which a member can make sure his digital presence is optimized.The permitted digital branding adhering to the guidelines of ICAI includes a website that is designed in tune with the latest trends. Educational videos without reference to the firm where the member is a partner or proprietor and client testimony videos are permitted.Niche SpecializationIn the initial days of starting a new CA firm or running a small and medium sized firm, we tend to do all types of assignments irrespective of our specialization. However, as we grow, a strategy of focus should be adopted. Steve Jobs once said that focus is to say \"no.\" This means that to be successful, you should focus on what you have to do, rather than adding more to your to-do list which affects the quality of all of your work. In a similar vein, as soon as sustainability is guaranteed, you should start making steps to focus only on one or two areas of your business that provide you a competitive edge.Premium PositioningICAI has almost 1,00,000 active CA firms registered out of which 75,000 are proprietorships and 25,000 are partnership firms. Creating a competitive advantage among the different specializations and premium positioning of the product is essential when launching a new CA firm or managing a small to medium sized CA firm. Premium positioning is a tool to ensure that the minimum recommended fees stipulated by ICAI can be collected. Whether it\'s a straightforward product like ITR filing or a sophisticated one like business valuation or consultancy, positioning the offering as a premium might give you the advantage of appropriate financial benefits. Additionally, when a product does not require CA certification, premium positioning will also help it withstand competition from online platforms and local tax consultants.ConclusionThe category of new or small to medium-sized CA firms offers enormous opportunities. Due to a lack of direction and supervision in the early years, many young qualified Chartered Accountants who possess the skills and potential to make a fortune in the CA practice sometimes harbor worries about entering this field.The new training method stipulated by ICAI demands an additional year of training in a CA firm in case someone wishes to start CA practice after qualifying as a Chartered Accountant. In addition, specialized management training has to be provided for new aspirants in CA practice by ICAI which in turn develops them to think like an entrepreneur, execute like a good manager and deliver excellent work like an eminent professional.References:The book E-Myth Revisited - Why Most Businesses Don\'t Work and What to Do About It by Michael E. Gerber.https://www.thehindubusinessline.com/news/icai-focusing-on-aggregation-of-ca-firms-to-cater-to-growing-overseas-accounting-demand/article67929943.ece.https://icai.org/post/19707Author may be reached at hilsonca@gmail.com and eboard@icai.in
PROFESSION
Ep. 300 — India - A Global Hub for the Accountancy Profession
CA Journal
· September 2026
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India - A Global Hub for the Accountancy ProfessionIndia is positioning itself as a pre-eminent global hub for accountancy and taxation, underscored by a robust talent pool, a commitment to international standards, and significant technological advancements. Indian professionals extend their expertise beyond traditional accounting functions to high-quality tax preparation and compliance services. Leveraging the capabilities of its skilled workforce, many global accounting firms have established Shared Service Centres (SSCs) in India, where critical financial operations are executed. Additionally, India is integral to the Global Business Services (GBS) and Business Process Outsourcing (BPO) sectors, providing cost-effective, efficient solutions to international clients. With a solid regulatory framework and an evolving FinTech landscape, India is well-positioned to drive the future of the accountancy profession. The ongoing trends of globalization, an expanding economy, and a complicated regulatory environment are expected to sustain a strong demand for accountants and auditors. The increasing number of public companies will further necessitate accountant\'s adept at managing obligatory financial documentation. Strategic initiatives focusing on skill development, international collaboration, and sustainability will further entrench India\'s leadership.Understanding BPO, SSC, and GBSBusiness Process Outsourcing (BPO) aims to capitalize on labour cost differential while enhancing working capital efficiency and optimizing operational expenditures, all while boosting cash flow and customer satisfaction. Shared Service Centres (SSCs) are internal units within organizations designed to consolidate and streamline business functions. Global Business Services (GBS) represents an evolved model born out of both BPO and SSC, providing an integrated service suite that enables companies to optimize operations and enhance customer service on a global scale.The fundamental distinction between BPO and SSC lies in BPO\'s reliance on external firms to execute specific tasks, whereas SSC emphasizes the internal pooling of resources and expertise.India\'s Emerging Leadership in AccountancyIndia\'s accountancy sector is anchored in rigorous educational frameworks, unwavering professional ethics, and a strong alignment with global standards. The Institute of Chartered Accountants of India (ICAI) plays a pivotal role, wielding global recognition and comprising over 400,000 members along with a vast network of 5 Regional Councils and 177 Branches nationwide. With a significant global footprint covering 52 Overseas Chapters and 29 Representative Offices across 81 cities in 47 countries, ICAI has positioned India as a critical contributor to the global accountancy paradigm.Adoption of Global Standards - Alignment with International Financial Reporting Standards (IFRS) through Indian Accounting Standards (Ind AS) has bolstered India\'s credibility. This adherence allows Indian professionals to operate seamlessly across borders, elevating their desirability in international markets.Talent Pool - India\'s educational institutions produce an impressive number of skilled accountants annually. Indian Chartered Accountants (CAs) are distinguished by their technical proficiency, analytical capabilities, and ethical integrity, with many occupying senior roles in multinational firms.Increasing Non-IT Services Outsourcing - The demand for outsourcing in accounting, taxation, and auditing is on an upward trajectory, reinforcing India\'s dominance as the premier location for SSCs. Finance processes such as accounts payable, receivable, and asset accounting are predominantly managed in SSCs alongside decision support functions (FP&A). There is a consistent rise in the provision of payroll, recruitment, and staffing services through these centres.Most Preferred Location for SSCs and GBSIndia is at the top of the list of the most preferred locations with the largest shared services centres across the globe.Achieving Global Outsourcing Objectives - India is playing a pivotal role in facilitating global outsourcing strategies with enhanced effectiveness and efficiency. One of the primary objectives achieved by Global Business Services (GBS) organizations is cost reduction, which remains a central focus for companies. Beyond this, standardization and process efficiency, along with capability development, have surfaced as immediate and actionable goals for GBS entities. Organizations are leveraging GBS to mitigate operational risks through the implementation of Business Continuity Planning (BCP) strategies and by diversifying their service delivery models. In the competitive talent landscape, GBS is proving advantageous by providing access to extensive and varied talent pools, thereby strengthening recruitment capabilities.Interplay of Finance and TechnologyThe intersection of finance and technology (FinTech) is transforming the accountancy landscape, placing India at the vanguard of this shift. The nation boasts a thriving startup ecosystem, driving innovation in financial solutions.Digital Transformation - The adoption of advanced technologies such as Artificial Intelligence (AI), Blockchain, and Robotic Process Automation (RPA) has optimized accounting workflows. Blockchain enhances transparency in financial reporting, while AI tools automate routine tasks, enabling accountants to pivot towards strategic roles.FinTech Ecosystem - India\'s FinTech sector ranks among the fastest-growing globally, fueled by rising demand for accountants proficient in financial technologies. As per FICCI, India has one of the top five startup ecosystems in the world, and over the years, India has become one of the world\'s leading countries in FinTech adoption. FinTech industry in India is strongly positioned to realize a total industry valuation of USD 150-160 billion over the next five years, creating an incremental value of USD 100 billion. This growth is catalyzing new opportunities within the profession.Skill Development - To maintain competitiveness in a rapidly evolving market, institutions like ICAI are integrating technology-centric modules into their educational curricula, equipping accountants with essential skills for the future.India\'s Global Contributions to the Accountancy ProfessionIndia\'s influence on the global accountancy landscape extends significantly, and it is characterized by its active participation in international standard-setting and collaborative initiatives.Knowledge Sharing - Indian professionals play a vital role in global accounting forums, contributing insights on emerging trends, regulatory developments, and best practices. The Institute of Chartered Accountants of India (ICAI) has established Memorandums of Understanding (MoUs) with various international accounting organizations to enhance knowledge sharing and facilitate professional mobility across borders.Offshoring and Outsourcing - India has emerged as a primary destination for offshoring accounting and financial services, driven by its cost-effectiveness and a well-trained workforce. Multinational corporations depend on Indian experts for a diverse range of services, such as bookkeeping, taxation, and intricate financial analysis. A key driver of this outsourcing trend is the significant demand for tax-related services, particularly for US clients. Indian professionals efficiently manage tasks such as tax return preparation, planning, and compliance, leveraging the time zone advantage to ensure overnight delivery of critical services. Their expertise in US tax laws positions them to deliver high-quality outcomes.Shared Service Centres - Numerous global accounting firms have established shared service centres in India to conduct a broad spectrum of operational functions, including accounting, auditing, tax preparation, and advisory services. By capitalizing on India\'s skilled labour, these centres provide high-quality, cost-efficient support, underscoring India\'s strategic relevance in firms like Big 4s.Global Business Services and Business Process Outsourcing - India is at the forefront of Global Business Services (GBS) and Business Process Outsourcing (BPO), offering comprehensive solutions that extend beyond traditional accounting and finance roles. Indian GBS operations manage entire financial processes including planning, budgeting, and reporting for multinational entities. Concurrently, BPO firms provide varied services from payroll processing to compliance management, utilizing economies of scale and advanced technologies to streamline operations. This model allows global firms to reduce costs, enhance efficiency, and redirect focus to their core strategic objectives.Thought Leadership - Indian accountants are increasingly recognized as thought leaders in multiple domains, contributing to research and policy formulation on topics such as sustainability reporting, Environmental, Social, and Governance (ESG) frameworks, and the realm of digital taxation.Strategies to Enhance India\'s PositionTo solidify India\'s standing as a premier global hub for accountancy, several strategic initiatives can be considered.Enhancing Education and Training - Continuous professional development is essential to address the evolving demands of the profession. Implementing specialized curricula focusing on data analytics, cybersecurity, and international taxation can empower professionals with advanced competencies.Promoting International Collaboration - Cultivating deeper partnerships with global accounting bodies and fostering cross-border collaborations will enhance India\'s influence. Initiatives such as joint certification programs and international exchange can facilitate this goal.Leveraging Technology - Advocacy for the adoption of emerging technologies in accounting practices is vital for boosting efficiency and fostering innovation. Support from the government for technology initiatives, exemplified by the Digital India program, can catalyze advancements in this sector.Focusing on Sustainability - Given the rising emphasis on ESG reporting, India can position itself as a leader in sustainability accounting. Developing specialized expertise in this area will unlock new opportunities for professionals.Building a Strong Brand - Highlighting India\'s success narratives and its contributions to the global accountancy profession will enhance its international reputation. Showcasing the accomplishments of Indian professionals on global platforms can engender confidence and attract foreign opportunities.ConclusionIndia is on a trajectory toward becoming a pivotal hub in the global accountancy profession, underpinned by its commitment to excellence, adaptability, and innovation. By capitalizing on its strengths and proactively addressing emerging challenges, India can reinforce its role in the global financial ecosystem. As the accountancy profession remains central to promoting transparency and accountability, it will continue to fuel India\'s growth narrative, contributing to a more inclusive and sustainable global economy.References:https://www.ficci.in/api/sector_details/131https://www.bls.gov/https://www2.deloitte.com/us/en/pages/operations/articles/shared-services-survey.htmlhttps://www.forrester.com/report/2024-global-outsourcing-benchmarks/RES181379https://www.pwc.com/gx/en/operations-consulting-services/pdf/outsourcingcomesofage.pdfAuthor may be reached at singh.maneet.21@gmail.com and eboard@icai.in
AUDIT
Ep. 301 — Client Acceptance and Audit Engagement Acceptance Process
CA Journal
· September 2026
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Client Acceptance and Audit Engagement Acceptance ProcessSQC-1 (Standard on Quality Control) issued by ICAI requires an audit firm to design and implement policies and procedures on the acceptance and continuance of client relationships and specific engagements. The client acceptance and engagement process is a critical step in the audit process that involves evaluating a potential client\'s suitability and establishing the terms of the engagement. This process includes several steps, such as conducting an initial evaluation of the potential client\'s financial statements and reputation, assessing any potential conflicts of interest, evaluating the firm\'s ability to perform the engagement, and developing an engagement letter that outlines the scope and terms of the engagement. The client acceptance and engagement process helps to ensure that the audit firm can provide high-quality and independent services, and helps to establish clear expectations and responsibilities for all parties involved in the engagement.IntroductionVery often we hear the term \"risk assessment process\" in the context of an audit engagement but whenever we use this term, we most likely refer to the process of assessing audit risk, control risk, and risk of material misstatement. However, the risk assessment process commences long before accepting an audit engagement or even an audit client. This article will help to understand this part of risk assessment.The client acceptance and engagement process is a very crucial part of the audit process, where the auditor decides whether to accept or continue an engagement with a client. The process should be designed to ensure that the auditor can accept the engagement in a responsible manner while minimizing the risk of any potential conflicts of interest. This involves evaluating the potential client\'s integrity, reputation, business practices, and financial stability, as well as determining whether the audit team has the necessary skills, knowledge, and resources to complete the engagement successfully.The client acceptance process involves evaluating whether the potential client is suitable for the audit engagement. The auditor should consider factors such as the client\'s reputation, industry, size, complexity, legal and regulatory compliance, and the integrity of its management. The purpose of this process is to assess whether the auditor can perform the audit engagement in accordance with the relevant professional standards.The engagement acceptance process involves assessing the specific engagement to determine if it is appropriate for the auditor to undertake. This process involves evaluating the scope and objectives of the engagement, the risks associated with the engagement, the resources required, and the audit fee. The auditor should also assess whether there are any threats to independence or objectivity and take appropriate steps to mitigate these threats.Risks Involved in Client AcceptanceThe client acceptance and engagement process includes a comprehensive assessment of the potential client\'s reputation, financial stability, management team, and governance structure. They should also evaluate any potential conflicts of interest or other factors that may impair their independence or objectivity in conducting the audit. The entire process derives from the various risks involved in the process.Independence RiskFinancial RiskLegal RiskCompetency RiskEthical and Reputational RisksHigh-Profile Client and Public Perception RiskLet\'s understand these in detail:1. Independence RiskIt is one of the key risks associated with the client acceptance process in an audit. Independence refers to the auditor\'s ability to perform their duties in an objective and unbiased manner, free from any conflicts of interest that may compromise their independence. When auditors are not independent, their objectivity may be compromised, and the quality of the audit may be called into question.In the context of the client acceptance process, independence risk can arise when the auditor has a financial or non-financial interest in the potential client, or when there is a perceived or actual threat to the auditor\'s independence. For example, independence risk can arise if the potential client is a close friend or family member of the auditor, or if the auditor has a significant investment in the potential client\'s business.Other factors that can increase independence risk include:Business relationships or transactions between the auditor and the client.The client\'s involvement in litigation or regulatory investigations in which the auditor is also involved.Pressure from the client to overlook or downplay certain issues during the audit process.To mitigate independence risk, auditors should carefully evaluate all potential threats to their independence during the client acceptance process. They should also ensure that they comply with all relevant ethical and professional standards, including those related to independence, objectivity, and integrity.2. Financial RiskIt refers to the risk of financial loss to the auditor as a result of accepting a client with poor financial stability or the risk of non-payment for services rendered.If an auditor accepts a client with a history of financial difficulties, there is a risk that the client may not be able to pay the auditor\'s fees or that the auditor may incur additional costs related to collecting unpaid fees. Additionally, accepting a financially unstable client may increase the likelihood of errors or misstatements in the financial statements, which can lead to reputational or legal risks for the auditor.To mitigate financial risk, auditors should conduct a comprehensive assessment of the potential client\'s financial stability during the client acceptance process. This may include reviewing the client\'s financial statements, credit history, and other relevant financial information. Auditors should also evaluate the client\'s ability to pay their fees, including assessing their cash flow, debt levels, and creditworthiness.3. Legal riskThe auditor may face legal consequences or liability as a result of accepting a client who is involved in legal proceedings or who has a history of legal issues.If an auditor accepts a client with a history of legal issues, there is a risk that the auditor may become associated with those issues or their work may be impacted by ongoing legal proceedings. Additionally, accepting a client who is involved in legal proceedings may increase the likelihood of errors or misstatements in the financial statements, which can lead to legal or reputational risk for the auditor.To mitigate legal risk, auditors should conduct a thorough assessment of the potential client\'s legal status during the client acceptance process. This may include reviewing public records, such as court filings and regulatory reports, to identify any legal issues that the potential client is involved in. Auditors should also consider the potential impact of legal risk on their overall risk management strategy and may set limits on the amount of legal risk they are willing to accept.4. Competency riskIt refers to the risk that the auditor may lack the necessary skills or expertise to perform the engagement effectively or efficiently.If an auditor accepts a client engagement for whom they lack the necessary skills or expertise, there is a risk that they may not be able to perform the engagement in accordance with professional standards or meet the client\'s expectations. Additionally, accepting an engagement that is outside the auditor\'s area of expertise may increase the likelihood of errors or misstatements in the financial statements, which can lead to reputational or legal risks for the auditor.To mitigate competence risk, auditors should conduct a comprehensive assessment of the potential client\'s industry, operations, and financial reporting requirements during the client acceptance process. Auditors should also evaluate their own skills, experience, and resources to determine whether they are capable of performing the engagement effectively.If the auditor lacks the necessary skills or expertise, they may need to consider bringing in additional resources or expertise, such as engaging a specialist or subcontracting certain aspects of the engagement to another firm. Auditors should also consider providing training or professional development opportunities to their staff to build their skills and expertise in areas where they may be lacking.5. Ethical and reputational risksEthical and reputational risks are significant risks associated with the client acceptance process in an audit.Ethical risk refers to the risk that the auditor may face ethical dilemmas or conflicts of interest as a result of accepting a client. For example, if an auditor has a personal or financial interest in a potential client, there is a risk that they may face conflicts of interest that could compromise their independence or objectivity. Similarly, if a potential client has a history of ethical violations or questionable business practices, there is a risk that the auditor may be associated with those issues by accepting the engagement.Reputational risk refers to the risk that the auditor may suffer damage to their reputation as a result of accepting a client with a poor reputation or history of ethical violations. If an auditor accepts a client with a history of fraud, for example, there is a risk that their association with that client may damage their reputation or erode client trust.If a potential client has a poor reputation or a history of ethical violations, auditors may consider declining the engagement or imposing additional controls or restrictions to mitigate risk. Auditors should also ensure that they comply with all relevant ethical and professional standards while accepting new clients to minimize the risk of ethical or reputational issues.To mitigate such risks, auditors should conduct a thorough assessment of the potential client\'s reputation, business practices, and ethical standards during the client acceptance process. Auditors should also evaluate their own potential conflicts of interest and take steps to ensure their independence and objectivity throughout the engagement.6. High-Profile Client and Public Perception RiskHigh-profile clients are often well-known in the public eye and involve constant media attention. Engaging with high-profile clients may be associated with various challenges such as:High-profile clients may expect special treatment or may attempt to influence the audit process. The audit firm must ensure that it comply with all ethical standards and maintain the integrity of the audit process.High-profile clients may have complex financial structures and may operate in volatile markets. The auditing firm must conduct a thorough financial analysis to assess the client\'s financial stability and determine whether it is capable of meeting its financial obligations.High-profile clients are often associated with higher levels of business risks, such as legal or regulatory risks. It is essential to conduct a thorough investigation of the client\'s reputation, including any past controversies or legal issues, to determine whether accepting the engagement could harm the auditing firm\'s reputation.Overall, evaluating a high-profile client in the client acceptance process requires a thorough and careful evaluation of several key factors. By conducting a comprehensive analysis of these factors, the audit firm can ensure that it can perform the engagement in a professional and effective manner, while also protecting its reputation and maintaining the integrity of the audit process.Client Acceptance Process StepsIt can be summarized that the client acceptance process typically involves the following steps:Preliminary evaluation: This involves obtaining basic information about the potential client, such as the nature of their business, size, location, and history including its business practices. This may involve conducting background checks on potential clients and their key stakeholders.Independence assessment: The auditor assesses whether any conflicts of interest may impair their independence or objectivity in conducting the audit.Evaluation of management and governance: The auditor evaluates the quality of the potential client\'s management team, including their integrity, competence, and commitment to financial reporting quality. They also assess the effectiveness of the organization\'s governance structure.Financial stability analysis: The auditor analyzes the financial stability and viability of the potential client, including their liquidity, debt levels, profitability, and cash flow.By evaluating the results of the steps involved in the process and assessing the responses to the risks involved, the auditor decides whether to accept or decline the engagement. If they decide to accept the engagement, they will proceed with the engagement acceptance process.Other Factors for Engagement AcceptanceOnce the client acceptance is concluded, the audit team should also consider several other factors related to engagement in particular which enable the team to assess the above engagement risks in an appropriate manner. A few of those are briefed below:a. Regulatory & Oversight governanceRegulatory and oversight governance in the audit engagement acceptance process play a critical role in ensuring that audit firms are independent, objective, and have the necessary skills and expertise to perform high-quality audits. This helps to maintain public trust in the audit profession and ensures that financial statements are reliable and accurate.To be compliant with regulatory and oversight governance, it is pertinent for the audit team to design, plan, and manage the audit engagement carefully. E.g., an engagement subject to review under PCAOB standards would require different skill sets, audit approaches, and the involvement of an experienced audit team. An audit of a listed company (which is subject to SEBI and SEC governance) would be different from the audit of a non-listed private entity. Similarly, an audit in relation to an Initial Public Offer would require specific considerations different from a recurring audit engagement under any statutory Act. These factors should be assessed while determining the risk of a potential engagement and the audit team need to design a risk mitigation plan accordingly to address this risk.b. Previous History of error or Financial IrregularitiesIf a potential client has a history of errors in their previous financial statements or qualifications issued in the prior year audit reports, and financial/non-financial information that shows indication of any irregularities, it will require meticulous assessment whether or not to accept the engagement and to risk mitigation plan accordingly.c. Confidential Information Management PlanConfidential information management plans are important considerations in the audit engagement acceptance process. The audit firm should take appropriate steps to ensure that confidential information is protected and managed appropriately throughout the engagement, including through the use of confidentiality agreements, access controls, secure storage, information-sharing policies, and data retention procedures.It becomes more critical when audit engagement is subject to data retention and data privacy laws of other countries which might be stricter than their own country. The audit team needs to design a robust risk mitigation plan to comply with such restrictions.d. Involvement of Component Audit TeamIn the context of a group audit, the component audit team is responsible for auditing the financial statements of a subsidiary or other component of the group. The group engagement team relies on the work of the component audit team to obtain assurance about the financial statements of the component.While involving component audit teams in an audit engagement has many benefits, it can also present several challenges and hence, it is significant to evaluate this factor while accepting an audit engagement. Some of these challenges include:Coordination: Coordinating the work of the component audit team with the work of the group engagement team can be challenging. This requires clear communication channels, regular meetings, and ongoing collaboration. It can be complex and critical in case the component audit team is located in a different geography.Timing: Component audit teams may be located in different countries, which can present challenges in terms of timing and language barriers. Differences in time zones and working hours may make it difficult for team members to communicate in real-time.Technology: Component audit teams may have different technology platforms and processes, which can create compatibility issues and challenges in sharing documents and data.Quality control: Ensuring consistent quality across the different teams involved in the audit can be challenging. The group engagement team needs to establish and communicate clear audit standards and procedures to ensure that the work of the component audit teams is consistent and meets the required quality standards.Independence: The component audit team may have a different reporting structure and may have closer ties to the subsidiary or division they are auditing, which can raise independence concerns. The group engagement team needs to ensure that the component audit team is independent and objective in their work.Therefore, involving component audit teams in an audit engagement can be challenging due to coordination, timing, technology, quality control, and independence concerns. Addressing these challenges requires clear communication, a strong project management approach, and effective quality control processes.ConclusionIn conclusion, the client acceptance and engagement acceptance process is an imperative step in the audit process that helps ensure the audit firm is able to provide high-quality, independent services to clients. This process involves evaluating the potential client\'s suitability and establishing the terms of the engagement, including assessing any potential conflicts of interest, evaluating the audit firm\'s ability to perform the engagement, and developing an engagement letter that outlines the scope and terms of the engagement. By conducting a thorough client acceptance and engagement process, audit firms can establish clear expectations and responsibilities for all parties involved in the engagement, and help maintain the integrity of the audit process.References:SQC 1 Issued by ICAI- https://resource.cdn.icai.org/15366Link1.pdfhttps://whitecollaraccountant.com/client-acceptance-or-continuance-audithttps://www.wikiaccounting.com/engagement-risks-audithttps://smallbusiness.chron.com/accounting-ethics-integrity-standards-24246.htmlAuthor may be reached at makreshwar.arya@gmail.com and eboard@icai.in
Ep. 302 — GST collection numbers: What story do numbers say
CA Journal
· September 2026
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GST collection numbers: What story do numbers sayHon\'ble Prime Minister Narendra Modi had rightly said, that GST (Goods and Services Tax) is an example of Cooperative Federalism. Our traditional tax systems like income tax, excise, customs, VAT, etc. are levied either by the central government or state government individually. However, with the advent of GST from 1 July 2017, our economy has implemented a tax system wherein the revenue of the central government and the state government are collected jointly in the form of GST. As of April 2024, we are about to complete 7 years of GST implementation. GST collection in this course of time has risen from INR 90,000 crores a month to INR 210,000 crores a month (at its peak so far). While 210,000 crores may be an exceptional figure for April 2024, we have managed to average collection of INR 168,000 crores in fiscal year FY 2023-24. These total numbers include Central Goods and Service Tax (\"CGST\"), State Goods and Service Tax (\"SGST\"), Integrated Goods and Service Tax (\"IGST\"), and compensation cess."I think statistics go in one ear and out the other. All of us respond to stories more than number" - Koren Zailckas, author of New York Times bestseller Smashed: Story of a Drunken GirlhoodGrowth in total GST collection numbers may just be one aspect to look at how GST has worked out for the Indian economy. However, it would be interesting to delve into other collection data published by the government to understand what story these numbers tell.Total yearly collection: we have grown 2.7XFirst things first, let\'s quickly look at overall GST collection numbers. In the first year of GST implementation (FY 2017-18), total gross GST collection provisionally stood at 7.41 lakh crores. In the last fiscal year of FY 2023-24, annual gross GST collection totaled INR 20.18 lakh crores. This indicates a 2.7X growth in the annual collection of GST. However, it may be noted that for FY 2017-18, GST was in place for only 9 months and not 12 months for the remaining years. If we look at the average monthly collection, the average monthly collection has grown from 82 thousand crores in FY 2017-18 (considering 9 months) to 1.68 lakh crores in FY 2023-24 i.e. we have grown 2x times.Gross GST collection has grown sequentially every year with an exception being FY 2020-21. In the year FY 2020-21, the yearly collection dropped to INR 11.37 lakh crores from INR 12.22 lakh crores in FY 2019-20. This can be attributed to COVID lockdown restrictions, due to which even the GDP growth of the country was impacted. Overall, keeping aside the exception of COVID year, GST collection has consistently contributed incremental funds to government coffers.April: A Month of Breaking Old Records and Setting New OnesThe month of April has been a bonanza for the government treasury with reportedly high GST collections. Every year, (exception again being April 2020-COVID period), the GST collection has set a new record of the highest ever monthly collection at that point in time. This fact can be attributed to the reason that GST liability for the month of March (last month of the financial year) is discharged in the month of April. The government has also pointed out this fact in the press release dated 1st May 2018 \"it is usually noticed that in the last month of the Financial Year, people also try to pay arrears of some of the previous months also and, therefore, this month\'s revenue cannot be taken as trend for the future.\"Table-1: GST Revenue of April from 2018-2024MonthTotal collection (in crores)Whether highest ever at that point of timeApr-24210,267YesApr-23187,035YesApr-22167,540YesApr-21141,384YesApr-19113,865YesApr-18103,458YesSource: Author data compilation on basis of press release issued by Ministry of Finance on pib.gov.inThe unusually high collection figures in April also indicate that there might be a scope for the majority of taxpayers to ensure tax liability is discharged more effectively on a monthly basis in place of making adjustments at the end of the year.Rising ratio of GST collection vis-à-vis GDPThe total GST collection has been increasing steadily over the years. However, it is also worthwhile to note that the ratio of GST collections vis-à-vis GDP is improving. The gross collection ratio has risen from 6.2% in FY 2019 to 6.9% in FY 2024. Net revenue ratio to GDP ratio has also increased from 5.6% in FY 2019 to 6.1% in FY 2024. The improving GST to GDP ratio may be the result of improved compliance, efforts by the government to curb tax evasion, etc.Big 6 state contributors: Same states in top 6 across yearsThe government provides state-wise GST collection data on a monthly basis. These numbers include tax collection pertaining to CGST, SGST, IGST (excluding IGST collected on import), and cess (excluding cess collected on import if any). For all the fiscal years spanning from FY 2017-18 to FY 2023-24, there are 6 states that have been constantly featured in the top 6 contributors. These states are Maharashtra, Karnataka, Gujarat, Tamil Nadu, Uttar Pradesh and Haryana. These 6 states have contributed to nearly 60% of the total GST collection across the years. Maharashtra has held the top spot for all the years.Table-2: Contribution of the top 6 states in total revenueYearProportion of share in total revenue (out of 100)FY 2017-1858.93FY 2018-1958.12FY 2019-2057.98FY 2020-2157.64FY 2021-2258.18FY 2022-2359.35FY 2023-2460.17Source: Author Data compilation on basis data available on https://www.gst.gov.in/download/gststatisticsSignificant share of import of goods on total collectionIGST is levied along with customs duty and various cess on the import of goods in India. The government has received nearly one-fourth of its total GST revenue from IGST levied on the import of goods. This indicates that though indirect taxes like GST are ideally levied on the supply of goods and services within the nation, cross border trade contributes significantly to overall kitty.Tax Breakdown: IGST Leads, SGST Surpasses CGSTIf we look at the break of tax components in total collection, it is no surprise that IGST (removing IGST on import of goods) has the highest number in terms of tax collection. This is due to the fact that the IGST rate is double of CGST and SGST rate equally in other words, CGST rate + SGST rate = IGST rate. For the purpose of clarity, IGST is levied on inter-state transactions, while CGST and SGST are levied on transactions within the state. It may be noted that by going through actual numbers of tax collection, IGST revenue is nowhere equal to the revenue from CGST and SGST combined indicating that the value of intra-state transactions is possibly higher compared to inter-state transactions.Additionally, the collection of SGST has been significantly more compared to CGST though CGST and SGST are levied at the same rate. This possibly may be attributed to the fact that taxpayers may have utilized IGST input tax credit (\"ITC\") to utilize CGST liability first and hence, the cash liability towards CGST gets reduced.States with significant IGST contribution in the overall collectionThe share of IGST (excluding import of goods) is roughly about 35% across years. However, there are few states wherein the share of IGST is near to 50% of total revenue. Major such states are Haryana, Delhi, Uttarakhand and Himachal Pradesh. For these states, the share of IGST is equivalent to or greater than 50% in overall collection indicating that the share of inter state transactions holds prominence for these states.Contribution of IGST settlement received by state government vis-à-vis SGST collected by stateGST is a consumption-based tax, meaning revenue is allocated to the state where goods or services are consumed. IGST is levied on interstate supplies, which is collected by the Central Government but apportioned to the destination state. Hence, the total revenue for the state government is the total sum SGST collected on intra state sales and IGST settlement received from the central government (additionally compensation cess is also available for the limited number of years). Going through the numbers, the above principle of GST (being consumption-based tax) is aptly depicted.Industrialized states like Gujarat, Maharashtra, Tamil Nadu, Karnataka, etc receive less IGST settlement compared to SGST collected by the state. This may be due to the fact that goods/services produced by these states are supplied to other states where it is consumed. Contrarily, there are states that receive higher IGST settlement from the government compared to SGST collected. Based on the numbers, it seems it may be attributable to two reasons i.e. 1) High population leading to higher consumption and 2) High tourism leading to higher consumption. While the above-mentioned may not be the sole reason (with multiple factors playing its own unique role), the numbers back the principles that GST is a consumption-driven state i.e. higher consumption leads to higher revenue.Public limited companies: Highest contributors to the walletAfter going through the statistics of central and state governments, it may be interesting to look at contributions made by various types of taxpayers. As we had seen in the case state wise revenue collection the top 6 states contribute almost 60% towards GST collection, this figure is even more skewed in the case of the type of taxpayers. Public Limited companies form only 0.50% of total taxpayers, however, their contribution to total tax collection reaches 34.06% as of 30th June 2024. If we see public limited and private limited companies together, 6.69% taxpayers contribute to 62.78% of GST collections. Thus, only 2 types of taxpayers contribute to nearly two-third of total GST collection. In terms of number of taxpayers, Sole Proprietorship firms form 80% of total taxpayers in the country. This underscores the fact that a significant number of small businesses continue to operate in the country. These small sole proprietors contribute to 13.30% of total GST collections.Table 3: Contributions by each type of taxpayer are as under:CONSTITUTION OF BUSINESSPercentage of Tax payersPercentage of Tax collectionPublic Limited Company0.50%34.06%Private Limited Company6.19%28.72%Proprietorship80.33%13.30%Public Sector Undertaking0.02%9.72%Partnership10.29%7.31%Others0.22%2.03%Society/Club/Trust/AOP0.87%1.39%LLP0.87%1.41%Government Department0.05%0.81%Others0.66%1.25%Grand Total100%100%*Status as of 30 June 2024; Return period accounted up to March 2024*Figures don\'t include IGST on importsSource: A statistical report on completion of 7 years of GST available on https://www.gst.gov.in/download/gststatisticsConclusionSince the introduction of the Goods and Services Tax (GST), it has emerged as a pivotal revenue source for both state governments and the central government in India. As of date, GST in India is still evolving with the passage of each year. Along with legal provisions, numbers analyzed in this article also tend to evolve with the passage of time. As we move forward, continuous monitoring of GST trends will be essential in shaping effective financial policies and in understanding the economic health of the nation. At the end of the day, what will be certain is that the GST shall continue to be a prominent revenue provider to governments (state and central) and will play a pivotal role in growth and development of the Indian economy.References:GST statistics provided on https://www.gst.gov.in/download/gststatisticsPress releases issued by Ministry of finance, the central government on pib.gov.inAuthor may be reached at karanrajvir18@gmail.com and eboard@icai.in
Ep. 303 — Decoding Uncertainty by Measuring the Risk
CA Journal
· September 2026
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Decoding Uncertainty by Measuring the RiskAn ideal risk management process contains various phases including Risk Identification, Risk Assessment, Risk Mitigations, Risk Monitoring and Risk Reporting. This article is focused on the Risk Assessment phase, where the risk professionals strive to measure the risks which enable the organizations to make informed decisions. Risk Assessment can be done both objectively and subjectively. It is based on the organization\'s maturity in the risk management process. Organizations new to risk management tend to prioritize qualitative risk measurement, while more established ones employ sophisticated methodologies to assess risks and uncertainties. Whether the risks are measured qualitatively or quantitatively, the only goal is to facilitate the board to make informed decisions. This article covers the concepts of \'why\' vs 'how' to measure the risks, basic tools, and techniques to measure the risks and broader implications.Measuring a Risk - \"Why\" Vs \"How\"Understanding \"why\" we measure risk is important before we think about \"how\" to do it. In everyday life, we constantly measure things to help us make smart choices. Let\'s say someone needs to be at a meeting by 11:30 AM, and it\'s currently 8:00 AM. To make sure they\'re not late, they need to figure out how long it takes to get there. ("Why")Now, let\'s talk about how we measure risk. In our example, we use a clock to measure time. While measuring the time, several considerations/scenarios are considered to have an approximate measurement of time. In our example, let\'s say it\'s the rainy season. The person might check the weather forecast to see if rain could slow them down and adjust their travel time accordingly. They could also use maps on mobile phones to check traffic conditions. They might decide to measure time down to the minute or even seconds, depending on how precise they want to be. Gathering this extra information helps make their travel time prediction more accurate. (\"How\")In risk management, people use different methods to measure risk. Is that okay? Instead of saying if it\'s right or wrong, we should ask if these methods help organizations make informed decisions. Organization needs to focus on optimized efforts in quantifying the risks.Enablers that assist in gauging the risksBefore diving into the quantification models, let\'s discuss \"what\'s next?\" i.e., what is the actual outcome of the quantification of risks involved? Yes, we discussed this earlier saying that quantification helps organizations to make informed decisions. But how does this quantification exactly help in making informed decisions?Organizations need certain \"enablers\" to make informed decisions. For example, the CRO of Company X has reported to the board saying that a potential cumulative financial risk would hit the profit and loss account adversely by ~INR 50 lakhs if it materializes. What does that INR 50 lakhs mean to Company X? How does Company X decide whether to mitigate or accept the risk?The following are the enablers that assist the organizations in making informed decisions:Risk Appetite StatementsRisk Assessment Scales1. Risk Appetite StatementsRisk Appetite statements are the amount and the type of risks that an organization is willing to accept. Risk appetite tends to change from time to time to reflect the organization\'s strategic objectives.In continuation to the above example, let\'s assume (Scenario 1) that Company X has planned to significantly invest in new markets/products in multiple regions as a part of its aggressive growth strategy. In this scenario, Company X would have made multiple debts, made aggressive recruitments, and spent on heavy research and marketing, impacting its cash flow statement adversely and in such situations when the risks are assessed, financial risk would be in the company\'s risk priority radar.An appetite statement is framed on how willingly an organization can accept the risk. In the above example, as the organization is currently operating in a cash crunch situation, the financial risk would be on the company\'s radar with a medium to low-risk appetite. Thus, a potential financial impact of INR 50 Lakhs would be considered by the board and try to mitigate the same.Below is the sample Risk Appetite Statement of Company X for Financial Risk (Scenario 1):The organization remains vigilant on the financial aspects to enable it to serve its purpose and value. Currently, to serve its strategic objective, Company X remains a low-risk appetite for financing activities.Sample Metric: Any potential impact over and above Y% on revenue is considered to be a serious financial impact for Company X.2. Risk Assessment ScalesRisk Assessment Scales help the organizations to measure the risks in multiple parameters (i.e., impact, likelihood, velocity, etc.) and define what is high/medium/low scales for each parameter.Risk Assessment scales serve as a gauge for measuring risk. In terms of risk appetite, organizations define the amount and types of risks they are willing to accept. In risk assessment, we establish scales for parameters such as impact, likelihood, and others, which help determine whether the identified risks fall with the organization\'s acceptable risk appetite.Similar to Risk Appetite Statements, Risk Assessment Scales require a periodic revision based on the strategic objectives and appetite levels of the organization. In general, most of the organizations prefer a 5-rating scale, however, there is no hard and fast rule for the same.Impact ScalesThe impact scale in risk assessment measures the potential consequences or severity of a risk event if it were to occur. It helps to evaluate how significantly the risk could affect an organization, project, or process. The impact scale typically ranges from low to high, with a metric that quantifies its effect.Impact/Consequence is defined by ISO 31000 as \"Outcome of an event affecting objectives. A consequence can be certain or uncertain and can have positive or negative direct or indirect effects on objectives. Consequences can be expressed qualitatively or quantitatively. Any consequence can escalate through cascading and cumulative effects.\"Risk CategoryMetricQuantitative Impact Scales 1 (Very Low)2 (Low)3 (Medium)4 (High)5 (Very High)Financial RiskRevenue1%2%3%5%7%In the above example, as the Risk Appetite for the company is already defined and the metric says Y% as the cap for potential impact, the scales are defined on the higher cap. Below could be the sample scale for the financial risk: (Assuming Y as 7%)The above table can be developed for all the risk categories that the organization is willing to assess. For example, SEBI provides a guideline for the risk domain coverage to include financial, operational, sectoral, sustainability, environment, social and governance, information, cyber security etc.In instances where financial metrics may not apply, such as in the case of Reputational Risks, it becomes imperative to define metrics based on the organization\'s operations. For instance, a key metric could be the reduction in market share or share price resulting from reputational impact or any inadvertent events.Risk CategoryMetricQuantitative Impact Scales 1 (Very Low)2 (Low)3 (Medium)4 (High)5 (Very High)Reputational RiskAdverse newsNews column in a district newspaperNews columns in a few to multiple district newspaperNews column in a state newspaperHeadlines in National newsMultiple allegations/acquisitions in National news on the company and its Board No impact on the share priceNo to very minor impact on the share priceMinor fluctuations in share priceSignificant fluctuations in share pricePermanent reduction in share priceLikelihood ScalesThe likelihood scale in risk assessment measures the probability or frequency with which a particular risk event is expected to occur. It helps to evaluate how likely it is that a specific risk will materialize. The likelihood scale typically ranges from low to high, with different levels representing the probability of the event happening.Likelihood/Probability is defined by ISO 31000 as \"chance of something happening, whether defined, measured or determined objectively or subjectively, qualitatively or quantitatively, and described using general terms or mathematically (such as a probability or a frequency over a given time period).\"Now, why do we require the likelihood scale? Is the impact scale and measuring the impact is not sufficient? As the risk is assessed always as a futuristic event, we need to assess how probable this impact might be, i.e., if an event is certain to occur, it transitions from being a risk to a certainty of loss. Conversely, when the probability of an event occurring is zero, it ceases to be a risk altogether. Therefore, the probability of occurrence lies between 1% to 99%! The scales can be defined after assessing the historic events and other considerations from the Small Modular Reactor (SMR\'s).The Likelihood scales, similar to the Impact scales, can be qualitative and quantitative:Quantitative likelihood Scales12345<=19% chance of occurance>=20% and <=49% chance of occurance>=50% and <=69% chance of occurance>=70% and <=89% chance of occurance>=90% chance of occuranceQualitative likelihood Scales12345Rare (OR) Once in every 30 to 50 yearsUnlikely (OR) Once in every 15 to 30 yearsPossible (OR) Once in every 5 to 15 yearsLikely (OR) Once in every 2 to 5 yearsFrequent / Almost Certain (OR) Annually or more than once annuallyImpact and likelihood are the fundamental scales adopted by organizations to assess the risks and make informed decisions. This is called a \"two-dimensional\" assessment of risks. However, other dimensions like \"Velocity\", and \"Controllability/Vulnerability\" can also be a part of risk assessment scales.Velocity ScalePaul Hopkins refers to velocity as the \"speed at which the risks become significant\". The assessment of velocity happens only after the event has occurred. In our example, we assumed that Company X has the potential financial risk of INR 50 Lakhs to achieve its strategic objective of aggressive growth. In this example, Company X would incur a heavy cash crunch due to its activities but does that impact the company immediately? NO! This impact might take a few months, unlike a financial risk due to a sudden crash in the stock market, which has an immediate effect.So, velocity can also be defined as \"the time between the risk event and the actual impact the company experiences\". Below is the sample Risk Velocity scales:Velocity Scales12345Company experiences the impact in a few years post the event occursCompany experiences the impact in a year post the event occursCompany experiences the impact in few months post the event occursCompany experiences the impact in few weeks post the event occursRapid onset of risk impactVulnerability/Controllability ScalesThe controllability scale in risk assessment measures the extent to which an organization can influence, manage, or mitigate a risk once it occurs. It evaluates how much control the organization has over the risk event, including the ability to prevent, reduce, or manage its impact.Control is defined by ISO 31000 as \"measure that maintains and/or modifies risk. Controls include, but are not limited to, any process, policy, device, practice, or other conditions and/or actions which maintain and/or modify risk. Controls may not always exert the intended or assumed modifying effect.\"In the context of scales, Vulnerability/Controllability is defined as the \"Organisations preparedness towards the risks or the strength of the controls\". Below are the sample scales for vulnerability or controllability:Controllability Scales12345Strong controls designed and implemented & Controls testing happens frequentlyStrong controls designed and implemented & Very minor deviations or lapses in controlsModerate controls designed and implemented & Few deviations or lapses in controlsFew controls designed and implemented & Major deviations or lapses in controlsNo controls in placeThe above scales assist organisations in gauging the risks, and now let\'s dive into the tools that assist in measuring the risks.Risk Quantification ModelsThere are several tools and techniques that help the organizations in measuring the risks. Below are a few examples:PI MatrixFAIR MethodologyPERT analysisVaR - Monte Carlo simulationScenario analysis etc.,In any quantification method, having accurate data is crucial. Without reliable data, the results won\'t be accurate.PI Matrix (Probability - Impact Matrix)After assessing the risks, the PI matrix helps the organizations in prioritizing the risks. Once the risks are prioritized, it becomes clear to the organization that what risks it has to invest resources and plan for mitigations. Below is the methodology:Calculate Risk Exposure = Probability X ImpactFor example, if a particular risk is rated as 3 on the impact scale and 4 on the probability scale, the risk exposure is $3 \\times 4 = 12$.The PI matrix is a 5X5 matrix (if the probability and impact scales are 5 pointers), below is the sample PI matrix post-computation of all risk exposures:Risk#Risk NameProbabilityImpactRisk ExposurePriorityR1Financial Risk34121R2Safety Risk2483R3Compliance Risk25102The Red, Amber, and Green colours in the PI matrix resemble the risk appetite of an organization. Different organizations adopt different prioritization methodologies. The above risks are prioritized based on the \"Risk Exposure\". If Velocity and Controllability scales are also considered, then the prioritization varies. Simply put, all risks that fall under the red colour represent the organization\'s top priority, while others are assigned lower priority accordingly.FAIR (Factor Analysis of Information Risk) MethodologyFAIR methodology deconstructs the uncertainty inherent in risk into manageable elements. FAIR methodology mostly focuses on Cyber and Operational Risks. Its fundamental components, Loss Event Frequency (LEF) and Probable Loss Magnitude (PLM), play key roles. LEF assesses the frequency of potential loss events occurring within a specific timeframe, while PLM evaluates the likely financial impact of each event. This structured approach enables organizations to comprehensively analyze and address their risk landscape.The entire flow of FAIR methodology ranges from designing scenarios, FAIR factors, Expert estimation, PERT analysis, and Monte Carlo.PERT AnalysisThe FAIR methodology has suggested the PERT analysis to estimate the uncertainty. As per this methodology, one should have 3 values for a risk i.e., minimum, most likely, and maximum. Along with this, organization has the highest confidence value among the three.For example, in case of financial risk, organizations should consider the maximum loss, most likely loss, and minimum loss if the risk materializes. Also, by expert judgement or by any past data, organizations should be a little surer about either of the 3 values. Below is the computation:Expected Value = [Min + (4 x Most likely) + Max] / 6 - If organization is little surer on Most likely valueExpected Value = [(4 x Min) + Most Likely + Max] / 6 - If organization is little surer on Minimum valueExpected Value = [Min + Most Likely + (4 x Max)] / 6 - if organization is little more sure on the Maximum valueVaR - Monte Carlo AnalysisMonte Carlo is the most commonly and widely used risk analysis methodology, mostly used in finance fields. Below are the steps followed to apply Monte Carlo simulation:Determine the impact of the potential risk event, based on expert judgement or brainstorming. A range of the outcome can also be considered as an input to the simulation.Run the Monte Carlo simulations with the available data by running around ~1000 iterations.For a simulation of ~1000, Mean and Std Deviation are calculated by the tool.The output of Monte Carlo, provides multiple possible outcomes and the probability of each from a large pool of data.The output generated will usually be a normal distribution or bell curve, with the most likely value in the middle of the curve i.e., There is almost an equal possibility that a risk impact could be higher or lower. Users may obtain the results such as the minimum value, which is the lowest value generated by the Monte Carlo simulation, a maximum value, which is the largest generated value, as well as an average and most likely value.Now as the results have been narrowed down, expert judgement can be utilized to quantify and rate the risks.Scenario AnalysisScenario analysis refers to defining one or more risk scenarios with utmost detail that could impact the strategic objectives. The details of the scenarios can boil down to the severity of risk, time duration, mitigation efforts, etc.However, this analysis cannot be done to all the risks of the organization. Before getting into scenario analysis, the organization should already have a high-level top 15-20 risks. The scenarios can be developed by a combination of risk experts, process owners, and SMRs.Below is the sample Scenario analysis: (While there can be base case, worst-case, and best-case scenarios, only the worst-case scenario is considered here for illustration purposes)Risk DescriptionStrategic ObjectiveMetricDetailed ScenariosImpactExisting ControlsAdditional actions to be takenStrategic Risk - The risk that the organisation cannot achieve its strategic objectives1B$ company by 2030RevenueNew market player with innovative productFailure of current R&D projectTechnology ShiftCompetitor pressureSupply chain issuesFailure to scaleAttrition/ loss of talentDecline in market share by 30%Loss of INR 50 Lakhs quarterlyIncrease in R&D expenses by INR 20 Lakhs15% price reductions / discounts12% price increases / inflationMarketing Campaigning at core markets - Detailed plan attachedFMEA in placeTBDConclusionIn conclusion, risk quantification is an indispensable process for organizations seeking to navigate the complexities of today\'s dynamic business environment. By systematically assessing, analyzing, and assigning numerical values to various risks, businesses can make informed decisions, allocate resources effectively, and mitigate potential threats to their objectives.However, it\'s crucial to recognize that risk quantification is not a one-time exercise but an ongoing practice that requires continuous monitoring, evaluation, and adaptation to evolving circumstances. By embracing a proactive and data-driven approach to risk quantification, businesses can better anticipate, respond to, and ultimately thrive in an ever-changing landscape, safeguarding their sustainability and success in the long run.References:Measuring and Managing information risk (A FAIR Approach) by Jack Freund and Jack Jones5th Edition of Fundamentals of Risk Management by Paul HopkinsISO 31000: 2018 Risk Management - Guidelines (ISO 31000:2018(en), Risk management - Guidelines)COSO 2017: Enterprise Risk Management integrating with Strategy and Performance - Executive Summary (https://aaahq.org/portals/0/documents/coso/coso_erm_2017_-_exec_summary.pdf)Monte Carlo Simulation and Risk Management: An Easy Explanation - IRM India Affiliate (theirmindia.org)Author may be reached at varanasi.kishore9308@gmail.com and eboard@icai.in
Ep. 304 — Valuing Employee Stock Options
CA Journal
· September 2026
00:00
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Valuing Employee Stock OptionsThe issue of business succession and distribution of value amongst a company\'s multiple stakeholders has been debated for a long time, with many solutions proposed over time, but the most elegant solution is the introduction of employee stock options. The progenitors of the foremost employee ownership plan believed that employees were the most vital contributors to any company\'s success and must be compensated with an ownership stake in the company. In recent years, the Indian startup landscape has flourished with funding skyrocketing to tens of billions of dollars, with the employee share buybacks tagging along for the ride. The mechanics of the ownership plan as well as the technique for determining their fair value, are equally wonderful, albeit with their own set of permutations and challenges.Lessons from HistoryThe Origin of First Employee Stock Ownership PlanThe origin of the Employee Stock Ownership Plan/Scheme [ESOP/ESOS] can be traced back to Mr. Louis O. Kelso, an economist and lawyer who created the ownership plan to ensure an ownership transition of Peninsula Newspaper Inc. from its aged founders to their chosen employees and managers. Kelso belonged to the school of thought with the proposition that employees are the ones responsible for a company\'s success and know the operations throughout, and accordingly, the company\'s own employees should be the owners. However, this ownership would come with a catch, in order to purchase any ownership in the company, the employees would have to use their own retirement funds to pay for the shares. The solution to this problem was created in the form of the world first ESOP in the year 1956.Prior to the genesis of this plan, the owners had majorly only two options:-Option 1: Sell the business to competitors.Option 2: Sell the portion of the business to key employees and redeem the remaining shares.Both of these options had significant disadvantages related primarily to brand identity, higher leverage, and tax inefficiencies. Further, employee ownership wasn\'t an unheard concept, as prior to Kelso\'s creation of the ESOP there were many public and private companies that had significant employee ownership to increase morale and productivity through the medium of the \"Stock Bonus Plan\" primarily investing the shares of the company.Survival and Defensive ToolThe year 1979 witnessed the application of the ownership plans to ensure that failing companies survived wherein the stocks that the ESOP acquired were paid from the negotiated salary reductions instead of employee contributions from current or accumulated profits. The major candidates for this survival plan were the Chrysler Corporation, Weirton Steel, and United Airlines. However, it is important to note that the majority of the salary-reduction ESOPs failed and were approved by a majority vote of all the participating employees after full disclosure of the financial situation.During the 1970\'s stocks of many publically traded companies became undervalued which eventually led to hostile takeovers. In order to prevent this, \"poison pills\" were invented which have many facets but the primary objective would be to deter takeovers by increasing the shareholding of all the shareholders except the acquirer and extinguishing the control they would have obtained normally. The poison pill took effect in the situation of an acquirer gaining controlling interest in the subject company and was litigated extensively in Delaware courts, as well as federal and federal district courts. ESOPs can be used as a defensive tool by issuing shares representing 20-30% of the outstanding share capital to block any incoming votes on the resolution for takeover.Accordingly, ESOP\'s fared much better in dissuading hostile takeovers than the poison pills along in protection shareholder value. For countries like Japan, nearly 90% of the publically traded firms offer stock options for the employees to participate in although the overall employee holding percentage is miniscule.Employee Stock Options in IndiaThe credit for introducing ESOPs to the Indian landscape is held by Wipro which introduced the scheme in 1985. Thereafter, many public IT Companies brought employee ownership plans into the mainstream media by creation of salaried millionaires and billionaires. The old taxation legislature offering tax exemption both at the time of exercise of options and sale led to the inherited value of ESOP being incredibly higher than the base salaries. The taxation laws would be amended in the early 2000s but that would not dampen the lustre of stock options for the employees.The government sector companies would soon jump on the bandwagon with Maruti Udyog Limited becoming the first PSU to introduce ESOP in 1990s in the form of a trust called \"Employees Mutual Benefit Fund\" which operated along the likes of mutual funds by churning employee savings to be utilized by the fund for investment in shares, stocks, debentures or other financial instruments of the company.Based on the positive feedback of the scheme, the Department of Public Enterprises, Government of India issued guidelines for other PSUs to develop similar schemes for their employees.Retrospective on Indian StartupsFollowing the funding boom of 2021 where startups raised more than $41.4 Billion for 1,579 deals which overshadowed the combined deal value of the last three years, many of the startups gravitated to buyback of Employee Stock Options for reward sharing. Further, the employee sentiments towards cash salary took a backseat as many were negotiating substantial ESOPs and less cash payment as part of their tech package, ESOPs being the major differentiator from the average salaries in the market.This table represents the summary statistics of the buyback value of ESOPs for FY-24Table 1: Startup Buyback Trends for FY2ParticularsBuyback Value [Amount in USD Million]Pocket FM8.30Swiggy65.00Whatfix4.30Capillary Technologies20.00Valuation NuancesThe first step in valuing stock options is to determine the value of the underlying equity value of the company. The inherited value of a company\'s stock depends upon a number of factors inter alia, nature of the industry, product offerings, level of competition, intangibles/patents held, government regulations, and director efficiency. All of the aforesaid factors translate into turnover, margins and cash flow to the business, which will ultimately serve as inputs to the valuation exercise.The three fundamental approaches to valuation are Cost Approach, Income Approach and Market Approach, with Income Approach being the widely used and scientific approach.After the identification of the stock price, the intricacies of option valuation can be explored. The employee stock options are derivative instruments whose values are contingent upon the price of the underlying stock price of the company. The option is a right but not an obligation to purchase a company\'s stock at a specific price for a specific period of time for a specified quantity. These enable the employees to share in the value generated by the company via an appreciation in the stock price at a minimized risk by not owing the stock directly till the time option is exercised by the employee.The option is generally vested to a particular employee after fulfilment of certain conditions which are primarily limited to performance, company valuation, milestones, capabilities, and profitability. After the options are vested, they must be exercised within a specific period of time known as the exercise period. The exercise period is generally one to three years for a listed company and event/milestone based for private companies. Options can be exercised by payment of exercise price or strike price which is significantly cheaper than buying the stock outright by paying full price.An employee will exercise the stock options if the price of the company\'s stock is greater than the exercise price. However, in the scenario where the stock price has fallen and is lower than the exercise price then the option will lapse and will expire worthlessly.Employee Stock Option Valuation MethodologyThe Black-Scholes Option Model was formulated in 1973 by Fisher Black and Myron Scholes for the valuation of a marketable call option on non-dividend paying stocks and is used for the valuation of options that can be exercised in the event of expiry. Another option valuation model is the Binomial Lattice Method which is utilized for the valuation of options that can be exercised anytime throughout the exercise period. Employee options employed by the startups or private companies are only exercisable at specific dates like European options, linked to either revenue milestones, initial public offerings or buyouts, and the issuing companies do not declare any dividend during the exercise period making the Black-Scholes the appropriate model for use in this circumstance.The valuation model outputs the fair value of a call option based on inputs such as the price of the underlying share, exercise price, risk free rate, volatility, and time to expiration of the option. The model has been adjusted by experts to account for dividend paying stocks, different expiry of options, as well as for pricing warrants.Formula for computation of fair value of a call option exercisable on expiryCall Value $= S \\times N(d_1) - Ee^{-rt} \\times N(d_2)$Where:$S$ = Stock price$E$ = Exercise (strike) price$N(d_1)$ & $N(d_2)$ = Value of cumulative distribution functions of the standard normal distribution, $d_1$ and $d_2$ evaluated$d_1 = 1 / \\sigma \\sqrt{t} [log(S/K) + (r + \\alpha^2 / 2)t]$$d_2 = d_1 - \\alpha \\sqrt{t}$$ln$ = Natural logarithm$r$ = Short-term Risk-free rate (continuously compounded)$t$ = Time to expiration, in years$e$ = Exponential function$\\sigma$ = Annual standard deviation of return (usually referred to as volatility)The derivation of the model is complex and has many variable components, brief explanation on the major drivers is provided below:-Stock Price and Exercise Price: The value of an employee option is directly proportional to the price of the underlying company\'s share. However, a higher exercise price will lower the value of an option since the employee will have to pay more to acquire the right to purchase shares at a discount. A typical ESOP Plan accounts for a different tier list of exercise prices depending on the employee designation and hierarchy.Risk-Free Rate: The risk-free rate for the purpose of the Black Scholes Option Pricing Model is the Yield to Maturity (YTM) on a sovereign government bond that has the maturity period equivalent to the term of the option. For Indian companies, 364-Day Treasury Bill (Primary) Yield is relevant and used for calculations. However, the risk free rate used is a continuously compounded rate of return, that is, the natural log of $1+i$, where i is the annual rate of interest. The higher the risk-free rate, the higher the value of an option.Time to Expiration: This refers to the exercise period available to the employees to exercise the option and purchase the shares. The longer the exercise period the more valuable the option becomes due to the effect of time value of money. The period is expressed in years or a fraction of a year in the computation.Volatility: The degree to which the price of a particular stock changes during a fixed period. Volatility is measured as the annualized standard deviation of the daily price changes of a stock if the stock is listed on a stock exchange. If the company stock is not listed, then the volatility of stocks of listed comparable companies can be used as a proxy. The proxy method is also relevant in cases where the stock is thinly traded and does not have sufficient reliable trading volumes during the relevant period.Natural logarithm: The natural logarithm, the standard normal cumulative distribution function, and the exponential function are all mathematical constants.Valuation Adjustments for Private CompaniesThe options granted by private companies are bundled with additional characteristics such as liquidity risk and volatility risk. In order to adjust for limited marketability of option discount for lack of marketability is considered appropriate and the volatility computation for private companies is subject to the greater degree of error and is inherently challenging. These are discussed in detail below:-Discount for Lack of MarketabilitySince neither the stocks nor the options of private companies are listed on any stock exchange, we need to assign a discount for lack of marketability (DLOM) to arrive at the fair value of employee options. In the published study conducted by the members of The Put and Call Brokers and Dealers Association (PCBDA) in \"The Wall Street\" Journal from March 1965 to March 1973, a total of 5700 PCBDA options were compared to their derived Black Scholes Option values.The study concluded that the illiquidity discount for in-the-money call options was 22% from the Black-Scholes Values, and the discount for out-of-the money call options was approximately 45%. Further, for the purpose of financial reporting valuations, adjustment for lack of transferability is made by adjusting the term or exercise period of the option rather than discounting the option value.Table 2: Factor Leading to Discount for Lack of MarketabilityFactors leading to a smaller discount for lack of marketabilityFactors leading to a larger discount for lack of marketabilityPublicly tradedClosely heldNo restrictions on the sale of the securitiesRestrictions on the sale of securitiesRegistered SecuritiesUnregistered SecuritiesActive market relative to the size of the block in questionThin market relative to the size of the block in questionAdjustment for Lack of ControlEmployee holdings typically do not result in a controlling stake in the company and accordingly, the employee should not be paying more than the fair price that a willing buyer will pay for non-controlling/minority interest. The employees will neither individually nor as a group will influence the dividends, listing/unlisting decisions, issuing or buying stock, directing management as well as their salaries. Accordingly, in this scenario, the company share price will be discounted for minority interest for input to the option valuation model. The adjustment for lack of control stems from the doctrine that a potential acquirer would be willing to pay extra for a controlling stake assuming all the other factors are constant. Control premium for the majority shareholder necessitates a minority discount for the minority shareholder.However, certain companies can provide cumulative voting to minority shareholders, elect small shareholder directors representing employee claims and certain minority shareholders can form a voting block and thereby achieve a substantial position. Accordingly, such shares with cumulative voting powers will command a smaller discount for lack of control than the other shares without cumulative voting and other factors being equal.Control as well as its lack thereof, does not have a demarcated dividing point and constitutes a spectrum from pure minority interest position to 100% controlling interest.Levels of OwnershipAs per empirical studies, the control premium ranges from ~29.0% to ~53.9% and the implied minority discount is within the range of ~22.5% to ~35.0%. The discount is applied directly to the fair value of equity derived at the first step itself and not at the option value level.Minority Discount is computed as per the following formula:-Discount for Lack of Control = $1 - 1/[1+\\text{Control Premium}]$Table 3: Levels of OwnershipControl InterestsMinority Interests1. 100% ownership2. Ownership sufficient to liquidate, merge, etc.3. 51% operating control1. 50%-50% ownership2. Less than 50%, but the largest block of stock ownership3. Less than 50%, but with swing vote powers4. Less than 50%, but with cumulative voting powers5. Pure minority interestsPut Rights and Potential BuyersA put is a contractual right but not an obligation to sell the ownership interest at one\'s own discretion to a third party for consideration under pre-determined events/circumstances, essentially creating a ready market for the transaction where there was none. Private companies can put provisions in the ESOP Plan that would allow the participants to sell the shares to the company in the event of retirement, disability, or death. The acquired share on the exercise of the option can either be redeemed or recirculated in the common ESOP Pool. Existence of Put Rights can significantly reduce the discount for lack of marketability to be applied.Similarly, potential buyers or acquisition interest by a major buyer can impact the discounts for lack of marketability. However, there have to be past trends or activity of acquisition by buyers for consideration in the fair value computation.Initial Public OfferingAn upcoming public listing can provide a market for the sale of shares exercised by the option holders. A prospective IPO without any concrete plan in place would not warrant any reduction in the discount, and it is problematic to offset the discount for only director intentions or aspirations. However, if the company founders are adamant on the company being private for the foreseeable future, this would require the discount for lack of marketability to be increased and adjusted accordingly.Further, the magnitude of discount for lack of marketability depends on historical performance, the extent of losses, high leverage, and restrictive transfer provisions in the ESOP Scheme.Empirical Tests and Pricing ErrorsThe Black Scholes Option Valuation Model is revolutionary but not without its faults. Research has been conducted to discuss the 1972 Black and Scholes Study as well as the subsequent studies to compare the price of publically traded options with its derived value based on model inputs. The initial studies discovered that there were statistically significant differences between the expected results and the actual market price, although the difference was not economically important due to trading costs. Other researchers propounded that there were significant deltas for long-term options that were significantly in or out the money. Authors like N. Gassel and J. Legras have argued that the difference can be attributed to the change in implied volatility of the underlying stock as the standard Black Scholes Model assumes constant volatility. Shmuel Hauser and Beni Lauterbach published a research paper in 1997 by observing 20,000 warrant price observations by testing five warrant pricing model.They concluded that a dilution-based model remained the most reasonable and economic model although another model, the Constant Elasticity of Variance Model [CEV] based on constant elasticity of variance generated the lowest average pricing observation, and the degree of error is within normal valuation tolerances, as depicted in Table 4.Table 4: Average Pricing Errors by Time to Expiration and the Degree of In or Out of the MoneyTime to ExpirationNumber of ObservationsBlack Scholes ModelDilution Adjusted Black ScholesCEV ModelOut-of-the-money warrants (stock price 80% or less of exercise price)Less than two years2,1227.63%7.23%5.67%More than two years12,0335.41%4.98%3.77%At-the-money warrants (stock price more than 80% but no more than 110% of exercise price)Less than two years1,3445.20%4.88%4.52%More than two years3,5513.68%3.11%2.77%In-the-money warrants (stock price more than 110% of exercise price)Less than two years6872.78%2.48%2.27%More than two years2,1632.37%2.08%1.89%ConclusionEmployee stock ownership plans are increasingly drawing the attention of founders as well as employees who prefer stock options to their cash salaries by delaying instant gratification for the sake of immense value in the foreseeable future. Evidence from the Indian Stock Buyouts suggests that the stock options are thriving and more importantly, there is a ready market for the vested options other than the popularised dream of public listing. However, stock options are not a path to be ventured upon nonchalantly and without conviction but demand an understanding of the valuation which not only determines value creation but also its many variables which can impact the price exponentially and many times dramatically.References:John D. Menke, The Origin and History of the ESOP and Its Future Role as a Business Succession Tool May 11, 2011Gupta, Ambuj, A Critique\'s View of Employee Stock Options in India: Re-Assessment and Perspectives August 10, 2010Nikhil Subramaniam, [2021 In Review] 42 Unicorns, $41.4 Bn Funding: A Blockbuster Year For Indian Startup Economy, December 30, 2021Jaspreet Kaur, ESOPs Galore: Indian Startup Employees Made Over $196 Mn Through Buybacks In 2022 January 5, 2023Shannon P. Pratt Valuing a Business, 5th Edition The Analysis and Appraisal of Closely Held Companies 2007James R. Hitchner Financial Valuation, Application and Models 2003Inc42 Indian Startup Employees Made Over INR 1,250 Cr Via ESOP Buybacks In 2024, October 31, 2024Author may be reached at ca.matharu@gmail.com and eboard@icai.in
Ep. 305 — Socially Responsible Investing (SRI) in India
CA Journal
· September 2026
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Socially Responsible Investing (SRI) in IndiaThe SRI industry in India is undergoing a major transformation. The regulatory requirements are increasing, investors are incorporating non-financial information in investment decision, and companies are focusing on the needs of all the stakeholders. In India, SRI is in the early stages, and there needs to be more awareness among retail investors. While exclusionary screening is quite popular in India, impact investing and shareholder activism are also becoming popular in the country. In order to accelerate the progress of SRI in the nation, India has introduced various measures like BRSR, BRSR Core, new categories for ESG mutual funds, regulation of ESG rating providers, and legally mandated CSR.Socially Responsible Investing (SRI) combines investors\' financial objectives with their concerns about Social, Environmental and Ethical (SEE) issues. SRI takes care of the financial risk and return along with non-financial factors that could materialise into future risk or growth opportunities (CFA Institute, n.d.). SRI has grown tremendously in the last two decades and has emerged as a global key investment trend. Responsible Investing has been a part of the Indian knowledge system. Indian ancient scripts like the Vedas, the Upanishads, the Ramayana, and the Bhagwad Gita discuss the provision of social good, co-existence with nature, and sustainability of economic activity (Kar & Kaur, 2023). In modern India, SRI is still in the nascent stage and investors are not fully aware of the concept in comparison with developed countries (Murugaboopathy & Dogra, 2021).The last decade has been very crucial for the growth of SRI, as India witnessed economic downturns, climate change and the COVID pandemic. ESG investing has gained momentum in India with the debut of dedicated ESG Funds and asset management companies signing up for UNPRI principles. There are 39 signatories of UNPRI from India; of these, 12 agreed in 2021, 7 signed in the year 2022, 11 nodded in 2023, and 1 joined in 2024 (UNPRI Website). By 2051, the ESG-based assets are expected to be 34% of the total domestic AUM (Avendus Capital, 2023).The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have launched various indexes to help investors identify firms that are committed to sustainable business practices. These include the BSE-Greenex, the BSE-Carbonex, the BSE ESG Index, the Nifty 100 ESG index, the Nifty 100 ESG enhanced index and the Nifty 100 ESG Sector leaders. Several Non-Banking Financial Companies (NBFCs) have also launched mutual funds based on an ESG Investment Strategy.Table 1: ESG Mutual Funds in IndiaFund NameLaunch YearTypeAUM (INR Billion)SBI ESG Exclusionary Strategy Fund2013Active61.12Quantum ESG Best in Class Strategy Fund2019Active0.95Axis ESG Integration Strategy Fund2020Active14.46ICICI Prudential ESG Exclusionary Strategy Fund2020Active16.52Quant ESG Equity Fund2020Active3.34Mirae Asset Nifty 100 ESG Sector Leaders ETF2020Passive1.36Adity Birla SL ESG Integration Strategy Fund2020Active7.34Kotak ESG Exclusionary Strategy Fund2020Active10.23Invesco India ESG Integration Strategy Fund2021Active5.47The first ESG-focused mutual fund in India was SBI ESG Exclusionary Strategy Fund catapulted in 2013. Post 2021, no new mutual fund was launched dedicated to the ESG criteria until WhiteOak Capital ESG Best-In-Class Strategy Fund was launched in the year 2024. Presently, there are 10 sustainable funds in India, with 9 being actively managed and one passively managed. SBI ESG Exclusionary Strategy Fund holds nearly 50% of the total AUM of such schemes.Evolution of ESG Reporting in IndiaThe evolution of ESG reporting in India can be traced back to the first decade of the 21st century when the government introduced policy reforms for greater inclusion of ESG parameters in corporate practices.In 2009, the Ministry of Corporate Affairs (MCA) introduced the National Voluntary Guidelines (NVGs), advising business houses to establish Corporate Social Responsibility (CSR) centres.In 2012, SEBI mandated the top 100 listed companies based on market capitalisation to publish a Business Responsibility Report (BRR) along with annual reports.In 2014, India became the first country to legislate Corporate Social Responsibility (CSR), requiring specific companies to spend 2 per cent of their average net profits of the preceding three years on CSR.In 2015, the BRR was mandated for the top 500 listed companies, and in 2019, extended to the top 1000 listed companies.In 2019, MCA issued National Guidelines on Responsible Business Conduct (NGRBC) to align with Sustainable Development Goals (SDGs).In 2021, SEBI introduced mandatory filing of the Business Responsibility and Sustainability Report (BRSR) by the top 1000 listed companies from the financial year 2023.In 2023, SEBI announced \"BRSR Core\", a subset of BRSR containing Key Performance Indicators (KPIs) across nine ESG aspects, mandatory initially for the top 150 listed companies for FY 2024.In addition, SEBI has unveiled six new strategies in the ESG scheme/theme under which mutual funds can offer investment avenues: exclusion, integration, best-in-class & positive screening, impact investing, sustainable objectives, and transition or transition-related investment. Mutual fund schemes must invest a minimum of 80% of the total AUM of the ESG scheme in equity aligning with the outlined strategy. SEBI has also established an ESG disclosure and compliance framework and made India the first nation globally to regulate ESG rating providers and define their qualifications.Total AUM of ESG Funds in IndiaThe fund size of ESG mutual funds was INR 27.03 billion in 2019, quadrupled to INR 94.11 billion in 2020, and peaked at INR 123.69 billion in 2021. In 2022, the total assets fell to INR 107.41 billion, then to INR 106.35 billion in 2023, before rebounding to INR 120.79 billion in 2024. Cash inflows peaked in 2021 when 6 new schemes were launched, but 2022 and 2023 witnessed cash outflows, possibly due to profit booking and the Russia-Ukraine conflict surging non-ESG stocks like defense, oil, and gas.India has also moved a step ahead by introducing the concept of Carbon Trading, wherein the central government or authorised authority issues \"carbon credit certificates to entities that are consuming less energy in comparison to the threshold allotted to them\". India stresses the utilisation of non-fossil energy sources and promotes clean energy with the Energy Conservation (Amendment) Act, 2022.Shareholder Activism and Impact InvestingIn addition to ESG integration, shareholder activism is a popular SRI strategy in India. Shareholders exercise voting rights, engage in publicity campaigns, litigation, and direct negotiation to pursue management changes. The rise of shareholder activism is attributed to legislative changes enhancing minority rights, greater institutional ownership, landmark judiciary judgments supporting shareholder rights, and the introduction of e-voting.Interest in impact investing has expanded substantially. In the last five years, deals with more than USD 0.01 billion have more than doubled. Impact investing has generally taken the form of venture capital in India.Table 2: Impact Investment in India for 2021-2023Particulars202120222023Equity Investment in USD Billion6.9296.0432.907No. of transactions377431290Number of unique Enterprises316396275In 2021, India witnessed the highest equity investment. The year 2022 observed fewer big-ticket transactions but 400 impact-focused enterprises raised USD 6 billion across 431 transactions. In 2023, 275 Indian impact companies received USD 2.9 billion in equity investment across 290 transactions, marking a significant decline mirroring the global venture capital market slowdown. Despite this, the Indian impact ecosystem remains resilient with strong growth in early-stage investments, though there is a need for more financing in later stages.ConclusionIn comparison to the developed world, SRI is still in the early stages in India and faces teething problems. However, popularity and awareness about SRI are rising. The Government along with market regulators and the central bank have initiated several measures to promote responsible investing and to protect investors\' interests, envisaging the embedding of sustainability in a company\'s vision, mission, ethos, principles, and culture across all levels.References:Avendus Capital (2023). ESG expected to contribute to ~34% of total domestic AUM by 2051, aligned to 2070 Net-Zero target: Avendus Capital Study.Economic Times. (2023, June 5). Asset base of ESG-focussed funds drops by Rs 2,020 cr in FY23.ESG investing and analysis. CFA Institute. (n.d.).Hand, D., Ringel, B., & Danel, A. (2022, October 12). GIINSIGHT: Sizing the Impact Investing Market 2022. The GIIN.Kar, & Kaur. (2023, June). Socially Responsible Investing - Recent Developments in India. Chartered Secretary, 53(6), 70-74.Kaul, A. (2024, October 15). A new ESG fund launch in over three years; should you go for it? A Moneycontrol Review.Ministry of Corporate Affairs (MCA). The National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business; 2011.Morningstar India. (2023, August 16). ESG funds available in India | Articles | Morningstar India.Murugaboopathy, P., & Dogra, G. (2021, August 27). India has fewer ESG funds than other top 10 economies | Reuters.Pai, R., Balooni, D., & Batra, V. (2022). 2022 In Retrospect: India Impact Investment Trends. Impact Investors Council.Panda, S. (2024, March 11). A decade of CSR in India - how impactful and transformative was the journey. CNBCTV18.Pinge, D. & Reddy, V. (2023). 2023 In Retrospect: India Impact Investment Trends. Impact Investors Council.SEBI. (2023, July 12). BRSR Core - Framework for assurance and ESG disclosures for value chain.Sultana, N. (2023, August 21). ESG funds losing sheen in India. Forbes India.UNPRI Signatory directory | PRI. (n.d.).Authors may be reached at shelly7508@gmail.com and eboard@icai.in
Ep. 306 — Digital Currents: Navigating the FinTech Revolution in Traditional Banking Waters
CA Journal
· September 2026
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Digital Currents: Navigating the FinTech Revolution in Traditional Banking WatersTransform your life by traveling with us in the financial technology ecosystem of Fintech where one can witness how modern banking has left the historical landscape. We tear apart the fabric upon which this quilt of modern finance is embroidered to guide accountants and businesses (chartered accountants) on a perfect track and lead them through choppy channels.IntroductionIn the realm of finance, FinTech is highly innovative and perpetually evolving traditional banking to what seems like an era bygone. Technological advancement and digitalization have revolutionized wealth management, financial services, as well as currency transactions. It would not be an exaggeration to say that FinTech is the place where people like innovators and disruptors melt down the traditional banking model and make it reborn as something new-a system that is based on universally agreed principles, totally transparent, and without any room for corruption at all levels from account opening to credit approval for households and SMEs.The development of FinTech started after the 2008 crisis, which resulted from social and political consciousness in most western public people\'s dissatisfaction with the financial system that had become obscure, inefficient, and exclusionary. This dissatisfaction led to a revolution that aimed to overthrow traditional norms on how a banking system should function, down to what it could potentially be. Driven by various game-changing technologies such as mobile payment platforms and blockchain security, this revolution is centered on introducing fundamental changes in the global financial markets landscape toward greater transparency, security, speed, and, most importantly, inclusiveness in the provision of financial services.Objective and ScopeThrough the constantly shifting landscapes where FinTech intersects with banking, this piece shows in what way Chartered Accountants and financial experts are being most affected by one of the biggest shifts. FinTech steers clear of the technology hype and represents a paradigm shift in the financial services sector, reflecting agility, innovation, and adaptability. It is an era that equips finance professionals with tools and enhancements rather than just the competitive edge of leading in the charge of transformations with foresight, not adapting, for client value and streamlined operations. Welcome to the age of FinTech, the innovative change that lets finance professionals be the ones at the driving wheel. It is this pursuit of embracing the future that makes every finance professional the light of a guiding star that charts away toward a creative future.The FinTech Vanguard: Architects of Financial EvolutionLeading-edge AI and innovative algorithms are redefining financial forecasting in the finance sector, and doing so at a rate many never saw coming. Digital tools like algorithms and blockchain technology redefine traditional means of investing and financial transactions. Such evolution is reshaping the financial space and bringing the transformation to everyone from investors to end consumers.The Spectrum of InnovationIt sums up the diversity in innovation that drives the FinTech revolution and epitomizes a range of the next big steps for a digitized financial future.Blockchain: It forms the apex technology of trust and transparency in the redefinition of transactions in finance, with a decentralized immutable ledger accentuating processes while enhancing security against fraud.Artificial Intelligence (AI) and Machine Learning (ML): They have collectively started a revolution in the entire paradigm of financial services by specializing their offerings, from predicting market trends to tailor-made advice and risk assessment automation for accurate and efficient customer service.Mobile Payments: This was made much easier with the arrival of smartphones, as it counts as one of the sum essentials in the world of digital commerce that can be dimensioned in terms of financial inclusivity and ease across the globe.Peer-to-Peer (P2P) Lending: In tune with the FinTech ethos, it is synonymous with enabling disintermediated, direct lending between persons, unlocking capital before which lay idling, and in this process makes the act of borrowing even more efficient and flexible.From Traditional to Digital: A Paradigm ShiftThe shift from traditional-first to the above digital paradigm entails a symbolic and profound significance-there is a transformation basic in the consuming and delivering manner of financial services.Digital Banks: The entry of digital banks in the market has changed the traditional approach that banks follow; most of them now have more digital than physical presence and offer paperless online services with new-age financial products, leaving traditional ones to scramble for digital adaptation.Empowered Consumers: The twenty-first-century consumer, enabled as he is by technology and based on it, demands transparency, speed, and customization. All these factors predispose the financial sector to move towards full integration of FinTech innovations in mainstream services.Regulatory Evolution: The paradigm shift towards digitization calls for advanced regimes in regulation. RegTech is coming up intending to aid institutions in effectively pursuing compliance to ensure the stability and integrity of the financial system through digital evolution.The Ripple Effect: FinTech\'s Impact on Traditional BankingThe emergence of fintech is certainly the biggest change in the financial industry since, probably, a revolution. The next wave of digital innovation does not only make things unsettled but reforms the landscapes. In this transformational odyssey, fintech is set to be the challenge and augmentation of the established fortresses of banking.Disruption in the CitadelThe FinTech wave rolling over traditional banking today is imperiled by swift, disruptive innovators who use digital tools to reshape customer service with greater efficiency and heightened security. From mobile banking, and P2P lending, to the use of blockchain technology, all have a projection of how easily banking can be done from whichever place on the earth in the not-so-distant future, transcending the physical walls of banks to the wide dimensions. This transition is not confrontational but a call for evolution, where traditional banks see more and more the indispensable need for FinTechs in defining the adapted banking model needed for the digital era. Together, they blend digital speed with seasoned financial insight, navigating the future of finance.A Synergy of SortsFinTech is the marriage between traditional banks at a time with this new dawn of banking that aims at enhanced inclusivity, efficiency, and security through technological synergy. Secure transactions powered by blockchain, and customer service equipped with AI are just parts of the partnership that\'s going to promise new innovative and customer-focused ecosystems to redefine the financial landscape. Far from displacing the traditional banking system, FinTech companies are instead forcing the traditional banking system into the future full of potential, which would mark a very conducive phase for financial services that are modernized and optimistic.The Digital Ledger: FinTech\'s Influence on Accounting and Audit PracticesFinTech is the new ray of innovation planning to change the key traditional activities of accounting and auditing in the fast-moving arena of finance. While the latter innovations redefine these practices under FinTech, they also set new benchmarks in efficiency, accuracy, and strategic foresight within the financial domain.Automation and EfficiencyFinTech has taken the accounting workflows into a whole new paradigm wherein automation and digital precision are game-changers for increasing productivity. Classical accounting works that are open to always be criticized due to their laboriousness and susceptibility to human error stand on the verge of transformational change. Smart tools and applications in FinTech will streamline critical processes, from making transaction records to financial reporting, turning them into smooth error-free operations.It is through this invention that a revolution has been held in the creation of digital ledgers forming an infallible reference for every transaction and therefore giving both integrity and transparency to every form of financial documentation, falling under this purview. Such reorganization facilitated by FinTech leads not only to speeding up various workflow procedures but also remarkably enhancing audit precision, ensuring compliance as well as financial health.Data-Driven DecisionsBig Data and analytics have, through FinTech, revolutionized how financial forecasting and strategic planning are carried out. Such recent advances now allow finance professionals to use predictive models so that decisions are made on transformed data into a strategic asset. It is this difference in data-driven strategies that has increased accuracy for professionals not to be on the losing.The Regulatory Conundrum: Navigating Compliance in the FinTech EraThe FinTech innovations in this dynamic tapestry of the financial sector embroider complex patterns, which pose an exclusive regulatory conundrum. But for that, it is digital progress that compels these contours of finance, and jugglers must foster innovation while maintaining steadiness and taking care of the consumers.A Balancing ActThe regulatory landscape is fast changing to be accommodative of the disruptive nature of the FinTech industry yet tempering the high risk likely to flow from the new technologies. The challenge is to design a framework that is flexible enough for all the constant innovations yet sturdy enough to protect the financial system from any integrity breaches.Thus, regulators are crafting a new paradigm-one in which the collaboration of FinTech firms with traditional financial firms is encouraged. This symbiosis aims to merge the agility and innovation of FinTech with the stability and monitoring of established banking systems. But creating them is not a piece of cake. Regulators must tread a fine line between stifling innovation with overly strict regulations and leaving the financial system vulnerable to new forms of risk.Comparative Perspective:From Open Banking Standards increasing competitiveness and consumer protection under European Union regulations to Open API standards that help protect customer data and promote competition in financial services in the USA.Ensuring a Secure Future: Why Strong Security Measures are Essential, in the FinTech IndustryFacing Challenges and RisksThe finance world harbors so many hopes, but in the same measure, it also faces a lot of risks; among them is cybersecurity that breaches sensitive data. Therefore, FinTech companies need to improve their security conditions through encryption, provision of authenticating systems, and putting in place continuous monitoring to protect user information in matters of finance transactions.The Quagmire of Risk and ComplianceIn today\'s technology-driven world, the risks and compliance challenges are quite daunting. Adherence to industry standards for credibility is very crucial because no man is an island, and sustainability can only be ensured through long-term adherence. The recent security breaches should be a stark reminder that strong cybersecurity protocols must be followed for full compliance. The basic commonality in the cases revolves around financial misconduct and irregularities, therefore there is the need for mandatory regulatory oversight and best practice risk management strategies that are critical to the integrity and confidence of the financial ecosystem.Ensuring the Integrity of FinTech through Effective ControlsSolid control in security, compliance, and operations is very crucial in FinTech. The adoption of advanced cyber strategies, like the best encryption and authentication, safeguards sensitive data. Looking through the viewfinder of RegTech tools in an ever-environment will have to focus on the ever-changing legal environment. Apart from disaster recovery and scalable systems, operational resilience would mean service delivery without interruption. These build up a strong, secure, compliant, indispensable resilient FinTech ecosystem that is indispensable in accomplishing long-run goals to gain belief retained.Charting Uncharted Waters: Strategies for CAs in the FinTech DomainAs the FinTech wave thunders towards the summit top, Chartered Accountants (CAs) are leading from the front in a profession fundamentally shifting. It is abundant with lots of challenges but also has brought with it many opportunities. Thus, CAs must test these unknown waters with a lot of caution and a little bit of daring. The philosophy that could be guiding success in the changed landscape would be strategic adaptation and commitment to innovation.Adaptation and AdvancementThis, therefore, brings to CAs an opportunity for them to become more competitive through the democratization of data and process automation that comes with the digital finance revolution. This shift has enabled CAs to provide insights and services with unprecedented velocity and accuracy that require a transition from traditional accountancy to a holistic advisory role. The knowledge of these FinTech tools helps CAs to advise their customers on the integration of these technologies to achieve increased efficiency and compliance, laying a platform for their transformation of such vast data into strategic insight. This working knowledge in FinTech is necessary for the CAs looking at leveraging the transformational potential arising from digital finance.Innovation as a ServiceInnovation, which was synonymous with high-decibel tech start-ups, is now part of the Chartered Accountancy (CA) profession. The CAs are broadening their roles to extend traditional boundaries, adopting FinTech for real-time financial analysis and predictive modeling for their businesses along with the customized financial planning of customers. This evolution allows a much more collaborative, customer-focused model that fosters a continuous dialog rather than historical, episodic reporting. The aim is to allow chartered accountants to automate the more routine work so that their focus can be on strategic advice designed to assist their clients through the financial complications of modern times. As finance becomes increasingly digital, CAs equipped with FinTech, and innovation capabilities will increasingly establish the competitive advantage and shape this future for the profession.The Horizon Beckons: The Future of FinTech and BankingThe future of FinTech and banking is a vista of promise and potential now opening to a new epoch in financial services with hyper-inclusion, efficiency, sustainability, and social good.Predictive CurrentsThe future success of FinTech lies in its analytic and AI capabilities that will unlock an unheralded level of predictive accuracy in all aspects of financial forecasting and assessment of risk, matched with personal customer service, bordering on the ability to achieve personal needs with almost predictive precision. Financial institutions and FinTech firms will be able to tap into such insights not only to anticipate customer needs but also to maneuver skillfully within the changing regulatory and economic environments. This predictive ability is set to improve profitability, security, and consumer suitability in such a manner that the future is marked by finance making a very significant contribution to personal and societal well-being.Sustainability and Social Good:Far beyond economic efficiency, FinTech is an equal player in driving sustainability and reaching out to the world\'s under-banked or unbanked community. They seek to promote social justice, giving access to the means of gaining both resilience and opportunities. Even as the financing catches up with the growth in the wave of eco-consciousness, green finance is, for the most part, being paved by fintech to align capital with goals for a healthier planet. When predictive innovation with social responsibility heralds changes in the FinTech and Banking sectors, it prompts the financial domain but also makes and grounds sustainability and inclusivity for the advanced and fair system.Conclusion: Embracing the Digital DelugeConsolidating and merging technology with the domain of finances, moving into ages wherein there is, in fact, such integration of digital spheres which will be adding to transparency, efficiency, and inclusivity. They invite us to the innovations in FinTech that are taking place today. The digitizing present era asks the guardians of finance to action and to create a more equal and inclusive environment.References:Blockchain Council (2023): Expert insights into how Blockchain is transforming our finance. Foundation to our Blockchain discussion. Visit Blockchain Council.Capgemini (2022): World FinTech Report, enriching our narrative with a panoramic view of the FinTech landscape. Explore the World FinTech Report.McKinsey & Company (2023): Insights on AI transforming finance, crucial for our AI argument. Read Insights from McKinsey.World Bank (2023): Data on digital finance\'s role in financial inclusion, a cornerstone of our argument. Learn from the World Bank.Author may be reached at soumendra.roy@gmail.com and eboard@icai.in
Ep. 308 — From Ledger to Algorithm: The Transformative Role of AI in Accounting Profession
CA Journal
· September 2026
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From Ledger to Algorithm: The Transformative Role of AI in Accounting ProfessionArtificial Intelligence (AI) has significantly impacted the accounting profession in recent years by creating opportunities and challenges for Chartered Accountants (CAs). It is the need of the hour to assess the effect and impact of the advantages and disadvantages of AI on the professional services offered by the CAs. To harness these advantages and overcome these challenges due to advancements in AI, CAs are required to foster human-AI collaboration with increased AI literacy and a focus on ethical issues with confidentiality and transparency. AI can shape future CA practices by ensuring more trusted, inclusive, and sustainable professional services.IntroductionThe advancement of Artificial Intelligence (AI) technology has considerably impacted various professions and industries. Due rise of AI like ChatGPT, in the finance and accounting field has considerably impacted the traditional practices of accounting professionals. Recent advancements in AI technology rooted in deep learning and vast text data processing have raised the debate about its impact on the professionals\' work. The most alarming aspect of artificial intelligence is that people conclude too early that they understand all its effects and impacts very well.Since long, Chartered Accountants are regarded as a wealth of expertise from auditing financial statements to providing strategic financial consultancy, making their contribution significant to the smooth functioning of business worldwide.AI technologies, especially ChatGPT, are rapidly getting more powerful and reactive with increasing capabilities conventionally associated with human intelligence, so evaluating its potential implications for the accounting profession is desirable. ChatGPT is just the beginning of the AI revolution in the coming years.AI Tools Useful for CAsThe following AI tools are useful to CAs in discharging their routine professional tasks:Table 1: Useful AI Tools for CAsAI ToolsDescriptionChatGPTUtilizes Natural Language Processing (NLP) to generate human-like text and assist with communication and analysis tasks in accounting and finance. (https://chat.openai.com/)MindBridge AiDetects anomalies and potential errors in financial data to aid in auditing processes. (https://www.mindbridge.ai/)IBM WatsonProvides AI-powered analytics and insights for financial data analysis and decision-making. (https://www.ibm.com/watson)UiPathOffers robotic process automation (RPA) solutions for automating repetitive accounting tasks. (https://www.uipath.com/)Xero AIIntegrates AI features into accounting software for tasks like categorizing transactions and budgeting. (https://www.xero.com/)AuditBoardProvides AI-driven audit management software to enhance efficiency and accuracy in auditing processes. (https://www.auditboard.com/)DatabricksOffers AI-powered data analytics and machine learning solutions for financial data analysis. (https://www.databricks.com/)AnaplanUtilizes AI for predictive analytics, forecasting, and financial planning and analysis (FP&A). (https://www.anaplan.com/)QlikProvides AI-driven data visualization and analytics tools for financial reporting and analysis. (https://www.qlik.com/us)CaseWare IDEAOffers data analysis software with AI-powered features for audit automation, fraud detection, and risk assessment. (https://www.caseware.com/products/idea/)Galvanize HighBondCombines AI and analytics capabilities for risk assessment, compliance monitoring, and audit management. (https://www.wegalvanize.com/)CheckmateUtilizes AI algorithms to analyze financial transactions and identify potential anomalies or irregularities. (https://checkmate.ai/)OnspringOffers AI-powered audit management software for streamlining audit processes, risk assessment, and compliance monitoring. (https://onspring.com/)Ideagen PentanaProvides AI-driven audit automation and risk management solutions for improving audit efficiency and effectiveness. (https://www.ideagen.com/solutions/audit-and-risk/internal-audit)AuditNetProvides AI-powered audit planning, documentation, and workflow management tools for auditors. (https://www.auditnet.org/home)These AI tools automate audit processes, analyze financial data, detect variances, and improve risk assessment, enhancing efficiency and effectiveness in audit engagements.Capabilities of AI modelsLatest AI models like ChatGPT can automate decision-making by interacting in a user-friendly manner using natural language. Users are not required to learn any coding skills. Broadly they can perform the following tasks:Data Analysis: With AI models like ChatGPT large databases can be analyzed to identify trends, standards, and variances. This technique helps accountants to track performance metrics and risk assessment tasks.Natural Language Processing: It is an area of AI that focuses on teaching computers to understand and manipulate human language, using techniques mostly based on machine learning. It\'s particularly beneficial for CAs when automating text analysis tasks.Financial Reporting: Complex financial information such as quarterly reports and annual statements can easily be converted into interactive dashboards and textual descriptions with the help of AI models.Compliance Check: AI tools can help professionals closely monitor legal compliances by analyzing transactions, identifying potential violations, and highlighting irregularities.Fraud Detection: AI-powered algorithms can trace indicative patterns of fraudulent activities like unauthorized access, manipulation of source code, irregular transactions, unusual spending patterns, anomalies, and suspicious connections.Predictions: AI models can analyze historical financial data to forecast future performance, market trends, and associated risk.Expertise of CAs compared to AIAI models can effectively process data and generate useful reports whereas CAs possess expert domain knowledge, critical thinking, and the capability of professional judgment. Hence AI models can complement, but not replace, the unique skills and expertise of CAs.CAs bring expert knowledge of accounting and auditing principles. They work under a strict regulatory framework including rules, regulations, standards, and guidelines. This enables them to interpret financial data in context to make their professional judgment. They also have strong interpersonal skills and ethical judgment capability for building trust with the client and other stakeholders.Although AI can increase accountants\' capabilities, it can not replace their human judgment and ethical reasoning integral to the accounting profession. Integrating AI with the accounting profession requires a balanced approach, leveraging AI\'s potential while preserving the unique qualities of CAs as trusted advisors and strategic partners.Advantages and Disadvantages of AIAdvantages of AIThe following are a few advantages of AI for CAs:Increased Efficiency: AI-powered tools can automate routine tasks like verification, reconciliation, and report generation allowing auditors to give more attention to advanced strategic activities.Improved Accuracy: Advanced AI algorithm processes data with full accuracy and detects irregularities and anomalies more efficiently than traditional spreadsheets which can eliminate the risk of errors in financial reporting.Fast Decision-Making: Advancements in AI models can easily solve complex accounting problems, and identify trends that may not be immediately apparent to human analysts giving more space to CAs for making fast and informed decisions.Risk Management: AI software can predict the likelihood of financial irregularities and frauds so that CAs can focus more on the weak areas in internal control. This helps CAs to proactively mitigate the risk and safeguard the financial health of their clients.Scalability: AI algorithms can increase or decrease their complexity, speed, and size as per the requirement to handle small as well as complex databases without additional resources. This enables CAs to manage the growing volume of financial information efficiently.Client Service: AI solutions such as virtual assistance, chatbots or automated sentiment assistance can help CAs to offer better client services such as real-time financial reporting, personalized recommendations, and predictive forecasting, thereby adding greater value to their client\'s businesses.Avoid the Possibility of Financial Fraud: AI enables CAs to detect financial fraud during audit functions by rapidly analyzing data for anomalies, automating complex tasks like transaction reconciliation, and continuously monitoring financial activities. For example, Anti-Fraud AI for Banking and Fintech companies can detect fraud using machine learning for data-driven fraud detection, push notification for unusual account activities, conversational AI for transaction Verification, and voice AI to prevent voice phishing (or vishing) scams.These advantages highlight the huge potential of AI in the accounting profession, to streamline routine tasks, improve accuracy in decision-making, and deliver more strategic insights.Disadvantages of AISome potential disadvantages of AI are as follows:Loss of Human Judgment: AI systems may lack the precise understanding and judgment that human accountants bring to complex financial situations. Over-reliance on AI may potentially lead to oversights or errors in decision-making.Data Privacy and Security Risks: The use of AI algorithms in accounting introduces concerns about the privacy and security of sensitive financial data, as these systems may be vulnerable to hacking or misuse.Dependency on Technology: CAs who rely heavily on AI-powered tools may become extremely dependent on this technology which may reduce their ability to critically evaluate financial information and the need for their independent judgment.Training and Adaptation Costs: Implementing AI in accounting needs substantial investment in training, infrastructure development, and maintenance which is challenging for smaller firms and individual practitioners.Ethical Considerations: The use of AI in accounting raises ethical concerns, such as algorithmic bias, lack of transparency, and accountability in decision-making, which could compromise public trust in financial reporting.Loss of Client Relationships: Overreliance on AI-driven processes may diminish the personal touch and rapport with clients essential for CA\'s practice. This may adversely impact the level of client satisfaction and retention.Opportunities and Challenges for CAsOpportunitiesWith the rapid advancement of AI technology, CAs have numerous opportunities to leverage it. Here are given some key opportunities:Data Analysis and Interpretation: As business data is growing more complicated day by day, advanced methods for understanding it are required. CAs can use the following AI-powered data analytical tools to process large volumes of audit data: RapidMiner, Tableau, Microsoft Azure Machine Learning, Google Cloud AutoML, PyTorch, DataRobot, and IBM Watson Analytics. This can identify trends, patterns, and anomalies and extract actionable insights to inform strategic decision-making.Process Automation: AI-driven automation tools can easily streamline routine accounting and audit processes, such as data verification, reconciliation, and compliance checks, allowing CAs to focus on higher-value activities, such as analyzing and interpreting audit data.Improved Consultancy: CAs can harness AI technology to offer personalized and value-added consultancy to their clients including legal compliance, tax planning, portfolio management, and business strategy development.Audit and Assurance: The quality of audit services has been greatly improved by AI technologies for both auditors & organizations. They help CAs in various ways like Fraud Detection, Risk Assessment, Continuous Monitoring, Compliance Assurance, Predictive Analytics and Enhanced Reporting.Legal Compliance: AI technologies can help CAs to ensure compliance with law, standards, guidelines, rules, regulations, and accounting principles by automating compliance checks, monitoring regulatory changes, and facilitating legal reporting and disclosure requirements.Continuous Learning: Integration of AI in audit practice creates plenty of opportunities for CAs to enhance their knowledge and expertise through continuous learning and professional development in areas like Robotic Process Automation (RPA), Natural Language Processing (NLP), Data Mining, Machine Learning, Data Analytics and Visualization, Anomaly Detection, Chatbots and Virtual Assistants, Automated Financial Reporting System, AI-Powered Audit Tools and Financial Health Monitoring Tools.Knowledge Management: Knowledge Management when integrated with AI tools like ChatGPT, provides CAs with an invaluable opportunity to acquire and manage tacit and explicit knowledge.By embracing these AI-based opportunities, CAs can position themselves as trusted advisors and strategic partners to drive innovation, enhance efficiency, and deliver value-added services in the increasingly digitized and data-driven world of auditing.ChallengesHere are some challenges that AI presents to the CAs in their auditing, certification, and consultancy functions:Accuracy and Reliability: The AI algorithm gives results according to the objectives for which data is trained. If the data is biased or incomplete, the algorithm will mirror those biases leading to inaccurate results. CAs must carefully validate and interpret AI-generated outputs to ensure that they are aligned with the requirements.Regulatory Compliance: In an increasingly complex and data-driven digital world, regulatory compliance has evolved into a multifaceted challenge for businesses across diverse industries. AI-driven practitioners are no exception to this for compliance requirements of various applicable laws, standards, and guidelines.Data Privacy and Security: AI systems rely on large databases for training and decision-making purposes. It raises concerns about data privacy and security. CAs must address privacy risks associated with sensitive financial information and ensure AI systems\' security to prevent unauthorized access or data breaches.Human-AI Collaboration: Integrating AI into auditing and consultancy workflows requires effective collaboration between CAs and AI systems in trust and transparency, communication and coordination, bias and fairness, and system integration. Lack of collaboration in these areas poses challenges in real practice.Rapidly Growing AI Technology: AI technologies are growing rapidly and exponentially. Within a month a new technology becomes obsolete because AI is developing itself through machine learning. CAs are facing challenges in grasping advanced natural language processing, AI-driven personalization, explainable AI (XAI), quantum computing AI, and generative AI technologies.Unintentional Adoption Resistance: Unintentional adoption resistance of AI occurs when individuals or organizations hesitate to integrate AI due to fear of job loss, lack of understanding, or concerns about ethical implications and data security.Addressing these challenges requires a proactive approach from CAs regarding ongoing education, collaboration with AI experts, and the development of robust governance frameworks to ensure the responsible and ethical use of AI in auditing, certification, and consultancy work.Road AheadThe intersection of AI and the accounting profession provides both unprecedented opportunities and complex challenges to CAs. The advancement of AI technologies, exemplified by models like ChatGPT, has the potential to revolutionize accounting practices by offering CAs powerful tools to enhance efficiency, accuracy, and value creation in their roles. From data analysis and interpretation to predictive analytics and process automation to client advisory services, AI opens new horizons for CAs to deliver innovative solutions and strategic insights to their clients.However, the integration of AI in accounting has also raised ethical, regulatory, and societal concerns. Issues such as algorithmic bias, data privacy, and regulatory compliance underscore the importance of ethical standards and the need for continuous professional development amid evolving technological disruptions. It\'s not rational to view AI-enabled tools like ChatGPT, which can neither be called evil nor a panacea at this stage.ConclusionThe emergence of AI is an opportunity and not a challenge for the CAs. In the journey towards realizing the full potential of AI, CAs require collaboration, innovation, and a steadfast commitment to ethical values and professional integrity. By embracing these principles and harnessing the transformative power of AI technologies responsibly, CAs can continue to play a vital role in driving organizational success, fostering financial integrity, and creating value in the ever-evolving landscape of their audit and certification functions. The future will witness a synergy between AI and human expertise, leading to more efficient, insightful, and proactive roles of CAs in the accounting profession as \'partner in nation-building\'.References:Abu Huson Y., Sierra-García L., and Garcia-Benau M. A. (2023). \'A bibliometric review of information technology, artificial intelligence, and blockchain on auditing\'. Total Quality Management & Business Excellence, 35(1-2), pp. 91-113.Das Kumar P. (2021). \'Impact of Artificial Intelligence on Accounting\'. Sumerianz Journal of Economics and Finance, (41), pp. 17-24.Farhat F., Sohail S. S. and Madsen D. O. (2023). \'How trustworthy is ChatGPT? The case of bibliometric analyses\', Cogent Engineering, 10:1, pp.1-8.Mat K., Ain N., Hani N., Nur S. and Ali M. M. (2024). \'The Impact of Artificial Intelligence on Accounting Profession: A Concept Paper\'. Business Management and Strategy, 15(1), pp. 34-34.Moll J., and Yigitbasioglu O. (2019). \'The role of internet-related technologies in shaping the work of accountants: New directions for accounting research\', The British Accounting Review, pp. 1-20.Odonkor B., Kaggwa S., Ugomma P. U., Hassan A. O. and Farayola O. A. (2024). \'The impact of AI on accounting practices: A review: Exploring how artificial intelligence is transforming traditional accounting methods and financial reporting\'. World Journal of Advanced Research and Reviews, 21(1), pp.172-188.Tiron-Tudor A, Dontu A. N. and Bresfelean V. P. (2022). \'Emerging Technologies\' Contribution to the Digital Transformation in Accountancy Firms\', Electronics, 11, 3818, pp. 1-20.Author may be reached at sanjeevkrsn@gmail.com and eboard@icai.in
Ep. 309 — Artificial Intelligence in Accounting: Balancing Sustainability and Ethical Considerations
CA Journal
· September 2026
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Artificial Intelligence in Accounting: Balancing Sustainability and Ethical ConsiderationsIn an era where sustainability is increasingly becoming a cornerstone of business strategy, the integration of Artificial Intelligence (AI) for accounting, audit, and governance purposes offers transformative potential. AI\'s ability to analyze vast amounts of data, optimize processes, and forecast trends presents unprecedented opportunities for businesses to drive sustainable practices. However, this technological advancement is not void of ethical concerns that must be addressed to ensure responsible and equitable use. As AI reshapes industries, understanding its integration into accounting, auditing, and control processes to promote sustainability, exploring the impact it creates, and navigating the ethical challenges it presents, are crucial steps toward building a future where technology, governance, and sustainability go hand in hand.IntroductionArtificial Intelligence, more popularly known as AI, has been a topic of discussion since John McCarthy introduced it in the 1950s and has been credited at times as the fourth industrial revolution. However, the idea of \"machine intelligence\" or \"artificial intelligence (AI)\" was already being explored as early as the mid-1940s by Alan Turing. Today, AI can be defined as \"machines that are capable of intelligent behaviour and are programmed to perform tasks that normally require human intelligence, such as pattern recognition, learning from experience, decision-making, and problem-solving\".AI is capable of transforming practices and processes, opening up new frontiers for businesses, practitioners, professionals, and governments to address major societal issues, including the issue of sustainability. By leveraging AI, organizations can analyze complex data sets, optimize resource use, anticipate future trends, and reduce waste. It is vital for business owners and top management to comprehend the impact of AI on their operations. The use of AI in decision-making processes, particularly those affecting governance and business sustainability, raises questions about transparency, accountability, and fairness. If the data is incomplete or biased, the decisions made by AI can perpetuate or even exacerbate existing inequalities. Furthermore, the environmental impact of AI itself cannot be ignored; the energy consumption required to power AI systems, particularly in data centres, is substantial.Transformational Impact of AI on Business and SocietyThe impact that AI has on business and society is profound and multifaceted, influencing everything from daily operations to global competitiveness. Below are key areas where AI is making a significant difference:Transformation of Business OperationsAI is transforming business operations by automating tasks and enhancing efficiency. Many companies use AI to streamline supply chains, optimize delivery routes, and manage inventory, enabling them to adapt to disruptions like pandemics. This also promotes sustainability by reducing fuel consumption and waste. In finance, automation tools like Robotic Process Automation (RPA) are being utilized to cut costs and minimize errors, while robo-advisors streamline portfolio management.Creation of New Business ModelsAI is driving innovation, transforming industries, and promoting sustainability. Many renowned companies offer AI-as-a-Service (AIaaS), enabling businesses to leverage advanced AI tools without developing them in-house. Start-ups utilize AI for on-demand medical imaging, improving diagnostic efficiency. E-commerce platforms use AI to personalize shopping experiences, optimize supply chains, and minimize overproduction.Impact on EmploymentAI\'s impact on jobs is twofold: It displaces some roles while creating new ones in AI and data science. The increasing integration of AI is leading to a reduction in traditional labor-intensive roles while simultaneously creating demand for specialized positions requiring advanced skills. This shift underscores the importance of reskilling and upskilling initiatives.Impact on Global CompetitivenessCurrently, the USA and China lead this AI race, each investing billions in AI research to gain strategic advantages. China\'s \'New Generation AI Development Plan\' aims to make it the global leader in AI by 2030, while the U.S. seeks to maintain its technological edge through the National AI Initiative Act. Nations with advanced AI infrastructure are set to dominate global markets, while those without may struggle to compete, exacerbating global inequality.Customization and Privacy ConcernsAdvanced medical data analysis platforms are revolutionizing healthcare by personalizing treatment plans and promoting sustainability. However, they raise privacy concerns due to the handling of sensitive patient information. AI\'s capacity to process vast amounts of personal data has also fuelled the growth of surveillance systems in smart cities, risking privacy and civil liberties.Shaping Future Societal Norms and ValuesAI is reshaping human-machine interaction, influencing trust, dependency, and human agency. Tools like OpenAI\'s DALL-E, which co-create art and music, are altering perceptions of creativity and trust in AI systems. Ensuring AI operates sustainably and responsibly is crucial for building public reliance and fostering effective human-AI collaboration.Long-Term Implications and SpeculationsThe rise of AI super intelligence raises deep concerns about future power dynamics between humans and machines. AI\'s ability to automate large portions of the economy could displace human labour on an unprecedented scale; therefore, concepts like universal basic income (UBI) are gaining traction as potential solutions. Several countries, including the USA, Canada, and Finland, have tested UBI pilots. Additionally, while AI significantly contributes to sustainability by optimizing energy use, the energy demands of AI systems themselves present challenges necessitating innovations to enhance energy efficiency.Accounting Education Must Adapt to Advancements in AIArtificial Intelligence, Machine Learning, and Cloud Computing are transforming the accounting industry by automating tasks like data analysis, complex calculations, and financial forecasting. Future accountants must be armed not only with technical expertise but also with a deep understanding of AI\'s impact on financial decision-making, risk management, and regulatory compliance. Accounting education must undergo a significant transformation to keep pace with advancements in AI. Educators need to integrate AI-related coursework into curriculums, emphasizing data analytics, machine learning, and ethical AI usage. If global reports are to be believed, 30% of auditing firms are in the contemplation phase of using AI, with 8% already implementing it and 13% planning to do so.Ethical Implications of AI Utilization by ProfessionalsCorporate GovernanceAI systems in corporate governance must prioritize transparency and explainability, offering clear insights into their decision-making processes. Addressing bias and ensuring fairness is critical, as AI systems can inherit biases from historical data or design flaws. Regular audits and fairness-enhancing interventions are essential to prevent discriminatory outcomes.ComplianceThe AI tools to be used in compliance must maintain high accuracy and reliability to avoid errors like false positives or overlooked violations. Robust validation mechanisms, such as cross-referencing the AI outputs with manual audits or peer reviews, are essential. Additionally, compliance AI systems must strictly adhere to data privacy regulations employing encryption and anonymization techniques.Statutory AuditLeveraging AI in statutory audits can provide significant advantages, including enhanced accuracy and efficiency in analyzing large and complex financial data. However, auditing professionals must ensure that these tools adhere to stringent data privacy standards. A balance between technological capabilities and professional oversight will ensure that AI supports accurate, reliable, and sustainable audit practices.AccountingAI systems need to be crafted to prevent biases that could distort financial reports. Regular audits to detect and correct biases, alongside the usage of diverse data sets and fairness algorithms, are essential. Human oversight remains vital to verify and review AI outputs, preserving accuracy and ethical standards in financial reporting. AI-driven accounting systems must comply with established accounting standards like Ind AS, IFRS, or GAAP.Business SustainabilityAI\'s most significant contribution lies in advancing sustainability by optimizing resource utilization, minimizing waste, and enhancing operational efficiency. AI can enhance supply chains through accurate demand forecasting, which leads to more efficient resource management. To further support sustainability, AI systems are required to be developed with energy efficiency in mind.ConclusionIn conclusion, Artificial Intelligence is profoundly reshaping the accounting industry, transforming how tasks such as data analysis, complex calculations, and financial forecasting are performed. Undoubtedly, AI\'s integration is driving significant improvements in efficiency, innovation, and sustainability within these fields. However, these advancements also present challenges, highlighting the necessity for reskilling and upskilling the workforce to adapt to emerging roles. Ethical considerations, including data privacy, algorithmic bias, and the necessity for human oversight, are crucial factors. Ultimately, while AI presents transformative potential, striking the right balance between technological progress and social responsibility is crucial for making sure that AI benefits are achieved in a way that fosters a sustainable and equitable future.References:Biswas., A. (2024, May 1) No, not UBIquitous yet. The Economic Times.Fedyk, A., Hodson, J., Khimich, N., & Fedyk, T. (2022). Is artificial intelligence improving the audit process?. Review of Accounting Studies, 27(3), 938-985.Flores, M. (2018, December 18). AI Innovators: Medical imaging startup helps radiologists detect diseases. Forbes.Khakurel, J., Penzenstadler, B., Porras, J., Knutas, A., & Zhang, W. (2018). The rise of artificial intelligence under the lens of sustainability. Technologies, 6(4), 100.Krauss, P. (2024). What is Artificial Intelligence?. In Artificial Intelligence and Brain Research.Mitchell, C. (2024, April 8). Microsoft, Google, & Other Major Tech Firms Pledge to Reskill Employees At Risk from AI. CX Today.O\'Sullivan, I. (2024, August 6). The Companies That Have Already Replaced Workers with AI in 2024. Tech.co.Sahota, N. (2024, April 22). The Dawn of a New Era: AI\'s Revolutionary Role in Accounting. Forbes.Stewart, N. (2024, February 20). How AI is impacting the accounting and finance sector. microsourcing.Thomson Reuters (2024, August 14). How are different accounting firms using AI? Tax & Accounting Blog Posts by Thomson Reuters.Wakefield, J. (2016, May 25). Foxconn replaces \"60,000 factory workers with robots.\" BBC News.Author may be reached at eboard@icai.in
Ep. 310 — Role of Indian Chartered Accountants in Shaping Global Accounting Standards
CA Journal
· September 2026
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Role of Indian Chartered Accountants in Shaping Global Accounting StandardsIt is worth noting that the accounting profession is a cornerstone of financial transparency and economic growth in any country. It serves as the backbone of financial systems worldwide - ensuring transparency, trust, and accountability in financial transactions. By upholding these values, Chartered Accountants (CAs) play an essential role in making India a global accounting leader.Both domestically and globally, Indian Chartered Accountants (CAs) have made a substantial contribution to the growth and development of the accounting profession. They have established themselves as an essential part of the financial ecosystem because of their technical expertise, integrity, and commitment to high ethical standards. Further, by virtue of their adaptability to the changing economic and regulatory environments, Indian CAs have significantly influenced the evolution of good accounting practices.The globalization of the world economies in the current business environment has necessitated the development and adoption of universal accounting standards. These international accounting standards ensure consistency, transparency, and comparability in financial reporting across countries, thereby fostering trust and facilitating international trade and investment. Indian Chartered Accountants (CAs) have also played a significant role in influencing and contributing to the evolution of global accounting standards. Their expertise, commitment, and active involvement in international collaborations have positioned them as key contributors to shape the global accounting landscape.Smooth and successful implementation of Indian Accounting Standards (Ind AS) that are converged with International Financial Reporting Standards (IFRS), reflects Indian Chartered Accountants\' efforts to bring the nation\'s financial reporting system at par with international standards. Their work ensures that Indian businesses can present their financial statements in a format understandable and acceptable to international investors and regulators.In consonance with the same, the Institute of Chartered Accountants of India (ICAI) has been playing a proactive role in global standard-setting. The ICAI is a contributing member of international standard-setting bodies, such as IFRS, IAASB, IESBA, and IPSASB. India\'s growing influence in the global economy is reflected in its active participation in international accounting forums. By leveraging these global platforms, Indian Chartered Accountants contribute their insights and recommendations to shape global accounting standards.Indian CAs play a crucial role in representing the country\'s interests in these forums, ensuring that global standards consider the needs and challenges of emerging economies. This advocacy helps create a more equitable and inclusive global accounting framework. In essence, by taking part in research projects and policy discussions, Indian Chartered Accountants help shape international accounting standards. Their knowledge aids in the development of inclusive policies that consider a range of economic realities.As is well known, one of the primary objectives of the global accounting standards is to enable comparability of financial information across jurisdictions. Indian CAs contribute by ensuring that the standards adopted in India are consistent with global practices while addressing unique domestic requirements. Precisely, because of this reason - ICAI recommended convergence to IFRS, rather than \'adoption of IFRS\'. This balance helps multinational corporations operating in India to streamline their financial reporting processes, reducing complexities and fostering confidence among global stakeholders.Further, Indian CAs have emerged as thought leaders in implementing IFRS across diverse sectors. By developing comprehensive training programs, and industry-specific solutions, Indian Chartered Accountants have set benchmarks for IFRS adoption in emerging economies. Indian CAs have a growing presence in international standard-setting bodies. Their active participation in consultations, feedback sessions, and research initiatives ensures that the perspectives of emerging markets like India are well represented.Additionally, their mentorship and training initiatives prepare future professionals to meet the demands of a globalized economy. Indian CAs are instrumental in fostering economic growth by supporting businesses of all sizes. They offer strategic advice on financial planning, risk management, and resource optimization, helping organizations achieve long-term sustainability. Indian Chartered Accountants also assist startups and SMEs in securing funding, improving financial efficiency, and scaling operations. By enabling businesses to thrive, they contribute to job creation, wealth generation, and overall economic development.It is appropriate to reiterate to everyone in this context that Indian Chartered Accountants are renowned for their thorough training and extensive understanding of accounting, auditing, taxation, and financial management. Considering this, they are in great demand in international markets.Global accounting standards also need to change to meet new issues including digital taxes, sustainability reporting, and Environmental, Social, and Governance (ESG) disclosures. In order to solve these problems, Indian Chartered Accountants have taken the initiative to develop frameworks that incorporate non-financial measures into conventional financial reporting. Their participation guarantees that international norms are progressive and able to handle the intricacies of contemporary economies.In today\'s tech-driven world, the integration of technology into financial reporting has become a cornerstone of modern accounting. Indian CAs have demonstrated leadership in adopting and promoting technological advancements such as blockchain, Artificial Intelligence (AI), and data analytics in accounting practices. Their efforts ensure that global accounting standards remain relevant in an increasingly digitalized world, thereby facilitating efficient and transparent financial reporting.To conclude, Indian Chartered Accountants have played a transformative role in shaping global accounting standards. Their technical expertise, ethical commitment, and ability to adapt to changing economic and technological landscapes have made them valuable contributors to the global accounting profession. Further, by bridging local and global practices, influencing standard-setting processes, and addressing emerging challenges, Indian CAs are not only shaping the future of accounting in India but also making a lasting impact on the global financial ecosystem.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 311 — Kautilya's Arthaśāstra and modern accounting and auditing
CA Journal
· September 2026
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Kautilya's Arthaśāstra and modern accounting and auditingThe ICAI is the inheritor of a unique, ancient, unparalleled culture of accounting and auditing. Over the millennia a range of international influences has been assimilated into the domestic Vedic accounting inheritance summarized in Kautilya\'s Arthaśāstra (4th century BCE). From the Hellenistic influences of Kauțilya\'s era through the Persianate empires to the modern era\'s Anglo-American influences, India\'s culture of accounting and auditing has selectively grafted branches onto its Vedic trunk. India has not simply absorbed foreign influences in a passive manner, but rather selectively integrated them into what amounts to the world\'s oldest continuous tradition of accounting and auditing. The ICAI is the custodian of a treasured tradition dating from the Arthaśāstra which, in an astonishingly fresh and relevant voice reaches out to us, across the centuries, in terms we can understand today. Kautilya\'s legacy reminds us, as we approach the Viksit Bharat target of 2047, that India and the ICAI are well positioned for a global leadership role in accounting and auditing.In this article, I suggest that the ICAI is well positioned, as we approach Viksit Bharat\'s target date of 2047, for a global leadership role in accounting and auditing. Viksit Bharat 2047 encompasses not only the economic development of India\'s financial and physical infrastructures, but also progress in a range of matters, including international politics and diplomacy, especially in the United Nations system. It also implies a heightened social responsibility: as Rabindranath Tagore constantly reminded us, India\'s national success will always be closely tied to the promotion of social equality. In addition, Viksit Bharat 2047 has strong implications for international professional practices, and accounting and auditing are fields of endeavour in which India already excels. India\'s domestic genius in these areas is ripe for a significant global impact.India\'s sui generis culture of accounting and auditing derives from both its ancient pedigree and its uniquely adaptable character. Only China and Greece possess documented histories of accounting and auditing to match the antiquity of those practices in India, but in both those countries the developments have been marked by rupture as much as by continuity. India has a far more obviously continuous history in accounting and auditing.Kautilya\'s Arthaśāstra is a convenient starting point for understanding the brilliance of India\'s inheritance of uniquely rich accounting and auditing practices. The Arthaśāstra is India\'s oldest extant text on statecraft: the most recent manuscripts date from the early Common Era but the composition of the text is generally dated far earlier. The Arthaśāstra was a blueprint for statecraft that encompassed political governance, state finances, warfare, and economics, alongside audit techniques intended to safeguard public assets from error or fraud. The Arthaśāstra defined sound accounting and auditing as central planks of the administration of socio-economic and political institutions.As with all ancient texts, there is scholarly disagreement over the Arthaśāstra\'s precise date of composition, but we would do well to follow Amartya Sen\'s judgment that it was written in the 4th century BCE, gathering and consolidating older Vedic traditions (Sen 2005). Although some historians attribute the authorship of the Arthaśāstra to several hands, there is no reason for us to dispute Sen\'s view that Kautilya was the primary author. Kautilya (also known to posterity as Canakya or Vişnugupta) served as prime minister or senior advisor to the emperor Chandragupta Maurya (350-295 BCE). If Kautilya was the organizing genius behind Chandragupta\'s powerful, centralized state, the Arthaśāstra was clearly his masterful policy book.The Arthaśāstra is divided into 180 \"topics\", spread over 15 sections, or \"books\". Our interest in Kautilya\'s masterwork resides mainly in Book Two, titled \"On the Activities of Superintendents\", that covers topics 19 to 56. Book Two provides a treatment of accounting practices, internal controls, and verification practices of surprisingly enduring value. The emphasis of Book Two is on the activities of bureaucrats charged with securing and controlling the state\'s revenues (Mattessich 1998), and the procedures it advocates to safeguard state finances. In their precision and sophistication these procedures adumbrate many of the modern principles of accounting and auditing practices (Bhattacharyya, 1989). Let us consider some of the Arthaśāstra\'s most striking passages.In words that resonate with professional auditors today, Kautilya memorably warned us that \"just as it is impossible to know when fish, moving about in water, are drinking water, so it is impossible to know when officers, appointed to carry out tasks, are embezzling money\" (Topic 27). The danger of fraudulent and corrupt practices is a perennial aspect of the human condition, no less today than in Kautilya\'s time, and in the Arthaśāstra accounting and auditing practices are crafted accordingly to minimize risks. One way of both preventing and detecting acts of fraud by those responsible for the custody of attractive assets is to \"shuffle\" individuals \"among different tasks\" (Topic 27), a prudent approach known today as the segregation of responsibilities (or duties). By denying individuals the continuous, untrammeled supervision of attractive assets, we reduce the opportunities for theft. Kautilya lists 40 methods for the misappropriation of assets (Topic 26): this very comprehensive list is indicative of the large variety of techniques used by crafty fraudsters. The Arthaśāstra does not present its list of asset misappropriation methods as a checklist to be ticked off, but rather as a thought-provoking reminder of the variety of possible manifestations of this crime.Kautilya is also interested in standardizing measurements, for comparability purposes. In calling for \"standard weights and measures\" (in Topic 37) he realizes that standardization is a prerequisite for reliable accounting and auditing. Another aspect of standardization is the application of consistent principles to the measurement and valuation of assets. In an era in which the adequacy of food storage often meant the difference between survival and starvation for the general population, Kautilya emphasizes the importance of measuring changes in the volumes of foodstuffs. For example: \'the amount of gain or loss that different types of grain undergo when they are pounded, ground, milled, and fried, and when they are soaked, dried, or cooked\' affects their periodic measurement (Topic 33). This hints at the ways in which modern cost accountants assess the shrinkage of perishable foodstuffs. Kautilya also advises the state\'s Chief Goldsmith to ensure the consistent quantity and quality of the gold under his purview, but Kautilya does give space for \"depletion and wear\" (Topic 32). This is a clear indication of the concept of depreciation applied to fixed assets, and specifically to gold as a store of wealth, and it is consistent with modern accounting practices.In terms of accruals accounting, the manner in which accounting transactions are allocated to the time periods most closely related to underlying occurrences, rather than to the more arbitrary timings of related cash flows, Kautilya encourages an accruals basis for the recognition of the state\'s revenues. He describes income as comprising three elements: \"the current, the miscellaneous, and the arrears\", defining the latter as \"carryovers from the previous year\" (Topic 24). This has clear affinities with revenue recognition concepts embodied in modern financial reporting standards. Kautilya also sets out strict parameters for defining accounting periods, presumably to ensure a rigorous cut-off of transactions, and he refers to \"estimated revenue\", an indication of the importance of budgetary control through variance analysis (also Topic 23). He also emphasizes the importance of ensuring the completeness of consolidated accounts (Topic 25), and this is related to maximizing customs duties (Topic 28). From these examples we can see how Kautilya promotes tight accounting controls over the state\'s revenues.A fuller analysis of the Arthaśāstra\'s guidance for sound accounting and auditing practices would require a substantial book-length treatment. But our brief review indicates that the Arthaśāstra is a starting point for understanding the role of accounting and auditing in protecting the public interest in ancient India. In addition to being a national treasure of India, it also has a universal significance as an early expression of timeless principles.The Arthaśāstra\'s contents have been described as undoubtably Vedic in nature (Saputra & Anggiriawan, 2021). On to this Vedic conceptual bedrock India has assimilated foreign accounting and audit practices during more than two millennia, from the Hellenistic culture of Alexander the Great (introduced to India during Kautilya\'s lifetime) to the centralizing tendencies and Persianate culture of the Delhi Sultanate and the Mughal Empire to the Anglo-American culture of the modern era. Let us briefly consider these waves of foreign influences.In 324 BCE, three years before Chandragupta established the Maurya Empire, for which the Arthaśāstra (as we have seen) was the administrative blueprint, Alexander the Great abandoned his recent invasion of India. Alexander\'s incursions into the subcontinent had caused immense political, economic, and cultural upheavals, and the Arthaśāstra has been described as a means of reordering the Indian polity following the Hellenistic disruption (Rao 1958). The Greek military invasion of India was accompanied by the arrival of a broader, eclectic Hellenistic culture in which strong Egyptian and Persian influences were discernable (O\'Regan 2024a). Indeed, Alexandrine Hellenistic influences had probably the first major, external impact on Vedic statecraft, undoubtedly including accounting and auditing techniques to safeguard public finances. Some of these Hellenistic influences may well have found their way into the near-contemporary Arthaśāstra.In the Islamic period, notably the Delhi Sultanate and the Mughal Empire (together lasting from the early thirteenth to the mid-nineteenth centuries of the Common Era), new accounting and auditing practices were introduced to India. The two Persianate regimes possessed increasingly centralized administrative tendencies, and they introduced new currencies, measurements, accounting practices, and auditing procedures. The Mughals in particular deployed meticulous accounting records and auditing routines (Pollock and Elman 2018). This period of India\'s history culminated in Emperor Aurangzeb\'s Fatawa \'Alamgiri, developed by 500 Islamic scholars, Indian and non-Indian. The Fatawa \'Alamgiri was the Mughals\' Islamic response to the Vedic Arthaśāstra in that it covered the essence of statecraft - political governance, warfare, taxation, legal matters, and economic policies and regulations. And, of course, the safeguarding of state funds through rigorous accounting and auditing procedures.In the modern era, the main influences on India\'s traditions of accounting and auditing have been Anglo-American. In the British colonial period, under both the East India Company (the hundred years from 1757 to 1857) and the near-century long Crown Rule in India (from 1858 to 1947), the formal institutional structures of Anglo-Scottish accounting and auditing were introduced to India. Following Britain\'s Joint Stock Companies Act of 1844, the remarkable rise of the institutes of chartered accountants in the United Kingdom (Matthews et al., 1998) were mirrored in India, and the ICAI of course traces its origins to affinities with its Anglo-Scottish cousins. Alongside the development of the statutory audit, more informal British auditing practices also arrived in India, through the railways. The chartered accountants\' audit focus was on providing opinions on financial statements, while the railway companies developed the less formal \"bookkeeping\" audit. The latter audit consisted of verifications and spot checks undertaken largely by individuals without formal training in accounting and auditing, with the objective of controlling the notoriously risky revenues of the sprawling railway systems. The \"bookkeeping\" audit was a form of proto-internal auditing, and modern internal auditing is a field in which India has distinguished itself in the twentieth and twenty-first centuries. Following the British colonial era, the United States has dominated both financial auditing and internal auditing internationally, and India has assimilated what it considers to be the best elements of the American professional accounting and auditing bodies.In summary, the uniqueness of modern Indian accounting and auditing is derived from both a rich Vedic bedrock of theory and practice, and an assimilation of selected foreign influences. Indian accounting and auditing have never been inward-looking, but rather responsive to international \"best practices\", to use a modern expression. In this way, India has preserved the continuity and flexibility of its accounting and auditing culture.More recently, the independent strength of India\'s accounting and auditing culture has risen to the challenge of modern internal auditing. We have noted that modern internal auditing originated from the humble \"bookkeeping audit\" of England\'s and India\'s railway companies, but today the Institute of Internal Auditors (IIA), an organization based in the United States, claims global pre-eminence for its brand of internal auditing. The IIA promulgates \"global\" professional standards. In India, however, the ICAI has developed Standards on Internal Audit for its members. The principles-based nature of the ICAI\'s Standards on Internal Audit provides India with a protective shield against the international ambitions of the IIA\'s increasingly prescriptive and formulaic standards. In this era of North America\'s checklist-based, unimaginative, and mechanistic style of global internal auditing, the ICAI\'s standards offer a more fluid, creative, principles-based approach, not unlike that of Kautilya\'s Arthaśāstra two and a half millennia ago. The Institute of Cost Accountants of India, the ICMAI, has also issued high-quality, principles-based Internal Audit & Assurance Standards, adding to the effervescence and sui generis nature of India\'s approach to internal audit. No other country in the world has developed two domestic, credible sets of internal audit standards on a par with, or perhaps superior to, the IIA\'s standards (O\'Regan 2024b).In conclusion, we should discern in the ICAI a vehicle for preserving, safeguarding, and enhancing India\'s millennia-old traditions of accounting and auditing. These traditions, unparalleled anywhere else in the world, bestow on the ICAI (as with the Arthaśāstra) the status of a national treasure of India. This bodes well for the future global influence of the ICAI and its activities. Viksit Bharat 2047 aims to solidify both India\'s hard economic realities and the softer skills of professional expertise. The ICAI, as inheritor of the Arthaśāstra\'s wisdom, is well-positioned for these aims.References:Bhattacharyya, A.K. (1989). Modern Accounting Concepts in Kautilya\'s Arthaśāstra. Calcutta: Firma KLM.Mattessich, R. (1998). \"Review and extension of Bhattacharyya\'s modern accounting concepts in Kautilya\'s Arthaśāstra\". Accounting, Business and Financial History, Volume 8, Issue 2: 191-209.Matthews, D., M, Anderson and J.R. Edwards. (1998). The Priesthood of Industry: The Rise of the Professional Accountant in British Management. Oxford: Oxford University Press.Olivelle, P. (2013). King, Governance, and Law in Ancient India: Kautilya\'s Arthaśāstra. Oxford: Oxford University Press. Olivelle\'s translation of the Arthaśāstra is the best currently available, and the quotations I provide in this article are taken or adapted from it.O\'Regan, David J. (2024a). \"India\'s unique internal audit culture: History, philosophy, and innovation.\" International Journal of Auditing and Accounting Studies (IJAAS). Vol. 6, No. 3, 425-440.O\'Regan, D. (2024b). The Closing of the Auditor\'s Mind? How to Reverse the Erosion of Trust, Virtue, and Wisdom in Internal Auditing. Boca Raton, FL: CRC Press.Pollock, S., and B. Elman (eds.) (2018). What China and India Once Were: The Pasts that May Shape the Global Future. New York: Columbia University Press.Rao, K. (1958). Studies in Kautilya, 2nd ed. Delhi: Munshi Ram Manohra Lal.Rich, B. (2010). To Uphold the World: A Call for a New Global Ethic from Ancient India. Boston, MA: Beacon Books.Saputra, K.A.K., and Anggiriawan, P.B. (2021). \"Accounting, auditing and corruption in Kautilya\'s Arthasastra perspective and psychogenetic Hindu: a theoretical review.\" South East Asia Journal of Contemporary Business, Economics and Law, Vol. 24, Issue 2: 67-72.Sen, A. (2005). The Argumentative Indian: Writings on Indian History, Culture and Identity. New York: Picador.Author may be reached at davidjosephoregan@gmail.com and eboard@icai.in
Ep. 312 — Outsourcing: India Calling!
CA Journal
· September 2026
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Outsourcing: India Calling!The article highlights India\'s ascendance as a global leader in outsourcing, particularly in finance and accounting. It examines what are the major motivational factors for a country to outsource and how Indian firms can position themselves to take advantage. It explores different outsourcing models and provides a critical analysis of how firms can effectively utilize them. The article cautions and emphasizes the need for continuous skill upgrades in key critical areas and details the same for ease of reference. The article has been presented in a tool-kit format for the firms to have a bird\'s eye view of things they need to take advantage of this global opportunity.BackgroundOutsourcing, in simple language it is the practice of delegating certain tasks, processes, or services to an external organization or third party, instead of performing them internally; the location does not matter whether it is the same or another country. While we primarily assume that outsourcing is done for cost reduction, there are a few other critical reasons too - i) for generating time to focus on core activities, ii) accessing specialized expertise not available internally, or which is not economically viable to have internally, or iii) just to improve overall efficiency.Outsourcing originated in the late 20th century with the rapid expansion of globalization and advancements in technology to enable outsourcing. Initially, it started with manufacturing, where the developed world started shifting core labour-intensive production lines to nations with lower labour costs, such as China and Mexico. However, with the advent and rise of the internet during the 1990s, even service-based tasks like customer support, IT services, etc started getting outsourced.Today, technology has advanced so much that outsourcing includes everything - IT, healthcare, finance, logistics, you name it and it is getting outsourced; not only for costs but other reasons as stated above. India, Philippines, China, and Eastern European countries like Poland and Ukraine are popular outsourcing destinations with each having its own area of expertise.India as an outsourcing majorIndia is often referred to as the \"World\'s Outsourcing Hub\". It has come a long way from a plain vanilla traditional call-centers based Business Process Outsourcing (BPO) hub to become a sophisticated Global Capability Centres (GCC) for the world. In this article, we will specifically focus on the Finance and Accounting Business Process Outsourcing (F&A BPO) Market.As per the SNS Insider Research 1, the F&A BPO market had a value of US$ 60.93 billion in 2023 and is projected to reach US$ 134.65 billion by 2032, reflecting a significant compound annual growth rate (CAGR) of 9.22% over the forecast period of 2024-2032. As per industry estimates, the Indian accounting outsourcing market constitutes approximately 50% of the global accounting outsourcing market and is growing. This presents a significant opportunity for the Indian accounting industry to capture a big slice of global growth.Developed world motivations and India\'s positioningGenerally developed world or high-cost countries are looking to outsource the finance and accounting for the below major generic reasons and India is well positioned to ensure that those reasons are well taken care of.Technological Expertise: Access to latest analytics and tools without investmentsCost Efficiency: Lower Labour costs & No infrastructure requirementsCore Business focus: To focus resources and attention on strategic business areasAccess to Skilled Talent: Access to English-speaking qualified professionals, handling global laws & regulationsCost Predictability: Fixed fees or hourly rates basis, resulting in costs controlScalability & Flexibility: 24/7 Availability & Absence of commitment of permanent hiresHowever, it is very important to do further country-specific research at the time of pitching for businesses in that particular country.Key nuggetsBusinesses that outsource their accounting functions to Indian outsourcing companies easily save upwards of 50-60% on their accounting costs.India has the largest accounting workforce in the world with over 10 million accountants and bookkeepers.90% of Fortune 500 companies outsource their accounting function to India.Various models being deployedIn general, there are 4 basic models via which the companies are outsourcing finance and accounting works to India. These are critical to understand as each has different target customers and depending on their own capabilities and customers\' requirements different models need to be deployed.Table 1CriteriaCaptive GCC (Global capability centres)Global Outsourcing CompaniesTie-up between target country accounting firms with Indian firmsDirect outsourcing to Indian accounting firmsMode of WorkingMNCs setting up their own in India for their global businessesCompanies (Cos) outsourcing to global CosOutsourcing to accounting firms in local countries & they in turn tie-up with firms in IndiaCos directly outsourcing with local accounting firms in IndiaSize of CustomersLarge MNCsMNCs & Big Local CompaniesCPA firms, generally medium to smallSmall & Medium enterprisesOpportunitiesNot Applicable for Accounting firms. But create large employment for accountants.Generally, not much for accounting firms due to scale challenges. But create large employment for accountants.High & cost-effective for accounting firms. Source & tie-up with the accounting firms in the target country.High to Medium. Need to maintain a presence in the target country.FeasibilityNot ApplicableVery high investments needed to set up such a scaleRelatively fewer investments needed as sourcing is done locally by local firms. Margins are a bit less though for Indian firms.Investments in setting up presence & marketing in the target country. Margins are relatively better for Indian firms.Key skills to be upgraded to maintain competitive advantageTo maintain India\'s position as a global hub, accountants need to continuously upgrade their skills to stay competitive and need to adapt to newer technologies & regulations. While it\'s a continuous evolution and learning journey with ever changing skill set requirements and thus demanding agility, the essential skills required to play a pivotal role and effectively address the diverse and evolving needs of international clients include:Upgrading to Higher End Services: Data Analytics & Data modelling, Strategic Advisory & Consulting, Innovative SolutionsTechnological Expertise: Understanding Artificial Intelligence Tools & Blockchain technologies, Robotic Process Automation, Machine Learning, Accounting Automation SoftwaresInternational Regulations: IFRS, GAAP, Country specific accounting regulations, Global & Country Specific Tax Regulations, Evolving ESG and Sustainability Standards, Regulatory Compliance Knowledge like US SOX, etcDevelopment of Newer Centres: Building Capabilities to develop beyond Tier 1 cities (Bangalore, Hyderabad, NCR, among other), New Tier-2 and Tier 3 cities to be further groomed (Kochi, Ahmedabad, Jaipur, etc)Soft Skills and Communication: Cross-cultural Understanding, Negotiation & Communication Skills, Team Coordination, Change ManagementConclusionIndia\'s dominance in global outsourcing, particularly in areas like accounting and digital transformation, stems from its cost-effectiveness, skilled workforce, and technological innovation. While countries like the Philippines, Vietnam, Eastern European Nations, etc., are emerging as strong contenders, India\'s scalability, innovation, and decades of experience ensure its continued leadership in the outsourcing industry. However, these are nimble-footed adversaries out there, and they are continually evolving learning, and improving in order to maintain global leadership, young accountants and firms will need to continuously innovate, embrace new technologies, adapt to regulatory changes, and enhance their skills to navigate these challenges. It\'s an ocean of opportunities lying ahead for us and we have a huge head-start, it\'s up to us how we keep driving home our advantage and reap the benefits. In summary, we must always remain proactive, and keep learning and innovating to continue delivering cost-effective solutions without compromising quality.References:https://www.globenewswire.com/news-release/2024/07/23/2917512/0/en/Finance-and-Accounting-Business-Process-Outsourcing-Market-Size-Worth-US-134-65-Billion-by-2032-Demand-for-Cost-Effective-and-Tech-Enabled-Services-SNS-Insider.html?https://wealthovation.com/resources/outsourcing-accounting-function-in-india-a-rising-trend-by-companies?utm_Author may be reached at nishantsurana@gmail.com and eboard@icai.in
Ep. 313 — India: Bridging the World, Adding Value for Global Accountancy Professionals
CA Journal
· September 2026
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India: Bridging the World, Adding Value for Global Accountancy ProfessionalsIndia, with its deep-rooted accountancy heritage, is emerging as a global leader in the profession. Powered by a skilled talent pool of over 400,000 professionals and supported by initiatives like Skill India and Make in India, the country excels in areas such as fintech innovation, ESG compliance, and AI-driven financial analytics. Indian accountants are celebrated worldwide for their technical expertise, cost efficiency, and adherence to international standards like IFRS and GAAP. By addressing skill gaps, modernising infrastructure, and fostering global collaborations, India is poised to redefine global accountancy and solidify its status as a global financial hub.India has a rich tradition of conspicuousness in the field of bookkeeping and accounting, dating back to the epochs when the concepts of finance, taxation, and management were integrated into societal systems. With its roots in ancient systems like the Arthashastra and its contemporary emphasis on rigour and ethics, the Indian accountancy profession has emerged as a global force. Over centuries, these standards have evolved into the current bookkeeping and accounting practices practiced not only in India but have become globally accepted as well.Today, Indian professionals are at the helm of some of the world\'s biggest corporations, leading finance functions, and strategies and forming economic policies. This progress is reflected in the increasing number of finance graduates and postgraduates in India. Government initiatives such as Skill India, Start-Up India, and the Make in India campaign have been instrumental in supporting this talent pool. Also, the ascent of Indian fintech organizations has transformed the global landscape, accentuating the profundity of Indigenous ability.India\'s gargantuan and energetic population is a critical benefit, providing a huge talent pool for the accounting profession. The relatively low labour cost of Indians combined with a higher literacy rate is a competitive advantage for the industry, allowing it to offer high-quality services at competitive prices. Indian accounting professionals are not only proficient at handling complex financial scenarios but are also equipped with efficient skills in data analytics, risk management, and financial technology. The nation\'s rapid strides in digital transformation, fuelled by advancements in big data, cloud computing, and artificial intelligence, have captured the attention of the world\'s largest professional services firms. These firms recognize India not only as a reservoir of skilled professionals but also as a strategic base for driving global initiatives in areas like environmental, social, and governance (ESG) compliance and sustainability.India\'s robust economic growth and its integration into international markets have created a fertile ground on the global stage, and is also creating a concrete foundation for the expansion of advanced services in taxation, audit, and advisory. The country is poised to redefine global standards in accountancy, shaping the future of a profession that is integral to the functioning of modern economies.India\'s Education Shaping Future Finance & Accounting LeadersIndia\'s education system is evolving to meet the demands of a dynamic global economy, empowering finance professionals to lead in the future. With its robust focus on commerce, accountancy, and management education, the country produces professionals adept in financial acumen and strategic decision-making. Institutions like ICAI, IIMs, and leading universities promote a mix of technical skills, strategic management, and ethical practices. The collaboration of technology, AI-driven tools, and global business norms in curricula ensures Indian finance professionals stay ahead in an ever evolving business world. Bolstered by a culture of ongoing learning and ethical practices, India keeps on empowering pioneers transforming India into a focal point for future-ready financial leadership.According to the data published by All India Review on Advanced Education (AISHE) 2020-21, the data with reference to commerce and finance field-related education in India incorporates the following:Undergraduate Commerce Enrolment: Out of the total undergraduates 13.1% enrolments are in commerce. This corresponds to roughly 43.4 lakh undergraduate students studying commerce.Postgraduate Enrolment in Commerce: Out of the total post graduates Approximately 2.64 lakh students, or 7.6% enrolments, are in the commerce field. Master of Business Administration (M.B.A.) and Master of Commerce (M.Com.) degrees totals about 11.6 lakh PG enrolments, or 22.7% of total PG enrolments.Graduates and Postgraduates students: The total number of graduates in commerce-related fields were substantial, accounting for a sizeable portion of the 95.4 lakh pass-outs in all fields in 2020-21.Specialised Institutional Growth: Over the last six years, enrolment in IITs and IIMs has mounted up by 61% in India, which may have an impact on advanced education in the field of finance and commerce.The Institute of Chartered Accountants of India. (ICAI) has made a number of foreign opportunities possible for its members:Global Presence: Roughly 15% of ICAI members are employed abroad in different nations. The Middle East, Europe, Australia, Canada, and the United States are among the regions with the highest demand for Indian certified public accountants. CA\'s proficiency in auditing, taxation, and accounting is the reason for this demand.International Collaborations: With professional associations in countries like Australia, Canada, England, etc., ICAI has signed memorandums of understanding (MOUs) and mutual recognition agreements (MRAs). These agreements acknowledge and recognize the qualifications of Indian Chartered Accountants and have opened new professional arena for them.India\'s Leadership in Accountancy and FinanceTalent Pool and Professional ExpertiseIndia is home to over 400,000 Chartered Accountants, and finance professionals trained under stringent conditions. The ICAI\'s rigorous training, which incorporates mastering the complexities of global accounting standards like IFRS (International Financial Reporting Standards) and international taxation laws, makes them significant resources for global enterprises. The Institute of Chartered Accountants of India (ICAI), a globally recognized body, has set benchmarks in professional ethics, technical know-how, and practical training. Indian accountants are celebrated for their analytical skills, problem-solving capabilities, and adaptability to global financial systems. Indian finance and accounting professionals serving outside India are estimated to constitute about 15-20% of the total finance professionals.Global ContributionsIndian professionals play a pivotal role in MNCs, consulting firms, and regulatory bodies across the globe. Global organizations have significant operations in India, utilizing Indian talent not only for home markets but additionally for international assignments.India\'s expertise is evident in areas such as:Forensic Accounting;Taxation Services;Advisory Roles.Technology and InnovationIndia has embraced technological advancements in the accountancy and finance sectors. The integration of AI, blockchain, and cloud computing in areas such as audit automation, fraud detection, and financial analytics placed India as a pacesetter in economic innovation. The Indian government\'s policies and actions, such as the Goods and Services Tax Network (GSTN) and e-Invoicing, demonstrate the successful collaboration of finance and technology on a massive scale.Indian Finance Professionals: Shaping Global Financial ExcellenceAs of recent reports, approximately 1 in 10 global finance professionals is of Indian origin. This reflects India\'s growing prominence in the international finance and accounting sectors, driven by strong technical abilities, ethical practices, innovative problem-solving, language skills, strategic acumen, and adaptability. thus, it is riding India\'s reputation as a worldwide hub for finance talent.This trend is particularly evident in MNCs, global financial establishments, and Big Four accounting organizations, wherein Indians hold top management positions. Many Indian Chartered Accountants and finance professionals occupy roles including CFOs, controllers, and finance directors worldwide.India\'s Services Industry - Driving Growth and Global ImpactThe finance and accounting sector is a key part of India\'s services industry, which contributes drastically to the country\'s GDP.Contribution to the Service Sector: The service sector constitutes 55% of India\'s GDP (FY 2024). Within this, financial and professional services are significant components.Growth Indicators: The sector benefited from rising credit inflows, with domestic bank credit growing at over 20% YoY in FY 2024. Additionally, the services PMI (Purchasing Managers\' Index) reflected robust growth, reaching 61.2 in March 2024, marking enormous business expansion.Global Services Exports: India ranked 5th globally in export of services, which consist of financial services, which accounted for 44% of total exports in FY 2024. The upward push in digitally delivered services like fintech solutions has also boosted India\'s global standing.Domestic Demand and Innovation: Domestic consumption of financial services has surged because of urbanization, digital payments, and the expansion of fintech platforms. This aligns with India\'s economic digitization efforts and government-sponsored financial inclusion programs like Jan Dhan Yojana.Taxation and Revenue: The finance sector appreciably impacts GST collections. In FY 2024, India recorded 20.18 lakh crore in gross GST revenue, showcasing the sector\'s vitality within the domestic economy.Employment and Investments: Finance sector is a significant employer, particularly in banking and financial services. It additionally draws overseas investments; the services sector accounted for 53% of total external commercial borrowings in FY 2024, including financial services.India\'s Contribution to Global GDP: As of 2023, India\'s GDP is approximately $3.73 trillion, making it the fifth-largest economy worldwide. This represents about 7% of the global GDP in nominal terms and a prominent share (about 15%) in purchasing power parity (PPP) terms.Financial Sector\'s Role in India\'s EconomyThe financial sector contributes a significant part to India\'s GDP, driven by different factors like:A rapidly growing banking network.Growth in financial technology (FinTech).Increasing foreign direct investments (FDIs) in financial services.The recorded transactions was 14.40 billion worth of Rs. 20.44 lakhs (US$ 245.61 billion) in July 2024 through Unified Payments Interface (UPI).In February 2024, the Immediate Payment Service (IMPS) recorded 534.6 million transactions, with a total value of Rs. 5.58 trillion (US$ 68.61 billion).India\'s FinTech Revolution: A $150 Billion Opportunity by 2025The National Strategy for Financial Inclusion 2019-2024 outlines the vision and primary goals of India\'s financial inclusion policies, aiming to broaden and sustain the financial inclusion process nationwide through coordinated efforts involving all stakeholders in the financial sector. And to achieve this vision, fintech and finance professionals will play a pivotal role.The Indian fintech ecosystem is a fast-evolving and vibrant sector, fueled by key drivers that are transforming the financial landscape. As one of the fastest-growing financial ecosystems, India\'s fintech sector is expanding rapidly across crucial areas such as payments, digital lending, insurtech, and wealthtech.India is home to one of the world\'s leading start-up ecosystems, and over time, it has emerged as a frontrunner in the FinTech revolution. The FinTech sector in India is well-positioned to reach an industry valuation of USD 150-160 billion in the next five years, contributing an additional value of USD 100 billion. This growth will be driven by the entry of over 50 new FinTech companies into the USD 100 million+ valuation range. To realize this potential, India will need investments totaling USD 20-25 billion over the next five years. The key factors shaping the Indian FinTech landscape include:The Indian FinTech sector is expected to reach a value of US$ 150 billion by 2025. With the third-largest FinTech ecosystem globally, India is also one of the fastest-growing FinTech markets in the world. Currently there are more than 2,000 DPIIT that are being recognized as Financial Technology (FinTech) businesses in India, and this number is swiftly growing.Amongst 25 nations, India\'s digital payments system has evolved the most. As per the Faster Payments Innovation Index (FPII), Immediate Payment Service (IMPS) from India was the only system across the world performing at level 5 FPII.India\'s Unified Payments Interface (UPI) has also revolutionized real-time payments and strived to increase its global reach in recent years.India\'s payment landscape is expected to reach a transaction volume of $100 trillion by 2030, with revenue from the sector potentially reaching $50 billion.The digital lending market in the country was valued at $270 billion in 2022 and is expected to reach $350 billion in the near future.India is rapidly becoming the second-largest InsurTech market in the Asia-Pacific region, with the potential for remarkable growth of up to 15 times by 2030, reaching a value of $88.4 billion.Driven by an increase in retail investors, the wealth-tech sector is projected to reach $237 billion by 2030.In the year 2020, InsureTechs and FinTech SaaS attracted investments of USD 145 million and USD 215 million, respectively, marking a 4-5x increase compared to previous years.As per BFSI, the adoption rate of fintech services in India is 87%, exceeding the global average of 64%, highlighting the sector\'s vast potential.GIFT City is building a vibrant and integrated fintech ecosystem through two groundbreaking initiatives: the GIFT International Fintech Institute (GIFT IFI) and the GIFT International Fintech Innovation Hub (GIFT IFIH).India\'s generative AI sector is rapidly emerging as a global leader, supported by a robust talent pool, increasing investments, and government policies. With a projected market growth exceeding $1 billion by 2025, Indian startups and tech giants are leveraging generative AI in healthcare, education, content creation, and customer service. The government\'s Digital India initiative and policies like the National AI Strategy are fostering innovation and collaboration.India\'s Financial Talent - A Cost-Effective Catalyst for Economic GrowthCost-Effective Talent Pool: Indian finance and accountancy experts are known for providing high-quality services at comparatively lower prices than their global counterparts. This is driven by way of:Affordable education system: India\'s finance and accountancy certifications (e.g., CA, CMA, CS) offer world-class standards at a fragment of the value of comparable certifications abroad.Lower cost of living: Indian Professionals can afford to work at competitive rates due to lower domestic expenses compared to developed nations.This affordability makes Indian professionals highly pretty sought-after in international outsourcing and offshoring markets.Global Recognition and Adaptability: Indian Chartered Accountants (CAs), Cost Accountants (CMAs), and MBAs in finance are recognized for their expertise in international standards such as:IFRS (International Financial Reporting Standards)US GAAP (Generally Accepted Accounting Principles)Taxation laws of various countriesThis adaptability allows Indian professionals to cater to diverse global markets, strengthening India\'s position as an accounting hub.Outsourcing Advantage: India has emerged as a leading destination for outsourcing finance and accounting services. The key reasons consist of:Efficient service delivery: Services inclusive of bookkeeping, financial analysis, taxation, payroll, and compliance are handled seamlessly by Indian professionals.Time zone advantage: India\'s time zone allows corporations within the US and Europe to experience overnight processing of financial tasks.Skilled workforce: A huge number of English-speaking, tech-savvy experts further boost India\'s edge in this domain.Boost to Export Earnings: The finance and accounting outsourcing industry contributes substantially to India\'s export revenue. The sector has enabled the creation of numerous jobs and brought forex earnings, driving economic growth.Contributions to Startups and MSMEsIndian finance professionals play a critical role in:Guiding startups: From the stage of funding strategies to the compliance, finance experts help startups thrive and strive.Supporting MSMEs: They assist in streamlining operations, optimizing tax liabilities, and making certain adherence to regulatory norms, strengthening the backbone of the Indian economy.Catalyst for Foreign Direct Investment (FDI): The expertise of Indian finance professionals in navigating complicated regulations and compliance provides foreign investors with confidence in India\'s economic systems and potential returns.Navigating Challenges on India\'s Path to Becoming a Global Finance and Accountancy HubIndia has the potential to become a global hub for finance and accountancy professionals, but several challenges must be addressed to realize this vision fully. Here are the key challenges India might face:Skill Gaps and Quality Consistency: Despite the large talent pool, not all professionals possess the skills required to meet global standards, particularly in areas like data analytics, AI integration, and IFRS compliance. Variations in the quality of education and training across institutions can hinder India\'s reputation as a reliable source of world-class talent.Technological Disruption: The increasing use of AI in financial processes like bookkeeping, auditing, and compliance reduces the demand for human involvement in traditional finance roles. Professionals need to continually upgrade their technical and analytical skills to remain relevant, which can be a challenge given the pace of technological advancements.Regulatory and Taxation Complexities: India\'s complex tax and regulatory environment can make it difficult for professionals to focus on global markets. Frequent changes in financial and tax laws may create uncertainty and limit India\'s ability to attract global clients.Competition from Other Countries: Countries like Singapore, Ireland, and the Philippines already have well-established reputations as global finance and accounting hubs.Infrastructure and Operational Challenges: While urban areas are well-equipped, Tier 2 and Tier 3 cities often lack robust digital infrastructure to support high-end finance and accounting services. Ensuring the security and confidentiality of sensitive financial data is critical for international clients, and India needs stricter regulations and implementation in this regard.Limited Focus on Niche Areas: India\'s finance professionals are often concentrated in traditional fields like taxation and auditing, while demand for niche skills like forensic accounting, ESG reporting, and fintech expertise is growing.Strategies to Overcome ChallengesTo make India a worldwide hub for finance and accountancy professionals, addressing diverse challenges is essential. The following strategies can be adopted to overcome these barriers:Improving Regulatory and Policy Framework: Streamline tax structures and make compliance easier for international corporations. Strengthen laws and regulations regarding corporate governance, ensuring transparency, accountability, and fair practices in financial reporting. Align Indian financial regulations with international standards (e.g., IFRS, GAAP) to improve credibility and ease global comparability.Education and Training: Increase investment in specialized training programs for finance and accountancy experts. These programs have to focus on global standards, emerging technologies, and new policies. Collaborate with international establishments to provide certifications, internships, and training programs that put together Indian professionals for international roles.Infrastructure Development: Invest in technology and infrastructure to support modern financial services. Establish specialized economic hubs that offer support services, entice global companies, and serve as centres of excellence for finance and accountancy specialists.Attracting Foreign Talent: Make policies attractive for foreign investments in the finance and accountancy sectors, reducing bureaucratic hurdles and ensuring intellectual property protection.Government Support and Initiatives: Encourage collaboration between the authorities, industry bodies, and private corporations to develop training programs, and enhance the quality of education. Provide tax benefits and incentives for businesses that adopt advanced technologies, such as AI and blockchain, in financial services.India stands at a pivotal juncture, poised to redefine the worldwide panorama of accountancy and finance. With a rich heritage of excellence, a significant and skilled skills pool, and a dedication to innovation, the country is transforming into a powerhouse in the field of finance and accountancy. By addressing key challenges, embracing technological advancements, and fostering global collaborations, India can solidify its position as the global hub for accountancy professionals.The road ahead is filled with possibilities. With sustained efforts in skilling, regulatory alignment, and technological integration, India can not only meet the evolving demands of the global economy but also lead the transformation of the accountancy profession. As the world seeks financial expertise grounded in ethics, innovation, and strategic acumen, Indian professionals are well-prepared to take the mantle of leadership.In this adventurous journey, India is not simply bridging the space between conventional and present-day practices but setting with the intention to shape the destiny of accountancy globally. With its eyes set firmly on the horizon, India is destined to become the cynosure of financial and accountancy excellence in the 21st century.References:https://socialwelfare.vikaspedia.in/viewcontent/social-welfare/financial-inclusion/national-strategy-for-financial-inclusion?lgn=en#https://www.commerce.gov.in/https://www.ibef.org/industryhttps://mospi.gov.in/51-annual-survey-industrieshttps://pib.gov.in/PressReleaseIframePage.aspx?PRID=1882145https://www.india.gov.in/topics/finance-taxes/economyAuthor may be reached at govindmishra.in@gmail.com and eboard@icai.in
Ep. 315 — Future Prospects for India as a Global Leader in Accountancy
CA Journal
· September 2026
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Future Prospects for India as a Global Leader in AccountancyIndia has a rich history of mathematicians and accountants. India\'s economic growth and its transformation into a global business hub have paved the way for the country to assert its leadership across various domains, including the field of accountancy. The accounting industry in India has undergone significant evolution, influenced by factors such as globalization, technological advancements, regulatory reforms, and the need for a dynamic and adaptable business environment. The implementation of globally aligned accounting standards like Indian Accounting Standards (Ind AS) and the growing emphasis on Environmental, Social, and Governance (ESG) reporting underscores India\'s commitment to global best practices. With a rapidly expanding economy, India has become a focal point for global investments, cross-border trade, and multinational operations, creating an unprecedented demand for robust financial management, reporting, and compliance standards. Additionally, the evolution of emerging technologies like artificial intelligence, blockchain, and data analytics has positioned India as a frontrunner in integrating innovation into accountancy. By addressing challenges such as talent development, regulatory complexities, and the digital divide, India has the potential to not only meet domestic needs but also become a global provider of high-quality accounting services. This article delves into the prospects, challenges, and strategies for India to achieve its vision as a global leader in accountancy.Current Landscape of Accountancy in IndiaIndia\'s accountancy sector is undergoing transformative changes, driven by robust regulations, a skilled workforce, and technological advancements. The current landscape highlights key factors that underscore India\'s position as a growing force in global accountancy.i. Strong Regulatory FrameworkIndia\'s accounting framework is anchored by the Institute of Chartered Accountants of India (ICAI) which is a statutory body established by an Act of Parliament. Further, regulatory bodies like the Reserve Bank of India (RBI), the Ministry of Corporate Affairs (MCA), and the Securities and Exchange Board of India (SEBI) lead the accounting and regulatory framework in the country. These institutions ensure adherence to high standards of financial reporting and compliance.The adoption of converged International Financial Reporting Standards (IFRS) through Indian Accounting Standards (Ind AS) demonstrates India\'s commitment to harmonize with global practices, fostering investor confidence, and promoting transparency in financial reporting. Regulatory initiatives such as the Goods and Services Tax (GST) and evolving corporate governance norms further strengthen the framework.ii. Expanding Talent and Skilled PoolIndia\'s accountancy sector benefits from a vast and highly skilled talent pool. Chartered Accountants (CAs), Cost Accountants, and Company Secretaries (CS) form the backbone of the industry. Institutions like ICAI ensure the availability of resource material, rigorous training, and professional development, equipping accountants with the expertise required to address domestic and international financial challenges. Increasing collaborations between Indian institutes and global organizations also enhance skill sets, making Indian professionals globally competitive.iii. Integration of Technology with Accounting and ReportingThe integration of advanced technologies has revolutionized India\'s accounting practices. Artificial Intelligence (AI), blockchain, Robotic Process Automation (RPA), and data analytics are driving efficiency, accuracy, and innovation in financial reporting. Fintech startups and established firms alike are leveraging these technologies to streamline processes, detect fraud, and enhance decision-making capabilities. The Institute of Chartered Accountants of India (ICAI) is making lot of efforts to educate members on Artificial Intelligence and other technological advancements.iv. Outsourcing HubIndia\'s competitive cost structure and skilled professionals have positioned it as a preferred outsourcing hub for accounting and financial services. From routine bookkeeping and payroll management to complex financial analysis and advisory, Indian firms cater to a global clientele, offering high-quality services with cost-efficiency.Opportunities for India in the Global Accounting ArenaIndia is poised to emerge as a global leader in accountancy, leveraging its economic growth, technological advancements, and skilled workforce. The following opportunities illustrate how India can solidify its position in the global accounting landscape:i. Globalization of BusinessesThe expansion of multinational companies into emerging markets has increased the demand for accounting professionals skilled in both local and international standards. Indian accountants, with their expertise in Indian Accounting Standards (Ind AS) which are largely equivalent to International Financial Reporting Standards (IFRS), are uniquely equipped to address this demand. As businesses navigate complex global tax laws, transfer pricing regulations, and cross-border mergers, Indian professionals can provide comprehensive solutions. This growing demand for dual expertise presents an opportunity for India to become a preferred talent pool for global businesses.ii. Growth of the Indian EconomyIndia is the fifth largest economy in the world by GDP. India\'s rapid economic growth provides a significant boost to the accounting sector. As one of the fastest-growing economies in the world, India is witnessing increased Foreign Direct Investment (FDI), entrepreneurial ventures, and startup activity. This surge in economic activity necessitates robust financial management and compliance, creating immense opportunities for accountants. The Indian government\'s initiatives to promote a business-friendly environment, such as tax reforms and ease of doing business policies, further enhance the prospects for accounting professionals. By capitalizing on these developments, India can expand its influence in the global accounting industry.iii. Digital Transformation in AccountingThe global accounting industry is undergoing a digital revolution, and India has the potential to lead this transformation. Emerging technologies like blockchain, AI, and cloud-based platforms are reshaping the way financial data is managed and analyzed. Blockchain ensures secure and transparent financial transactions, while AI enables predictive analytics and automation of routine tasks. Cloud-based platforms offer real-time data accessibility and scalability. Indian technology firms and startups specializing in financial technology (fintech) can play a pivotal role in developing innovative digital accounting solutions that cater to global markets. By focusing on research, development, and implementation of such technologies, India can position itself as a hub for cutting-edge financial solutions.iv. Leadership in Sustainability AccountingThe rising importance of ESG reporting presents a new frontier for the accounting profession. Investors and regulators worldwide are emphasizing sustainable business practices, creating a need for accountants skilled in ESG reporting and sustainability frameworks. India can take the lead by integrating ESG principles into mainstream accounting education and practices. By fostering a workforce proficient in sustainability accounting, India can cater to the growing global demand for professionals who can quantify and report on environmental and social impacts, strengthening its position as a leader in this emerging field.The country\'s accounting regulators have already initiated in this area, the Institute of Chartered Accountants of India (ICAI) formed the Sustainability Reporting Standards Board (SRSB) in 2020 and the Institute of Cost Accountants of India formed the Sustainability Standards Board (SSB) in 2022 to help strengthen the country\'s sustainability reporting ecosystem and encourage sustainable practices.v. Strategic Partnerships and CollaborationsCollaborations between Indian accounting institutions and international organizations present another avenue for growth. Partnerships such as those between ICAI and global accounting bodies foster knowledge sharing, skill development, and international recognition of Indian accountants. These collaborations help establish India\'s credibility and enable the country to play a more significant role in shaping global accounting standards and practices.Challenges to Overcome in India\'s Accounting SectorIndia is well-positioned to emerge as a global leader in the accounting field, but several challenges must be addressed to unlock its full potential. From skill gaps to regulatory complexities, these obstacles require strategic interventions to ensure India\'s accounting sector remains competitive and achieves global recognition.i. Skill enhancement required in emerging areasWhile India boasts a robust pool of skilled accounting professionals, a significant skill gap exists in emerging areas like AI, blockchain, RPA, and ESG reporting. The accounting profession is rapidly evolving, and the demand for expertise in these technologies and frameworks is growing globally. However, there still exists a large scope in equipping accountants with the advanced digital tools and sustainability reporting standards. Bridging this gap requires a concerted effort to promote continuous professional development (CPD) and upskilling initiatives. Institutions like ICAI have started imparting their training programs to include courses on emerging technologies and sustainability accounting, ensuring Indian professionals stay ahead of the curve.ii. Regulatory ComplianceNavigating the complexities of global and domestic regulatory frameworks is another significant challenge. Indian accountants must deal with overlapping regulations, frequent policy changes, and varying compliance requirements across jurisdictions. This can be particularly challenging for firms engaged in cross-border transactions or operating in multiple countries. Simplifying compliance processes, ensuring timely updates on regulatory changes, and having a single set of accounting standards for all corporates in line with international frameworks like the International Financial Reporting Standards (IFRS) are critical steps to address these issues.iii. Technological DisparitiesDespite India\'s strides in integrating technology into accounting, a significant digital divide persists, particularly between large firms and small and medium enterprises (SMEs). Large accounting firms often have access to advanced tools, automation, and analytics, while smaller firms struggle with limited resources and outdated technology. This disparity hampers the overall growth and competitiveness of the sector. To address this challenge, the government and industry bodies must work together to provide affordable access to modern tools and training for SMEs. Subsidies, grants, or partnerships with technology providers could enable smaller firms to adopt advanced technologies, ensuring inclusive growth across the sector.iv. Adapting to Rapid Technological AdvancementsThe pace of technological advancement poses a dual challenge: staying updated with new tools and ensuring that they are effectively integrated into practice. Technologies like AI, blockchain, and advanced analytics are reshaping the accounting profession, but their rapid evolution makes it difficult for professionals to keep pace. This requires a cultural shift within the profession, emphasizing the adoption of technology as a core competency. Industry bodies, firms, and educational institutions must collaborate to create a learning ecosystem that supports ongoing technological adaptation.v. Balancing Automation and Human ExpertiseAs automation and AI take over routine accounting tasks, the role of human accountants is shifting towards strategic decision-making, advisory services, and data interpretation. While this transition offers opportunities, it also demands a recalibration of skills and roles. Accountants must move beyond traditional bookkeeping and develop expertise in areas like data analytics, financial modeling, and strategic consulting.vi. Talent Retention and Brain DrainIndia\'s accounting sector also faces challenges in retaining top talent. Many skilled professionals seek opportunities abroad, drawn by higher salaries, better work environments, and global exposure. To combat this, Indian firms must invest in creating attractive career paths, offering competitive remuneration, and fostering work-life balance. Highlighting the global opportunities available within India and emphasizing the impact professionals can have on shaping the industry\'s future could also help retain talent.Growth Story and Strategy for India to Become a Global Leader in AccountancyIndia Inc. has already paved the way in capitalizing on the anchor position in the field of accountancy. India\'s growing influence in the global accounting and financial services sector is best illustrated through real-world examples of companies and initiatives that have set benchmarks in efficiency, innovation, and global collaboration. Below case studies depict how Indian firms and institutions are leveraging their strengths to address complex financial challenges worldwide:i. ICAI\'s International Collaborations Strengthening Global Presence.The ICAI has been instrumental in enhancing India\'s global footprint in the accounting profession. By forging agreements with international accounting organizations, ICAI has facilitated mutual recognition of qualifications and professional exchange programs. These collaborations have opened avenues for Indian Chartered Accountants to work in global markets, bridging the talent gap in advanced economies. Such initiatives underline India\'s proactive approach to integrating its accounting expertise with global best practices.ii. Role of leading IT companies resulting in laudable success storiesIndia has established itself as a global leader in financial and accounting services through its innovative and technology-driven solutions. The leading IT companies of the country plays a crucial role in transforming financial processes, offering services such as financial reporting, compliance management, risk assessment, and advisory solutions.For example, Finacle, a flagship product of one of the leading IT giants is driving Digital Transformation in Banking and Finance sector. The platform has revolutionized digital banking and financial management for clients worldwide, providing solutions such as core banking systems, treasury operations, and digital payments.Indian firms have been at the forefront of adopting advanced technologies like blockchain, AI, RPA, and cloud computing to deliver efficient and customized solutions. These services help organizations streamline operations, reduce costs, and meet complex regulatory requirements. By combining technical expertise with deep domain knowledge, India continues to demonstrate its capability to manage large-scale financial operations and drive digital transformation in the global financial sector.iii. Startups in FinTech and Accounting: Pioneers of InnovationIndia is emerging as a hub for Startup space and the way the quantum is increasing marking a position in the globe. India\'s dynamic startup ecosystem is another driver of its global accounting potential. Few Companies are transforming tax compliance, payments, and financial management processes. One of the company has simplified tax filing for millions of users, while another one has introduced innovative payment gateway solutions that cater to businesses of all sizes. These startups reflect India\'s ability to innovate rapidly and create solutions that address both domestic and international challenges. Their success showcases how India is well-positioned to lead the next wave of financial technology advancements.India Inc. has showcased numerous growth stories and exemplary achievements in accounting and reporting, particularly through leveraging technology. However, to establish itself as a global pioneer in the realm of accounting, it is essential to adopt a sustained strategy focused on the following areas:i. Focus on Education and Skill DevelopmentThe accounting curriculum in India should evolve to include training in emerging technologies, global accounting standards, and ESG reporting. Partnerships with global educational institutions and online learning platforms can enhance the accessibility and quality of education.ii. Leveraging TechnologyInvestments in technology infrastructure, research, and innovation will be key. Encouraging startups and collaborations in the fintech space can drive advancements in accounting solutions.iii. Policy Reforms and SimplificationStreamlining tax laws, financial regulations, and compliance requirements will create a more business-friendly environment, attracting global firms and showcasing India\'s efficiency.iv. Elevating Indian Accountants to Global ProminenceGovernment and industry bodies can work together to promote Indian accountants on global platforms, such as the World Economic Forum (WEF), the International Federation of Accountants (IFAC), and the United Nations conferences.v. Encouraging Research and DevelopmentEstablishing research centers focused on accounting practices, technological innovations, and sustainability reporting can position India as a thought leader in the domain.vi. Strengthening Global NetworksStrengthening relationships with international accounting bodies, such as the Association of Chartered Certified Accountants (ACCA) and CPA associations, can enhance global recognition and collaboration opportunities.ConclusionIndia\'s journey to become a global leader in accountancy is not just about matching global standards but about setting new benchmarks that others can follow. The nation has the foundation its rich talent pool, technological advancements, and strong regulatory framework to emerge as a trailblazer in this domain. However, this potential can only be realized by addressing key challenges and fostering a culture of continuous learning, innovation, and inclusion.Empowering small businesses and rural enterprises with accessible accounting tools and training programs will ensure inclusive growth. This approach will not only strengthen the domestic economy but also position India as a role model for emerging markets worldwide. Promoting sustainability through the integration of global Sustainable Development Goals (SDGs) into corporate reporting will showcase India\'s commitment to responsible business practices, appealing to investors and stakeholders who value long-term, ethical growth.Finally, building on its successes in technological adoption and international collaborations, India must leverage its expertise to shape global accounting standards and practices. By staying ahead of trends like ESG reporting, digital transformation, and financial transparency, India can redefine the role of accountants in a globalized economy and establish itself as a pioneer in the field. With a focused and sustained strategy, India has the opportunity to not only be a participant in the global accounting arena but a leader that sets the agenda for future generations.References:(No explicit references listed in source)Author may be reached at cacsalokgarg@gmail.com and eboard@icai.in
Ep. 316 — India: The Rising Global Leader in Accountancy
CA Journal
· September 2026
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India: The Rising Global Leader in AccountancyIndia\'s emergence as the most preferred destination for accounting and financial services is being increasingly recognized and relied upon by the international markets due to various factors like skilled professionals, technological integration and cost-efficiency. In this article, we traverse through the various factors and initiatives contributing to the growing influence of India in the global accounting & financial landscape. This article provides insights into the opportunities and developments taking place within the profession to equip its readers with a practical approach to apprehend and capture the prospects of a now globalized discipline.The standard of accountancy adopted by an economy is the hallmark of its financial ethics, transparency and accountability. Accountancy fosters economic stability by laying a structured framework for businesses through systematic recording of financial transactions and periodic assessment of performance metrics. Accounting practices ensure sustained and ethical growth of enterprises by setting benchmarks for allocation and optimization of financial resources and equipping policy makers on a macroeconomic level, to make informed decisions by enabling them to monitor economic progress by tracking GDP growth, trade deficits & balances.Systematic control mechanisms in the form of record keeping and financial management are not alien to India and can be traced back to the ancient times. Authoritative texts like Arthashastra, Manusmriti and Yajnavalkya-Smriti, provided early insights into the aspects of wealth management, financial administration and good-governance. Over the centuries, this ocean of foundational knowledge has created a deep-rooted tradition of financial accountability, administrative prudence and expertise that have become integral to modern accounting practices in India.Rapid globalization has organized the approach of modern economies to tackle new challenges like tax evasion, digital transformation and financial frauds. Technological developments like Blockchain and AI, have digitalized financial flows and are driving the new wave of innovation in accounting practices. Hence, it has become imperative to address these challenges through mutual cooperation, adoption of transparent reporting & compliance frameworks and ethical use of financial systems.The Emergence of brand IndiaThe past decade of the Indian archive has been characterized by groundbreaking expansion in the Indian economy, progressive taxation reforms and digital transformation. The sustained growth across various sectors in the manufacturing base, supported by government initiatives like Make in India and Product Linked Incentive (PLI) Schemes, along with a dedicated focus on strengthening global synergies, exports, sustainable development and digital innovation; outlines the economic roadmap to consistently position India as the most favourable emerging economy for global investments and businesses.The government of India envisages at improving the ease of doing business by simplifying regulatory processes and encouraging venture capitalism. The evolving startup ecosystem and MSMEs have embarked their journey to become the new conglomerates of the future. With the government\'s untethered financial support, India is poised for a new wave of global entrepreneurship. As businesses worldwide increasingly operate across borders, the demand for standardized, robust accounting practices has become more vital than ever.Accounting plays a critical role in the sustainable financial transparency and economic growth. The role of accounting professionals is indispensable in supporting the target of achieving a USD 35 Trillion economy by 2047, which marks 100 years of independence. The increased demand of the professionals who have expertise in accounting, auditing and other financial services is bound to arrive in the times to come as India unfolds into a global economic superpower.Why India is a Global Power House for financial & accounting services?Indian accountants have a spectacular reputation worldwide for their analytical acumen, technical expertise and commitment to continuous learning. As globalization reshapes business landscapes, Indian accounting professionals have become indispensable players in the global market. Multinational corporations (MNCs) increasingly turn to India for their dynamic accounting and compliance needs, drawn by the country\'s skilled workforce and adherence to global accounting standards. The convergence of accounting standards with the International Financial Reporting Standards (IFRS) in the form of IND AS, has been a significant upgrade in the field of accounting.The Institute of Chartered Accountants of India (ICAI) is undisputedly the biggest Institute for accounting professionals worldwide, with a cumulative base of more than 1.25 million Chartered Accountants and students. The Institute graduates more than 14,000 Chartered Accountants annually. The wide range of auxiliary educational (diploma and certificate) courses launched by the ICAI for Chartered accountants in US Accounting, IFRS, International Taxation, business and project financing, Information Technology and Soft Skills; stand as a testament to the Institute\'s commitment to contrive the blue print for establishing resilient, adaptable and skilled accounting professionals, while also keeping them up-to-date with the latest developments and trends.With its strong focus on driving the digital transformation, tightening regulatory reforms and global integration, ICAI has cultivated a robust ecosystem for the accounting profession in India. ICAI has also launched the \'AI in ICAI\' Certificate Course for its members to integrate next generation Artificial Intelligence technologies in the field of accounting and finance, that will revolutionize the approach of its professionals.Another distinctive feature that puts India on the global forefront is the linguistic proficiency among Indian professionals in English language. Clear and efficient communication is an indispensable pre-requisite for maintaining transparent interactions with global clients. This linguistic advantage concomitantly amplifies India\'s global competitiveness in the field of accounting and financial services.The geographical location of India offers a strategic time-zone advantage to global businesses. This unique feature enables India to provide unremitting services round the clock to multinational companies operating in the America, Europe, Africa, Australia, Middle-East and South-East Asia. It also enhances India\'s capacity for optimizing global operations and addressing financial matters promptly, thereby brightening India\'s appeal as a globally reliable partner.Another competitive advantage that positions India as the most preferred outsourcing destination for global businesses is the ability to deliver unparalleled services at unmatched rates. Cost efficiency and highly skilled workforce have lured in the interests of global players to resort to India for high-quality and reliable financial expertise. With a proven track record, India is without a shred of doubt headed to emerge as the world\'s leading outsourcing hub.What global opportunity lies ahead for Indian Accountants?Being home to various multinational corporations, Europe is an economic juggernaut which contributes significantly to global finance and trade. India\'s trade with EU (its largest trading partner) is set to grow at a 9.9% CAGR with exports growing at 13% CAGR, which indicates a phenomenal growth cycle for the years to come. European markets like UK, Malta and Luxembourg are emerging as the key financial hubs for banking, fintech and investment management. Indian CAs with expertise in International taxation, Anti-Money Laundering (AML), financial reporting, auditing and regulatory compliance are in high demand, especially post-Brexit, where businesses require professionals who can navigate both UK and EU regulations.Europe\'s largest economy, Germany\'s strength lies in its manufacturing and engineering sectors. The increasing emphasis on digitalization and Industry 4.0 is opening up massive opportunities for Indian CAs in corporate finance, auditing, and M&A advisory roles. The Netherlands being the gateway for trade between Europe and other continents due to its strategic location; Dutch companies highly value cross-border tax planning, transfer pricing and risk management, particularly in sectors like logistics, energy, and technology. Europe is also leading the way in Environmental, Social, and Governance (ESG) reporting and sustainability initiatives. CAs with expertise in ESG metrics, sustainability accounting, and green finance are in high demand, especially after the introduction of Emissions Trading Scheme (ETS) & Carbon Border Adjustment Mechanism (CBAM).Australia, US and New Zealand are persistently faced with a shortage of skilled accountants and look towards India for cost efficient and reliable partnership to streamline their accounting processes.Middle Eastern countries like UAE and Saudi Arabia are diversifying their economic portfolios beyond oil economies, which have led to upgraded tax and regulatory frameworks. This paradigm shift has created a new realm of opportunities for Indian auditors and tax experts who can navigate complex regulations and minimize compliance risks.Artificial Intelligence is set to substitute the traditional approach to accounting practices with highly optimized data-driven processes that will analyze colossal databases to generate predictive insights and automate routine tasks like invoice processing, book-keeping etc. Global businesses are increasingly relying on leveraging AI to generate tailored financial advisory to predict global trends, understand market behaviours and enhance strategic decision making. Therefore, Fintech and AI companies are another under-explored arena which requires CAs with skills in financial modeling, risk management and regulatory compliances that are specific to tech innovations.Outsourcing financial services fosters strategic partnerships between global firms and Indian service providers, creating opportunities for knowledge exchange and collaborative problem-solving. Indian CAs can join firms that offer flexible and customizable solutions tailored to the specific needs of businesses. Supportive recruitment and migration schemes for expatriates launched by these nations, have reduced barriers and enhanced global market access to Indian accounting professionals.How to broach the opportunity?It is important to target major services and gain skills in global taxation, IFRS, and Auditing that are in the highest demand across global markets. While Indian CAs are highly respected, gaining additional certifications such as ACCA or local GAAPS, CPA & CFA certainly enhance employability. Accounting is pivotal in administering fledging global challenges like climate change by providing frameworks to measure and report on sustainability metrics. It is of paramount importance for accounting professional to constantly research emerging trends to stay updated with latest developments like digital transformation, ESG reporting, and sustainability standards to remain competitive in the job market.Collaborative efforts between National Skill Development Agency (NSDA) and the EU have resulted in the launching of India-EU Skill Development Program. A unique feature of this program is its specific emphasis on enhancing skill development and vocational training to bridge gap between training and employability. The program also organizes study visits to European Nations on the National Qualifications Framework for better integration in priority sectors like Construction, healthcare, logistics, capital goods, beauty & wellness.Networking plays a key role in a globalizing world that has a flourishing Indian Diaspora. There are more than 30,000 Indian Chartered Accountants present globally. Therefore, leveraging professional networks like ICAI overseas chapters and associating with key industry clusters, opens the doors to new opportunities and fosters exchange of ideas and best business practices. Networking in events like conferences and webinars with industry professionals and stalwarts, is another way to associate oneself with international businesses and enhance market insights.There are many global business firms operating across various international corridors. These firms have strong networks and business alliances through which they mobilise business operations internationally for multi-national companies. These firms offer a holistic opportunity to articles and professionals across various vocations like accounting & financial reporting, transfer pricing, finance, international tax, audit, AML, M&A etc. Accountants should consider gaining experience at global business firms operating in India to build credentials for a global move.Indian Accounting professionals can also leverage the migration schemes for designed for expatriates. Many countries offer express gateway entries for skilled professionals to cater to their growing demand for experienced and talented professionals. It therefore becomes necessary to not only focus on pursuing global opportunities but also to strategize entries in these markets. Hence, professionals need to dedicatedly research visa and residency options in these countries to capitalize on these prospects. EU Blue Card, Highly Skilled Migration Visas, Talent Passports and initiatives like India-EU Skill development Program can streamline the access of Indian accountants and foster career advancement in global markets.Netherlands\' Highly Skilled Migrant Program, Ireland\'s Critical Skills Employment Permit, France\'s Talent Passport, Germany\'s Job Seeker Visa and EU Blue Card Schemes are some major schemes that attract highly skilled professionals from Non-EU Countries by offering work and residence permits. These schemes offer Fastrack permanent residencies for recruitment of high-skilled professionals and in some cases, the benefits may even extend for family reunification and favourable tax treatments. Netherlands\' 30% ruling for example is an interesting immigration scheme that streamlines family reunification and offers 30% relief on income tax for expatriates.UK\'s Designated Investment Zone (DIZ) is another interesting initiative launched by the UK Government. It targets new and emerging sectors like renewable energy, fintech, healthcare, advanced manufacturing and digital innovation by integrating support for expatriates through Skilled Worker Visa, Global Talent visa & Innovator Visa. Many Indian students target reputed institutions in UK for their higher studies. Associating with these DIZs can benefit Indian Students to target training programs and industry specific events.ConclusionIndia\'s journey to become a global hub for accounting is certainly headed for a steep ascent and is of course not without challenges. The evolution of new avenues and specific niche areas require accounting professionals to persistently upgrade themselves to stay relevant in the global market. As businesses continuously seek reliable expertise and partners to meet their business needs, Indian accountants can help solidify the global integration by expanding into emerging markets and establish India as a leader in the global accounting landscape.References:(No explicit references listed in source)Authors may be reached at eboard@icai.in
Ep. 317 — Significance of Force of Attraction ('FoA') clause in tax treaties
CA Journal
· September 2026
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Significance of Force of Attraction (\'FoA\') clause in tax treatiesForce of attraction (FoA) principle is concerned with taxation of business profits in the source country. The Organisation for Economic Co-operation and Development (OECD) model treaty does not allow the application of the FoA rule, whereas the United Nation Model Tax Convention which designed the model treaty in the interest of developing countries supports the application of the FoA rule. The principle of the FoA rule has been a matter of immense interest and deliberation in the field of international taxation. Tax treaties, based on the OECD Model, provide that business profits of an enterprise resident in one state would be taxable in the other state only if there exists a Permanent Establishment (PE) in the other state.IntroductionThis paper is an attempt to analyze various aspects of the FoA principle. The structure of this paper is as follows - the first section focuses on the purpose and various types of FoA rule. In this regard, a flow chart depicting the application of FoA rule with tax positions in different situations has been provided.Thereafter, this paper analyzes the key guiding principles for FoA, particularly under the OECD Model Convention, United Nation (UN) Model Convention, Indian Income Tax Act, 1961, and the Indian Double Taxation Avoidance Agreement (DTAA).The last section of the paper takes a closer look at the application of FoA rule to services, explores the interplay of the FoA principle with the arm\'s length principle, and highlights a few challenges in its application. Further, this paper gives an overview of the recent trends regarding the non-inclusion of the FoA clause in Article 7(1), along with situations where the FoA rule cannot be invoked.Purpose & philosophy of FoAThe FoA rule provides that when a foreign enterprise sets up a PE in a source state, it brings itself within the fiscal jurisdiction of the source state to such a degree that all profits that the enterprise derives from the source state, whether through the PE or not, can be taxed by the source state. Thus, unless a PE is set up, the question of taxability of direct transactions conducted by the foreign enterprise in the source state will not arise.Three possibilities emerge in the context of taxing jurisdiction of the source state in respect of business profits and application of the FoA rule:Full or complete FoA rule: Under the Full FoA rule, once a foreign enterprise has a PE in the source state, the source state has the right to tax all income/profits of the enterprise in the source state irrespective of whether the transactions are managed and organized through such PE or not.Limited or restricted FoA rule: Under the Limited FoA rule, if a foreign enterprise has a PE in the source state, the profits of direct transactions made by the head office in the source state-apart from activities of the PE-will be attributed to the PE to the extent that such activities are similar to those managed and organized by the PE.No FoA rule: The business profits would be taxed in the source state by treating the PE situated therein as a separate source, while other independently earned business profits of the enterprise in the source state would not be taxed in that state.In short, the FoA rule applies if the following conditions are fulfilled:The foreign enterprise has a PE in the source state.The foreign enterprise makes business profits in the source state.Goods or merchandise are sold in source state, and such goods are of the same or similar kind as those sold through the PE or business activities carried on in the source state independently of the PE. However, such activities are of the same or similar kind as the business activities carried on in the source state through the PE.If the above conditions are fulfilled, the profits attributable to such sales of goods or business activities will be taxable in the source state.Key guiding principles for the FoA rulei. Under the OECD Modela. Scope of the FoA ruleOnly profits attributable to the PE should be taxed in the source state. In other words, the OECD Model does not prefer the application of the FoA rule.Other business profits of the enterprise, independently earned in the source state should not be taxed in that state by applying the FoA rule.b. Scope of Paragraph 1 and Paragraph 2 of Article 7(2)Paragraph 1 of Article 7(1) of the OECD Model provides that a contracting state may only tax the profits of an enterprise of the other contracting state to the extent that they are \'attributable to a PE\' situated in the first state. In other words, the purpose of Paragraph 1 is to limit the right of one contracting state to tax the business profits of enterprises of the other contracting state.Paragraph 2 of Article 7(1) of the OECD Model determines the meaning of the phrase \'profit attributable to a PE\'. Paragraph 2 may result in no profits being attributed to a PE even though the enterprise as a whole has made profits.c. Meaning of \'profit attributable to a PE\' and \'only so much of them as is directly or indirectly attributable to the PE\'The phrase \'profit attributable to a PE\' referred to in Article 7(1) was understood as profits required to be determined under Article 7(2).The concept of \"attributable to\" means a reasonable nexus between the profit and the business activity.The profit of an enterprise of a Contracting State is taxable only in the state of residence and it is taxable in another state if the enterprise carries on business through a PE situated therein. The entire profits is not taxable. Only so much is taxable as is attributable to that PE. The attributable profit can be determined by apportioning the total profits of the foreign company to its various parts, if such apportionment is customary. Otherwise, it is calculated on the basis of the hypothesis that the profits which the PE might be expected to make as if it were a distinct and separate enterprise engaged in the same and similar activities under the same and similar conditions, and dealing wholly independently with the enterprise of which it is a permanent establishment. Attributable profits are determined by the same method each year unless there is a valid or sufficient reason to adopt the contrary.The expression \'only so much of them as is directly or indirectly attributable to the PE\' narrows the scope of taxability in that other contracting state by excluding profits derived by such enterprises in the source state independently of the PE.ii. Under the UN Modela. Scope of the FoA ruleThe UN Model is followed by developing countries preferred to apply the FoA rule. Paragraphs (1) & (2) of Article 7 of the UN Model, 2021 cover the provisions of the FoA rule.Article 7(1) of the UN Model, 2021 allows the country in which the PE is located to tax the profits attributable to that PE, as well as other profits of the foreign enterprise derived in that country, to the extent allowed under the article.The FoA rule is limited to business profits covered by Article 7 and does not extend to income from capital such as dividends, interest and royalties which are covered by other treaty provisions.b. The Limited FoA ruleThe UN Model recognizes Limited FoA which is restricted to the profits from sale of goods/merchandise or business activities of the same or similar kind.The UN Model does not restrict the right of taxation of the source state only to the profits attributable to the PE situated therein, but such is extended to profits from the direct sale of similar goods and also from those independent business activities which are similar to the business activities carried on by the PE in that state.c. Meaning of \'same\' and \'similar\'Both clauses (b) and (c) of Article 7(1) of the UN Model, 2021 used the expression \"same or similar kind\".The word \'same\' may mean \"resembling in every aspect, identical\".The expression \'same or similar\' excludes something which is distinct.The word \'similar\' means \"relatable\", \"of the same kind in appearance, character or quantity, without being identical.\"Let\'s understand the concept of \'same\' and \'similar\' with the following example:Example: There may be a situation where an installation PE may not be covered by the FoA rule even if the installation PE was selling goods which are same or similar to those sold directly by the foreign enterprises due to the following reasons:Direct sales by foreign enterprise in the source state will be covered by the FoA rule only when the PE is selling similar goods.In the case of an installation PE, because the fact that some goods are locally purchased in the source state used in installation, does not necessarily lead to the conclusion that the foreign enterprise is engaged in selling similar goods as the Installation PE.d. Scope of clause (b) & clause (c) of Article 7(1) of the UN Model, 2021Clause (b) of Article 7(1) of the UN Model restricts the scope thereof only to the sale of goods or merchandise of the same or similar kinds whereas clause (c) of Article 7(1) of the UN Model will only be restricted to other business activities excluding the activities of selling of goods or merchandise.The Mumbai Tribunal held that taxability of profit on sale of goods does not fall within the scope of Article 7(1)(c).All business activities of any nature whatsoever, directly carried out by enterprises in the source state will not necessarily fall within the scope of such Limited FoA rule. In other words, only when such other business activities or the sale of goods are of same or similar kind will they attract such FoA rule.iii. Under Indian Income Tax Act, 1961Section 9 of the Income Tax, 1961 (\'Act\') recognizes the principle of attribution of income. Explanation 1(a) and Explanation 3 to Section 9(1)(i) provide that the income to be taxed in India is limited to only that part of the income that is reasonably attributable to the operations carried out in India.The determination of taxable business profits of a foreign company in India requires an artificial division between profits earned in India and those earned outside India by considering the PE as a separate profit center vis-à-vis the foreign company. This principle is aligned with Article 7(2) of the OECD & UN Model.Under the Act, taxability is confined to the profits attributable to operations carried out in India whereas Article 7(1) of the OECD & UN Model provides taxability of the profits attributable to a PE, which may also include profits related to the PE in respect of its operations carried outside India.iv. Under Indian DTAAsUnder Indian DTAAs, in the context of the FoA rule, majorly two sets of provisions are found:(i) FoA provisions based on the OECD Model guidelines.(ii) FoA provisions based on the UN Model guidelines.In some Indian DTAAs, the FoA rule is not incorporated directly in Article 7(1), but the same is mentioned in the Protocol to DTAAs.There are certain Indian DTAAs where the protocol brings the concept of the FoA rule in DTAA either directly (example, India - Turkey DTAA) or indirectly (example, India - France DTAA).a. Use of phrase \'directly or indirectly\' in Article 7(1) of Indian DTAAsSome of the Indian DTAAs use the phrase \'directly or indirectly\' in Article 7(1) which are additional words when compared to the wording of Article 7(1) of the OECD Model.The terms \'directly or indirectly\' referred to in Article 7(1) are clarified to the effect that where the PE takes an active part in negotiating, concluding or fulfilling contracts entered into by the enterprise, then, notwithstanding that other parts of the enterprises have also participated in those transactions, the proportionate profits of the enterprises from such contracts should also be treated as profit indirectly attributable to the PE.For example, the India-Japan DTAA uses the phrase \'directly or indirectly\' in Article 7(1) such as:The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment.b. Protocol to DTAAsThere is a possibility that the FoA rule in DTAA may contain some special provisions through protocol. In such a case, the scope of the FoA rule has been clarified in the protocol. For example, the India-Hungry DTAA have special provisions of FoA rules in their protocol in relation to construction work.c. Right to prove otherwiseSome of the Indian DTAAs provide the \'right to prove otherwise\' in the FoA rule.\'Right to prove otherwise\' means where the FoA provisions give the enterprise the right to prove that:profit from sale of similar goods or carrying on other business activities of the enterprise is not attributable to the PE, andsuch activity could not have been undertaken by the PE.For example, the India-Sri Lanka DTAA has the provision of \'right to prove otherwise\' in the FoA rule.d. Only part of the Limited FoAIn some Indian DTAAs, only part of the provisions of the UN Model has been incorporated. In such cases, the scope of Limited FoA rules gets further restricted.For example, the India-Indonesia DTAA does not incorporate the provisions contained in the Article 7(1)(c) of the UN Model, 2021.e. Broad analysis of the Limited FoA in Article 7(1) in Indian DTAAsBased on Article 7(1) and Article 7(2) of Indian DTAAs, the following tables provide a broad overview of the Limited FoA available or not available in the Indian DTAAs:Table 1: No Limited FoA in Article 7(1)Sl. No.Respective countries with which India has DTAARemarks1Albania, Armenia, Australia, Bangladesh, Bhutan, Botswana, Brazil, Bulgaria, Colombia, Croatia, Cyprus, Czech Republic, Estonia, Ethiopia, Fiji, Finland, Georgia, Greece, Hong Kong, Hungary, Iceland, Israel, Jordon, Kazakhstan, Korea, Kuwait, Kyrgyz Republic, Latvia, Libya, Lithuania, Luxembourg, Macedonia, Malaysia, Mauritius, Morocco, Montenegro, Mozambique, Myanmar, Namibia, Nepal, Netherlands, Norway, Uruguay, Philippines, Qatar, Russia, Saudi Arabia, Serbia, Slovenia, South Africa, Sudan, Sweden, Syria, Swiss confederation, Taiwan, Tajikistan, Tanzania, Trinidad and Tobago, Turkmenistan, UAE, Egypt, Uganda.No Limited FoATable 2: Available Limited FoA in Article 7(1)Sl. No.Respective countries with which India has DTAARemarks1Belgium, Belarus, Canada, China, Denmark, France, Germany, Indonesia, Italy, Japan, Kenya, Malta, Mongolia, New Zealand, Oman, Poland, Portuguese Republic, Romania, Singapore, Slovak Republic, Spain, Sri Lanka, Thailand, Turkey, USA, UK, Ukraine, Uzbekistan, Vietnam, Zambia.Yes, Limited FoA mentioned in Article 7(1). Phrase \'directly & indirectly attributable to that PE\' has been used in the Article 7(1).Whether FoA rule is applicable to servicesThe FoA rule is appliable to profits derived from the sale of goods or merchandise of the same or similar kind, or from other business activities of the same or similar kind.The phrase \'other business activities\' includes services. Further, it has been held that reference to sale of goods or merchandise in Article 7(1)(b) of the UN MTC includes rendering of services also.The following tables depict the FoA rule under some of the Indian tax treaties applicable either to \'goods and merchandise\' or to both \'goods and services\':FoA rule applicable toRespective countries with which India has DTAAGoods and merchandiseNew Zealand, BelgiumGoods and merchandise and other activitiesCanada, Denmark, Italy, Poland, Portuguese Republic, SpainFoA rule vis-a-vis the arm\'s length principleThe adoption of the FoA rule would lead to a wider tax base and thereby larger share of revenues arising out of the same, whereas complete rejection of the FoA rule would be tantamount to adoption of the arm\'s length principle in the strictest sense which again is not free from flaws.As the arm\'s length principle would call for the treatment of the head office and the PE as two independent entities and thus, a probability of double non-taxation may arise wherein the activities carried out in the PE would neither be taxable in the source country and the activities carried out in the source country may also escape the taxation scanner owing to the domestic laws of the country. Therefore, the same would not certainly be within the interests of either of the countries.Challenges in application of the FoA ruleAn imposition of the force of attraction would certainly lead to a greater amount of uncertainty to the taxpayer. As the UN model which talks about the taxation of the income attributable to the PE involving sales and business activities of the \'same or similar kind\', ipso facto calls for judicial interpretation and ambiguity in the minds of the taxpayers.Further, the very essence of an economic nexus would be lost in case the entire array of activities of the foreign enterprise is brought under taxation through the FoA rule. This would only lead to abuse by generalization of standards and activities irrespective of the fact whether the same has been carried out in the territory where it is being taxed.Klaus Vogel distinctly criticizes the applicability of the force of attraction as it leads to the generality of income irrespective of the fact whether it has been generated out of the PE or not.Recent trends regarding non-inclusion of the FoA clause in Article 7It has been observed that in the new Indian treaties, the FoA clause has not been included or has been omitted in the existing tax treaties:Table 3 depicts the recent trends regarding non-inclusion of the FoA clause in Article 7:Table 3: Recent trends regarding the non-inclusion of the FoA clause in Article 7 DateRespective countryStatus of FoA clauseIndia DTAAsSigned after 2012Hong Kong, Uruguay, Albania, Bhutan, Croatia, Macedonia, Colombia, Ethiopia, Latvia.AbsentEffective in India 01.04.2011Effective in India 01.04.2012Effective in India 01.04.2014Effective in India 01.04.2017FinlandNorwaySri LankaCyprusAbsent, but was Present earlierEffective in India 20.09.2013AustraliaOmittedExemptions from the FoA ruleThe FoA rule does not apply in the following cases:when sales are made by a foreign principal through independent agents in the source state.where foreign enterprises are able to demonstrate that the sales of goods or merchandise or business activities were carried out in the source state other than through the PE for legitimate business purposes and there is no objective to obtain treaty benefits.Concluding remarksThe principle of the FoA rule has been a matter of immense interest and deliberation in the field of international taxation. Tax treaties provide that business profits of an enterprise resident of one state would be taxable in the other state only if there exists a PE in the other state. The FoA rule is basically an anti-avoidance measure which is implemented in varying degrees. The tax treaties are by and large based on the UN, OECD or the US Model Conventions. These Model Conventions differ with respect to applicability of the FOA rule.Developing countries are supporting the application of the FoA rule. Some countries provide for taxing profits/income (i) only to the extent that they are attributable to the PE, (ii) from direct transactions effected by the non-resident, provided the transactions are of the same or similar kind as that effected through the PE and (iii) from all transactions whether they are attributable to the PE or not, or whether they are of the same or similar kind of transactions carried on by the PE or not. From the above discussion in this article, one principle emerges: that most Indian DTAAs are on the lines of the OECD MTC i.e., the FoA rule should not be invoked. However, on the other hand, when the relevant provisions of the Indian DTAAs are on the lines of the UN Model, which particularly provide for the Limited FoA rule, in such a case, one has to find out the scope of each provision and its effect thereof. Finally, in each such case, the issue of the FoA rule will have to be decided on the facts of that case.References:(No explicit references listed in source)Author may be reached at sr1502@rediffmail.com and eboard@icai.in
Ep. 318 — Deciding between ITC and Composition Scheme: A Guide for Small Businesses in the GST Era
CA Journal
· September 2026
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Deciding between ITC and Composition Scheme: A Guide for Small Businesses in the GST EraBusinesses have the option to choose between the Input Tax Credit (ITC) and the Composition Scheme under GST. ITC allows for the offsetting of taxes paid on purchases against tax liabilities on sales, ensuring that taxes are balanced and maintain a state of tax neutrality and transparency. In contrast, the Composition Scheme provides a uniform tax rate determined by the total sales, streamlining adherence to tax regulations, particularly for small enterprises, and diminishing expenses. ITC facilitates adherence to regulations and the efficient monitoring of cash flow, while the Composition Scheme promotes economic expansion and the development of entrepreneurial activities. Small businesses should thoroughly evaluate the advantages and disadvantages of each choice and may consider consulting with tax experts to efficiently negotiate the intricacies.IntroductionThe ITC mechanism allows businesses to reduce their tax liability by claiming credit for the GST paid on purchases and inputs. Businesses have the tendency to deduct the tax they have already paid on their raw materials, services, and other business expenses from the GST they are obligated to pay on their sales. This technique is especially advantageous for organizations that have high input costs, such as manufacturers and wholesalers, who face hefty charges for raw materials, machinery, and other inputs. By utilizing ITC, these enterprises can efficiently reduce their total tax liability, resulting in cost reductions and enhanced profitability. In addition, ITC guarantees that firms involved in the supply chain do not face several layers of taxation at each stage of production and distribution. This prevents the accumulation of taxes and ultimately reduces the cost of goods and services for customers. The pass-through benefit of the ITC enables businesses to maintain their competitiveness by offering items at reduced rates as a result of tax savings.Furthermore, the ITC process improves transparency and facilitates the maintenance of precise transaction records. Firms are required to maintain comprehensive documentation of their purchases and sales in order to be eligible for Input Tax Credit (ITC). This requirement serves as an incentive for firms to improve their record-keeping practices and exercise more financial discipline. Precise documentation is essential for audit purposes and plays a vital role in establishing confidence within stakeholders, including customers, suppliers, and tax authorities. Nevertheless, the ITC system necessitates careful documentation and consistent filing of returns, which can be burdensome for small enterprises with restricted administrative resources. Complying with the ITC regulations requires meticulous monitoring and recording of all GST payments made on purchases, comparing these amounts with suppliers\' tax filings, and assuring prompt submission of monthly or quarterly GST returns. Small enterprises with a smaller workforce and insufficient knowledge of tax affairs may find this to be a substantial administrative challenge, which could possibly take away resources from their main business operations.Conversely, the Composition Scheme provides a streamlined tax structure designed to alleviate the administrative burden on taxpayers operating on a small scale. This scheme is suitable for enterprises that have an annual turnover of up to INR 1.5 crore in the preceding financial year. In the case of service providers (other than restaurants), this turnover threshold limit is fixed at INR 50 lakhs, whereas for restaurants, it is INR 1.5 crore. Under this program, the qualifying registered person has the option to pay a certain proportion of their revenue as tax, which is considerably lower than the regular GST rates. Manufacturers and traders generally have a tax rate of 1%, while restaurant services typically have a tax rate of 5% and 6% for service providers.The simplified approach simplifies tax calculations and eliminates the requirement for strict regulatory compliance, as enterprises under the Composition Scheme submit tax returns on a quarterly basis instead of monthly. The quarterly filing schedule reduces administrative burdens, enabling business owners to concentrate on operations instead of substantial tax compliance duties.Nevertheless, enterprises that choose the Composition Scheme will issue a Bill of Supply in place of a Tax Invoice and are not permitted to avail ITC. This constraint implies that they are unable to transfer the advantages of GST to their business-to-business (B2B) clients, who may have a preference for suppliers that provide ITC. As a result, enterprises participating in this program may experience competition in the B2B sector, since their clients are unable to balance off tax obligations on their purchases. This could result in a potential decline in business if clients prioritize the benefits of ITC.Furthermore, the inability to generate tax invoices under the Composition Scheme presents difficulties while interacting with larger corporations that demand accurate tax paperwork to adhere to regulations and maintain proper records. (Anjaneyulu, 2024), (Kessler, 2020), (Filings, 2002), (Annapoorna, 2023)ObjectiveTo review and provide insights into the topic \"Deciding Between ITC and Composition Scheme: A Guide for Small Businesses in the GST Era\".MethodologyThe researcher encountered numerous obstacles during the execution of this review. A major challenge was the extensive reliance on existing research findings related to the subject, requiring a comprehensive review of existing literature to ensure that the study was based on current and relevant research findings.In addition to navigating the breadth of existing research, the researcher had to make critical judgments regarding which studies and data to include. This involved setting stringent review time restrictions to manage the volume of literature efficiently. The selection of publications was particularly crucial, as it needed to ensure a balanced and comprehensive perspective on the subject matter.To address these challenges, the researcher will employ interpretive, analytical, and comparative approaches in the current research project. These methodologies will facilitate a nuanced understanding of the data and allow for the synthesis of information from various sources.Data collection will be conducted from several renowned libraries, which house a wealth of primary and secondary materials relevant to the study. The focus will be on thoroughly reviewing these materials to extract valuable insights and data. Additionally, websites and other online resources will be utilized as supplementary data-collecting tools, ensuring that the research encompasses a broad spectrum of information and remains up-to-date with the latest developments in the field.Through these strategies, the researcher aims to overcome the inherent obstacles and produce a comprehensive and insightful guide for small businesses navigating the decision between ITC and the Composition Scheme under the GST regime.DiscussionITC is a fundamental concept within the GST framework, designed to avoid the cascading effect of taxes and enable businesses to reduce their overall tax liability. By allowing businesses to claim a credit for the GST paid on their purchases, ITC ensures a seamless flow of tax credits from manufacturers to consumers, enhancing the efficiency and fairness of the tax system. (Ainapur, 2017)ITC is the tax paid on purchases of goods or services that a business can use to offset against the GST liability on their sales. In simpler terms, it allows businesses to deduct the tax they have paid on inputs (purchases) from the tax they are required to pay on outputs (sales). This mechanism ensures that the tax is levied only on the value addition at each stage of production and distribution, preventing the double taxation effect.To illustrate the working of ITC, consider the following example:A manufacturer incurs a GST of ₹ 300 on purchasing raw materials and other inputs.The manufacturer then processes these inputs and generates a final product, which incurs a GST liability of ₹ 450 when sold.In this case, the manufacturer can claim an ITC of ₹ 300, which has already been paid on inputs. Therefore, the net GST payable by the manufacturer would be:Net GST Liability = Output GST - Input GST = ₹450 - ₹300 = ₹150Thus, the manufacturer effectively reduces the tax burden by utilizing the ITC, ensuring that only the value addition is taxed.For a business to claim ITC, it must meet certain conditions laid out under the GST laws. These conditions include:Possession of a Tax Invoice: The claimant must have a valid tax invoice or debit note issued by the registered supplier of goods or services. This invoice serves as an evidence of the GST paid.Receipt of Goods/Services: The claimant must have received the goods or services for which they are claiming ITC. This ensures that the credit is only claimed for actual purchases.Filing of GST Returns: The claimant must file the relevant GST returns, including the details of inward supplies (purchases) and outward supplies (sales). Timely and accurate filing of returns is crucial for the reconciliation of ITC.Payment of Tax Charged: The tax charged on the supply of goods or services must be paid to the government by the supplier. This condition ensures that the credit is claimed only when the tax has been actually remitted to the government.Importance of ITC in the GST FrameworkITC is instrumental in eliminating the tax-on-tax (cascading) effect, thereby reducing the overall cost of goods and services. This promotes competitiveness and efficiency in the market by ensuring that businesses are not taxed repeatedly at each stage of the supply chain. Additionally, ITC improves tax compliance and revenue collection for the government by encouraging businesses to procure from registered suppliers and maintain accurate transaction records.The GST Composition Scheme provides a customized solution for small businesses as an alternative to the conventional GST structure. Instead of following the usual GST rates and reporting procedures, businesses have the option to pay a predetermined proportion of their yearly turnover as tax under this program. This streamlined method greatly diminishes the regulatory obligations for small enterprises, enabling them to concentrate more on their fundamental activities. (Das, 2023)Certain requirements must be met by enterprises in order to be eligible for the GST Composition Scheme. This initiative is primarily available to enterprises with an annual revenue of up to 1.5 crore. This cut-off point makes sure that the program aids small enterprises that might find it difficult to manage the hassles of ongoing GST compliance. Manufacturers, dealers, and eateries may participate in the program as long as they don\'t provide alcohol. A comparable program is also offered to service businesses with less than 50 lakh in annual revenue. With the help of this extension, small service providers will benefit from a more straightforward tax structure.Small businesses find the GST Composition Scheme appealing because it provides a number of noteworthy advantages, including:Simplified Tax Procedures: The Composition Scheme\'s ability to simplify tax procedures is one of its biggest benefits. By choosing this plan, businesses can file quarterly returns rather than monthly ones, which greatly minimizes the administrative load.Less Compliance and Record-Keeping: Compared to the normal GST regime, the scheme necessitates less stringent bookkeeping and fewer thorough records. For small enterprises with limited resources for accounting and compliance procedures, this simplification can be especially helpful.Reduced Tax Rates: In general, the Composition Scheme\'s tax rates are less than the regular GST rates. For instance, the tax rate for manufacturers and traders is 1%, whereas the tax rate for restaurant owners is 5% and 6% for service providers. Because of these lower rates, small businesses will find it easier to comply with the tax laws overall.Decreased Tax Liability: Small firms can reduce their tax liability by using the Composition Scheme. Businesses with narrow profit margins especially benefit from this reduction since it allows them to have better cash flow and reinvest savings back into their operations. (India, 2024), (Narayan, 2023)Considerations for DecisionWhen deciding between the ITC mechanism or the Composition Scheme under the GST regime in India, it is important to carefully analyze various considerations. These issues can have a significant influence on the financial and operational elements of small enterprises.Business Turnover: A crucial factor to examine is the financial income created by a corporation. If the annual revenue is less than Rs. 1.5 crore, selecting the Composition Scheme could be a feasible option. This program provides simplified compliance requirements, and a fixed tax rate determined by turnover, which can be beneficial for smaller enterprises seeking to simplify their tax responsibilities.Volume of Taxable Supplies: It is important to assess the number of taxable supplies that the business generates. If the business engages in a large number of taxable transactions, choosing the standard scheme and taking advantage of ITC benefits may lead to substantial tax savings. Businesses can enhance their profitability by efficiently reducing their overall tax bill by claiming credit for the tax paid on inputs.Compliance simplicity: The level of simplicity in adhering to regulations is a crucial factor, especially for small enterprises that have limited resources and knowledge in tax-related issues. The Composition Scheme provides a streamlined system for businesses to meet their compliance obligations. Under this scheme, firms are required to submit quarterly returns and pay taxes at a predetermined rate determined by their turnover. This efficient method can effectively reduce both time and resources, making it an appealing choice for firms aiming to decrease administrative hassles.Inter-State Transactions: When a firm participates in substantial inter-state transactions, it is essential to evaluate the consequences of this based on the decision between the normal scheme and the Composition Scheme. While the normal scheme enables firms to carry out both intra-state and inter-state transactions smoothly, the Composition Scheme is restricted to intra-state supply alone. Thus, companies that have a significant presence in numerous states may discover that the regular system is better suited to properly manage their inter-state operations. (Sagar, 2023), (Panda, 2024), (P, 2023)Availability of Composition Scheme to Service ProvidersBy paying a predetermined proportion of their turnover in fees rather than regular tax liabilities, qualifying taxpayers can opt for a streamlined compliance option under the Goods and Services Tax (GST) law\'s composition scheme. Everyone wins with the composition scheme: producers, buyers, and users alike. The use of this system is contingent upon meeting certain requirements, however ITC is not an option under this program, as stated in the previous paragraph.A taxpayer using a reverse charge mechanism is nonetheless liable for paying taxes at the standard rate. Payers are required to show the term \"Composition Taxable Person\" on all notice boards and signboards at their business location, and it must also be specified in the bill of supply. However, the following individuals are not eligible to use the Composition Scheme:Those who supply goods across statesIndividuals who engage in e-commerceCasual tax-payersIce cream, pan masala, and tobacco businessesCombine services and commodities up to a maximum of five lakhs or ten percent of the annual turnover, whichever is greaterProvision of services more than 50 lakhsThe following are the other features of the Composition Scheme:Eligibility: Taxpayers who offer services and have an aggregate turnover of up to 50 lakhs from the previous financial year are eligible to choose the composition plan. Whether they are eligible for the program is determined by this threshold.Threshold Limit: A taxpayer is required to switch to the normal GST scheme and pay taxes at the appropriate rates if their turnover is above 50 lakhs in a given fiscal year. In order to lessen the difficulty of compliance, the composition system is tailored for smaller firms.Applicability: Both service providers and suppliers of goods and services are covered under the plan. It eases the burden by streamlining compliance standards and tax computations.Exempt Services: A number of services are free from taxes under the GST. This exemption applies specifically to services that involve making deposits, loans, or advances and when payment is made in the form of interest or a discount.Calculation of Aggregate Turnover: Exempt services connected to providing loans, advances, or deposits are not included in the aggregate turnover calculation used to assess eligibility for the composition scheme. In this computation, only taxable supply is taken into account.For qualifying taxpayers with turnovers up to 50 lakhs, the composition plan provides a simple tax compliance option that let them pay a fixed proportion of turnover as fees instead of ordinary GST. It eases administrative responsibilities and streamlines the tax process, which is especially helpful for smaller companies and service providers. (Rohit Pithisaria, 2021)Composition Scheme incl. conditions to be followed:Taxpayers may take advantage of the Composition Scheme, a straightforward GST program. Streamlined GST procedures and a flat rate of turnover payment are available to small taxpayers. Any taxpayer with a revenue of less than 1.5 crore is eligible to participate in this plan. A more straightforward option for taxpayers under the GST regime is the GST Composition Scheme. The following are the prerequisites to participate in this program:No Input Tax Credit (ITC): Dealers who choose the composition plan are not eligible to claim the ITC on their purchases.Services Only: Sub-section 2A Section 10 allows service providers to avail of this scheme having turnover below ₹ 50 lakhs in the preceding financial year.Goods Excluded: Under this program, dealers are not allowed to supply goods that are GST-free. Alcoholic beverages, for instance, are usually not allowed.Normal GST Rates for the Reverse Charge Mechanism: Taxpayers must pay taxes at the regular rates in effect if they are involved in transactions covered by the Reverse Charge Mechanism.For qualifying enterprises, especially those that deal primarily in commodities, the GST Composition Scheme provides a streamlined tax compliance option, but it also limits their ability to claim input tax credits. (Annapoorna, 2023), (CHAWLA, 2020)To switch from regular registration to the Composition Scheme under GSTIn order to pay tax under the aforementioned provision, taxpayers who are registered as regular tax payers under GST must submit an application to opt for Composition Levy in Form GST-CMP-02 at the GST Portal before the start of the financial year.Log in to the GST PortalAccess the Taxpayers\' Interface on the GST portal.Navigate to the Application for Composition LevyGo to Services > Registration > Application to Opt for Composition Levy.Fill the FormComplete the form according to the specified rules.Ensure you meet the eligibility criteria for the Composition Scheme.Remember that you cannot opt for the Composition Levy if you are involved in:Supplying goods not liable to be taxed under GST.Inter-state outward supplies of goods.E-commerce supplies where tax collection is required by the operator.Manufacturing notified goods.Being a casual dealer, non-resident foreign taxpayer, Input Service Distributor (ISD), or TDS Deductor/Tax Collector. (Tutorial.gst, 2024)ConclusionThe GST Composition Scheme serves as a significant mechanism for streamlining tax compliance for small firms. This scheme offers a simplified method for taxation, resulting in a substantial decrease in administrative tasks, a reduction in tax rates, and a more efficient process for filing taxes. This provides valuable assistance to businesses that are struggling with limited resources and knowledge in tax-related topics. Although the Composition Scheme has certain benefits, such as a consistent tax rate and streamlined processes, it does have several restrictions, most notably the lack of ITC. Small firms considering participation in the Composition Scheme must carefully evaluate their qualifying criteria and ensure congruence with their operational requirements. Although the program provides advantages specifically designed for small firms, such as decreased administrative work and tax obligations; businesses must evaluate if it is compatible with their future expansion plans and transaction patterns. Effectively navigating the intricacies of tax legislation necessitates making well-informed decisions, and seeking help from tax professionals becomes essential. Small firms can enhance their tax efficiency and ensure compliance with regulatory requirements by utilizing the knowledge and skills of tax consultants.The primary objective of the Composition Scheme is to reduce the tax burden on small enterprises and streamline compliance procedures. Nevertheless, every business must carefully evaluate its advantages and disadvantages, taking into account its distinct circumstances and goals. The goal is to find a harmonious equilibrium between streamlining tax processes and making astute choices that optimize the business\'s long-term objectives. Considering this perspective, the Composition Scheme presents itself as a beneficial choice for small enterprises aiming to negotiate the complexities of GST rules while ensuring economic stability and expansion.ITC is an essential element for small firms functioning under the GST framework. This approach enables firms to deduct the tax paid on their purchases from the tax payable on their sales, thus significantly decreasing their overall tax burden. ITC is crucial for small firms as it helps to maximize financial resources, improve competitiveness, and promote growth. ITC offers small firms a significant advantage by effectively preventing the domino effect of taxes. The use of ITC enables firms to offset the tax spent on inputs, ensuring that taxation is levied solely on the value added at each stage of the supply chain. This not only eradicates the imposition of taxes on the same income twice but also enhances effectiveness and equity within the tax system. ITC empowers small enterprises to enhance their ability to manage cash flow. Businesses can successfully minimize their tax liability to the government by subtracting the tax paid on purchases from their tax liability on sales. Excess funds can be reinvested in the business, utilized for expansion, or allocated to other operational costs, promoting growth and long-term viability. In addition, ITC encourages tax compliance among small firms. Businesses must comply with the conditions outlined in the GST legislation to be eligible for claiming input tax credit. These factors include having legitimate tax invoices, submitting GST reports on time, and ensuring that the tax charged by suppliers is paid to the government. This encourages firms to maintain precise transaction records, acquire goods and services from registered suppliers, and perform their tax duties conscientiously. The Input Tax Credit is a crucial resource for small firms, enabling them to effectively manage the intricacies of the GST system, minimize their tax obligations, and improve their competitive advantage. Small firms can optimize their operations, enhance their financial well-being, and facilitate sustainable expansion in the current changing business landscape by harnessing the advantages of information technology and communications.References:Ainapur, D. R. (2017). An Overview of Input Tax Credit System and Computation of GST Liability. Journal of Emerging Technologies and Innovative Research (JETIR).Anjaneyulu. (2024). What is Input Tax Credit under GST & How to claim it? https://cleartax.in/s/what-is-input-credit-and-how-to-claim-itAnnapoorna. (2023). GST Composition Scheme: Rules, Turnover Limit, Rate, Benefits. https://cleartax.in/s/gst-composition-schemeCHAWLA, K. (2020). GST Composition Scheme - Limit, Eligibility, GST Rates and Benefits. https://razorpay.com/learn/gst-composition-scheme-benefits/Das, N. (2023). What is composition scheme of GST, who is eligible and how to opt for it. https://economictimes.indiatimes.com/wealth/tax/what-is-composition-scheme-of-gst-who-is-eligible-and-how-to-opt-it/articleshow/103683334.cms?from=mdrFilings, I. (2002). Consumer Protection Laws in India.India, G. of. (2024). Goods and Services Tax (GST). Central Board of Indirect Taxes and Customs.Kessler, C. (2020). Taxpayer Non-Compliance with Input Tax Credit Rules: Data and Policy Options for Canada. Canadian Tax Journal/Revue Fiscale Canadienne, 68(3), 751-800. https://doi.org/10.32721/ctj.2020.68.3.kesslerNarayan, A. (2023). Comprehensive Guide to GST Composition Scheme for Small Businesses.P, S. (2023). Understanding GST Composition Vs. Regular Scheme: Ideal Business Choices.Panda, A. (2024). Small Businesses Registrations: GST Composition Scheme Explained.Rohit Pithisaria. (2021). Composition Scheme for Service Providers in GST. https://taxadda.com/gst-composition-scheme-for-service-providers/Sagar, V. (2023). Input Tax Credit (ITC) Provisions In GSTR-4. https://www.captainbiz.com/blogs/input-tax-credit-itc-provisions-in-gstr-4/Tutorial.gst. (2024). FAQ To Opt Composition Scheme (Explained under GST). https://tutorial.gst.gov.in/userguide/compositionpoc/optforcomposition.htmAuthors may be reached at pavi311094@gmail.com, thaiyammalkannan@gmail.com and eboard@icai.in
Ep. 319 — Skilling India with Corporate Social Responsibility
CA Journal
· September 2026
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Skilling India with Corporate Social ResponsibilityIn recent years, Corporate Social Responsibility (CSR) has evolved into a formidable instrument for effecting positive social change, concurrently harmonizing business objectives with societal imperatives. Among the myriad domains where CSR initiatives have exhibited substantial progress, skill development stands out prominently. India, grappling with a burgeoning population and diverse demographics, confronts the intricate task of balancing economic advancement with the equitable dispersion of opportunities. Skill development initiatives catalyzed by CSR not only possess the capacity to narrow this gap but also hold the transformative potential to empower individuals, propelling the nation towards a trajectory of inclusive progress.In the dynamic landscape of Corporate Social Responsibility (CSR), the article meticulously explores the profound role CSR plays as a catalyst for skill development in India. Beginning with an overview of CSR\'s evolution and its increasing focus on skill development, the article discusses the legal framework, key components, and success stories that underscore the transformative potential of integrating CSR with skill enhancement initiatives. The narrative culminates in an examination of challenges faced by organizations and proposes viable pathways for future progress. This comprehensive exploration affirms that CSR, strategically aligned with skill development, holds the key to propelling India towards socio-economic progress and inclusive growth.Understanding Corporate Social Responsibility (CSR)Corporate Social Responsibility refers to a company\'s commitment to act ethically and contribute positively to society, beyond its economic and legal obligations. CSR exemplifies the ethical and responsible conduct of businesses, transcending the sole focus on profit maximization to embrace a broader commitment to social and environmental stewardship. This involves integrating social and environmental concerns into business operations, decision-making processes, and interactions with stakeholders. Essentially, CSR is a way for businesses to demonstrate accountability for their impact on the world. It entails considering the interests of various stakeholders, including employees, customers, communities, and the environment. Enacted in 2013, the Companies Act in India introduces a mandatory provision stipulating that companies meeting specified thresholds in net worth, turnover, or net profit must allocate a portion of their earnings to Corporate Social Responsibility (CSR) activities. This legislative mandate underscores the government\'s commitment to fostering a corporate culture that actively contributes to social and environmental well-being. These activities encompass a wide spectrum of social, environmental, and economic initiatives that contribute to sustainable development.Key Components of CSREnvironmental Sustainability: Companies are increasingly recognizing the importance of sustainable practices to minimize their ecological footprint. This involves implementing energy-efficient measures, reducing waste, and adopting eco-friendly technologies. Sustainable business practices not only benefit the environment but also contribute to long-term cost savings.Social Welfare: CSR extends to supporting social causes and addressing societal issues. This can involve charitable donations, community development projects, and initiatives to improve education, healthcare, and living conditions. By actively participating in social welfare, companies build goodwill and strengthen their relationships with communities.Ethical Business Practices: CSR emphasizes the importance of conducting business ethically. This includes fair labour practices, transparent financial dealings, and responsible marketing strategies. Companies that prioritize ethical behaviour build trust with consumers, investors, and employees, ultimately enhancing their reputation and brand value.Employee Well-being: Companies are recognizing that their most valuable assets are their employees. CSR involves creating a positive and inclusive work environment, offering fair wages, providing opportunities for professional development, and promoting a healthy work-life balance. Employee well-being is not only a moral obligation but also contributes to increased productivity and employee retention.The Legal Framework for CSR in IndiaAs we lay the foundation by understanding the broader implications of Corporate Social Responsibility (CSR), it becomes imperative to explore its legislative roots and the compulsory dimensions introduced by the Companies Act of 2013 in India. This regulatory framework not only underscores the government\'s dedication to cultivate a corporate ethos that actively enhances social and environmental well-being but also sets the stage for a closer examination of the key components that define CSR initiatives. Corporate Social Responsibility (CSR) in India has witnessed a transformative shift in recent years, evolving from voluntary initiatives to legally mandated obligations. The government has recognized the crucial role that businesses play in contributing to societal well-being. Section 135 of the Companies Act, 2013 serves as the cornerstone of the legal framework for Corporate Social Responsibility (CSR) in India.With this foundational understanding, let\'s discuss the specific mandates and provisions outlined in Section 135, elucidating the key components that define the landscape of Corporate Social Responsibility (CSR) practices in India.Companies Act, 2013: The Companies Act of 2013 is the cornerstone of CSR regulation in India. Section 135 of the Act mandates that companies meeting specific criteria must allocate a percentage of their profits towards CSR activities. Applicable to companies with a net worth of INR 500 crore or more, a turnover of INR 1,000 crore or more, or a net profit of INR 5 crore or more during a financial year, the legislation ensures a structured approach to corporate social responsibility.CSR Policy Formulation: Companies falling under the purview of Section 135 are required to formulate a CSR policy, delineating the activities to be undertaken, the manner of implementation, and the financial allocation. This policy must be approved by the board and disclosed to the public, ensuring transparency and accountability.Constitution of CSR Committees: The Act necessitates the formation of a CSR committee comprising three or more directors, including at least one independent director. This committee plays a pivotal role in formulating and overseeing the implementation of CSR policies, ensuring that the company adheres to its social responsibility commitments.Expenditure Allocation: The legislation specifies that companies must spend a minimum of 2% of their average net profits over the preceding three financial years on CSR activities. This financial allocation ensures a dedicated commitment to social initiatives, driving meaningful impact on the ground.Areas of CSR Activities: The Act outlines broad areas for CSR activities, encompassing eradicating hunger, promoting education, gender equality, healthcare, environmental sustainability, and poverty alleviation. This allows companies flexibility in choosing projects aligned with their values and the needs of the communities they serve.The Significance of Skill DevelopmentSkill development stands as a fundamental pillar supporting economic growth and social progress. In nations like India, characterized by a substantial youth demographic and an expansive labour force, the imperative of imparting pertinent skills becomes indispensable to harness the full potential of this demographic advantage. Beyond merely enhancing employability, acquiring the right skills empowers individuals to actively engage across diverse sectors of the economy, catalyzing innovation and entrepreneurship in the process.Recognizing the pivotal role that skill development plays in both economic advancement and social empowerment, businesses are increasingly focusing on making a substantial impact in this domain. These days\' businesses are aligning their business efforts with skill enhancement which not only bolsters employability but also forms a strategic approach for businesses to actively contribute to societal well-being.The Rationale behind CSR and Skill Development:One of the key areas where companies are making a substantial impact is in skill development. Skill development programs are designed to enhance the employability and capabilities of individuals, providing them with the tools to succeed in the workforce. CSR initiatives, when integrated with skill development programs, contribute to a holistic approach to social responsibility. Beyond philanthropy, businesses can actively engage in shaping the future workforce by imparting relevant skills. This approach aligns with the principles of sustainable development, ensuring that communities are equipped to thrive independently. By integrating skill development into their CSR initiatives, businesses can address social challenges while fostering long-term sustainability. By investing in skill development programs, businesses can:Enhance Employability: Skill development programs are designed to provide individuals with industry-relevant skills, making them more employable and reducing the skills gap prevalent in many sectors. This, in turn, contributes to economic growth by ensuring a competent workforce.Empower Marginalized Groups: CSR-driven skill development initiatives often prioritize marginalized sections of society, such as women, tribal communities, and people with disabilities. These initiatives enable these groups to access better livelihood opportunities and break the cycle of poverty.Promote Entrepreneurship: Equipped with the right skills, individuals are better positioned to become entrepreneurs and contribute to economic development by starting and growing their own businesses. CSR support can provide the necessary training and resources for aspiring entrepreneurs.Support Rural Development: Many skill development initiatives target rural areas, where access to quality education and training is often limited. By imparting skills relevant to agriculture, handicrafts, and other local industries, these initiatives stimulate rural economies.Address Regional Disparities: India\'s economic development is not evenly distributed across all states. CSR-driven skill development initiatives can help bridge regional disparities by enhancing the employability of youth in underdeveloped regions.Enhanced Corporate Reputation: Companies that actively participate in skill development programs as part of their CSR initiatives build a positive reputation within their communities. This positive image can lead to increased customer loyalty, brand trust, and improved relationships with stakeholders.Talent Acquisition and Retention: Investing in skill development not only benefits the wider community but also contributes to a skilled and motivated workforce within the company. Employees are more likely to stay with an organization that invests in their professional growth, leading to improved talent retention and reduced recruitment costs.Sustainable Economic Growth: CSR initiatives that focus on skill development contribute to the creation of a skilled and capable workforce, fostering economic growth in the long run. As individuals acquire new skills and find employment, the overall standard of living in communities rises, creating a positive cycle of development.Promotion of Lifelong Learning: In an era of rapid technological advancements, fostering a culture of continuous learning is crucial. Skill development initiatives supported by CSR efforts promote a mind-set of lifelong learning, ensuring that communities stay relevant and adaptable in an ever-changing job market.Success StoriesExploring the multifaceted dimensions of Corporate Social Responsibility (CSR) and its profound impact on skill development, we now pivot toward real-world success stories that exemplify the transformative potential of integrating CSR with skill enhancement initiatives.The transformative impact of CSR on skill development is evident through various innovative initiatives undertaken in India and globally. Companies are increasingly recognizing that skill development programs can drive sustainable social change, address workforce gaps, and foster economic growth. These initiatives focus on vocational training, digital upskilling, and entrepreneurial support, empowering individuals to adapt to the evolving job market dynamics.One of the core strategies in CSR-driven skill development is aligning initiatives with the needs of underserved communities. Programs tailored to address specific challenges such as access to quality education, employability, and entrepreneurial mentorship-have significantly contributed to bridging socio-economic disparities. In rural areas, CSR initiatives often enhance agricultural practices, promote traditional crafts, and introduce technological tools to optimize productivity, fostering self-sustaining communities while preserving cultural heritage.Digital transformation has increasingly rely on partnerships these efforts, with training programs focusing on areas like digital literacy, basic coding, and technology application. This enables participants to thrive in a technology-driven economy and prepares youth for careers in emerging sectors. Moreover, the integration of critical thinking and problem-solving skills into these programs ensures that individuals are equipped to navigate the challenges of an increasingly complex job market.Inclusivity remains central to many CSR initiatives, particularly those targeting women and marginalized communities. Tailored programs focusing on women\'s entrepreneurship, leadership skills, and financial literacy empower women to take active roles in the workforce. Similarly, vocational training programs for persons with disabilities and tribal communities ensure that opportunities for growth are accessible to all, fostering an equitable and inclusive workforce.Skill development initiatives also emphasize fostering an entrepreneurial mindset. Many CSR programs provide business mentorship, seed funding, and market access, enabling aspiring entrepreneurs to transform innovative ideas into sustainable ventures. This entrepreneurial focus boosts economic activity at the grassroots level while stimulating job creation and fostering community development.To maximize impact, CSR programs increasingly rely on partnerships and collaborations with non-governmental organizations (NGOs), educational institutions, and local governments. These collaborations enable the customization of training programs to meet local needs and extend their reach. For example, initiatives that combine hands-on technical training with internships help participants gain practical experience, enhancing their employability and confidence.A focus on measurable impact further strengthens these programs. Metrics such as employment rates, entrepreneurial success stories, and community satisfaction are used to evaluate outcomes and refine strategies. This results-oriented approach ensures that CSR-driven initiatives remain impactful and relevant to societal needs.In conclusion, CSR-driven skill development represents a powerful tool for creating pathways to empowerment and growth. By equipping individuals with industry-skills, fostering entrepreneurship, and promoting inclusivity, these initiatives help bridge socio-economic divides and lay the foundation for sustainable, long-term progress. As CSR programs continue to align corporate resources with societal aspirations, they play a pivotal role in building a skilled, adaptable, and inclusive workforce that can navigate the complexities of a rapidly changing global economy.Challenges and the Way ForwardWhile we glean insights from impactful success stories in the arena of Corporate Social Responsibility (CSR), it is crucial to pivot our attention towards the challenges confronting organizations in these pursuits, delving into viable pathways that pave the way for future progress.While CSR-driven skill development initiatives present promising opportunities, there are inherent challenges that demand attention. Effective coordination with local communities, ensuring program sustainability, and establishing mechanisms for measuring long-term impact stand out as key hurdles. Addressing these challenges requires collaborative efforts involving the corporate sector, government, and NGOs, pooling resources and expertise to surmount obstacles and drive sustainable change.In conclusion, the potential of CSR as a catalyst for skill development remains vast and pivotal in propelling India towards socio-economic progress. By strategically aligning corporate interests with societal needs, companies can assume a central role in cultivating a skilled workforce, nurturing entrepreneurship, and contributing to inclusive growth. As India strives for comprehensive and equitable development, these CSR initiatives stand as beacons of hope, illuminating a transformative path toward a brighter and more prosperous future. Through collaborative endeavours and a shared commitment to social betterment, the private sector, government, and non-profit organizations can collectively shape a landscape where skill development becomes a driving force for positive change.References:(No explicit references listed in source)Author may be reached at prashantmishra1986@gmail.com and eboard@icai.in
Ep. 320 — The State of the Art in Insurance: A Vision for the Future
CA Journal
· September 2026
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The State of the Art in Insurance: A Vision for the FutureThe Insurance Regulatory and Development Authority of India (IRDAI) has committed to enable \'Insurance for All\' by 2047, where every citizen has an appropriate life, health, and property insurance cover, and every enterprise is supported by appropriate insurance solutions, making the Indian insurance sector globally attractive. Thus, the insurance industry stands on the brink of a transformative era, poised to leverage advanced technologies and ethical practices to reshape its landscape. Traditional models often suffer from complex bureaucratic processes, opaque policy documents, and, at times, unethical practices. This vision outlines a path forward, using machine learning (ML), artificial intelligence (AI), clear accountability, and ethical standards to create a transparent, customer-focused insurance ecosystem that delivers exceptional service, builds trust, and ensures long-term financial stability. The entire insurance ecosystem comprises of 3 pillars viz. insurance customers (policyholders), insurance providers (insurers) and insurance distributers (intermediaries).This Vision shall try to address the use of ML/AI based interventions at the following 4 levels of insurance transactions.Risk Assessment and UnderwritingRisk AssessmentStraight-Through Processing of PoliciesPolicy DocumentationIndependent Confirmations of PoliciesClaims ProcessingAutomated Probate-free Claims TransfersClaim ProcessingImproving Balance Sheet/ProfitabilityIntermediary ManagementEnhancing Honesty and Integrity of IntermediariesOptimizing Commission StructureInternal Capability Enhancementi. Risk Assessment and Underwritinga. Risk Assessment: Multi-Parameter AnalysisAdvanced ML and AI models hold the potential to revolutionize risk assessment by synthesizing a vast array of data from an ecosystem of sources. Going beyond historical data, these models can incorporate real-time information on climate, socio-economic factors, individual behaviors, and macroeconomic indicators to build a comprehensive risk profile. This ecosystem approach enables dynamic assessments that accurately reflect each customer\'s unique risk profile and adapt over time.Implementation: AI engines can pull data from IoT devices, environmental databases, health records (with permissions), and social media, creating a multi-dimensional view of risk. This precision enables the insurer to personalize premiums fairly, reflecting each insured party\'s specific circumstances.Outcomes: This level of risk analysis reduces underwriting errors, lowers premiums for low-risk customers, and improves profitability by aligning premiums more closely with actual risk, enhancing fairness and customer satisfaction.b. Straight-Through Processing (STP) of PoliciesStraight-Through Processing (STP) aims to eliminate the manual bottlenecks traditionally involved in policy issuance, achieving seamless, end-to-end automation. With STP, the application review, underwriting, pricing, document generation, and policy issuance processes are completed in real-time, enabling policies to be issued instantly.Implementation: By using AI to analyze applications and perform underwriting instantaneously, and integrating cloud and blockchain technologies for secure, verifiable records, insurers can streamline STP. Blockchain\'s immutability ensures data integrity, enhancing trust in the automated process.Outcomes: STP reduces policy issuance time from weeks to minutes, significantly cutting costs and enhancing customer experience. This system enables insurers to handle higher volumes, drive growth, and deliver the level of speed and convenience that modern customers expect.c. Policy Documents that a Common Person can UnderstandComplex and jargon-filled policy documents often leave customers feeling overwhelmed or misinformed. The goal is to create straightforward, accessible documents that clearly outline the product\'s benefits, obligations, conditions, and claims processes.Implementation: By using natural language processing (NLP), insurers can convert technical language into plain, customer-friendly terms. Interactive digital documents can include explainer videos, visual diagrams, and highlighted key points to further ease understanding.Outcomes: Transparent documentation fosters trust, reduces customer complaints, and minimizes disputes. When policy terms are easy to understand, customers are empowered to make informed choices, enhancing satisfaction and reducing the likelihood of misunderstandings.d. Independent Confirmation of Policy UnderstandingTo ensure that customers genuinely understand their policy-its benefits, conditions, surrender values, and claims processes-an independent system must validate comprehension before policy issuance. This additional step safeguards both the insurer and the insured.Implementation: AI-driven chatbots or live video sessions equipped with sentiment analysis can interact with customers to confirm their understanding. Customers may answer simple questions about key policy aspects before finalizing their agreement.Outcomes: This confirmation process protects against mis-selling, reinforces customer trust, and fulfills an insurer\'s duty to act responsibly. It ensures that customers feel informed, reducing the risk of disputes and promoting a positive customer experience.ii. Claim Processinga. Automated, Probate-Free Claim TransfersThe traditional claims process can be slow, complex, and stressful, especially in times of bereavement. The future of insurance should allow for automatic claim transfers to beneficiaries without the need for probate.Implementation: Smart contracts on a blockchain platform enable automated disbursement of funds upon verification of the insured\'s death. Integration with government records for death verification would streamline this process further.Outcomes: Beneficiaries receive their claim payouts quickly and without bureaucratic hurdles, providing financial relief when it\'s most needed. This approach enhances the insurance provider\'s reputation and builds trust in its commitment to customer care.b. High-Quality, Bureaucracy-Free Claim ProcessingA seamless claims process is vital for customer satisfaction and retention. Using AI to streamline claims assessment and fraud detection, insurers can ensure that legitimate claims are paid promptly, with funds transferred directly to beneficiaries\' accounts.Implementation: AI models can review claims for fraud indicators, reducing the burden of manual assessments. Digital banking integration enables instant fund transfers, bypassing traditional, time-consuming bureaucratic steps.Outcomes: Faster claim settlements improve customer experience, strengthen brand reputation, and build loyalty. Robust fraud detection ensures that payouts go only to legitimate claims, enhancing fairness and reducing losses.c. Building a Stable, Liquid, and Trustworthy Balance Sheet-ProfitabilityTo support these customer-focused initiatives, insurers must prioritize financial health and resilience. A balance sheet that emphasizes stability, liquidity, and the capacity to weather economic shifts builds trust and ensures sustainability.Implementation: AI-driven analytics guide investment and risk management, optimizing portfolio allocations and ensuring liquidity. Diversified investments and prudent reinsurance strategies enable insurers to remain well-capitalized, fostering resilience against market shocks.Outcomes: A financially stable and liquid balance sheet reassures customers and investors, supporting long-term growth and enabling insurers to weather economic uncertainties.iii. Intermediary Managementa. Enhancing Honesty and Integrity Among Agents/IntermediariesGiven the pivotal role of agents/intermediaries in customer interactions, fostering honesty and integrity is critical. Severe penalties for mis-selling, such as commission clawbacks and potential license revocation, deter unethical behavior. AI-driven monitoring systems can oversee agent-customer interactions, flagging any misrepresentations.Implementation: Agent performance metrics can be recalibrated to reward ethical practices, long-term customer satisfaction, and retention. Agents receive digital tools that standardize communication, ensuring consistency and transparency.Outcomes: Customers trust agents who prioritize their needs and provide honest advice, enhancing brand loyalty. An integrity-focused approach creates a healthier, more customer-centric distribution channel.b. Commission Structure: Payment Linked to Premium RealizationTo discourage short-term sales tactics and encourage genuine customer care, commission payments should be structured to depend on premium realization over time. Commissions that only vest after the second premium payment align agent incentives with customer retention.Implementation: A staggered payout model provides commission based on policy milestones, with additional incentives for longer policy retention. Clear, transparent metrics inform agents of these benchmarks.Outcomes: This structure encourages agents to recommend suitable policies for lasting value, reinforcing customer satisfaction and trust. It reduces \"churning\" and results in a more stable and profitable customer base.iv. Internal Capability Enhancement: Creating a Culture of AdvocacyA customer-focused insurance company must cultivate a culture in which every employee takes pride in its services and would confidently recommend them to their family. This sense of advocacy can be achieved through continuous training, a supportive work environment, and alignment of personal values with the company\'s mission.Implementation: Regular training in technology, product knowledge, and ethical standards ensures employees can serve customers effectively. Recognition programs that reward employees for demonstrating company values help build internal advocacy.Outcomes: A culture of internal advocacy fosters pride, loyalty, and a shared commitment to quality service. Employees become natural ambassadors for the brand, creating a ripple effect of trust and satisfaction among customers.ConclusionThe vision for the future of insurance is one that seamlessly integrates advanced technology with ethical practices to create an industry grounded in trust, transparency, and customer care. Technological advancements, the biggest game changer in the insurance industry, will continue to streamline customer onboarding and claims processing through AI-driven tools and digital platforms. These innovations can enhance customer service and operational efficiency, making insurance more accessible and transparent. As a result, the insurance industry can transform itself into a beacon of reliability and resilience. This future-ready insurance ecosystem will not only meet the evolving needs of modern consumers but also build a foundation of trust and loyalty that will support sustainable growth for generations to come.References:(No explicit references listed in source)Author may be reached at shaileshvharibhakti@gmail.com and eboard@icai.in
Ep. 321 — Charting the Path to Success: A Comprehensive Examination of Challenges, Opportunities, and Strategies for MSMEs in India
CA Journal
· September 2026
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Charting the Path to Success: A Comprehensive Examination of Challenges, Opportunities, and Strategies for MSMEs in IndiaMicro, Small, and Medium Enterprises (MSMEs) are integral to India\'s economic fabric, driving employment, industrial output, and exports. Despite their crucial role, MSMEs frequently encounter significant challenges that threaten their growth and sustainability. This article explores the dynamics of crisis management within India\'s MSME sector, addressing the multifaceted challenges these enterprises face, including financial constraints, technological barriers, regulatory complexities, market access difficulties, and skilled manpower shortages. The analysis includes a review of government policies and initiatives aimed at supporting MSMEs, such as financial aid programs and technology integration efforts. Through a critical examination of existing literature and data, the article identifies key strategies for MSMEs to navigate these challenges effectively. These strategies encompass strengthening financial management practices, leveraging technological advancements, streamlining regulatory compliance, and expanding market reach.The article underscores the importance of collaboration with industry peers, government agencies, and academic institutions to foster innovation and enhance competitive advantage. The article concludes by advocating for a reimagined narrative on MSMEs in India, emphasizing the need for holistic and strategic interventions. By addressing systemic challenges and leveraging opportunities for growth, MSMEs can unlock their full potential as engines of inclusive and sustainable economic development. This comprehensive approach to crisis management will enable MSMEs to thrive in a dynamic and competitive environment, ultimately contributing to India\'s broader economic resilience and prosperity.The Significance of MSMEs in India\'s Economic LandscapeMicro, Small, and Medium Enterprises (MSMEs) form the backbone of India\'s economy, contributing significantly to employment generation, industrial output, and export earnings. With over 63 million enterprises across various sectors, MSMEs play a pivotal role in fostering entrepreneurship, driving innovation, and promoting inclusive growth. However, despite their immense potential, MSMEs often face a multitude of challenges that hinder their growth and sustainability. In the vibrant tapestry of India\'s economic landscape, MSMEs form a crucial thread, contributing significantly to growth, innovation, and employment generation. Often hailed as the backbone of the economy, MSMEs play a pivotal role in fostering entrepreneurship, driving industrial development, and promoting inclusive growth. However, behind the facade of optimism and enthusiasm lies a stark reality that warrants closer scrutiny. As of July 1st 2020, a new definition was coined for MSME with a new criterion on 13th May 2020 in the package of Atmanirbhar Bharat which is depicted in Table-1.The Hype Surrounding MSMEs: Understanding the DynamicsIn recent years, there has been a surge of interest and optimism surrounding MSMEs, fuelled by government initiatives, technological advancements, and changing consumer preferences. The narrative of MSMEs as engines of economic growth and job creation has gained prominence, leading to increased attention from policymakers, investors, and industry stakeholders. However, it is essential to critically examine the underlying realities beneath the hype to address the systemic challenges facing MSMEs. Amidst the rhetoric of MSMEs as engines of growth and innovation, it is essential to discern the underlying challenges that beset this sector. While there is no denying the potential and resilience of MSMEs, they face a myriad of obstacles that impede their growth and sustainability. From financial constraints to technological barriers, regulatory complexities to market access dilemmas, MSMEs grapple with a host of challenges that demand urgent attention and concerted action.Table 1: MSME with a new criterionCategory of enterpriseCap of investment in plant and machinery or apparatuses and limit of TurnoverMicro EnterprisesInvestment up to 1 crore, turnover up to 5 crores.Small EnterprisesInvestment up to 10 crores, turnover up to 50 crores.Medium EnterprisesInvestment up to 50 crores, turnover up to 250 crores.Source: https://msme.gov.in/sites/default/files/MSME_gazette_of_india_0.pdfAs stated by K. Rajamani in Engineering Economics in 2022, the access to finance is crucial for fostering entrepreneurship and economic growth, particularly in micro, small, and medium enterprises (MSMEs). This study investigates the challenges faced by MSMEs in obtaining finance and assesses their implications for business performance. Through a survey of 400 MSMEs in various Indian industrial clusters, it is found that firm characteristics, financing sources, and the MSME life cycle positively influence access to finance, while financial barriers hinder growth and impede national economic progress. As per the Das report published in 2017, the vast growth potential and opportunities present in India for the advancement of the MSME sector, aiming to identify critical issues, challenges, and recommendations. Through the utilization of secondary data, the report reveals that the sector has demonstrated remarkable resilience by leveraging traditional skills, expertise, infusion of capital, adoption of new technologies, and innovative marketing strategies. Technological adoption was crucial for MSMEs to enhance productivity and competitiveness.Many MSMEs struggle with integrating modern technologies due to high costs, lack of technical expertise, and limited awareness as stated by Lohith in 2020. Manna and Mistri made an analysis in 2017 of the current scenario and trends within India\'s MSME sector, utilizing secondary data. Their findings indicate that while micro-enterprises naturally dominate across all states, certain developed states are making strides in advancing small and medium enterprises. Furthermore, they highlight the sector\'s role in mitigating regional disparities and fostering regional development. In accordance with Mohanty in 2018, he investigates the present status and performance of the MSME sector, highlighting various government measures and initiatives, including those by SIDBI. Notably, the study observes a positive performance trajectory in recent years, positioning the sector as a pivotal driver for rural and urban development. Mohanty underscores the sector\'s significance and its implications for policy formulations. Satish Kumar in 2023, has stated in an article that access to finance continues to be a critical barrier for MSMEs. Despite various government schemes aimed at improving credit availability, many MSMEs struggle with astringent lending criteria and high collateral requirements. Innovative financing solutions, such as digital lending platforms and credit guarantee schemes, are necessary to enhance financial inclusion and support the growth of MSMEs.Unni in 2020 investigated the impact of COVID-19 on the informal economy and MSMEs, emphasizing the need for macro-level forecasts to estimate the loss of employment, income, and GDP. Such forecasts are crucial for devising short-term action plans and policies to mitigate the pandemic\'s adverse effects on MSMEs and the broader economy. Recent studies by Ahuja & Hari in 2023 have shown that integrating sustainability into MSME operations is crucial for their survival and growth within global value chains. Large corporations and multinational companies are increasingly prioritizing suppliers who align with their sustainability goals, creating both a challenge and an opportunity for Indian MSMEs. This shift requires MSMEs to adopt sustainable practices and certifications to remain competitive. Proactive measures, such as aligning strategies with global policy changes and engaging in sustainability initiatives, can help MSMEs flourish in this evolving landscape.Challenges Faced by MSMEs in IndiaMSMEs in India confront a host of challenges that impede their ability to thrive and expand. Access to finance remains a persistent issue, with limited availability of credit and high borrowing costs constraining investment and expansion efforts. Additionally, bureaucratic red tape, complex regulatory compliance requirements, and inadequate infrastructure pose significant barriers to growth. Moreover, MSMEs often struggle with technology adoption, skill shortages, and market access constraints, further exacerbating their challenges. The primary challenges lie in the following:Financial Struggles: Access to Credit and FundingOne of the most pressing challenges confronting MSMEs is access to finance. Despite being the lifeblood of the economy, many MSMEs struggle to secure adequate credit and funding from formal financial institutions. High collateral requirements, stringent lending criteria, and lack of credit history often render MSMEs ineligible for bank loans, forcing them to rely on informal sources of finance at exorbitant interest rates. This perpetuates a cycle of financial vulnerability and inhibits investment, expansion, and job creation.Technological Barriers: Navigating the Digital DivideIn an increasingly digitized world, technological adoption has emerged as a critical determinant of competitiveness and productivity. However, MSMEs face significant challenges in embracing technology due to factors such as lack of awareness, affordability, and technical expertise. The digital divide exacerbates disparities between large corporations with sophisticated IT infrastructure and small businesses struggling to digitize their operations. Bridging this divide is imperative for MSMEs to harness the transformative power of technology and unlock new growth opportunities.Regulatory Roadblocks: Compliance Challenges for Small BusinessesNavigating the regulatory landscape is a daunting task for MSMEs, particularly in India where bureaucratic red tape and complex compliance requirements abound. From obtaining licenses and permits to adhering to tax regulations and labour laws, small businesses are burdened with a myriad of regulatory obligations that consume time, resources, and energy. The compliance burden disproportionately affects MSMEs, diverting scarce resources away from core business activities and hindering growth and innovation.Market Access Dilemma: Competition and GlobalizationIn an era of globalization and liberalization, MSMEs face intensified competition from domestic incumbents as well as foreign entrants. Limited scale, resources, and brand visibility place MSMEs at a disadvantage in capturing market share and penetrating new markets. Moreover, trade barriers, supply chain disruptions, and fluctuating demand pose additional challenges for small businesses seeking to compete in an increasingly interconnected and dynamic marketplace.Human Capital Crisis: Skilled Manpower ShortageThe shortage of skilled manpower poses a significant challenge for MSMEs, hampering their ability to innovate, adapt, and grow. Inadequate access to quality education and vocational training programs exacerbates the skills gap, leaving MSMEs struggling to find qualified employees with the requisite technical, managerial, and entrepreneurial skills. Addressing the human capital crisis is essential for enhancing productivity, competitiveness, and sustainability in the MSME sector.Policy Paradox: Evaluating Government InitiativesWhile successive governments have rolled out various policies and programs to support MSMEs, the effectiveness and impact of these initiatives remain questionable. Despite the rhetoric of \'ease of doing business\' and \'Make in India\', bureaucratic inefficiencies, implementation bottlenecks, and lack of coordination among government agencies continue to hinder the growth and development of MSMEs. A critical evaluation of existing policies is imperative to identify gaps, inefficiencies, and areas for reform.Realities of Operating as an MSME in IndiaOperating as an MSME in India entails navigating a complex and dynamic business environment characterized by volatility, uncertainty, and intense competition. Despite the hype surrounding MSMEs as drivers of innovation and job creation, the ground realities often paint a different picture. Many MSMEs grapple with issues such as limited access to markets, lack of scale, and vulnerability to economic shocks. Moreover, structural inefficiencies, supply chain disruptions, and inadequate support mechanisms further compound the challenges. faced by MSMEs. Operating as a Micro, Small, and Medium Enterprise in India comes with its own set of challenges and opportunities (Rana & Choudhary, 2019). The MSME sector in India faces various problems including lack of management skills, poor record-keeping, weak access to financing, multiple taxation, and inconsistent policies. These challenges often hinder the growth and development of MSMEs, leading to a low contribution to the national income. Despite these difficulties, MSMEs in India also have certain strengths and advantages.Opportunities for growth and developmentThe MSME sector in India has significant potential for growth and development. With a large population and a high demand for goods and services, there is ample scope for MSMEs to thrive in various industries. One of the major strengths of MSMEs is their flexibility. Being small and agile allows MSMEs to quickly adapt to changes in the market and absorb new innovations (Fathima, 2020). Additionally, the owner management structure of MSMEs enables quick decision-making, reducing bureaucratic delays and increasing operational efficiency (Rana & Choudhary, 2019). Furthermore, the Indian government has recognized the importance of MSMEs for economic growth and has implemented various schemes and initiatives to support their development. For example, the government has introduced policies such as the \'Make in India\' campaign and the implementation of Goods and Services Tax, which aim for opportunities for MSME\'s growth and development.Government SupportThe Indian government actively supports MSMEs through various policies and initiatives, such as financial aid programs, subsidies, tax incentives, and simplified regulatory procedures. For instance, the Prime Minister\'s Employment Generation Programme (PMEGP) and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) aim to provide financial assistance and promote entrepreneurship. These initiatives play a crucial role in reducing financial barriers and facilitating access to resources for MSMEs, enabling them to grow and thrive in the competitive market landscape.Technology IntegrationMSMEs are increasingly adopting technology to enhance their operations, improve efficiency, and stay competitive. Technologies like cloud computing, data analytics, and e-commerce platforms are being leveraged by MSMEs to streamline processes, reach new customers, and innovate products and services. By investing in research and development (R&D) and fostering a culture of innovation, MSMEs can stay abreast of technological advancements and adapt to changing market dynamics, thereby securing their position in the industry.Global ExpansionIn today\'s interconnected world, MSMEs can tap into international markets and expand their reach beyond domestic borders. India\'s integration into the global economy provides MSMEs with access to a diverse range of customers and business opportunities. Through export-oriented strategies and government-supported initiatives like the Export Promotion Capital Goods (EPCG) scheme and the Market Access Initiative (MAI), MSMEs can explore new markets, diversify revenue streams, and strengthen their competitive advantage on a global scale.Strategies for Success: Navigating Challenges and Seizing OpportunitiesDespite the formidable challenges, MSMEs can chart a path to success by adopting a proactive and strategic approach. Strengthening financial management practices, leveraging technology for efficiency and productivity gains, and diversifying market reach can enhance competitiveness and resilience. Collaboration with industry peers, academia, and government agencies can facilitate knowledge sharing, skill development, and access to resources. Moreover, embracing sustainability practices, fostering innovation, and nurturing talent can unlock new growth opportunities for MSMEs in India. Amidst the myriad challenges facing MSMEs, there is a pressing need for proactive and strategic interventions to unlock their full potential. Strengthening access to finance through innovative financing mechanisms, promoting technology adoption through capacity-building initiatives, streamlining regulatory processes through digital platforms, and enhancing market access through trade facilitation measures are some of the strategies that can empower MSMEs to thrive in a rapidly evolving business environment.In the realm of Micro, Small, and Medium Enterprises (MSMEs), success hinges on adeptly navigating challenges and capitalizing on opportunities. Identifying key hurdles, such as limited access to finance and regulatory complexities, is essential. MSMEs can enhance their financial resilience by implementing sound financial management practices. Embracing technology and fostering innovation are imperative for competitiveness in the digital age. Collaborating with strategic partners can provide access to new markets and resources. Customer-centricity should be prioritized to deliver value and foster lasting relationships. Investing in employee training and talent retention initiatives is vital for enhancing workforce productivity. By focusing on these strategies, MSMEs can overcome obstacles and achieve sustainable growth.Conclusion: Rethinking the Narrative on MSMEs in IndiaIn India, MSMEs necessitates a holistic understanding of the sector\'s complexities, challenges, and opportunities. While MSMEs undoubtedly serve as engines of growth, innovation, and employment generation, the prevailing narrative often overlooks the formidable hurdles they face. From financial struggles and technological barriers to regulatory roadblocks and market access dilemmas, MSMEs encounter a myriad of challenges that demand urgent attention and strategic interventions. However, amidst these challenges lie opportunities for growth, development, and resilience. Government support, technology integration, global expansion, and strategic collaborations offer pathways to success for MSMEs willing to embrace innovation and adaptability. By reimagining the narrative on MSMEs in India and prioritizing proactive measures to address their systemic challenges, we can unlock their full potential as drivers of inclusive and sustainable economic development. It is imperative to recognize the multifaceted nature of the MSME landscape and adopt a nuanced approach that empowers small businesses to thrive in a dynamic and competitive environment. Only by rethinking the narrative and harnessing the collective efforts of stakeholders can we unleash the transformative power of MSMEs and propel India towards a future of shared prosperity and economic resilience.References:K., Rajamani & Jan, N Akbar & Subramani, AK & Raj, Nirmal. (2022). Access to Finance: Challenges Faced by Micro, Small, and Medium Enterprises in India. Engineering Economics. 33. 73-85. 10.5755/j01.ee.33.1.27998Das, P. (2017). Micro, Small and Medium Enterprises (MSME) in India: Opportunities, Issues & Challenges. Great Lakes Herald, 11(1).Lohith, C. P. (2020). Innovation the key to success: A literature review on Indian MSMEs. Indian Journal of Science and TechnologyMama, P., & Mistri, T. (2017). Status of Micro, Small and Medium Enterprises (MSME) in India: A Regional Analysis. IOSR Journal of Humanities And Social Science, 22(9), 72-82Mohanty, J. J. (2018). A Study on Micro, Small and Medium Enterprises (MSME) in India: Status and its Performance. International Journal of Research and Scientific Innovation, 5(5).Kumar, R., et al. (2023). Financial inclusion for MSMEs in India: Current trends and future directions. Indian Journal of Finance and Economics.Unni, J. (2020). Impact of COVID-19 on Informal Economy: The Revival. The Indian Journal of Labour Economics, 63. https://doi.org/10.1007/s41027-020-00265-yAhuja, P., & Hari, D. (2023). Empowering Indian MSMEs in a shifting global marketplace through climate action. Outlook India. Retrieved from https://www.outlookindia.comRana, G., & Choudhary, R. (2019). Micro Small and Medium Scale Enterprises-\'Hidden and Helping Hand in Economic Growth\'. Available at SSRN 3354268.Fathima, J. S. (2020). A Study on Competitive Performance and Progress of Micro, Small and Medium Enterprises (MSMEs) in India.Rana, G., & Choudhary, R. (2019). Micro Small and Medium Scale Enterprises-\'Hidden and Helping Hand in Economic Growth\'. Available at SSRN 3354268.Authors may be reached at carlynmartin7@gmail.com and eboard@icai.in
Ep. 322 — India's National Deep Tech Startup Policy: A Journey towards Innovation
CA Journal
· September 2026
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India's National Deep Tech Startup Policy: A Journey towards InnovationThis article explores the dynamic landscape of India\'s deep tech startup ecosystem, delving into the imminent National Deep Tech Startup Policy (NDTSP) poised to shape the sector\'s trajectory. Profiling over 10,000 startups across various sub-sectors, the article defines \'deep tech\' and \'non-deep tech\' entities, elucidating their distinctive features and implications. Examining global strategies, the study highlights key approaches undertaken by major economies to harness the potential of deep tech innovations. The NDTSP\'s crucial pillars, including funding and innovation, talent development, access to infrastructure, public procurement, and intellectual property protection, are dissected for comprehensive understanding. The study also underscores the challenges faced by deep tech startups, with a specific focus on funding, and explores innovative solutions proposed by entities like the Bharat Innovation Fund. Finally, the article envisions the transformative impact of the NDTSP, aiming to democratize the benefits of deep technology and position India as a global leader in innovation, economic growth, and societal development.IntroductionIndia\'s deep tech startup ecosystem has been on the brink of a transformative shift. Prof. Ajay Kumar Sood, the Chairperson of the Prime Minister\'s Science, Technology and Innovation Advisory Council (PM-STIAC) and Principal Scientific Advisor, announced the imminent presentation of a comprehensive \'deep tech\' policy to the Union Cabinet. This policy followed the unveiling of a draft on 31st July 2023, now reportedly in its final version. India proudly boasts the world\'s third-largest startup ecosystem, housing over 3000 deep tech enterprises dedicated to pioneering advancements in artificial intelligence, machine learning, big data analytics, Internet of Things (IoT), blockchain, and more. These startups, venturing into diverse realms like agriculture, life sciences, chemistry, aerospace, and green energy, are on a mission to revolutionize industries through cutting-edge technological solutions.Defining 'Deep Tech' and 'Non-Deep Tech'The term \'deep tech\' continues to resonate as a buzzword in tech and startup circles, lacking a precise definition. The upcoming policy aims to provide clarity and strategic direction in this realm. Drawing from Startup India\'s database, the draft policy notes that, as of May 2023, 10,298 startups are recognized by the Department for Promotion of Industry and Internal Trade, classified within various sub-sectors of the expansive deep tech space shown in Table 1.Table 1: Sub-Sectors of Deep Tech SpaceSub-SectorNumber of Recognised StartupsTechnology Hardware (including 3D Printing, Semiconductor Manufacturing etc.)3175Enterprise Software (including Cloud, Enterprise Mobility etc.)887Artificial Intelligence (including NLP, ML etc.)1650Internet of Things1479Security Solutions (including Cyber Security)1027Analytics (including Big Data, Data Science etc.)664Robotics (including Robotics Technology & Applications)516AR VR (Augmented & Virtual Reality)510Computer Vision235Nanotechnology155Total10,298Source: https://psa.gov.in/CMS/web/sites/default/files/process/NDTSP.pdfWhat is a deep tech start up?A deep tech startup is characterized by its early-stage utilization of scientific or engineering advancements, paving the way for technologies not yet applied commercially. Such startups embark on unexplored pathways within scientific or engineering disciplines, often integrating knowledge from diverse fields. The distinctive feature of deep tech startups lies in their creation and ownership of Intellectual Property (IP), setting them apart from non-deep tech counterparts. The inherent technical or scientific uncertainty associated with deep tech startups presents both significant opportunities and risks based on their success. Notably, these startups are marked by extended development timelines and necessitate substantial capital investment due to the intricacies of their innovation processes.The depth exhibited by deep tech startups is contingent on the maturity of scientific and technological pursuits within a given context.In environments characterized by substantial investments in Research and Development (R&D) and advanced academic and industry research, deep tech startups that draw from more fundamental research tend to emerge. These startups often have broader applications and extended gestation periods, and necessitate sustained investments, rendering them more feasible and viable.Conversely, in contexts where R&D investments are limited and academic and industry research progresses incrementally, the nature of deep tech startups tends to be shallower.The identified attributes for recognizing deep tech startups can be elaborated, with parameters varying depending on the specific technology focus. For instance, suggestive parameters for distinguishing between Hardware and Service deep tech startups are provided in Table 2.Table 2: Parameters for distinguishing between Hardware and Service deep tech startupsParametersHardware Deep Tech StartupService Deep Tech StartupObjectiveProviding technology solutions requiring R&D > 3 yearsProviding technology solutions requiring R&D > 1 yearCapital Expenditure before CommercializationRs 10 Cr. capex (non-R&D investment)Rs 1 Cr. capex (non-R&D investment)Potential Impact on the EconomyEconomic IRR > 30%Economic IRR > 30%Source: https://psa.gov.in/CMS/web/sites/default/files/process/NDTSP.pdfWhat is a non-deep tech start up?In contrast, a non-deep tech startup typically relies heavily on the business model as its differentiating factor or moat. It thrives on easily producible or replicable technologies without significant advancements.Objectives of the National Deep Tech Startup PolicyObjectivesStrengthen the research and innovation ecosystem for scientific breakthroughs and technological advancements.Bolster the Indian intellectual property regime to attract international deep tech startups.Facilitate access to diverse capital sources through specialized funding programs and increased investments.Foster industry-relevant, cutting-edge research in academia.Enable infrastructure and resource sharing for accelerated product development.Support hardware-based deep tech startups with shared facilities for prototyping and validation.Create a conducive regulatory environment with streamlined frameworks and incentives.Attract and retain top talent with a focus on equity, diversity, and inclusion.Promote indigenous deep technologies through favorable procurement rules and global market access.Align with existing national policies to strengthen India\'s position in the global deep tech value chain.Address local, societal, and business challenges, focusing on key sectors aligned with national interests.Support the sustenance of deep tech startups, addressing funding limitations and resource constraints during the Valley of Death (VoD) phase.Essential Foundations and OutlookReleased by the National Deep Tech Startup Policy (NDTSP) Consortium on July 31, 2023, the draft policy was open for public consultation until September 15, 2023. Framed after thorough consultations with stakeholders, the policy centers around four key pillars as shown in Figure 1:Figure 1: Key PillarsSecuring India\'s economic futureAdvancing towards a knowledge-driven economyEnhancing national capability and sovereignty through the Atmanirbhar Bharat imperativePromoting ethical innovationCrucial Components of National Deep Tech Startup Policy (NDTSP)Funding and Innovation: NDTSP envisions providing financial support through grants, loans, and venture capital, streamlining regulatory processes, and fostering collaboration between academia and industry. Proposed measures encompass a centralized platform, fiscal incentives, specialized financial instruments, and technology impact bonds.Talent Development: Acknowledging the critical role of human resources, NDTSP advocates for STEM education promotion, training opportunities, and attracting international talent to nurture a skilled workforce in the deep tech sector.Access to Advanced Infrastructure and Technology: Highlighting the significance of advanced infrastructure access, the policy suggests establishing deep tech incubation centres and testing facilities nationwide. It aims to fortify partnerships with institutions like IITs and IISc, providing shared infrastructure resources at nominal fees.Public Procurement and Market Opportunities: NDTSP encourages government agencies to embrace deep tech solutions, unlocking fresh markets for startups. It also champions international cooperation and expanded market access.Intellectual Property (IP) Protection: Recognizing the imperative of IP protection, the policy proposes a uniform IP framework, robust cybersecurity measures, and startup support through in-house capabilities and government-purpose rights for strategic technologies.Current Landscape and ConcernsThe proportion of startups in India falling under the \"deep tech\" umbrella remains significantly low, signaling the need for more concerted efforts and support mechanisms to nurture and bolster deep tech startups. The following points highlight an overview of India\'s dynamic deep tech landscape:Robust Presence: India\'s deep tech ecosystem boasts a strong presence with over 10,298 DPIIT-recognized startups, indicating a thriving landscape.Substantial Influence: Deep tech startups form a significant portion of India\'s overall startup ecosystem, showcasing their notable influence and contribution.B2B Focus: A majority of these startups operate on a business-to-business (B2B) model, emphasizing their dedication to serving enterprise clients and addressing specific industry needs.Growth Trajectory: In the past decade, Indian deep tech startups have experienced remarkable growth, attracting substantial funding and witnessing a surge in mergers and acquisitions.Dynamic Expansion: The continuous addition of new ventures has enriched the deep tech startup landscape, fostering a dynamic and entrepreneurial culture within the realm of advanced scientific development.Global Strategies for Deep Tech EcosystemsSeveral leading economies worldwide have adopted strategic measures to capitalize on the advantages offered by deep tech innovations and science-driven startups. These initiatives aim to enhance socio-economic competitiveness through infrastructure reinforcement, investment attraction, and the cultivation of skills and talent. The following Table 3 outlines key approaches undertaken by major economies in this endeavor:Table 3: Global Strategies for Deep Tech EcosystemsGlobal Strategies for Deep Tech EcosystemsDescriptionDedicated Startup CampusesCountries establish collaborative hubs dedicated to deep tech innovation, drawing in talent, investors, and universities to foster growth and advancement within the ecosystem.Comprehensive Brand CampaignsNations launch extensive brand campaigns to promote their deep tech ecosystems, showcasing strengths and unique offerings. This enhances internal credibility and attracts global stakeholders, generating further interest and investment.International Startup Residence ProgramsCountries implement programs to attract global talent and experienced mentors through international startup residences, acting as magnets for individuals contributing to local deep tech founders\' growth and development.Attracting Venture Capital Investor TalentNations attract superior venture capital investor talent to ensure access to necessary funding and support for deep tech startups. Establishing a secondary market for investments and leveraging pension funds expands private sector growth funding.Tax Incentives and ExemptionsGovernments introduce tax incentives and exemptions to encourage deep tech investments, creating a favorable investment climate and stimulating financial support for ventures.Global Talent Scouting and Skill DevelopmentGovernments actively scout talent globally, enabling exchanges and collaborations. Dedicated startup ecosystem infrastructure within local universities nurtures deep tech ventures, fostering innovation and competitiveness.Global Growth of Deep Tech EcosystemsThe global scenario witnessed significant growth, with initiatives and organizations supporting deep tech innovation. Examples include UK Catapult, Belgium\'s WSL, Germany\'s EXIST Program, and Canada\'s Innovation Superclusters Initiative.India\'s Aspiration and Policy FocusDrawing inspiration from global strategies, India aims to cultivate a thriving deep tech ecosystem through policies that foster innovation, attract talent, and facilitate investment. The goal is to elevate India\'s standing as a global leader in deep tech.Government\'s Focus on Technology TransferThe Department of Scientific and Industrial Research (DSIR), affiliated with the Council of Scientific and Industrial Research (CSIR), is gearing up to play a pivotal role in the evolution of India\'s tech landscape. Commemorating the 40th anniversary of its founding, the DSIR is focusing on technology transfer. While the DSIR will target medium and small-scale industries, the CSIR will extend its efforts to industry at large. The National Research and Development Corporation, another CSIR entity, will specifically concentrate on fostering startups. This multi-pronged approach aims to synergize scientific and technological developments with industrial needs, ensuring a holistic impact on India\'s science and technology ecosystem. Here are potential scenarios that could arise from the integration of these initiatives, contributing to the enhancement of India\'s deep tech startup ecosystem as shown in Table 4:Table 4: Policies/Initiatives taken to enhance India\'s Deep Tech Startup EcosystemPolicies/InitiativesDescriptionTamil Nadu Technology Hub (TNT Hub)Located in Chennai, this hub connects startups in emerging and deep tech areas with an extensive academic network of over 570 engineering colleges. It fosters innovation through collaboration with researchers and industry partners, establishing India\'s first deep tech innovation network. It is funded by the Government of India and the Government of Tamil Nadu.TIDE 2.0 SchemeA scheme promoting tech entrepreneurship in India by providing financial and technical support to incubators supporting ICT startups using emerging technologies. It aims to support around 2000 startups over 5 years, involving 51 incubators across the country at a total cost of Rs. 264 crore.Next Generation Incubation Scheme (NGIS)A Ministry of Electronics and Information Technology (MeitY)-funded initiative supporting innovative startups in India, with a focus on software product development and embedded electronics. It operates in 12 Tier-II locations across the country.Scientific and Useful Profound Research Advancement (SUPRA)A research grant supporting high-quality proposals challenging existing theories and offering disruptive solutions. (Science and Engineering Research Board) SERB-SUPRA focuses on transformative research concepts with a high degree of uncertainty but potential lasting impact across disciplines.Fund for Industrial Research Engagement (FIRE)SERB-FIRE is a co-funded research initiative between SERB and industry, aiming to accelerate research and innovation in India. It creates an ecosystem supporting strong research projects with breakthrough impact on major national issues.NECTARAn autonomous society under the Department of Science and Technology (DST), Government of India, North East Centre For Technology Application & Reach (NECTAR) harnesses niche frontier technologies to address socio-economic challenges in the Northeast region.National Supercomputing Mission (NSM)Launched in 2015, NSM is a government-funded initiative aimed at making India a global leader in supercomputing. It provides state-of-the-art supercomputing facilities to scientists and researchers, promoting the use of supercomputers for research in various domains.National Quantum Mission (NQM)Initiated in 2023, NQM aims to make India a global leader in quantum technologies. The mission provides state-of-the-art quantum research facilities to scientists and researchers, promoting the use of quantum technologies in areas such as healthcare, energy, and national security.National Education Policy (NEP)Emphasizing multidisciplinary education, NEP calls for a new curriculum allowing students to study various subjects, including science, technology, engineering, mathematics, humanities, and arts.International InitiativesThe Indo-US Joint Working Group on Artificial Intelligence: Established in 2020 to promote collaboration between India and the US on AI, focusing on areas like healthcare, transportation, and energy.The Indo-Israel Deep Tech & Life Sciences Mission: Launched in 2021 to foster collaboration between India and Israel in deep tech and life sciences, funding several projects for economic and social benefits.Overcoming Funding ChallengesOne of the primary hurdles facing the augmentation of \'deep tech\' startups is funding. VK Saraswat, Member (Science) at NITI Aayog, highlighted the stark contrast in funding needs compared to fintech or retail software startups. The quantum of funds required for \'deep tech\' endeavors is considerably larger, posing a challenge that needs innovative solutions.Addressing the intricate funding challenges prevalent in India\'s deep tech startup ecosystem, the National Deep Tech Startup Policy (NDTSP) aims to build upon existing initiatives, mitigating issues such as fragmented funds, misalignment between gestation periods and market expectations, and payment delays causing working capital constraints.Conclusion and Looking AheadAs India positions itself on the cusp of a new era in technological innovation, the impending \'deep tech\' policy holds the promise of reshaping the startup landscape. The focus on technology transfer and concerted efforts to support startups, particularly in the \'deep tech\' domain, are integral steps towards a more robust and diversified startup ecosystem. The success of these initiatives will not only be measured in numbers but in the transformative impact on India\'s scientific, economic, and technological fabric. The NDTSP aspires to democratize the benefits of deep technology, making them accessible across all levels of society and steering India into a new era of innovation, economic growth and societal development.References:https://psa.gov.in/CMS/web/sites/default/files/process/NDTSP.pdfhttps://yourstory.com/2023/08/bharat-innovation-fund-strengthen-deeptech-startups-investmenthttps://www.thehindu.com/news/national/deeptech-policy-to-be-presented-for-approval-soon-science-advisor/article67710467.ecehttps://www.thehindubusinessline.com/multimedia/audio/how-will-the-national-deep-tech-startup-policy-help-the-deep-tech-start-up-ecosystem/article67572821.ecehttps://www.livemint.com/economy/longterm-funding-for-deep-tech-startups-on-cards-pm-stiac-chaiperson-11703696421973.htmlhttps://www.financialexpress.com/business/sme/cafe-sme/how-national-deep-tech-startup-policy-can-help-chart-a-new-era-in-innovation/3229861/Author may be reached at cami777@gmail.com and eboard@icai.in
Ep. 323 — Exploring the Socio-Economic Impacts of Blockchain Technology in the Accounting and Auditing Profession
CA Journal
· September 2026
00:00
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Exploring the Socio-Economic Impacts of Blockchain Technology in the Accounting and Auditing ProfessionBlockchain technology has the potential to revolutionize the field of accounting and auditing. It has several benefits, such as automating processes, managing identities and authentication more efficiently, providing real-time accounting and auditing, and reducing costs. However, there are also potential negative impacts that need to be considered, such as the possibility of job loss due to automation, heavy initial investment, lack of technical skills, and compatibility issues. Therefore, it is crucial to weigh both the pros and cons of adopting blockchain technology and take appropriate measures to mitigate any negative impacts.IntroductionThe world is currently experiencing the fourth industrial revolution, also known as Industry 4.0, thanks to the rapid development of technology. This revolution calls for automation in various industries, which has led to the need for blockchain technology. Blockchain technology has gained significant attention in recent years due to its potential to revolutionize multiple fields, including accounting and auditing. Its adoption in the accounting and auditing field has the potential to transform the way financial transactions are recorded and verified, which could have significant socio-economic consequences. The decentralized nature of blockchain ensures that transactions are secure, transparent, and tamper-proof, thereby reducing the risk of fraud and errors. Additionally, the technology\'s ability to automate accounting processes could increase efficiency and reduce organizational costs. Adopting blockchain technology in accounting and auditing could pave the way for a more accurate, reliable, and efficient financial reporting system. This article highlights the necessity and objectives of the study, presents the research findings and discussions, and concludes by synthesizing insights derived from the analysis.Need of the Study and ObjectiveAlthough prior research has explored the technical aspects of blockchain technology and its potential applications in accounting, there is still a lack of research on the socio-economic impacts of implementing blockchain technology in accounting and auditing. Therefore, this study addresses this gap by examining the socio-economic impact of implementing blockchain technology in the accounting and auditing profession. In addition, a comprehensive review of literature aimed at assessing the socio-economic implications of integrating blockchain technology into the accounting and auditing sector.Findings and Discussion:The implementation of blockchain-based platforms in the accounting and auditing profession has the potential to make the job easier and more efficient. Every technological advancement has both its pros and cons. Similarly, blockchain technology has positive as well as negative impacts. This study summarizes the potential socio-economic impacts of this technology.Table 1: Socio-economic Impact of Implementing Blockchain Technology in Accounting ProfessionCategoryAuthorSocio-economic ImpactsPositive Impacts(Dai & Vasarhelyi, 2017)Automation of business process(Byrne & Lees, 2018)Effective identity and authentication management system(Dai & Vasarhelyi, 2017)Establish an effective tracking and monitoring system(Dai & Vasarhelyi, 2017); (Cai, 2019)Self-enforcement and self-execution of the mutual agreement through a smart contract(Dai & Vasarhelyi, 2017); (Demirkan et al., 2020)Real-time accounting and auditing(Dai & Vasarhelyi, 2017)Establish interoperability of accounting records(Dai & Vasarhelyi, 2017)Manipulation or destroying accounting records practically impossible(Demirkan et al., 2020)Reduced duplications of accounting records(Demirkan et al., 2020)Improve transactional efficiency and transparency(Dai & Vasarhelyi, 2017); (Weigand et al., 2020)Enhance the auditability of accounting records(Demirkan et al., 2020)Reduction in cost of accountingNegative Impacts(Tysiac, 2017)Loss of jobs due to automation(Dai & Vasarhelyi, 2017)Initially required heavy investment to establish such type of system(Karajovic et al., 2019)Lack of such type of infrastructure(Dai & Vasarhelyi, 2017); (Cai, 2019)Lack of technical courses and training for accounting professionals(Lagaras, 2018)Lack of compatibility with the existing system(Surana et al., 2021)Enhance the monopoly of the big corporationsSource: Own CompilationI. Positive Socio-economic Impacts of Blockchain TechnologyAutomation of business process: Technology\'s rapid development in recent times has brought in industrial revolution 4.0, which requires automation in various industries, especially financial sectors. Blockchain technology helps to detect errors and fraud in accounting entries and automate transaction verification. Automation shifts the role of an accountant and an auditor from a collector and aggregator to a translator and analyst. (Dai & Vasarhelyi, 2017)Effective identity and authentication management system: Service providers use centralized architecture to authenticate users, but it is flawed since it relies on a single trust point. A decentralized blockchain-based approach eliminates the need for a middleman and provides cryptographically secure identities. (Byrne & Lees, 2018)Establish an effective tracking and monitoring system: One well-publicized use of blockchain technology is real-time tracking and monitoring of financial transactions. Blockchain would serve as the accounting information system in the ecosystem, distributing transaction verification, storage, and administration power among a group of computers to avoid illegal data modifications. The system could enable real-time tracking and monitoring of physical item activities while automating the recording and analysis of business performance by integrating emerging technologies. (Dai & Vasarhelyi, 2017)Self-enforcement and self-execution of the mutual agreement through a smart contract: Smart contracts could not be executed before the introduction of blockchain technology because different parties maintained different databases. Smart contracts perform themselves without a third-party intermediary using a shared blockchain technology-based database. (Dai & Vasarhelyi, 2017)Real-time accounting and auditing: Blockchain technology can enable real-time accounting by providing immediate access to accurate financial information. It reduces human errors, provides trustworthy updates in decentralized public ledgers, and allows near-real-time communication of accurate accounting data to interested parties. (Dai & Vasarhelyi, 2017; Demirkan et al., 2020)Establish interoperability of accounting records: Blockchain interoperability enables blockchains to communicate and share data. It improves efficiency and transparency but requires standardization to avoid fragmentation and duplication of efforts. Governments can establish an infrastructure for local agencies to develop blockchain applications securely, facilitating collaborative standards development. (Dai & Vasarhelyi, 2017)Manipulation or destroying accounting records practically impossible: Blockchain is a distributed database that makes it difficult to tamper with or destroy accounting records. This technology provides prompt access to financial information for shareholders, creditors, business partners, government agencies, and other interested parties. Users can be granted specific access authorizations based on their jobs and expectations. Blockchain-based accounting information\'s transparency and verifiable nature can potentially boost shareholder trust. (Dai & Vasarhelyi, 2017)Reduced duplications of accounting records: Blockchain technology offers various essential features for accounting purposes. This technology allows companies to create entries or transactions into a shared register. Rather than keeping separate records based on transaction receipts, they may establish an interconnected system of permanent accounting records.Improve transactional efficiency and transparency: Blockchain is a database that consists of data blocks connected by algorithms. It provides immutable data and increases accuracy, transparency, fraud prevention, and cyber-attack resistance. Blockchain technology offers transparency and decentralization, which makes it almost impossible for accounting fraud to occur. It ensures the accuracy and trustworthiness of accounting information, and its unique operating mechanism prevents data tampering, securing information, and increasing credibility. (Demirkan et al., 2020)Enhance the auditability of accounting records: The auditability of information is a crucial aspect of blockchain technology. The blockchain ledger provides a secure data record and can authenticate multiple audit-related documents. For instance, if every inventory item arriving at a company\'s warehouse is registered on the blockchain and its location and condition are regularly updated, a detailed history of inventory items can be established. This feature enables real-time inventory inspection from a remote location. Additionally, audit trails can be recorded on the blockchain, making it easier to track and review them in the future. Similarly, electronic invoices, bills of lading, letters of credit, receipts, and other documents can be included in the blockchain, allowing auditors to verify the accuracy of financial data. These documents can be exchanged among linked parties. A blockchain-based accounting system can enhance the quality of the contents from an accounting standpoint and improve the system\'s auditability and interoperability. (Dai & Vasarhelyi, 2017; Weigand et al., 2020)Reduction in accounting cost: In 2020, Irem Demirkan along with other authors stated that combining accounting and blockchain technology has a lot of potential benefits. It can enhance information integrity, lower transmission costs, speed up transaction settlement, and reduce fraud. As a result, implementing blockchain can make accounting and auditing practices more efficient and productive. Although the computational overhead of blockchain is still significant compared to a relational database, technological advancements are expected to lead to cost savings, allowing blockchain to become a widely used infrastructure for enterprise information systems and continuous auditing systems. (Demirkan et al., 2020)II. Negative Socio-economic Impacts of Blockchain TechnologyLoss of jobs due to automation: Change is an inevitable part of life, but some people may find it difficult to accept, especially when it comes to new technologies like blockchain. People must adapt to this new technology to ensure their transactions are safe, secure, and completed. However, implementing such changes may pose challenges for personnel in any organization, and some may even lose their jobs. Companies must allocate resources to accommodate these new work patterns effectively. Developing new technologies can potentially threaten people\'s livelihoods in several fields. For example, the development of the internet made it challenging for newspaper writers to stay employed, and experts predict that self-driving trucks could result in massive employment losses for truck drivers. Similarly, blockchain has consequences for the accounting and auditing profession. (Tysiac, 2017)Initially required heavy investment to establish such type of system: Blockchain technology requires significant investments in financial and human resources. It involves drastic changes to corporate processes and requires a thorough cost-benefit analysis before implementation. The success of every blockchain project depends on careful evaluation of viability, practicality, and alignment with the company\'s business. Accounting professionals can be vital in providing essential advisory services and conducting cost-benefit analyses. (Dai & Vasarhelyi, 2017)Lack of such infrastructure: It is important to note that some people may argue that the situations mentioned are not representative or that early and ongoing investments in infrastructure will outweigh any cost savings. It is essential to consider the unique characteristics of each company and industry. Before implementing blockchain technology, several factors need to be evaluated, such as the company\'s size, the nature of the business, the competitive environment, whether to develop the technology in-house or use other services, and the available financial resources. Each organization should compare the costs and benefits to determine if a technology suits their needs. (Karajovic et al., 2019)Lack of technical courses and training for accounting: The lack of blockchain development in accounting is due to a knowledge gap between blockchain developers and accounting professionals. Additionally, accounting professionals and researchers lack in-depth training in blockchain infrastructure, while blockchain specialists need help from accounting professionals to understand business and accounting needs. Managers, accountants, and auditors require training and support from IT specialists to use blockchain technology efficiently. Smart contract auditing is also a complex issue that requires a deep understanding of blockchain technology. (Dai & Vasarhelyi, 2017; Cai, 2019)Lack of compatibility with the existing system: Innovation Diffusion Theory outlines five properties of innovation spread, including observability, trial ability, complexity, compatibility, and relative advantage. Blockchain technology has low levels of observability and compatibility, but it has much potential for utilization. However, there are practical issues with its compatibility with enterprise resource systems. Each node must be able to communicate with the shared blockchain and must agree on the shared network rules. (Dai & Vasarhelyi, 2017; Cai, 2019)Enhance the monopoly of the big corporations: In today\'s era of technology, a few large tech corporations hold monopolistic control over providing digital services. As India is a significant market for these companies, it is crucial to establish regulatory norms beforehand to prevent them from gaining too much influence. The concern is that giant corporations such as Amazon, Facebook, Google, and Microsoft could control and operate a digital infrastructure that impacts nearly every aspect of public life. The issue of Big Tech is no longer just a business concern but a broader problem due to the accelerated adoption of digitalization caused by COVID-19. It is time for India to take the lead in rethinking its regulatory framework and controlling Big Tech\'s power. (Surana et al., 2021)ConclusionBlockchain technology has significantly changed the accounting industry, offering rapid error detection and fraud prevention within accounting entries and automating transaction verification using data from business partners. The accountant\'s role evolves from collector and aggregator to translator and analyst as the recording and presentation process moves towards progressive automation. While technological advancements can threaten people\'s livelihoods in various fields, blockchain technology has positive and negative consequences for the accounting and auditing service industry. It requires companies to rebalance their workforce, trust their data in the public domain (even if encrypted), and persuade business partners to participate in an open-share environment. It should be done in tandem with traditional business systems such as ERPs, and large firms with several ERPs may need to invest significant resources to connect blockchain apps with each system.Implementing blockchain technology in accounting requires significant changes in corporate processes, which can be challenging but offer long-term benefits. It is crucial to ensure a smooth transition that balances the benefits of blockchain with the impact on the workforce.References:Byrne, D., & Lees, D. (2018). Finance and accounting-beyond the numbers with self-leadership. In Contemporary Issues in Accounting: The Current Developments in Accounting Beyond the Numbers. https://doi.org/10.1007/978-3-319-91113-7_9Cai, C. W. (2019). Triple-entry accounting with blockchain: How far have we come? Accounting and Finance. https://doi.org/10.1111/acfi.12556Dai, J., & Vasarhelyi, M. A. (2017). Toward blockchain-based accounting and assurance. Journal of Information Systems, 31(3), 5-21. https://doi.org/10.2308/isys-51804Deloitte. (2016). Blockchain Technology: A game-changer in accounting? https://www2.deloitte.com/content/dam/Deloitte/de/Documents/Innovation/Blockchain_A_game-changer_in_accounting.pdfDemirkan, S., Demirkan, I., & McKee, A. (2020). Blockchain technology in the future of business cyber security and accounting. Journal of Management Analytics, 0(0), 1-20. https://doi.org/10.1080/23270012.2020.1731721Karajovic, M., Kim, H. M., & Laskowski, M. (2019). Thinking Outside the Block: Projected Phases of Blockchain Integration in the Accounting Industry. Australian Accounting Review, 29(2), 319-330. https://doi.org/10.1111/auar.12280Lagaras, M. C. P. (2018). Changing the Landscape of Accounting using Blockchain Technology. International Journal of Engineering and Management Research, 8(5), 190-195. https://doi.org/10.31033/ijemr.8.5.23Surana, G., Bhanawat, S. S., & Chouhan, V. (2021). Measuring professionals\' perception on blockchain-based futuristic accounting. In Blockchain 3.0 for Sustainable Development (pp. 89-100). De Gruyter. https://doi.org/10.1515/9783110702507-006Tysiac, K. (2017). Blockchain: An opportunity for accountants? Or a threat? Journal of Accountancy. https://www.journalofaccountancy.com/news/2017/nov/blockchain-opportunity-for-accountants-201717900.htmlWeigand, H., Blums, I., & Kruijff, J. de. (2020). Shared Ledger Accounting Implementing the Economic Exchange pattern. Information Systems, 90, 101437. https://doi.org/10.1016/j.is.2019.101437Authors may be reached at gouravsurana7@gmail.com and eboard@icai.in
Ep. 324 — Auditing using Drone Technology
CA Journal
· September 2026
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Auditing using Drone TechnologyDrones, commonly recognized as Unmanned Aerial Vehicles (UAVs), represent a synthesis of technological ingenuity and aerial exploration. These aerial vehicles, devoid of human pilots, traverse the skies with remarkable precision, orchestrated either remotely by skilled operators or autonomously through computational systems. Drones represent a powerful tool for auditors seeking to enhance their capabilities and efficiency in today\'s digital age. By understanding the fundamentals of drones and their applications in auditing, researchers and practitioners can explore innovative ways to leverage this technology for improved audit outcomes and client satisfaction.Here are some of the areas where drones can be extensively used by the Auditors:Physical Inventory CountThe utilization of drones in inventory management represents a paradigm shift in audit methodologies. Drones, equipped with state-of-the-art camera technology, offer auditors an unprecedented vantage point for capturing inventory data in warehouses and large-scale facilities. This innovative approach promises to revolutionize traditional inventory counting methods, presenting a compelling solution to the challenges of manual counts burdened by inefficiencies and errors.Drones navigate seamlessly through warehouse aisles, capturing high-resolution footage of inventory from various angles. This real-time data collection process eliminates the need for manual intervention, significantly reducing the time and resources expended on inventory counting activities. With drones at the helm, auditors can expedite the reconciliation process and gain a comprehensive understanding of inventory levels without compromising accuracy.By affixing QR codes to inventory items or storage locations, auditors can encode vital information such as product details, quantities, and location identifiers. Drones equipped with cameras and QR code scanning capabilities can then autonomously navigate through warehouses or facilities, capturing QR code data and transmitting it to auditors in real-time.Auditors can identify slow-moving or obsolete inventory items, implement inventory replenishment plans, and optimize storage space utilization based on real-time inventory data captured by drones.Assessment of Supply Chain OperationsDrones, equipped with advanced surveillance capabilities, offer auditors a comprehensive view of various aspects of the supply chain, including transportation routes, storage facilities, and distribution centres. This innovative approach empowers auditors to gain real-time insights into the intricacies of logistics operations, facilitating informed decision-making and strategic planning to optimize efficiency and compliance.In addition to optimizing logistics efficiency, drones contribute to ensuring compliance with inventory management practices within the supply chain. By monitoring storage facilities and distribution centres, drones enable auditors to verify the accuracy of inventory records, identify discrepancies, and mitigate the risk of inventory shrinkage or loss. Furthermore, drones can detect potential security breaches, unauthorized access, or deviations from standard operating procedures, allowing auditors to enforce compliance with inventory control measures and regulatory requirements.By leveraging drones to capture aerial footage of transportation activities, auditors can identify bottlenecks, streamline routes, and optimize resource allocation to enhance logistics efficiency. Additionally, drones can surveil storage facilities and distribution centres, enabling auditors to assess inventory levels, storage capacity utilization, and warehouse organization.Drones for Remote AccessDrones have emerged as invaluable tools for auditors seeking to access remote or hazardous areas that are challenging to reach manually. These areas, which may include rooftops, high shelves in warehouses, or confined spaces, present significant safety risks to auditors if accessed without proper equipment or training. By deploying drones equipped with cameras and sensors, auditors can overcome these challenges and gather crucial information from otherwise inaccessible locations. This innovative approach not only minimizes safety risks for auditors but also streamlines the audit process by facilitating efficient data collection and inspection activities.The deployment of drones for remote access offers auditors a safer and more efficient alternative to traditional manual inspections. Rather than subjecting auditors to hazardous conditions or requiring specialized equipment for accessing elevated or confined spaces, drones provide a non-intrusive means of gathering information from a safe distance. Auditors can remotely control drones to navigate through complex environments, capturing high-resolution images and videos for inspection and analysis.Beyond traditional building inspections, drones can be deployed in various industries and environments, including construction sites, manufacturing facilities, and infrastructure projects. Auditors can use drones to assess structural integrity, identify maintenance needs, and monitor compliance with regulatory requirements in remote or hazardous areas. By embracing drone technology for remote access, auditors can unlock new opportunities for innovation and efficiency in audit practices, ultimately advancing the profession into the digital age.Monitoring Compliance with Safety RegulationsEquipped with advanced camera technology, Drones offer auditors a powerful tool for monitoring client sites and ensuring compliance with safety regulations. These regulations encompass a range of requirements, including the availability of safety equipment, adherence to evacuation procedures, and identification of potential hazards. By deploying drones to conduct aerial surveillance of client sites, auditors can gain real-time insights into safety practices and identify areas where improvements may be needed to mitigate risks and ensure a safe working environment.They can also monitor adherence to evacuation procedures by assessing the accessibility and clarity of evacuation routes, signage, and assembly points. Furthermore, drones provide auditors with a bird\'s-eye view of the site, allowing them to identify potential hazards, such as blocked exits, trip hazards, or unsafe working conditions, that may pose risks to employees or visitors.By proactively identifying safety gaps and recommending corrective actions, auditors can help clients prioritize safety initiatives and invest in measures to mitigate risks and prevent accidents. Moreover, the visibility provided by drone surveillance can enhance accountability and transparency, encouraging employees to adhere to safety protocols and report hazards promptly.Ultimately, the integration of drones into safety compliance monitoring empowers auditors to support clients in achieving and maintaining a safe work environment, thereby safeguarding the well-being of employees and stakeholders while minimizing liability and reputational risks.Assessment of Agricultural AssetsIn the agricultural sector, drones equipped with specialized sensors and imaging technology have emerged as indispensable tools for assessing and managing agricultural assets. One of the primary applications of drones in agriculture is the monitoring of crop health and irrigation systems. Equipped with multispectral or thermal imaging sensors, drones can capture detailed imagery of crop fields, enabling auditors to assess crop health indicators such as chlorophyll levels, moisture content, and temperature variations.Additionally, drones can survey irrigation systems to identify inefficiencies, such as leaks or uneven water distribution, and optimize irrigation practices to ensure optimal crop growth and water conservation.Another valuable application of drones in agriculture is the detection of pest infestations and the management of associated risks. Drones equipped with high-resolution cameras and advanced image analysis software can identify early signs of pest damage, such as discoloured foliage or irregular crop patterns, enabling auditors to implement timely pest control measures and minimize crop losses.Verification of Land Use and Zoning ComplianceUtilizing drones for aerial surveys offers auditors a powerful tool to verify compliance with land use and zoning regulations, ensuring adherence to established guidelines and requirements. These surveys enable auditors to conduct comprehensive assessments of land parcels, identifying key elements such as the placement of structures, adherence to setback requirements, and the presence of unauthorized developments.Aerial surveys conducted by drones enable auditors to monitor land use and zoning compliance with unprecedented accuracy and efficiency. Drones can navigate through complex terrain and capture aerial footage of land parcels, allowing auditors to verify the placement and dimensions of structures relative to property boundaries and zoning restrictions. Additionally, drones can detect unauthorized developments or encroachments, such as illegal construction or land clearing activities, enabling auditors to take timely enforcement actions to address violations and ensure regulatory compliance.By leveraging drone technology for aerial surveys, auditors can enhance their ability to detect potential zoning violations and uphold the integrity of land use regulations.By embracing drone technology for verification of land use and zoning compliance, auditors can optimize their audit processes, improve accuracy, and ensure the effective enforcement of regulatory requirements to safeguard public safety and property rights.Embracing the Future: The Transformative Role of Drones in Corporate InnovationIn the history of corporate innovation, the utilization of drones stands as a testament to the visionary ethos upheld by esteemed entities across diverse industries. Embarking upon a journey of technological prowess, renowned companies have adeptly wielded drones to transcend conventional boundaries and redefine operational paradigms. Far from mere novelties, drones represent a cornerstone of innovation embraced by illustrious organizations committed to pioneering the future.These examples demonstrate the diverse range of applications for drones in auditing across various industries, highlighting the versatility and value of drone technology in enhancing audit efficiency, accuracy, and risk management.Various industries leverage drone technology to enhance operational efficiency and safety. NASA uses drones for facility inspections, improving safety while reducing resource needs. In the insurance sector, many companies expedite property damage assessments with drones, accelerating claims processing. Many energy giants rely on drones for pipeline inspections to ensure safety and regulatory compliance. Companies also deploy drones for utility infrastructure inspections, enhancing reliability. Environmental monitoring firms also use drones for compliance checks, while mining companies employ them for detailed site surveys to optimize resource extraction. Real estate firms use drones for property assessments, aiding investment decisions, while few companies bolster forensic accounting investigations with drone-gathered evidence. Financial institutions have also turned to drones for disaster recovery audits, supporting business continuity. This illustrates the integration of drone technology across diverse sectors, underscoring its operational significance and its role in enhancing productivity.As auditing evolves with the integration of drone technology, inherent vulnerabilities and threats arise, demanding careful consideration. From data breaches during transmission to unauthorized access and physical security risks, addressing these challenges is crucial for maintaining the integrity of audit operations and ensuring stakeholder trust.VulnerabilitiesData Breaches: Implementing end-to-end encryption protocols can fortify data transmissions, thwarting potential interception attempts. Additionally, regular security audits should be conducted to identify and patch vulnerabilities in data storage systems.Software Vulnerabilities: Employing rigorous testing procedures during software development stages can mitigate the risk of bugs and vulnerabilities. Continuous monitoring and updates of drone software ensure that emerging threats are promptly addressed and patched.Loss of Control: Implementing fail-safe mechanisms such as automatic return-to-home features and geofencing can mitigate the risk of drones becoming lost or hijacked due to malfunctions or signal interference. Additionally, investing in redundant control systems can provide backup options in case of primary control failure.ThreatsUnauthorized Access: Deploying intrusion detection systems and regularly updating authentication protocols can thwart unauthorized attempts to gain control of drones. Additionally, implementing behaviour-based anomaly detection algorithms can help identify suspicious activity and mitigate potential threats.Data Theft: Employing data encryption not only during transmission but also at rest can safeguard sensitive information from interception and theft. Moreover, establishing strict data access controls and robust data loss prevention measures can prevent unauthorized access to confidential data stored onboard drones.Physical Security: Implementing physical security measures such as tamper-evident seals and GPS-based tracking systems can deter theft and unauthorized access to drones. Furthermore, storing drones in secure facilities equipped with surveillance cameras and access controls can minimize the risk of physical tampering or theft.In drone-assisted auditing, effective controls and policies are crucial for ensuring operational integrity and compliance. From encryption to access management, these measures mitigate risks and bolster stakeholder confidence.Controls and PoliciesEncryption: Enforcing encryption standards compliant with industry best practices and regulatory requirements ensures the confidentiality and integrity of data transmitted by drones. Regularly updating encryption algorithms and key management protocols further strengthens security measures against evolving threats.Access Control: Implementing role-based access control mechanisms ensures that only authorized personnel can operate drones and access sensitive data. Additionally, incorporating biometric authentication technologies adds an extra layer of security to verify the identity of drone operators.Regular Audits: Conducting periodic security audits not only identifies existing vulnerabilities but also helps assess the effectiveness of implemented security measures. Collaborating with third-party cybersecurity firms for independent audits can provide unbiased evaluations and recommendations for enhancing security posture.Training: Providing comprehensive cybersecurity training for drone operators enhances their awareness of potential threats and equips them with the skills to mitigate risks effectively. Regular training sessions on security protocols and incident response procedures ensure that operators remain proficient in handling security incidents.Regulatory Compliance: Adhering to aviation regulations such as the Federal Aviation Administration (FAA) guidelines ensures safe and compliant drone operations. Additionally, complying with data protection laws such as the General Data Protection Regulation (GDPR) safeguards the privacy rights of individuals and mitigates legal risks associated with data breaches.Incident Response Plan: Developing a robust incident response plan that outlines clear procedures for detecting, containing, and mitigating security incidents is essential for minimizing the impact of breaches or malfunctions. Regularly testing the incident response plan through tabletop exercises and simulated drills ensures its effectiveness in real-world scenarios.ConclusionIn the realm of auditing, the incorporation of drone technology signifies a monumental leap forward in innovation and operational efficacy. From streamlining physical inventory counts to monitoring compliance with safety regulations, drones present auditors with an array of powerful tools to elevate their practices. While challenges such as regulatory constraints and technical limitations may pose hurdles, the transformative potential of drones in auditing cannot be overstated.Embracing drone technology is not merely an exercise in modernization; it is a testament to auditors\' commitment to pushing the boundaries of traditional methodologies and embracing innovation. By harnessing the capabilities of drones and navigating through the complexities with agility and foresight, auditors can unlock new horizons of efficiency, accuracy, and client satisfaction.As auditors embark on this journey of technological advancement, they must remain vigilant and proactive in addressing challenges and maximizing opportunities. Through strategic planning, robust risk management strategies, and continuous adaptation, auditors can harness the full potential of drone technology to redefine auditing practices and drive positive change in the profession.The path forward for auditors lies in embracing a culture of innovation and continuous adaptation to harness the full potential of drone technology. As technological advancements continue to reshape the audit landscape, auditors must remain agile and proactive in exploring new opportunities and overcoming challenges. This entails investing in research and development to refine drone capabilities, collaborating with industry partners to share best practices and insights, and advocating for regulatory frameworks that balance innovation with safety and privacy considerations.In conclusion, the integration of drones into auditing practices represents not only a technological evolution but also a cultural shift towards embracing innovation and embracing the future of audit. By embracing the possibilities offered by drones and embracing a mindset of continuous improvement, auditors can position themselves as trailblazers in an ever-evolving landscape, poised to shape the future of auditing for years to come.References:Using Drones in Internal and External Audits: An Exploratory Framework by Deniz Appelbaum and Robert A. Nehmer. Journal of Emerging Technologies in Accounting, Spring 2017, Vol. 14/01.Deloitte. (2018). \"Advancing Audit Quality with Smarter Audits.\" Retrieved from https://www2.deloitte.com/qa/en/pages/audit/solutions/gx-smarter-audits.htmlLee, C., and Park, S. (2018). \"Drones in Supply Chain Auditing: A Comparative Study of Logistics Operations.\" International Journal of Logistics Management, 29(2), 176-189.Kennedy Martinez. \"5 industries using drones to benefit their business\" Retrieved from https://www.rob-harris.com/5-industries-using-drones-to-benefit-their-business/Author may be reached at rishanthvankadari@gmail.com and eboard@icai.in
Ep. 325 — Beyond the Bottom Line: Framework for Long-Term Value Reporting
CA Journal
· September 2026
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Beyond the Bottom Line: Framework for Long-Term Value ReportingHow much is this quarter's profit?You must have heard this question very often. All listed companies on Stock Exchanges are required to publish their financial results every quarter and this particular question is always bothering Management. Investors often react strongly to these financial results. Because of this fear, most of the companies, if not all, neglect long-term in trying to impress investors through their quarterly earnings.In today\'s fast-changing business world, the current system of reporting that focuses on quarterly earnings seems to have become outdated. The growth of modern businesses like tech startups, infrastructure projects, and R&D highlights the flaws of focusing only on short-term results. Sustainable businesses take time to deliver results. Assessing their growth solely based on quarterly earnings can lead to misinterpretation of their true potential. A company may be investing heavily in customer acquisition, research and development, building its infrastructure, or entering new markets, where returns may not be immediate and quarterly earnings insufficient to get favorable response from investors.Are All Companies same?Is a company working on Artificial Intelligence (AI) the same as one trading in fast-moving consumer goods? I am sure, answer to this is emphatic \'No\'; then why quarter results produced by all Companies looks the same? Because, all of them follow same regulatory template. Financial ratios like profit margins or revenue growth are universally relevant, however they fail to account for the unique dynamics that drive a business. For example - A manufacturing company might focus on inventory turnover and production efficiency, while a tech firm should be evaluated on product development or user growth, and a space company might focus more on technology innovation, regulatory compliance and partnerships & collaborations.Businesses are not alike, the environment in which they operate is not same, risks they carry also varies and therefore matrices on which they are evaluated should also be different and not just quarterly earnings.Investor Presentation is there, what else is needed?Some companies voluntarily shares performance indicators and other long term matrices through \'Investor Presentations\'. However, the lack of a standardized framework leads to inconsistencies. Companies may highlight favorable metrics when they perform well but discontinue or modify reporting when the results are less favorable. This information is neither reviewed by their auditor nor approved by their governing board, thus not giving any assurance of accuracy of information presented.Should we then do away with quarterly financial results reporting?As an investor, I wonder how I would know answer to some of the relevant questions:How is business performing?Is my investment safe?Should I increase or decrease my investment?Companies routinely monitor their KPIs internally and Investors should not be deprived of these critical piece of information, as they too have right to understand the ongoing progress of a company they have invested in. Depending on the nature of the business, access to wider range of information should be given to investors on a more frequent basis instead of just limiting progress card to financial earnings.Imagine an e-commerce startup, giving regular update to its investors on critical metrics such as user acquisition, conversion ratio, repeat customer, product engagement, or customer retention rates. For an infrastructure company, key updates might include project milestones, progress on land acquisition, contract awards, or regulatory approvals, percentage of project completion, percentage of actual traffic vis-à-vis projected traffic.Further, a SaaS (Software as a Service) company could report on customer acquisition costs, monthly recurring revenue, and churn rates. A manufacturing company might focus on capacity utilisation, production efficiency matrices, cost of raw material inflation index, supply chain performance etc.These are some of the lead performance indicators that can give investors a much clearer view of where the company is heading by providing report on \'Long Term Value\'.What could be the framework for 'Long Term Value' reporting?A complete overhaul of regulatory framework requiring companies to disclose quarterly earnings is required. To ensure accountability, consistency and relevance of reporting with changing times, the following framework is suggested:Companies should be free to choose matrices they want to report considering the industry, stage of evolution and other factors. Amazon made losses for 20 years but shareholders still continued to reward, there was one simple reason, the company continued to communicate their focus area with their shareholders and matrices showing the clear progress on the same.All matrices should be classified in three categories, as follows:Critical to Success: Focus on long-term view.Lead indicators of Progress: Short-term in nature and may include financial results, if company believes that to be the best metric.Risks Factors: Relevant and concise risks, avoiding exhaustive lists. This should not be like risk factors in Prospectus in which any and every remotest possible risk is mentioned. This is taken as false alarm by Investor and squarely ignored.These matrices, along with the frequency of reporting (minimum Quarterly), should be approved by the Board of Directors and consistently followed and reported by Companies.Numbers, thus reported should be reviewed (not audited) by Auditors and authorised by Board for issuance for greater accountability.We live in an ever changing environment and these matrices may need change to keep up with changing world. Any departure/modification to these metrics should be approved by Board with rationale of changes recorded and communicated to investors. To bring more accountability, voting by Independent Directors may be made compulsory. Changes to the \'Critical to Success\' metrics should be carried only with Shareholders\' approval and promoters not participating in the voting process.Annual report along with complete set of audited financial results should continue under current framework.Conclusion: Focusing on Long-Term Value CreationBy embracing this framework with governance, companies can align investor expectations with their strategic goals, fostering mutual trust and ensuring sustainable growth leading to long term value creation.References:(No explicit references listed in source)Author may be reached Goyal_Deepak@hotmail.com and eboard@icai.in
Ep. 329 — SEBI (LODR): - Regulations to Resilience: Transparency, Governance & Sustainable Growth
CA Journal
· September 2026
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SEBI (LODR): - Regulations to Resilience: Transparency, Governance & Sustainable Growth"The measure of intelligence is the ability to change." - Albert EinsteinIn a rapidly evolving global landscape, the Securities and Exchange Board of India (SEBI) is driving change to foster a more robust and resilient Capital market ecosystem. As the world\'s fifth-largest economy, India boasts over 7,500 listed entities across the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), with all BSE listed entities having market capitalization exceeding 431 trillion Rupees. SEBI has introduced various amendments to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) in the past few years, paving the way for sustainable growth by enhancing transparency, governance, and stakeholder communication and aligning India\'s capital markets with global best practices.These transformative changes can be categorized into the following four main aspects:TransparencyMateriality: One of the significant changes in the LODR is the introduction of a quantitative threshold for determining the materiality of events or information. This threshold, based on 2% of turnover, 2% of net worth, or 5% of the average absolute value of profit or loss after tax, provides greater clarity and certainty for listed entities in fulfilling their disclosure obligations and eliminates subjectivity for dissemination of information.Tightening Timelines: SEBI has also tightened the timelines for disclosing material events, ensuring that investors have access to timely and accurate information. This includes reducing the time for disclosing the outcome of board meetings from 12 hours to 30 minutes. Further, in the 207th Board meeting held on 30.09.2024 the timelines for disclosing the outcome of board meeting happening after market hours has been increased to 3 hours.Disclosure of penalties, fines, litigation & disputes: The disclosure requirements now mandate listed entities to disclose any penalties or fines imposed on them by regulators or judicial bodies and litigation & disputes without any threshold. Soon, we saw that materiality was taken over by triviality in form of notices/fines/tax litigation of miniscule amounts being disseminated to the exchange. Keeping this in mind, SEBI extended the time limit for dissemination to 72 hours if the information is stored in SDD, only significant tax litigations and disputes are required to be disclosed and penalties and fine with a Rs. 1 lac threshold for sectoral and Rs. 10 lac thresholds for others.Verification of Market Rumours: Confirm, Deny or Clarify upon material price movement due to any reported events or information in the mainstream media i.e. a rumour is what the regulation has mandated the top 100 listed companies by market capitalization w.e.f. 01.06.24 and, subsequently, the top 250 listed entities w.e.f. 01.12.24.GovernanceChanges in Corporate Governance Reports: The LODR has introduced changes in corporate governance (CG) reports, requiring listed entities to provide more comprehensive information on their CG practices. This includes disclosing details of cybersecurity incidents & breaches along with the quarterly CG report and particulars of senior management including changes therein since the close of the previous FY, need to be reported in the Corporate Governance Report.Tightening Promoter & Key Person Disclosure Norms: To enhance governance, SEBI has tightened the disclosure norms for promoters of listed entities. Promoters must now disclose any agreements or arrangements that could impact the management or impose restrictions on the company. Also, key persons are now obligated to provide adequate, accurate and timely response to the queries raised or explanations sought by listed companies regarding any fraud/default or other event which they are required to report related to key persons.Filling Vacancies & Disclosure of Resignations: SEBI has introduced specific timelines of 3 months for filling vacancies in key positions, such as the CEO, CFO, and Compliance Officer subject to the case where the entity is required to obtain any regulatory approval, approval of government or statutory authorities where the timelines shall be of 6 months. This ensures that critical roles are filled promptly, maintaining the operational efficiency of listed entities. Also mandated disclosure of resignation of KMP, senior management, director other than independent director within 7 days of resignation.Prohibition of Insider Trading (PIT) Regulations: -Expansion of the definition of connected persons to include a firm or its partner or employee where a \"connected person\" is also a partner, as well as individuals sharing a household or residence with a connected person.\"The provisions related to connected persons will now apply to \"relatives\" rather than just \"immediate relatives\"Insertion of a new definition \"relative\" to include the spouse, parents (including parents of the spouse), siblings (including siblings of the spouse), and children (including children of the spouse), along with their spouseSustainability: - BRSR ReportingBRSR is not just another box to tick. It is a journey towards a more sustainable and responsible future for Indian businesses. India is one of the few countries where a comprehensive statutory reporting framework exists for ESG parameters. Think of BRSR as a compass, guiding us towards a destination where profit and purpose coexist. It is about recognizing that our actions today shape the world of tomorrow. It is about understanding that sustainability is not just a buzzword, it is the bedrock of long-term success.Let me share a quick story. Imagine you are on a road trip. You have a powerful car, a clear map, but no fuel gauge. You might speed ahead initially, enjoying the ride. But sooner or later, you will be stranded, unsure of how far you have come or how much further you can go. That is where BRSR comes in. It is our fuel gauge for the journey towards sustainability. It helps us measure our impact, identify areas for improvement, and communicate our progress transparently.The journey might be challenging. There will be hurdles to overcome, data to gather, and new ways of thinking to embrace, because BRSR is not just about reporting, it is about rethinking our role in society and contributing to a better world.BRSR Core: The introduction of the BRSR Core framework is a significant step towards enhancing sustainability reporting. BRSR Core is a sub-set of the BRSR, consisting of a set of KPIs under 9 ESG attributes. Reporting of BRSR Core mandates listed entities to report on key ESG (Environmental, Social, and Governance) parameters, providing investors with standardized and comparable data on their ESG performance.Revised BRSR Framework: SEBI has also revised the BRSR framework including BRSR Core KPIs & other KPIs such as job creation in small towns, open-ness of business, gross wages paid to women etc. This updated framework provides a more holistic view of a company\'s sustainability efforts and impacts.Reasonable Assurance & Value Chain Reporting: To ensure the credibility of BRSR disclosures, SEBI has introduced the requirement for reasonable assurance of BRSR Core disclosures. This assurance, to be provided by independent third-party experts, enhances the reliability and transparency of sustainability reporting. Further, its scope has been expanded to include disclosures on the ESG Parameters of 75% of Downstream and Upstream value chain partners of listed entitiesRelated Party TransactionsExpanded Definition of Related Party: The definition of a related party has been expanded to include promoters and promoter group entities, regardless of their shareholding. This removes a previous loophole and ensures that all related parties are subject to the same disclosure and approval requirements.Inclusion of any person equity shares in the company (even on beneficial basis): The definition of \"related party\" has been further amended to include any person or entity holding equity shares either directly or on a beneficial interest basis as provided under section 89 of the Companies Act, 2013, at any time, during the immediately preceding financial year amounting to 10% or more (w.e.f. April 1, 2023).Inclusion of Subsidiaries\' Transactions: Related party transactions now cover transactions between a listed entity or its subsidiaries and a related party of either the listed entity or any of its subsidiaries. This ensures that all related party transactions within a group are subject to scrutiny.Transactions Benefiting Related Parties: A transaction with an unrelated party will also be considered a related party transaction if its purpose is to benefit a related party of the listed entity or any of its subsidiaries. This provision, effective from April 1, 2023, focuses on the substance of the relationship rather than just the legal form.Enhanced Role of Audit Committee: The audit committee\'s role has been strengthened, requiring them to approve related party transactions of subsidiaries exceeding specific thresholds. This ensures greater oversight and accountability.Shareholder Approval: The threshold for obtaining shareholder approval for related party transactions has been revised to cover transactions exceeding INR 1,000 crore or 10% of the annual consolidated turnover, whichever is lower. This ensures that significant related party transactions are subject to shareholder scrutiny.Impact of ReformsThe recent amendments to the LODR have brought India\'s regulatory framework more in line with global standards. The reforms related to materiality, disclosure timelines, and corporate governance practices are like those implemented by the various other regulators across globe.The LODR reforms have significantly impacted India\'s capital markets, enhancing transparency, governance, and investor communication. The introduction of quantitative thresholds for materiality, stricter disclosure timelines, and the verification of market rumours has improved the quality and timeliness of information available to investors. The tightening of promoter disclosure norms and the expansion of shareholder approval for certain events have strengthened corporate governance practices. The introduction of the BRSR Core and the revised BRSR framework has enhanced the transparency and accountability of listed entities on their sustainability performance.This alignment enhances India\'s attractiveness as an investment destination and facilitates greater integration with global capital markets.Implementation ChallengesWhile the SEBI (LODR) amendments aim to enhance transparency and governance, their implementation presents practical challenges for companies. The expanded definition of related parties, encompassing subsidiaries\' transactions and those indirectly benefiting related parties, along with tighter timelines and the requirement for verification of market rumours, adds complexity to compliance efforts. Moreover, the BRSR Core, while promoting standardized ESG reporting, necessitates the collection and disclosure of extensive ESG data across the value chain, potentially straining resources, particularly for companies with intricate supply chains. Value chain reporting and reasonable assurance requirements are under consideration for revision, and we might see changes to facilitate ease of doing business in these regulations.ConclusionThe journey from regulations to resilience is ongoing, and SEBI\'s proactive approach to regulatory reform is shaping a more robust and investor-friendly Capital Market ecosystem in India. The LODR reforms have not only enhanced transparency and governance but have also aligned India\'s regulatory framework more closely with global standards. As India continues its journey towards becoming a global economic leader, our commitment to regulatory excellence will play a crucial role in ensuring sustainable growth and investor protection. Let us end this chapter of discussion at this saying of father of nation: \"The future depends on what we do in the present.\" - Mahatma Gandhi.References:(No explicit references listed in source)Author may be reached at cakuldeepkothari@gmail.com and eboard@icai.in
Ep. 330 — Beyond the Barrel: Managing Price Risk in Energy Markets
CA Journal
· September 2026
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Beyond the Barrel: Managing Price Risk in Energy MarketsCommodity price risk has become one of the crucial financial risks on an entity\'s financial performance/ profitability, especially with fluctuations in the prices of commodities that are primarily driven by external market forces. Sharp fluctuations in commodity prices are creating significant business challenges that can affect production costs, product pricing, earnings, and credit availability. This price volatility makes it imperative for an entity to manage the impact of commodity price fluctuations irrespective of its position in the value chain to effectively manage its financial performance and profitability.The Reserve Bank of India, in its December 2022 issue of its Financial Stability Report has, once again, focused on volatile commodity prices as a source of risk in the Indian economy. The central bank categorizes this risk in the \'high risk\' category, ranking it the 4th biggest risk (out of 32 identified risks) in the Indian financial system.Till recently, most businesses managed to withstand the commodity price movements, through these rudimentary methods, as the swings were more often temporary and cyclical and they had long-term contractual agreements. However, with structural changes shaping up the global commodities economy, the broad-based volatility in commodity prices, is not only affecting short term profits, but also long-term planning and investment. Hence the need for undertaking commodity price risk management in a more structured manner. There is a need for the corporates to manage risk for ensuring stability, resilience, and sustainable growth in an unpredictable environment. Risk management allows companies to identify potential threats, reduce vulnerabilities, and capitalize on opportunities to ensure long term success.Impact of Commodity Price MovementsVolatility in commodity prices impacts market participants differently irrespective of where they stand in value chain. To put out in simple words,A fall in commodity prices can:Decrease sales revenue for producers, potentially decreasing the value of the organisation, and/or lead to change in business strategy.Reduce or eliminate the viability of production mining and primary producers may alter production levels in response to lower prices.Decrease input costs for businesses consuming such commodities, thus potentially increasing profitability, which in turn can lead to an increase in value of the business.Affect inventory management solutions as there is a direct impact on earnings in case of fall in the value of inventory.A rise in commodity prices can:Increase sales revenue for producers if demand is not impacted by the price increase. This in turn can lead to an increase in the value of the business.Increase competition as producers increase supply to benefit from price increases and/or new entrants seek to take advantage of higher prices.Reduce profitability for businesses consuming such commodities (if the business is unable to pass on the cost increases in full), potentially reducing the value of the organisation.Directly have an adverse impact on input cost with prices of raw materials going up significantly.While we talk of commodities, in the world of energy, uncertainty is constant, and managing price risk is becoming an essential for survival. Going ahead, strategizing energy price risk management may become the backbone of business houses, especially in terms of creating resilience and enabling them to thrive against uncertainty.Oil prices are heavily influenced by global economic conditions. Factors such as economic slowdowns, disappointments over stimulus packages, recessions, or changes in consumer demand can lead to decreased oil consumption, which in turn affects prices.OPEC (Organisation of the Petroleum Exporting Countries) plays a significant role in influencing global energy prices through its production quotas and collective decision-making among member countries. However, OPEC\'s influence also gets offset by external economic factors heavily influencing market behaviour. Political instability in key oil-producing regions can disrupt supply chains and impact pricing dynamics. While OPEC may attempt to manage its output, geopolitical events can create uncertainty that leads to fluctuating prices independent of OPEC\'s actions.On the other hand, the rise of non-OPEC oil producers, particularly the United States with its shale oil production, has significantly increased global oil supply. This surge means that even if OPEC decides to cut production to raise prices, the additional supply from non-OPEC countries can offset these efforts, keeping prices lower than desired.The interplay of these geopolitical factors-regional conflicts, OPEC and OPEC+ decisions, and global economic health-continues to create volatility in oil prices, making it essential for stakeholders to stay informed about these developments.With this, hedging energy prices emerges as a vital strategy for companies looking to stabilize costs, enhance financial planning, and maintain a competitive edge.Hedging - A brief overviewHedging is a method of strategically using financial instruments to offset the risk of any adverse price movements. Hedging plays a crucial role in the industry today for proper risk management and to protect shareholder value. Companies are assessed by shareholders and investors based on how strong their hedging strategy is. Derivative instruments such as forwards, futures, swaps and options are examples of some of the instruments used by companies to mitigate the risk and hedge the physical positions/asset. Essential benefits of hedging:Cost PredictabilityEnhanced Investment DecisionsImproved Cash Flow ManagementCompetitive AdvantageRegulatory Compliance and Sustainability GoalsFitch Ratings examined the hedge books of 27 U.S. and Canadian oil and gas exploration and production (E&P) companies at 3Q23 to assess their hedge coverage for 2024 and the implications for credit and price risk. The average 2024 oil hedge coverage for oil-focused producers is 39%, while the average 2024 gas hedge coverage for gas-focused producers is 48%. Many investment-grade (IG) oil and gas producers, along with a few high-yield (HY) producers, remain fully unhedged throughout 2024, which brings added downside price risk, particularly for those with weaker balance sheets or who are digesting debt-funded M&A deals. (Source: Fitch Ratings website)Sustainable BusinessesSustainability as a concept is linked generally only to environment. However, when we talk of commodity and energy insecurity, overcoming these insecurities becomes a question of survival first and then sustaining these businesses.Infact, sustainability is often broken down into three pillars: economic, environmental, and social-also known informally as profits, planet, and people. As a result of volatile commodity prices which is fuelled by population growth, climate change and growth prospective; companies face a significant exposure. The concept of \'economic sustainability\' focuses on conserving the natural resources that provide physical inputs for economic production, including both renewable and exhaustible inputs. Industries having exposure to these natural resources as feedstock cannot reduce the consumption but can manage their price risk efficiently in a volatile environment by hedging through commodity derivatives traded on exchanges. In Indian markets, price risk management has most often talked only in terms of forex prices. However, a quick run through Graph 2 will tell us how far-fetched the gravity of commodity price risk management is. One side is 4-5% average forex volatility which we tend to manage. On the other side is oil & gas price risk, where the average annualized volatility is around 40-50%, and many a times the exposure to this price risk is kept open-ended.Energy Derivatives - Effective risk management instrumentsThe availability of financial instruments, particularly energy derivatives like crude oil and natural gas contracts on regulated exchanges such as MCX, help mitigate price volatility by serving as effective risk management tool. These highly transparent and liquid contracts attract various financial sector participants, including algorithmic traders, AIFs, FPIs, and MFs, who absorb risks faced by value chain participants and provide essential liquidity for hedging.Fuel feedstock and crude based raw materials account for bulk of the manufacturing costs across various industries like the automobile, glass, metals & metallurgy, fertilizer, paints, etc. The robust and liquid crude oil and natural gas futures and options contracts are available to the corporates for hedging their input costs through the MCX Exchange Platform. These cash settled contracts mirror the price movements in the international market. Additionally, these contracts allow for hedging international exposure in INR-denominated contracts, offering a natural currency hedge.The Exchange provides buyers and sellers with price insurance that can be integrated into cash market operations. Trading Exchange contracts can improve the credit worthiness and add to the borrowing capacity of natural resource companies, thus augmenting the companies\' financial management and performance capabilities.Energy price risk management can emerge as a critical differentiator of business performance. The global conglomerates from producers (British Petroleum, Shell), refiners, Airlines (Southwest Airlines, Air France-KLM, Lufthansa), glass companies (Saint Gobain, Duralex), fertiliser companies, etc. and other core sectors have been committed to hedging actively in energy derivative instruments, thus enhancing their competitiveness and in-turn their bottom lines.Hedge AccountingTransition to Ind AS regime is a landmark for the Indian industry, bringing about a paradigm shift in reporting & disclosures besides improving the transparency of financial statements, benchmarking them to international standards and accounting practices. While hedging mitigates price risk, the associated accounting norms requires organizations to record MTM gains and losses in each reporting period, leading to earnings volatility in financial statements. Hedge accounting governed by IndAS 109 addresses many challenges by providing stability in profitability reporting thereby minimizing the volatility in bottom-line reported in financial statements.Hedge accounting is basically a technique that modifies the normal basis for recognizing gains and losses on associated hedging instruments and hedged items, so that both are recognized in Profit and Loss Account (P&L) or Other Comprehensive Income (OCI) in the same accounting period. Ind AS permits an entity to apply hedge accounting to represent the effect of risk management activities that use financial instruments to manage exposures arising from risks that could affect profit or loss (P&L) or other comprehensive income (OCI).The basics of hedge accounting have not changed over the earlier regime. However, change as mandated by Ind AS 109 lies in widening the range of situations to which one can apply hedge accounting. Under Ind AS regime, hedge accounting can be basically applied to almost all hedge relationships, as the rules are now more practical, principle based and place greater emphasis on an entity\'s risk management practices. They provide more flexibility and allow corporates to apply hedge accounting where previously they would not have been able to. As a result, this is an opportunity for corporate treasurers and boards to review their current hedging strategies and accounting, and to consider whether they continue to be optimal in view of the new accounting regime.Ind AS 109 has introduced a new concept of \'economic relationship\' and requires the existence of an economic relationship between the hedged item and the hedging instrument.Ind AS 109 also relaxes the requirements for hedge effectiveness, removing the bright line test of 80-125%. In the new era of Ind AS 109, an entity needs to demonstrate that an \'economic relationship\' exists between the hedged item and hedging instrument on a prospective basis. This change could result in more hedging relationships qualifying for hedge accounting based on the actual risk management strategies of the company. For example, a vast majority of petrochemical manufacturers employ naphtha cracker units for cracking naphtha into polymers and olefins. Since naphtha is a product from the fractional distillation of crude oil, its price movement is highly correlated with that of crude. Hence Brent and WTI Crude hedges are most common proxy hedges due to its economic relationship with naphtha.ConclusionIn an era of heightened energy price volatility, hedging has become an indispensable tool for businesses seeking to navigate the complexities of the energy market. By implementing effective hedging strategies, companies can protect their bottom lines, support sustainable practices, and enhance their overall competitiveness. As the energy landscape continues to evolve-driven by technological advancements, regulatory changes, and market dynamics-the need for proactive risk management will only grow. Companies that prioritize hedging will be better positioned to thrive amid uncertainty and capitalize on opportunities in the changing energy market.Indian statutory bodies and regulators have also initiated many steps to encourage good risk management practices, especially commodity price risk. One such step has been SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which require the listed companies to disclose the information related to commodity price risk in their Annual Reports, as one of the mandatory components of Corporate Governance Report (Schedule V, C(9) (n) and C (10) (g)).Exposure of the listed entity to commodity and commodity risks faced throughout the year:Total exposure of the listed entity to commodities in INRExposure of the listed entity to various commodities:Commodity NameExposure in INR towards the particular commodityExposure in Quantity terms towards the particular commodity% of such exposure hedged through commodity derivatiesDomestic market (OTC / Exchange)International market (OTC / Exchange)Total Commodity risks faced by the listed entity during the year and how they have been managed.In our numerous discussions with different corporate risk managers on the derivatives trading desk, we have found that disciplined hedgers consistently outperform their competitors. This is true regardless of volatility levels and market conditions, as predictable cash flows are always essential. A comprehensive hedging policy should address all aspects of corporate operations. The key is to approach risk holistically, hedging as a package, and ensuring the policy is systematic and centralised.Effective risk management in energy markets is not about avoiding risk; it\'s about understanding and managing it.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 331 — Decoding Investor Psychology: The Role of Behavioral Finance in Shaping Financial Decisions
CA Journal
· September 2026
00:00
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Decoding Investor Psychology: The Role of Behavioral Finance in Shaping Financial DecisionsThe field of behavioral finance examines the impact of psychological factors on the decision-making processes of investors and financial analysts. Investors exhibit human characteristics, including irrational behavior, lack of self-control, and biased decision-making. Behavioral finance tries to understand and address these human behaviors. The pioneers in behavioral finance were Daniel Kahneman and Amos Tversky, who divided behavioral finance into prospect theory and heuristics. According to behavioral finance, an individual\'s financial decision-making can be influenced by cognitive biases, lack of self-control, and irrational beliefs. Awareness and addressing cognitive biases is crucial in making sound financial decisions. Individuals and organizations can develop more logical and successful investment approaches and economic choices by acknowledging and reducing these biases.Behavioral Finance is the study of how human psychology can impact the financial decisions of investors and analysts. It sheds light on the irrational decisions taken by the investors, causing financial setbacks in the financial realm. The study addresses and understands the human characteristics that an investor possesses like irrational behavior, lack of self-control, and biased decision-making.There is a bifurcation in financial markets mainly into two categories: Traditional Finance, regarded as conventional finance, and Behavioral Finance, a relatively recent development in the field. The traditional financial theory asserts that during the process of trading when buying and selling stocks, an investor thinks and behaves rationally after thoroughly evaluating all the available information before making any decision. Previously, in the premise of the financial market, there was an emphasis on traditional finance theories such as the Efficient Market Hypothesis and the Harry Markowitz Model, both of which were based on the rationality of investors. Harry Markowitz is known for his pioneering work in modern portfolio theory, which is based on the portfolio\'s expected return, standard deviation, and correlation within the portfolio. This theory, the Efficient Market Hypothesis (EMH), and the Capital Asset Pricing Model (CAPM) form the cornerstone of modern portfolio theories. Research in finance aims to create a theoretical framework to comprehend market uncertainties by making minimal assumptions. Traditional finance has successfully unified a set of results, such as the CAPM formula, Black-Scholes formula, informational efficiency, and Modigliani-Miller theorem, with fewer assumptions. This achievement has led some researchers to consider finance the most scientific of all social sciences. Financial market theories are broadly classified into Traditional Finance and Behavioral Finance theories. Traditional theory assumes that investors act rationally, aim to maximize profit, and are generally risk-averse. However, market efficiency assumptions are violated due to speculations and unpredictability, often called market anomalies.Behavioral FinanceKahneman\'s and Tverky\'s (1979) groundbreaking research on challenging the efficiency of the markets formed the foundation of behavioral finance. This emerging field of study aims to throw light on the actual irrational behaviors of individuals when confronted with risky choices, which stays opposite to the rationality hypothesis and posits that individuals constantly tend to maximize the anticipated utility derived from their wealth. Behavioral finance is a comparatively new field that brings the behavioral and cognitive theories of psychology with finance and economics and thereby provides reasons behind the suboptimal financial decisions of investors. Behavioral finance does not consider investors as rational; instead, it treats them as normal, and they may lack self-control, be biased, and have cognitive distortions, causing errors and resulting in wrong decisions. It focuses on studying the effects of psychology on financial decision-making. Also, it deals with theories and experiments focusing on the after-effects of investor decision-making based on emotions or institutions. Behavioral finance comprises two theories the pioneers Kahneman and Tverky developed: the prospect theory and the heuristic.Prospect TheoryThe Prospect theory was formulated in 1979 and was subjected to further revision in 1992 by the pioneers in behavioral finance, Daniel Kahneman and Amos Tversky. Prospect theory posits that individuals evaluate losses and gains differently, leading them to make decisions based on perceived gains rather than perceived losses. The general idea of the theory is that when two potentially equal choices are given to an individual, where one is explained in terms of loss and another in terms of gain, the latter option will be chosen by the individual. Generally, individuals tend to be risk-averse regarding gains but are more inclined to take risks in situations involving losses. This theory also demonstrates that decision-making by individuals is not always rational and is influenced by how various choices are presented to them. According to this theory, individuals\' decision-making is influenced by persistent biases driven by psychological factors when facing uncertainty. The prospect theory posits that preferences are determined by \"decision weights,\" which do not always align with probabilities. Individuals are inclined to assess potential outcomes regarding gains and losses relative to a reference point rather than focusing solely on the final states of wealth. This theory explains how investors make decisions when under risk and the predictability of their risk profiles. According to prospects theory, individuals value gain and loss disproportionately, so the perception of loss is more damaging than the feeling of improvement resulting from an equivalent gain. The reason for this is the outcome evaluation of individuals, which is based on relative rather than absolute utility. This theory carries significant implications and forms the basis of decision-making in investment. Many investors often make misguided decisions by solely focusing on avoiding losses. This theory explains the decision-making of investors and makes their behaviors predictable.Heuristics in Behavioral FinanceHeuristics are cognitive shortcuts that facilitate efficient decision-making and the rapid drawing of inferences. These simple rules are employed in selecting schema, reducing mental effort, and aiding problem-solving endeavors. When evaluating stocks, there is a common belief that a price-earnings ratio below fifteen signifies a good buy. However, stock valuation is a multifaceted process that cannot be simplified to a single metric, such as the price-earnings ratio. Utilizing such a metric as the sole basis for investment decisions can be considered a heuristic, an approach that involves omitting certain information to expedite decision-making. Ultimately, using heuristics allows investors to make faster decisions by selectively focusing on specific data points while potentially disregarding other relevant information.As it influences any decision-making, it also influences financial decision-making. Heuristics can be effective and efficient in cases of uncertainty. Sometimes, individuals making decisions may inadvertently rely on mental shortcuts, known as heuristics, without being conscious. Occasionally, decision-makers may employ heuristics in an automatic or unsophisticated manner, and there may also be instances where conflicting heuristics are used. Furthermore, individuals may impulsively utilize these cognitive shortcuts, leading to unintended outcomes. So, understanding the importance and use of heuristics will be helpful for investors in decision-making. Traditional financial theories prioritize decision-making based on rational statistical tools and excluding heuristics.All the necessary information for a scientific solution may be unavailable in an open market. Even if the information is available, investors may face challenges gathering it within a short and specific timeframe. In certain instances, although all relevant and necessary information is present in the market, the capability of the decision-makers may face difficulty in accurately comprehending the information and making informed choices. In such situations, investors may go for shortcuts called heuristics. There are different types of heuristics.Availability HeuristicsAn availability heuristic is a cognitive strategy used to make decisions based on the ease with which specific information can be brought to mind. It suggests that information that is more readily available in memory significantly influences decision-making and judgment. This heuristic assesses the likelihood of events based on the speed and ease with which relevant examples come to mind. In behavioral finance, investors may make decisions based on a recent market loss that is salient in their minds. It may or may not be the right decision. Still, without much mental effort, the investigator arriving at a decision using readily available data can be an example of availability heuristics in finance. It can be critically evaluated and studied to make effective and predictable financial decisions.Representativeness HeuristicsRepresentative heuristics refer to the decision-making process in which individuals assess the probability of an event by comparing it to another similar event. Typically, people overestimate an event\'s likelihood based on its perceived similarity to another event. This tendency often results in the neglect of the base rate, which is the actual probability of an event occurring, irrespective of its resemblance to other events.Anchoring and Adjustment HeuristicsAnchoring and adjustment heuristics involve decisions or judgments made when one lacks the necessary expertise by using available information as an anchor to formulate an initial estimation, subsequently making modifications or adjustments as required. Decisions are exclusively made with the anchor as the sole basis. Using past stock prices as anchors and making predictions and decisions are implications of anchor and adjustment heuristics, which may lead to wrong investment decisions.Biases in Behavioral FinanceAccording to Behavioral finance, an individual\'s financial decision-making can be influenced by cognitive biases, lack of self-control, and irrational beliefs. Cognitive biases influence how financial decisions are made. Some of the cognitive biases that can influence an investor\'s financial decision-making are as follows:Negativity BiasHumans tend to assign greater significance to negative information over positive information, even when both are presented equally. This tendency of individuals is referred to as negativity bias. This influences financial decision-making also. Sometimes, investors may over-attend the declining news about a company in the stock market without attending to the long-term outlook, which is still positive, and may make the wrong financial decisions.Counterfactual ThinkingIndividuals tend to think contrary to what has already occurred. People think about what could have happened if things had been the other way around regarding events that had already occurred. People may think about alternatives or other choices they could have chosen after facing a loss. This may negatively influence their further decisions, decrease their self confidence and self-esteem, and lead to future biases. Counterfactual thoughts may arise involuntarily and necessitate cognitive effort to suppress them. Their influence on current moods can be either uplifting or detrimental. People might be using counterfactual thinking as a coping mechanism to reduce the feeling of disappointment.Optimistic BiasThere is a tendency to anticipate positive overall outcomes, reflecting a solid inclination to overlook potential risks and expect favorable results. Individuals often demonstrate overconfidence in their predictions, with those possessing the slightest expertise in a particular domain being most prone to unwarranted certainty in their judgments. In the context of investments, this can manifest as underestimating risks and overestimating potential returns, resulting in overly aggressive portfolio choices. Such tendencies can lead to substantial financial losses, particularly in volatile market conditions.Overconfidence BarrierIt is the tendency to exhibit excessive confidence in the accuracy of reasonable judgments. This overconfidence can lead day traders to believe they can consistently outperform the market based on their trading abilities, prompting them to assume excessive risks. Overconfidence may result in frequent trading, increased transaction costs, and diminished investment returns.Magical ThinkingMagical thinking is a thought process that involves making assumptions that cannot withstand logical examination. It is arriving at irrational assumptions based on some laws of perception, such as the law of contagion and similarity. The law of similarity assumes that people who look similar in their appearance may share similar fundamental characteristics. According to the law of contagion, characteristics are believed to be transferred between two individuals in close contact and can persist even after their contact has ended. Investors may tend to assume that the historical performance of a stock or fund will continue indefinitely without any logical foundation. This can result in irrational investment decisions influenced by trends that lack genuine predictive significance.Paying Attention to Inconsistent InformationThis cognitive bias refers to preferring inconsistent information over consistent information, leading to potential errors in financial decision-making. Portfolio managers may overly weigh negative performance metrics when evaluating an otherwise sound investment. This bias could lead them to focus more on inconsistent negative information and potentially prompt premature selling of a high-potential asset.Cognitive-Experiential Self TheoryCognitive experiential self-theory asserts that individuals prefer intuitive thoughts based on past experiences rather than present logical thinking while evaluating a situation or making decisions. If a person wore a specific color dress while buying a property and if it turned into a huge profit, he continues to wear the same dress later for buying properties without considering his professional appearance or anything. In such cases, intuitive thoughts originate from past experiences of getting huge profits and are being maintained. This has its application in behavioral finance and day-to-day life. Such irrational and intuitive thoughts can have negative impressions on clients, making one\'s cognitions conserved and restricted.Confirmation BiasConfirmation bias occurs when investors are predisposed to accept information that validates their beliefs about an investment. In such cases, investors readily embrace information confirming their investment decision, even if flawed.Herd BehaviorHerd behavior is a phenomenon in which individuals base their decisions on the actions of others rather than on their independent analysis. In finance, herding occurs when investors follow the crowd instead of conducting independent analysis. During market upswings or downturns, investors may follow the crowd, purchasing stocks during a bull market or selling during a bear market without conducting independent analysis. The collective behavior of market participants can magnify market volatility, thereby giving rise to the development of asset bubbles or market downturns.Overcoming Cognitive Biases in Behavioral FinanceAwareness of and addressing cognitive biases is crucial in making sound financial decisions. Individuals and organizations can develop more logical and successful investment approaches and financial choices by acknowledging and reducing these biases. The first management strategy is to be aware that cognitive bias may affect financial decision-making. Maintaining a balance between positive and negative information and searching and relying on only authentic information can help individuals overcome cognitive biases like negativity bias, paying attention to inconsistent information, optimistic bias, cognitive experiential self-theory, and overconfidence barrier. The emotions and effect of an individual can significantly impact their financial decision-making within the realm of behavioral finance. It is advisable to avoid making decisions when influenced by emotions, as doing so can help mitigate the adverse effects of cognitive biases. Reviewing past errors and conducting a thorough analysis of empirical data can reduce biases such as counterfactual, magical thinking, and confirmation bias. The careful evaluation and study of empirical data impacts an individual\'s self-confidence and helps ward off herd mentality in financial decision-making. Applying stress management techniques, such as deep breathing exercises, Jacobson\'s progressive muscle relaxation, grounding techniques, and mindfulness-based therapies, can effectively assist in managing impulsive and highly risk-taking behaviors. Additionally, these techniques may help mitigate the negative emotional impact of cognitive biases, such as counterfactual thinking.Behavioral finance incorporates psychological theories to address biases and improve decision-making efficiency by examining the role of psychology in the process. Encouraging a forward-thinking approach and cultivating an autonomous investment strategy can enable investors to make well-informed, logical decisions and enhance their financial results.ConclusionBehavioral finance integrates psychological theories into the field of finance. It characterizes investors as individuals who may act irrationally, be influenced by biases, and, at times, exhibit a lack of self-control. Even individuals with similar financial knowledge and evaluation may not achieve the same level of success. The application of psychology, the ability to introspect and make decisions accordingly, self-regulation, and the capacity to bounce back from setbacks are also crucial in finance. Financial decision-making is a critical process that significantly impacts an individual\'s life. Various factors can influence this process, including psychological variables such as risk-taking behavior, impulsivity, resilience, decision-making, problem-solving, stress tolerance, and cognition. For investors, possessing financial knowledge alone is insufficient; one must also engage in introspection to understand personal capabilities, weaknesses, and strengths, with a particular focus on human psychology. Psychological concepts and theories can interpret common issues and biases of investors and, at the same time, suggest management strategies to overcome setbacks in the market and make sound financial decisions. Success in investments does not rely solely on financial knowledge and critical evaluation. Psychological principles in finance can aid in making sound financial decisions, managing biases and practicing self-regulation, promoting critical thinking, and effectively managing financial setbacks.References:Branscombe, Nyla R., Baron, Robert A. (2017). Social Psychology (Fourteenth Edition). England: Pearson Education Limited.Behavioral Economics.com. (n.d.). Prospect theory. Behavioral Economics.Com | The BE Hub. Retrieved July 12, 2024, from https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/prospect-theory/Bikas, E., Jurevičienė, D., Dubinskas, P., & Novickytė, L. (2013). Behavioral finance: The emergence and development trends. Procedia-social and behavioral sciences, 82, 870-876Cuthbertson, K., Nitzsche, D., & Hyde, S. (2007). Monetary Policy and Behavioral Finance. Journal of Economic Surveys, 21(5), 935-969. https://doi.org/10.1111/j.1467-6419.2007.00525.xDeBondt, W., Forbes, W., Hamalainen, P., & Gulnur Muradoglu, Y. (2010). What can behavioral finance teach us about finance? Qualitative Research in Financial Markets, 2(1), 29-36.Forbes, W. (2009). Behavioral Finance. John Wiley & Sons.Gergen, K. J. (1973). Social psychology as history. Journal of personality and social psychology, 26(2), 309.Lindesmith, A. R., Strauss, A., & Denzin, N. K. (1999). Social psychology. SageShleifer, A. (2000). Inefficient markets: An introduction to behavioral finance. Oup Oxford.Author may be reached at eboard@icai.in
Ep. 333 — The Indian Financial Advisor in the Robo Suit
CA Journal
· September 2026
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The Indian Financial Advisor in the Robo SuitIn developing financial markets like India, people are not fully utilizing the existing financial advisory mechanisms due to its cost structure, conflicts of interest, etc. The question arises as to whether the newly emerging AI-embedded systems can resolve the issues. So, the researchers perform a cross-comparison of robo-advisors and traditional financial advisor along with a SWOT analysis. The research results indicate the need to develop a hybrid model of financial advisors, to cater the emerging investment objectives. This model will ensure that the unserved investor groups would gain access to financial advice at nominal costs.IntroductionFinancial advisory services have passed through phases of digitalisation and now embrace automation through artificial intelligence and machine learning. This shift started in the US and has spread around the globe. Startup companies initially developed the robo-advisors. Then, we saw the geographical expansion, acceptability, and never-ending concerns about this disruptive market innovation. This new avatar has gained popularity because of the low-cost model and customer profiling-based portfolio management services.India\'s stock market has achieved a market capitalization of listed firms amounting to USD 3.99 trillion (CEIC Data, 2023). The world economy focuses on this developing country, which is predicted to be the fastest-growing economy (World Economic Forum, 2022). In developing financial markets like India, the people are not yet fully utilizing the existing financial advisory mechanisms owing to many issues like cost structure, conflict of interests, low personalization, lack of fiduciary duty, etc. The emergence of robo-advisory services promises to solve this situation (Ji, 2017). The current \"Account Aggregator\" framework of RBI widens the scope of robo-advisors in India. The total assets managed by robo-advisors are expected to reach USD 33.49 billion in India, by 2027 (Statista, 2023).The question arises as to whether the existing financial advisory system in the country fails? Can it overcome these issues with the incorporation of technology? Can the newly emerged AI embedded systems elevate or resolve the issues in traditional services?The traditional and AI based robo-advisory services are analysed based on the following five aspects: Conceptual, Functional, Technical, Emotional and Regulatory.Conceptual differencesRobo-advisors are digital platforms that comprise interactive and intelligent user assistance components, using information technology to guide customers through an automated financial advisory process. Robo-advisors differ from traditional advisory services in two conceptual levels: customer assessment and customer portfolio management. Robo advisory services are based on the theoretical underpinnings of Joseph Schumpeter\'s (1942) Innovation Theory, Everette Roger\'s (1955) Diffusion of Innovation Theory, and Harry Markowitz\'s (1952) Modern Portfolio Theory (Clarke, 2020). The arrival of Robo advisory services as an alternative to traditional financial advisors promised to bring value addition through quality portfolio management, rebalancing, and added benefit of tax harvesting. This process is designed using the mean-variance analysis suggested by Markowitz.Conceptually, the robo-advisors have evolved from generation 1.0 in 2008 to 4.0 in 2023. They have raised from suggesting pre-developed portfolios according to the risk profile of investors evaluated via an online questionnaire to sophisticated AI algorithms which can adjust investors\' asset class, in real-time (Hasanah et al., 2023). Robo-advice is an umbrella term that refers to a broad spectrum of online automated tools and algorithms to determine financial or investment decisions for an individual\'s portfolio (Lee, 2020).Functional differencesa. Fully Automated Customer Profiling and Investment Process- The robo advisory system follows Markowitz\'s Modern Portfolio Management Theory while developing portfolios. It requires the advisor to obtain customer characteristics and develop a well-diversified portfolio to suit the risk and expected return. Also, the theory requires continuous monitoring and corresponding rebalancing to meet the changing market conditions (Clark, 2020).For this, robo-advisors provide an online questionnaire to collect investor data about personal characteristics, risk profile, financial knowledge level, investment goals, investment horizon, expected return, tax conditions, etc. Then, inserting this information into the computer algorithm helps to develop a portfolio. AI-enabled systems ensure portfolio monitoring and rebalancing.The above process is carried out by the traditional advisor via face-to-face interaction without following a standard questionnaire. Even though portfolios are developed, they fail to do rebalancing. Most research has pointed out the lack of monitoring and improper portfolio turnovers by human advisors.b. Investment Psychology Investment strategies are often executed through Exchange Traded Funds (ETFs) which will ensure that costs are lower. Most robo-advisors follow a passive mode of investment. Hence, these products require no or less active portfolio management. A few invest in equities as well along with bonds or even gold. In India, the robo-advisors are primarily investing in mutual funds as the popularity of the same is more than ETFs.c. Cost structure The most attractive feature of robo-advisors is its low-cost structure and no or low minimum investment requirements. Even though fees are charged as a percentage of assets managed in countries like the US, in India, either it is free or a flat annual fee with fixed charges per transaction is followed (Groww, 2023). Also, most of the robo-advisors invest in the ETFs which have a low-cost structure. Certain robo services keep their minimum investment as low as Rs. 400 or even without such a condition. All these make it a considerably lower-cost option.In India, as the robo-advisors are in their evolution stage, they maintain either a free or flat annual fees along with fixed charges per transaction.Contrary to the above fee structure, traditional advisors, or full-service brokerages charge heavy fees ranging up to 2.5% of the transaction value or a flat fee on assets managed, not exceeding Rs.1,25,000. Hence, the use of robo-advisors can draw a large number of unreached investors who keep away due to burdensome charges.d. Performance-Performance expectancy has a positive influence on the adoption of robo-advisors (Gan et al., 2021). The performance of robo-advisory services has been evaluated through the following elements:Return generation The portfolio performance of robo-advisors has shown varying results when compared to human advisors specifically during the crisis time periods (Harrison and Samaddar, 2020). The performance among robo-advisors also varies based on the portfolio management techniques employed (Puhle, 2019).Diversification Most of the investors do not have a proper diversified portfolio. A well-diversified portfolio helps to earn better returns and ensures a risk-adjusted portfolio. But in the traditional system, this benefit was enjoyed chiefly by the high-net-worth individuals. Robo-advisors are in a position to improve the diversification of these undiversified portfolios. Sometimes, using robo-advisors increases trading, resulting in bad performance (D\'Acunto et al., 2019).Portfolio rebalancing Robo-advisors continuously monitor both the investment accounts and market conditions and brings in the required reallocations considering the risk profile of investors. Clients of traditional financial advisors have the grievance that there is a lack of proper account monitoring mechanism resulting in missed opportunities.Debiasing-Robo-advisors do not work on emotions. It increases the cognitive capabilities of investors. Research has identified that robo-advisors can reduce biases like disposition effect. Unfortunately, these biases cannot be fully eliminated.Tax loss harvesting - In India, taxes are a concern to every investor affecting the returns. The long-term and short-term tax rates are at 30% and 15% respectively along with other charges like STT. Robo-advisors offer tax loss harvesting whereby the shares are sold at a loss, and the proceeds are used to buy new shares. The loss so generated would be set off against other capital gains considering the provisions of the Income Tax Act, 1961 and its regulations. Hence, the profit arises to investors as follows: The tax saving amount can be reinvested again, resulting in tax compounding and the differences in the tax rates enable tax rate arbitrage benefit. Tax loss harvesting benefits the investors but this feature is not available or is not fully explored in the traditional system. Only people who rely on their personal advisors like Chartered Accountants or tax consultants claim the tax benefits.Fiduciary duty Fiduciary duty mandates the advisor to act according to the clients\' best interest. The advisor should not focus on his/her own profit at the cost of the investor. The same principle is made applicable to the robo-advisors as well.Market upturns The robo-advisor systems in India failed multiple times to handle the crisis situations resulting in heavy losses to the investors. The experienced and cautious traditional advisors could drive their clients on the right path in such situations.Technical differencesRobo-advisory services use AI-based portfolio construction and portfolio management. They also use it for portfolio rebalancing resulting in added benefits. By using big data analytics, robo-advisors can conduct advanced research and implement timely, informed decisions. The robo-advisors have a major duty to keep their system updated with the changing market conditions. This would necessitate robust modeling and decision systems which would upgrade with quick turnaround time.On the other hand, traditional advisors use online platforms and mobile apps to digitalise their services. They are yet to utilise the advancements in technology.Regulatory differences:a. Regulatory structure available Currently, robo-advisors are treated at par with Investment Advisors and are governed by the SEBI (Investment Advisor) Regulations, 2014. Rules like execution of physical agreement and maintenance of records of risk profile and risk assessment, suitability of advice provided, and client interactions are mandatory for the robo-advisors as well. Quarterly reports submitted to the SEBI must include information on AI applications used for advice generation, cyber security controls, and other privacy protocols. The rules have made comprehensive system audit compulsory along with an audit of automated tools. But the lack of specific regulations for Robo-advisors raises many issues like liability concerns in a situation of investment losses or errors, or the extent of application of fiduciary obligations to algorithmic decision-making processes, etc. The SEBI regulations on robo-advisors are only in the nascent stage and it is high time that they introduce new guidelines or amendments to the existing regulations as this service embarks its growth journey.b. Required regulations - Fees charged by the robo-advisors are not currently regulated by the authorities. They have the discretion to fix the same, unlike the traditional advisors who are constantly monitored by the SEBI. There is a higher chance that these services, which provide at low costs now, would hike their prices once the customer base has grown. Also, regulatory supervision is crucial in areas like fiduciary standards, disclosure of potential conflicts of interest, assumptions, and limitations of algorithms, etc. The SEBI (Investment Advisors) (Amendment) Regulations, 2020 require investment advisors to have professional qualifications or at least a 2-year PG diploma or degree in commerce and an experience of 5 years. But recommending this would require robo advisory services to hire human experts who will have to be paid higher salaries affecting the cost of operation of the service.Emotional differencesa. Users of Robo-advisors - Investors who are young (Hasanah et al., 2023) with high subjective financial knowledge and a high level of risk tolerance utilise robo-financial advisors (David, 2019) in developed markets. However, a similar socio-demographic based study in India could not find a distinction between users and non-users of robo-advisory services. These users possess higher wealth and are more financially sophisticated. Trade behaviour of these users indicates active nature whereby they trade more, both in frequency and volume.Traditional financial advisers, though cater to all investor segments, do not consider the retail segment to be profitable. They offer customized services only to affluent high-net-worth retail investors through Portfolio Management Services. The retail investors\' segment has low returns per customer when compared with High-Net-worth Individuals (HNIs). With the rise of robo-advisory, retail investors can be better served and revenue generation can be improved (Warchlewska & Waliszewski, 2020). Also, by applying a behavioural approach to decisions, these robo-advisors impart more confidence in making investment decisions.b. Customer support The robo-advisory services lack face-to-face interaction as well as a customer grievance handling mechanism. This lack of human touch affects the investors who always wish for emotional support.c. Less emotional decision making In volatile market situations, retail investors make mistakes resulting in buying at higher prices and selling at lower prices. Robo-advisors perform well in such situations by integrating fintech and portfolio management processes.d. Financial education - Robo-advisors provide online modules for investor education free of cost. This develops their investment knowledge and financial sophistication. The traditional advisors do not take much effort except due to pressure from the SEBI.e. Conflict of interest and trust Robo-advisors owing to the investment modes chosen, do not possess conflicts of interest as compared to traditional investors. Also, they make disclosure of these interests to their clients. Traditional financial advisors are often criticized for possessing and never disclosing conflicts of interest. These affect clients\' trust levels. (Cruciani et al., 2021).SWOT Analysis of ROBO Advisory SystemWhile using robo advisory services, investors get the benefits of low costs, low influence of biases, proper customer profiling etc. However, investors must also caution themselves about the inability in handling new crises, data privacy and security concerns, prevailing regulatory structure, investment options available, fees charged, etc. Lower human interaction in these services can reduce care and emotional support. The following SWOT analysis will further help the investors before choosing among the two advisory services.StrengthsWeaknessesLow costs and low minimum balancesCustomer ProfilingHidden presence of Conflicts of InterestsUnfulfilled fiduciary dutyTax Loss HarvestingDifficult to handle crisis and other bear market situationsLess emotional decision makingNo personal touchInvestment experienceNo standards for customer risk profilingPortfolio management and risk management OpportunitiesThreatsSurging investmentsInvestment costs are not minimisedDevelopments in AI and MLRegulatory controls including technical protocolsUbiquity of digital servicesLack of trust in a digital platformGoal based investingZero-brokerage models poses competitive environmentCompliment and conjointly work with traditional advisors Account Aggregator scheme Suggestions for the Hybrid SystemPlacing the human advisors in the robo suit would give them these features:a. The Trendsetter Advancements in technology in big data analytics, artificial intelligence, and natural language processing have to be incorporated to ensure further value addition to the services (Wipro, 2020). They can be used for technical analysis and in developing model portfolios. The system would facilitate informed decisions even during exceptional scenarios with the presence of humans, thereby ensuring the services are unaffected by algorithmic flaws. Human intervention should be focussed only on high-level strategic decisions, while AI should perform rapid data processing, quicker simulation of multiple scenarios, and execute operational decisions. This judicious use of the two systems can control any impact of human involvement in the fast-decision-making ability of robo advisory services.b. The Penetrator - The cost models are gaining a lot of attention in India, especially among the affluent or retail investor groups. The zero brokerage records the highest number of users in the country due to this. But the lack of advisory feature in this model will not help the financially unsophisticated retail investors (Çera et al., 2021) in the future. A low-cost model of robo-advisors can be a way of serving them to generate returns than traditional investment advisors. Added personalization or features could be charged more to ensure quality recommendations.c. The Market Predictor The hybrid system would help to incorporate the learning experiences of the human advisors which can be used as a knowledge base. The presence of experienced human beings will help to handle first-time scenarios such as COVID-19, failure of any financial products, or global war situations etc. as the robo-advisors do not have adaptive thinking or ability to synthesize information from different sources. The historical data specifically compiling the changes during these crises can be used to address similar situations in the future. This would enable the systems to manage downside risk and make investment reallocations as per the situation and the investors\' goals (Wipro, 2020).d. The Performer The customer initiation, profiling, matching, and portfolio generation could be carried out as robo-advisors do. But the customers can be enquired as to whether they need human support, and they also need to be consulted regarding their suggestions in portfolio development. This would speed up the account opening, KYC, and risk profiling. Customer handling and relations management can also be taken care of. The lack of a customer grievance mechanism can also be an area where human intervention can be adopted. The tax harvesting feature of robo-advisors can be highlighted by traditional advisors to gain investors and ensure higher returns. Better tax planning can be carried out if they invest in direct equities rather than ETFs. Financial professionals like Chartered Accountants can play a decisive role in these areas.e. The Caretaker - The Indian investors lack emotional trust with their advisors. They are interested in an advisor who would generate better returns at a low cost. Yet, a section of investors who are not tech-savvy still rely on human experts. To ensure that the clients stay with the advisor, high-end customer service on both the technical side and customer relation aspect are expected. The merged system can easily integrate these requirements.f. The Researcher It is quite difficult to say who is a better researcher. Humans or the human developed AI-based Robo-advisors. What if both are joining? This splendid combo would offer the best of research. Data mining done by robo-advisors generates beneficial information on valuation, stock prices, etc. which, can be used to provide stock recommendations swiftly. This would elevate the investors to a superior position.g. The Abider The robo-advisors must follow the amendments suggested in the SEBI (Investment Adviser) Regulations 2013 and the SEBI (Investment Adviser) Amendment Regulations 2020. This, along with other indispensable laws on security and fiduciary duty, has to be developed rapidly to ensure the legitimate functioning of the robo-advisors. At the same time, unnecessary compulsions like requiring physical agreement from the client, would result in increased cost of operation and further raise the fees charged by the robo-advisors. An explicit regulation is imperative at the current stage to gain maximum benefits from this service.Conclusions and ImplicationsThe evaluation of both systems recommends a hybrid mode of operation. This would generate a system combining their positive features. This co-existence would result in the growth of financial advisory services as it would help to incorporate the underserved markets at nominal costs. The hybrid model would ensure better returns to both the clients and the advisory services. This enhanced customer base would stay in the markets for long, once better services are obtained at affordable costs. A proper monitoring mechanism, both legal and technical, is the most vital development suggested in robo-advisory services so as to ensure investor protection.References:Çera, G., Khan, K. A., Rowland, Z., & Ribeiro, H. N. R. (2021). Financial Advice, Literacy, Inclusion and Risk Tolerance: the Moderating Effect of Uncertainty Avoidance. E a M: Ekonomie a Management, 24(4), 105-123. https://doi.org/10.15240/tul/001/2021-4-007Cruciani, C., Gardenal, G., & Rigoni, U. (2021). Trust-formation processes in financial advisors: A structural equation model. Quarterly Review of Economics and Finance, 82, 185-199. https://doi.org/10.1016/j.qref.2021.09.001D\'Acunto, F., Prabhala, N., & Rossi, A. G. (2019). The Promises and Pitfalls of Robo-Advising. Review of Financial Studies, 32(5), 1983-2020. https://doi.org/10.1093/rfs/hhz014David, S. (2019). Who are robo-advisor users?Gan, L. Y., Khan, M. T. I., & Liew, T. W. (2021). Understanding consumer\'s adoption of financial robo-advisors at the outbreak of the COVID-19 crisis in Malaysia. Financial Planning Review, 4(3), 1-18. https://doi.org/10.1002/cfp2.1127Hasanah, E. N., Wiryono, S. K., & Koesrindartoto, D. P. (2023). FINANCIAL ROBO-ADVISOR: LEARNING FROM ACADEMIC. 10(1), 17-40. https://doi.org/10.24252/minds.v10i1.33428Ji, M. (2017). Are robots good fiduciaries? Regulating robo-advisors under the investment advisers act of 1940. In Columbia Law Review (Vol. 117, Issue 6). Columbia Law Review Association. https://doi.org/10.2139/ssrn.3036722Lee, J. (2020). Access to Finance for Artificial Intelligence Regulation in the Financial Services Industry. European Business Organization Law Review, 21(4), 731-757. https://doi.org/10.1007/s40804-020-00200-0Puhle, M. (2019). THE PERFORMANCE and ASSET ALLOCATION of German ROBO-ADVISORS. Society and Economy, 41(3), 331-351. https://doi.org/10.1556/204.2019.41.3.4Warchlewska, A., & Waliszewski, K. (2020). Who uses Robo-Advisors? The Polish Case. European Research Studies Journal, XXIII(Special Issue 1), 97-114. https://doi.org/10.35808/ersj/1748https://www.ceicdata.com/en/indicator/india/market-capitalizationhttps://www.weforum.org/agenda/2022/12/top-economy-stories-december-22/https://www.statista.com/outlook/dmo/fintech/digital-investment/robo-advisors/indiahttps://www.sebi.gov.in/legal/regulations/jul-2020/sebi-investment-advisers-amendment-regulations-2020_47007.htmlhttps://www.sebi.gov.in/reports-and-statistics/reports/oct-2016/consultation-paper-on-amendments-clarifications-to-the-sebi-investment-advisers-regulations-2013_33435.htmlhttps://groww.in/blog/robo-advisory-indiaAuthors may be reached at josephjoy111@gmail.com and eboard@icai.in
Ep. 335 — Price-to-Earnings Ratio Anomalies: A Comprehensive Analysis of Portfolio Performance in the Indian Stock Market
CA Journal
· September 2026
00:00
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Price-to-Earnings Ratio Anomalies: A Comprehensive Analysis of Portfolio Performance in the Indian Stock MarketThis study investigates the phenomenon of Price-Earnings (P/E) ratio anomaly in the context of Indian stock market. To conduct the analysis, data was collected from 60 randomly selected companies listed on the National Stock Exchange (NSE) for the years 2021, 2022, and 2023. Daily returns and risk metrics were calculated for each portfolio, along with a comparison to the broader market index, NIFTY 500. Statistical tests, including t-tests and p-values, were employed to assess the significance of the observed differences in performance. Additionally, the Sharpe ratio, Beta, Treynor ratio, and Alpha (Jensen\'s) were computed to provide insights into risk-adjusted returns and portfolio efficiency. The results reveal varying degrees of performance across the portfolios, with lower P/E ratio portfolios demonstrating higher annualized returns and lower risk compared to higher P/E ratio portfolios.IntroductionWhen it comes to investing money, everyone wants to make as much profit as possible while mitigating risks. That\'s where the idea of \'Value Investing\' comes in. Value investing is all about finding securities trading below their intrinsic value, thereby offering a margin of safety for investors. One important concept in value investing is called the \'price-earnings (P/E) ratio anomaly\', or \'earnings yield anomaly\'. This idea challenges the usual way of looking at how stocks are valued. Instead of just looking at stock prices, the P/E ratio anomaly looks at a company\'s earnings compared to its overall value.The genesis of the P/E ratio anomaly can be traced back to pioneering research conducted by Basu in 1977. Basu\'s groundbreaking study revealed that stocks with high earnings yield (low price to earnings), often categorized as value stocks, consistently outperformed their counterparts with lower earnings yield (high price to earnings), termed growth stocks. This discovery changed how people thought about investing and led to more research on the topic.The interest in this topic stems from the significance of P/E ratios in guiding investment decisions and understanding market dynamics. As posited by Graham and Dodd (1934), the P/E ratio serves as a key determinant in assessing the intrinsic value of a stock, offering insights into its growth potential and future earning prospects. However, despite its widespread usage, anomalies in P/E ratios have long intrigued scholars due to their potential to influence investment outcomes and market efficiency.Our examination of this problem is driven by the desire to shed light on the impact caused by P/E ratio anomalies on portfolio performance in the Indian context. By exploring this issue, we aim to contribute to the existing body of literature on behavioural finance and market efficiency by drawing upon the foundational theories of Fama and French (1992) to frame our analysis.In the subsequent sections of this paper, we will delve into the methodology employed for our analysis, present the empirical findings, and discuss their implications. Finally, we will conclude with a summary of our key findings.Review of LiteratureThe examination of \'low P/E ratio stocks\', commonly referred as \'value stocks\', has garnered significant attention over investment research after the passing of Benjamin Graham, the pioneer of value investing. Basu (1977) conducted ground-breaking research on the performance of value stocks compared to growth stocks on the New York Stock Exchange (NYSE) revealing that portfolios comprised of low P/E ratio stocks, consistently outperformed their high P/E ratio counterparts. Capaul et al. (1993) extended this analysis across six countries and affirmed the superior performance of value stocks, even after accounting for risk. Further empirical evidence by Brouwer et al. (1997) in European markets reinforced the notion that value strategies, based on earnings-to-price valuation metrics, yield higher annual returns than glamour strategies.Bauman and Miller (1997) investigated the investment performance of high P/E ratio stocks listed on various stock exchanges, including NYSE, AMEX, and NASDAQ, reaffirming the outperformance of value stocks overgrowth portfolios. Similarly, Bauman et al. (1998) expanded this analysis to 20 established markets represented in the Morgan Stanley Capital International (MSCI) EAFE index and Canada, consistently finding value stocks outperforming growth stocks on both total return and risk-adjusted bases.Anderson et al. (2003) observed the presence of a value premium in Mongolia, while Dunis and Reilly (2004) demonstrated the superior risk-adjusted performance of low P/E ratio stocks in the UK market. Ding et al. (2005) uncovered a positive value premium in East Asian countries before the 1997 Asian financial crisis, highlighting the resilience of value strategies across diverse market conditions. Anderson and Brooks (2006) corroborated these findings in the UK market, emphasizing the persistent outperformance of value stocks based on P/E ratios.Despite the historical prevalence of the value premium, recent research has indicated a diminishing significance of asset pricing anomalies, including the value and size premiums. Schwert (2002) noted a reduction in anomalies over different sample periods, particularly observing the disappearance of the value and size premiums. Chordia et al. (2012) further supported this trend, suggesting a decrease in the economic and statistical significance of the asset pricing anomalies due to increased market efficiency and anomaly-based arbitrage activity.While the presence of asset pricing anomalies may be diminishing in larger capital markets, studies on smaller capital markets suggest that premiums may still exist. Norges et al. (2009) and Grimeland (2018) examined the Oslo Stock Exchange and, found evidence of a size effect but limited support for a value effect, indicating that the dynamics of asset pricing anomalies may vary across different market environments.Overall, the literature underscores the enduring appeal of value investing strategies based on earnings to price yield metrics, while also highlighting the evolving nature of asset pricing anomalies in global financial markets. This paper contributes to this body of research by examining the persistence of the value premium in the Indian stock market context, providing valuable insights into the efficacy of value-based investment strategies amidst changing market conditions.Data and MethodologySelection of CompaniesA total of 60 companies were randomly selected from those listed on the National Stock Exchange (NSE). P/E ratios for all 60 companies were collected for the years 2021, 2022, and 2023 to ensure a comprehensive dataset for analysis. The selection of companies from 2021 aimed to mitigate the potential impact of the COVID-19 pandemic on the analysis.Data CollectionClosing prices of the selected securities were collected from July 1st, 2021, to February 28th, 2024. Data collection for each year spanned from July 1st of the current year to June 30th of the following year, aligning with the annual portfolio construction timeline.By selecting July 1st as the starting point for data collection, the analysis aimed to capture the impact of P/E ratios calculated as of March 31st, allowing for a lag of three months to reflect the availability of P/E ratio information to investors.Portfolio ConstructionPortfolios were constructed based on predefined P/E ratio ranges, categorizing companies into five distinct groups (<5, 5-10, 10-15, 15-25, and 25<). This categorization facilitated the comparison of companies with similar valuation metrics.Calculation of Performance MetricsKey performance metrics, including annualized return, annualized risk, Sharpe ratio, Beta, Treynor ratio, and Alpha (Jensen\'s), were calculated for each portfolio. These metrics provided insights into the risk-adjusted returns and abnormal returns generated by each portfolio relative to the market.Comparison AnalysisPairwise comparisons were conducted between portfolios and the market index (NIFTY 500) using t-tests to assess the statistical significance of differences in performance. The t-statistic and corresponding p-values were calculated to determine whether differences in returns were statistically significant.HypothesisH0 - The absolute returns of the low P/E ratio portfolios are not statistically higher than the absolute returns of the high P/E ratio portfolios and the NIFTY 500 benchmark index.Empirical EvidencePerformance Comparison of Portfolios and Market Index from 2021 to 2024Table 1 presents a comprehensive analysis of the performance of various portfolios based on P/E ratios, along with comparisons against the market index NIFTY 500. This analysis aims to evaluate the impact of P/E ratio anomalies on investment outcomes and provide insights into the relative performance of different portfolios.Table 1P/E ratioPortfolioAnnualized ReturnAnnualized RiskAnnual Risk FreeSharpe RatioBetaTreynor RatioAlpha (Jensen\'s)<5A9.51%5.35%3.39%1.14281.17235.22%6.74%5-10B6.51%5.67%3.39%0.55071.15072.72%3.73%10-15C5.11%5.29%3.39%0.32431.15231.49%2.32%15-25D5.05%4.50%3.39%0.36911.04871.58%2.22%25 <E5.16%4.89%3.39%0.36101.14781.54%2.37% M2.86%3.03%3.39%-0.17431-0.53% Note: Jensen\'s Alpha for the market (NIFTY 500) is always zero, as it represents the benchmark against which portfolio performance is measured. Therefore, only the Jensen\'s Alpha values for individual portfolios are calculated and presented in the table.Portfolio A (P/E ratio < 5): Portfolio A, consisting of stocks with a P/E ratio of less than 5, demonstrates the highest annualized return among all portfolios at 9.51%. This result suggests that stocks with lower P/E ratios have the potential to deliver higher returns compared to those with higher P/E ratios. However, it\'s important to note that with higher returns comes higher risk. Portfolio A also exhibits the highest annualized risk, or volatility, at 5.35%, indicating greater fluctuations in returns compared to other portfolios. Despite the higher risk, Portfolio A achieves a notable Sharpe Ratio of 1.14, signifying a favourable risk-adjusted return compared to the risk-free rate. Additionally, Portfolio A\'s Treynor Ratio of 5.22% implies that it generates excess return per unit of systematic risk, further highlighting its superior performance relative to the market index. Furthermore, Portfolio A\'s Jensen\'s Alpha of 6.74% indicates that it has generated significant abnormal returns beyond what would be expected based on its risk exposure.Portfolio B (P/E ratio 5-10): Moving on to Portfolio B, which encompasses stocks with P/E ratios ranging from 5 to 10, we observe a slightly lower annualized return of 6.51% compared to Portfolio A. This indicates that as the P/E ratio increases, the potential for returns diminishes. However, Portfolio B also exhibits a higher annualized risk of 5.67%, reflecting increased volatility in returns compared to Portfolio A. Despite the lower return and higher risk, Portfolio B maintains a Sharpe Ratio of 0.55, suggesting a modest risk-adjusted performance relative to the risk-free rate. Similarly, its Treynor Ratio of 2.72% indicates some excess return per unit of systematic risk, albeit lower than Portfolio A. Furthermore, Portfolio B\'s Jensen\'s Alpha of 3.73% suggests that it has generated positive abnormal returns beyond what would be expected based on its risk exposure.Portfolio C (P/E ratio 10-15): Transitioning to Portfolio C, which includes stocks with P/E ratios between 10 and 15, we observe a further decline in annualized return to 5.11%. This downward trend in returns as P/E ratios increase corroborates the notion that higher P/E ratios are associated with lower potential returns. Despite the decrease in return, Portfolio C maintains a relatively high annualized risk of 5.29%, indicating significant volatility in returns. The Sharpe Ratio for Portfolio C is 0.32, suggesting a less favourable risk-adjusted return compared to Portfolios A and B. Similarly, its Treynor Ratio of 1.49% indicates a lower excess return per unit of systematic risk compared to previous portfolios. However, Portfolio C still exhibits a positive Jensen\'s Alpha of 2.32%, suggesting some degree of abnormal returns beyond what would be expected based on its risk exposure.Portfolio D (P/E ratio 15-25): Moving on to Portfolio D, which comprises stocks with P/E ratios ranging from 15 to 25, we continue to observe a decrease in annualized returns to 5.05%. This reinforces the inverse relationship between P/E ratios and potential returns. Despite the decrease in return, Portfolio D exhibits a lower annualized risk of 4.50% compared to Portfolios B and C, indicating relatively lower volatility in returns. However, Portfolio D\'s Sharpe Ratio of 0.37 suggests a slightly less favourable risk-adjusted return compared to Portfolio C. Similarly, its Treynor Ratio of 1.58% indicates a moderate excess return per unit of systematic risk. Additionally, Portfolio D maintains a positive Jensen\'s Alpha of 2.22%, suggesting some degree of abnormal returns beyond what would be expected based on its risk exposure.Portfolio E (25 < P/E ratio): Finally, Portfolio E represents stocks with P/E ratios greater than 25, where we observe a further decline in annualized return to 5.16%. This reinforces the trend of diminishing returns as P/E ratios increase. Despite the lower return, Portfolio E exhibits a moderate annualized risk of 4.89%, suggesting relatively lower volatility as compared to Portfolios B and C. However, Portfolio E\'s Sharpe Ratio of 0.36 indicates a less favourable risk-adjusted return as compared to Portfolios A, B, and D. Similarly, its Treynor Ratio of 1.54% suggests a moderate excess return per unit of systematic risk. Nonetheless, Portfolio E maintains a positive Jensen\'s Alpha of 2.37%, indicating some degree of abnormal returns beyond what would be expected based on its risk exposure.Market Index (NIFTY 500): In comparison to the portfolios, the market index NIFTY 500 exhibits an annualized return of 2.86%. This suggests that while the portfolios may outperform or underperform the market index. The market index itself represents the average performance of the broader market. Additionally, the market index displays a lower annualized risk of 3.03% compared to the portfolios, indicating relatively lower volatility in returns. However, the market index\'s negative Sharpe Ratio of -0.17 implies a less favourable risk-adjusted return as compared to risk-free assets. Similarly, its negative Treynor Ratio of -0.53% suggests a negative excess return per unit of systematic risk.Comparative Analysis of Portfolio Performance and Market Index from 2021 to 2024Table 2 presents the t-stats and p-values using a significance level of 5%. We reject the null hypothesis (the absolute returns of the low P/E ratio portfolios are not statistically higher than the absolute returns of the high P/E ratio portfolios and the NIFTY 500 benchmark index) if the p-value is below the significance level.Table 2 A vs EB vs DA vs ME vs Mt-stats1.06110.41502.00380.8051p-value0.28880.67820.04530.4209ConclusionDo not reject the nullDo not reject the nullReject the nullDo not reject the nullA vs E (Portfolio A vs Portfolio E):The comparison between Portfolio A and Portfolio E aims to assess whether there is a statistically significant difference in their performance. Portfolio A consists of stocks with a P/E ratio of less than 5, while Portfolio E comprises stocks with a P/E ratio greater than 25.The calculated t-statistic for this comparison is 1.0611, indicating the magnitude of difference between the mean returns of the two portfolios. A positive t-statistic suggests that Portfolio A has, on average, higher returns as compared to Portfolio E.The corresponding p-value is 0.2888, which represents the probability of observing such results if the null hypothesis (no difference in performance) were true. With a p-value greater than the commonly used significance level of 0.05, we fail to reject the null hypothesis.Conclusion: There is no statistically significant difference between the performance of Portfolio A and Portfolio E. This suggests that, based on the sample data, both portfolios exhibit similar performance characteristics despite the difference in their P/E ratios.B vs D (Portfolio B vs Portfolio D)The comparison between Portfolio B and Portfolio D aims to evaluate whether there is a significant disparity in their performance. Portfolio B consists of stocks with a P/E ratio between 5 and 10, while Portfolio D comprises stocks with a P/E ratio between 15 and 25.The t-statistic for this comparison is 0.4150, indicating the magnitude of difference in the mean returns between the two portfolios. A positive t-statistic suggests that Portfolio B has, on average, higher returns as compared to Portfolio D, although the difference is less pronounced.The associated p-value is 0.6782, which exceeds the significance level of 0.05. Consequently, we do not have sufficient evidence to reject the null hypothesis.Conclusion: There is no statistically significant difference between the performance of Portfolio B and Portfolio D. This implies that, based on the available data, both portfolios demonstrate comparable performance characteristics despite their different P/E ratios.A vs M (Portfolio A vs Market Index)The comparison between Portfolio A and the Market Index assesses whether Portfolio A outperforms or underperforms the broader market represented by the NIFTY 500 index.The t-statistic for this comparison is 2.0038, indicating a substantial difference in mean returns between Portfolio A and the Market Index. A positive t-statistic suggests that Portfolio A, on average, has higher returns as compared to the market index.The corresponding p-value is 0.0453, which is less than the significance level of 0.05. Consequently, we reject the null hypothesis, indicating a statistically significant difference in performance.Conclusion: Portfolio A exhibits a statistically significant difference in performance compared to the Market Index. This suggests that Portfolio A outperforms the market.E vs M (Portfolio E vs Market Index)The comparison between Portfolio E and the Market Index aims to determine whether Portfolio E differs significantly from the broader market.The t-statistic for this comparison is 0.8051, indicating a modest difference in mean returns between Portfolio E and the Market Index. A positive t-statistic suggests that Portfolio E, on average, has higher returns as compared to the market index, although the difference is less pronounced.The associated p-value is 0.4209, which exceeds the significance level of 0.05. As a result, we lack sufficient evidence to reject the null hypothesis.Conclusion: There is no statistically significant difference between the performance of Portfolio E and the Market Index. This implies that Portfolio E exhibits performance characteristics similar to those of the broader market, as evidenced by the non-significant difference in mean returns.ConclusionThe analysis of P/E ratio anomalies in the Indian stock market provides valuable insights on the performance of different category of portfolios, based on P/E ratios. The findings reveal that portfolios with lower P/E ratios tend to exhibit higher annualized returns, suggesting potential opportunities for investors seeking higher returns. However, these portfolios also come with higher volatility, indicating increased risk. Despite the higher risk, certain portfolios, particularly Portfolio A with P/E ratio < 5, demonstrate favourable risk-adjusted returns, as reflected in their higher Sharpe ratios as compared to the market index. Additionally, Portfolio A exhibits significant abnormal returns beyond what would be expected based on its risk exposure, suggesting potential for alpha generation.Furthermore, the comparison analysis between portfolios and the market index NIFTY 500 sheds light on their relative performance. While some portfolios, such as Portfolio A, exhibit statistically significant differences in performance as compared to the market index, others show no significant deviations. This indicates that while certain portfolios may offer opportunities for outperformance relative to the broader market, others tend to align closely with market trends. Overall, the analysis underscores the importance of considering P/E ratio anomalies in investment decision-making and highlights the potential for strategic portfolio construction and allocation strategies to capitalize on these anomalies for generating alpha and optimizing investment outcomes in the Indian stock market.References:Anderson, J. H., Korsun, G., & Murrell, P. (2003). Glamour and value in the land of Chingis Khan. Journal of Comparative Economics, 31(1), 34-57.Anderson, K., & Brooks, C. (2006). The long-term price-earnings ratio. Journal of Business Finance & Accounting, 33(7-8), 1063-1086.Basu, S. (1977). Investment performance of common stocks in relation to their price-earnings ratios: A test of the efficient market hypothesis. The journal of Finance, 32(3), 663-682.Bauman, W. S., & Miller, R. E. (1997). Investor expectations and the performance of value stocks versus growth stocks. Journal of Portfolio Management, 23(3), 57.Bauman, W. S., Conover, M., & Miller, R. E. (1998). Growth versus value and large-cap versus small-cap stocks in international markets. Financial Analysts Journal, 54(2), 75-89.Benjamin Graham, D. L. D. (1934). Security Analysis: Principles and Technique. McGraw-Hill.Capaul, C., Rowley, I., & Sharpe, W. F. (1993). International value and growth stock returns. Financial Analysts Journal, 49(1), 27-36.Chordia, T., Subrahmanyam, A., & Tong, Q. (2014). Have capital market anomalies attenuated in the recent era of high liquidity and trading activity?. Journal of Accounting and Economics, 58(1), 41-58.Ding, D. K., Chua, J. L., & Fetherston, T. A. (2005). The performance of value and growth portfolios in East Asia before the Asian financial crisis. Pacific-Basin Finance Journal, 13(2), 185-199.Dunis, C. L, & Reilly, D. (2004). Alternative valuation techniques for predicting UK stock returns. Journal of Asset Management, 5, 230-250.Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. the Journal of Finance, 47(2), 427-465.Grimeland, S. J. (2018). Anomalies and the five-factor model in the Norwegian stock market (Master\'s thesis, NTNU).Iwan, J., & Veld, C. B. V. D. P. (1997). Contrarian Investment Strategies in a European Context. Journal of Business Finance & Accounting, 24(9-10), 1353-1366.Næs, R., Skjeltorp, J. A., & Ødegaard, B. A. (2009). What factors affect the Oslo Stock Exchange?. Norges Bank.Schwert, G. W. (2003). Anomalies and market efficiency. Handbook of the Economics of Finance, 1, 939-974.Authors may be reached at satishnemani05@gmail.com, bheemanagouda@gmail.com and eboard@icai.in
Ep. 336 — The Heart of Leadership in a World Run by Algorithms
CA Journal
· September 2026
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The Heart of Leadership in a World Run by AlgorithmsGiven the growing concerns about AI and automation replacing humans, almost everybody I know has a strong take on the AI vs human debate. AI may displace some human jobs, but simultaneously, it could give rise to new roles and opportunites. A report by the World Economic Forum adds to this realistic narrative, stating that by 2025, the new division of labor between humans and machines could displace 85 million jobs but create 97 million new roles.1By CA. Shekhar Bhandari, President & Business Head of SME Banking, Kotak Mahindra BankAccounting is not immune to the AI wave either. Estimates suggest that artificial intelligence can automate around 46% of accounting and bookkeeping jobs. This is why traditional accounting roles can (and perhaps will) evolve as AI develops.Sure, a Chartered Accountant\'s role surpasses mere accounting. However, in an era where algorithms predict market trends and crunch numbers with unprecedented accuracy and speed, does the traditional expertise of a CA still hold sway in leadership roles?The Enduring Relevance of Chartered Accountancy SkillsAs an alumnus of the Institute of Chartered Accountants of India (ICAI), and having had an interesting journey through various facets of banking like treasury, transaction banking, and now SMEs, I firmly believe that the human element remains the heart of effective leadership, especially in an increasingly automated industry. Data and analytics also remain particularly relevant not only for existing businesses but even for young companies and startups, which rely greatly on effective leadership for growth. That said, with algorithms now analyzing vast datasets accurately and in record time, it can be tempting to argue that the analytical capabilities that once set CAs apart could be rendered obsolete. However, despite the fast-expanding AI footprint, Chartered Accountancy remains an enduring skill. CAs are inherently trained to be meticulous, hardworking and detail-oriented - all qualities that translate seamlessly into excellent leadership. My education at the ICAI taught me the fundamentals of planning, time management and organizational efficiency. These three skills proved to be invaluable in my strategic leadership roles across various segments like transaction and SME banking. I have also always been an avid tech enthusiast. This has made it easier for me to lead my team, adapt to changing job scopes and keep pace with new developments.Many banking professionals today find it challenging to upskill technologically and juggle these three pivotal skills. It is crucial that today\'s leaders resolve this issue and keep pace with the future of Chartered Accountancy which is expected to branch out into advisory and consulting services, sustainability reporting, and semi-automated AI-driven work models.Navigating the Moral Dilemmas of LeadershipThis is an inescapable aspect of leadership roles, especially in finance. However, whether automated or not, \'character\' is the currency that matters most in leaders. The decisions they make can have far-reaching consequences, both for their organizations and for the wider community they serve. Navigating such dilemmas isn\'t always easy, though. There will be times when the right choice isn\'t clear, priorities clash, and short-term gains can be tempting. It is in these moments that character emerges as the defining acid test, separating true leaders from others. This is perhaps why I am confident that automation can never fully replace ethical leadership.When leaders are transparent in their dealings, lead with integrity, and make decisions that prioritize the long-term well-being of stakeholders, they foster a culture of trust that can withstand the toughest challenges.Walking the Tightrope of Risk and RewardFor CAs in leadership positions, it can also be easy to get caught up in the numbers game. However, as any seasoned leader knows, success surpasses crunching data and minimizing risk. Most of it revolves around striking that perfect balance between being prudent and seizing opportunities.The human capacity to balance risk and reward remains a critical skill that automation cannot replicate. Data may provide valuable insights, but it takes a human at the helm to weigh the benefits against the pitfalls and steer an organization to new heights. This is a lesson that many department heads may learn the hard way over the years. Often, there may be times when they are too cautious and let promising opportunities slip through. Conversely, there may be instances when leaders are too aggressive, often taking risks that may not pay off as expected. This is an unavoidable learning curve, but it helps build resilience and decisiveness.Learning from the Past to Shape the FutureChange is inevitable and is occurring at a breathtaking pace today, so it\'s natural to always have our eyes fixed on the horizon, anticipating the next big change. However, automation and algorithms may be all about the future, but good leaders know that the most valuable lessons we can learn come from looking back at past experiences.By reflecting on their successes and failures, leaders can pick out lessons for strategic planning. Of course, learning from the past is one thing; being held back by it is another. Fortunately, the human ability to remain curious emerges as a key differentiator here. It helps leaders simultaneously respect the old and embrace the new, both of which are crucial to remaining relevant.Accelerating Change Without Losing ControlIn an automated world, it\'s easy to get caught up in the race to adopt new technologies. True leaders, however, understand that it is the human element that keeps organizations grounded. So, as finance and accounting rapidly evolve to make automation and algorithms mainstream, it falls upon leaders to handhold their teams through the changes ahead without compromising their stability.Focus, agility, and timeliness are all paramount as we propel headfirst into a new future. Delegation of responsibilities is also critical in this journey forward. To maintain control in this fast-changing environment, experts must trust the teams they lead and foster collaboration rather than competition - not just among one another but also between human intelligence and AI.The Human TouchI cannot emphasize enough the role of empathy in an era of automation. Even as technology transforms the way we work, human connection remains vital. Empathy enhances customer relationships, helps teams remain cohesive, and reminds us that behind every data point driving automation, we have a human story.Leaders have the unique responsibility of ensuring that technology serves as a tool to enhance, not replace, personal interactions. I like to equate it to an orchestra conductor who harmonizes several instruments and artists to create good music. A leader\'s role in an organization is quite similar; they work with several people to achieve collective goals.Balancing Professional Success with Personal Well-beingIn the pursuit of professional success, it\'s easy to overlook the importance of physical and mental well-being. However, leaders who prioritize their well-being are better equipped to sustain high performance over the long term and thrive in the workplace.I find that the notion of choosing between career and family is a false dichotomy. By integrating work and personal life harmoniously, leaders can find fulfillment in both spheres, make the workplace a positive environment, and find joy in daily activities while encouraging others to do the same.Leading with HeartThe skills and values that professionals must cultivate - whether as Chartered Accountants, financial experts, or business leaders - are essential tools for shaping the future. By playing to our strengths as people and leveraging technology as a means rather than an end, we have the exclusive power to steer our organizations and society toward a brighter, more inclusive, and more sustainable future.My message to fellow professionals is one of encouragement so we are not daunted by the rapid pace of change or the threat of automation. Instead, let us accept them for the opportunities they present. The core of human leadership may be tested by the rise of algorithms, but it is our human spirit, our resilience, creativity, and unshakeable belief in the power of human potential, that will ultimately prevail.References:https://www.weforum.org/publications/the-future-of-jobs-report-2020/in-full/executive-summary/https://www.indiatoday.in/technology/news/story/ai-can-do-46-per-cent-work-of-accountants-and-bookkeepers-risks-jobs-takeover-in-india-2468833-2023-11-29https://charteredaccountantsworldwide.com/future-chartered-accountancy-profession-2024/Author may be reached at shekhar.bhandari@kotak.com and eboard@icai.in
Ep. 337 — Charitable organisations and evolving uncertainties of tax exemption
CA Journal
· September 2026
00:00
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Charitable organisations and evolving uncertainties of tax exemptionUnder the amended section 2(15) of the Income-tax Act, 1961 (\"the Act\"), charitable institutions with the purpose of \'advancement of any other object of general public utility\' are permitted to have limited business activity only. While \"profit motive\" is relevant, factors like dominant object of the organisation, consistency, and regularity of transactions have been historically examined to infer whether the activity is \"business\" or not. However, the Hon\'ble Supreme Court recently held that \"ploughing\" back of business income to \"feed\" charity is irrelevant under amended provisions and would be considered as business even if the dominant object is a charity. It needs to be seen how courts choose between past and present judicial principles; and protect/prejudice genuine charitable organisations.By CA. Shreya Daga, Member of the InstituteFactsTo understand the concept better, let us take an example, say ABC Association which is a trade association registered under section 8 of the Companies Act, 2013 and section 12AB of the Income-tax Act, 1961 (\"the Act\"). ABC conducts activities for the promotion of the interest of its members, such as advocacy of industry concerns to regulatory authorities, organizing networking conferences bi-annually, maintaining industrial data, publishing journals with topical subjects. In turn, it collects membership and journal subscription fees. While organizing the conference, the association collects payment from its members and other industrial stakeholders for participation, stall charges, sponsorship, and advertisement, sometimes resulting in a significant surplus which is, in turn, used to promote the Association\'s main objectives.Legal frameworkOn a coherent reading of section 2(15) with sections 10, 11, and 13(8) of the Act, it transpires that the eligibility of exemption of the Association depends on whether its activities during the year were for \"charitable purposes\" squarely covered by the above definition. Hence, it is imperative to analyse the legal framework governing the concept of \"charitable purpose\" for income tax purposes.Section 2(15) reads as follows:\"\"charitable purpose\" includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;\"Emphasis supplied.On a careful reading of section 2(15), it is clear that organizations carrying out the first six categories of charitable activities can have incidental business activities without any financial limit. However, the seventh category for \'advancement of any other object of GPU\' can have business activity only up to 20% of gross receipts; that too while advancing the primary objective. This limit was imposed by an amendment through the Finance Act 2012 as Rs. 25 lakhs, changed later by the Finance Act 2015 to 20% of the gross receipts. If the seventh category of activity is any business activity (even if incidental) in excess of such threshold, then their charitable status will not be lost as per judicial precedence, but they will be treated as \'non-exempt entity\' for that particular assessment year under section 13(8) of the Act.Issue at handIn light of the above background, the concern is whether the income received during the conference constitutes an activity in the nature of trade, commerce, or business, or in relation thereto for the purpose of section 2(15)?Legislative intent of the amendment to section 2(15)To interpret the provisions of the amended section constructively, it is imperative to understand the intent behind the amendment. The explanatory Circular No. 11 of 2008 issued in the context of proviso to section 2(15) provides that this provision is enacted to weed out masked entities or for-profit organizations working in the garb of charitable institutions. The Hon\'ble Finance Minister\'s Budget Speech of 2008 states as follows:\"180...some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under \"charitable purpose\". Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organisations will not in any way be affected.\"Further, the Hon\'ble Finance Minister replied to the Debate in the Lok Sabha on the Finance Bill 2008 as follows:\"...The CBDT will, following the usual practice, issue an explanatory circular containing guidelines for determining whether an entity is carrying on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organisations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as \"advancement of any other object of general public utility.\"Emphasis supplied.From the above, it is clearly discernible that the intention of the Parliament was to identify and restrict the business activity undertaken by masked commercial organizations while advancing the primary objectives.Possible contentionsCharitable does not mean \"no profit/ surplus\" | Profit v/s. profit motiveIt may be noted that there are judicial pronouncements that the principal or dominant activity of a tax-exempt charitable institution can also be undertaken on commercial lines, though without profit intent and to such extent, it shall still be called \"charitable\" and \"not commercial.\"The Hon\'ble Supreme Court judgement in the case of T.M.A. Pai Foundation vs. State of Karnataka (2002) 8 SCC 481 and in the case of P.A. Inamdar vs. State of Maharashtra (2005) SCC 537, laid down the principles of understanding charitable activity, the ratio of which holds good even after the amendment of section 2(15) in 2008. It was emphatically clarified that the term \"charitable\" did not imply that an organization cannot have profit from its primary charitable activity. In these cases, the Hon\'ble Supreme Court followed its own ruling in the case of Islamic Academy of Education vs. State of Karnataka on 14th August 2003, WP (Civil) 350 of 1993 where it was held that an educational institution could have reasonable surplus up to 6% to 15% every year without affecting its charitable character.If income from the conference constitutes more than 20% of gross receipts, the moot question is whether the activities in relation thereto, is \"in the nature of trade, commerce or business\" in the first place. This is a question of fact which will be decided based on the nature, scope, extent, and frequency of the activity. In other words, if it can be inferred that conducting INC is a charitable and not business activity, per se, in the facts of the Association; the financial limit capsulated in the proviso to section 2(15) should not apply.Whether organizing the conference as stated above is \"trade, commerce or business\"?At the outset, let us do a threadbare analysis of what is the meaning of each of these terms to examine how they match with the scope of activities involved in organising the conference as stated above. The three words \"trade\", \"commerce\" or \"business\" have been interpreted by the Supreme Court and other courts in various decisions.\"Trade\", as per the Webster\'s New Twentieth Century Dictionary, means amongst others, \"a means of earning one\'s living, occupation or work\". In Black\'s Law Dictionary, trade means a business which a person has learnt or he carries on for procuring subsistence or profit; occupation or employment, etc.The word \"trade\" was elucidated in State of Punjab v. Bajaj Electricals Ltd. [1968] 2 SCR 536. It has been opined: -\"The question whether trade is carried on by a person at a given place must be determined on a consideration of all the circumstances...In the present case, the respondent has no shop or office within the State of Punjab. The respondent supplies goods within the State pursuant to orders received and accepted at New Delhi, and also receives price for the goods within the State. But these are ancillary activities and do not in our judgment amount to carrying on trade within the State of Punjab.\"The SC in Khoday Distilleries Ltd. v. State of Karnataka [1995] 1 SCC 574 was of the opinion:-\"\'Trade\' in its primary meaning is the exchange of goods for goods or goods for money and in a secondary meaning it is any business carried on with a view to profit, whether manual or mercantile, as distinguished from the liberal arts, or learned professions and from agriculture...\"The meaning of \"commerce\" as given by the Concise Oxford Dictionary is \"exchange of merchandise, especially on large scale\". In ordinary parlance, trade, and commerce carry with them the idea of purchase and sale with a view to make profit. If a person buys goods with a view to sell them for profit, it is an ordinary case of trade. If the transactions are on a large scale, it is called commerce. For the first proviso to section 2(15), trade is sufficient, therefore this aspect is not required to be examined in detail.Section 2(13) of the Act defines the term \'Business\' as a broad term which encompasses trade, commerce and other activities.In Black Law\'s dictionary, 6th Edition, the word \'business\' has been defined as under:\"Employment, occupation, profession or commercial activity engaged in for gain or livelihood. Activity or enterprise for gain, benefit, advantage or livelihood...\"According to Sampath Iyengar\'s Law of Income-tax (9th edition), a business activity has the following four essential characteristics:continuous and systematic [Director of Supplies & Disposal v. Member, Board of Revenue [1967] 20 STC 398 (SC), State of Gujarat v. Raipur Mfg. Co. [1967] 19 STC 1 (SC), Customs and Excise Commissioner v. Lord Fisher [1981] S.T.C. 238]capable of producing profit [CIT v. Lahore Electric Supply Co. Ltd. [1966] 60 ITR 1 (SC), State of AP v. H. Abdul Bakhi & Bros. [1964] 15 STC 664, Mrs. Sarojini Rajah v. CIT [1969] 71 ITR 504 (Mad.), Bharat Development (P.) Ltd v. CIT 133 ITR 470 (Delhi)], Eclat Construction (P.) Ltd. v. CIT [1988] 172 ITR 84 (Pat.), CIT v. M.P. Bazaz [1993] 200 ITR 131 (Orissa) and CIT v. (R.M.) Meenakshisundaram [1995] 212 ITR 220 (Mad)]brought about by a transaction between two or more persons.has an element of reciprocity.Economic activity v/s. profit motiveIt thus transpires that the term \"profit motive\" is relevant but not the sole consideration to be kept in mind; and principle of \"economic activity\" has gained acceptability especially under indirect tax laws where the taxable event occurs because of the \"economic activity\" involved and not necessarily accrual of income.It may also be appropriate here to refer the decision of the House of Lords in Town Investments Ltd. v. Department of the Environment [1977] 1 All ER 813 where the term \"business\" was held to include Government activities collecting rent (not necessarily for profit).Having said so, it may be pertinent to draw attention to the case of the Institute of Chartered Accountants in England and Wales v. Customs and Excise Commissioners [1999] 1 W.L.R. 701, the House of Lords examined the question whether the aforesaid institute was carrying on an economic activity by issuing licenses and certificates under three enactments for a fee. It was observed that any regulatory activity carried out under a statutory power for the purpose of protecting the public by supervising and maintaining the standard of practitioners, fall on the other side of the line from economic activities.Thus, it is important whether the collection of revenue is in discharge of commercial or statutory functions by the organization.Incidental or ancillary activities draw colour from the main and dominant activities?In CST v. Sai Publication Fund [2002] 122 ITR 437, the Supreme Court interpreted the word \"business\" under section 2(5A) of the Bombay Sales Tax Act, 1959 as under:-\"..if the main activity of a person is not trade, commerce etc., ordinarily incidental or ancillary activity may not come within the meaning of \"business\". ...Publication for the purpose of spreading message is incidental to the main activity which the Trust does not carry on as business... Chagla, C.J. pointed out that it was not merely the act of selling or buying etc. that constituted a person a \"dealer\" but the \"object\" of the person who carried on the activities was important... One of the cases concerned Aligarh Muslim University... It was held,...the activity of serving food in the dining hall was a minor part of the overall activity of the University... Likewise, in the State of T.N. v. Cement Research Institute of India it was held...that though the cement manufactured as a result of research was sold, it could not be considered to be a trading activity within section 2(d) of the Tamil Nadu General Sales Tax Act, 1959...\"In the case of the Institute of Chartered Accountants of India vs DGIT (Exemptions) [2011] 13 taxmann.com 175, it was held by the Hon\'ble Delhi High Court that:\"An activity would be considered \"business\" if it is undertaken with a profit motive, but in some cases this may not be determinative... In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles and pursued with reasonable continuity... The courses of the institute, per se, it does appears, cannot be equated to a private coaching institute.\"In ICAI vs DGIT (Exemption) [2013] 35 taxmann.com 140 while considering whether the activities of ICAI fell within the proviso of amended section 2(15), the Delhi High Court (after considering the SC decision in Sai Publication Fund supra) held that if the dominant activity of the assessee was not business, then any incidental or ancillary activity would also not fall within the definition of business.It has been held by the Hon\'ble High court of Delhi in the case of ICAI Accounting Research Foundation v/s. DGIT (Exemptions) [2009] 183 Taxman 462 (Delhi) that any collection of remuneration from projects or funds for fostering research; cannot be singled out as an independent commercial activity if the overall purpose served is charitable in nature, even after the amended section 2(15) of the Act was introduced.Impact of the recent Supreme Court judgement in [2022] 143 taxmann.com 278 (SC) in the Ahmedabad Urban Development AuthorityHaving said the above, it may be pertinent to refer to the recent SC ruling, mentioned in the beginning of this article, where it adjudicated the scope of GPU in the definition of \"charitable purposes\". The SC rejected the claim for tax exemption as charitable institutions stating that they were carrying on trade, commerce or business for consideration even if intrinsically linked to or a part of charity\'s objects. Consequently, the test of the charity being driven by a predominant object, as laid down by the SC in Asstt. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1, is no longer good law after the 2008 amendment and that the \"ploughing\" back of business income to \"feed\" charity is an irrelevant factor in light of the amended provisions.The SC generalized and held that if the bodies involved in trade promotion provide additional services such as courses meant to skill personnel, providing private rental spaces in fairs or trade shows, consulting services etc., against service fees, then the income or receipts from such activities would be considered as \"in relation to\" business or commercial in nature and may be governed by the prescribed threshold limit under the Income tax laws.ConclusionIt may not be fair to generalize the outcome of the SC decision in the Ahmedabad case; and the facts of each case including the object, main and dominant activity of the organization; consistency and regularity of transactions should be examined to infer whether the activity undertaken is in fact \"business\" or not in the first place. Considering the recent SC pronouncement, chances of litigation cannot be ruled out.Food for thought: Constitutional validity of the amendment to section 2(15)Without prejudice to the above, it is worth examining the constitutional validity of the amendment to section 2(15). In Shri Ram Krishna Dalmia vs. Justice S.R. Tendolkar AIR 1958 SC 538, the SC stated that generally the burden is upon someone who challenges a constitutional amendment to prove that there is a clear violation. However, in case of discrimination in favour or against any class, one cannot presume that there must be some undisclosed and unknown reasons for subjecting individuals or corporations to hostile or discriminating legislation.Causing tax prejudice to a broader section of society (while targeting a few) vis-a-vis others without intelligible differentia, may be considered hostile, discriminatory and violative of Article 14 of the Constitution for the genuinely aggrieved [Mediwell Hospital & Health Care (P.) Ltd. vs. Union of India [1997] 1 SCC 759].Thus, the amendment to section 2(15) to deprive even genuine charitable organisations falling in the seventh limb of section 2(15) from doing even incidental commercial activities beyond a financial limit; while allowing even masked entities falling in the other limbs to do so without any financial limit, can be challenged as violative of Article 14 of the Constitution of India.The CBDT may clarify how the policy and object of the legislation will work vis-à-vis those to whom it will apply and those who will be left out. The principles laid down by the SC judgement in the Ahmedabad case may also not be in complete sync with the intention of the Parliament while bringing these amendments in 2008.References:(No explicit references listed in source)Author may be reached at dagashreya1992@gmail.com and eboard@icai.in
Ep. 338 — Loss of Goods by Fire under GST
CA Journal
· September 2026
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Loss of Goods by Fire under GSTThe issue of reversal of credit in case of loss by fire was under litigation for years in Central Excise regime. It got settled with amendment in erstwhile CENVAT Credit Rules, 2004. However, while transitioning to Goods and Service Tax regime, this issue remained unsettled again. The provision of reversal of input tax credit on goods lost has been provided in section 17(5)(h) of Central Goods and Service Tax Act, 2017. This provision is ambiguous and is subject to several interpretations. This piece of articulation covers the detailed analysis of this provision and the ambiguities attached to it.By CA. Preeti Parihar, Member of the InstituteLegal provisions related to loss of goods under Central Excise regimeThe concept of reversal of input tax credit (ITC) in case of goods lost has its roots from erstwhile Central Excise Regime. The relevant provisions from Central Excise Regime are discussed as follows: -As per section 3 of Central Excise Act, 1944, Central Excise Duty is leviable on \"manufacture\" of goods. The duty liability used to arise once the goods were \"manufactured\"; duty was demanded even in case the goods were destroyed after manufacture.However, there was provision of remission of duty under section 5 of Central Excise Act, 1944 read with rule 21 of Central Excise Rules, 2002. Under these provisions, the manufacturer was allowed to apply for remission of Central Excise Duty due on manufactured goods in specified cases.The remission of duty was allowed if the goods were destroyed by natural causes or unavoidable accident or were claimed as unfit for consumption.As mentioned, the provision of remission of Central Excise Duty was on the final product. As no duty was payable on final products in case of remission of duty, the credit availed on inputs used in the manufacture of such products was demanded by Revenue Department. However, there was no express provision for reversal of CENVAT credit taken on the inputs or input services used in manufacture of final products on which duty has been remitted.After much litigation, the Circular No.650/41/2002-CX dated 7th August, 2002 was issued by the Board to clarify that the reversal shall not be required on the inputs contained in finished goods on which Central Excise Duty has been remitted.Later, CENVAT Credit Rules, 2004 were amended vide Notification number 33/2007-CE(N.T.) dated 07.09.2007. This notification added sub-rule 5C to rule 3 of CENVAT Credit Rules, 2004. This sub-rule prescribed that where the Duty has been remitted under rule 21 of Central Excise Rules, 2002; the CENVAT Credit taken on inputs and input services used in manufacture of such goods will be required to be reversed. Consequently, it became mandatory to reverse the credit on inputs before applying for remission of duty.In view of above discussion, we can conclude that just before arrival of Goods and Service Tax, the Central Excise law was clear: -If the goods were lost due to fire or any other reason, the remission had to be applied in respect of Central Excise Duty on final products.Before applying for remission of duty, reversal was required on inputs, inputs contained in semi-finished and finished goods by virtue of rule 3(5C) of CENVAT Credit Rules, 2004.As the issue of reversal of credit on inputs got settled in Central Excise regime after substantial debates, the law makers have taken care of it while drafting Goods and Service Tax law.Legal provisions related to loss of goods under Goods and Service Tax regimeSection 17(5)(h) of Central Goods and Service Tax Act, 2017: -In GST, section 17(5) of Central Goods and Service Tax Act, 2017 prescribes the cases where input tax credit is not allowed. The relevant part of this section, prescribing the reversal in case of loss of goods, reads as follows: -\"(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely: -17 (5) (h) -goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; andThe analysis of section 17(5)(h) of Central Goods and Service Tax Act, 2017 clarifies that the ITC shall not be available in respect of goods lost, stolen, or destroyed.Rationale behind section 17(5)(h) and ifs and buts attached to it: -ITC is allowed in any indirect tax regime to eliminate the cascading effect. In other words, where the outward supply is leviable to tax, the tax element included in the inward supplies is allowed as ITC.Clause (h) of section 17(5) restricts the input tax credit in specified cases where tax is not payable on outward supplies. This clause covers the cases of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. In such case, no tax is payable. Therefore, it is logical also that the input tax credit on the respective inward supplies should not be allowed.However, there are several complexities attached to this clause. The scope of Goods and Service Tax law is very wide, and it covers several cases where tax is payable even if the goods are not sold against consideration. These are the cases listed in schedule I of Central Goods and Service Tax Act, 2017. Thus, these will be typical cases where the tax is payable on the supply of goods for which no consideration is received. In other words, tax will be payable, however, no ITC will be available if the case is listed in section 17(5)(h). One such issue was faced by trade in respect of distribution of samples which was later clarified by way of issuance of Circular No. 92/11/2019-GST dated 7th March, 2019 by Board. The issue was related to common practice followed by certain sectors like the pharmaceutical sector which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration. If these free samples are given to its related or distinct person, the activity falls in definition of supply, thus, tax is payable on the same even if no consideration is involved. Tax is payable on outward supply, however, no ITC is allowed as the inward supplies are prescribed under section 17(5)(h). This was perhaps against the intention of law makers, therefore, Circular No. 92/11/2019-GST dated 7th March, 2019 was issued to clarify the situation. In this Circular, it was clarified that where the activity of distribution of gifts or free samples falls in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.Can analogy drawn by Circular no. 92/11/2019-GST dated 7th March, 2019 be applied in case of fire accidents?The intention behind issuance of Circular no. 92/11/2019-GST dated 7th March 2019 is to remove the blockage in input tax credit. In case of fire accidents, 100% destruction is rare. There is always some scrap that is sold in the market against some consideration. Can the sale of scrap of outward supply be equated with normal supply to claim the input tax credit on the inward supplies? It may be interpretated this way however, this interpretation is prone to litigation.Though tax is payable on scrap, yet the admissibility of input tax credit cannot be debated merely on fact of payment of tax on scrap, particularly when the finished goods have completely lost their identity and there is no value addition in the said transaction. This happens more when the lawmakers have specifically used the word \"lost, stolen or destroyed\" which themselves means the said goods cannot be used for intended purpose or sold as such. Further, the overriding effect given to section 17(5) also clarifies the intention of law makers where there is no outward supply or if there is outward supply with no value addition, the input tax credit should not be allowed.It is also interesting to check if the insurance claim is received against the said loss, whether the person has option to pay tax treating it as supply and claim the input tax credit pertaining to it. However, the option doesn\'t seem to be available within the current tax framework. Insurance claims are types of actionable claims which are outside the purview of Goods and service tax by virtue of para 6 of schedule III of Central Goods and Service Tax Act, 2017. So, there is no option to pay tax on outward supply in case of fire accidents and claim the input tax credit. Thus, the benefit of above-mentioned Circular dated 7th March 2019 is not admissible.Burning issues in GST arising in case of mishaps and fire accidents1) Mystery of phrase \"in respect of\"Section 17(5)(h) restricts the ITC in respect of goods lost, destroyed, stolen, or written off. However, to what extent the input tax credit should be denied, is subject to several interpretations. One school of thought, is of the opinion that this section restricts the input tax credit only on the inputs and not in cases where the input has already changed its form in process of manufacture. This is so interpreted because once input enters in the manufacturing process, it can be said to be used in course or furtherance of business. As the language of section 17(5)(h) uses the phrase \"input tax credit shall not be allowed in respect of goods lost, stolen, destroyed, etc.\", the followers of this school of thought are of the view that the ITC will be denied only if the said goods itself is lost, stolen, or destroyed.However, there is another school of thought which interpret this phrase - \"in respect of\" in wider terms. According to them, the term \"in relation to\" must be given an extended meaning, thus, ITC should be denied irrespective of fact whether input has changed its form or not. This school of thought therefore holds a view that input tax credit is denied on inputs, inputs contained in semi-finished goods as well as in finished goods. This approach is more likely inspired from erstwhile Central Excise Regime.Well, amidst this debate of interpretations, Revenue Department is super clear about its approach, and it always follow the second school of thought. As such, in case of fire and other mishaps, reversal is demanded on inputs, inputs contained in semi-finished goods and inputs contained in finished goods.2) Loss of inputs - in transit & during manufactureIn Central Excise Regime, no ITC was allowed on the inputs not received in the factory as the said inputs will never be used in the manufacturing process. However, a normal transit loss of inputs was allowed by various appellate authorities in Central Excise Regime. In the case of Hindalco Industries Ltd. v/s Commissioner of Central Excise, Allahabad, reversal of credit was sought by Revenue Department on account of short receipt of inputs. However, hon\'ble Delhi CESTAT vide final order number 259/2009-EX dated 23rd March 2009 allowed the credit on the grounds that short receipt of inputs by just 0.08% to 0.38% is nominal and should not be a ground of reversal.Similar situation is there in GST as well. Clause (b) of section 16(2) of Central Goods and Service Tax Act 2017 specifically mentions that the receipt of goods or services is must for the availment of input tax credit. Thus, no input tax credit is allowed if the goods are lost in transit due to fire or any reason.However, there is different story in the case of process loss. In the case of ARS Steels & Alloy International (P.) Ltd. v/s State Tax Officer, Group-1, Chennai, hon\'ble Madras High Court on 24th June 2021 has held that where loss in consumption of inputs is inherent to manufacturing process, the reversal is not required as it does not fall in ambit of section 17(5)(h). Though this judgment is related to process loss, however, its analogy may be applied in case of short receipt of inputs due to inherent nature of goods.3) Capital Goods lost in fireCapital goods are defined in section 2(19) of Central Goods and Service Tax Act, 2017 as follows: - \"Capital goods\" means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;Thus, capital goods are also goods, hence will be duly covered in the ambit of section 17(5)(h) which is applicable on all types of goods which are lost, stolen, destroyed, etc. Thus, reversal is also required on the capital goods as may be inferred from the language of section 17(5)(h). But how much input tax credit is required to be reversed on capital goods destroyed is an unsolved mystery in view of following:Language of section 17(5)(h) states that \'NO\' input tax credit is allowed on capital goods destroyed or lost. Thus, as per principle of literal interpretation, Revenue Department demands 100% reversal on capital goods in case of mishaps.On the flip side, according to the taxpayers, framing of provisions in Goods and Service Tax law clarifies that the effective life of capital goods is deemed as five years, so, input tax credit attributable to remaining effective life of capital goods will be required to be reversed.There is no clarity as to whether reversal is required on those capital goods which were purchased in erstwhile indirect tax regime and credit of Central Excise Duty or VAT was availed and the said credit was transitioned through TRAN-1?If reversal is required, it will be covered under which rule? There is no rule specifying the manner of computation of reversal of input tax credit on capital goods lost by fire. Whether you may choose not to reverse any input tax credit following the doctrine of \"Lex non Cogit Ad impossibilia\" mentioning that it is not possible to compute the reversal in absence of any rule specifying the manner of such reversal.Alternatively, whether such reversal can be computed under rule 40(2) or rule 44(6) of Central Goods and Service Tax Rules, 2017? As per language of these rules, these are applicable only in case of supply of capital goods. Whether it can be applied in case of capital goods lost in fire? Clarification is needed on this matter.ConclusionLoss of goods by fire or accident is critical for any business. Apart from risking loss of customers and financial crisis, its tax implications are severe, particularly under Goods and Service Tax. Above all, there is no clarity on the issue of reversal at all, neither a Circular nor any judicial pronouncement. However, there is an Advance Ruling given by AAR-Telangana on 2nd September 2023 in the case of GEEKAY WIRES LTD.. In this ruling, the Authority for Advance Ruling held that reversal is required on the inputs already used in manufacture of finished goods and finished goods are destroyed in fire accident completely. Now what? Should a person who had fire accident in his premise be afraid of this ruling? Certainly not. As per section 103 of Central Goods and Service Tax Act, 2017 an advance ruling is binding only on the person who sought it and on the concerned jurisdictional officer in this respect. So, the issue is still under consideration.References:(No explicit references listed in source)Author may be reached at preeti.parihar@gmail.com and eboard@icai.in
Ep. 339 — Unlocking Litigation Strategies: Fighting Penalties for Late Supplier Payments under GST Law
CA Journal
· September 2026
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Unlocking Litigation Strategies: Fighting Penalties for Late Supplier Payments under GST LawThe issue of challenging penalties on Input Tax Credit (ITC) availed but not reversed by the recipient of supply, in case he has made belated payments of the value of the supply along with tax thereon to the supplier after 180 days of invoice issuance is a contentious one under the GST law. Show Cause Notices (SCNs) under Section 74(1) of the CGST Act, 2017 in respect of F.Y.(s) up to 2023-24 and under Section 74A of the CGST Act, 2017 in respect of F.Y.(s) 2024-25 and onwards are often issued demanding the reversal of such ITC along with payment of applicable interest and penalty on the allegations of fraudulent ITC usage and on the basis of violation of Second Proviso to Section 16(2) of the CGST Act read with Rule 37 of the CGST Rules. This article discusses several grounds of defence, supported with significant court precedents, that may be relied upon in challenging such penalty notices.By FCA Ishan Tulsian, Member of the InstituteIntroductionOne of the burning issues which is often litigated in the GST law since its inception is challenging the levy of penalty on the amount of Input Tax Credit (ITC) availed earlier but neither paid nor reversed in case of belated payment by the recipient of the supply to the supplier towards the value of the supply along with tax thereon made after a period of 180 days from the date of issue of invoice by the supplier.Usually, a Show Cause Notice (SCN) u/s 74(1) of the CGST Act, 2017 in respect of F.Y.(s) up to 2023-24 and u/s 74A of the CGST Act, 2017 in respect of F.Y.(s) 2024-25 and onwards is issued demanding such penalty, alleging wrongful availment of ITC and wrongfully utilizing the same for payment of GST by reasons of fraud, wilful misstatement of facts, and suppression of material facts with an intention to evade GST payment. The above-mentioned SCN is issued as a result of an audit finding in the Audit Observations Report and in the Audit Report in Form GST ADT-02.Grounds of DefenceBeing a litigated issue, it becomes important to understand the grounds of defence that may be taken when replying to such SCNs. Following court decisions and other points may be referred while drafting such grounds of defence:Any shortcomings noticed during the course of Departmental Audit u/s 65 of the CGST Act itself cannot be reasoned that the deficiency was due to mala fide intention on the part of the assessee.In case the SCN does not discuss the facts and circumstances which were suppressed or mis-declared or mis-stated by the taxpayer and how the taxpayer had availed the said admissible ITC with mala fide intention, except observing that had the audit not pointed out the impugned ITC, the amount would not have been recovered from the taxpayer. This reasoning, standing alone, cannot be accepted as a ground for confirming suppression, mis-statement or mis-declaration of facts by the taxpayer.The very objective of conducting the audit of records of an assessee is to ascertain the correctness of the payment of tax, availment of ITC, etc.Furthermore, in case the SCN is based only on the audit para and there is no iota of evidence to prove either suppression or mis-declaration of facts or contravention of provisions with intention to evade the payment of tax, the SCN may be liable to be quashed.In this regard, reliance may be placed on the following judgments:M/s. Nexteer Automotive India Pvt. Ltd. versus the Commissioner of Central Excise and Service Tax (2023) - CESTAT BangaloreThe Hon\'ble Karnataka High Court in the case of Commissioner of Central Excise and Service Tax Bangalore-I versus Geneva Fine Punch Enclosures Ltd. [2011 (1) TMI 746 Karnataka High Court]M/s. LANDIS + GYR LTD. versus Commissioner of Central Excise, Kolkata-V 2013 (290) E.L.T. 447 (Tri. Kolkata), 2017 (49) S.T.R. 637 (Tri. - Kolkata) CESTAT KolkataIt is only in cases where tax is determined coupled with the fact that the tax is evaded by a reason of fraud, collusion or any wilful mis-statement or suppression of facts or contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax, the liability to pay penalty arises.It is worthwhile to refer to Section 74(1) of the CGST Act, 2017 in respect of F.Y.(s) up to 2023-24 and Section 74A of the CGST Act, 2017 in respect of F.Y.(s) 2024-25 and onwards, wherein it is mentioned that the taxpayer is required to \"show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.\" Therefore, it is to be noted that Section 74(1) of the CGST Act, 2017 in respect of F.Y.(s) up to 2023-24 and Section 74A of the CGST Act, 2017 in respect of F.Y.(s) 2024-25 and onwards specify that the amount of penalty should be equivalent to the tax specified in the notice.Secondly, there would exist no case for imposing penalty when the aforesaid requirement of mentioning the cause of evasion of tax is not provided in the SCN. Furthermore, there would exist no case for imposing penalty, when the entire tax along with the value of supply has been already paid, albeit belatedly after 180 days from the date of issue of the invoice by the supplier, but before the issue of the SCN u/s 74(1) of the CGST Act, 2017 in respect of F.Y.(s) up to 2023-24 and u/s 74A of the CGST Act, 2017 in respect of F.Y.(s) 2024-25 and onwards and when the recovery of interest as required u/s 16(2) of the CGST Act, 2017 read with Rule 37 of the CGST Rules, 2017 and computed u/s 50(1) of the CGST Act, 2017 has been done by voluntary payment by the assessee on being pointed out by the audit or adjudication team. Therefore, it may be inferred that when the taxpayer fails to reverse the Input Tax Credit as per Rule 37 of the CGST Rules 2017, it would amount to erroneous utilisation of credit and not otherwise.In this regard, reliance may be placed on the following judgments:The Hon\'ble Karnataka High Court in the case of Commissioner of Central Excise and Service Tax Bangalore-I versus Geneva Fine Punch Enclosures Ltd. [2011 (1) TMI 746 Karnataka High Court]M/s. LANDIS + GYR LTD. versus Commissioner of Central Excise, Kolkata-V 2013 (290) E.L.T. 447 (Tri. Kolkata), 2017 (49) S.T.R. 637 (Tri. - Kolkata) CESTAT KolkataFurthermore, reliance may be placed on Para 3.3 of Instruction No. 05/2023-GST dated the 13th December 2023, which states that the extended period of limitation, as prescribed under Section 74 of the CGST Act, 2017 in respect of F.Y.(s) up to 2023-24 and under Section 74A of the CGST Act, 2017 in respect of F.Y.(s) 2024-25 and onwards cannot be invoked in the absence of any material evidence of fraud or wilful misstatement or suppression of facts to evade tax. Accordingly, the evidence for the invocation of the extended period shall form part of the show cause notice. Furthermore, reliance may be placed on the Hon\'ble Madras High Court judgement in the case of Hind Aluminium Vs Assistant Commissioner 2023 (2) TMI 90, wherein it was stated that an order passed on the basis of a Show Cause Notice which is bald and cryptic and which has simply extracted the ingredients of Section 74 of the CGST Act, 2017 in respect of F.Y.(s) up to 2023-24 and Section 74A of the CGST Act, 2017 in respect of F.Y.(s) 2024-25 and onwards and does not disclose the exact details of the violations committed by the taxpayer, is liable to be quashed and set aside.There is no suppression of fact, non-declaration or wilful mis-representation in case the entire amount of impugned ITC availed and utilized were duly accounted for in the Electronic Credit Ledger (ECL) and the aforementioned ITC was duly reflected in the monthly returns filed in GSTR-3B with the department and had been correctly reported in the audited financial statements.Furthermore, there is no suppression of fact when all payments, albeit belatedly after 180 days from the date of issue of the invoice by the supplier, have been carried out through banking channels towards the value of the supply along with tax thereon and all such banking payments have been adequately reported in the audited books of accounts and financial statements of the relevant financial years.In this regard, reliance may be placed on the following judgments:Wild Craft India Private Limited versus Commissioner of Central Tax, Mysuru Commissionerate 2019 (7) TMI 902 - CESTAT Bangalore and in Tata Global Beverages Limited Versus Commissioner of Central Tax, Bangalore North, 2019 (2) TMI 586 CESTAT BangaloreM/s. Landis+ Gyr Ltd. versus Commissioner of Central Excise, Kolkata-V 2013 (290) E.L.T. 447 (Tri. Kolkata), 2017 (49) S.T.R. 637 (Tri. - Kolkata) CESTAT KolkataM/s. Jwalla Security Force versus Commissioner of Service Tax Cell, Nagpur [2015 (11) TMI 524-CESTAT Mumbai]When the situation is revenue-neutral, then no mala fide intention could be discerned. The burden of proving mala fide intention or suppression is on the revenue, since it is the cardinal principle of law that the burden of proof lies on the shoulder of the person alleging it. Moreover, a mechanical reproduction of the language used in the statute would not per se justify the mala fide intentions.In case the amount of output tax was paid by the supplier in full to the Government Exchequer, for which an undertaking can be acquired from the supplier or a CA, there can be said to be no loss of tax to the Government and this is a case of a revenue neutral situation.Furthermore, in case of belated payment of value of supply along with tax thereon to the supplier after 180 days from the date of issue of invoice by the supplier, there exists no tax liability or no requirement of reversal of ITC by the recipient of supply as per the Second proviso to Section 16(2) of the CGST Act read with Rule 37 of the CGST Rules.Moreover, Section 16(2) (c) of the CGST Act mandates the eligibility of ITC only in case the tax charged in respect of the supply has been paid to the Government Exchequer. Thus, the Government is not losing any revenue due to such an exercise and the only benefit accruing to the Government due to such exercise is the interest u/s 50(1) of the CGST Act.It is to be noted that when there is a revenue neutral situation, there cannot be a question of any fraud, suppression of facts, wilful misstatement etc. and penalty cannot be levied and the same has been held in a plethora of cases decided under the Central Excise and Service Tax law. It is to be noted that when the entire exercise is revenue neutral, the assessee could not have achieved any purpose to evade the tax.In this regard, reliance may be placed on the following judgments:Essilor India Pvt. Ltd. versus Commissioner of Central Tax, Bangalore North Karnataka, 2018 (11) TMI 826 - CESTAT BangaloreNirlon Ltd. versus CCEx 2015 (320) ELT 22 (SC)CCEx versus Tenneco RC India Pvt. Ltd. - 2015 (323) E.L.T. 299 (Mad.)M/s. Uniworth Textiles Ltd. versus Commissioner of Central Excise. Raipur 2013 (1) TMI 616 - (SC)ConclusionTherefore, in the above-mentioned scenario of belated payment in full of value of supply along with tax thereon to the supplier, a SCN issued u/s 74(1) of the CGST Act, 2017 in respect of F.Y.(s) up to 2023-24 and issued u/s 74A of the CGST Act, 2017 in respect of F.Y.(s) 2024-25 and onwards is in principle a mere demand notice for the recovery of applicable interest as required u/s 16(2) of the CGST Act, 2017 read with Rule 37 of the CGST Rules, 2017 and Section 50(1) of the CGST Act, 2017 and the imposition of penalty can be challenged on the basis of the above-mentioned grounds of defence since neither is there any determination of tax liability payable, nor is there any tax liability due on part of the recipient of the supply and there has been no incidence or intention of any tax evasion by a reason of fraud, collusion or any wilful mis-statement or suppression of facts or contravention of any of the provisions of this Act or the rules made thereunder.References:Taxmanagementindia.comAuthor may be reached at eboard@icai.in
Ep. 340 — Unveiling Asset Quality Metrics of Banks: Exploring the Myth of Net NPA Ratio and Dispelling Provisioning Misconceptions
CA Journal
· September 2026
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Unveiling Asset Quality Metrics of Banks: Exploring the Myth of Net NPA Ratio and Dispelling Provisioning MisconceptionsBanking companies in India are plagued with higher amounts of NPAs owing to deterioration in their asset quality. For evaluating the asset quality, the regulator and other authorities have specified, among others, the Net Non-performing Assets Ratio (NNPA Ratio). However, this ratio fails to properly evaluate the asset quality. Against this backdrop, this paper aims to highlight the shortcomings of the NNPA Ratio and proposes, with justification, the Adjusted Gross NPA Ratio for evaluating banks\' asset quality. Besides, an analysis of misconceptions about the implications of provisioning on financial results revealed a strong, yet negative correlation between provisioning and the profits of banking companies.By Dr. J. Madegowda, AcademicianBy Dr. Inchara PM Gowda, Post-Doctoral FellowConceptual Framework\'Asset quality\' is a feature of the credit portfolio of banking companies. It entails examining banks\' loans to assess the level and size of credit risk associated with their loans. Loans are considered as high-quality assets if they can be converted into cash easily and immediately with no or little loss of value. Usually, loans carry a \'normal to higher\' degree of risk. Even the collaterals given may possess certain risks. The apex bank of the country (Reserve Bank of India, RBI) directs the banking companies to assess the actual level of bad loans and to classify a loan account as NPA if interest/principal is not paid in 90 days from the due date.The loans provided by banks are commonly referred to as their \'assets\' as they generate a stream of interest income. However, in addition to \'loans and advances\', the term \'assets\' includes items like equipment, intangibles, etc. Despite this distinction, this paper uses the term \'assets\' to specifically refer to \'loans\' disbursed by banks. Therefore, \'asset quality\' in this context refers to the quality of loans, i.e., the timeliness with which borrowers pay interest and repay borrowed sums as per the credit terms.When a loan asset ceases to generate interest income for the lender-banker, it is classified as a non-performing asset (NPA). Operationally, when a borrower fails to make the scheduled payment of interest or principal for a period of 90 days (from the due date), the account is classified as NPA. The NPAs are classified into three categories: (i) sub-standard assets (if a loan account is in NPA for 12 months or less), (ii) doubtful assets (if it remained NPA for more than 12 months), and (iii) loss assets (if the loan is considered/identified \'uncollectible\').There are several reasons why asset quality deteriorates and transitions into an NPA. Natural calamities like COVID-19, economic recession frequent strikes impacting production, faulty projections, wilful defaults, target-driven pressures, etc., exert a substantial influence on the prevalence of bad loans (Sanjeev, 2007). Research spanning 76 countries indicates that \'corruption\' exacerbates bad loans in the banking sector, leading to the misallocation of banks\' funds from sound projects to risky ventures, further deteriorating asset quality (Park, 2012). Additionally, diverting borrowed funds for unauthorized purposes also contributes to the rising NPAs (Richard, 2011).However, the RBI requires the banks to set aside money to cover potential losses on these NPAs at the specified rates. The money so set aside is called, \'Provisioning\' - a proactive measure to mitigate credit risk and ensure financial resilience. Adequate Provisioning strengthens the balance sheets of banks and maintains the investor/ depositor confidence. Although it is construed as a sign of mismanagement, it is fundamental to risk management and regulatory compliance reflecting prudent financial stewardship.The rate of Provisioning depends on the category of loan/NPA - 0.25% on \'standard assets\' to 100% on \'loss assets\'. Both NPAs and Provisioning indicate a deterioration in asset quality, manifested by a decrease in the proportion of standard assets in gross advances and a consequent rise in the proportion of NPAs in gross advances, necessitating increased Provisioning.Further, the amount of Provisions held is subtracted from the amount of Gross NPAs (GNPAs i.e., aggregate of sub-standard assets, doubtful assets, and loss assets) to arrive at the amount of Net NPAs (NNPAs). Based on the amounts of NPAs and Advances, two NPA Ratios are computed:GNPA Ratio = [GNPAs / Gross Advances] * 100 ...(1)NNPA Ratio = [NNPAs / Net Advances] * 100 ...(2)where, Net Advances = (Gross Advances - Repayments of Principal)Magnitude of NPAs - An OverviewThe amount of GNPAs of scheduled commercial banks (SCBs, public sector banks, private sector banks, and branches of foreign banks are considered here) increased from Rs. 593.73 billion up to 31 March 2005 to Rs. 10,387.86 billion by 31 March 2018, representing an increase of Rs. 9,794.13 billion or 16.50 times. However, it declined to Rs. 7,354.87 billion by 31 March 2022 due to recovery, write-offs, etc., which is a commendable achievement. Similarly, the GNPA Ratio rose from 4.90% at the end of 2004-05 to 11.20% by the end of 2017-18 but decreased to 5.80% by 31 March 2022.Similarly, the amount of NNPAs increased from Rs. 217.55 billion at the end of 2004-05 to Rs. 5,204.01 billion by 31 March 2018, representing an increase of Rs. 4,986.46 billion or 22.92 times. However, it declined to Rs. 2,015.01 billion by the end of 2021-22. Even the NNPA Ratio increased from 0.76% in 2007-08 to 5.62% in 2016-17 but declined to 2.70% in 2018-19. This clearly shows that initially, the NPA Ratios registered a continuous increase due to deterioration in asset quality, followed by a continuous reduction.However, the deterioration in asset quality (i.e., a decline in the Standard Assets Ratio) has multifarious ill effects on the performance of banks (Figure 1).Figure 1: Implications of Asset Quality DeteriorationDecrease in Standard Assets Ratio,Increases: GNPAs, GNPA Ratio, Provisioning, NNPAs, NNPA RatioReduces: Credit Recycling Capacity, Profit, Profitability, etcThere is a significant negative relationship between NPAs and the profitability of banking companies - lower asset quality, higher the NPAs (and provisioning), leading to lower profit, return on assets (RoA), and return on equity (RoE), and vice-versa (Kadioglu et al., 2017). Additions to loan-loss reserves are charged to the income statements of banks, crushing their earning power (Eavis, 2008). Even the different sectors of the economy are affected by NPAs as the smooth flow of credit is disrupted when the cycle of lending-repaying-borrowing is broken.Objectives and MethodologyThe important objectives are, (i) to point out the deficiencies in the NNPA Ratio recommended by regulators for assessing the asset quality of banking companies, and propose a new practical tool for evaluating bank\'s asset quality, and (ii) to examine the adverse implications of provisioning on the financial results of banks, which are not currently highlighted.The second objective of the study is also addressed with a null hypothesis, namely H0: There exists no significant relationship between the amounts of provisioning made by the SCBs and their profits. Besides ratios, a \'correlation\' test is carried out to test the hypothesis. Data essential for this study is gathered from RBI reports and other secondary sources.Shortcomings of NNPA Ratio - An EvaluationFor assessing the asset quality of banks, regulatory authorities have recommended the use of the NNPA Ratio. The Padmanabhan Committee endorsed the NNPA Ratio for this purpose (Reserve Bank of India, 1995). Additionally, the central bank of the country incorporates the NNPA Ratio as a key measure in constructing the Banking Stability Map and Indicator (Reserve Bank of India, 2020). In its 2021 \'Prompt Corrective Action Framework,\' the RBI specifically identifies the NNPA Ratio as the primary parameter for evaluating asset quality (Reserve Bank of India, 2021). Moreover, many researchers have employed the NNPA Ratio as a tool for assessing asset quality (Gowda, Inchara P. M. 2019). From the above, it is evident that more emphasis is placed on the NNPA Ratio as the tool for measuring and evaluating the asset quality of banking companies.However, this Ratio seems to be an inappropriate tool for evaluating asset quality as analyzed below.As previously explained, the NNPA Ratio is calculated using the amount of NNPAs in the numerator of Formula-2. This amount of NNPAs is affected by various factors, including the amount of Provisioning made - in the opposite direction - a higher amount of Provisioning leads to a lower amount of NNPAs (assuming other factors remain constant), and vice versa. Therefore, a decrease in the amount of NNPAs (caused by an increase in Provisioning) may result in a decrease in the NNPA Ratio, falsely suggesting an improvement in asset quality. True improvement in asset quality is observed only when the reduction in NNPAs and NNPA Ratio is a result of the actual recovery of amounts due.Further, the reduction in the amount of GNPAs should stem from recovery rather than write-offs. This is crucial because, one of the key factors behind the decrease in NPAs of SCBs in India is the rise in NPAs being written off, not an enhancement in the recovery performance (Kalyanasundaram, 2020). For instance, in 2021-22, PSBs wrote off Rs. 1,197.13 billion of loans, while the reduction (presumably from recovery) was only Rs. 946.34 billion. This indicates that the decrease in NPAs by the end of 2021-22 (in comparison to the beginning of the same period) is predominantly due to write-offs rather than recoveries. The details of loans written off and the reduction amounts (assumed to be from recoveries) are illustrated in Figure 2 below, showcasing that the decline in NPAs from 2017-18 onwards is primarily a result of write-offs rather than recoveries.Figure 2: Loan - Recovery and Write-off (Rs. billion)[Graph showing Loan Written-off (INR Bn) and Reduction/Recover (INR Bn) from 2012-13 to 2021-22. Key data points: Loan Written-off peaked at 1,831.68 in 2018-19; Reduction/Recover peaked at 1,278.35 in 2018-19.]Although NPA write-offs reduce the amounts of Gross and NNPAs, and their relative shares, they do not contribute to the improvement in the asset quality of banking companies. It is clear that (i) authorities use the NNPA Ratio as a key measure for assessing the asset quality of banks, and (ii) the NNPA Ratio fails to properly evaluate the asset quality of banks. This is because the decrease in the NNPA Ratio also arises from subtracting Provision from the GNPAs to determine the amount of NNPAs, which influences the NNPA Ratio. Interpreting this reduction in the NNPA Ratio as an enhancement in the asset quality of banks is inaccurate. Therefore, an Adjusted GNPA Ratio is suggested.Adjusted GNPA Ratio - SuggestedIn light of the loophole in the NNPA Ratio, we suggest making a few adjustments to the GNPA Ratio. We propose naming this adjusted ratio as the \'Adjusted GNPA Ratio\' (GNPA RatioAdj), where two modifications are incorporated into the GNPA Ratio to derive the GNPA RatioAdj as outlined below:(a) The amount of Provisioning may be added back to the amount of NNPAs (as in Formula-2) to arrive at the Adjusted amount of GNPAs.(b) The amount of Gross Advances (i.e., denominator of GNPA Ratio, Formula-1) may be adjusted to account for the amount of repayments of principal received. The resulting figure would be the \'net advances\' as used in the denominator of the NNPA Ratio (Formula-2).Adjusted GNPA Ratio may be calculated by dividing the aggregate amount of \'NNPAs and Provisioning\' by the \'Net Advances\' as shown below:GNPA RatioAdj = [(NNPAs + Provisioning) / Net Advances] * 100 ...(1)The above formula seems to offer a more comprehensive assessment of asset quality for banks than Gross and NNPA Ratios. In this context, the Gross and NNPA Ratios (currently used as per Formulas 1 and 2) and the outcomes derived from the GNPA RatioAdj for PSBs of over 10 years are computed and tabulated below (Table 1).It is evident from Table 1 that the order of ratios is as follows: \'GNPA Ratio > GNPA RatioAdj > NNPA Ratio\'. The NNPA Ratio appears lower due to the deduction of Provisioning from the GNPAs, leading to a potential underestimation. This misrepresentation could give stakeholders a false sense of improved asset quality. Conversely, employing the proposed GNPA RatioAdj provides a more accurate assessment of asset quality.Table 1: Gross and NNPA Ratios, and Adjusted GNPA Ratio of PSBsYearPresent NPA Ratios (%)Proposed Ratio, GNPA RatioAdjGNPA RatioNNPA RatioNNPAsProvisionsAmount (Rs. Billion) Aggregate of NNPAs and ProvisionsOutstanding Loan (year-end)GNPA RatioAdj (%)2012-133.611.99900.37430.631,331.0045,601.002.922013-144.362.701,306.35554.501,860.8552,159.203.572014-153.094.961,599.51683.762,283.2756,167.184.072015-165.699.273,203.751,538.844,742.5958,274.998.142016-179.0711.673,830.891,663.295,494.1858,663.749.372017-1814.589.654,544.732,722.137,266.8661,416.9811.832018-1911.596.202,851.222,306.205,157.4263,824.618.082019-2010.30NA2,309.181,731.174,040.3566,151.126.112020-21NA9.101,964.511,004.332,968.8467,703.634.392021-227.30NA1,547.45798.232,345.6874,330.063.16Source: (Reserve Bank of India, 2023)Implications of Provisioning - An Analysis of MisconceptionThere is a misconception about the implications of NPAs and Provisioning on the profit and profitability of banking companies. As stated earlier, Provisioning is a charge to the Statement of Profit and Loss causing a reduction in the amount of profit for that year, which, in turn, lowers the profitability of banks. Of course, through Provisioning, banks build a buffer to take care of write-offs, haircuts (i.e., Loan Amount Due - Loan Amount Recovered), etc. When banks write off their lost assets, these are charged against the accumulated Provisioning created. It is important to note that, in the case of default,(a) GNPAs do not amount to the actual loss for the banks as the Provisioning on the unpaid debts is not subtracted.(b) NNPAs amount to the actual loss for the banks as the Provisioning on the unpaid debts is subtracted.However, this line of argument appears to be based on a misconception about the Provisioning accumulated over the years. The Provisioning buffer is built gradually by charging it against income annually, resulting in a decrease in yearly profits. In the scenario where there are no GNPAs (i.e., when GNPA Ratio = 0), the Provisioning amount would have been significantly lower, given the nominal rate of Provisioning on Standard Assets (e.g., at 0.25%), thereby minimizing the negative impact on reported profits. This could have allowed banking companies to either report higher profits or lower losses (Table 2).After absorbing the amounts of Provisions, PSBs reported profits for five years (2012-13 to 2014-15 and 2020-21 to 2021-22), and losses for another five years (2015-16 to 2019-20). If they had reduced the NPAs to zero, they would have reported profit for all 10 years as the amount of provision charged is higher than the amount of loss/profit reported. Most importantly, Provisioning is not an item of appropriation of profit but a mandatory charge to the Profit and Loss.Table 2: Impact of Provisioning on the Profit of PSBsYearAmount (Rs. Billion)Provision chargedProfit after ProvisionProfit before Provision2012-13430.63327.99758.622013-14554.50233.50788.002014-15683.76212.38896.142015-161,538.84-295.821,243.022016-171,663.29-100.061,563.232017-182,722.13-853.711,868.422018-192,304.43-666.081,638.352019-201,731.17-260.151,471.022020-211,004.33318.181,322.512021-22798.23665.401,463.63\'r\' value (relationship between Provision and Profit after Provision) = -0.92603Source: (Reserve Bank of India, 2023)For testing the null hypothesis, H0. There exists no significant relationship between the amounts of provisioning made by the SCBs and their profits, a \'correlation\' test is carried out for the type of relationship between the amounts of Provision and profit. The critical value associated with the degree of freedom (df) = 8 (n=10) is ±0.632 (i.e., -0.632 to 0.632). In this case, the calculated \'r\' value of (-) 0.92603 (Provision Vs Profit) falls outside the acceptance region of ±0.632. Therefore, a strong negative correlation exists between provision and profit.ConclusionIt is obvious from the above that (i) the NNPA Ratio fails to evaluate the asset quality of banking companies, and (ii) the GNPA RatioAdj is a better alternative for evaluating the asset quality of banking companies. It is hoped that the regulatory authority, the RBI, takes note of this suggestion and gives effect to the same by modifying its PCA Framework of 2021 appropriately.Furthermore, to keep stakeholders informed about the adverse implications of Provisioning on profits, it is recommended that banking companies disclose in the \'Notes to Accounts\' the extent to which profit has decreased due to Provisioning. Alternatively, the central bank may direct banking companies to make this disclosure.Banks are required to adhere to regulated provisioning requirements, which involve accurately assessing and setting aside funds for potential losses. This transparency in financial reporting and investment activities demonstrates the banks\' commitment to responsible practices, building trust among stakeholders and enhancing the credibility of banks as reliable financial intermediaries.References:Eavis, P. (2008). Banks\' unnerving reserving. Wall Street Journal, 252(98), 12. https://www.wsj.com/articles/SB122481496976965627Gowda, Inchara. P. M. (2019). Implications of NPAs on the Profitability of SCBs - A Comparative Study of Public, Private and Foreign Banks. Amity Journal of Finance, 4(2), 88-109Kadioglu, E., Telceken, N., & Ocal, N. (2017). Effect of asset quality on the bank profitability. International Journal of Economics and Finance, 9(7), 60. https://doi.org/10.5539/ijef.v9n7p60Kalyanasundaram, S. (2020, January 3). Only actual recovery will solve the banks\' NPA problem. The Hindu Business Line. https://www.thehindubusinessline.com/opinion/only-actual-recovery-will-solve-the-banks-npa-problem/article30472210.ecePark, J. (2012). Corruption, soundness of banking sector, and economic growth - A cross-country study. Journal of International Money and Finance, 31(5), 907-929Reserve Bank of India. (1995). Report of the working group to review the system of on-site supervision over banksReserve Bank of India. (2020). Banking stability map and indicatorReserve Bank of India. (2021). Prompt corrective action framework for scheduled commercial banks.Reserve Bank of India. (2023). Report on trends and progress of banking in India, 2022-23.Richard, E. (2011). Factors that cause non-performing loans in commercial banks in Tanzania and strategies to resolve them. Journal of Management Policy and Practice, 12(2002), 50-59Sanjeev, G. M. (2007). Bankers\' perceptions on causes of bad loans in banks. Journal of Management Research. 7(1), 40-46)They may be reached at eboard@icai.in
Ep. 341 — Asset Liability Management (Liquidity Risk and Interest Rate Risk in Banking Book (IRRBB)) in the bank - Why does it matter more today than ever
CA Journal
· September 2026
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Asset Liability Management (Liquidity Risk and Interest Rate Risk in Banking Book (IRRBB)) in the bank - Why does it matter more today than everLiquidity is the backbone of the banking industry and is one of the Key Result Areas (KRA) of the Bank Treasurer. Many times, for a Treasurer, managing the bank\'s daily liquidity is more important than generating trading income. Banks are in the business of accepting deposits and lending (advances) that money to the borrowers. Accepting deposits means repaying that money back to the customers when they need it. Customers can withdraw the money from the bank anytime; hence banks need to have sufficient money with them to repay the depositors whenever they demand. At the same time, if a bank holds more money than required, it misses out on investment opportunities, which will impact its Net Interest Margin (NIM). So, managing this is a critical task for a Treasurer.By CA. Amey Haware, Member of the InstituteAsset-Liability MismatchThe mismatch in the difference in timing at which the bank accepts deposits and provides loans creates an asset-liability mismatch within the bank\'s Treasury, which serves as the main hub for managing the bank\'s funds. To explain this we can take a simple example where the bank has accepted the deposit of Rs. 100 for 1 year from the customer and lent it for 3 years to the borrower. While the borrower would repay the debt after 3 years, a bank would be obligated to return the funds to the depositor after one year.In real life, there would be many deposits (of various tenors ranging from one week to 10 years) that the bank would be receiving from the customers and many advances that the bank would be lending to its customers. So, the Treasury department plays a critical role in managing the liquidity position of the bank.What is Liquidity Risk and why it is important for banks?Liquidity risk is the potential risk that a bank may be unable to meet its funding obligations without incurring huge losses such as by selling assets at greatly reduced price. Liquidity risk is a very peculiar risk applicable to the banking industry because of the nature of the business explained above (borrowing from depositors and lending to customers). Liquidity risk can threaten the very existence of the bank.Banks are considered to be trustworthy organizations that will not default on their obligations. Imagine a situation where a bank has failed to repay its due amount. Public trust in that bank and in the banking industry as a whole will be eroded and when that happens, imagine what would happen to the economy?Bank Run and perception of the publicTreasurer\'s worst nightmare is the BankRun. Bank Run means all depositors flocking at the same time in front of the bank/ ATM to withdraw their money. This can be due to some rumors or due to some adverse news about the bank in the market which has shaken public confidence in the bank. So, as a preventive control, top management should always display good governance and sound management/ accounting practices which maintain the good reputation of the bank.Consider, for example, the confidence that people feel when depositing their money with a Public Sector Bank (PSB) compared to private sector bank. PSBs are backed by the government and will rarely fail but private sector banks are more prone to failures due to management issues or risk of fraud by key managerial personnel. Hence, even though private sector banks have better infrastructure and IT capabilities compared to PSBs, PSBs garner more deposits and have around 60% of the total outstanding deposits compared to 40% held by private sector/ foreign banks. I am not talking here about the pros and cons of PSBs or private sector banks but giving a perspective that maintaining public confidence is the key to preventing bankruns.RBI regulations on Liquidity RiskGiven the importance of liquidity to the banks, RBI from time to time has issued various guidelines for the banks. Let\'s go through them one-by-one.CRR and SLRMost of the general public is aware of the concept of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). CRR requires banks to hold a specific percentage (currently 4.50%) of their Net Demand and Time Liabilities (NDTL) as cash with the Reserve Bank of India (RBI). SLR requires banks to maintain a specified portion (currently 18%) of their Net Demand and Time Liabilities (NDTL) in liquid assets, primarily in government securities (G-Secs). This is not pledged/maintained with RBI but held by the banks in it books of account as investment.STL and IRSA Statement of Structural Liquidity (STL) is a statement that gives details of the liquidity position of the bank in different buckets. It is a tool for measuring and controlling liquidity risk. It plots the expected funds inflow and outflow in different buckets (such as one day, 2-7 days, 8-14 days, 15-30 days, and so on). At the end of the calculation, bucket-wise funds mismatch is calculated by subtracting fund outflow from funds inflow. For example, the bank has to repay term deposits of Rs. 107 to its customer in the next one week and it is supposed to receive Rs. 110 from its borrower. Then this will reflect as a net positive figure of Rs. 3 (Rs. 110- Rs. 107) in the 2-7 days bucket. RBI has set certain restrictions on the net cumulative mismatches in each of the buckets to control the asset-liability mismatch.Interest Rate Sensitivity (IRS) statement gives details of rate-sensitive assets and rate-sensitive liabilities in different buckets. It is a tool for measuring and controlling interest rate risk. All the interest rate-sensitive assets and liabilities are plotted in different buckets according to maturity date or next repricing date, whichever is earlier. For example, in the case of floating rate bonds which are repriced (i.e. interest rate fixed) every six months, its next repricing date will be considered, instead of its maturity date for bucketing. IRS gives details of the sensitivity of the changes in interest rate to the bank\'s earnings and net worth.Stress testingRBI has given scenarios, assumptions, and run-off factors to be considered by the banks while performing the stress testing. It is a way to assess the preparedness of the bank in case of an adverse event that impacts the bank or banking industry as a whole. It assumes accelerated outflows and conservative inflows in times of stress. This is done assuming a stress period of 30 days. If the inflows are more than the outflows after applying the RBI assumptions and run-off factors, it is said that the bank can withstand the stress. In case it doesn\'t, the bank has to prepare a plan of action and list down the sources of funds through which it will finance and meet its obligation during stressful times. This is done through the Contingency Funding Plan (CFP).LCR and NSFRThis is latest of all the guidelines which has come out of BASEL regulations after the 2008 financial crisis. Liquidity Coverage Ratio (LCR) is a ratio that tells how much High- Quality Liquidity Asset (HQLA) a bank holds corresponding to its 30-day net cash outflow (under stress scenario).In other words, HQLA is nothing but liquid securities (G-Sec and corporate bonds (haircut is applied on corporate bonds) that can be sold to pay the bank\'s obligations arising in the next 30-day under a stress scenario. As per the current regulations, this ratio is 100%.Net Stable Funding Ratio (NSFR) is a ratio that ensures that a bank has funded its assets through stable funds. Stable funds are funds which are stable in nature and are less volatile. For example, term deposits from retail customers are less volatile compared to deposits from corporate customers. Funding through stable sources reduces the cost of funds to the banks and does not create liquidity issues. Take it this way, suppose the bank has financed loans and advances through unstable funds, it may lead to a situation wherein the bank may have to repay the borrowing whereas it cannot ask the borrowers to repay its loans and advances before maturity thereby leading to the liquidity crisis.LCR, from 2014, has become the single most important ratio for liquidity risk management in bank Treasury across the globe. The calculation of LCR is complex and has attracted the attention of the regulators during their annual inspection. Regulators including RBI are in the process of revising certain parameters/run-off factors (percentage of outflow to be considered e.g. 10% of the corporate deposits assumed to be withdrawn in times of stress) due to the advent in technology and the ability of the depositors to quickly transfer the funds from one bank to another. This will impact the banking system due to the need to maintain more HQLA and reduce their profitability due to lower earnings on HQLA.Liquidity Risk Monitoring ToolsContractual maturity mismatchFunding concentrationAvailable unencumbered assetsLCR by significant currencyMarket related monitoring toolsOut of the above, funding concentration is important since it assesses the concentration of funding by a few counterparties which may pose a risk in case they were to shift their relationship to another bank or stop providing funding in the future.Daily cash flow projectionsCash inflows, outflows, and end-of-day balance are projected. This is done for both INR and foreign currencies. There should be sufficient balance available in the RBI account at day-end to take care of RTGS / NEFT payments (since it is available 24x7 and 365 days a year) and maintain CRR as per the RBI requirements. Similarly, projections are done for day-end balance in foreign currencies to ensure that there is no negative balance in the nostro account (account maintained by an Indian bank with a foreign bank in a foreign country) and resultant penalty by the nostro bank. These projections are dynamic in nature and typically done several times in a day to account for inflows and outflows coming in during business hours.Asset Liability Management Committee (ALCO)ALCO is one of the important committees that each bank has and is responsible for managing the bank\'s assets and liabilities. ALCO usually consists of the MD & CEO of the bank, Treasury Head, Head Asset and liability management (ALM), CRO, and other business heads depending on the committee charter. Asset Liability issues and liquidity issues are discussed in ALCO, and the committee draws up an action plan. The ratios and liquidity statements as described above are presented and discussed in the meeting.Current Liquidity situation - High Credit to Deposit ratio (CD ratio)CD ratio is a key metric in Treasury asset liability management and has been in the news lately. CD ratio is a ratio of loans and advances given to the customers to the deposits mobilized from customers. In other words, how much percentage of deposits has been deployed in loans and advances? The ideal CD ratio is between 75-80%.Post COVID-19, there is a spike in credit demand from the industry due to an overall rise in business activity. Deposit has not kept pace with the credit demand (one of the reasons is people prefer to invest in capital markets and mutual funds rather than keep their money in savings accounts or term deposits) and hence, there is a gap between credit and deposit growth. A High level of CD ratio is not considered good since it indicates that the bank is funding all its incremental loans and advances through incremental deposits (which includes borrowings through certificate of deposits) or through external borrowings (in the worst case). If deposit flow slows down, the bank\'s ability to grant loans and advances will be jeopardized. Also, the cost of funds will increase (since banks will have to offer a higher rate of interest on deposits to generate additional deposits) and the bank\'s net interest income will reduce.Further, there is liquidity risk in lending through external borrowings such as interbank borrowing as it gives rise to systemic risk in the sense that the failure of one bank can impact the liquidity position of other banks. Hence, it is very important that bank attract depositors by giving them confidence about the strong governance and management of the bank to sustain credit growth and maintain a healthy NIM and liquidity position.Usually, Treasury department is the one who decides rate of interest on deposits and has to consider the CD ratio and other liquidity/ market factors while publishing the rate of interest on deposits.Interest Rate Risk in Banking Book (IRRBB)In Bank Treasury, there are primarily two books: the Trading Book and the Banking Book. The Trading Book includes assets that Treasury trades to generate profits, such as equities, corporate bonds, and forex. The Banking Book encompasses all assets not held in the Trading Book. Interest rate risk is the potential for adverse movements in interest rates, which can result in losses for the bank. For instance, if the bank holds a bond yielding an 8% coupon while the market interest rate is 7%, the bond will trade at a premium (above Rs. 100). If the interest rate rises by 1% to 8% over the next six months, the bond\'s price will fall because its coupon remains at 8%.IRRBB, rather an important aspect in Treasury Asset Liability Management was long ignored but has gained limelight after the failure of Silicon Valley Bank in 2023.Quick recap on the failure of SVBDuring COVID-19, businesses had to temporarily halt their operations, and they had cash with them which they wanted to keep safe (the stock market was not in good condition and bank deposits are considered safe). This flushed the banks with so much deposits/ liquidity (credit offtake was low due to near zero business activity) that banks decided to invest them in safe heaven Government bonds/ US T-Bills. Banks classified them in the held-till-maturity (HTM) category or at amortized cost since they intended to hold them till maturity. As per the accounting guidelines, Mark-to-Market (MTM) valuation is not done for securities held in the HTM book.The interest rate at that time was nearly 0%. Things changed rapidly post COVID and economic activities were happening like never before. This fuelled inflation and central banks across the globe raised the interest rates. Federal Reserve in the US raised interest from 0% to 5% in one year\'s time. Since the price of bonds and interest rate are inversely related, banks had heavy MTM losses in their HTM books. Due to heavy losses, there was news about capital raising by the bank and depositors started to lose confidence in the bank and decided to withdraw the money. There was run-on the bank and the bank went bankrupt since it did not have sufficient liquid assets to pay the depositors. Luckily, the US government stepped in and guaranteed the depositor\'s money.Due to the run on SVB Bank, there was a contagion effect and run on other banks such as First Republic Bank and Signature Bank which also collapsed in 2023.Why IRRBB Is Important?As explained above, the Treasury has to maintain SLR and now LCR, and most of these are invested in liquid government securities in the HTM portfolio (banking book) since banks do not intend to gain from trading in these securities. With the rise in interest rate in 2023, there has been huge MTM losses in this book. This got hidden in the books of accounts since the investments were carried at amortized cost and there was no mark-to-market of these securities. But with the collapse of SVB Bank, regulators got acting fast and swiftly.RBI guidelines on IRRBBIRRBB has an impact on 2 things, changes in the economic value of equity (EVE) and earnings. Changes in the economic value of equity mean an impact on the net worth of the bank due to interest rate shocks. Changes in earnings mean impact on net interest income of the bank due to interest rate shocks. Banks need to fix limits on both these items and senior management should review the exposure on a regular basis.Banks need to apply interest rate shocks prescribed by RBI, decided internally by the bank, or any other scenario to assess the impact on both EVE and earnings.Further, banks are required to undertake stress testing on IRRBB and take its results into consideration while making strategic decisions.Post the above, banks should assess whether they need to raise more capital based on the impact on net worth and future earnings potential. RBI has set a threshold of a 15% decline in Tier I capital for the banks to start acting, i.e. reducing IRRBB exposure, managing the risk (i.e. hedging), or raising additional capital. Accurate and timely MIS reporting to senior management is important to assess the situation and take appropriate actions. However, since we are at the peak of the interest rate cycle, further impact on IRRBB will be limited in the near future.ConclusionIn a nutshell, there are 7 things that matter the most today in Treasury Asset and Liability of the Bank.Confidence of the depositors: Senior management should provide confidence to the depositors that their money is safe through the display of good governance and ethical practices.LCR: Managing LCR has become the utmost important thing. Various interpretations and supervisory comments keep the Treasury busy in managing this ratio.Funding concentration: Managing funding concentration from a single counterparty or say top 20 counterparties is critical to avoid funding reliance on a few counterparties.Daily funding management and CD ratio: Managing day-to-day funding has become difficult and banks are in a deposit-mobilization war to keep their CD ratio in check.IRRBB: Although there is no immediate need for Indian Banks to worry about IRRBB, they need to continuously monitor the limit utlization and take necessary action, if required.Internal Capital Adequacy Assessment Process (ICAAP): Banks must assess their capital needs in light of liquidity and interest rate risks, among other factors.Effective ALM requires a comprehensive approach that integrates liquidity management, interest rate risk management, and capital planning to ensure that the bank remains solvent and profitable under various conditions.References:(No explicit references listed in source)Authors may be reached at ameyhaware2007@gmail.com and eboard@icai.in
Ep. 342 — Strategic Finance: Unveiling the Multifaceted Role of Today's CFO
CA Journal
· September 2026
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Strategic Finance: Unveiling the Multifaceted Role of Today\'s CFOIn a business landscape that is increasingly global and digitally interconnected, the Chief Financial Officer (CFO) emerges as a central figure in navigating the complexities and driving corporate success. Beyond the catalyst role of Mergers and Acquisitions (M&A) in achieving accelerated growth and strategic transformation, CFOs are critical in optimizing financial and operational performance. As we move from the expansive potential of M&A to the bedrock of strategic financial management, we enter a domain where CFOs fine-tune the gears of a business, ensuring financial health and sustainable profitability. Their strategic foresight in planning, risk mitigation, and investment decisions become indispensable in guiding organizations toward enduring growth and stability. The article also highlights the challenges that CFOs must address to streamline operations.By CA. Tejas Savla, Member of the InstituteIntroductionIn the rapidly evolving business landscape, the role of a CFO transcends traditional boundaries, morphing into a pivotal cornerstone for strategic decision-making, growth, and sustainability. Today\'s CFOs navigate through the complexities of global economics, technological disruption, and shifting market dynamics, wielding financial acumen to steer their organizations toward prosperity.This article unfolds the multifaceted contributions of CFOs, from optimizing operations and managing cash flows to spearheading expansion and innovation, underscoring their integral role in crafting the future of businesses. Amidst the backdrop of these responsibilities, we delve into intriguing business facts that underscore the importance of the areas where CFOs contribute significantly:A. Global Reach:Emphasize the exponential growth potential for businesses when expanding globally, citing examples of companies that successfully entered new markets to multiply their revenue streams.B. Innovation as a Revenue Driver:Illustrate instances where businesses leveraged technological innovations not just for operational efficiency but as major revenue sources, highlighting the role of strategic financial planning in supporting such initiatives.C. The Power of Data:Mention how data-driven decision-making has transformed businesses, with companies leveraging big data analytics to gain competitive advantages, underscoring the CFO\'s role in harnessing this power through KPIs and performance metrics.D. Sustainability and Profitability:Introduce examples of businesses that have aligned sustainability with profitability, demonstrating the strategic integration of environmental, social, and governance (ESG) factors into financial planning and risk management.E. The M&A Catalyst:Provide insights into how M&As have acted as catalysts for growth and transformation in various industries, reshaping competitive landscapes and opening new avenues for revenue.Below, we delve into the key areas where CFOs make significant contributions:1. Strategic Financial Management and Operational EfficiencyThis involves optimizing the company\'s financial health and operational activities to enhance efficiency and profitability. It encompasses financial planning, risk management, and investment decisions to ensure the organization\'s long-term stability and growth.A. Financial Planning and Analysis (FP&A):Developing comprehensive financial models to forecast future performance and guide strategic decisions.Roadblock - Lack of accurate or timely data can lead to poor forecasting and strategic missteps.B. Cost Management:Identifying and implementing cost-saving measures without compromising product or service quality.Roadblock Resistance to change and difficulty in identifying non-essential costs can impede effective cost reduction.C. Cash Flow Optimization:Managing working capital to ensure liquidity and operational stability.Roadblock Unpredictable revenue streams and poor receivables management can lead to cash flow issues.D. Investment Strategy:Allocating capital to high-return investments to support growth and enhance shareholder value.Roadblock - Difficulty in assessing investment risks and returns accurately can result in suboptimal allocation of resources.E. Risk Management:Identifying, analyzing, and mitigating financial risks to protect the company\'s assets and financial health.Roadblock Inadequate risk identification processes and tools can leave a company exposed to unforeseen threats.Industries: Manufacturing, Retail, HealthcareIn manufacturing, cost management and investment strategy are critical due to thin margins and capital-intensive nature.Retail businesses rely heavily on cash flow optimization to manage inventory and seasonal demand.Healthcare providers must excel in risk management to navigate regulatory changes and payment models.2. Performance Measurement and Key Indicator AnalysisThis area focuses on the systematic tracking and analysis of key performance indicators (KPIs) to gauge the organization\'s effectiveness and efficiency. Through data-driven insights, it aids in identifying performance gaps and areas for improvement, guiding strategic decision-making.A. KPI Selection and Definition:Choosing relevant KPIs that align with strategic goals and accurately measure performance.Roadblock Choosing irrelevant or too many KPIs can dilute focus and impede meaningful analysis.B. Data Analytics and Reporting:Utilizing advanced analytics to interpret data, generate insights, and report on performance metrics.Roadblock Lack of sophisticated analytics tools or expertise can hinder the extraction of actionable insights.C. Benchmarking:Comparing company performance against industry standards or competitors to identify improvement areas.Roadblock Difficulty in finding comparable benchmarks or interpreting data correctly can lead to inaccurate conclusions.D. Continuous Improvement:Using KPI analysis to drive process enhancements and operational excellence.Roadblock Organizational inertia and lack of a clear process for implementing changes can slow improvement efforts.E. Strategic Decision Making:Informing executive decisions with data-driven insights to align actions with strategic objectives.Roadblock - Biases and poor data interpretation can lead to strategic decisions that do not align with business goals.Industries: Technology, Financial Services, E-commerceTechnology firms use KPI analysis to drive innovation and efficiency, focusing on metrics like user growth and engagement.Financial services leverage data analytics for risk assessment and customer segmentation.E-commerce companies rely on benchmarking and KPI tracking to optimize conversion rates and customer retention.3. Scalability and Revenue Diversification StrategiesStrategies here are designed to grow the business sustainably and increase its revenue potential. This includes exploring new markets, diversifying product lines, and leveraging technology to ensure the organization can scale effectively and meet evolving market demands.A. Market Analysis:Assessing market trends and customer needs to identify new opportunities for growth.Roadblock Misinterpreting market signals or underestimating competitive responses can derail growth strategies.B. Product/Service Diversification:Expanding the product or service offerings to tap into new revenue streams.Roadblock - Diversifying without a clear alignment to core competencies can dilute brand value and confuse customers.C. Geographical Expansion:Entering new markets to increase customer base and enhance revenue potential.Roadblock - Underestimating cultural and regulatory differences can lead to failed expansion efforts.D. Technology and Innovation:Leveraging technology to improve efficiency, reach, and scalability of operations.Roadblock - Rapid technological changes and high development costs can make it difficult to maintain a competitive edge.E. Partnerships and Alliances:Forming strategic partnerships to access new markets and capabilities.Roadblock - Mismatched goals and values between partners can undermine collaborative efforts.Industries: SaaS (Software as a Service), Renewable Energy, EntertainmentSaaS businesses focus on scalability and technology to quickly adjust to market demands and competitive pressures.Renewable energy firms seek diversification in technologies and markets to mitigate regulatory and technological risks.The entertainment industry, including streaming services, uses product diversification to capture a wider audience base.4. Capital Acquisition and Funding Strategy DevelopmentThis aspect deals with identifying and securing the necessary financial resources to fuel the company\'s growth and expansion plans. It involves evaluating different funding options, engaging with potential investors, and managing financial risks associated with capital acquisition.A. Funding Options Analysis:Evaluating various funding sources, including equity, debt, and alternative financing, to determine the best mix.Roadblock - Limited access to funding sources and unfavourable market conditions can restrict capital raising efforts.B. Financial Structuring:Designing the capital structure to optimize the cost of capital and financial flexibility.Roadblock Complex regulatory requirements and market volatility can complicate financial structuring.C. Investor Relations:Building and maintaining strong relationships with investors and stakeholders to support future funding needs.Roadblock Maintaining positive investor relations can be challenging during periods of underperformance.D. Regulatory Compliance:Ensuring adherence to financial and legal regulations in fundraising activities.Roadblock Navigating the complex landscape of financial regulations requires expertise and resources.E. Valuation and Deal Structuring:Assessing the company\'s valuation accurately and structuring deals that align with strategic financial goals.Roadblock Overvaluation or undervaluation can affect fundraising efforts and investor relations.F. Mergers & Acquisitions (M&A):Strategically pursuing mergers and acquisitions as a method to accelerate growth, enter new markets, or acquire new technologies and talent.Roadblock Due diligence complexity, where thorough assessment often reveals risks or valuation discrepancies that can impede deal negotiations and success.Industries: Startups, Biotechnology, Real EstateStartups depend on various funding stages, from angel investment to venture capital, to fuel growth.Biotechnology firms require significant capital for research and development before reaching profitability.Real estate developers and investors use complex financial structuring for projects and investments.5. Market Penetration and Global Expansion StrategyFocusing on expanding the company\'s footprint, involves strategic planning for entering new domestic or international markets. It includes understanding market dynamics, adapting to local cultures, and navigating regulatory landscapes to achieve competitive advantage.A. Market Entry Strategy:Developing tailored strategies for entering new domestic or international markets.Roadblock - Overlooking local consumer behaviour and competitive dynamics can lead to ineffective market entry strategies.B. Cultural Adaptation:Adapting products, services, and marketing strategies to fit local cultures and preferences.Roadblock - Failure to adapt products or marketing to local tastes and preferences can hinder acceptance.C. Local Regulations and Compliance:Navigating the legal and regulatory requirements of new markets.Roadblock Misinterpreting local laws and regulations can lead to legal challenges and fines.D. Supply Chain and Operations Localization:Establishing efficient local supply chains and operations to support market demands.Roadblock Establishing efficient local operations can be hampered by logistical and supply chain complexities.E. Brand Positioning and Marketing:Crafting marketing strategies that resonate with local audiences and build brand presence.Roadblock - Inconsistent or inappropriate brand messaging can fail to resonate with new target markets.Industries: Consumer Goods, Telecommunications, E-commerceConsumer goods companies often seek global expansion to tap into new markets and achieve scale.Telecommunications firms focus on market penetration strategies to expand network coverage and subscriber base.E-commerce platforms use localization strategies to adapt to consumer preferences in different geographical markets.6. Strategic Brand Alliances and Co-Branding InitiativesThis area explores the formation of strategic partnerships and co-branding efforts to enhance brand visibility, access new customer segments, and create synergistic value. It emphasizes aligning with partners whose brand values and goals complement the company\'s objectives.A. Brand Synergy Analysis:Identifying potential partners with complementary strengths and brand values.Roadblock - Identifying and securing alliances with brands that offer complementary strengths can be challenging.B. Co-Branding Opportunities:Exploring co-branding initiatives to enhance product offerings and customer experience.Roadblock Aligning co-branding strategies and ensuring mutual benefit can be difficult.C. Joint Marketing Campaigns:Designing and executing marketing campaigns that leverage the strengths of each brand.Roadblock Coordinating efforts and maintaining brand integrity across marketing campaigns require careful planning and execution.D. Cross-Market Penetration:Using alliances to enter new markets or segments with reduced risk and increased leverage.Roadblock - Overcoming regulatory, cultural, and logistical barriers when entering new markets with partners.E. Revenue Sharing and Economic Models:Establishing financial agreements that benefit all parties involved in the alliance.Roadblock Negotiating fair and sustainable economic models can be complex and contentious.Industries: Fashion, Automotive, TechnologyFashion brands frequently engage in co-branding to reach new demographics and refresh their image.Automotive companies form alliances for technology sharing and to enter new markets, leveraging brand synergies.Technology firms use strategic alliances to enhance product ecosystems and expand their market offerings.Following the exploration of Key areas, it\'s imperative to delve into broader, transformative roles that CFOs play in today\'s digital and global business environment. This includes:Leading Digital Transformation: As CFOs spearhead the digital transformation in finance, the integration of AI and blockchain is expected to not only streamline operations but also introduce predictive analytics and smarter decision-making capabilities, heralding a new era of financial strategy and reporting.Championing Sustainability and ESG Initiatives: CFOs are set to become pivotal in embedding sustainability into the DNA of corporate strategies. By leveraging ESG metrics, they will play a key role in aligning financial performance with environmental and social goals, thereby attracting a new wave of conscious investment.Strengthening Cybersecurity Frameworks: The future will demand CFOs to prioritize cybersecurity as a strategic imperative. By implementing advanced security protocols and fostering a culture of cyber awareness, they will protect their organizations from financial and reputational damage in an increasingly digital world.Exploring Innovative Financing: The exploration of non-traditional financing, including Special Purpose Acquisition Company (SPACs), cryptocurrencies, and digital tokens, will offer CFOs novel ways to raise capital, diversify investment portfolios, and drive growth, setting the stage for a financial landscape that embraces innovation and flexibility.Fostering Workplace Well-being: The emphasis on employee well-being will evolve beyond mere programs to become a strategic lever for financial health. CFOs will recognize the direct link between well-being initiatives and enhanced productivity, creativity, and loyalty, leading to a more engaged and efficient workforce.ConclusionThe CFO\'s role in a business is multifaceted and indispensable. By leading financial planning, risk management, and strategic initiatives, CFOs ensure that the company remains financially healthy and positioned for growth. Their expertise in identifying growth opportunities, managing cash flow, and overseeing expansions into new markets is crucial for the company\'s success. Through their leadership, businesses can navigate the complexities of the financial landscape, capitalize on opportunities, and achieve their long-term objectives. The strategic input and financial oversight provided by the CFO are vital in shaping the future direction of the company, making the CFO a key player in any business\'s success story.References:(No explicit references listed in source)Author may be reached at catejassavla@gmail.com and eboard@icai.in
Ep. 343 — Navigating Uncharted Waters: A Deep Dive into Overlooked Territories of Insurance Management
CA Journal
· September 2026
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Navigating Uncharted Waters: A Deep Dive into Overlooked Territories of Insurance ManagementIn the era of heightened corporate governance and internal controls, businesses are increasingly compartmentalizing internal audits, focusing on specific areas to ensure comprehensive risk management. Traditional realms like Procure-to-Pay, Order-to-Cash, and others receive due attention, yet a notable gap exists in specialized areas. This article sheds light on one such critical domain: Insurance Management. As companies delve into the intricacies of risk mitigation, the often underestimated role of insurance management emerges as a linchpin in fortifying the corporate defence against unforeseen challenges. This article aims to explore the nuances of insurance management, unravel commonly overlooked facets, and underscore its pivotal role in the broader landscape of corporate governance.By CA. Nagesh Mayakuntla, Member of the InstituteTypes of Insurances: A Comprehensive OverviewBefore delving into the complexities of insurance management, it\'s imperative to understand the diverse array of insurance policies that form the backbone of risk mitigation for businesses. These policies serve as strategic shields against various unforeseen challenges, each tailored to address specific facets of potential risks. Let\'s explore the diverse landscape of insurance types that organizations commonly engage with:Property Insurance: Property insurance covers the loss or damage to insured buildings and their contents caused by various perils such as fire, fermentation, natural heating or burning, explosion, or natural calamities. This encompasses a wide range, including buildings, furniture & fixtures, plant & machinery, and stocks such as raw materials, finished goods, and stock in process. Fire policies for Small and Medium Sized units have been standardised by Insurance Regulatory and Development Authority (IRDA) for all insurers named Bharat Sookshma Udyam Suraksha and Bharat Laghu Udyam Suraksha for sum insured upto Rs. 5 Cr and upto Rs. 50 Cr respectively.Burglary Insurance: Burglary insurance offers coverage for contents, stocks, or goods owned or held in trust or on commission, safeguarding against losses or damages resulting from burglary.Electronic Equipment Insurance: This policy offers comprehensive coverage for electronic equipment, protecting against physical loss or damage to all electronic devices and data media. It also considers the increased work costs resulting from accidental and unforeseen physical loss or damage to electronic equipment.Employees Benefit Insurance: Employee benefit insurance encompasses various coverages provided to employees on behalf of companies. This includes health insurance, accident insurance, life insurance, an and workmen\'s compensation insurance, ensuring the well-being and financial protection of the workforce.Liability Insurance: Liability insurance is a versatile product protecting against claims arising from injury or damage to a third party or property due to the insured\'s business operations. This coverage safeguards against the liability of paying a third party for bodily injury, property damage, financial harm, and other consequential losses. Companies dealing with hazardous goods have to mandatorily take Public Liability Insurance Policy as per the Public Liability Insurance (PLI) Act 1991.Marine Insurance: Marine insurance addresses damages and losses caused to goods while being transported by individuals, employees, drivers, or third parties. This coverage is vital for businesses engaged in the export and import of goods.Money Insurance: Money insurance provides coverage for cash, including cheques, both at office premises and in transit, offering protection against various risks associated with the movement and storage of money.Business Interruption Insurance: Business interruption insurance is designed to mitigate the financial impact of disruptions. This policy includes coverage for the loss of profit due to events like fire or machine breakdown, ensuring continuity in business operations.Commercial Vehicle Insurance: Essential for businesses with one or multiple vehicles or those involving the use of vehicles such as cabs, tankers, trucks, or buses. Commercial vehicle insurance covers the damages of the vehicle and compulsory insurance to compensate third party liability. This includes accidents, collisions, natural calamities, fires, and theft etc.Cyber Insurance: It is a crucial policy covering businesses from potential financial losses due to cyber crimes, online data breaches, malware, ransomware, and other digital risks.While this list provides a robust foundation, prudent management should also explore specialized insurance policies tailored to the specific needs of their businesses. These may include signboard insurance, contractor all-risk insurance, erection risk, drone insurance, and other specialized coverages to enhance the overall risk management strategy.Key Areas to Focus on: Enhancing Insurance Management PracticesAfter delving into the comprehensive landscape of insurance types, it is imperative for internal auditors to focus on key areas that demand meticulous attention. These aspects are critical in fortifying a company\'s risk management strategy. Let\'s explore these key areas:Goods held in trust: The all-risk insurance policy [umbrella policy] typically either excludes goods held in trust or imposes a monetary cap on their coverage. When receiving goods from customers intended for manufacturing or modification, the warehouse team may overlook capturing their value during the creation of a Goods Receipt Note (GRN). Unfortunately, this oversight extends to the finance team, which fails to monitor or track the value for insurance purposes. Such lapses can pose legal risks in the event of accidents. The optimal solution involves capturing the value from the E-way bill generated during stock transfer and explicitly detailing insurance liability inclusion or exclusion in customer agreements. This proactive approach serves to avert potential disputes in the future.Expiry/Near-Expiry Management: Care should be taken in coverage computation; expired goods not yet destructed should either be excluded, or NRV (Net Realizable Value) should be considered based on the materiality after report generation. Near expiry items shall be adjusted in the projection. This ensures that excess coverage is avoided, which can eventually lead to increased insurance costs.Driving License Validation: Claims under commercial vehicle insurance will be rejected if the driver does not possess a valid driving license. While many companies monitor the validity of driver\'s licenses, it\'s important to note that some states have two types of validity: one for transport vehicles and another for non-transport vehicles. The absence of a Transport Receipt (TR) or an expired TR date is deemed as an invalid license, resulting in claim rejection.Navigating Marine Insurance Challenges: Standard marine insurance policies do not cover transits to specific countries and sanction zones. Considering the increasing number of sanctions due to war in the last decade, a review should be conducted, and particular endorsements should be sought before sending goods.Burglary Risks and Employee Theft: The standard burglary policy states that theft must follow an actual forcible and violent entry or exit from the premises, excluding theft by employees or individuals with easy access. With the increase in white-collar crime, especially concerning the value and size of stocked items, it is advisable to obtain specific endorsements to include theft by own employees.Managing Portable Equipment Coverage: While an all-risk insurance policy generally covers various machines, it is essential to conduct a comprehensive check. This ensures that all movable equipment is explicitly included in the policy definitions. In cases where Electronic Equipment Insurance is acquired, confirming that it excludes the value of immovable property already covered by other insurance policies is crucial. This precautionary measure prevents duplicate coverage, ultimately averting excess premiums.Employee Age Consideration: Many insurance policies hinge on age brackets for pricing and coverage determination. During policy renewal, if an employee transitions beyond the age limit set within a coverage bracket, companies should proactively ensure that policy clauses adequately cover such individuals. This strategic approach ensures continued coverage alignment with employee demographics.Prioritizing Health Insurance Claim Settlement: Health insurance is a pivotal policy with a significant impact, especially considering that many employees rely on company health insurance for their families. Companies should review the claim settlement time (Turn Around Time or TAT) to enhance employee satisfaction and fulfil the moral responsibility toward their well-being. Prioritizing periodic feedback from all employees before renewal becomes imperative, emphasizing a focus on settlement ratios over cost considerations.Risk Management in Cash Transit: With the increasing trend of businesses opting for cash management services, where funds are directly picked up by bank personnel or third-party service providers, there\'s a need for precise risk delineation. It is crucial to ensure that agreements explicitly state that the pickup service provider assumes the risk after the point of collection. This measure safeguards companies from potential financial implications and legal complexities associated with cash in transit.Disconnect with In-house Insurance Teams: Many companies have outsourced the monitoring of insurance aspects to their group capability centres, integrating it with broader operational functions. This decentralization creates a gap wherein the insurance team within the capability centre often remains unaware of numerical changes and shifts in business operations. This lack of awareness gives rise to high risks. To address this, conducting a monthly review meeting involving the Finance, Procurement, and Operations teams is strongly recommended. This collaborative effort ensures seamless alignment between insurance aspects and the overall business strategy.Verbal Confirmations: In cases where the insurance policy lacks clarity, queries regarding inclusions or exclusions are frequently addressed verbally over calls. To mitigate potential disputes and enhance transparency, shifting towards more formal communication channels is advisable. Urgent matters should be communicated through mail, and written documentation should be encouraged, whether stamped, signed, or digitally signed. This approach is a preventive measure, minimizing the likelihood of legal conflicts and ensuring a documented understanding of insurance terms.Timely Claim Submission for Risk Mitigation: Instances have been observed where insurance policy claims are accepted even after submission timelines due to business relationships between the company and insurer. However, relying on business relationships for delayed submissions may expose companies to legal risks and impact working capital. Opting for a proactive stance by submitting claims immediately becomes a prudent strategy. This safeguards against potential legal complexities and ensures a more efficient utilization of working capital resources.ConclusionIn the realm of insurance management, adopting all-risk insurance policies serves as a comprehensive umbrella against a myriad of risks, a familiar strategic choice for many companies. These policies traditionally cover standard property and perils, providing a foundational layer of protection. However, a simple policy reading proves insufficient to enhance risk management efficacy. As all-risk policies offer only standard coverage, it is crucial to ensure that endorsements, additional add-ons, or specialty covers are obtained based on the specific nature of the business. A meticulous approach involves maintaining a detailed tracker that considers the particular locations of all business establishments. This ensures a nuanced understanding of potential risks at various sites and allows for the formulation of a comprehensive risk assessment periodically.To bolster risk mitigation further, companies should delve beyond conventional standards. Incorporating a NatCat Analysis Report (NCAR) based on location-specific factors can provide deeper insights into potential risks. This comprehensive risk assessment should include the strategic placement of fire hydrants, monitoring devices, ultrasonic leak detection mechanisms, and rigorous electrical risk assessments. Moreover, extending risk management practices beyond the purview of statutory norms, such as the Factories Act is crucial. For instance, while the Factories Act prescribes that doors should open outward, it remains silent on the specifics of corporate buildings. A forward-thinking approach involves adopting this principle for corporate structures, tailoring door configurations, width, and pathways based on the size and number of employees. By embracing these proactive measures and continuously enhancing risk assessment protocols, businesses can fortify their resilience against unforeseen challenges in the dynamic risk management landscape.References:(No explicit references listed in source)Author may be reached at nagi.mayakuntla@gmail.com and eboard@icai.in
Ep. 344 — Demystifying Section 43B(h): A Deep Dive into Micro and Small Enterprises Payment Compliance
CA Journal
· September 2026
00:00
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Demystifying Section 43B(h): A Deep Dive into Micro and Small Enterprises Payment ComplianceThe Micro, Small, and Medium Enterprises (MSME) sector, which plays a crucial in India\'s economy, has evolved into a dynamic and impactful segment. Over the last five decades, MSMEs have not only been instrumental in generating significant employment with lower capital investment but have also played a pivotal role in industrializing rural and backward regions, mitigating regional imbalances, and fostering equitable distribution of national income. Recognizing their contribution, the Finance Ministry, through the Finance Act 2023, has introduced Section 43B(h). This provision mandates timely payments to MSMEs within 45 days, aligning with Section 15 of the MSMED Act, 2006, fortifying the financial stability of MSMEs against delays. As per the Udyam website, as of 12th March, 2024, total 3.97 crores enterprises are registered under MSME sector out of which 3.90 crores and 6 lakhs are Micro and Small enterprises respectively. MSME includes manufacturing and service providers, excluding enterprises solely focused on trading activities.By CA. Husain Ujjainwala, Member of the InstituteBackground of this clauseThe recent amendment introduced by the Union government in Section 43B(h) of the Income Tax Act is a significant social-economic measure aimed at bolstering the MSME sector. Despite the explicit prohibition of any delay beyond 45 days in the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006), adherence to this regulation has been more observed in breach than in practice. The report released on May 12, 2022, by the Global Alliance for Mass Entrepreneurship (GAME) and Dun & Bradstreet (D&B) reveals that estimated delayed payments across all MSMEs amount to about Rs 10 lakh crores. The annual interest cost alone on this staggering amount is Rs 1 lakh crore. If the delayed payments are cleared as per the provision of the 2006 Act it would be like releasing a subsidy of Rs 1 lakh crore to the MSMEs. This will help in the credit revolution for Micro and Small enterprises.Section 43B(h) of Income Tax Act, 1961The Finance Act of 2023 has introduced an amendment under Section 43B, by inserting clause (h), which reads as follows: \"any sum payable by the assessee to a Micro or Small Enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006.\"A crucial addition to this amendment is found in the proviso to the section, which states, \"Provided that nothing contained in this section except the provisions of Clause (h) shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of Income under Sub-section (1) of section 139 in respect of the previous year in which the liability to pay the sum was incurred as aforesaid, and evidence of such payment is furnished by the assessee with such return.\"The amendment to section 43B of the Income Tax Act, 1961 Act, as interpreted, allows the deduction of payments to MSEs exclusively on a payment basis. Accrual basis deduction is permissible only if payment aligns with the timeframes mandated under section 15 of the MSMED Act.What is Micro and Small Enterprise?As per explanation 4 of section 43B, clause (e) states that micro enterprise shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006). Clause (g) of the same explanation states that small Enterprises shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).Now Union Ministry of Micro, Small, and Medium Enterprises has issued a Gazette Notification to pave the way for the implementation of upward revision in the definition and criteria of MSMEs in the Country. A revision in the MSME definition was announced in Aatmanirbhar Bharat Package on 13th May, 2020. As per this announcement, Micro Enterprises means an enterprise having Rs. 1 crore investment in Plant & Machinery (P&M) or equipment and Rs. 5 crore turnover. Small enterprises means an enterprise having Rs. 10 crore investment in P&M or equipment and Rs. 50 crore turnover.REVISED MSME CLASSIFICATIONS - Composite Criterion: Investment in Plant & Machinery/Equipment and Annual TurnoverMICROSMALLMEDIUMInvestment in P&M/Equipment: Not more than Rs. 1 crore & Annual Turnover; not more than Rs. 5 croreInvestment in P&M/Equipment: Not more than Rs. 10 crore & Annual Turnover; not more than Rs. 50 croreInvestment in P&M/Equipment: Not more than Rs. 50 crore & Annual Turnover; not more than Rs. 250 croreTurnover and investment limits are the only eligibility criteria for registration as an MSME. All organizations falling within the turnover and investment limits that want to be classified as MSMEs are required to register on the Udyam registration portal. The official website for registration is udyamregistration.gov.in. Upon registration, an \"Enterprise Registration Number\" will be allotted to the enterprise and an e-certificate of registration will also be issued.Decoding Payment Timelines under section 15 of MSMED Act, 2006Section 15 of the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006 lays down explicit guidelines for payment timelines between buyers and suppliers of goods or services.The section stipulates that where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement on this behalf, before the appointed day:Provided that in no case is the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.The term \"appointed day\" is defined as the day immediately following the expiry of the fifteen-day period from the day of acceptance or the day of deemed acceptance of goods or services by the buyer from the supplier. For clarity, the day of acceptance is determined either by the actual delivery of goods or services or, in case of written objection by the buyer within fifteen days from delivery, the day when such objection is resolved by the supplier. In situations, where no written objection is raised by the buyer within fifteen days from the delivery of goods or services, the day of deemed acceptance aligns with the actual delivery.To sum up, Section 15 of the MSMED Act establishes a framework for timely payments to MSEs, emphasizing the importance of written agreements and setting a maximum limit of 45 days for payment realization. In the absence of a written agreement, the default timeline for payment is mandated to be within 15 days, safeguarding the interests of Micro and Small Enterprises in their business transactions.Date of InvoiceDate of acceptance of goods/servicesWritten Agreement with SupplierPayment terms as per the AgreementDue date as per AgreementDue date as per MSMED ActPayment dateA.Y. for deduction01/03/202401/03/2024No16/03/202415/03/20242024-2501/03/202401/03/2024No16/03/202430/03/20242024-2501/03/202401/03/2024No16/03/202410/04/20242025-2617/03/202417/03/2024No01/04/202401/04/20242024-2517/03/202417/03/2024No01/04/202410/04/20242025-2601/02/202410/02/2024Yes1525/02/202425/02/202415/03/20242024-2501/02/202410/02/2024Yes1525/02/202425/02/202415/04/20242025-2601/02/202410/02/2024Yes9010/05/202426/03/202410/04/20242025-2601/02/202410/02/2024Yes9010/05/202426/03/202430/03/20242024-2510/03/202420/03/2024Yes6019/05/202404/05/202425/04/20242024-25Tax Audit ReportIn accordance with Notification No. 27/2024-Income Tax dated March 5, 2024, a notable amendment has been introduced to clause 26 of Form 3CD. The new clause 26 of Form 3CD can be read as \"In respect of any sum referred to in clauses (a), (b), (c), (d), (e), (f), (g) or (h) of section 43B, the liability for which:-1) Pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was(a) paid during the previous year;(b) not paid during the previous year;II) Was incurred during the previous year and was(a) paid on or before the due date for furnishing the return of income of the previous year under section 139(1);(b) not paid on or before the aforesaid date.\"In light of these developments, the onus now falls on the tax auditor to meticulously examine the accounts of MSME creditors. The primary objective is to scrutinize and report on disallowances under section 43B(h), with the findings to be documented in the revised Form 3CD. This procedural refinement enhances the rigour of the tax auditing process, ensuring thorough compliance and transparency in adherence to regulatory frameworks.Compliance framework and reporting requirement relating to MSMEs under other laws:I. Impact of Section 23 of MSMED Act on Income Tax Act, 1961Section 23 of the Micro, Small, and Medium Enterprises Development (MSMED) Act explicitly states that interest payable or paid by any buyer under the provisions of this Act shall not be allowed as a deduction for the computation of income under the Income-tax Act, 1961. This provision, with its overriding effect, emphasizes the significance of aligning with the MSMED Act\'s stipulations regarding interest deductions.II. Companies Act Disclosure MandateThe Companies Act necessitates distinct disclosure of outstanding balances and related interest due to MSMEs in financial statements. The Ministry of Corporate Affairs, through its notification issued on the 24th of March, 2021 (G.S.R. 207(E)), guides that companies must present a detailed breakdown of trade payables, categorizing outstanding amounts for different periods from the due date of payment. This disclosure framework enhances transparency and compliance with the Companies Act.As per MCA notification, Trade payables should be reported as per below format:ParticularsOutstanding for following periods from due date of paymentNot DueLess than 1 year1-2 Years2-3 YearsMore than 3 yearsTotalTotal outstanding dues of micro-enterprises and small enterprisesXXXXXXXXXXXXTotal outstanding dues of creditors other than micro- enterprises and small enterprisesXXXXXXXXXXXXDisputed Dues of micro- enterprises and small enterprisesXXXXXXXXXXXXDisputed Dues of creditors other than micro- enterprises and small enterprisesXXXXXXXXXXXXTotalXXXXXXXXXXXXIII. GST Provisions on Timely PaymentsGST provisions mandate that payments to vendors, whether MSEs or not, must be made within 180 days. Failure to meet this timeline requires the reversal of input tax credit along with applicable interest. This statutory requirement underscores the importance of prompt payment practices in accordance with GST regulations.IV. Reporting Requirements under Section 22 of MSMED Act, 2006Section 22 of the MSMED Act, 2006 mandates reporting requirements in the annual statement of accounts. Buyers are subject to annual audit obligations and must furnish additional information, including the principal amount and interest due, unpaid amounts to suppliers at the end of each accounting year, interest payments made, and accrued interest.RBI Circular on MSME paymentsThe Reserve Bank of India, through circular No. IECD.No.20/08.12.01/2002-03, has laid down crucial mandates regarding payments to Micro and Small Enterprises (MSEs). According to the circular, to take care of the payment obligations of large corporate borrowers to MSEs, banks have been advised that while sanctioning/renewing credit limits to their large corporate borrowers (i.e. borrowers enjoying working capital limits of Rs. 10 crores and above from the banking system), to fix separate sub-limits, within the overall limits, specifically for meeting payment obligations in respect of purchases from MSEs either on the cash basis or on bill basis. Banks are also advised by RBI to closely monitor the operations in the sub-limits, particularly with reference to their corporate borrowers\' dues to MSE units by ascertaining periodically from their corporate borrowers, the extent of their dues to MSE suppliers and ensuring that the corporate pay-off such dues before the \'appointed day\' /agreed date by using the balance available in the sub-limit so created.Navigating Practical Implications of Section 43B(h)What if MSEs fall under the limit of section 7 of the MSMED Act, 2006 but do not have a Udyam registration?The clarity surrounding the requirement of Udyam registration in the context of Section 43B(h) remains elusive, with no explicit clarification from the Government or the Central Board of Direct Taxes (CBDT). To shed light on this matter, we turn to the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006.The MSMED Act, under section 2(n), defines a supplier as a micro or small enterprise that has filed a memorandum with the authority specified in sub-section (1) of section 8. Section 8, in turn, grants the discretion to any person intending to establish a micro or small enterprise to file the memorandum with the relevant authority as specified by the government. While the legislation suggests that a micro or small enterprise may exercise discretion in applying for registration, the government has mandated this registration for all Micro and Small enterprises.From a practical standpoint, Section 43B(h) appears to apply to all micro and small enterprises, regardless of their registration status. If lawmakers would have made MSME registration mandatory for 43B(h) then large entities may prefer to get goods/ services from unregistered suppliers and this will defeat the purpose of this law.Impact of Presumptive Taxation on Section 43B(h) DisallowanceWhen a buyer chooses the Presumptive Taxation Scheme under sections 44AD and 44ADA, it introduces a significant implication for the application of Section 43B(h) in the Income Tax Act. Section 44AD commences with the phrase \"Notwithstanding anything to the contrary contained in sections 28 to 43C,\" while Section 44ADA begins with \"Notwithstanding anything contained in sections 28 to 43C.\" Both these sections explicitly override the disallowance provisions of Section 43B(h). Consequently, based on the author\'s understanding and considering the absence of specific clarification by the CBDT, if an assessee, the buyer in this context, opts for presumptive taxation under either Section 44AD or Section 44ADA, it is interpreted that Section 43B(h) does not apply to the assesses. However, it is suggested that one should take into consideration any decision on this issue before forming a view.Capital Purchases from MSEsDisallowance is not applicable for the amount payable in respect of the purchase of assets, as a deduction is not claimed of such an amount.Partial payment to MSEsA plain reading of the provisions suggests that in case of partial payment, the proportionate amount will be disallowed under the said section. For example, Purchases are made from Micro/Small enterprises on July 1, 2023. Price of goods Rs. 20 lakh, GST Rs. 3.60 lakh and total dues Rs. 23.60 lakh. Payment of Rs. 10 lakhs was made on 30 Jan, 2024. Then the disallowed amount as per section 43B(h) will be Rs. 11,52,542 (Amount eligible for deduction x remaining payable/ total purchases including GST i.e. 20 x 13.60/23.60).Payable to MSEs converted into Loan/DebenturePurchases are made from Micro/Small enterprises on Dec 1, 2023. The price of goods is Rs. 80 lakhs. On February 1, 2024, dues are converted into loans of Rs. 80 lakh carrying interest of 6% p.a. In this case, payment is made beyond MSMED Act due date, therefore, Sec. 43B is applicable. However, liability is discharged before the close of the previous year. Therefore, eligible for deduction for the A. Y. 2024-25. This can be concluded from the Supreme Court judgment. In M.M. Aqua Technologies Pvt Ltd. v. Commissioner of Income Tax [CIVIL APPEAL NOS.4742-4743 OF 2021 dt. 21 August 2021], the issue was the discharge of interest liability through the issue of debentures. The Supreme Court held that the discharge of interest payable to financial institutions by way of issue of debentures allows actual payment of interest and is allowed as a deduction under Section 43B. The Court reasoned that the interest was actually paid by the issuance.Creditor\'s Balances as on 31.03.2023Since this amendment will take effect from 1st April 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years. The creditor\'s balance outstanding as of 31st March, 23 is already been claimed as a deduction in earlier year. Hence, this clause is not applicable in such balances. A view can be that this gives rise to one tax saving strategy, the buyer can claim a deduction for current year purchases by allocating payment made during the year with current year invoices first.Purchases from Traders/Wholesalers / Retailers / DistributorsThis clause applicable to payment to MSEs covered in section 7 of MSMED Act, 2006. Section 7 MSMED Act, 2006 read with section 2(e) of the same act specifies that an industrial undertaking or business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services.In the Office Memorandum No. 5/2(2)/2021-E/P & G/Policy dated 02/07/2021, issued by the Ministry of Micro, Small & Medium Enterprises, Government of India, the following decision has been communicated.\"The Government, in response to numerous representations received, has decided to incorporate Retail and Wholesale trades within the ambit of Micro, Small, and Medium Enterprises (MSMEs).\"Consequently, these entities are now eligible for registration on the Udyam Registration Portal. However, it is important to note that the benefits extended to Retail and Wholesale trade MSMEs will be confined to Priority Sector Lending exclusively.Also, later in the same year Ministry of Micro, Small & Medium Enterprises vide Office Memorandum No. 1/4(1)/2021 P&G Policy E-19630 dated 01/09/2021 clarifies that Retail and Wholesale Trade MSMEs are exclusively entitled to benefits related to Priority Sector Lending, and any other advantages, including provisions for delayed payments under the MSMED Act, 2006, remain excluded for these specific sectors.Taking into account the aforementioned provisions and the issued office memorandums by the Ministry, a view can be taken that the transactions with traders, retailers, or distributors are outside the scope of Section 43B(h), providing relief from the disallowance provisions outlined in the section.Further Action on Outstanding paymentsBuyers engaging with Micro and Small Enterprises (MSEs) should begin by verifying the MSE status of suppliers. If the buyer does not have any written agreement, then get the written agreement on paper or in the mail from the supplier specifying the payment terms of 45 days or a shorter period, as may be agreed by them. For the supplier who has provided the agreement as mentioned above buyer should check the aging report and get the payment completed within 45 days or if any shorter than the period specified in the agreement, then within such period, to get the deduction of such payment in the same financial year. If the supplier does not provide any agreement, then the buyer should pay such supplier within 15 days to get the deduction of purchases of goods or services in the same financial year.ConclusionThe recent amendment to Section 43B(h) marks a pivotal stride in addressing persistent challenges associated with delayed payments to Micro and Small Enterprises (MSEs). While it brings forth challenges for industries such as cashflow concerns and collating information from suppliers, its overall impact is anticipated to be highly positive for MSEs, fostering improved cashflows. The confluence of income tax laws with the MSMED Act underscores the importance of meticulous compliance and reporting by taxpayers and auditors. This provision beneficial to MSMEs should not be implemented in such a way as to discourage enterprises from transacting with the MSMEs. This article serves as a comprehensive guide, aiding in navigating the intricacies of this legislative change and its practical implications on businesses and tax compliance.References:https://udyamregistration.gov.in/Government-India/Ministry-MSME-registration.htmAuthor may be reached at husainujjainwala786@gmail.com and eboard@icai.in
Ep. 345 — The Wheel of Happiness- Finding our purpose at work as CAs: A perspective on Positive Organizational Behavior
CA Journal
· September 2026
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The Wheel of Happiness- Finding our purpose at work as CAs: A perspective on Positive Organizational BehaviorThis article explores the concept of leading a purposeful professional life. The CA profession continues to evolve and expand at good pace. Chartered Accountants must lead with purpose and meaning each time they are called upon to assume roles of responsibility. The article also elaborates why a sense of fulfilment and happiness at work is key for a successful work life. It explains that effective performance may be gauged by a combination of conventional and unconventional approaches.By CA. Tilottama Tarafdar, Member of the InstituteWhy happiness at work is relevantHappiness at the workplace is seldom considered a measure for organizational performance. In our quest for happiness in life, we often forget that the time we spend at work constitutes a significant part of our day. Therefore, it is important to be happy at work as what we feel during the major part of the day will determine how we feel about life in general. A business cannot be construed as successful solely by the measure of it\'s profits and returns. Enterprises do not run on their own. They exist and perform due to collective human effort. Human beings drive organizational changes and policies. They are at the core of successful organizational functioning. If an enterprise has to flourish, it\'s constituent members must also thrive and be happy at an individual level. Happiness at work is relevant for Chartered Accountants today if they are to achieve success in entirety as professionals. Finance professionals, whether working in industry at various levels of the organizational hierarchy or helming small, mid or big sized firms must possess an inner compass that guides them to gratifying careers.Happiness is a basic human need, the very driving force for existing. It is the pursuit of happiness that makes us feel aspirational in life. We seek success, growth and accumulations because we feel that these will make us happy. However, happiness is derived not so much from what we have but from who we are. Being contented in one\'s work life is a worthwhile goal to have. While it may seem ideal to compartmentalize life into different zones, one cannot be entirely happy in one\'s personal space if one is unhappy in their professional domain. Having a spill over is natural at times. Thus, happiness at work is a concept that is pertinent to a successful and rewarding work life.\"Most of us would like to be happier at work to be able to say that the hours and effort that we dedicate to it truly contribute to how happy we are in life\" - Emiliana R.Simon-Thomas, Kira M. Newman, Article- How Happy are people at Work?, July 2019, Greater Good Magazine, Greater Good Science Center based at the University of California, Berkeley,Happiness and PurposeAmongst other things, happiness comes from inculcating a sense of purpose at work. As Chartered Accountants and finance professionals, it is critical that we be purpose driven as integrity is the bedrock of our profession. Our purpose is linked to the professional values we nurture within ourselves. Purpose is that which leads us to discover fulfillment and meaning at work. Thus, it also relates to being happy at work. Our professional lives keep evolving at a remarkable pace leveraging the use of different technologies and other resources for greater productivity. The chase to optimize and be productive is often accompanied by the scurry to fit even more into an already packed schedule, to accomplish the maximum that we can. However, what goes in tandem with productivity is the need to weigh the impact our work leaves on ourselves at a personal level and on society at large. This also brings to the fore an often overlooked aspect of life - the need to create positivity in the world of work and our responsibility towards it.\"Today, most company leaders believe that their firms\' larger purpose is to make a positive difference in the world-not just to maximize shareholder value. More than eight in 10 executives, for example, think that a strong sense of shared purpose drives employee satisfaction, facilitates business transformation, and helps boost customer loyalty. Most executives also understand that purpose helps companies navigate a volatile and unpredictable environment and delivers higher and more sustainable performance\" - Hubert Joly (Former Chairman and CEO of Best Buy, Senior Lecturer of Business Administration, Harvard Business School), Article, Harvard Business Review Digital Articles - Creating a Meaningful Corporate Purpose, October 2021.How important is it for CAs to work with purpose\"Ya esa suptesu jagarti\", meaning one who is awake in those that sleep is reflective of the ideals of the Chartered Accountants\' fellowship. This text from the Kathopanishad was suggested to ICAI by Sri Aurobindo at the time of its formation as its motto and reminds us that the path we tread as professionals must be steeped in responsibility, accountability, integrity, sincerity and meaning. CAs, both in industry and practice, assume various roles as executives, managers, leaders and self - starters. As such, one maybe required to deal with complex financial scenarios along with constantly evolving business processes. Working with purpose calls for having a personal credo to live by. It has no one yardstick. It involves being rooted to one\'s core values and then being able to integrate those convictions with one\'s work ethics and leadership values. It encompasses a wide gamut of attributes that bolster effective performance. Businesses today are no longer based on the theory of maximizing profits only. Successful global CEOs often advocate the mantra that profit should be regarded as an end result, an outcome or a consequence that comes out of following purposeful processes and not be the sole existential goal for a company. As Chartered Accountants, we must be conscious that our work has the potential to bring about significant impact in the business world. Hence, anchoring our work to meaning and purpose should be central to our professional practices.How to find purpose at workDefining our individual purpose at work begins with aligning our personal core values with the way we work and the goals we set for ourselves. Purpose at work is seldom related to earning only monetary compensation, rather it is more connected to the non monetary intangibles. While monetary incentives do play a role in motivating us, it is factors like making an impact, recognition, goodwill, contributing meaningfully to our profession that make us feel more valued. Introspection is key to identifying and recognizing one\'s own objectives at work.Personal reflections that lead us to ask questions such as those below are a pertinent starting point.Why do I work?What in my profession fetches most meaning for me?What drives me?What are the values on which I base my professional life?It is important to remember that each of us is writing our own unique story at work every day, that which mirrors our aspirations and carves the path we finally walk on to actualize the professional goals we set for ourselves. This story is authored by us in numerous ways and is woven through the decisions we make, tasks we execute, teams we lead and the collaborations we forge.Constructs of a purposeful work story may include the following:Integrity - Integrity cannot be alienated from purpose. Integrity calls for honest discharge of our functions with the awareness that any lapse or failure to do our part diligently can impair proper decision making, governance, matters of revenue and other key enablers of progress with respect to the country, corporate houses, and individual citizens.Authenticity - Bringing our authentic self to work forms an integral part of a purposeful journey. Authenticity is about being genuine at work. It involves forging true connections by delivering and advising with complete sincerity. When we build trust for the end user of our services by being committed and responsible, we know we have succeeded as professionals.Building a foundation of sound professional ethics - By being ethical at work, we create a shadow for ourselves that follows us through our professional lives and may be even beyond that. It is important that the shadow we cast as individuals embraces the totality of our professional ethos and represents an immutable professional spirit which does not falter over time and changing circumstances.Trust and Responsibility - Trust is acquired through competence and expertise. Responsibility is also key to building trust. Any client-service provider relationship is strengthened through a process of building trust over a period of time. As a professional community serving the nation, CAs must give primacy to gaining trust through responsible conduct.Clarity of objectives - It is important to have a strong and clear vision of one\'s goals and objectives. The ability to perceive the bigger picture with clarity simultaneous to realizing the smaller steps needed to accomplish the final goal supports in crafting a purposeful narrative at work.Having a balanced approach - Balance and even mindedness is an important attribute to cultivate. Having balance holds us in good stead in every phase of our professional and personal lives. A balanced approach increases our capacity to tackle change and fluctuation with calm stability. This in turn promotes agile thinking, good comprehension and effective decision making.Enabling collaboration - A well performing team is one that works together in a cohesive manner to achieve common objectives. In an organization, goals are accomplished by combined group efforts. Constructive collaboration between people increases productivity and shared tasks help to reduce turnaround times for client delivery. Existence of proper communication channels between different levels of the pyramid both top-down and bottom-up lead to people being heard, viewpoints being expressed, and ideas being exchanged. Thus, problem areas are better identified and solutions for resolution are aptly arrived at.Mindfulness - Mindfulness and resilience enhances our threshold levels to manage stress and other challenges at work. It equips us with a coping mechanism and makes us more resilient to stressors. Mindfulness can be defined as that which enables us to maintain an inner equilibrium within the landscape of stress at work. This can be done through techniques that help us develop discernment while possessing a quiet awareness of outer circumstances.Wheel of Happiness - Managing Work Stress and India\'s ancient wisdomThe wheel is a significant concept in ancient Indian spirituality. Buddhism expounds the process of elimination of suffering by following the Noble Eight-Fold Path often depicted by means of a wheel. The Noble Eight-Fold Path prescribes how one must engage in rightful living encompassing right thought, right understanding, right action, right speech, right livelihood, right effort, right mindfulness and right concentration to achieve permanent happiness. This wheel of Dharma or \"Dharmachakra\" sets in motion the laws and principles of truth, peace, virtue, change and resurgence. The wheel also finds mention in Hinduism as the cosmic weapon \"Sudarshanchakra\" used by Lord Vishnu, the preserver of the cosmos to annihilate negative forces. Therefore, at a profound level, the wheel symbolizes being anchored to Dharma and all that is positive. The phenomenon of happiness at work can be compared to a wheel - the wheel of happiness. The wheel of happiness applies to life in general and can also be replicated in a corporate setting.The wheel of happiness is a tool that helps to keep our purpose alive as we try to find our \"North Star\" at work.Happier professionals are more productive and capable of triggering significant individual and organizational growth. Enforcing positivity at the workplace will result in a shift which must be sustained for a better world.The wheel of happiness can be perceived as a revolving circle with the circumference being constantly buffeted by potential uncertainties from the external environment. The circle is held to the center by spokes; the spokes being symbolic of eliminators that help mitigate the challenges and preserve the balance of the wheel.A wheel rotates and is synonymous with motion, the moving of time. If we introspect, it seems that we are on a wheel which is constantly revolving from the time we enter the world to the time we leave it. This movement is the origin of a constant flux, signifying a river like life that not only flows constantly but is subject to change every minute. Is it possible to find happiness in this state of uncertainty? Yes. We are perched, almost precariously on the rim of the wheel. The rim is constantly exposed to stressors from the outer environment. At work, these stressors may come to us as performance pressures, stretched work schedules, difficult deadlines, lengthy meetings, evolving business processes, toxic behavior from co-workers, keeping step with constantly changing laws and regulations, financial uncertainties etc. Added to this, we may have our own internal stressors triggered by any limiting beliefs that we may have of ourselves. The center of the wheel, not impacted by this exposure, is thus the only safe place. How do we stay anchored to the center of the wheel?Hinduism\'s foremost spiritual text, the Bhagavad Gita, is an uplifting and insightful exchange between God incarnated as Krishna and the Pandava prince, Arjuna. This eternal dialogue points out that the soul is not affected by external forces. Therefore, one can reach a state of tranquility if one is able to transcend the external changes and anchor oneself in one\'s inner being. Happiness is a state, perpetual and inherent in man\'s inner self and can be realized by him anytime he cultivates the positive traits intrinsic to balanced living, no matter what the outer circumstances are. The spokes of the wheel which bind the rim to the center maybe considered as being symbolic of these strengths which when nurtured, fortify and equip us so that we can function happily and unhindered in any environment. Values such as integrity, resilience, equanimity, empathy, mindfulness, understanding, respect, meaningful exchange and purposeful engagement result in universal alignment with a harmonious existence at the workspace. For the wheel to rotate seamlessly without friction, the space inside must be evenly diffused with such vibrations so that the external stressors are not cause for any disruption. What would be an ideal environment to foster such values?Businesses need to realign and recalibrat-e on various aspects.This would include following practices -that encourage leadership to be meaningfulthat stress on development of the individualthat further an environment where one\'s individual goals are aligned with the organizational goalsthat believe in giving room for autonomy and independent decision making for an individual to participate and flourishthat instill a sense of belief and pride that every role and contribution add value and is significant for a company\'s progressthat celebrate achievementsthat enable constructive team spiritthat promote workplace equitythat respect conflicting opinionsthat bring about a spirit of goodwill and altruism, and above all embrace a humanistic approach in organizational operationsThe wheel of happiness is a reflection of adopting business practices that are conducted with the intent of making business a force for good and is about the values we embrace at work. The ICAI motto, so deeply entrenched in the spiritual philosophy of the Kathopanishad, serves as a beacon for members of this lofty profession and empowers us on our professional path.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 346 — Understanding Application of Predictive Analytics to Finance Functions using Non-Personal Data
CA Journal
· September 2026
00:00
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Understanding Application of Predictive Analytics to Finance Functions using Non-Personal DataThis article explores the application of predictive analytics in finance functions including Chartered Accountancy, focusing on the utilization of non-personal data. It examines how non-personal data can enhance financial forecasting, risk management, and strategic planning. By integrating non-personal data into predictive models, Chartered Accountants can achieve more accurate financial insights and improve decision-making. Case studies illustrate the practical applications of non-personal data in financial services, demonstrating improved accuracy in forecasting and risk assessment. The findings underscore the transformative potential of predictive analytics in accounting, emphasizing the importance of adopting data-driven approaches to navigate the complexities of the financial landscape.By Dr. Kuldeep Singh Panwar, AcademicianBy Jaishree Gaur, Research ScholarIntroductionPredictive analytics is a branch of advanced analytics that utilizes historical data, statistical algorithms, and machine learning techniques to identify the likelihood of future outcomes based on past data[cite: 20]. Unlike traditional descriptive analytics, which focuses on what has already happened, predictive analytics aims to forecast future events, behaviors, or trends[cite: 20]. It plays a pivotal role in enabling organizations to make informed decisions by providing actionable insights that anticipate potential scenarios[cite: 20].In the modern business landscape, where competition is fierce, risks and future events are uncertain, and the volume of data generated is immense, predictive analytics has become a key differentiator[cite: 20]. Businesses today operate in an environment where uncertainty is constant, and the ability to predict outcomes is crucial for strategic planning[cite: 20]. Predictive analytics helps organizations to harness the power of their data, allowing them to foresee risks, optimize operations, enhance customer experiences, and increase profitability[cite: 20].For instance, in customer relationship management, predictive analytics is used to identify potential churn, allowing companies to take proactive measures to retain customers[cite: 20]. In finance & banking, it aids in credit scoring, fraud detection, and risk management by analyzing patterns and trends that may indicate future financial threats[cite: 20]. In supply chain management, it helps optimize inventory levels by predicting demand fluctuations, thereby reducing costs and improving efficiency[cite: 20].Relevance to the field of finance & Chartered AccountancyPredictive analytics is rapidly transforming the field of finance by enhancing the accuracy, efficiency, and strategic value of financial services[cite: 20]. Traditionally, Chartered Accountants/finance professionals have relied on historical data and descriptive analysis to report past performance, assess financial health, and ensure compliance with regulatory standards[cite: 20]. However, contemporary Auditing Standards and other requirements of assurance service require the identification & evaluation of risk of material misstatements in financial information, either due to error or fraud[cite: 20]. Therefore, the introduction of predictive analytics has expanded their role from reactive to proactive, allowing them to anticipate future financial trends, risks, and opportunities[cite: 20].Predictive analytics significantly impacts finance professionals, particularly in financial forecasting, risk management, business valuation and audit & assurance services[cite: 20]. By combining historical financial data with external factors like economic indicators and market trends, predictive models offer forward-looking insights that enhance strategic decision-making for budgeting, investments, and resource allocation[cite: 20]. For instance, they can forecast cash flow shortages or surpluses, aiding in planning for funding needs or investment opportunities[cite: 20].In risk management, predictive analytics helps identify potential financial risks by analyzing transaction patterns and operational data[cite: 20]. It can flag unusual transactions, indicating fraud or non-compliance, thereby improving audit efficiency and focus[cite: 20].Technology also revolutionizes business valuation and due diligence in mergers and acquisitions (M&A) by providing accurate valuations through comprehensive data analysis[cite: 20]. This data-driven approach reduces uncertainty and enhances valuation credibility for investors[cite: 20].Additionally, predictive analytics enhances performance management by predicting key performance indicators (KPIs) and providing actionable insights for strategy adjustment[cite: 20]. It allows accountants to offer personalized, value-added services, such as identifying profitable customer segments, suggesting cost-saving opportunities, and recommending optimal pricing strategies, thus moving beyond traditional financial reporting and compliance tasks[cite: 20].However, the adoption of predictive analytics also presents challenges for finance professionals and Chartered Accountants[cite: 20]. It requires a shift in mindset, from traditional accounting practices to a more data-centric approach[cite: 20]. Accountants must develop new skills in data analysis, statistics, and machine learning, as well as gain a deeper understanding of the technologies that power predictive analytics[cite: 20]. Additionally, there are ethical considerations around the use of data, including ensuring data accuracy, maintaining confidentiality, and adhering to regulations related to data privacy[cite: 20].Understanding Predictive Analysis in the field of AccountancyKey components of predictive analytics include several crucial steps that ensure the accuracy and effectiveness of the predictive models[cite: 20]. First, data collection involves gathering relevant historical and current data, which forms the foundation of predictive analytics[cite: 20]. In accounting, this could include financial statements, transaction records, and economic indicators[cite: 20]. It is essential that the data collected is comprehensive, accurate, and relevant to the analysis[cite: 20]. Once collected, data processing and cleaning are necessary to remove inconsistencies, errors, or irrelevant information, ensuring that the data used is reliable and usable[cite: 20].Next, statistical algorithms and machine learning techniques are applied to analyze the data[cite: 20]. Algorithms such as regression analysis, decision trees, and clustering help build models that predict future outcomes based on historical patterns[cite: 20]. Machine learning techniques, including neural networks and ensemble methods, further enhance the model\'s predictive accuracy by continuously learning from new data[cite: 20]. Following this, model training and validation are conducted, where the predictive model is trained on historical data to identify patterns and relationships, and then validated using a separate data set to test its accuracy and effectiveness[cite: 20]. This process helps refine the model and improve its predictive capabilities[cite: 20].Finally, the results from predictive models are often presented using visualization tools such as graphs, charts, and dashboards[cite: 20]. These visualizations make it easier for accountants and stakeholders to interpret the predictions and make informed decisions based on the insights provided by predictive models[cite: 20].Predictive analytics has several key applications in accounting, where non-personal data plays a significant role[cite: 20]. In financial forecasting, predictive analytics enhances accuracy by analyzing historical financial data alongside external factors such as market trends and economic indicators[cite: 20]. For example, by examining past revenue patterns and incorporating economic forecasts, accountants can more accurately predict future sales, cash flow, and budget requirements[cite: 20]. Non-personal data, like industry growth rates and economic conditions, adds valuable context and improves the reliability of these forecasts[cite: 20].In risk assessment, predictive analytics helps identify potential financial risks before they become significant issues[cite: 20]. By analyzing historical transaction data and external economic indicators, predictive models can detect anomalies or trends that may indicate financial instability or fraud[cite: 20]. For instance, non-personal data such as market volatility or industry-specific risks can be integrated into risk assessment models to predict potential threats and recommend mitigation strategies[cite: 20].Predictive analytics also enables performance benchmarking by allowing accountants to compare financial performance against industry standards and peer organizations[cite: 20]. Using non-personal data, such as industry benchmarks and market performance metrics, accountants can evaluate a company\'s financial health relative to its competitors, helping to identify areas for improvement and set realistic performance goals[cite: 20].In cost management and optimization, predictive models analyze historical cost data and market trends to forecast future expenses and optimize cost management strategies[cite: 20]. For instance, by examining non-personal data related to commodity prices or supply chain dynamics, accountants can predict future cost fluctuations and adjust budgets accordingly to manage expenses more effectively[cite: 20].Role and Importance of Non-Personal DataNon-Personal Data refers to data that does not relate to any identifiable individual[cite: 20]. It encompasses information that is aggregated or anonymized, and is often used to analyze trends, patterns, and correlations without revealing personal identities[cite: 20]. Non-personal data is typically used to understand broader phenomena or market conditions, and it includes various types of information that can be valuable for statistical and predictive analysis[cite: 20].Examples of non-personal data relevant to accounting include several key types of information[cite: 20]. Economic trends provide insights into national or global indicators, such as GDP growth rates, inflation rates, and unemployment figures, which can be used to predict how changes in economic conditions might impact a company\'s cost structure and pricing strategies[cite: 20]. Market data encompasses information about market conditions, such as commodity prices, stock indices, and industry performance metrics, allowing businesses to forecast future cost changes, particularly those dependent on raw materials[cite: 20]. Industry benchmarks offer aggregate data on performance metrics, including average profit margins and revenue growth rates, providing a comparative basis for evaluating a company\'s performance against its peers[cite: 20]. Consumer behavior trends reflect general purchasing patterns and market demand, helping to predict future product or service demand based on observed consumer behavior[cite: 20]. Lastly, regulatory and policy data, which includes information on changes in tax laws and compliance requirements, assists```sql
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'Understanding Application of Predictive Analytics to Finance Functions using Non-Personal DataThis piece examines the integration of predictive analytics into finance and Chartered Accountancy, with a specific focus on the use of non-personal data. It highlights how leveraging this data can significantly improve financial forecasting, strategic planning, and risk management. By incorporating non-personal datasets into analytical models, finance professionals can generate highly accurate insights that drive better business decisions. The article underscores the necessity for accounting professionals to embrace these data-driven methodologies to remain competitive in today\'s complex financial environment.By Dr. Kuldeep Singh Panwar, AcademicianBy Jaishree Gaur, Research ScholarIntroductionPredictive analytics represents a sophisticated branch of data analysis that relies on historical records, machine learning, and statistical algorithms to project future outcomes. In contrast to traditional descriptive analytics—which only looks at past events—predictive models attempt to forecast upcoming trends and behaviors. This capability is increasingly vital in a modern business landscape characterized by fierce competition, vast amounts of data, and persistent uncertainty. Across various sectors, from predicting customer churn to optimizing supply chain inventories, these tools allow organizations to act proactively rather than reactively.Relevance to the field of finance & Chartered AccountancyThe realm of finance is being profoundly reshaped by predictive analytics, which brings elevated accuracy and strategic value to the profession. Historically, Chartered Accountants focused primarily on historical reporting and compliance. However, modern auditing standards now emphasize the proactive identification of material misstatement risks, necessitating a forward-looking approach. By synthesizing internal historical data with external economic indicators, predictive models empower finance professionals to optimize budgeting, assess investments, and anticipate cash flow variations. Furthermore, these tools are revolutionizing risk management by detecting anomalous transaction patterns that could suggest fraud, and they are enhancing business valuation processes during mergers and acquisitions (M&A). Adopting these tools does require a paradigm shift, compelling accountants to acquire new competencies in machine learning, statistics, and data privacy.Understanding Predictive Analysis in the field of AccountancyThe predictive analytics lifecycle involves several critical phases. It begins with rigorous data collection from relevant financial and economic sources, followed by thorough data cleaning to eliminate errors and inconsistencies. Next, analysts apply machine learning techniques and statistical algorithms (such as decision trees or regression analysis) to construct predictive models. These models are then trained and validated against separate datasets to ensure their accuracy before the final insights are presented via data visualization tools like dashboards.Within accounting, these models rely heavily on non-personal data to refine financial forecasting and risk assessment. For instance, by evaluating past revenue alongside external economic forecasts, organizations can predict future cash flows with greater precision. Additionally, these insights aid in performance benchmarking and cost optimization by anticipating supply chain fluctuations or commodity price shifts.Role and Importance of Non-Personal DataNon-personal data comprises anonymized or aggregated information that cannot be linked to specific individuals. This includes macroeconomic indicators (like GDP growth and inflation), market metrics (such as stock indices and commodity prices), industry benchmarks, and regulatory updates.Because it is free from individual privacy concerns and personal biases, non-personal data offers a highly objective foundation for financial analysis. It is also highly scalable, allowing analysts to examine trends ranging from global economic shifts down to regional market conditions. Integrating this objective data into financial models greatly enhances the reliability of long-term strategic planning and risk mitigation.However, professionals must be cautious. Utilizing outdated, incomplete, or contextually irrelevant non-personal data can lead to distorted financial perspectives. Chartered Accountants are tasked with critically validating these external data sources—often using APIs to integrate them directly into ERP systems—and ensuring they appropriately complement internal data to produce reliable audit trails and authentic outcomes.ConclusionThe strategic use of predictive analytics, fueled by non-personal data, is a game-changer for the accounting and finance sectors. By embedding external market data and economic trends into their models, firms can achieve superior forecasting and operational efficiency. Despite the technical complexities and data governance challenges involved in implementing these systems, the benefits are undeniable. Organizations that invest in robust data integration, artificial intelligence, and strict compliance measures will position themselves to navigate future financial complexities with unmatched foresight and agility.References:Chartered Accountants to Engage in Big Data Analytics, ExcelRRole of Big Data Analytics in Chartered Accountancy, Taxmann (Dec. 23, 2023)Suresh Sood, Tools and Techniques of the Predictive Practice, Chartered Accountants Austl. & N.Z.Accounting & Data Analytics: What You Need to Know, Franklin Univ.Rainer Mühlhoff & Hans Ruschemeier, Predictive Analytics and the Collective Dimensions of Data Protection, 16 Law, Innovation & Tech. 261 (2024).Authors may be reached at eboard@icai.in
Ep. 347 — AI-driven innovations in auditing: A comprehensive exploration
CA Journal
· September 2026
00:00
--:--
AI-driven innovations in auditing: A comprehensive explorationThis article delves into the realm of AI Audit, investigating the impact of artificial intelligence (AI) technologies on audit processes. It provides an overview of AI in audit, highlighting key applications, benefits, challenges, and future trends. Through empirical analysis, case studies, and data-driven insights, the article explores the effectiveness of AI tools and techniques in enhancing audit quality, efficiency, and risk management. It addresses critical issues such as data quality, cyber security risks, and ethical considerations in AI-enabled audits. The article also discusses emerging trends in AI audit, including regulatory developments, job roles, and skill sets required for the future AI-auditor. By examining real-world examples and empirical data, the article offers valuable insights into the transformative potential of AI in the audit profession.By CA. Deepak Rathore, Member of the InstituteIntroductionIn recent years, the integration of artificial intelligence (AI) technologies in audit processes has emerged as a transformative force in the field of accounting and finance. The rapid advancements in AI, coupled with the growing complexity of business operations and regulatory requirements, have necessitated a paradigm shift in audit practices. This article delves into the realm of AI Audit, aiming to explore the implications, challenges, and opportunities presented by AI adoption in audit processes.The primary objective of this article is to evaluate the impact of AI technologies on audit quality, efficiency, and risk management within the context of contemporary audit practices. With the evolution of AI tools and techniques such as machine learning algorithms, natural language processing (NLP), robotic process automation (RPA), and data analytics platforms, auditors now have access to powerful resources that can enhance their capabilities and insights.One of the key motivations driving the adoption of AI in audits is the quest for improved accuracy and reliability in financial reporting. AI-powered algorithms can analyze vast amounts of data with greater precision, identifying anomalies, patterns, and trends that may escape traditional audit methodologies. This not only enhances the detection of fraud and errors but also facilitates a deeper understanding of business operations and risks.Furthermore, AI-enabled audits offer significant potential for cost savings and efficiency gains. By automating repetitive tasks, such as data entry, reconciliation, and testing procedures, auditors can redirect their focus towards higher-value activities such as strategic analysis, risk assessment, and client advisory services. This shift not only enhances audit productivity but also enables auditors to deliver more value-added insights to stakeholders.However, the integration of AI in audit processes is not without its challenges and considerations. Data quality issues, including data accuracy, completeness, and integrity, remain critical concerns that can impact the reliability of AI-generated insights. Moreover, the interpretability and explainability of AI algorithms pose ethical and regulatory challenges, particularly in the context of audit transparency and accountability.Evolution of AI Technologies in the Audit IndustryThe evolution of AI technologies in the audit industry has been marked by significant advancements and innovations. Initially, AI was primarily used for automating repetitive tasks such as data entry and validation. However, with the advent of machine learning and predictive analytics, AI has evolved to perform more complex tasks, including risk assessment, anomaly detection, and predictive modeling.One of the key milestones in the evolution of AI in audit is the development of AI-powered audit analytics platforms. These platforms leverage AI algorithms to analyze financial data, detect irregularities, and generate audit findings. For example, AI-driven anomaly detection algorithms can identify unusual patterns in transactions, alerting auditors to potential fraud or errors.Another notable development is the integration of NLP in audit processes. NLP enables AI systems to understand and interpret human language, allowing auditors to analyze unstructured data such as emails, contracts, and documents. This capability is particularly valuable in conducting document reviews, compliance checks, and contract analysis during audits.Moreover, RPA has gained traction in audit firms, automating manual tasks such as data extraction, reconciliation, and report generation. By leveraging RPA, auditors can streamline audit workflows, reduce errors, and improve overall audit efficiency.AI Tools and Techniques for AuditingIn the rapidly evolving landscape of auditing, the integration of artificial intelligence (AI) tools and techniques has become instrumental in enhancing audit processes. Here\'s an overview of key AI tools and techniques used in auditing:These practical examples demonstrate the application of AI technologies in audit processes, highlighting their impact on audit quality, efficiency, and risk management. The sources mentioned provide valuable insights and case studies for further research and analysis in the field of AI Audit.1. Machine Learning for Predictive AnalyticsExplanation: Machine learning is like a smart assistant that learns from past experiences (data) to make predictions about the future. In audit, it looks at lots of financial data and patterns to predict where potential risks or problems might be hiding. For example, it can spot unusual transactions that might be fraud or errors.Example: Imagine machine learning as a detective that learns from previous cases to predict where the next crime might happen.2. Natural Language Processing (NLP) for Contract AnalysisExplanation: Natural language processing is like a language expert that can read and understand human language, just like we do. In audit, it helps read and analyze contracts, agreements, and documents to find important information or potential issues. For instance, it can highlight clauses that might pose risks or compliance challenges.Example: Think of NLP as a translator that can understand legal jargon and point out important terms in contracts.3. Robotic Process Automation (RPA) for Data ReconciliationExplanation: Robotic process automation is like a virtual assistant that can do repetitive tasks without getting tired or making mistakes. In audit, it automates tasks like checking data across different systems to make sure everything matches up correctly. For example, it can reconcile bank statements with accounting records automatically.Example: Picture RPA as a tireless worker that double-checks numbers and flags any discrepancies it finds.4. Predictive Analytics for Fraud DetectionExplanation: Predictive analytics is like a fortune teller that uses data patterns to predict future events. In audit, it looks for unusual patterns in financial data that might indicate fraud or suspicious activities. For instance, it can detect unexpected spikes in expenses or payments.Example: Think of predictive analytics as radar that scans financial data for any signs of fraud or unusual behavior.Benefits of AI in AuditArtificial Intelligence (AI) has brought about significant benefits in the field of audit, revolutionizing traditional practices and enhancing audit effectiveness. Here are some key benefits of AI in audit:1. Improved Accuracy in Risk IdentificationAI-powered tools and algorithms improve the accuracy of risk identification by analyzing large volumes of data with precision and identifying patterns, anomalies, and outliers that may indicate potential risks. This proactive approach enables auditors to detect fraud, errors, and compliance issues more effectively, leading to more reliable audit outcomes.2. Enhanced Efficiency in Audit ProcessesAI automates repetitive and time-consuming tasks, such as data entry, reconciliation, and testing procedures, which significantly enhances audit efficiency. By streamlining these processes, auditors can focus on higher-value activities such as data analysis, risk assessment, and client advisory services, leading to faster audit cycles and increased productivity.AI TechnologyPractical ExampleImpact on Audit ProcessesMachine LearningPredictive analytics for risk assessmentEnhances audit quality by proactively identifying risks. Improves audit efficiency by automating risk assessment tasks.Natural Language ProcessingContract analysis using NLPReduces manual effort in document examination. Enhances accuracy in contract analysis. Streamlines document review processes.Robotic Process AutomationAutomation of data reconciliationImproves accuracy and data integrity in financial reporting. Enhances audit efficiency by automating repetitive data reconciliation tasks.Predictive AnalyticsFraud detection using AI algorithmsStrengthens fraud detection capabilities. Reduces false positives. Prioritizes high-risk transactions for detailed investigations.3. Cost Savings and Resource OptimizationThe automation of audit tasks through AI technologies results in cost savings by reducing manual effort, minimizing errors, and optimizing resource allocation. Auditors can achieve greater efficiency and effectiveness without the need for additional resources, leading to cost-effective audit operations and improved overall profitability.4. Advanced Data Analytics CapabilitiesAI enables auditors to harness advanced data analytics capabilities, including predictive analytics, trend analysis, and anomaly detection. These capabilities provide deeper insights into financial data, market trends, and operational performance, allowing auditors to identify emerging risks, assess trends, and make data-driven decisions during audits.Challenges and Limitations1. Data Quality Issues and Data BiasesMeaning: Data quality issues refer to problems with the accuracy, completeness, consistency, and reliability of the data used for training and deploying AI models. Data biases, on the other hand, refer to systematic errors or distortions in the data that can lead to unfair or discriminatory outcomes.Practical Example: Consider an AI-powered fraud detection tool trained on historical financial data from a particular industry or region. If the data contains errors, inconsistencies, or is skewed towards certain types of transactions or entities, the tool may fail to accurately detect fraudulent activities in different contexts or settings.Practical Mitigation: Audit firms should implement robust data validation processes, such as automated data checks, data cleansing routines, and regular data quality audits. They can also leverage data visualization tools to identify potential outliers or anomalies in the data before feeding it into AI models. Additionally, techniques like cross-validation and stratified sampling can help mitigate data biases by ensuring that the training data is representative of the diverse scenarios encountered in practice.2. Interpretability and Explainability of AI-Generated InsightsMeaning: Interpretability refers to the ability to understand how an AI model works and the reasoning behind its decisions or recommendations. Explainability, on the other hand, focuses on providing clear and understandable explanations for specific decisions or predictions made by the AI model.Practical Example: An AI-powered risk assessment model identifies a client as high-risk based on complex patterns in financial data and operational metrics. However, the auditor cannot explain the reasoning behind this assessment to the client or regulatory authorities due to the \"black box\" nature of the model, potentially undermining trust and credibility in the audit process.Practical Mitigation: Audit firms can adopt interpretable AI models, such as decision trees or rule-based systems, which provide transparent decision-making processes. Additionally, they can leverage techniques like LIME (Local Interpretable Model-agnostic Explanations) or SHAP (SHapley Additive explanations) to generate local explanations for individual predictions, helping auditors understand the key factors contributing to a particular risk assessment.3. Cyber security risks in AI-Enabled Audit SystemsMeaning: As AI systems become more integrated into audit processes, they introduce new cybersecurity risks. AI models and the data they rely on can be vulnerable to adversarial attacks, data poisoning, or model stealing, potentially compromising the integrity and confidentiality of audit information.Practical Example: An adversary gains unauthorized access to the AI-powered contract analysis tool and injects malicious data into the system, causing the tool to overlook critical clauses or generate incorrect interpretations of contract terms, leading to potential legal or financial risks for the audit client.Practical Mitigation: Audit firms should integrate practical mitigation strategies, including the adoption of robust cybersecurity measures like firewalls, intrusion detection systems, and secure data encryption protocols. They should also conduct regular security audits and penetration testing to identify potential vulnerabilities in their AI-enabled systems. Additionally, implementing strict access controls, multi-factor authentication, and regular software updates can help mitigate cybersecurity risks.Study on Generative AI in Auditing: Transforming the Landscape through Innovative TechnologiesThe auditing industry is undergoing a significant transformation driven by the advent of generative artificial intelligence (AI) technologies. These advanced AI systems possess the remarkable ability to generate human-like outputs, such as text, images, and audio, revolutionizing traditional audit processes. This study delves into the rapidly evolving Generative AI in Audit Market, providing an in-depth analysis of its current state, growth trajectory, key drivers, challenges, and future prospects.The Generative AI in Audit Market has witnessed substantial growth in recent years, with a valuation of US$ 73.9 Million in 2023. According to projections, this market is expected to reach an impressive US$ 2,120.7 Million by 2033, exhibiting a remarkable Compound Annual Growth Rate (CAGR) of 41.10% during the forecast period from 2024 to 2033. This trajectory highlights the significant potential for the adoption of generative AI technologies in the auditing industry.Market Growth Projection: The table below presents the projected market value for Generative AI in the Audit Market from 2023 to 2033:YearMarket Value (in US$ Million)202373.92024104.22025141.52026214.92027314.82028427.42029535.62030755.720311,026.1020321,447.8020332,120.70The accompanying figure illustrates the market\'s growth trajectory over the forecast period, highlighting the significant potential for Generative AI adoption in the auditing industry.Market DriversSurge in demand for corporate spending on financial audits: As businesses expand and financial regulations become more stringent, the demand for accurate and efficient financial audits has increased substantially, driving the adoption of Generative AI technologies to streamline audit processes.Requirement of auditing across all verticals of market industries: Auditing is a critical function across various industries, including banking, finance, healthcare, manufacturing, and retail. The need for comprehensive audits in these diverse sectors has fueled the integration of Generative AI solutions to enhance audit quality and efficiency.Adoption of AI to proactively navigate accounting regulations: The ever-evolving landscape of accounting regulations and standards has prompted audit firms to embrace Generative AI technologies. These advanced solutions enable auditors to proactively adapt to regulatory changes, ensuring compliance and mitigating risks associated with non-compliance.AI-driven efficiency reshaping auditing economics: Generative AI technologies have the potential to revolutionize the economics of auditing by automating repetitive tasks, reducing manual effort, and optimizing resource allocation. This increased efficiency translates into cost savings and improved profitability for audit firms, driving the market\'s growth.Competitive differentiation through AI adoption in financial reporting: Audit firms are increasingly recognizing the competitive advantage offered by Generative AI in financial reporting. By leveraging these advanced technologies, firms can provide more efficient, accurate, and insightful audits, positioning themselves as leaders in the industry and attracting clients seeking cutting-edge audit services.Market ChallengesExplainability concerns due to the \"black box\" nature of AI models: Complex generative AI models often operate as \"black boxes,\" making it challenging to understand and explain their decision-making processes and outputs. This lack of transparency can be a significant issue in the audit sector, where understanding the rationale behind findings is crucial for validation and regulatory compliance.Cybersecurity risks associated with handling sensitive client data: Generative AI models frequently require training on vast amounts of sensitive and confidential client data. If these AI systems are not secured with robust protections, they could become targets for cyberattacks, leading to data breaches and significant legal and reputational consequences, deterring their adoption in auditing.Market Segmentation: Technology SegmentationNatural Language Processing (NLP) holds a dominant position in Generative AI in the Audit Market, with a 36% share, owing to its ability to interpret, analyze, and generate human-like text, which is crucial in auditing documents, financial reports, and regulatory filings.Machine Learning Algorithms, Predictive Analytics, and other AI Technologies also contribute significantly to the market.Application SegmentationFinancial Auditing is the dominating segment, commanding a 42% market share due to the critical role of financial auditing in ensuring accuracy, compliance, and transparency in financial reporting.Compliance auditing, risk assessment, and fraud detection are other significant applications.End-User SegmentationThe Banking and Finance sector dominates Generative AI in the audit market, with a 38% market share, driven by the high volume of transactions, regulatory intensity, and the need for precision, compliance, and risk management in auditing.Healthcare, manufacturing, retail, and other industries also integrate Generative AI in their audit processes.Regional OutlookNorth America dominates the market, with a 34.50% share, fueled by the region\'s robust financial sector, stringent regulatory environment, and technological prowess.Europe, driven by an advanced regulatory framework and a strong focus on technological adoption, is a significant market for Generative AI in auditing.The Asia-Pacific region is experiencing rapid growth due to economic expansion, digital transformation, and the need for efficient and accurate auditing practices.Generative AI in the audit market is characterized by the presence of technology giants, as well as leading accounting firms.Generative AI in the audit market is experiencing substantial growth, driven by the increasing demand for efficient and accurate auditing practices across various industries. As businesses embrace digital transformation and navigate a complex regulatory landscape, the integration of Generative AI technologies is becoming a strategic imperative for audit firms seeking competitive differentiation and enhanced audit quality. However, addressing challenges related to explainability, cyber security, and data governance will be crucial for the responsible and sustainable adoption of these innovative technologies in the auditing industry.References:Source: https://marketresearch.biz/report/generative-ai-in-the-audit-market/#overviewAuthors may be reached at deepakrathore.8888@gmail.com and eboard@icai.in
Ep. 348 — Navigating the Nexus of AI and Behavioural Decision-Making
CA Journal
· September 2026
00:00
--:--
Navigating the Nexus of AI and Behavioural Decision-MakingThis comprehensive exploration delves into the intricate relationship between Artificial Intelligence (AI) and behavioral decision-making, elucidating its dynamics, implications, and ethical considerations. Behavioral decision-making, rooted in behavioral economics, recognizes human deviations from rationality due to cognitive biases and heuristics. Meanwhile, AI technologies, fuelled by advances in machine learning, have revolutionized decision-making processes by processing vast data sets, identifying patterns, and offering insights beyond human capacity. While AI augments decision-making through timely information, automation, and personalization, it also poses challenges such as overreliance, bias amplification, and transparency concerns. Human-centered AI approaches, prioritizing ethical deployment and human oversight, are crucial for mitigating risks and fostering trust.By CA. Dipak Kumar Singh, Member of the InstituteEthical and regulatory frameworks play a pivotal role in ensuring fairness, accountability, and transparency in AI-driven decision-making. Addressing algorithmic bias, ensuring explainability, and establishing mechanisms for recourse are imperative for upholding ethical standards and safeguarding individual rights. Ultimately, collaborative efforts among stakeholders are essential for navigating the complex interplay between AI and behavioral decision-making, ensuring that AI serves as a good force while respecting human autonomy and societal welfare.Decoding Human Choices: Understanding Behavioral Decision-MakingIn recent years, the rapid advancement of Artificial Intelligence (AI) has reshaped various facets of human life, including decision-making processes. This transformation has been particularly intriguing in the context of behavioral decision-making, where human choices are influenced by cognitive biases, emotions, and social factors. This article aims to provide an in-depth analysis of the intersection between AI and behavioral decision-making, elucidating the dynamics, opportunities, challenges, and ethical considerations inherent in this complex relationship.Behavioral decision-making refers to the process through which individuals make choices based on a combination of cognitive, emotional, and social factors, often deviating from strict rationality. Traditional economic theories assume that individuals make decisions to maximize utility, but behavioral economics and psychology have shown that human decision-making is influenced by various biases, heuristics, emotions, and social influences.These factors can lead individuals to make choices that may not align with strict rationality or traditional economic models. Understanding behavioral decision-making is crucial for fields such as economics, finance, marketing, and public policy, as it provides insights into how humans actually make choices in real-world situations.The following examples illustrate how behavioral decision-making influences choices in various contexts, highlighting the importance of understanding human behavior beyond traditional economic models.Investment Decisions: In finance, investors often exhibit behavioral biases such as loss aversion, where they are more sensitive to losses than gains, leading them to make suboptimal decisions such as holding onto losing investments for too long or selling winning investments too soon.Consumer Behavior: In marketing, consumers may be influenced by psychological factors such as social proof (e.g., preferring products endorsed by celebrities or popular influencers) or scarcity (e.g., feeling compelled to buy a product if they perceive it to be in limited supply).Healthcare Choices: Patients may be influenced by emotional factors and cognitive biases when making healthcare decisions. For example, they may opt for treatments that offer immediate relief rather than those that provide long-term benefits, or they may avoid preventive measures due to a perception of invincibility.Public Policy: Policymakers must account for behavioral biases when designing interventions. For instance, default options in organ donation programs can significantly impact donation rates, with opt-out systems leading to higher participation rates compared to opt-in systems.Career Decisions: Individuals may exhibit biases such as status quo bias, where they prefer maintaining their current situation over making changes, even if those changes could lead to better outcomes. This can influence career choices, leading individuals to stick with familiar but suboptimal career paths.Empowering Decision-Making: The Advent of Artificial IntelligenceThe emergence of AI technologies, fuelled by advances in machine learning, natural language processing, and predictive analytics, has revolutionized decision-making processes. AI systems have the capacity to process vast amount of data, identify patterns, and derive insights at speeds beyond human capability. Moreover, AI algorithms can learn from data iteratively, continuously improving their performance over time. This transformative potential has led to the integration of AI in diverse applications, ranging from recommendation systems and predictive modeling to autonomous vehicles and robotic decision-making.AI\'s impact on decision-making is multifaceted, offering both opportunities for enhancement and challenges to be navigated. Given below are some of the areas where AI is being leveraged:Personalized Recommendations: Many companies leverage AI algorithms to analyze user behavior and preferences, offering personalized recommendations for movies, shows, products, and services. These recommendations are tailored to individual users\' tastes and past interactions, improving user satisfaction and engagement.Financial Advisory Services: AI-powered financial advisory platforms analyze clients\' financial goals, risk tolerance, and market trends to provide personalized investment advice and portfolio management. These platforms automate investment decisions, optimizing asset allocation and risk management based on individual preferences and market conditions. Top financial advisory companies are using AI in their day-to-day operations for:Identifying trends and patterns using predictive analytics and machine learningAutomated data analysis which includes Sentiment AnalysisRound the clock Client Servicing using GenAI-based chatbotsCompliance adherence using LLMsRisk Management and Portfolio OptimizationMarketing Collaterals for effective client outreachHealthcare Diagnosis and Treatment Planning: AI algorithms analyze medical data, including patient symptoms, medical history, and diagnostic tests, to assist healthcare professionals in diagnosing diseases and developing treatment plans. AI-driven diagnostic tools can identify patterns and correlations in large datasets, leading to more accurate diagnoses and personalized treatment recommendations. AI is employed in automating administrative workflows that involve extensive documentation, creating virtual nursing assistants, and reducing dosage errors for chronic diseases. Effective Patient and Health Care Professional (HCP) engagement is being revolutionized through early detection of diseases and reduction in treatment costs.Educational Technologies: AI-based educational platforms utilize adaptive learning algorithms to personalize learning experiences for students. These platforms assess students\' strengths and weaknesses, adapt learning materials and exercises accordingly, and provide targeted feedback to optimize learning outcomes. AI-driven educational technologies cater to individual learning styles and paces, thus enhancing student engagement and comprehension. Tools like ChatGPT are revolutionizing the way educational information can be garnered from the open internet.Customer Service and Engagement: AI-powered chatbots and virtual assistants enable businesses to provide round-the-clock customer support and engage with customers in real-time. These AI systems use Natural Language Processing (NLP) and machine learning to understand customer inquiries, provide relevant information, and resolve issues efficiently. By automating routine interactions and tasks, AI enhances customer service and satisfaction.Smart Home Devices: AI-enabled smart home devices, such as virtual assistants, learn users\' preferences and routines to anticipate their needs and provide proactive assistance. These devices can control connected appliances, adjust settings based on user preferences, and offer personalized recommendations for entertainment, shopping, and other activities, enhancing convenience and comfort.Unveiling Insights: AI Models Revolutionizing Behavioral Decision-MakingGiven below are some of the AI models that are being developed and used for the purpose of Behavioral Decision making.AI ModelUseExampleMachine LearningAnalyze large datasets, identify patterns in human behavior, predict future behaviorsRetailers use machine learning algorithms to analyze customer purchase history and predict future buying behavior.Natural Language Processing (NLP)Analyze and understand human language from text data, extract sentiment, identify topics of interestSocial media platforms use NLP algorithms to analyze user comments and posts, identifying trends, sentiments, and topics of discussion.Recommender SystemsAnalyze user preferences and behavior, provide personalized recommendationsStreaming platforms use recommender systems to suggest movies, shows, and songs based on users\' viewing or listening history, ratings, and preferences.Predictive AnalyticsForecast future outcomes or behaviors based on historical data and trendsFinancial institutions use predictive analytics models to assess credit risk and predict loan default probabilities.Deep Learning NetworksProcess complex data, extract highlevel-features, used in image recognition, natural language understanding, sequential decision-makingE-commerce companies use deep learning networks for image recognition and product recommendation.Human Touch in the Digital Age: The Role of Human FactorsTo harness the full potential of AI in decision-making, it is imperative to consider human factors such as cognitive biases, emotions, and social dynamics. Human-centered AI approaches prioritize the ethical and responsible deployment of AI technologies, ensuring that they align with human needs and values. Designing AI systems that are sensitive to human preferences, biases, and cultural nuances is essential for fostering trust and acceptance among users.Moreover, human oversight and intervention play a crucial role in mitigating the limitations of AI. While AI excels at processing data and identifying patterns, human judgment is indispensable for interpreting results, considering ethical implications, and making decisions in ambiguous or novel situations. Human-AI collaboration models, where humans and AI systems work together synergistically, hold promise for achieving optimal outcomes while preserving human agency and accountability.Navigating the Ethical Frontier: Considerations in AI-Driven Decision-MakingThe reliance on AI also introduces potential risks and limitations. Human users may develop overreliance on AI recommendations, leading to the abdication of personal responsibility or the neglect of critical contextual information. Moreover, AI algorithms are susceptible to biases present in the data they are trained on, raising concerns about fairness, transparency, and accountability. Biased AI systems can perpetuate or even exacerbate societal inequalities, particularly in sensitive domains such as criminal justice, hiring practices, and access to resources.As AI becomes increasingly integrated into decision-making processes, ethical and regulatory considerations become paramount. Ethical frameworks guide the development and deployment of AI systems, addressing issues such as privacy protection, fairness, accountability, and transparency. Regulatory bodies play a pivotal role in enforcing ethical standards and ensuring compliance with legal requirements, safeguarding individuals from potential harms associated with AI-driven decision-making.One of the key ethical imperatives in AI is fairness, particularly concerning algorithmic bias and discrimination. AI systems trained on biased data can perpetuate or amplify existing inequalities, leading to disparate outcomes for different demographic groups. Addressing algorithmic bias requires proactive measures, including diverse and representative data collection, algorithmic transparency, and ongoing monitoring and mitigation of biases in AI systems.Transparency and accountability are also essential principles in AI ethics, ensuring that AI systems are explainable, auditable, and accountable for their decisions and actions. Explainable AI (XAI) techniques aim to make AI systems more interpretable and transparent, enabling users to understand the rationale behind AI-driven decisions. Furthermore, it\'s essential to establish mechanisms for recourse and redress to handle cases of AI-related harm or injustice. These mechanisms would offer avenues for affected individuals to seek remedy and restitution.Here are some general ethical concerns that have arisen lately in the context of using AI for behavioral decision-making, along with clear real-world examples:Algorithmic BiasExample: An AI-powered recruitment tool was found to favor candidates from certain demographics over others due to biased training data, perpetuating systemic inequalities in hiring processes.Privacy ViolationsExample: Facial recognition technology deployed in public spaces collected and analyzed individuals\' biometric data without their consent, raising concerns about privacy infringements and potential misuse of personal information.Lack of Transparency and AccountabilityExample: Social media algorithms prioritize content based on user engagement metrics but lack transparency about how content is selected and amplified, leading to unintended consequences such as the spread of misinformation and polarization.Unintended Consequences and HarmExample: AI-driven content recommendation algorithms inadvertently promote extremist or harmful content to users, contributing to radicalization and the dissemination of misinformation, undermining societal cohesion and well-being.Informed Consent and AutonomyExample: Healthcare AI systems make diagnostic and treatment recommendations without transparently informing patients about the role of AI algorithms in decision-making, potentially compromising patients\' autonomy and right to make informed choices about their health.Fairness and EquityExample: AI systems used for predictive policing exhibit racial bias, leading to disproportionate targeting and surveillance of certain communities, exacerbating existing disparities in law enforcement practices and undermining trust in the criminal justice system.Bridging Expertise: Chartered Accountants in the Era of AI-Based Behavioral Decision-MakingAI Will Transform not Replace CAsChartered Accountants (CAs) possess a unique skill set that equips them to navigate the intersection of AI and behavioral decision-making effectively. Here are several roles a CA can play in this context:Data Analysis and Interpretation: CAs are adept at analyzing financial data and interpreting complex information. In the realm of AI and behavioral decision-making, they can leverage their expertise to analyze large datasets generated by AI algorithms, identify patterns, and extract meaningful insights. By interpreting the results of AI-driven analyses, CAs can provide valuable guidance to businesses and individuals in making informed decisions.Risk Assessment and Management: CAs are well-versed in risk assessment and management principles, which are essential considerations in AI-driven decision-making processes. They can assess the risks associated with AI implementations, such as data privacy concerns, algorithmic bias, and regulatory compliance issues. CAs can help organizations develop strategies to mitigate these risks and ensure the responsible use of AI technologies.Ethical Considerations: Ethical considerations are paramount in the deployment of AI systems, particularly concerning issues such as algorithmic bias, transparency, and accountability. CAs can contribute their ethical expertise to ensure that AI implementations adhere to ethical principles and regulatory guidelines. They can advocate for the ethical development and deployment of AI technologies, promoting fairness, transparency, and societal well-being.Financial Planning and Forecasting: CAs are skilled in financial planning, budgeting, and forecasting, which are crucial components of decision-making processes. With the aid of AI tools, CAs can enhance their financial analysis capabilities, generate more accurate forecasts, and identify trends and opportunities that may impact decision-making outcomes. By integrating AI-driven insights into financial planning processes, CAs can help businesses make sound financial decisions.Advisory Services: CAs can provide advisory services to businesses and individuals seeking to leverage AI technologies in their decision-making processes. They can offer guidance on selecting appropriate AI solutions, assessing their potential impact, and integrating them into existing workflows. CAs can also assist in evaluating the cost-effectiveness of AI investments and identifying opportunities for optimizing decision-making through AI-driven solutions.Continuous Learning and Adaptation: As the field of AI evolves rapidly, CAs must engage in continuous learning and adaptation to stay abreast of new developments and best practices. By acquiring knowledge and skills in AI-related disciplines such as machine learning, data analytics, and algorithmic governance, CAs can enhance their ability to navigate the nexus of AI and behavioral decision-making effectively.ConclusionThe intersection of AI and behavioral decision-making presents a fertile ground for exploration, innovation, and ethical reflection. By understanding the interplay between AI technologies and human behavior, we can harness the transformative potential of AI while mitigating risks and safeguarding against unintended consequences. Human-centered AI approaches, guided by ethical principles and regulatory frameworks, offer a pathway towards the responsible integration of AI in decision-making processes, enhancing human well-being, autonomy, and societal welfare. As we navigate this complex terrain, collaboration among researchers, policymakers, technologists, and ethicists is essential to ensure that AI serves as a force for good, empowering individuals and advancing the collective interest.References:https://hbr.org/sponsored/2023/08/how-ai-can-scale-personalization-and-creativity-in-marketinghttps://www.investopedia.com/how-can-ai-help-financial-advisors-8385520https://www.weforum.org/agenda/2023/05/ai-accelerate-students-holistic-development-teaching-fulfilling/https://www.linkedin.com/pulse/impact-ai-smart-homes-juan-pablo-boz/https://www.coursera.org/articles/ai-ethicsAuthor may be reached at dipak.singh.saggi@gmail.com and eboard@icai.in
Ep. 349 — Excerpts of the Address by Hon'ble Shri Justice Dipak Misra
CA Journal
· September 2026
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Excerpts of the Address by Hon\'ble Shri Justice Dipak Misra, Former Chief Justice of India on \"Improving engagement across stakeholders\" on the occasion of 8th Foundation Day of Indian Institute of Insolvency Professionals of ICAI (IIIPI)By Shri Dipak Misra, Former Chief Justice of India\"In a civilized and highly economically developing country, the legislative concern has always been that businesses initiated by individuals, in whatever form and frame they may be, should pave the path of progress. It is because the attempt of the law is to see a constructively affirmative business that grows progressively. To quote a statement from Benjamin Cardozo \"A business never stands still. It either grows or decays\". And, at present, after decades of economic liberalisation and globalization, regard being had to growth, the law was required to be changed and the legislature did change it with intent and purpose.\"\"In the year 2014, the Bankruptcy Legislative Reforms Committee was constituted. In November 2015, the Committee submitted its report. It highlighted that: \"India is one of the youngest republics in the world, with a high concentration of the most dynamic entrepreneurs. Yet these game changers and growth drivers are crippled by an environment that takes some of the longest times and highest costs by world standards to resolve any problems that arise while repaying dues on debt. This problem leads to grave consequences: India has some of the lowest credit compared to the size of the economy...\"\"The entire process of Corporate Insolvency Resolution, or Liquidation, involves multiple stakeholders who play critical roles in the process. The key stakeholders are:(i) Corporate Debtor which includes its employees, management and shareholders. They provide all necessary information to the Resolution Professional (RP) and co-operate with the RP during the resolution process. (ii) Financial and Operational Creditors who play a critical role in identifying defaults and triggering the insolvency process by filing applications before the Adjudicating Authority. (iii) Then comes the significant stakeholder, namely, Resolution Professional - who takes custody of the corporate debtor\'s assets and records and facilitates the claims process by inviting and verifying the creditors\' claims, conducts meetings of the Committee of Creditors (CoC) and implements their decisions, and prepares an information memorandum and assists in drafting the resolution plan. (iv) Committee of Creditors (CoC) - which, primarily comprising of financial creditors, evaluates and approves resolution plans, ensuring that these plans maximize the value of the corporate debtor\'s assets and serves all stakeholders\' interests. (v) Resolution Applicants who submit plans to revive the Corporate Debtor, and ensure that their plans comply with the IBC guidelines, including fairness to all stakeholders and legal requirements. (vi) Adjudicating Authorities who ensure legal compliance and exercise legal supervision at every stage, from admitting applications to approving resolution or liquidation plans. (vii) The Regulatory Authority, that is, Insolvency and Bankruptcy Board of India (IBBI) - which ensures that all stakeholders comply with the regulations, monitors the process, and penalizes misconduct. It frames rules and guidelines for effective implementation of the Code.While each of the aforesaid stakeholder plays an independent role under the Act, the cumulative role of stakeholders under the Code is to ensure a time-bound, transparent, and efficient resolution of insolvency. The success of the Code depends on the collective roles and coordinated actions of its stakeholders. Together, they enable a structured process for resolving insolvency while balancing the interests of creditors, debtors, and other affected parties, ensuring economic growth and stability. It is expected from them that they must focus on substantial essentiality and pragmatic philosophy of implementation of the Code.Presently, I shall advert to the role of Chartered Accountants (CAs) who play a crucial role in the effective implementation of the Insolvency and Bankruptcy Code (IBC), given their expertise in financial analysis, auditing, taxation, and regulatory compliance. Their contributions are essential throughout various stages of the insolvency resolution process. Their role in various stages of the insolvency process can be succinctly summarised having regard to their special ability which is further cultivated by experience. (i) CAs conduct detailed audits of the corporate debtor\'s accounts. They verify financial claims submitted by creditors to the Resolution Professional and analyse mismanagement or fraudulent transactions that may have contributed to the default. (ii) CAs also play a key role in assisting RAs for the preparation of the Resolution plan by structuring financial proposals, ensuring compliance with applicable tax laws, and conducting feasibility and viability assessments. They advise on the tax implications of resolution plans, asset sales, and write-offs. (iii) In addition, CAs investigate transactions that may be fraudulent, undervalued, or preferential under Sections 43, 45, and 66 of the IBC.Chartered Accountants bring a wealth of financial expertise to the IBC process. Whether acting as Insolvency Professionals, advisors, or auditors, their role is critical in ensuring compliance, transparency, and the successful resolution of insolvency cases. Their contribution helps balance the interests of all stakeholders and strengthens the credibility of the insolvency ecosystem. The engagement between Chartered Accountants (CAs) and Resolution Professionals (RPs) is essential for the effective and efficient implementation of the Insolvency and Bankruptcy Code (IBC). Given their complementary skill sets, collaboration between these two professionals can streamline the insolvency process and maximize value for all stakeholders.The synergy between Chartered Accountants and Resolution Professionals strengthens the insolvency resolution process under the IBC. Their combined expertise ensures compliance with legal, financial, and procedural requirements, enhancing\' efficiency and transparency. This engagement is seminal for achieving the IBC\'s primary objectives: timely resolution, maximization of asset value, and balancing stakeholder interests.Given the important roles played by Chartered Accountants in all stages of insolvency resolution, and the significance of quality engagement between them and Resolution Professionals, it is categorically imperative, for the continued success of IBC, to devise more strategies to further improve and foster collaboration between them.The following methods may be used to achieve the said purpose:(i) Regular joint training sessions on IBC provisions, financial restructuring, valuation, and forensic auditing can be conducted. This would promote interactions between CAs and RPs and enable them to utilize their skills jointly for a more efficient resolution under IBC.(ii) There can be creation of forums where RPs and CAs can share best practices, challenges, and innovative approaches from previous insolvency cases.(iii) CAs be encouraged to develop expertise in insolvency specific fields such as forensic accounting, business valuations and restructuring plans. Such specialization will further improve collaboration between CAs and RPs.(iv) Institutes such as Institute of Chartered Accountants of India (ICAI), Indian Institute of Insolvency Professionals of ICAI (IIIPI), and Insolvency and Bankruptcy Board of India (IBBI), can issue joint guidelines to promote collaboration and offer incentives for successful resolution cases where RPs and CAs work in harmony to maximize value of assets or revive businesses.By fostering transparency, inclusivity, and collaboration, these measures can significantly improve engagement among stakeholders in the IBC process, assuring smoother and more effective insolvency resolutions.In conclusion, I must say with emphasis that IBC, as a piece of legislation, meets the vision of progress and development. But the words of law need to be activated. That should be the pledge of the day. I remember an old saying and I quote:\"Iron rusts from disuse; stagnant water loses its purity and in cold weather becomes frozen; even so does inaction sap the vigour of the mind.\"The suggestion today is to act with vibrance and vigour to achieve constructive economic stability with the purpose of saving and growing. \"*Addressed on 26 Novmber 2024References:(No explicit references listed in source)(No explicit contact information listed in source)
Ep. 351 — Creativity and Innovation Driven Leadership
CA Journal
· September 2026
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Creativity and Innovation Driven LeadershipToday\'s times are full of intense competitions. In the phenomenal world professionals are adopting all means to march ahead. Man is the most pristine creation of the Universe. The cosmic system has endowed each of us with immense potential to do noble deeds for a higher ideal. One such endowment is creative power of human mind which can turbocharge a professional like CA to access out of the box ideas by lateral thinking. This has been vindicated by extra ordinary success of a number of businesses and other leaders in the past. A CA as a high caliber professional can through Creative & Innovative Thinking (CIT) conceive breakthrough brilliant ideas in various professional domains. Using rational validating faculties of mind act sagaciously to excel as numero uno hero and script unique saga of success. The article discusses the concept of CIT and its tools to make a CA a multi-role super prowess professional.By CA. Raj Kumar Manocha, Former Judge RCT\"Think beyond boundaries; creativity knows no limits. Creativity is a divine gift; use it to uplift humanity. Innovation arises from inner stillness and clarity of mind.\" Sri Sathya Sai BabaCreativity and innovation are vital to success in any field. Sri Sathya Sai Baba\'s teachings capture the essence of using creativity and innovation to serve humanity. The remarkable success of Sathya Sai Institutions-offering world-class free services in healthcare, education, and environmental initiatives-illustrates the power of innovative leadership and resource management. Across industries, from business and social entrepreneurship to public policy, trailblazing leaders have harnessed creative & innovative thinking (CIT) to achieve success. In contrast, failures in leadership often stem from over-reliance on conventional thinking and resistance to change.Why Do Some Business Leaders Excel?Numerous individuals, including Mahatma Gandhi, Albert Einstein, Steve Jobs, Bill Gates, and Ratan Tata, have achieved extraordinary success through creativity and innovation. Many of these figures started humbly and did not attend prestigious management institutions, yet their original thinking propelled them to global recognition.What set them apart? It wasn\'t formal education alone but their ability to think differently, adapt, and create novel solutions.For example, Steve Jobs revolutionized the tech industry by applying lateral thinking, turning Apple into a leader in innovation. Creative thinking is often rooted in intuitive wisdom, driven by a quest for growth and excellence.How Does Creativity & Innovative Thinking (CIT) Arise?Creativity often emerges from fresh perspectives and inner clarity. For instance, Walt Disney\'s idea for Mickey Mouse-a character that revolutionized the entertainment industry-stemmed from an unexpected observation of a rat in a garage. This demonstrates that creativity arises when we look at everyday situations differently.Swami Sukhbodhananda, a spiritual leader and management thinker, emphasizes that we must elevate our consciousness to access creative thinking. Creative solutions often emerge when we shift our mindset and approach problems with openness and curiosity. As per him, the concept of creative and innovative thinking has existed since time immemorial. This is vindicated from the teaching of Indian mystic Saint Kabir, who expressed this idea in one of his couplets (Doha),हद-हद करते सब गए, बेहद गयो न कोए। अनहद के मैदान में, रहा कबीरा सोए ।।हद हद जपे सो औलिये, बेहद जपे सो पीर। हद अनहद दोनों जपे सो वाको नाम फकीर ।।Which means majority of people think and act on beaten routine path. Very few have divergent differentiated thinking and daring action which scripts saga of sterling success of few.Leveraging the Right Brain for InnovationNobel Prize winner Psychologist Roger Sperry\'s research demonstrates that the human brain has two hemispheres the left (logical, analytical) and the right (creative, intuitive). In today\'s world, too much emphasis is placed on the logical left brain. However, by nurturing the right brain, managers can unlock creativity and drive innovation in the domain of business and finance. Cultivating both sides of the brain leads to breakthrough creative decision-making and innovative leadership.Connecting to the Superconscious MindMany breakthrough discoveries arise from deep reflection and intuition. For example, German chemist Friedrich August Kekulé discovered the structure of the benzene ring after a vivid dream in which he visualized atoms forming a snake. Similarly, in business, innovation often emerges after periods of contemplation and mental clarity. By connecting with deeper mental processes, individuals can access new ideas and out of the box solutions.Practical Examples of Creative Problem-SolvingCreativity can come from unexpected sources. For example, when a toothpaste company struggled with declining sales, a simple yet innovative solution came from a peon at a brainstorming session: increasing the diameter of the tube\'s opening. This minor change led to a significant boost in sales.Similarly, in a traffic jam, an illiterate boy offered a simple solution to a truck stuck under an overpass in a traffic jam. He suggested that by partially deflating the truck\'s tires, it\'s height can be reduced just enough for it to pass under the overpass, allowing it to move freely and resolve the traffic issue. These examples highlight the importance of lateral thinking, which is not always linked to formal education but rather to intuitive and creative problem-solving.Building an Innovation-Driven EcosystemTo foster creativity and innovation within organizations, the following elements are crucial:Strong work ethics and a growth-oriented workforceClear strategic vision with a focus on customersOpen communication across all hierarchiesA work environment that encourages trust, positivity, and inspirationReward systems for achieving innovative goalsA culture of creativity enables organizations to adapt and thrive in competitive environments as is demonstrated in Blue Ocean and Red Ocean Strategies of Marketing.Toolkit for Promoting Creative and Innovative Thinking (CIT)A toolkit was also introduced to cultivate CIT among managers when addressing challenges. The CIT exercise comprised the following steps:Optimal Timing: Early morning, a time filled with pure and productive vibrations, was considered ideal for CIT exercises.Posture and Focus: Managers sat in Sukhasana, with their fingers in Chin Mudra, while consciously observing their breath.Visualization: With closed eyes, they visualized the light of a lamp, symbolizing the removal of darkness-dispelling preconceived notions and mental blocks regarding the problem at hand.Breathing Awareness: Managers concentrated on their breathing, with each exhalation symbolizing the release of negativity, self-doubt, and frustration.Mind Power: With every inhalation, they visualized an influx of mental power and creative energy, allowing their imagination to soar to new possibilities.Right-Brain Visualization: As they focused on the inner light, they visualized the problem and imagined potential solutions in a creative and unrestricted way.Restful Awareness: Managers entered a state of restful awareness, unlocking the power of the subconscious mind.Idea Generation: As their inner stillness deepened, fresh and original ideas began to emerge.Intuitive Insights: Throughout the exercise, intuitive flashes of ideas and solutions occurred, which were immediately noted down in a Creativity Journal for further action.Case Study: Transforming BSNL\'s Work CultureDuring a challenging period at BSNL, an innovative morning routine (a prayer, motivational talk and sharing of creative ideas) called \"Organization Sadhana\" (OS) was introduced by the author. This initiative fostered teamwork and commitment by incorporating a motivational start to each day. The results were remarkable, as employees became more engaged, punctual, and dedicated. This case illustrates how small changes in organizational culture can drive significant improvements in performance and also can lead to synergies.Yogic Higher-End Techniques for Lateral Thinking: Unveiling Hidden PotentialYogic practices offer profound insights into harnessing the power of the mind for lateral thinking-a form of creative problem-solving that goes beyond conventional thought patterns. These practices, rooted in the Patanjali Yoga Sutras, involve focusing the mind and unlocking the potential of the subconscious, which plays a key role in generating innovative solutions.The human mind is composed of four primary components:Mana: The sensory and emotional aspect of the minds.Chitta: The subconscious storehouse of memories and experiences (Sanskaras).Buddhi: The intellect responsible for reasoning and decision-making.Ahamkara: The ego or sense of identity.Chitta, in particular, is critical in lateral thinking as it holds vast reserves of past experiences and impressions. Accessing this hidden storehouse allows us to draw upon creative solutions that are often unavailable to the conscious mind. However, this process requires a calm, focused mind, which can be achieved through specific yogic techniques such as Dharana (concentration), Dhyana (meditation), and Samadhi (absorption).In Chapter 3 (Vibhuti Pada) of the Patanjali Yoga Sutras, the simultaneous practice of Dharana, Dhyana, and Samadhi on a single idea is known as Samyam. This practice is a powerful method of gaining deep insights into a subject or problem. By maintaining this focused and meditative state, practitioners can access the subconscious mind (Chitta), revealing hidden patterns, insights, and innovative solutions.The practice of Samyam is not only a tool for discovering solutions but is also said to bestow miraculous powers (Siddhis) or extraordinary attainments in the specific area of focus. By directing intense concentration and meditation on a topic, one can unlock deeper wisdom and abilities, offering profound breakthroughs in understanding.An example of this is the story of August Kekulé, the German chemist who discovered the ring structure of benzene. After struggling to understand its molecular structure through conventional methods, Kekulé accessed his subconscious through deep reflection, resulting in a vivid dream of a snake eating its own tail. This dream inspired the revolutionary idea of benzene\'s hexagonal ring structure, a breakthrough that transformed organic chemistry.The Power of Meditation for Lateral ThinkingMeditation is a crucial practice for accessing the subconscious mind and enabling lateral thinking. By calming the critical, conscious mind (Mana), meditation allows deeper thought processes to emerge.This process is akin to the dream state, where the subconscious mind takes over and reveals images and insights based on stored experiences and impressions (Sanskaras).A well-known example of harnessing the subconscious mind is Tibetan monks practicing tummo meditation, through which they can raise their body temperature in freezing conditions by accessing deeper layers of their mind. Similarly, in daily life, progressive relaxation and meditation allow professionals to access the creative, non-linear thought processes housed in the subconscious.In essence, when we practice meditation, we move beyond the habitual flow of thoughts controlled by the conscious mind and unlock the vast potential of the subconscious. This helps us tap into internal knowledge and intuition, fostering creative, lateral thinking.CIT Toolkit for Chartered AccountantsFor Chartered Accountants (CAs), CIT is an essential tool for providing unique insights and solutions in business strategy to top management in their role as CFO. By combining logical thinking with creative problem-solving, CIT can turbocharge their professional prowess as a practicing professional to discover new areas of professional practice. For a high-caliber professional like a Chartered Accountant, the logical capabilities of the left hemisphere of the brain are well-developed. What is required is to leverage the creative imaginations from the right hemisphere of brain to enhance CIT, enabling the emergence of exceptional, out-of-the-box ideas. CIT will specially empower them to offer specialized services in diverse corporate advisory roles. CIT should be integrated into CA education curriculum, especially in strategic financial management, to prepare future leaders for unique success in a dynamic business world. CIT will enable the think tank at ICAI to carve out new areas of service for its esteemed members and add more laurels to the image of Chartered Accountancy as a noble profession.Conclusion: The Power of Creativity and Innovative ThinkingCreativity is not limited to artists or inventors and scientists; it\'s a valuable asset for finance professionals. For CAs, the ability to think creatively can lead to ground breaking business and financial strategies, improved client advisory services, and out of box decision-making. Embracing creativity in accounting and auditing will lead to innovative approaches and trail-blazing success in all roles which a CA as multi-role professional can perform.References:(No explicit references listed in source)Author may be reached at rkminocha@rediffmail.com and eboard@icai.in
Ep. 352 — From CFO to CEO: Developing a Broader Leadership Mindset
CA Journal
· September 2026
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From CFO to CEO: Developing a Broader Leadership MindsetTransitioning from the role of Chief Financial Officer (CFO) to Chief Executive Officer (CEO) is not merely a change in job titles; it represents a significant evolution in leadership responsibility, perspective, and mindset. The CFO role, traditionally focused on financial oversight, risk management, and ensuring the fiscal health of the organization, is critical. However, the CEO role encompasses a much broader scope, requiring a visionary approach, people leadership, strategic thinking, and stakeholder engagement at all levels.By CA. HS Puri, Member of the InstituteIn recent years, there has been a growing trend of appointing CFOs as CEOs, particularly in Central Public Sector Enterprises. The Government of India has frequently appointed Director (Finance), who is basically a Chartered Accountant /Cost Accountant to serve as the as Chairman cum Managing Director of company. In the past, companies like NTPC, PGCIL, ONGC, Coal India, SAIL, and NHPC were led by non-technical executives. Today, organizations increasingly recognize that CFOs, with their in-depth knowledge of a company\'s financial operations, are well-equipped to take on leadership roles and steer businesses towards success. Their financial expertise provides them with a strong foundation to manage and guide the overall direction of the organization.However, to succeed, CFOs must develop a broader leadership mindset-one that expands beyond numbers and financial strategies to include a comprehensive understanding of operations, innovation, human capital management, and market dynamics.Expanding Beyond Financial ExpertiseThe journey from CFO to CEO begins with expanding one\'s knowledge and engagement beyond financial management. CFOs have traditionally been viewed as the \"financial guardians\" of the company, primarily concerned with cost management, budgeting, financial reporting, and regulatory compliance. While these areas remain crucial, the CEO must also understand the intricacies of marketing, sales, operations, and technology. A CEO is responsible for the overall success of the company, and this requires a holistic view. For example, Mr. Satya Nadella, CEO of Microsoft, originally came from a technical background, but his ascent to CEO was facilitated by his ability to understand both the financial and operational sides of the business. Nadella\'s approach of investing in cloud computing, even when Microsoft was primarily a software company, came from his understanding of future trends beyond Microsoft\'s traditional focus.To expand their perspective, CFOs need to actively engage with and gain experience in other areas of the business. This might include taking part in cross-functional projects, sitting in on operational meetings, or even directly managing non-financial teams for a period. The goal is to develop a well-rounded understanding of how different areas of the business contribute to overall success.CFOs also need to shift their focus from past performance, which they have analyzed meticulously throughout their career, to future opportunities and long-term planning. CEOs are expected to have a vision that spans beyond the next fiscal quarter. They need to think five or ten years ahead, positioning the company for growth, innovation, and adaptability in a constantly changing market.Embracing Strategic VisionThe core responsibility of a CEO is to establish and communicate a strategic vision for the company. This involves not only understanding current market conditions but also anticipating future trends and positioning the organization to capitalize on them. CFOs often focus on managing financial risk and safeguarding the company\'s assets, but a CEO must learn to think more broadly and take calculated risks that drive growth and innovation.Developing a strategic vision requires CFOs to stay informed about broader business and industry trends, including advancements in technology, changing consumer behaviors, and global economic shifts. CEOs need to identify growth opportunities, whether through new markets, products, or strategic partnerships, and balance those opportunities against potential risks. For example, Mr. Shantanu Narayen, the CFO-turned-CEO of Adobe, was instrumental in the company\'s strategic shift from selling software in boxes to becoming a leader in subscription-based cloud services. Narayen\'s forward-thinking vision transformed Adobe\'s business model, ensuring its relevance in an increasingly digital world. His ability to foresee the direction of the industry and adjust Adobe\'s offerings accordingly exemplifies how a CFO can successfully transition to a CEO by leveraging strategic foresight.Another essential skill CFOs must develop is the ability to clearly articulate the strategic vision. CEOs need to inspire and motivate their teams by clearly communicating the company\'s goals and the path forward. This often requires simplifying complex financial and operational plans into a compelling narrative that resonates with employees, shareholders, and customers. A leader\'s ability to rally their team around a shared vision is often the difference between a company that is merely functional and one that is thriving.Balancing Risk and InnovationOne of the most challenging aspects of transitioning from CFO to CEO is the shift in risk tolerance. As CFOs, the primary objective is to manage financial risks, ensure compliance, and safeguard the company\'s financial position. This often entails being cautious and conservative, particularly when it comes to spending and investments. However, CEOs must balance financial prudence with a willingness to take strategic risks that drive growth.Successful CEOs understand that innovation often requires stepping outside of the comfort zone and investing in new technologies, markets, or products, even when the outcomes are uncertain. CEOs need to encourage a culture of innovation within the organization, where calculated risks are embraced, and failure is seen as a learning opportunity rather than a setback. A key figure who mastered this balance is Ms. Indra Nooyi, former CEO of PepsiCo. Initially serving as PepsiCo\'s CFO, Nooyi spearheaded significant innovations, such as the pivot towards healthier products in response to the growing demand for nutritious alternatives. Her openness to change and leadership in steering PepsiCo in a new direction, even at the potential expense of short-term profitability, ultimately positioned the company for long-term success.CFOs transitioning to the CEO role must learn to embrace uncertainty and move beyond the rigid financial metrics that have guided their previous decision-making. While financial discipline remains important, CEOs must also think about non-financial factors such as market positioning, customer satisfaction, and brand equity. Leaders who are overly focused on immediate financial results may miss out on opportunities for innovation and growth.Developing Emotional Intelligence and People LeadershipA fundamental difference between the CFO and CEO roles is the level of people leadership that each position requires. While CFOs work closely with their finance teams and senior leadership, the CEO must manage relationships across the entire organization. This requires Emotional Quotient (EQ)-the capacity to recognize and manage both one\'s own emotions and the emotions of others. Emotional intelligence is essential for establishing trust, resolving conflicts, and motivating teams to achieve their highest potential. Mr. Alan Mulally, the former CEO of Ford, is widely praised for his emotionally intelligent leadership style. When he took over Ford during the 2008 financial crisis, Mulally brought a human-centric approach, listening carefully to employees at all levels of the company. This approach, combined with strategic decisions, enabled Ford to weather the crisis and emerge stronger than its competitors.For CFOs transitioning to the CEO role, improving interpersonal skills is essential. CEOs must not only lead by example but also create a culture of openness, collaboration, and respect. This involves being approachable, actively listening to employees\' concerns, and fostering an environment where feedback is welcomed.In addition to EQ, leadership presence is important. CEOs are constantly in the public eye, whether meeting with investors, speaking at industry events, or engaging with the media. CFOs who are used to working behind the scenes must develop the confidence to represent the company publicly. This includes honing communication skills, mastering body language, and learning to project authority without being authoritarian.Engaging with a Broader Range of StakeholdersA major shift from CFO to CEO is the requirement to engage with a much broader range of stakeholders. CFOs primarily engage with investors, analysts, and regulators. While these groups remain important for CEOs, the role expands to include employees, customers, suppliers, government officials, and the media.Engaging with this diverse array of stakeholders requires adaptability. CEOs must learn to tailor their communication styles depending on the audience. For example, while financial reports and earnings calls with investors may focus on numbers, meetings with employees emphasizes on the company\'s vision, culture, and purpose.CFOs must also develop their storytelling abilities to succeed in the CEO role. Effective CEOs can communicate the company\'s strategy and direction in a way that resonates with different audiences. Whether speaking to employees about corporate culture, engaging customers in the brand\'s values, or reassuring investors about the company\'s long-term prospects, CEOs need to be versatile communicators who can connect with people on an emotional level.Furthermore, building relationships with key stakeholders, such as government bodies, industry leaders, and communities, is critical for a CEO. CFOs need to cultivate these relationships and navigate the complex web of stakeholders who can influence the company\'s success.Leading Organizational Culture and ChangeOne of the CEO\'s most important responsibilities is to shape and lead the company\'s culture. While CFOs focus on financial metrics, CEOs must focus on ensuring that the company\'s culture aligns with its values and strategic goals. A strong corporate culture fosters innovation, collaboration, and a sense of purpose among employees, all of which contribute to the organization\'s long-term success.CFOs transitioning to the CEO role need to understand that culture drives performance. Creating a positive, inclusive, and purpose-driven culture requires active leadership. CEOs must not only set the tone from the top but also lead by example. This includes modeling the behaviors and values that they want to see in the organization, from transparency and accountability to empathy and respect.In addition to shaping culture, CEOs are responsible for leading organizational change. Whether it\'s a strategic pivot, a merger, or an operational overhaul, CEOs must guide the organization through change with confidence and clarity. CFOs often manage the financial implications of change, but as CEOs, they need to consider the human side of change management-how to keep employees engaged, how to mitigate resistance, and how to maintain productivity during transitions. For any CEO to succeed it is not the issue of discipline but issue of other factors like capability to carry team with him and to take decision.References:(No explicit references listed in source)Author may be reached at puriharjeetsingh@gmail.com and eboard@icai.in
Ep. 353 — From Good to Great: How Effective Leadership Can Transform Your Business
CA Journal
· September 2026
00:00
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From Good to Great: How Effective Leadership Can Transform Your Business\"The good leaders are not necessarily the ones who do great things. They are the ones who get the people to do great things.\" Modern leadership is about inspiring innovation, encouraging a resilient culture, and personifying integrity. Good leaders don\'t wait for a title. They simply lead, and others naturally follow. But with Generation Z (Gen Z) coming into the work force in the next decade, what does it really take for a leader to go from good to great? A question that must be deeply read, and a journey that must be taken to be an effective leader of the near future.By CA. Arjit Sethi, Member of the InstituteThe future of work is dominated by rapid technological advancement, shifting societal norms, and unprecedented global challenges. With this, the concept of leadership is undergoing a profound transformation. The leaders of the future need to navigate an increasingly complex landscape, characterized by diverse teams, digital communication, and an urgent call for social responsibility. As traditional authority structures dissolve and collaborative approaches gain prominence, the skills and qualities required to guide organizations are changing in response. But are we ready?Well, \"Great leaders have a mindset of adaptability, understanding that the future is not something to be predicted but something to be created.\" In a world where everyone has access to all information and the urgency to be a leader, let us explore the key aspects of modern leadership - how real leaders can drive organisations to meaningful success.Emotional Intelligence (EI) - Being Naturally Intelligent in the Age of Artificial Intelligence (AI)Imagine a leader facing a major project deadline while team members are feeling overwhelmed and stressed. By being emotionally vigilant, this leader observes non-verbal cues like sighing or disengaged body language during meetings. Recognizing the team\'s distress, the leader initiates a candid conversation, inviting team members to express their concerns and feelings. This act of empathy creates a safe space, encouraging collaboration to redistribute workloads and manage stress more effectively. As a result, team morale improves, productivity increases, and the project is completed with higher quality and creativity. In another scenario, consider a leader handling a conflict between two high-performing team members. By employing EI (Emotional Intelligence), the leader listens actively to both sides, acknowledges their emotions, and facilitates a constructive dialogue to reconcile differences. This approach not only resolves the immediate issue but also strengthens team dynamics and trust moving forward. Such situations demonstrate how emotional intelligence empowers leaders to create supportive environments and drive collective success even amid challenges.Emotional Intelligence (EI) can help leaders go from good to great by enhancing their ability to understand and manage their own emotions as well as the emotions of others. This self-awareness allows leaders to respond thoughtfully in high-pressure situations.Accountability, Commanding & Transparency (ACT) - Strengthening Execution by Making Mini-LeadersBy emphasizing accountability, leaders set clear expectations and hold themselves and their team members responsible for their actions, encouraging a proactive approach to problem-solving. This, in turn, inspires individuals to take initiative and act like \"mini-leaders,\" driving projects forward with confidence. Commanding doesn\'t just mean issuing orders; it involves asserting authority in a way that motivates and guides the team, inspiring them to align with the organization\'s vision. Transparency cultivates trust and open communication, allowing team members to understand the rationale behind decisions and the bigger picture. As teams become more engaged and invested, they contribute innovative ideas and solutions, enhancing overall execution.Accountability in a Sales Team: A sales manager sets clear quarterly targets for their team but notices that some members are falling short. Instead of reprimanding them, the manager organizes a meeting to review individual performance metrics. During the discussion, team members share their challenges, and the manager encourages everyone to take ownership of their roles by developing action plans. By setting accountability, the manager not only improves performance but also creates a culture where team members feel empowered to take charge of their results.Commanding Presence in Crisis Management: During a product recall, a company\'s leader must efficiently guide the team through the crisis. The leader may hold an all-hands meeting to address the situation head-on, clearly articulating steps that the company will take to rectify the issue. By demonstrating a commanding presence, the leader instills confidence in the team, encouraging them to take decisive action. This approach mobilizes resources quickly, ensuring a swift response and minimizing damage to the brand.Transparency in Strategic Planning: In a tech startup, a CEO decides to involve the entire team in the strategic planning process for the next year. The CEO shares the company\'s financial status, goals, and potential challenges openly. Through workshops and brainstorming sessions, team members contribute their ideas and insights. This transparency not only builds trust but also develops a sense of ownership among employees, making them feel like an integral part of the company\'s journey. As a result, employees are more motivated to execute the strategy because they understand how their contributions impact overall success.Inspirational Aggression - Drive Passion & Conquer through ActionInspirational aggression can elevate leaders from good to great by blending assertiveness with a magnetic drive that sparks enthusiasm and courage in their teams. Imagine a leader who charges into a meeting with an electrifying vision, displaying confidence and urgency. Their passion is contagious, transforming hesitation into bold action as team members feel empowered to tackle ambitious goals. This creates an environment where every challenge is seen as an exciting opportunity, and individuals are motivated to think outside the box and even take risks.The important task here is to balance determination with encouragement. A passionate, win-driven leader can strike a balance between the aggressive pursuit of goals and team encouragement by practicing Emotional Intelligence. They should articulate their ambitious vision with enthusiasm while remaining open to feedback, in an environment where team members feel valued.Underperforming teams come in the way of ambitious leaders, and mediocrity leads to slow failure. So how can great leaders manage these situations?In a high-stakes tech startup, a results-oriented leader faced challenges with several new joiners who were struggling to meet the ambitious targets set for their teams. Recognizing their potential but aware of the urgent need for performance, she implemented a strategy of targeted support and motivation.First, she scheduled one-on-one meetings with each new team member to understand their individual challenges and provide personalized guidance. During these sessions, she acknowledged their struggles but also highlighted their strengths, forming a sense of confidence. To promote a growth mindset, she introduced a mentorship program, pairing underperformers with high-achieving colleagues who could model best practices and offer hands-on support.Simultaneously, she maintained a culture of high performance by setting clear, measurable goals and regularly reviewing team progress in open forums. She used these sessions not only to drive accountability but also to celebrate small wins, ensuring that every improvement was recognized. This approach created a vibrant atmosphere where team members felt motivated to contribute and grow, aligning their ambitions with the leader\'s vision while consistently raising the bar for performance.Empathy does not mean acceptance of underperformance. Once a leader understands this, advancement begins from good to great.Cultural Fit: Aligning Company Culture with Modern Value SystemCultural fit is a crucial consideration for leaders aiming to elevate themselves as well as their organizations from good to great. In today\'s rapidly evolving landscape, aligning company culture with modern values is not just an option; it\'s a necessity. A strong cultural fit enhances productivity. Leaders must recognize that today\'s workforce prioritizes inclusivity and involvement. By integrating these principles into the core of the company culture, organizations can attract and retain talent who share these values, leading to a more motivated success team.To achieve this alignment, leaders should actively engage in open dialogue with employees, ensuring that their voices are heard and valued. This collaborative approach cultivates a sense of belonging, enabling individuals to thrive in a workplace where they feel understood. Moreover, leaders should embody the values they wish to promote, serving as role models for their teams. By demonstrating commitment to modern value systems, such as work-life balance and transparency, leaders inspire others to adopt these principles, reinforcing a positive cultural shift.Ultimately, aligning company culture with contemporary values is a transformative process that propels organizations into a new stage of success, where a shared vision and organizational commitment take center stage, paving the way for long-term growth and valued excellence. Interestingly, Gen Z values transparency and authenticity from leaders, seeking organizations that align with their personal values and offer opportunities for growth, engagement, and social impact. This generation also embraces technology and remote work, expecting flexibility and innovation in their professional lives.Suppose the leader feels an undercurrent in the organization where the teams seem disinterested in work. To amplify a culture fit, the leader might start by conducting regular employee surveys to assess the current cultural climate and identify areas for improvement. After analyzing the feedback, they discovered that employees feel disconnected due to remote work. To address this, the leader implements bi-weekly team-building activities both virtual and in-person to strengthen camaraderie and strengthen relationships. Additionally, they revised the hiring process to prioritize candidates with collaborative mindsets by incorporating group interviews where candidates work on problem-solving tasks together. By actively promoting these cultural initiatives, the leader not only aligns the organization\'s values with employee experiences but also amplifies a sense of belonging and shared purpose, ultimately enhancing overall productivity.Be Selfish: Actively Seek Feedback and Invest In Continuous LearningTo elevate a leader\'s effectiveness from good to great and ultimately to the greatest, they must embrace a mentality of self-improvement, often described as being \"selfish\" in the pursuit of growth. This concept revolves around the idea that by prioritizing personal development, leaders can ensure an environment that benefits not only themselves but also their teams and organizations.Actively seeking feedback is a fundamental step in this process. Leaders should cultivate a culture of open communication, encouraging team members to provide constructive criticism. This practice not only highlights areas for improvement but also builds trust and openness, essential for a unified team dynamic. By welcoming diverse perspectives, leaders can gain insights into their own leadership styles, decision-making processes, and potential blind spots, which can guide their development. As they say, parents unlearn and relearn things as their kids grow up, similarly, leaders need to unlearn and relearn as their teams gain experience and knowledge.Investing in continuous learning is crucial. This doesn\'t just mean attending seminars or pursuing formal education; it also includes engaging with mentors, reading widely, and staying updated on industry trends. When leaders prioritize their growth, they are better equipped to navigate challenges, inspire their teams, and drive innovation. The commitment to learning signals to team members the importance of adaptability and development, creating a ripple effect that encourages them to pursue their own growth.In essence, being \"selfish\" about personal growth and actively seeking feedback allows leaders to refine their skills and make informed decisions. This transformational journey solidifies the transition from good to great to the greatest.Emotional Intelligence (EI)Accountability, Commanding & Transparency (ACT)Inspirational AggressionCultural FitBe SelfishWith the above, current leaders can strengthen themselves to be great leaders of today, but what about the young aspiring dreamers of today, who dream of being the greatest leaders of tomorrow?Future leaders are the young visionaries poised to become the heroes of tomorrow. They embrace challenges, understand collaboration, and are committed to make a positive impact in their communities and beyond. These emerging leaders possess a unique blend of passion, creativity, and adaptability, essential for navigating the complexities of an ever-evolving business world. By cultivating their skills, championing diversity, and prioritizing ethical decision-making, they can prepare for leadership roles. Empowering these young talents is crucial as they aspire to inspire others and lead with purpose and integrity.So, the question is, what can advance the emerging young leaders to cement their position in big leadership roles ahead?Be InterestingKeep a light egoNetworkBe Interesting: People are all about stories that relate to themTo be interesting, cultivate a genuine curiosity about the world and people around you. Share unique stories and experiences that reflect your passions and adventures. Actively listen to others, while engaging with their interests. Embrace humor, ask thought-provoking questions, and stay informed about diverse topics to spark engaging conversations. And be authentic; your enthusiasm and confidence in being yourself will naturally attract and impress others. But is leadership about impressing others? Do you lose your individuality to be a good leader?Well, leadership involves the desire to impress; it revolves around inspiring, guiding, and supporting others toward a shared vision. Effective leaders understand that their influence stems from the trust and respect of their followers rather than superficial displays of power or charisma. A leader\'s role is to empower individuals and encourage diverse perspectives. While uniting a group is essential, strong leaders do not lose their individuality in the process. In fact, authenticity enhances leadership effectiveness. When leaders embrace their unique qualities and experiences, they create a culture of openness that encourages others to express themselves as well.To maintain a balance, leaders should strive to resonate with their followers while remaining true to themselves. Leaders can maintain this balance by actively listening to their teams and taking the time to understand their life goals, concerns, and random aspirations. This empathetic engagement allows leaders to connect on a personal level while customizing their approach to resonate with the team. Additionally, sharing personal stories or challenges can help leaders demonstrate vulnerability, making them more relatable without compromising their individuality. So, for young aspirers, if they feel short of ideas or experiences and feel underconfident about their personality, listening actively to others is equally rewarding in the long-term. The secret is having big ears to listen to stories and a bigger appetite to not share ahead. It helps in going a long way in business leadership lessons.Network: Build Bridges, Travel New WorldsNetworking is crucial for young leaders, as it enables them to build relationships, gain insights, and access opportunities that can facilitate their growth within an organization. By connecting with mentors, peers, and industry professionals, they can tap into valuable experiences and advice, especially understanding the organizational landscape. Networking also supports collaboration, allowing young to expand their visibility within the company.Engaging with a diverse range of individuals can help young leaders develop emotional intelligence, cultural awareness, and adaptability-key traits of \"good to great\" leaders. These connections can also lead to potential partnerships or projects that demonstrate their leadership capabilities.You wouldn\'t want to give yourself a scar of lifetime embarrassment. So here are a few things to remember while approaching senior leaders;Be ProfessionalBe PreparedBe VisibleBe PatientBe Professional: Dress appropriately, maintain confident body language, and practice good manners. Professionalism leaves a lasting impression on senior leaders.Be Prepared: Research the senior leaders you\'ll be meeting, understand their roles, and come equipped with thoughtful questions or insights related to their work and the organization.Be Visible: Attend company events, workshops, and gatherings where senior leaders are present. Your presence and participation can help you stand out and make meaningful connections.Be Patient and Respectful of Their Time: Acknowledge that senior leaders have busy schedules. Be concise in your interactions and respectful of their time constraints.Keep a Light Ego: Head Down, Confidence UpBalancing vision and ego in leadership is crucial for a productive work environment. A strong vision provides direction and motivation, inspiring teams to strive towards shared goals. However, unchecked ego can cloud judgment, isolate team members, and curb collaboration. To achieve balance, leaders should first cultivate self-awareness, recognizing their strengths and limitations. Regularly seeking feedback from peers and team members can help them stay grounded and adjust their approach.Additionally, maintaining humility by acknowledging the contributions of others reinforces a culture of teamwork. Celebrating team successes rather than solely personal achievements can help keep the ego in check.Read this, in a mid-sized tech company, a once-aspiring leader who got an early success, began to show signs of overconfidence following a successful product launch that pivoted her to a leadership position. Initially, her approachable nature and collaborative spirit motivated her team. However, as her ego inflated, she started dismissing input from colleagues, insisting her vision was the only path forward. Team meetings became tense, with her frequent interruptions and condescending remarks making others reluctant to share ideas. The shift in her behavior led to decreased morale, increased exits of team members, and a decline in innovation, especially because talented employees felt undervalued. Eventually, the company\'s productivity suffered, and executives were forced to address her leadership style, signaling a significant loss of the charm and respect she once commanded.Learning from this; Early-success leaders can keep their ego in check by cultivating self-awareness and embracing humility. They should regularly reflect on their achievements while recognizing the contributions of their team members, understanding that success is rarely a solo endeavor. Open conversations with mentors and family can help them gain perspective and identify blind spots, reinforcing the notion that learning is a continuous process.Practicing active listening during meetings encourages open dialogue and shows that they value others\' input. Additionally, setting aside time for self-reflection and mindfulness can help young leaders maintain perspective and manage their emotions. Engaging in team-building activities makes for stronger relationships and reminds us of teams\' importance in their success. Implementing a \"servant leadership\" approach where leaders prioritize the growth and well-being of their team further emphasizes the significance of collaboration over individual accolades. Finally, maintaining a commitment to personal growth, such as ongoing education and professional development, keeps the ego in check by highlighting the ever-evolving nature of leadership and the need for adaptability.As a conclusion, to elevate from good to great, leaders must cultivate a culture of innovation, inclusivity, and adaptability, recognizing that managing Gen Z known for their digital fluency and diverse perspectives requires flexibility in communication and an emphasis on purpose-driven work. By harnessing the unique strengths of teams of the future, such as their tech savvy and passion for social issues, organizations can enhance collaboration and empower these future leaders to drive change. This generational alliance, characterized by mentorship and continuous learning, will not only enhance organizational resilience but also propel companies toward sustainable success in an ever-evolving global marketplace.References:(No explicit references listed in source)Author may be reached at sethi.arjit5@gmail.com and eboard@icai.in
Ep. 354 — The Role of Leadership in Strategy, Planning, and Execution
CA Journal
· September 2026
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The Role of Leadership in Strategy, Planning, and ExecutionLeadership is often described as the engine that drives a business forward. It is the constant thread that connects strategy, planning, and execution. Leadership isn\'t just about making decisions; it\'s about envisioning a future, crafting a roadmap, and ensuring that every step is taken to bring that vision to life.By CA. K. Ullas Kamath, Founder UK&CO; Former JMD, Jyothy Labs; Chairman, FICCI-KarnatakaHaving had the privilege of being a part of the growth of a small FMCG company, which started with a ₹5,000 investment, into a ₹20,000 crore multi-brand giant, I\'ve witnessed the profound impact of strong leadership. For nearly 30 years, I was fortunate to have worked closely with the founder to achieve this transformation. This experience showed me that the right leadership doesn\'t just guide a company-it can completely reshape its future, turning small beginnings into extraordinary successes.I would like to share some of the key lessons that I have learned in my leadership journey. Firstly, what is leadership? At its core, leadership is not just about holding a title or position-it\'s about influence and the ability to inspire action. True leaders are those who have followers because they\'ve earned respect, trust, and admiration. People willingly follow them because they believe in their vision, values, and character. These leaders inspire through example, and their influence is rooted in genuine connection and the ability to motivate others.Today, I work with small and medium-sized enterprises (SMEs), helping them grow and scale. Through my experience, I\'ve learned that businesses, regardless of their size, face similar challenges: defining a strategy, creating actionable plans, and ensuring smooth execution. In this article, I hope to convey to you how leadership plays a crucial role across these-strategy, planning, and execution and how it\'s applicable, whether you\'re running a small, medium or large corporation.The Foundation: Leadership in StrategyVision CreationAt its core, strategy is about defining where you want your company to go. Leadership is critical in this phase because it\'s the leader\'s role to craft and communicate a compelling vision that inspires and motivates others. The clearer the vision, the easier it is for the rest of the organization to understand what they\'re working towards.But vision alone is not enough-it must be backed by deep market understanding and insight. Today\'s leaders need to be aware of how interconnected our world is. What happens in one part of the globe can ripple through other markets, affecting everything from supply chains to consumer demand. As the saying goes, when the West catches a cold, the East may also sneeze-global events often trigger reactions across industries, regions, and economies.A great leader understands these interdependencies and takes them into account. They analyze global scenarios, geopolitical issues, industry trends, and any other factors that might affect the business, whether directly or indirectly. By incorporating these insights into their decision-making, leaders ensure that their vision remains practical and aligned with the realities of the marketplace.Setting the Strategic DirectionOnce the vision is in place, the next step is defining the strategic direction. Leadership plays a crucial role in identifying key focus areas.For SMEs, the challenge is often deciding which markets to enter or what products to develop. Leaders must ask the right questions: Do we have the capability to expand? How can we leverage our existing strengths? What does the competition look like? These questions guide strategic decision-making.Also, great leaders don\'t shy away from hard decisions. I\'ve seen companies stall because they were unwilling to pivot or let go of underperforming divisions. Leadership is about recognizing when to stay the course and when to shift direction.Aligning the Organization with the StrategyFor a strategy to be successful, the entire organization needs to buy into it. As a leader, it\'s your responsibility to make sure everyone understands the strategic goals and their role in achieving them. I remember conducting numerous sessions with my leadership team, breaking down the strategy, addressing concerns, and ensuring everyone was aligned.SMEs often struggle with communication gaps between leadership and the operational teams. Leaders need to bridge that gap by fostering transparency and creating a culture where strategy isn\'t just something discussed in boardrooms but is integrated into the daily operations of the company.Embracing and Anticipating DisruptionIn today\'s fast-evolving business landscape, disruption is inevitable. Whether it\'s new technologies, shifting market dynamics, or changing consumer behaviors, businesses are constantly at risk of being overtaken. Being a disruptor means having the courage to innovate and challenge the status quo before someone else does. Leaders must both seek to disrupt the market themselves and also have the foresight to identify potential disruptions long before they become threats. The ability to spot changes on the horizon, prepare for them, and even leverage them to your advantage can be the difference between thriving and becoming obsolete.Hiring Experts to Strategize: Leveraging Specialized KnowledgeA smart leader understands that experts and specialists are essential partners for leaders, offering fresh perspectives and deep insights that enrich their strategic thinking. Leadership is never a solo endeavor-it\'s a collective effort, and a leader is only as strong as the team and expertise they surround themselves with.Consider it this way: if your vision begins to deteriorate, you visit an ophthalmologist who prescribes lenses to set your vision clear. Similarly, a leader needs experts to provide clarity and reassurance on their thoughts and perspectives on business.By leveraging this expertise, leaders can confidently make informed decisions that can be transformative. The in-depth research, and valuable insights that professionals and experts provide on market dynamics, competitive landscapes, and future trends, can validate the leader\'s existing thoughts and plans. This support reassures leaders that their instincts are well-founded, empowering them to navigate challenges and complexities effectively. With expert backing, leaders can make decisions grounded in solid data, guiding their organizations toward success with confidence and clarity.Bridging the Gap: Leadership in PlanningTranslating Strategy into Actionable PlansOnce the strategy is set, the next step is planning. Planning involves breaking down the broader strategy into specific, measurable, and achievable goals. Leadership plays a pivotal role in ensuring that these plans are realistic and executable.For SMEs, planning can be daunting because resources are often limited. This is where leadership makes a difference. A good leader can prioritize effectively, ensuring that the most critical initiatives get the resources they need, while less important projects are put on hold.Resource AllocationResource management is where many companies falter. It\'s easy to spread yourself too thin, but as a leader, you need to make tough calls on where to allocate resources. In my experience, successful growth comes from focusing on a few key areas and doing them well, rather than trying to do everything at once.For SMEs, leadership is critical in balancing short-term needs with long-term goals. Leaders must have the foresight to understand which investments will yield the highest returns and allocate resources accordingly.Building the Right TeamsA plan is only as good as the people executing it. One of the most important roles of leadership is building a team that can bring the strategy and plan to life. Leaders must identify the skills and talent gaps in their organization and take steps to address them, either through hiring or training.In SMEs, leadership often means rolling up your sleeves and being involved in talent development. Unlike large corporations, SMEs may not have the budget to hire the best talent immediately, so leaders must be creative in nurturing and developing their teams.Driving Results: Leadership in ExecutionCreating a Culture of AccountabilityExecution is where many strategies and plans fail. Good leaders know that even the best plans can fail without proper execution. This is where leadership needs to shift from strategic thinking to operational rigor. As a leader, you need to create a culture of accountability where everyone is responsible for delivering results.For SMEs, the key challenge in execution is often managing multiple priorities with limited resources. Leaders must create a framework that allows for regular review and adjustment. This might mean setting up systems for tracking performance or simply holding regular meetings to assess progress.Handling Challenges and SetbacksNo execution plan goes perfectly. There will always be unforeseen challenges, whether it\'s a supplier issue, a market shift, or a competitor\'s unexpected move. The mark of good leadership is how you handle these setbacks.For SMEs, setbacks can feel overwhelming, especially when margins are thin, and resources are limited. Leaders must be resilient and adaptable. More importantly, they need to foster a problem-solving mindset within the organization, so that when challenges arise, the team is equipped to handle them.Celebrating Wins and Learning from FailuresAs a leader, it\'s important to celebrate wins-both big and small. This not only boosts morale but also reinforces the behaviors that lead to success. At the same time, leaders need to create an environment where failures are seen as learning opportunities rather than reasons for punishment.For SMEs, this is crucial. Growth is rarely a straight line. There will be bumps along the way, but a good leader turns those bumps into learning experiences and keeps the team motivated to push forward.People and Profits: The Heart of LeadershipA good leader understands that the true strength of an organization lies in its people. You can have the best strategy, the most detailed plans, and flawless execution, but without a motivated, engaged team, none of it will matter. That\'s why I firmly believe in the principle: take care of your people, and they will take care of your organization.Investing in your employees is not just about offering competitive salaries; it\'s about creating an environment where they feel valued, supported, and empowered to grow. When people feel genuinely cared for both professionally and personally-they become more committed to the company\'s success. In my experience, well-compensated, well-respected employees not only deliver better results but also become ambassadors for the brand, fostering a culture of loyalty and excellence.For any organization, focusing on your people is a long-term investment that pays dividends. When employees see that their growth, well-being, and contributions are prioritized, they don\'t just work for you-they work with you which is the success of a great leader.To cultivate this environment, leaders should embrace the \"3 Rs\": Respect, Reward, and Recognize. Respect your employees by valuing their contributions and fostering a culture of trust. Reward them with fair compensation and growth opportunities. Most importantly, Recognize their efforts and achievements, no matter how small, to make them feel appreciated.Moreover, effective leaders hire for competence but retain employees for their commitment and character. This approach means looking beyond skills to recognize potential and the ability to contribute positively to the organization\'s culture. Great leaders should also have an eye for recognizing talents, ensuring they do not overlook individuals who possess unique capabilities. By understanding what each employee has to offer, leaders can leverage diverse strengths to enhance overall performance.Leadership as the Key to Sustainable GrowthAs I reflect on my journey, one thing is abundantly clear: leadership is the key to sustainable growth. It\'s not just about making decisions at the top; it\'s about guiding the company through every phase-from strategy to planning to execution.Whether you\'re leading a large corporation or a small business, the principles remain the same. Leadership is about bringing out the best in your people, aligning them towards a common goal, and ensuring that every plan is executed with precision and purpose. This is the formula for not just growth, but lasting success.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 355 — Bridging Tradition and Modernity: The Influence of Indian Traditional Knowledge on Culturally Competent Leadership
CA Journal
· September 2026
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'Bridging Tradition and Modernity: The Influence of Indian Traditional Knowledge on Culturally Competent LeadershipIn today\'s rapidly evolving world, technology is reshaping not only business processes but also leadership dynamics. As Industry 4.0 introduces unprecedented challenges, there is a growing need to integrate ethical and transformational leadership approaches within a cultural context. This article explores how the timeless principles of the Bhagavad Gita, such as Dharma (duty) and Nishkama Karma (selfless action), can be harmonized with modern leadership frameworks to create a holistic model for leading in complex environments. The integration of these values fosters a leadership style rooted in selflessness, accountability, and emotional intelligence- qualities that are essential for sustainable leadership in a fast-changing world. By drawing on India\'s rich philosophical heritage, this framework provides leaders with the tools to navigate ethical dilemmas, inspire innovation, and promote collective well-being. This approach offers a culturally grounded, yet future-ready solution to the leadership challenges of today\'s globalized, technology-driven landscape.By Dr. Rudresh Pandey, AcademicianIntroductionTechnology has dramatically reshaped how we live and work. Albert Einstein\'s remark that \"Technology has exceeded our humanity\" seems more relevant than ever. In recent years, we have witnessed the emergence of social media, smartphones, and cloud computing, which is transforming the way we interact, while newer advancements like artificial intelligence (AI), data mining, and the Internet of Things (IoT) have redefined organizational operations. These shifts have not only changed the dynamics of our workspaces but have also necessitated new leadership competencies for navigating the complexities of Industry 4.2.Leadership is inherently shaped by culture and traditions. As Aristotle once said, \"Knowing ourselves is the beginning of all wisdom.\" Leaders often draw from their cultural roots, and in the context of modern organizations, leadership is about motivating people to collaborate for shared objectives. Indian cultural values, particularly those embedded in the teachings of the Bhagavad Gita, the Ramayana, and the Upanishads, offer ethical and moral guidance that continues to influence leadership in both social and business contexts. (Dubey et al., 2024).However, as we embrace modern technological advancements, we must also consider how these align with our traditional values. The divide between modernity and tradition has always existed, but today\'s rapid changes call for a more structured effort to bridge this gap. Business processes have become more complex, and this, in turn, has reshaped the leadership landscape, calling for both a deep understanding of cultural roots and the ability to motivate and lead tech-savvy employees.This article aims to explore the intersections between modern leadership challenges and traditional wisdom, specifically how the timeless teachings of the Bhagavad Gita can inform ethical and transformational leadership in today\'s organizations. The Bhagavad Gita, long revered as a guide for ethical living, offers insights that are relevant to contemporary leadership dilemmas. By integrating its teachings, this study proposes a conceptual framework that bridges the gap between traditional knowledge and modern leadership requirements, offering a path forward for addressing complex organizational challenges.Philosophical Foundations of Traditional Indian LeadershipIndia has long been a cradle of civilization, contributing significantly to global culture, art, science, and technology for millennia. Historical estimates by Angus Maddison (OECD, 2024) show that from 1 CE to AD 1700, India accounted for nearly 30% of the world\'s GDP, surpassing other major economies of the time. This economic dominance was sustained by a strong tradition of ethical, cultural, and moral leadership, deeply rooted in ancient Indian philosophy.The foundation of Indian leadership is drawn from texts such as the Ramayana, the Bhagavad Gita, the Upanishads, and other Vedic scriptures. These texts not only provide moral and ethical guidelines but also practical frameworks for leadership, emphasizing the cultivation of spiritual and moral qualities in leaders. Among these, the Bhagavad Gita stands out as a timeless guide, offering wisdom applicable to all aspects of life.Central to the teachings of the Bhagavad Gita is the concepts of Dharma (duty/righteousness), Karma (action), and the three Gunas-Sattva (purity), Rajas (passion), and Tamas (inertia) which influence human behaviour and decision-making. Leaders are encouraged to cultivate Sattva, fostering clarity and wisdom, while balancing the dynamic influences of Rajas and Tamas. (Pandey et al., 2022).The Bhagavad Gita also advocates for Nishkama Karma, or selfless action, where duties are performed without attachment to the results. This philosophy is crucial for leaders, guiding them to focus on collective goals rather than personal gain (Sharma, 2022). As the verse \"कर्मण्येवाधिकारस्ते मा फलेषु कदाचन।\" (Bhagavad Gita 2.47) suggests, leaders should act without being driven by outcomes, focusing instead on righteous conduct.Moreover, the three Gunas-Rajas, Tamas, and Sattva- are vital for shaping leadership qualities. Cultivating Sattva leads to balanced decision-making, in line with the teaching, \"उद्धरेदात्मनात्मानं नात्मानमवसादयेत्।\" (Bhagavad Gita 6.5), which emphasizes self-mastery as the foundation of ethical leadership (Commentary by Swami Mukundananda, n.d.).The concept of Dharma (righteousness or duty) is central to Indian philosophy and is emphasized throughout the Mahabharata. As stated in the verse \"धर्मेण राज्यं विन्देत धर्मेण परिपालयेत्। धर्ममूलां श्रियं प्राप्य न जहाति न हीयते ॥२९॥\" Udyog Parva, Chapter 34; (Menon, 2017) which says, one should acquire a kingdom through righteous means and govern it with righteousness. It further explains that wealth and prosperity founded on Dharma are enduring and never lost.Additionally, the concept of Vasudhaiva Kutumbakam (\"The world is one family\") from the Hitopadesha promotes the idea of universal brotherhood and compassion. The verse \"अयं निजः परो वेति गणना लघुचेतसाम् । उदारचरितानां तु वसुधैव कुटुम्बकम् ।।\" contrasts narrow-minded individuals with those who embrace all humanity as one family, advocating for a leadership approach that transcends cultural and personal boundaries to foster global harmony (Narayana, 2005).In practical terms, leaders who adopt the principles of Dharma and Nishkama Karma are better positioned to inspire trust and foster a culture of collaboration. By prioritizing selfless action and ethical decision-making, they not only strengthen their organization\'s moral foundation but also drive innovation and creativity. This is particularly essential in times of rapid technological disruption, where leaders must guide their teams with clarity, purpose, and integrity.The Bhagavad Gita and LeadershipThe Bhagavad Gita offers timeless leadership lessons that remain highly relevant today. At its core is the concept of Dharma (duty), emphasizing integrity and commitment to one\'s responsibilities. Equally important is Nishkama Karma-the idea of selfless action without attachment to outcomes-encouraging leaders to focus on ethical execution over personal gain (Sankar, 2003).The Gita also highlights the balance of the three Gunas-Sattva (purity), Rajas (passion), and Tamas (inertia) which shape human behaviour. Leaders are urged to cultivate Sattva, fostering clarity and wisdom, essential for sound decision-making. Self-discipline and emotional regulation are key aspects of effective leadership, as underscored by the Gita\'s teachings.Scholars have linked the Gita\'s principles to modern leadership, particularly transformational leadership, which inspires followers to work for collective goals rather than individual interests. The Gita\'s focus on duty and selflessness can transform \'me-leaders\' into \'we-leaders,\' aligning personal actions with universal values.Modern Leadership in Industry 4.0In today\'s AI-driven world, leadership must adapt to rapidly changing technological landscapes. Transformational leadership is vital here, fostering continuous learning, innovation, and team alignment. Leaders must embrace adaptability and innovation, especially in navigating ethical dilemmas like data privacy and bias (Badrinarayanan, 2024). The Gita\'s principles offer a moral foundation, guiding leaders through these challenges with a balanced long-term vision.As leadership continues to evolve in the age of AI and automation, the ability to foster adaptability, creativity, and emotional intelligence becomes a competitive advantage. Leaders who can seamlessly integrate traditional wisdom with cutting-edge technologies are not only more effective but also more capable of building sustainable, resilient organizations. This integration empowers leaders to make thoughtful, ethical decisions while inspiring their teams to contribute meaningfully to the organization\'s long-term goals.Ethical LeadershipEthical leadership goes beyond transformational styles by fostering transparent communication, fairness, and accountability. Leaders must serve as role models, inspiring trust and promoting a culture of ethical behaviour. By embodying moral values, ethical leaders create workplaces conducive to trust, knowledge sharing, and organizational citizenship.Transformational leaders, in particular, use vision, intellectual stimulation, and high expectations to inspire loyalty and exceptional performance. This style aligns with the Gita\'s emphasis on selfless action and emotional intelligence, positioning leaders as ethical exemplars within their organizations.Indian Conceptual Framework for Transformational and Ethical Leadership.[Chart illustrating the Indian Conceptual Framework for Transformational and Ethical Leadership, depicting the flow from Dharma-Oriented Purpose -> Nishkama Karma (Selfless Action) -> Cultivation of Sattva Guna -> Leading by Example -> Empowering and Developing Followers -> Compassion and Inclusivity -> Self-Control and Balance -> Upholding Dharma in Decision-Making]Merging Modern Leadership and the Bhagavad GitaThe timeless wisdom of the Bhagavad Gita offers leaders a way to anchor themselves in ethical principles while navigating the fast-paced, technology-driven world of Industry 4.0. As businesses increasingly rely on artificial intelligence and automation, the need for leaders to embody ethical responsibility and emotional intelligence has never been more important. This fusion of traditional values with modern innovation equips leaders to face challenges with resilience and a long-term perspective, fostering sustainability in both business practices and leadership.Modern leadership concepts share much with the Bhagavad Gita, providing an opportunity to develop a culturally competent leadership model. The Gita\'s emphasis on Nishkama Karma and Sattva aligns well with transformational leadership, where leaders prioritize collective well-being and emotional intelligence. Mindfulness, empathy, and compassion-core to the Gita-enhance leadership qualities like individualized consideration and intellectual stimulation. By integrating these principles, leaders can navigate the complexities of modern business while staying rooted in timeless values. This approach bridges tradition and modernity, offering a robust framework for ethical, transformational leadership in today\'s fast-evolving world.Conceptual FrameworkThe following framework integrates principles from Bhartiya traditional knowledge, particularly the Bhagavad Gita, into modern Transformational and Ethical Leadership models. It highlights how ancient wisdom can enhance contemporary leadership practices by fostering selflessness, moral responsibility, and emotional intelligence, all crucial in today\'s dynamic organizational environments.This framework aims to bridge cultural values with leadership approaches, offering a holistic model for navigating modern challenges while upholding ethical and transformational ideals.The framework presented integrates modern leadership principles from Ethical and Transformational Leadership models with the timeless teachings of the Bhagavad Gita, creating a comprehensive, holistic approach. By combining these two perspectives, this model offers a culturally rich and ethically grounded leadership style that addresses the complexities of today\'s business environments.The following chart outlines each component, highlighting how the principles from the Bhagavad Gita enhance modern leadership practices, enabling leaders to navigate challenges with integrity, emotional intelligence, and a sense of collective responsibility.ComponentBhagavad Gita PrincipleEnhancement to Leadership PracticesDescriptionDharma-Oriented PurposeDharma (Duty/ Righteousness)Ethical Leadership: Prioritizes righteous decision-making.Ethical duty and moral obligations.Transformational Leadership: Inspires commitment to higher, socially responsible goals.Nishkama Karma (Selfless Action)Nishkama Karma (Desireless Action)Idealized Influence: Models selflessness, fostering trust.Act without attachment to outcomes.Ethical Leadership: Encourages integrity and collective well-being.Cultivation of Sattva GunaSattva Guna (Purity and Harmony)Individualized Consideration: Enhances emotional intelligence and follower support.Wisdom, clarity, and emotional balance.Intellectual Stimulation: Promotes creative and balanced thinking.Leading by ExampleRole Modeling Ethical BehaviorEthical Leadership: Leaders as moral exemplars.Setting high ethical standards through actions.Transformational Leadership: Inspires admiration and emulation.Empowering FollowersEmpowerment through Knowledge SharingProviding knowledge and fostering autonomy.Individualized Consideration: Promotes growth and follower engagement.Ethical Leadership: Builds trust and empowerment.Compassion and InclusivityEquality and FairnessTreating all individuals with respect and fairness.Ethical Leadership: Fosters diversity and fairness.Transformational Leadership: Strengthens team cohesion through inclusivity.Self-Control and BalanceModeration and Self-MasteryPracticing moderation and emotional balance.Ethical Leadership: Models healthy work-life balance.Transformational Leadership: Prevents burnout and promotes long-term effectiveness.Upholding Dharma in DecisionsCommitment to RighteousnessEthical Leadership: Strengthens accountability and responsibility.Ensuring decisions align with moral principles.Transformational Leadership: Builds trust through ethical consistency.DiscussionTechnology is transforming every aspect of our lives, from daily decisions to how businesses operate. These shifts are redefining leadership, as modern organizations require new skills at all levels, especially in top management.While traditional leadership theories like Transformational and Ethical Leadership remain relevant, the need to merge these with cultural values has become increasingly important. India\'s rich heritage of leadership, as reflected in texts like the Bhagavad Gita, Ramayana, and Upanishads, offers timeless wisdom that aligns well with contemporary leadership challenges.The Bhagavad Gita, in particular, provides a foundation for ethical decision-making through its principles of Dharma (duty) and Nishkama Karma (selfless action), which resonate with modern leadership values like integrity and responsibility. The Sattva principle of harmony and emotional intelligence enhances decision-making, especially in today\'s complex, tech-driven business environment.To navigate technological disruptions and drive innovation, leaders must integrate these traditional values with modern frameworks. This research bridges tradition and modernity, offering a culturally competent leadership model tailored to the demands of Industry 4.0 and AI. By doing so, it presents a robust framework for leading in today\'s complex organizational landscapes.References:Badrinarayanan, V. (2024). Trust building strategies for virtual leaders in the post pandemic era. Project Leadership and Society, 5, 100126. https://doi.org/10.1016/j.plas.2024.100126Commentary by Swami Mukundananda. (n.d.). Bhagavad Gita, The Song of God. https://www.holy-bhagavad-gita.org/Dubey, P., Joshi, A., & Mishra, R. C. (2024). Attaining Sustainability via Shrimad Bhagavad Gita: An Empirical Study of Identified Variables, Self-Efficacy, Goal Performance and Leadership Effectiveness. Journal of Human Values, 09716858241263127. https://doi.org/10.1177/09716858241263127Menon, R. (2017). The Complete Mahabharata. Rupa Publications India. https://rupapublications.co.in/books/the-complete-mahabharata-adi-parva-vol-1/Narayana. (2005). Hitopadesa. Penguin India.OECD. (2024). Towards Greener and More Inclusive Societies in Southeast Asia. OECD. https://doi.org/10.1787/294ce081-enPandey, A., Bhawuk, D. P. S., & Budhwar, P. (2022). Emergence of Indian Management: Cultural Ideals, Uniqueness, and Behavioural Manifestations. In A. Pandey, P. Budhwar, & D. P. S. Bhawuk (Eds.), Indigenous Indian Management (pp. 523-561). Springer International Publishing. https://doi.org/10.1007/978-3-030-87906-8_16Sankar, Y. (2003). Character Not Charisma is the Critical Measure of Leadership Excellence. Journal of Leadership & Organizational Studies, 9(4), 45-55. https://doi.org/10.1177/107179190300900404Sharma, S. (2022). Indian Models of Management and Leadership with Roots in Ancient Wisdom. In S. Mukherjee & L. Zsolnai (Eds.), Global Perspectives on Indian Spirituality and Management (pp. 251-262). Springer Nature Singapore. https://doi.org/10.1007/978-981-19-1158-3_21https://sanskritdocuments.org/mirrors/mahabharata/unic/mbh05_sa.htmlAuthor may be reached at rudreshpandey@gmail.com and eboard@icai.in
Ep. 356 — Leading with Strategy: How Great Leaders Shape Organizational Direction
CA Journal
· September 2026
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Leading with Strategy: How Great Leaders Shape Organizational DirectionLeadership is a concept that has intrigued philosophers, scholars, and practitioners for centuries. It goes beyond mere titles, power, or authority; it\'s about influence, vision, and direction. Great leaders possess the unique ability to set a clear and compelling direction for their organizations, inspiring people to achieve extraordinary results. In today\'s fast-paced and ever-evolving business environment, leadership intertwined with strategy is more critical than ever. Strategy, in this context, is the roadmap that guides the leader in setting the direction and making impactful decisions. The most impactful leaders are those who understand that their primary role is not just managing day-to-day operations but shaping the future through strategic foresight.By CA. Pankaj Vasani, Group CFO, Cube Highways InvITWhat Leadership Means: Action Over WordsLeadership is more about action than words taking ownership of responsibilities and making impactful decisions. The essence of leadership lies in three primary functions: setting direction, aligning and communicating, and motivating and inspiring. Great leaders know that the best strategies in the world are worthless without execution. They demonstrate leadership by making thoughtful decisions, owning the outcomes, and ensuring that everyone is aligned with the organizational goals. In essence, leadership is about being reliable, consistent, and having integrity, which builds trust within the organization.Leadership today is more conversational than authoritarian. It\'s about engaging employees in meaningful discussions that lead to alignment and buy-in. The days when leadership meant dictating orders from a position of authority are long gone. Wise leaders know how to influence people through genuine conversations, fostering a culture of trust and collaboration where every individual feels valued and integral to the organization\'s success. However, this conversational approach is different from being weak. Leaders must maintain a balance between kindness and firmness. Niceness should not be mistaken for a lack of authority.Motivating Teams: The Heart of LeadershipA leader\'s role is crucial in maintaining high motivation levels in a team setting. This involves treating team members with respect, acknowledging their achievements, and cultivating a positive work environment. Motivating employees goes beyond monetary rewards; it\'s about making them feel valued and recognized. Consistent and dependable actions, rather than just major decisions, are highlighted as key to influencing team motivation. When employees have confidence in their leader\'s reliability, they are more likely to remain motivated and committed.Furthermore, personal integrity holds excellent importance in leadership. Leaders who uphold their principles and adhere to ethical standards are better able to instil trust in their teams, providing a sense of security and assurance in their leadership. This trust forms the bedrock of motivation. Additionally, humility is a crucial trait for a leader to possess. Leaders who are approachable and modest and prioritize the well-being of their teams create an environment where employees are inspired to exceed expectations. It\'s about establishing a shared sense of purpose and a dedication to excellence.Accountability: The Cornerstone of LeadershipThe cornerstone of effective leadership is accountability. To instil a culture of accountability, a leader must actively engage with, support, and empathize with their team members. Approachability is critical for leaders, as it encourages employees to discuss challenges and opportunities openly without hesitation. This approach enables leaders to gain an honest assessment of the organization\'s well-being and make the necessary adjustments to drive positive outcomes.Accountability is exemplified through leading by example. When a leader consistently demonstrates integrity and professional ethics, it establishes a standard for the entire team. Leaders must create an environment in which employees feel responsible not only for their individual tasks but also for the overall success of the organization. This collective accountability fosters heightened motivation and a more dedicated pursuit of excellence. By acknowledging and respecting the team\'s contributions, leaders can nurture a positive and accountable work environment.Influencing Teams Toward Organizational GoalsLeaders influence their teams through a combination of approachability, learning mindset, and strategic focus. Great leaders understand the importance of being approachable and transparent. When employees feel comfortable sharing their thoughts and ideas with their leaders, the organization benefits from diverse perspectives that can drive innovation and improve decision-making.A learning mindset is critical in leadership. There is a need for discipline and a constant thirst for knowledge. Great leaders always continue learning, whether it\'s about their industry, market trends, or leadership itself. They encourage their teams to adopt a similar mindset, fostering a culture of continuous improvement.Leaders must also focus on both the big picture and the finer details. They should grasp the overarching goals while remaining attentive to the details that can make or break a project. Balancing these two perspectives ensures that strategic decisions are well-informed and can be executed effectively.Furthermore, a good leader does not surround themselves with \"yes\" people. Encouraging dissenting opinions allows for a richer, more nuanced view of the organization\'s direction. Differing perspectives help leaders either corroborate or reconsider their strategies, ensuring that they are not operating in a vacuum.Lastly, leadership is about driving change. Leaders must be willing to step into the unknown and challenge the status quo. This involves leading the team with confidence into new territories and exploring innovative ideas that create value. Leaders who embrace change and innovation help build organizational alignment and foster a culture that strives for excellence.The Leadership Style: A Blend of Vision and StrategyEvery leader has a unique style. My leadership style can be described as a blend of vision and strategy, rejecting both extremes of dreaming and blind leadership.A good leader sets a clear, realistic agenda and remains grounded in results. Leadership is not about daydreaming but about crafting a vision that is both aspirational and achievable.Leaders focus on several key areas like setting direction, being change agents, and coaching others. Great leaders understand that people are an organization\'s bloodline. Emotional and cultural intelligence are crucial in ensuring that employees remain engaged and motivated. This people-centric approach extends beyond employer branding to a genuine concern for employees\' physical and mental well-being.Leaders must remain engaged with their workforce, providing transparency about the organization\'s direction and the realities of the situation. Building a culture of agility and involvement throughout the organization is critical to answering the question, \"Where do we go from here?\" The best strategic directions often come from colleagues on the ground, and leaders must be open to these ideas.Mission and Vision: The Bedrock of LeadershipA leader\'s mission and vision provide a foundation for everything they do. For instance, my mission is straightforward: simplify the complex, create value, and make a difference. Their vision focuses on providing quality products and services that meet people\'s needs while fostering a matrix of success that benefits customers, service providers, employees, and shareholders alike. Great leaders keep these principles at the heart of their strategic decisions, ensuring that every action contributes to these overarching goals.A leader with a clear mission and vision offers a sense of purpose and direction that resonates throughout the organization. This clarity allows teams to align their efforts with the broader goals, fostering a sense of unity and purpose. When everyone understands the mission and vision, the organization can move forward cohesively and effectively.Balancing Loyalty: Employees and CustomersLoyalty is another critical aspect of leadership. Great leaders understand that both employee and customer loyalty are vital to the success of the organization. It\'s impossible to choose one over the other. However, loyalty starts in-house with employees and extends to customers. Employees are the organization\'s biggest asset, often described as the \"secret sauce\" that drives growth and maintains momentum. By nurturing employee loyalty, leaders can create a motivated workforce that delivers outstanding service to customers.Customer loyalty, in turn, is the reason for the organization\'s existence. Leaders must strike a balance between fostering a loyal and engaged workforce and ensuring that customers receive the best possible service. This balance sustains long-term success.Navigating Competition: A Strategic ImperativeCompetition is an ever-present force in the business world. Leaders must navigate both internal and external competitive pressures to achieve organizational success. The more dynamic the environment, the more crucial it is for leaders to be agile in their strategies. Businesses need to continuously fine-tune and innovate their business models to stay ahead of the competition.In times of volatility, leaders must focus on what they can control and pivot quickly when necessary. This involves making deep cuts where required and adopting an urgent, proactive approach to gain ground. Leaders who focus on organic innovation and inorganic growth are better equipped to thrive in competitive environments. They understand that strategy is not a one-time event but an ongoing process that requires constant attention and adaptation.To Part with - Leading with Strategy for Lasting ImpactGreat leaders shape the future of their organizations through strategic leadership. They set a clear direction, foster alignment and communication, and motivate their teams to achieve extraordinary results. Leadership is about action, integrity, and influence. By maintaining a balance between kindness and firmness, leaders can create an environment where people feel valued and motivated to excel.Leadership is not just about making decisions; it\'s about influencing people, driving change, and navigating competition. The most effective leaders are those who remain grounded in their values while being open to new ideas and approaches. They lead with strategy, ensuring that every decision contributes to the organization\'s mission and vision.In today\'s rapidly changing world, leadership is more critical than ever. Leaders who combine strategic foresight with emotional intelligence and a people-centric approach are best positioned to shape the direction of their organizations and achieve lasting success.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 357 — The Power of Effective Communication in Leadership
CA Journal
· September 2026
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The Power of Effective Communication in LeadershipEffective communication is the cornerstone of successful leadership. It is the conduit through which leaders inspire, motivate, and guide their teams toward shared goals. In this digital age, where information flows rapidly and expectations are high, the ability to communicate effectively has become more crucial than ever. I will break this into various sub topics to explore the various dimensions of effective communication in leadership, including its impact on team morale, decision-making, conflict resolution, and organizational culture.By CA. Narendra Jain, Executive Director and COO, IIFL Securities Itd.The Foundation of Trust and RelationshipsAt the heart of effective leadership is the establishment of trust and positive relationships with team members. Communication plays a pivotal role in fostering these bonds. When leaders communicate openly, honestly, and consistently, they demonstrate their commitment to transparency and accountability. This builds trust and encourages team members to feel valued and respected. Furthermore, effective communication facilitates the development of strong interpersonal relationships, which are essential for collaboration, teamwork, and overall organizational success.Teams see their leaders being transparent in their dealings and delegation of powers to them, and hence feel bonded towards the organisation and want to contribute in an effective manner. Clarity of actions always leads to better and effective delivery, as there is no element of confusion regarding roles. Leaders need to clearly define and communicate expectations to team members, thereby leaving little chance for ambiguity.Inspiring and Motivating TeamsEffective leaders are exceptional communicators who can inspire and motivate their teams to achieve extraordinary results. Through clear and compelling communication, leaders can articulate the vision and mission of the organization, inspiring team members to feel a sense of purpose and belonging. By sharing the company\'s goals and expectations, leaders can create a shared sense of direction and empower team members to take ownership of their work. Moreover, effective communication can be used to recognize and celebrate accomplishments, boosting morale and encouraging continued high performance.Leaders need to appreciate and reward team members for a job well done. Appreciation is also, in a way, effective communication to the team members conveying a sense of gratitude for a performance done well. At the same time, feedback given by leaders for improvement is also appreciated as it helps an individual make course corrections and bring about necessary changes required for a much better and more effective performance.Facilitating Informed Decision-MakingEffective communication is essential for informed decision-making. By gathering and sharing relevant information, leaders can ensure that their teams have the knowledge and understanding necessary to make sound judgments. Open and honest communication channels also allow for the exchange of ideas and perspectives, leading to more innovative and effective solutions. Furthermore, effective communication can helps prevent misunderstandings and conflicts that can arise when information is incomplete or inaccurate.Decisions arrived at after debate and discussion are generally found to be appropriate since they have been arrived at after weighing various pros and cons. Additionally, when all practical aspects of implementing a decision are communicated and discussed with teams, it lead to more effective execution.Resolving Conflicts and Building ConsensusConflict is an inevitable part of organizational life. However, effective communication can play a crucial role in resolving conflicts and building consensus. By listening actively to all parties involved, leaders can identify the underlying issues and work toward mutually beneficial solutions. Clear and open communication can also help prevent conflicts from escalating and damaging relationships. Moreover, effective communication can be used to facilitate difficult conversations and address sensitive topics in a respectful and constructive manner.There is a higher chance of acceptance of a decision if all conflicts are discussed and communicated well in advance.Shaping Organizational CultureEffective communication is essential for shaping and maintaining a positive organizational culture. By communicating the company\'s values and expectations, leaders can create a shared sense of identity and purpose. Open and honest communication also cultivates a culture of trust, respect, and collaboration. Furthermore, effective communication can be used to promote diversity, inclusion, and ethical behaviour.Leaders need to encourage their team members to voice their concerns early on so that they are addressed promptly. If grievances are allowed, to linger they may result in lack of interest and participation in the decision-making and execution process.It is important for the leadership team to create a environment conducive to the free and fair flow of ideas throughout the organisation. Addressing issues early on also create a positive atmosphere amongst team members and they feel like an important part of the organisation structure.Owing to free debate and discussion beforehand can lead to a more structured and complete solution to issues at hand. This can also lead to some out-of-the-box thinking ideas to emerge, which can prove to be game changer for the organisation.Tools for Effective communication by LeadersCommunication can be written or oral. To ensure communication is effective, a leader must make sure that the communication is simple and explains the issue or subject in a manner which can be easily understood.One effective method of communications is to use very simple words/language and avoid using excessive jargons. The use of illustrations or examples to explain a point helps to a large extent in effectively communicating views.Leaders should confirm that team members have understood the communication through summary briefs, reiteration of important points, and by seeking confirmation and feedback.ConclusionIn conclusion, effective communication is a fundamental leadership skill essential for success in today\'s complex and competitive business environment. By building trust, inspiring teams, facilitating decision-making, resolving conflicts, and shaping organizational culture, effective communication empowers leaders to achieve extraordinary results. As the saying goes, \"Communication is the key to success.\"References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 358 — Cultivate a Leadership Mindset in the Digital Age
CA Journal
· September 2026
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Cultivate a Leadership Mindset in the Digital AgeThe digital age today is a period of unprecedented interconnectedness, where technology has woven itself into the fabric of our lives, transforming how we communicate, access information, work, and interact with the world around us. It\'s characterized by the widespread use of smartphones, internet, social media, and advanced computing power, allowing for instantaneous global communication and a constant stream of digital data.By CA. Asim Kumar Mukhopadhyay, Managing Director & CEO, TML Smart City Mobility Solutions Ltd.The digital age has transformed our world into a hyper-connected, data driven ecosystem where social media platforms like Facebook, Twitter, and Instagram shape our interactions, while e-commerce and AI redefine how we shop, work, and live. This era has unlocked global access to information, empowered innovation, and created opportunities for entrepreneurship and digital inclusion. However, as companies increasingly rely on data analytics and AI for decision-making, the challenges of privacy, cybersecurity, and the digital divide grow more acute. Meanwhile, the gig economy blurs the lines between traditional and freelance work, and misinformation spreads rapidly, fuelling social discord.While these advancements have enhanced communication and created new business models, the mental health impacts of constant connectivity and excessive screen time are significant. Thus, we must strive to harness the potential of digital transformation responsibly, ensuring it serves as a force for positive societal change while mitigating its inherent risks.In today\'s rapidly evolving business environment, digital transformation is no longer just an option-it is a necessity. The advent of new technologies and data-driven systems is reshaping industries and challenging traditional business models. Organizations must navigate this dynamic landscape by equipping their leaders with the right mindset and capabilities to lead them into the future.Research has shown that 58% of senior managers are prioritizing the development of \'change and transformation\' skills, with a strong emphasis on technological advancements. However, despite this focus, many organizations still struggle with implementing new technologies.A recent BT research report suggests that 104,000 British businesses may be avoiding the adoption of new technologies due to the stress associated with the change process. This hesitation could potentially result in £11.79bn in lost growth opportunities by 2030.Moreover, a global survey of over 4,300 executives from 120 countries revealed startling gaps in leadership readiness. Only 12% of respondents strongly agree that their leaders possess the right mindset to steer the organization forward. Merely 40% believe that their companies are building robust leadership pipelines to tackle the demands of the digital economy. While 82% of respondents acknowledge that leaders in the new economy must be digitally savvy, less than 10% believe that their organizations have leaders equipped with the necessary skills to thrive in the digital economy.The Imperative of Digital LeadershipTechnology challenges conventional assumptions of how business is conducted. From the wheel to the internet, technology has continuously expanded the possibilities for innovation. Yet, if mismanaged, technology can also dismantle companies, disrupting established practices and upending entire industries.Cultivating a leadership mindset in the digital age involves developing a unique blend of skills, attitudes, and behaviours that enable leaders to effectively navigate this tech-driven environment.Key principles and strategies for fostering a digital-age leadership mindset include:A robust digital transformation framework is built on five key pillars, each designed to drive sustainable growth and create a digitally empowered organization. The first pillar, Strategic Digital Vision & People-Driven Planning, focuses on co-creating a digital vision that aligns with business goals and engages employees, managers, and customers at every level. This vision is supported by a transformation roadmap that integrates technology initiatives with people-centric strategies, such as reskilling and change management programs.The second pillar, Digital Literacy & Talent Empowerment, aims to upskill the workforce by providing targeted training programs and equipping employees with collaborative digital tools. It also emphasizes on recognizing and rewarding digital innovators to foster a culture of creativity and technology adoption.The third pillar, Agile Leadership & Collaborative Execution, redefines traditional leadership roles and promotes agile frameworks across all functions, encouraging quick decision-making and cross-functional collaboration.To ensure customer-centric digital leadership, the fourth pillar leverages design thinking, customer data platforms, and real-time feedback mechanisms to deliver personalized experiences and deeper customer engagement.Finally, the fifth pillar, Sustainable Digital Leadership & Continuous Development, establishes a leadership culture rooted in digital ethics, responsible technology use, and a commitment to continuous learning and sustainability. This holistic approach ensures that digital transformation is not just about technology, but about creating a resilient, agile, and people-focused organization prepared for long-term success.Putting People at the Heart of Digital TransformationA key component for cultivating a future-ready leadership strategy is recognizing that people are at the core of every digital transformation. Leaders must view technology as a tool that amplifies human capabilities, rather than as a replacement for them. Building a culture that values collaboration, inclusivity, and continuous learning is critical. This approach aligns technology adoption with people\'s roles, skills, and contributions, ensuring that digital initiatives are sustainable and effective. By integrating people-centric practices into a technology-driven leadership approach, organizations can create a strong foundation for sustainable growth and innovation.Framework for Cultivating Leadership in Digital AgeOrganizations must adopt a structured approach to cultivate a digital mindset among their leaders. Below is a framework that outlines key elements of this transformation:Co-Create the Digital Vision with Key Stakeholders: Engage leaders and employees across functions to define a shared digital vision that aligns with business objectives.Develop a People-Centric Digital Transformation Roadmap: Focus on how technology adoption will enhance employee capabilities and customer experiences.Engage People Through Change Management Initiatives: Address resistance to change by implementing comprehensive change management strategies.Build a Digital Advisory Board: Establish a group of experts to guide the organization through complex digital challenges.Invest in Digital Upskilling Programs: Provide employees and leaders with continuous learning opportunities to build their digital skills.Empower Employees with Digital Tools: Ensure that staff have access to the right tools and resources to work efficiently in a digital environment.Recognize and Reward Digital Innovators: Create incentives for employees who contribute to digital innovation and transformation.Implement Agile Frameworks Across Teams: Use agile methodologies like Scrum or Kanban not just in IT, but across all functions (such as marketing, HR, finance) to foster a culture of rapid iteration and continuous improvement.Create Digital Centers of Excellence (COE): Develop specialized hubs to accelerate digital projects and build digital expertise within the organization.Integrate Digital Ethics into Leadership Practices: Promote responsible use of technology, data privacy, and ethical AI adoption.Promote Environmental and Social Responsibility in Technology Use: Align digital initiatives with the values of sustainability and social responsibility to ensure long-term resilience and success.A Digital Leadership Mindset for the FutureLeaders need to be prepared for this difficult shift, which is replete with blind spots and cultural tensions. Identifying and addressing these challenges is a substantial undertaking that requires reimagining what it means to be a leader. Technology must be viewed not as a standalone solution but as a catalyst for transforming how people collaborate, make decisions, and drive value.As organizations navigate the complexities of the digital age, leaders who cultivate a forward-looking mindset, embrace change, and champion a people-centric approach will be well-positioned to steer their organizations toward a future of sustained growth and innovation. By fostering a digital leadership mindset that is both agile and inclusive, companies can unlock new opportunities and remain competitive in an increasingly digital world.References:https://www.graygroupintl.com/blog/digital-inclusionhttps://sloanreview.mit.edu/projects/the-new-leadership-playbook-for-the-digital-age/https://www.servicenow.com/uk/blogs/2021/putting-people-at-the-heart-of-digital-transformationhttps://www.jointhecollective.com/article/leadership-skills-for-the-digital-era/Author may be reached at eboard@icai.in
Ep. 359 — The Rise of Social Entrepreneurship: Leadership Opportunities
CA Journal
· September 2026
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The Rise of Social Entrepreneurship: Leadership Opportunities\"We make a living with what we get, but we make a life with what we give.\" - Winston ChurchillBy CA. Ashwajit Singh, Founder and Managing Director, IPE GlobalToday, around 10 million social enterprises globally are creating over 200 million jobs, weaving an economy that puts purpose over profit. Unfolding a story of changing paradigms and perspectives within the business landscape, social entrepreneurship generates USD 2 trillion of revenue annually, accounting for 2% of the global GDP. By recognizing social issues and understanding that conventional business and charity models aren\'t sufficient to tackle them, trailblazers in this field have blurred the boundaries between profit and social impact - bringing together a vibrant tapestry of innovation and purpose.Social Entrepreneurship: Mission with a Business, and not a Business with a MissionPurpose over profit is the very essence of social entrepreneurship. Breaking away from traditional business strategies that have solely focused on furthering their profit margin, social entrepreneurs work towards bringing about positive change in the community while generating profit.Over the years, social entrepreneurship has seen marginal growth. In recent decades, it has gained immense traction owing to rising global issues like inequality, environmental degradation, and health difficulties that call for action. Currently, in almost every sector, from microfinance to renewable energy, many social entrepreneurs stand out by extending their unwavering focus on innovation. They are using cutting-edge technologies and business strategies to solve long-standing problems, setting their businesses apart in the process.Over time, these business opportunities have shaped leaders to go beyond the call to become leading examples of giving back to society by redistributing profit and accumulated wealth for philanthropic purposes. These leaders not only weave social and environmental focus into the core of their business but also monitor the social value and environmental impact generated for a greater impact.CSR practices that build leadersThe mandate of Corporate Social Responsibility (CSR) in 2014 has propelled businesses to act more responsibly and use a part of their profit for social causes. Through training programs, skills development, and leveraging company resources to promote positive, sustainable change, social entrepreneurs have become leading voices, showing how businesses can adopt the best CSR practices to enhance community empowerment in social and economic contexts. By using these CSR practices, leaders can prioritize addressing social issues relevant to employers\' immediate surroundings and trying to achieve a solution. In this way, the entrepreneurs significantly contribute to sustainable business development.Today, around 600 impact enterprises in India affect 500 million lives and attract over USD 9 billion in capital. Several government initiatives, including Startup India and Atma Nirbhar Bharat Abhiyan, have encouraged sustainable entrepreneurship by offering incentives, mentorship, and policy support. These statistics from the Impact Investors Council (IIC) 2022 speak volumes about the potential of social entrepreneurs to transform lives and communities for the better.This development of social entrepreneurship and the rise of these leaders signifies a transformation in how we think about business models and where to begin when implementing changes. It symbolizes an increasing understanding that the brightest minds in the business world and society must work in tandem to solve the times\' most critical issues. As this movement gains traction, it continues to motivate people and institutions to reconsider the place of business in society.Why is leadership important in social entrepreneurship?\"Effective leadership is defined by results, not attributes.\" - Peter DruckerLeadership is one of the crucial drivers of the success of social entrepreneurship. Visionary social entrepreneurs are the ones who can turn ideas into reality by blending strong business and leadership skills and a deep passion for social change.While social entrepreneurship involves identifying social problems and developing innovative solutions, effective leadership is necessary to implement these solutions successfully. Social entrepreneurs have a few traits that make them influential leaders of tomorrow in driving social change.To begin with, a social entrepreneur must have:A vision and ability to strategize in alignment with the organization\'s social objectives. This not only strengthens leadership qualities but also drives the team closer to achieving its goals. A visionary leader can craft strategies to effectively manage the organization\'s financial, human, and material resources, since effective resource allocation is crucial for the organization\'s smooth operation and achievement of its goals.Impact and purpose-driven mindset that come as a beacon of hope in a world increasingly witnessing rising global challenges. Looking beyond short-term goals and quick money, a social entrepreneur must stay committed to drive a long-lasting, and sustainable impact. These endeavors leave behind a positive legacy for future generations, whether that involves addressing environmental challenges, strengthening neglected groups, or enhancing healthcare access.This model follows a bottom-up approach and remains community-driven, as it is key to advancing socio-economic development and furthering social impact. Unlike the conventional \"top-down\" decision-making leadership, social entrepreneurs follow the \"bottom-up\" development approach that engages development players at every level and follows a collective process whereby a local community can take charge of the future of its area. This approach allows the local community and players to express their views and help define the development course for their area in line with their opinions, expectations, and plans.The ability to bring technology and people together to expand the horizons of social entrepreneurship. Technology and innovation have created a new entrepreneurial genre for aspiring social leaders to bridge the gaps caused by the limitations of human reach. In a world where innovation has no bounds, combining technology and manpower has revolutionized people\'s lives by bringing out tools and products that focus on the welfare of communities. In this context, the healthcare sector is one such area that has witnessed innovative solutions following technological interventions.Engage in Continuous Collaborations through Public-Private Partnership (PPP): The PPP alliance between social leaders, government stakeholders, and private organizations has become key in transforming health and social care interventions in strategic partnership settings. Limitations of public funds should not deter social entrepreneurs from their mission and objectives. By collaborating and fostering positive relationships with private players, entrepreneurs must encourage them to invest in social causes.Rely on Partnerships and Donations as they play a crucial role in initiating social change, social entrepreneurs must create more crowdfunding platforms and invest in NGOs, who are involved in most of the groundwork. Crowdfunding platforms have become a potent tool for social entrepreneurs seeking to raise money directly from the general public. This method not only democratizes the funding process but also enables business owners to gauge the level of support and interest in their projects before their official launch. Numerous platforms devoted to social concerns have emerged, allowing individuals and leaders to begin enterprises with a core social objective.A more human-centric approach towards your employees and stakeholders because people are your biggest assets. As a social entrepreneur, your prime motive is the welfare of people and communities; hence, one must remain transparent, fair, and honest to build credibility and integrity among all stakeholders. Besides being a people\'s leader, be a well-rounded mentor. Do not give answers to all their questions and solve problems, instead, let them understand, discuss, and take charge of their solutions. What finally guides you is how you treat your team, the relationships you build over time, and the spirit of honoring your work with the devotion and integrity it deserves.The ability to take risks, evaluate and reevaluate one\'s purpose in life. Risk-taking is a critical skill for social entrepreneurs because it\'s a key part of entrepreneurship and business. While this involves trying out new things when the outcome is mainly unknown, evaluating why you want to continue your impact-driven business and what is your purpose, are equally important. This thought process lays out a clear answer as to how you want to be remembered - as someone who left behind a lot of wealth or a legacy and impact that cannot be erased.Crafting new business and financial models for social change:Several creative business and financial models within social entrepreneurship have led to significant social changes in recent decades.As we look ahead, the next generation of social entrepreneurs and leaders are pioneering innovative models like circular economies and impact investing to drive systemic change. By combining profit and the purpose of tackling societal concerns, these entrepreneurs are crafting new business models and entrepreneurial strategies that rely on donations, grants, and revenue-generating activities to fund their missions. These leaders are pushing the age-old traditional non-profit organizations to embrace a hybrid approach and commercial strategies to improve their sustainability and expand their influence in social entrepreneurship while maintaining operational effectiveness and financial stability. After all, it is not the strongest of the species nor the most intelligent that survive, but the most responsive to change.Social entrepreneurs who want to be financially successful and expand social impact are coming up with \'for-profit\' companies, which stand out heavily in this area. Legally, the leaders are responsible for considering how their decisions may affect suppliers, customers, employees, the local community, and the environment.Social entrepreneurs are key for SDGAccounting for 3% of global business, social entrepreneurship is considered one of the most important avenues for attaining the United Nation\'s (UN\'s) Sustainable Development Goals (SDGs) and closing the financing gap by fostering public-private partnerships. With a pressing need to close the USD 4 trillion financing gap to achieve India\'s SDGs, social entrepreneurs can play a vital role. Through strategic collaborations they can ensure new projects/avenues that contribute to poverty reduction, gender equality, local job creation, the circular economy, and help improving people\'s lives.Further, with Social Impact Bonds, social entrepreneurs have been promoting socially responsible investments and driving progress towards the UN\'s SDGs. This inventive financial tool, known as social impact bonds, links funding for social services to accomplishing predetermined goals. Investments are made in initiatives that have the potential to save the public sector money over time and pull private investment to finance high-impact social programs, including raising educational standards, global health, development financing, and so on. Out of the two kinds of impact bonds - Social Impact Bonds (\"SIBs\") and Development Impact Bonds (\"DIBs\"), there is an increased interest in DIBs, which are turning out to be effective ways to foster relationships between the public and private sectors.Social entrepreneurs as a driver of the economyAs catalysts for economic growth, social entrepreneurs have the potential to create new markets, spur innovation, stimulate demand for their products and services, play a significant role in economic expansion, and support equitable economic growth by applying business techniques to address social issues.By fusing profit-making with social impact, social entrepreneurs significantly contribute to economic growth and the development of inclusive economies, resulting in more consumer spending, higher living standards, and lower unemployment rates.Social entrepreneurs can support inclusive economic growth and address inequality by providing several opportunities to marginalized communities long isolated in mainstream economic activities. These enterprises\' social programs and employment opportunities can empower individuals to become self-sufficient contributors to the economy by offering resources, skills, and jobs, while also promoting equal access to education, resources, and meaningful work. These outcomes help them to break the cycle of poverty and actively participate in economic growth.Employment generation is one of the direct effects of social entrepreneurship. One of the most important things social entrepreneurs can do to create jobs is to find and fill employment gaps in the community. As they expand and grow, these businesses need workers who can contribute to different areas of the company.There is a growing prioritization for achieving sustainability by integrating eco-friendly methods into business strategies. By using resources more efficiently, social entrepreneurs promote techniques that meet the increasing demand for sustainable products and save consumer spending. Using tactics that lower operating expenses, entrepreneurs free up funds to grow the business and strengthen its resilience.Balancing social and economic goals by blending revenue and social impact results in creating a self-sustaining model that supports continuous expansion. Unlike traditional philanthropy, social enterprises make money through their operations, which often depend on ongoing donations. Their long-term financial viability enables them to keep investing in their missions, attract new audiences, and support economic growth.Opportunities that lead to become social entrepreneursA career in social entrepreneurship can help today\'s aspirational youth to utilize their potential to the fullest. A life dedicated to the welfare of society can transform an individual by offering a unique opportunity to give back to society and positively impact people and the planet. As catalysts of change and symbols of progress, social entrepreneurship helps you create value, offer solutions, and provide contentment - a combination difficult to find elsewhere.Social entrepreneurship can be enhanced within an organization by influencing one another to create a network of individuals committed to social change. Human Resource managers can hire the right people by reviewing resumes, attending interviews, and sifting through candidate profiles. Investing in onboarding and building a strong team is vital for the company\'s success and growth. With staff development and skill enhancement policies, HRs can grow a team of learners and develop professionals who foster a workforce dedicated to social change.Social enterprise fundraisers and grant writers can use their expertise to acquire financing from donors, investors, and grants to meet their organizations\' goals. As a communications manager, one plays a crucial role in communicating the organization\'s long-term sustainable influence to the broader public. At the same time, marketing specialists are critical in increasing awareness of and support for social causes.As Programme Developers overseeing Monitoring and Implementation, professionals can take charge of planning and carrying out projects that directly influence the communities they serve. Within social enterprises, qualified social workers and counselors are crucial in supporting and providing directions for collaborating with partners and impactful resources to drive positive changes.In social entrepreneurship, tech professionals can utilize their knowledge to craft creative solutions and streamline complex processes to execute development projects. Conversely, data analysts can also use data analysis to support organizations in monitoring their impact and continuously enhancing their initiatives.Strategies for measuring and maximizing social impactWhile the aim is to create an impact through sustainable and responsible businesses, measuring and maximizing its effects becomes crucial for bringing real change. Impact measurement begins with clear goals and metrics, allowing entrepreneurs to track progress and evaluate effectiveness.Leaders must invest in data collection and analysis, which is essential for understanding community effects and holding regular stakeholder feedback, ensuring responsiveness. Sustainability also becomes necessary for maximizing impact beyond financial viability, including environmental and social responsibilities. Further, to promote continuous improvement and stay adept at maximising their impact, social entrepreneurs must ensure innovation in service delivery and product design.Challenges as Social EntrepreneursWhile social entrepreneurship promises a pathway to innovative and sustainable solutions for societal problems, it also comes with challenges and hardships. You may find that the current scope for experimentation in the social sector needs to expand. The access to resources and capital is often limited. Business agendas and social objectives may occasionally clash and contrast. Your vision may seem hindered by ground realities. Striking a balance between social goals and financial sustainability may feel challenging. You may also feel that the work is often fast-paced and stressful. In such trying circumstances, your confidence in your ideas, willingness to learn from past mistakes and reboot when needed, perseverance, resilience, and zeal to go the extra mile will all come in handy.Looking ahead...In an era where increasing global challenges loom large, the rise of social entrepreneurs comes as a beacon of hope. By integrating social and environmental goals into business practices, social entrepreneurs are revolutionizing the definition of successful businesses by embracing sustainability.As we approach this revolutionary shift, I advise young entrepreneurs to remember that each one of us has the power to effect change to create a better world for future generations. Embrace the challenges and setbacks along the way, for they are integral to any transformative journey. Ultimately, stand by the thought of giving back because \"When God blesses you financially, don\'t raise your standard of living. Raise your standard of giving.\"References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 360 — Uncovering the Shadows: A high level view of literature on tax evasion in India
CA Journal
· September 2026
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Uncovering the Shadows: A high level view of literature on tax evasion in IndiaTax evasion trickles away the revenue collection from government coffers. This article attempts to study the literature on the domain of tax evasion concerning India. Most of the literature suggests that enhanced tax enforcement by the government will lead to tax compliance by individuals and firms.By Dr. Renu Gupta, AcademicianBy Dr. Shivani Arora, AcademicianBy Dr. Meera Mehta, AcademicianIntroductionTaxes are the primary source of revenue for the government that comes as mandatory financial contributions made by individuals and organizations, to fund essential public services, programs, and operations. However, tax collection becomes a challenging job for the government, as the person or an entity may unlawfully and intentionally avoid paying their fair share of taxes (Slemrod, 2007). Tax evasion involves the illegal act of avoiding tax obligations. This can happen through various means such as not reporting income, claiming expenses that are not permitted by law, or failing to pay taxes that are owed. It has numerous implications for any economy, including decreased government revenue, increased income inequality, and distorted incentives for economic growth. Thus, the amount of tax evaded, which could have been used for economic and social development, is used for anti-social activities and creates black money in the country.Tax evasion is a widespread practice in both developed and developing nations, with its prevalence increasing significantly after World War II (Shubhang, 2013; Slemrod, 2007). It involves various illegal methods, including misrepresentation of income and profits, false statements of fact, fabrication of financial records, or outright fraud, to avoid payment of tax. The complexity of tax laws and the burden they place on taxpayers further exacerbate the problem (Nugent, 2013). Some other causes of tax evasion include higher tax rates, lack of integrity on the part of the citizens, the existence of tax havens, etc. Evading taxes is a crime in all major nations, with penalties for offenders including fines and confinement. Income tax, goods and services tax, import-export tax, state border tax, etc., are some mandatory taxes in India. However, some people try to evade paying taxes despite the rules and regulations surrounding these taxes. This article aims to provide a comprehensive analysis of the literature on tax evasion in India and its multifaceted impact on the economy and society. By identifying the factors driving tax evasion and its consequences, this study seeks to inform policy interventions and enforcement measures to address this crucial issue in the Indian context.ObjectivesThis article aims to scan the literature from the Scopus database in the field of tax evasion in India. The objectives of the paper are:RO- To evaluate the importance and impact of the articles that have been published with the title Tax Evasion in India since 2004-2024.RO1: Literature AnalysisThe paper by Benno Torgler published in 2004 titled \"Tax Morale in Asian Countries\" with 100 citations was focused on taxpayer\'s willingness to pay taxes, also known as tax morale, in various Asian countries including India. The paper elaborates that for India, tax morale is positively influenced by trust in the government, democratic values, national pride and the legal system, which collectively shape the tax morale of the people of the country. And the tax morale is higher in India as compared to the OECD countries. The paper also touches on the issue of significant variation within the Asian countries, indicating that the Philippines has a low level of tax morale, while Japan, China, India, and Bangladesh show a higher willingness to pay taxes. The study is well cited but it is dated 2004 and since then the tax regimes in India and other countries have changed significantly and may give a very different picture in today\'s time. Researchers in this field can adopt the methodology used in the paper, which involves conducting survey analyses in a uniform format across different countries, enabling comparative analysis. (Benno Torgler, 2004)Chandan Sharma\'s (2015) paper titled \"Corruption, Governance and Firm Performance: Evidence from Indian Enterprises\" contributes to understanding the complex relationship between corruption, firm behavior, and economic development, particularly touching on how bribery is related to tax evasion. The paper, which has 76 citations, uses self-reported data on bribery (which may not be entirely accurate) to establish a relationship between corruption and firm behavior. The study does not fully indulge in finding the facts of tax evasion but does conclude that firms that are more likely to evade taxes are also more likely to pay bribes to government officials. The implication is clear that bribery may be viewed as a route to avoid detection or consequences of tax evasion. However, the paper does not discuss the ways used by the firms for tax evasion and whether bribes mitigate the consequence of tax evasion. The limitation of the study can be taken as a cue for further research, where the gap is that tax evasion is only considered and studied as a contributing factor of bribery wherein the focus remains on bribery. An alternative approach should be adopted to explore the contributing factors in cases of tax evasion, leading to a more comprehensive understanding of tax evasion in India. (Sharma, 2015)The research paper \"Cash and the Economy: Evidence from India\'s Demonetization\" by Gabriel Chodorow-Reich, Gita Gopinath, Prachi Mishra, and Abhinav Narayanan in 2020 discusses demonetization. The Indian government abruptly removed big denomination banknotes\' legal tender status in 2016. The aim of demonetization was to target black money, corruption, and counterfeit money resulting in reducing tax evasion. The study creates a model to examine the impact of demonetization on economic activity. The model identifies two main reasons why households keep cash in hand: to make trades and to evade taxes.The paper \"Tax Evasion and Optimal Environmental Taxes\" by Antung Anthony published in 2013 is the fifth most cited paper with 53 citations. The paper is an interesting take on how environmental tax can benefit in terms of serving as a cost-effective way to reduce both environmental damage and tax evasion. The discussion revolves around the fact that traditional taxes (income or labor taxes) are easier to evade than environmental taxes (carbon taxes, gasoline taxes). Green tax is tough to evade due to the fact that it is normally a part of the price of goods and services. This would also favor the environmental concerns, and also it benefits in both saving the environment and reducing tax evasion. The paper subscribes to the idea of a \"Green tax swap\" which might be profitable due to improved tax system efficiency in nations with high rates of pre-existing tax evasion.The paper \"The BRICs and International Tax Governance: The Case of Automatic Exchange of Information\" by Dries Lesage et al. (2019) discusses the practice of international tax evasion. The study highlights the role of CRS (Common Reporting Standard) for the purpose of the Automatic Exchange of Information. It further examines the role of \'Automatic Exchange of Information (AEol) by G20 and the Organization for Economic Cooperation and Development (OECD) as a major breakthrough in the global fight against tax evasion\'. The study insists that because of the underreporting of company profits, capital outflows resulting from trade misinvoicing also constitute forms of tax evasion. In addressing tax evasion by affluent individuals, the paper scans the role played by the BRIC nations in the establishment of the multilateral AEol framework, with a focus on the OECD\'s efforts.The paper by Kushwah et al. (2021), titled \"Impact of Tax Knowledge, Tax Penalties, and E-Filing on Tax Compliance in India\", is one of the frequently cited works in this field. The paper does not discuss tax evasion directly, it talks about the opposite of it, i.e., tax compliance. It is very difficult to get information on tax evasion through surveys or questionnaires since tax evasion is a criminal activity and would not be self-reported by companies or individuals, and hence the factors contributing to tax compliance can be considered to study what might make people evade the tax. The finding that heavy penalties increase tax compliance implies that some firms refrain from tax evasion because they fear facing penalties. E-filing eases tax compliance and in turn, makes tax evasion difficult. The paper is an indirect take on how tax compliance factors may result in deterring tax evasion.The study makes another very important contribution with regard to the role of the business environment in tax evasion. The correlation between voluntary audits and tax evasion is not as strong in jurisdictions with superior business environments (as determined by the ease of doing business). This implies that, even in the presence of external audits, a more open and effective business environment may deter tax evasion activities. For further research in the field, public organizations could be taken into consideration.Wadhwa and Pal (2012), in their paper \"Tax Evasion in India: Causes and Remedies\", is a detailed paper on factors contributing to tax evasion in India and proposes potential solutions to address this issue. The paper lays down the apparent causes of tax evasion including high tax rates in India; complexities of tax laws; widespread corruption; inefficient and time-consuming tax collection process and lack of tax literacy. The authors propose a multi-pronged approach to address the issue of tax evasion. This can be done by simplifying the tax system, improving tax administration including the collection of tax, reducing tax burdens, and promoting tax awareness, the authors believe India can create a more efficient and equitable tax environment.Das-Gupta et al. (2004), in their paper \"Tax Administration Reform and Taxpayer Compliance in India\" (2004), do not directly investigate tax evasion but make a valuable contribution to the topic of research. The focus of the paper is on the behavioral response of taxpayers to tax administration practices, and that can be interpreted as indirectly shedding light on how certain policies might influence the incentives for tax evasion.The research paper investigates the counterintuitive idea that assigning high-income taxpayers to special assessment units within the Indian income tax administration might encourage tax evasion. This approach could lead businesses to become less transparent about their income and may lead to \"spillover effect\", i.e., if higher-income taxpayers have higher chances of being held to scrutiny or audit, it might discourage people from complying and increase the efforts of tax evasion.The paper, \"Determinants of Behavior of Payers of Personal Income Tax: An Empirical Study from Indian Context\" by Sanjeeb Kumar Dey, Shradhanjali Panda and Debabrata Sharma published in 2023, focuses on the factors influencing tax compliance behavior among individual taxpayers in India. The study mainly focuses on the factors that motivate individuals to pay their personal income taxes accurately and timely. This is done by employing an empirical approach, likely using surveys or questionnaires distributed to a sample of taxpayers in India. Tax evasion is a topic that cannot be effectively studied through surveys because it is an illegal activity, leading individuals to be reluctant to share truthful information. If the tax system is considered unfair, tax evasion would be higher. The efficiency and transparency of tax administration, the ease of filing procedures, and the perceived risk of penalties for non-compliance, also impact tax compliance and tax evasion. The social factors around tax compliance, trust in government institutions, and the influence of family and friends would lead to either tax compliance or tax evasion.The research findings can inform policymakers on how to design tax policies and improve tax administration practices to promote greater tax compliance among individuals. It also focuses on aspects like simplifying tax filing procedures, increasing transparency, and potentially adjusting tax rates based on economic considerations could lead to a more compliant taxpayer base. The study conducted by Dey and colleagues offers a significant understanding of the elements that encourage people to adhere to personal income tax laws in India. The results may be utilized to create plans for raising government income and enhancing tax compliance.Overall, these research papers offer diverse perspectives on tax evasion in India, highlighting its drivers, potential solutions, and consequences. While some explore the issue directly, others provide insights through related concepts like tax compliance and bribery.ConclusionThe key takeaway of this study is that combating tax evasion can be a useful strategy for raising tax revenue from the wealthy, enhancing the tax system\'s progressivity, and ultimately lowering inequality. Also, enhanced tax enforcement by way of simplified tax procedures, transparency, and adjustable rates of tax will promote tax compliance. The studies discussed also reveal that tax evasion through the lens of tax compliance will give another dimension to the issue of tax evasion. Adoption of technology can be a possible solution to crack upon tax evasion. \"Changes driven by the transformation of information into digital formats for use by computers seem likely to affect tax evasion in the years ahead\" (Alm, 2021)References:Alm, James. 2021. Tax evasion, technology, and inequality. Economics of Governance 22:321-Narayanan, A & Reich, G & Gopinath, G & Mishra, P (2020). CASH AND THE ECONOMY: EVIDENCE FROM INDIAS DEMONETIZATIONArindam Das-Gupta, Ghosh, S. & Mookherjee, D (2004). Tax Administration Reform and Taxpayer Compliance in India. International Tax and Public Finance, 11, 575-600Dr. S Devarajappa. (2017). Tax Evasion in India: a Study of Its Impact on Revenue of the Government. EPRA International Journal of Economic & Business Review, 5(9), 134-138Lesage, Dries; Lips, Wouter; Vermeiren, Mattias (2019). The BRICs and International Tax Governance: The Case of Automatic Exchange of Information. New Political Economy, (), 1-19Siva Nathan;, F. K. D., & Siva, S. (2023). External audit and tax evasion: evidence from India. Applied Economics, 55(34), 4023-4036Nugent, David. (2013). Legislating Morality: The Effects Of Tax Law Complexity On Taxpayers Attitudes. Journal of Applied Business ResearchPal, D. W. and B. (2012). Tax evasion in India: Causes and remedies. International Journal of Law and Management, 54(2), 121-130Sanjeeb Kumar Dey, Shradhanjali Panda, and D. S. (2023). Determinants of Behavior of Payers of Personal Income Tax: An Empirical Study from Indian Context. Journal of Tax Reform, 9(3), 262-277Sharma;, C. Mitra, A (2015). Corruption, governance and firm performance: Evidence from Indian enterprises. Journal of Policy Modelling, 37(5), 835-851Shubhang (2013), Tax Evasion in India, Research Journal of Humanities and Social Sciences, Volume: 4, Issue: 4, 465-469Silky Vigg Kushwah, Neelam Nathani, and Vigg, M (2021). Impact of tax knowledge, tax penalties, and E-filing on tax compliance in India. Indian Journal of Finance, 15(5-7), 61-74Slemrod, Joel. 2007. \"Cheating Ourselves: The Economics of Tax Evasion.\" Journal of Economic Perspectives, 21 (1): 25-48Authors may be reached at renu.jmc@gmail.com and eboard@icai.in
Ep. 361 — Interest under GST- Has the debate stopped?
CA Journal
· September 2026
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Interest under GST- Has the debate stopped?Section 50 of the CGST Act imposes interest liability on the person who fails to pay tax. Even though the legal provisions are not lengthy, the same has been a subject matter of continuous discussion. Thus, it is crucial to understand the current issues revolving around this section and the amendments (made effective), since the advent of GST Act.By CA. Arpit Garg, Member of the InstituteUnder the GST Law, interest is levied under Section 50 of the Central Goods and Services Tax Act, 2017 (\'CGST Act\'), read with Notification No. 13/2017-Central Tax dated 28th June 2017 (collectively referred to as the \'Interest Provisions\'). Such interest provisions have been tested in various High Courts to analyze the applicability of interest on delayed payment of tax (e.g., Interest on Gross vs Net Tax Liability, what constitutes as payment of tax, i.e., Depositing in the Electronic Cash Ledger vs Filing of Form GSTR-3B).The GST Council has time and again addressed this matter (based on the recommendations from industry and case laws) in its meetings notably in the 31st, 35th, 39th, and 43rd Council meetings. As a result, the Central Government has amended these interest provisions multiple times, even retrospectively.Recently, the Hon\'ble High Court of Madras in the case of M/s Eicher Motors Limited (W.P. Nos. 16866 & 22013 of 2023 and W.M.P. No. 32200 of 2023) (hereinafter referred to as \'case under discussion\', has analyzed the Interest Provisions in its judgement dated 23rd January 2024.Under this article, an attempt has been made to discuss the amendments made under the Interest Provisions along with the interpretation of such provisions by various High Courts referred to in the case under discussion.A) Sub-section 1 and Sub-section 2 of Section 50 of the CGST Act1) Interest on Gross Tax Liability or Net Tax Liability1.1 As per the Interest Provisions implemented on 1st July 2017 (read with Notification No. 9/2017 dated 28th June 2017), interest was applicable on a person who failed to pay tax at the rate of 18%, within the prescribed period. Such interest was computed from the day immediately following the due date for payment until the tax was fully paid. Initially, it was interpreted that tax would mean gross tax liability. No relevance or importance was given to the mode of payment of such tax (whether through the Electronic Credit Ledger (\'ECrL\') or the Electronic Cash Ledger (\'ECL\')) and 18% interest was made applicable on tax short paid irrespective of its mode of payment.1.2 The same resulted in a debate as to whether the interest liability would arise on Gross Tax Liability or Net Tax Liability. The said issue was deliberated by the Law Committee and in 31st GST Council meeting it was decided that amendments be made in GST Law to provide for interest on the amount paid by ECL (not on gross tax liability).1.3 Vide Section 100 of Finance Act, 2019, read with Notification No. 63/2020 dated 25th Aug 2020 (effective from 1st Sep 2020), a proviso was inserted to Section 50(1) of the CGST Act which states that interest shall be levied on that portion of tax that is paid by debiting the ECL (in respect of supplies made during a tax period and declared in the return for said period, furnished after the due date). It is pertinent to note that this amendment was prospective in nature and resulted in GST Council to further deliberate the intent of GST Law.1.4 Accordingly, the said proviso was further substituted w.e.f. 1st July 2017 vide Section 112 of the Finance Act, 2021, (read with Notification No. 16/2021 dated 1st Jun 2021) to provide that interest shall be payable on that portion of tax which is paid by debiting the ECL. It is pertinent to mention that vide Finance Act 2021, the benefit introduced vide Finance Act, 2019, was retrospectively allowed (since the inception of GST) to limit the exposure of interest to the amount that is paid through ECL.1.5 Further, Rule 88B of the CGST Rules 2017 inserted w.e.f. 1 Jul 2017 vide Notification No. 14/2022 dated 5th Jul 2022 prescribes that interest shall be calculated @18% on the amount paid by debiting ECL, depending on the delay in filing the return under section 39 (where a registered person declares supplies made during a tax period in their return for that period, and this return is submitted after the due date). For other cases, interest @18% shall be paid starting from the day on which such tax was due to be paid till the date such tax is paid.AnalysisThe amendments discussed above intend to settle the dispute with the GST Authorities w.r.t. the amount of tax on which interest is applicable, incase the same is paid via Input Tax Credit and Cash. Finance Act, 2021, resolves the issue (Interest on Gross Tax Liability or Net Tax Liability) by providing (w.e.f. 1st July 2017) that interest shall be applicable only on the net portion of tax, i.e., the amount that is paid by ECL.Another Pandora Box... debate continuesHowever, the interpretation of some of the provisions of the CGST Act by the Hon\'ble Madras High Court (discussed later) in the case under discussion has opened another Pandora\'s box of litigation by ruling that merely deposit of the amount under ECL constitutes payment of tax, and delay for computing interest would accordingly be calculated (date of filing of Form GSTR-3B is not considered relevant under Section 50(1)).2) Judicial Interpretations on what constitutes as payment of tax1.6 Section 50(1) states that interest shall be applicable if tax is not paid within the period prescribed. Hon\'ble Madras High Court in the case under discussion has referred to Section 39 of the CGST Act to determine the period prescribed.1.7 Section 39(7) of the CGST Act states that tax shall be paid to the Government not later than the last date on which the registered person is required to furnish the return.1.8 On a combined reading of the above provisions, Hon\'ble Madras High Court has interpreted that the tax paid to the Government before the date on which Form GSTR-3B is required to be furnished, would constitute as sufficient compliance for non-charging of interest.1.9 Thus, the Hon\'ble Court has held that there is no linkage between the filing of Form GSTR-3B and the payment of tax to the Government. It has said that \"for payment of tax to the Government filing the monthly returns is not the matter but the last date for furnishing the monthly return is important. Thus, whether the monthly return is filed in time or not but the GST has to be remitted not later than the last date for filing the monthly returns.\"1.10 To analyse \'payment of tax to the Government\', the court referred to the Explanation to Section 49 and Form GST PMT-06 (form for depositing amount in the ECL). Hon\'ble Court mentioned that Form GST PMT-06 refers beneficiary as RBI wherein the GST account of Government is maintained and Explanation to Section 49 states that the date of credit to the account of the Government in the Authorised bank shall be deemed to be the date of deposit in the ECL. It has been interpreted that vide depositing the amount in ECL, the amount is first credited to the account of the Government and thereafter it is reflected in the ECL, meaning that the tax has reached the kitty of the Government once it is deposited in ECL.1.11 It further stated that the amount once deposited in the ECL is made available to the Government for their use and at any cost, the exchequer cannot be deprived of its right to utilize the amount deposited into the Government account under the pretext of non-filing of GSTR-3B monthly returns.1.12 Further, placing reliance on Section 39(1), the court stated that while filing GSTR-3B, it is mandatory to provide details about the tax paid, which means that prior to the filing of any such form, tax should have been paid to the Government. Also, it said that the Government follows a prescribed procedure (which includes proper verification) for granting refunds under the GST Law, and also it pays interest in case of delay, which would not be the case if the amount has not been paid to the Government already.1.13 Additionally, the Hon\'ble Court mentioned that it is not that the discharge would be treated only when debit entries are made in ECL (while filing Form GSTR-3B). It is treated as a mere accounting entry that does not has any relation with the actual payment of tax to the Government.1.14 The Hon\'ble High Court has also distinguished the timeline interpreted by the Jharkhand High Court in the case of M/s RSB Transmissions India Limited (W.P(T) No. 23 of 2022) under proviso to Section 50(1) of the CGST Act (date of debiting ECL). The Hon\'ble Madras High Court relied on the judgement of the Hon\'ble Apex Court in the case of Romesh Kumar Sharma, stated that normally a proviso does not travel beyond the provision to which it is a proviso.1.15 Based on the above interpretation of various provisions of the GST Act, the Hon\'ble Madras High Court has held that the deposit of the amount in ECL would be treated as payment of tax to the Government. Alternatively, it can be said that there would be no interest (even if Form GSTR-3B is delayed) if the amount is deposited in ECL before the due date.1.16 Interestingly, other High Courts have interpreted the provisions differently and have given importance to filing of Form GSTR-3B, credit/debit entries in ECrL and ECL. Some of the contrary rulings on the Interest Provisions are mentioned below:High Court of Telangana in the case of M/s Megha Engineering & Infrastructures Ltd (WP. No. 44517 of 2018).High Court of Jharkhand in the case of M/s RSB Transmissions India Limited (W.P.(T) No. 23 of 2022).AnalysisThe above judgement/interpretation of the Madras High Court (in the case under discussion) opened a pandora box of litigation while dealing with the GST Authorities wherein the taxpayer would tend to rely on the case under discussion and GST Authorities would rely on other contrary rulings. Thus, it became crucial for the GST Council to take cognizance of the matter and the same was taken up in 53rd GST Council Meeting held on 22nd June 2024. Therein, the GST Council recommended an amendment in Rule 88B of the CGST Rules providing that the amount available in ECL on the due date of filing Form GSTR-3B shall not be included while calculating interest under Section 50 of the CGST Act (in line with the interpretation of the Madras High Court in the case under discussion).In light of the above recommendation, a proviso was inserted in Rule 88B of the CGST Rules vide Notification No. 12/2024 dated 10th Jul 2024 (reproduced below for ease of reference):\"Provided that where any amount has been credited in the Electronic Cash Ledger as per provisions of subsection (1) of section 49 on or before the due date of filing the said return, but is debited from the said ledger for payment of tax while filing the said return after the due date, the said amount shall not be taken into consideration while calculating such interest if the said amount is lying in the said ledger from the due date till the date of its debit at the time of filing return.\"The above amendment would be benefical to taxpayers who have deposited the amount in ECL on or before the due date of filing Form GSTR-3B, but have filed the said return belatedly.Even after the above amendment, it would be pre-mature to conclude that the debate around the interest provisions has settled. However, it would be interesting to see the interpretation from the following perspective:Prospective vs Retrospective application: Though the above amendment in Rule 88B is applicable w.e.f 10th July 2024 (prospectively), it will be interesting to see whether a plea is taken by taxpayers to extend the benefit for prior period(s) too (considering that the mechanism of making payment and filing return has been the same since the advent of GST).Will the benefit be extended to the amount lying in ECL based on the number of days: The proviso states that the amount would be excluded from the computation of interest if the amount is deposited on/before the due date and keep lying till the date of its debit at the time of filing return. However, it will be interesting to see whether this benefit is extended based on the number of days an amount keep lying in the ECL. For example, if a taxpayer has a cash liability of INR 1,00,000 for Aug and deposits the said amount in ECL on 20th Sep but fails to file the return till 30th Sep. In the meantime, say, he utilises INR 60,000 to pay any other outstanding liability (via Form DRC-03) on 28th Sep and deposits the same again on 30th Sep while filing Form GSTR-3B for Aug, will INR 60,000 be exempted from interest for 8 days?Though the current provisions does not seem to extend the benefit of excluding INR 60,000 from interest for 8 days it will be interesting to observe the arguments of taxpayers and position of the Authorities going forward.B) Sub-section 3 to Section 50 of the CGST Act1) Making the provisions relevant as per the current schema of GST Returns1.1) As per the CGST Act implemented on 1st July 2017 (read with Notification No. 9/2017 dated 28th Jun 2017), a taxable person who makes an undue/excess claim of input tax credit or undue/excess reduction in output tax liability u/s 42(10) or 43(10) respectively was required to pay interest at the rate of 24% (as notified) under section 50(3). However, since the complete matching and reversal introduced vide the Forms GSTR-1, GSTR-1A, GSTR-2, GSTR-2A, and GSTR-3 was not made effective, the suitable amendment was necessitated.1.2) Vide Section 111 of the Finance Act, 2022, (read with Notification No. 09/2022 dated 5th Jul 2022, sub-section 3 of Section 50 was retrospectively substituted w.e.f. 1st Jul 2017. As per the substituted provisions, interest at a rate not exceeding 24% may be levied on the amount of input tax credit wrongly availed and utilized by the registered person.1.3) Also, vide Section 116 of the Finance Act, 2022 (read with Notification No. 13/2017-Central Tax dated 28th June 2017), the interest rate under Section 50(3) was notified as 18% (reduced from 24%) retrospectively w.e.f. 1st Jul 2017.1.4) Further, Rule 88B of the CGST Rules 2017 inserted w.e.f. 1st Jul 2017 vide Notification No. 14/2022 dated 5th Jul 2022 (read with Circular No. 192/04/2023 dated 17th Jul 2023) provides clarification on what would construe as wrong availment and utilization of Input Tax Credit along with the method of charging interest in cases where IGST credit has been wrongly availed by a registered person.AnalysisAmendments discussed above substitutes the erstwhile provision of Section 50(3) in line with the compliances in force under the GST Law. Further, it is pertinent to highlight that Central Government still has the power to increase the rate of interest on such wrong availment and utilization under this subsection from 18% to 24%.References:(No explicit references listed in source)Author may be reached at garg.arpit1975@gmail.com and eboard@icai.in
Ep. 363 — Amendments to FCRA Form FC-4: Disclosure of asset details & suggested accounting treatment of assets
CA Journal
· September 2026
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Amendments to FCRA Form FC-4: Disclosure of asset details & suggested accounting treatment of assetsThe recent amendment to the reporting requirements under FC-4 underpins the importance of adapting sound systems for asset recognition, accounting, and tracking of the same in the books of accounts of the NGOs. Without such clarity, the FCRA-registered NGOs face the risk of non-compliance under FCRA, which could adversely impact their very sustenance. This article highlights the new compliance requirements and suggests how NGOs should account for and report their finances, both in their financial statements and FC-4.By CA. Swati Arya, Member of the InstituteBy CMA PK Sriraman, Cost and Management Accounting ProfessionalIntroductionThe Foreign Contribution (Regulation) Act of 2010, commonly referred to as FCRA, serves as a pivotal piece of legislation in India, meant for governing and overseeing the inflow and utilization of foreign contributions to the country. This legislation, the revised version of which has been in place since 2010, plays a crucial role in regulating the activities of individuals, associations, and various organizations in India that receive foreign funding or contributions from abroad. Its primary objective is to ensure that these foreign contributions are utilized for their designated purposes and do not threaten the nation\'s security or integrity.However, over the years, the landscape of foreign contributions and the methods employed by organizations to manage these funds have evolved significantly. To adapt to these changing dynamics and foster greater transparency and accountability in using foreign contributions, the Government of India has periodically introduced amendments to the FCRA. The most recent set of amendments, which have been a subject of significant discussion, are related to the modification of Form FC-4, an integral component of the FCRA reporting framework.Form FC-4 is an annual returns form that organizations receiving foreign contributions are mandated to submit. In its original form, it primarily focused on financial information, requiring organizations to disclose details of their foreign funding sources, the purposes for which these funds were intended, and how they were utilized. However, the most recent amendments have taken this form to a new level, significantly expanding its scope and introducing a whole new dimension of reporting, i.e., the disclosure of an organization\'s assets.These amendments, which were introduced through a Gazette Notification (G.S.R. 683(E)) in September 2023, have far-reaching implications. They essentially signify the Indian government\'s commitment towards modernizing and enhancing the regulatory framework surrounding foreign contributions. By requiring organizations to provide comprehensive information about their assets, the government aims to ensure that foreign funds are being deployed for their intended objectives and not being diverted for other purposes.The inclusion of asset disclosures in Form FC-4 not only bolsters transparency, but also serves as a safeguard against the misuse of foreign contributions. It ensures that regulators have complete details of the assets in case they need to act upon the FCRA-registered entities and take control of the assets that are in their custody.This article offers a comprehensive overview of these recent amendments, providing valuable insights into their implications, and further extends its focus to suggest proper accounting treatment for assets, specifically aimed at Non-Governmental Organizations (NGOs) that are the primary recipients of FCRA grants. By emphasizing compliance with regulatory requirements and financial reporting standards, the article guides FCRA-registered NGOs and other organizations to effectively account for assets, ensuring that their financial practices align with the legal obligations imposed by the FCRA. The cost of non-compliance with the FCRA rules is far-reaching. It is, therefore, important for all the FCRA entities, the financial professionals working in those organizations and their auditors, to understand the nuances of the new requirement and comply with the same in its entirety.Amendment to FCRA 2010 in Sept-23 and the changes in FC-4The Gazette Notification G.S.R. 683(E) dated September 22, 2023, which is exactly two years after the last major change in the Act, which was introduced in September 2021, is a significant change in the Foreign Contribution (Regulation) Act (FCRA) in India. Vide this notification, the specified annual return Form FC-4 (Annual Returns) has been modified. The modification involves the addition of two new tables, namely 3(ba) and 3(bb), to the form. These new tables are meant to capture detailed information about movable and immovable assets held by organizations receiving foreign contributions.The primary aim of this modification is to enhance transparency and accountability in the utilization of foreign contributions. By requiring organizations to disclose comprehensive information about their assets, the government can ensure that foreign funds are being used for their intended purposes and are not diverted for other uses. This is in line with the broader goal of the FCRA to regulate and monitor foreign contributions to safeguard India\'s national interests and security.Additionally, this modification is significant as it provides a mechanism for regulators to have visibility into the assets that are \"held in trust\" by FCRA-registered NGOs. This becomes especially important in situations where an organization\'s registration is cancelled under Section 14 of the FCRA 2010. According to Section 15, when an organization\'s registration is cancelled, the assets created out of foreign contributions that were in the custody of that organization will vest in a prescribed authority. As with liquid assets held by NGOs (in the form of bank balances), the Ministry of Home Affairs (MHA) can notify the respective bank branches by quoting the account details of designated and utilization accounts and inform the bank about freezing the account. The availability of asset details will facilitate the MHA in taking charge of these assets in the event of suspension and/or cancellation of the FCRA registration of the entity.In summary, the modification of Form FC-4 with the addition of Tables 3(ba) and 3(bb) is a regulatory step aimed at ensuring that foreign contributions are used appropriately, and it provides a mechanism for the government to take control of assets held by organizations whose FCRA registration has been cancelled, as specified in Section 15 of the FCRA 2010. This change underscores the government\'s commitment to monitor and regulate foreign contributions in a manner that aligns with India\'s national interests.Note: It\'s worth noting that the MHA is concerned only about assets created/purchased out of FCRA funds and not from local funds.Definition of AssetsIn order to comply with this rule, we first need to understand the definition of \'asset\', as this term is not defined in the FCRA. Therefore, it should be interpreted in a way that is commonly understood and deemed appropriate. \"Assets\" are economic resources owned or controlled by an organization that has the potential to provide current and/or future economic benefits. They can be tangible, such as buildings, land, and machinery, or intangible, such as patents, trademarks, or intellectual property rights. Accurate and transparent accounting of assets is essential for purposes of financial control, reporting of grant utilization, and for better transparency.Another dimension in defining \'assets\' is also the significance of the unit cost of acquiring the assets. For example, common staplers used in offices. It may last for a few years. However, the cost of the stapler is not significant to categorize the same as an asset. Applying principles of materiality, such items should rather be categorized as consumable items of stationery and expensed off in the year of purchase. As such, evaluation cannot be done from item to item and on a case-to-case basis. Most organizations have a pre-defined unit cost above which the item will be treated as an asset; otherwise, the item will be treated as a part of the revenue expenses. Such details are usually found in a well-defined Asset Policy document of formal sector organizations.Accounting Guidelines for NGOs for sharing details in Table 3(ba) of FC-4Table 3(ba) reporting is specifically w.r.t. movable assets. In the context of movable assets, we can further categorise them into 2 parts for accounting purposes in the development sector:Assets that are under the control of the NGO.Assets distributed to beneficiaries and therefore, not under the control of the NGO.Assets Recognition1. Assets that are under the control of the NGOsNGOs should recognize tangible assets at cost, less accumulated depreciation, and intangible assets at cost or fair value, depending on the nature of the asset in their balance sheet. These assets include items such as laptops, which are purchased and issued to the employees but still considered under the control of the NGO. Such expense on assets needs to be shown as utilization of donor funds to the donor and should be shown as an expense in the income & expenditure account. Further, since this laptop remains under the control of the organization, it qualifies as an asset & must be reported as such in the balance sheet.This can be done in 2 different ways:Alternative 1: Show the asset at its nominal value. However, this method will not show the actual value of the asset & is therefore not recommended.Alternative 2: Show the asset in the balance sheet at cost & create an asset reserve of the same amount against it. Now, depreciation is to be charged annually. This will reduce both the asset value (cost minus depreciation) and the asset reserve (asset reserve minus depreciation). This depreciation shall not be shown in the Income & Expenditure account.2. Assets distributed to beneficiaries and not under the control of the NGOAssets purchased and distributed by the NGO to the beneficiary are considered operational expenses. Furthermore, these assets, irrespective of their value, are not under the control of the NGO and therefore do not meet the definition of an asset. As a result, they should be expensed and shown as program expenses in the Income & Expenditure A/c. For example, if an NGO buys movable assets (such as tabs, headphones, etc.) and distributes them to schools, children, or ASHA workers as a part of the program design, it is incorrect to classify them as assets in the books of the NGO. The NGO should rather treat the cost as a revenue expense and report the same as a part of the program expenditure.However, NGOs must exercise caution not to procure and distribute assets to other NGOs, as the transfer of assets is deemed sub-granting under the FCRA, which is not permissible under the law. For instance, if a district-level or state-level apex body of the SHGs is registered as a Society or Section 8 Company, transferring assets to such entities, for example, to set up a processing centre to benefit the members of the SHG, may be viewed as a violation under the FCRA, as it amounts to sub-granting.Guidelines for NGOs for reporting details in Table 3(bb) of FC-4Table 3(bb) of Form FC-4 focuses on the disclosure of immovable assets, such as land, buildings, and other fixed structures, acquired using foreign contributions. NGOs are required to provide details, including the complete address of the location where the asset is located, along with its size. These assets must be accurately recorded in the organization\'s financial statements at their original cost, reduced by any accumulated depreciation over time. Proper identification and reporting of immovable assets in this section are essential for ensuring FCRA compliance. NGOs should also differentiate between assets funded through FCRA contributions and those financed through local sources, ensuring the reporting aligns with both regulatory and financial standards. This includes careful accounting for depreciation and maintenance in accordance with the organization\'s asset management policies.Assets received in kind by the NGOsAs per the definition in section 2(1)(h) of FCRA, 2010:\"Foreign contribution\" means the donation, delivery or transfer made by any foreign source, (i) of any article, not being an article given to a person as a gift for his personal use, if the market value, in India, of such article, on the date of such gift, is not more than such sum as may be specified from time to time, by the Central Government; (ii) of any currency, whether Indian or foreign; (iii) security as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 and includes any foreign security as defined in clause (o) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).In view of the above, assets gifted by any foreign source are a foreign contribution and are to be disclosed in FC-4. The recipient NGO may assign a notational value to the asset received and treat that as income and the corresponding utilization could be an asset addition. For purposes of ensuring proper tracking and transparent declaration of asset value in the balance sheet, the NGO may again use the same principles, and create an Asset Reserve for the notional value of the asset received in-kind as a donation.ConclusionIn conclusion, the recent amendments to Form FC-4 under the Foreign Contribution (Regulation) Act, 2010 (FCRA) signify a significant step towards enhancing transparency and accountability in the utilization of foreign contributions by organizations in India. These changes, introduced through the Gazette Notification G.S.R. 683(E) in September 2023, have expanded the scope of reporting by requiring detailed disclosures of an organization\'s assets. The government\'s primary objective behind these modifications is to ensure that foreign contributions are being used for their intended purposes and that they are not diverted for other uses, thus safeguarding India\'s national interests and security.It is worth noting that the Ministry of Home Affairs (MHA) is particularly concerned about assets created or purchased using FCRA funds and not assets financed with local funds. Properly accounting for these assets is essential to maintain financial integrity and to comply with regulatory requirements and financial reporting standards. Organizations should ensure values shown in the tables in FC-4 match with the asset figure in its FCRA balance sheet. Therefore, care should be exercised while recognizing assets in the books of accounts, particularly in the FC books. Assets in the balance sheet should represent only those items that are owned by the organization and are under the control of the organization.The recent amendments to Form FC-4 and the accounting guidelines for assets within the development sector contribute to the overarching goal of strengthening accountability and transparency in the utilization of foreign contributions. By adhering to these guidelines and maintaining accurate records of assets, NGOs can fulfill their mission of serving society and demonstrating their commitment to the responsible management of foreign contributions in line with India\'s national interests. These amendments reflect a proactive step by the government to regulate and monitor foreign contributions effectively, aligning with the objectives of the FCRA.References:Foreign Contribution (Regulation) Act, 2010 (FCRA) - The official text of the FCRA 2010, which serves as the legal framework for regulating foreign contributions in India.Gazette Notification G.S.R. 683(E) dated September 22, 2023 - The official government notification that details the amendments to Form FC-4 and the introduction of tables (3ba) and (3bb).Authors may be reached at swati123p@gmail.com and eboard@icai.in
Redefining the Loan Business; Alternate Investment Options: NBFC P2PWealth maximization is a generic characteristic of every individual. Individuals prefer various modes of risk profiling and diversification of portfolios in order to maximize wealth and minimize the risk associated with assets. Amongst others, individuals can have the option to make use of their idle funds to invest authentically for needy people, in the form of loans with a return of interest income on it via registered NBFC P2P.By CA. Subash Thakuri, Member of the InstituteNBFC P2P stands for Non-Banking Finance Company Peer-to-Peer lending business governed by the Reserve Bank of India. NBFC P2P is a technology platform that acts as an aggregator/monitor of transactions between loan provider (investor) and loan taker (borrower) in order to keep the space unbiased and fair. It has become a crowdfunding pool nowadays, to collect fund(s) from eligible investors and make the availability of fund(s) to needy people. It is now a new avenue of investment option and an alternative corner for loan seekers for an authentic and hassle-free process.Current ScenarioUnlike the ongoing fintech burst, the NBFC-P2P is licensed and duly governed by the regulator, i.e., the Reserve Bank of India (RBI). As of January 2022, the RBI has given the Certificate of Registration (CoR) to 25 companies across India.Geographically, South India, including Bengaluru (known as the tech-driven Silicon Valley of India), Chennai, and Hyderabad, have a total of 9 registered NBFC-P2P companies. The first of these was Etyacol Technologies Private Limited (known as Cashkumar), likely the first city-based registered NBFC-P2P in India. More recently, LF2Peer Financial Services Private Limited has also been registered. The Western Region based out of Mumbai has 10 registered NBFC-P2P (highest across the region) and is widely involved in the higher business, even keeping the Silicon Valley of India, Bengaluru city behind it as far as business volume is concerned, irrespective of the business being entirely tech-driven. Central India has only 1 registered NBFC-P2P namely RNVP Technology Private Limited (known as i2ifunding.com). North India has 5 registered NBFC-P2Ps. Eastern India, as of date, has not even registered a single NBFC-P2P but an applicant might be in the process of getting it done.Fintech BusinessOngoing fintech businesses are like marketing and servicing agency businesses instead of innovation and developments. Most fintech corporations working in the field are acting as a business associate in terms of lead generation, management, and distribution of underlying products of actual owners i.e., Banks, Financial Institutions, NBFCs, etc. In order to increase and enhance user confidence and experience tech, people are engaging themselves to leverage the existing system at the tip of their mobiles or by implementing easy user interface or instrument acceptability. In a nutshell, it can be said that major fintech players are hedging existing resources against the cost of authorization or license of financial institutions in the market. It is the technology service provider of the owners of underlying assets, not the owner of actual assets, including but not limited to Buy Now Pay Later, Neo Banking, or Google Pay.DifferenceIn contrast, the NBFC-P2P is a tech-driven lending business that does not infuse its own funds. Instead, the lender (investor) comes to the platform for utilization of their fund on better borrowers for higher rates of returns. In fact, this license owner is subject to managing an accredited and approved technology platform from the Reserve Bank of India to onboard both Borrower and Lender on its own criteria and with underlying credit assessment methodology without its own involvement. The system participant acts upon the available deal and the same is served by NBFC-P2P, Trustee of the Nodal Account i.e., Escrow Disbursement and Escrow Collection Account with any scheduled Sponsor Bank to operate therein.Therefore, unlike the fintech people available in the market, NBFC-P2P has its own big market with limited market players. No doubt, it provides an alternative platform to investors for portfolio diversification and wealth maximization, however on the other hand, it is up to you to verify the details before making any investment on those platforms. Similarly, the borrower must also check the authenticity of the platform before entering the transaction. Otherwise, the false representation of NBFC-P2P and fraud against the end user are not new occurences in the financial market.Regulatory SegmentAuthorization ProcessThe prospective applicant shall form a company domiciled in India under the provision of the Companies Act, 2013. The company shall have a minimum net owned fund requirement of INR 2 Crore. When it says \"form a company\" and \"net owned fund\", the applicant shall make proper provision for underlying expenses and the required capital fund must be enhanced by that provision. It is advisable to go with a fresh company and in the formation of a fresh company costs are associated with the capital structure and service availed. Thus, the capital of INR 2 Crore alone does not support to derive at the minimum requirement of net owned fund of INR 2 Crore. As the company is newly formed, there is no positive reserve; therefore, any expenses, whether for the formation of stamp duty or consultancy fee, directly decrease the reserve and surplus, resulting in the net owned fund below INR 2 Crore. Therefore, it is advisable to maintain a little higher capital when forming a fresh company to apply for the license.The company shall have the basic three fundamentals of this business domain i.e., necessary technology, entrepreneurship, and managerial resources in line with a robust and secure Information Technology System to get the registration i.e., the Certificate of Registration (CoR) from the regulator i.e., the Reserve Bank of India. Once the company is formed, if required, as per the requirements of getting approval from the regulator, a shuffle is advisable, as during the scrutiny process from the regulator, such changes may not be positively taken. Therefore, it is a must to have proper planning before submission to the regulator.Primarily, the regulator i.e., the Reserve Bank of India has a three-dimension scrutiny basis: first being the composition of the Board; second, the capital; and third being the business plan vision & mission aligned with the goal of serving the public interest at large if the CoR is granted to the applicant. These aspects must be thoroughly reviewed and appropriately presented with effective quality control; the result can be positive, or the regulator has a very particular rejection model.Nowadays, fintechs are very active in the finance market but surprisingly these entities are not so proactively applying for the Certificate of Registration (CoR); the reason is sound and loud and clear due to the lacunae of existing practices. The fintech entity\'s purpose is solved by existing traditional NBFC through underlying agreement, keeping the red eye of the RBI on its own, not on the fintech partners. However, in light of the recent developments, the RBI is very proactive and closely monitoring such partnerships and businesses in depth. Often, reminders, notices, and circular are now being issued on various matters including KYC, Penal Interest, digital lending practices, and so on.Salient Features of Business ModelLet us discuss some special features of this business model, some do\'s and don\'ts to have an in-depth understanding of the business operation/model.Being a marketplace or platform, participants with their specific login details have access to their own dashboards for various listings. For the lender, it shall be a borrower profile listing with a ranking or score as per the underwriting model, and on the other hand, for a borrower, the list of interested lenders shall be displayed in the dashboard. Both desktop and mobile versions are available in the market for such information. The matter to be checked and taken note of is that such a platform shall be authorized and regulated by the Reserve Bank of India. Such a list of institutions can be checked on the RBI website on https://www.rbi.org.in/Scripts/BS_NBFCList.aspx.Online marketplace or platform for the participants (here the participants refer to the Investor (Lender) and Borrower)Cannot raise depositsNot lending on their ownNo credit enhancement or credit guaranteeNot holding, on its own balance sheet, funds received from lenders for lending or funds received from borrowers for servicing loansNo cross-selling (of) any product except for loan-specific insurance productsNot permitted to international flow of fundsStore and process all data relating to its activities and participants on hardware located within IndiaUndertake due diligence on participantsPerform credit assessment and risk profiling of the borrowers and disclose the same to their prospective lendersObtain prior and explicit consent of the participants to access their credit informationUndertake documentation of loan agreement, related documents, and assistance in disbursement and repayment of the loan amountRender services for recovery of loans originated on the platformPrudential NormsSuch registered NBFC-P2P, whose leverage ratio shall not exceed 2. Further, aggregate exposure of lenders to all borrowers at any point of time, across all P2P platforms, shall be subject to a cap of INR 50 Lakh, provided that such investments are supported by their net-worth.Lenders investing more than INR 10 Lakh across all P2P platforms shall produce a certificate to the P2P platform from a practicing Chartered Accountant certifying a minimum net worth of INR 50 Lakh.Accordingly, aggregate loans taken by a borrower at any point of time, across all P2Ps shall be subject to a cap of INR 10 lakh, however, the exposure of a single lender to the same borrower, across all P2Ps, shall not exceed INR 50k.The maturity of loans shall not exceed 36 months. The platform shall obtain a certificate from the borrower or lender, as applicable, that the limits prescribed above are being adhered to, from time and again for compliance matters.Other than this, in addition to the above, the general prudential norms for income recognition, provision, assets classification, etc. shall be as per the underlying master direction(s) for the non-systematically important non-banking finance company.Reporting RequirementsRegulated entities, unlike others, shall have segment-specific reporting in addition to general reporting. They are required to get themselves registered with the Financial Intelligence Unit of India (FIU-IND) for the submission of suspicious transaction. Further, to update the credit data, the registered entity will be required to obtain membership of 4 Credit Information Company (CIC) for both pull and push of data for the underwriting model of business.The credit information data shall be submitted by the 15th of the following month, generally on a monthly basis, in the given format of the CIC company. Further, with the help of the pull-data authority, the registered entity can download the required credit information from CIC, helping the platform to assess the credibility of the borrower. This greatly assists the underwriting model of the company.Besides this, the RBI has strictly mandated that the following quarterly statements shall be submitted to the aforesaid Regional Office within 15 days after the quarter to which these relate:a) Statement showing number and amount in respect of loans disbursed, closed, outstanding at the beginning and end of the quarter.b) Amount of funds held in the Escrow Account, bifurcated into funds received from lenders and fund received from borrowers, with credit and debit summations for the quarter.c) Number of complaints outstanding at the beginning and end of the quarter, disposed of during the quarter, bifurcated as received from lenders and borrowers.d) Leverage ratio, with details of its numerator and denominator.Other than this, the XBRL reporting, like DNBS13 (Overseas Investment), DNBS02 (Important Financial Parameter), and DNBS10 (Statutory Auditor Certificate) is mandatory.ConclusionNBFC-P2P is the future, but most people do not know about it. It can shift the paradigm of traditional banking to the next level, unlike the existing neo-banking concept. Due to recent developments, or rather ongoing developments on a daily basis for the finance segment, NBFC-P2P can do far better than the existing performance. It has a full-fledged concept of being digital and technical, yet the underlying guidelines and regulatory framework will need to come into the picture. It may be that the existing NBFC-P2P is less explored, minimally popular, and not so widely accepted in India as of date, irrespective of its growing popularity today. The concept of this platform is simple: automation of easy finance in a controlled environment, managed and supervised by professionals and industry experts.Most banks and financial institutions, due to recent developments in product offerings and circumstances, have formed separate Digital Banking Units to provide fair and transparent user interfaces when it comes to mobile or internet banking. The debate on the potential of NBFC-P2P is large, and it has a huge impact on traditional banking. Banks have the license to collect the deposit and lend such deposit to the public at large for their credit needs. On the contrary, NBFC-P2P is a crowdfunding concept where those with idle funds can have investment options, helping the needy people on a decided rate of interest. Funds can be arranged through NBFC-P2P, by not going to the bank unlike earlier, but the cost of raising funds is part of the thought process as the terms are mutually agreed upon and accepted via the platform. The cost of funding on this platform is comparatively expensive if the borrower\'s profile is not good, and the platform management fee is higher. Otherwise, the platform can be an alternative mode for borrowers to raise funds. Similarly, on the other hand, it is an alternative investment platform that assures a return far beyond the return of the bank.Few among others are doing good business and even requesting limit enhancement, whereas few are not being able to be fully operationalized, considering the growing aspects of both regulator and applicant. More licenses and authorizations will be likely explored in the future. It has been checked and verified as a secure and fair business model, unlike the uncontrolled and non-supervised fintech business operating freely. The future lies with NBFC-P2P, which requires support and marketing education to make it more visible and prominent in the market. A more visionary and capable team is required to further strengthen and make this project viable in order to uplift and promote the Indian Economy in the Digital Chapter on the global stage, both from the regulator\'s point of view or applicant\'s side too.References:https://www.rbi.org.in/Scripts/BS_NBFCList.aspxAuthor may be reached at thakurisubash2017@gmail.com and eboard@icai.in
Ep. 365 — ESG Indices: Methodology and Importance
CA Journal
· September 2026
00:00
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ESG Indices: Methodology and ImportanceEnvironmental, Social, and Governance (ESG) aspects have gained importance for every corporate organization. Stock exchanges have been displaying thematic indices, which are based on ESG ratings. The objectives of this research are to study the ESG indices, understand the methodology of index calculations, and compare the ESG indices. The study covers three indices the Nifty 100 Enhanced ESG Index, the Nifty 100 ESG, and the Nifty 100 ESG Sector Leaders Index. The data relating to the three above-mentioned indices is sourced from the National Stock Exchange website. The current research is important as it shows the changes in the indices over the past years, and also the methodology of calculating the indices is explained. This research is significant because investors are becoming more aware of ESG related issues, and the investors analyze ESG related issues before investing their money. The major findings of the research are that the ESG indices are gaining significance and major multinational companies are a part of the indices. Investors are considering investing in companies following moral, ethical, and environmentally safe processes. This article will help the readers to understand the methodology and the importance of the ESG indices.By CA. Shilpa Vasant Bhide, Member of the InstituteIntroductionA stock market index is a statistical measure to judge and evaluate the market. One of the benchmarks for investors is indices, which means that the investors, whether institutional or individual, look for the index of a particular stock exchange to monitor their portfolio. Stock Exchanges have indices such as the Nifty 50 on the National Stock Exchange, and the BSE Sensex. The investors have to make decisions regarding their portfolios such as buy, sell, or hold, depending upon the information regarding individual stocks. The decision making requires a lot of information and analysis. One of the basic parameters is the index. Index is important as it is a benchmark for measuring the performance of the shares as well as for a portfolio. Stock market indices are important parameters due to their interlinkages with other macro-economic factors. (Moussa & Delhoumi, 2021). There are different types of indices such as thematic, sectoral, and broad based. Examples of broad-based stocks are the Nifty 50, and the Nifty 100. The sectoral index consists of the Nifty Auto and the Nifty Bank. Examples of thematic indexes include the Nifty Energy and the Nifty 100 ESG. Each index is calculated using a methodology. Most of prescription use the free float market capitalization method, and the index is displayed to the investors in a real-time mode.ESG means the Environmental, Social, and Governance aspects of a company. ESG risk scores of different companies are calculated using different methodologies. Over the period, ESG indices have gained significance from the investor\'s point of view, apart from other indices. Stock exchanges display ESG indices for the benefit of the customers. Companies that are ESG sensitive face fewer financial issues. (Singh, 2023). ESG indices have risk hedging properties. (Piserà & Chiappini, 2022). They fall under the thematic indices.The three indices of Nifty related to ESG are analyzed. These three indices are the Nifty 100 Enhanced ESG Index, the Nifty 100 ESG, and the Nifty 100 ESG Sector Leaders Index. The investors are interested in returns from environmentally responsible, socially aware, and ethical firms. The three Nifty ESG Indices are created to reflect the performance of the Nifty 100 index\'s constituent companies based on their ESG scores; ESG indices outperform other conventional indices. (Deshmukh et al., 2022). It has become imperative to study the performance of the ESG indices since inception, the methodology of calculation, and the importance of the ESG indices from the point of view of the investor as well as the company.ObjectivesThe indices are essential benchmarks for analyzing stock markets and are based on the ESG scores, hence it is important to study and analyze the three ESG indices i.e., the Nifty 100 Enhanced ESG Index, the Nifty 100 ESG, and the Nifty 100 ESG Sector Leaders Index.The ESG Indices follow a different methodology as compared to other indices, hence it is essential to understand the methodology followed for the calculation of the three indices as the indices are based on ESG risk factors.ESG is one of the recent concepts in the financial world, therefore it is essential to understand the importance of the ESG indices, from the investor\'s and companies\' perspectives.MethodologyFor the purpose of the study, three indices related to ESG are selected. The three indices are thematic indices of the National Stock Exchange i.e., the Nifty 100 Enhanced ESG Index, the Nifty 100 ESG, and the Nifty 100 ESG Sector Leaders Index. The data was sourced from the website of Nifty indices. The data for the Nifty 100 Enhanced ESG index and the Nifty 100 ESG index is for the period 27th March 2018 to 16th February 2024. The Nifty 100 ESG Sector Leaders\' data is from 15th June 2020 to 16th February 2024. The closing index of the three indices was selected for the study. For all three indices, graphs were also prepared for sector representation, weight percentage, and top constituents by weightage from the fact sheet available on the Nifty Indices website. The date of the factsheet is 31st January 2024 and was accessed on 16th February 2024.Nifty100 Enhanced ESG IndexThe purpose of the Nifty 100 Enhanced ESG Index is to represent the performance of the Nifty 100 index firms according to their Environmental, Social, and Governance (ESG) risk scores. Businesses that have a high category risk are not included in the index. Each member\'s weight in the index is skewed according to the ESG risk score the firm has been allocated i.e., the weight of each constituent is determined by taking the company\'s modified ESG risk score and free-float market capitalization.Nifty100 ESGThe Nifty 100 ESG Index is intended to show how well-performing Nifty 100 index companies have done in relation to ESG risk scores. Each component\'s weight in the index is skewed according to the ESG risk score that the firm has been allocated i.e., the component weight is determined by taking the company\'s modified ESG risk score and free-float market capitalization.Nifty 100 ESG Sector LeadersThe goal of the Nifty 100 ESG Sector Leaders Index is to monitor the performance of a few chosen companies from each Nifty 100 sector that have demonstrated strong ESG risk management and are not associated with any significant scandals. About 75% of the eligible stocks\' Free Float Market capitalization within each Nifty 100 sector is covered by the index. Subject to a 10% stock cap, the stocks\' weights are determined by their free-float market capitalization.ESG Index Methodology for Nifty 100 ESG Index and Nifty 100 Enhanced ESG IndexWhen compared to the Nifty 100 (parent index), the Nifty ESG indices (the Nifty 100 ESG index and the Nifty 100 Enhanced ESG index) produce a portfolio with a similar sector exposure but with a stock level ESG bias. As a result, companies with stronger ESG performance are given a higher weightage in the portfolio. The methodology followed for the Nifty 100 Enhanced ESG Index and Nifty 100 Index is tilt weighted, with the number of constituents being 94 and 95 respectively. The launch date was 27th March 2018, the base date was 01st April 2011, the base value was 1000, the calculation frequency is end of day, and the index is rebalanced semi-annually.Designed to reflect the performance of the Nifty 100 index\'s constituent companies based on their ESG scores, companies involved in significant environmental, social, or governance scandals will not be considered for inclusion in the index. The index\'s constituents\' weight is determined by combining their ESG scores with free-float market capitalization. The indices\' base date is 01st April 2011 and their base value is 1000. For stocks to be included in the Nifty 100 ESG Index and the Nifty 100 Enhanced ESG Index, they must meet the specified eligibility requirements. Stakeholder Empowerment Services (SES) provides ESG and controversial research. Stocks ought to be included in the Nifty 100 during the index review period. There will only be consideration for common equity shares.Companies\' performance on the fronts of environmental, social, and governance is gauged by their ESG score. Three key factors-environmental, social, and governance-as well as policy declarations are used to evaluate the companies. The scores are categorized into eight grades: A+ 90 to 100 score; A - 80 to 89.99 score; B+ 70 to 79.99 score; B 60 to 69.99 score; B- 50 to 59.99 score; C+ 40 to 49.99 score; C- 20 to 39.99 score; D - 0 to 19.99 score.Each year, SES evaluates the organizations based on Business Responsibility & Sustainability Reports, as well as critical disclosure requirements from Integrated Reports (GRI/IIRC), TCFD, and other reports. Furthermore, corporations are continuously checked for any ESG-related controversy. Subject to the following criteria, stocks that currently comprise or will soon comprise the Nifty 100 index may be included in the index:When a company is being reviewed, it should have an ESG score.Index firms with an \"ESG score\" of less than 60, or B-, C+, C, and D grades, will not be included in the Nifty 100 Enhanced ESG Index. Businesses having a controversy score below 70 will not be allowed. Businesses involved in the sale of alcohol, cigarettes, illicit weapons, and gambling are not allowed. Chemical and biological weapons, anti-personnel mines, and cluster bombs are examples of controversial weaponry.ESG Index Methodology for Nifty 100 ESG Sector Leaders IndexThe Nifty 100 ESG Sector Leaders Index attempts to monitor the performance of a few chosen companies from each Nifty 100 sector that have performed well on the ESG front and are not associated with any significant scandals. The index monitors the performance of the Nifty 100 index stocks that have achieved high scores in the areas of environmental, social, and governance. Businesses engaged in significant environmental, social, or governance provide approximately 75% coverage of the Free Float Market Cap of eligible stocks within each sector of the Nifty 100; companies involved in the business of tobacco, alcohol, controversial weapons, and gambling operations shall not be considered for selection in the index. The stock\'s weight is determined by its free-float market capitalization, with a 10% maximum stock cap. The index\'s base value is 100, and its base date is January 1, 2014.For stocks to be included in the Nifty 100 ESG Sector Leaders index, they must meet the following eligibility requirements. All stocks that were included in the Nifty 100 at the time of evaluation are qualified to be included in the June and December indices. Companies with controversy scores below 70 will be disqualified; Only ordinary equity shares will be considered. Companies with ESG scores below 60, classified as B-, C+, C, and D grades, will be excluded.Businesses that receive at least 25% of their revenue from nuclear power, gambling, cigarettes, breweries, weapons, and/or any money from \"controversial weapons\" (as defined by the firm disclosures given under the segment revenue breakup in its annual report) will not be allowed to participate.Symbol1M3M1Yr3Yr5Yr10YrNIFTY100 ESG0.154.3738.2614.916.3115.58NIFTY100 ENHANCED ESG0.144.3338.0914.8816.115.6Nifty 100 ESG Sector Leaders0.813.76----Importance of ESG IndicesVarious studies are available to understand the importance of ESG indices. Investing in ESG indices can improve portfolio diversity and risk-adjusted returns. (Alvarez-Perez et al., 2024). ESG disclosures have gained momentum during the last few years. (Del Gesso & Lodhi, 2024).Studies reveal that the stock market reacts positively to the disclosure. There is a positive association between stock market returns and ESG disclosure (Desai, 2023; Naseer et al., 2023). The majority of investors felt that ESG problems are important when making investments and indicated a readiness to make socially responsible investments, despite a low degree of understanding of SRIs. Investors\' awareness of SR/ESG funds, SR/ESG indices, and the desire to engage in SRI channels have a substantial impact. Retail investors\' money is invested by institutional investors, thus ESG fund managers must comprehend their social investment inclinations. (Jonwall et al., 2022). More ESG-compliant businesses might be included by fund managers in their portfolios, and financial incentives from the government can be a powerful tool for motivating investors. Businesses seeking long-term, sustainable capital investment should also strategically implement green production methods. (Raut et al., 2023).Investors look for different parameters, both financial and non-financial, before investing in a company\'s shares. Financial parameters such as returns on the stock markets, the earnings per share, and profitability is also studied and analyzed. ESG falls under non-financial parameters, and the impact on the environment, society and governance are assessed, as investors do not want to risk exposure to the issues under ESG aspects, for example, pollution caused by industries is an environmental issue, employee dissatisfaction can be a social issue and unethical practices followed by the board can be a governance issue. Therefore, a company that is environmentally compliant, follows ethical and correct governance practices is preferred by the investors. On the other hand, if companies are a part of the ESG index, then they will be assumed to be following the right approach towards ESG related practices. Not only the retail, but also institutional investors rely upon ESG related index. Businesses that are environmentally aware, socially responsible, and follow ethical practices in governance are desirable investment destinations. ESG risk ratings, ESG disclosures by businesses, and ESG index will play an important role in the decision making for investors, especially in long-term investments as both profits and ESG responsible companies will sustain in the market in the long run. In fact, products and services of ESG responsible companies will be in more demand.ConclusionAll three indices are based on the risk score associated with ESG. These indices are therefore different from the indices such as the NIFTY 50, as they do not incorporate the risk factors related to the ESG factors, making the ESG indices more robust. It can be observed that the investors will rely on ESG indices more in the coming future. There are many ESG rating agencies that provide risk scores on which the investors rely. It can be concluded that investors will be able to assess the risk exposure of companies with the help of the ESG indices and will therefore be able to build a robust portfolio.References:Alvarez-Perez, H., Diaz-Crespo, R., & Gutierrez-Fernandez, L. (2024). ESG investing versus the market: returns and risk analysis and portfolio diversification in Latin-America. Academia Revista Latinoamericana de Administración, 37(1), 78-100.Del Gesso, C., & Lodhi, R. N. (2024). Theories underlying environmental, social and governance (ESG) disclosure: a systematic review of accounting -studies. Journal of Accounting Literature, ahead-of-print(ahead-of-print). https://doi.org/10.1108/JAL-08-2023-0143Desai, R. (2023). Nexus between mandatory ESG disclosure regulation and abnormal stock returns: a study of an emerging economy. Coastal Management: An International Journal of Marine Environment, Resources, Law, and Society, 66(2), 236-258.Deshmukh, P., Sharma, D., & Sharma, P. (2022). Do Socially Responsible Indices Outperform the Market During Black Swan Events: Evidence from Indian Markets During Global Financial and COVID-19 Crises. Australasian Accounting, Business and Finance Journal, 16(5), 19-37.Jonwall, R., Gupta, S., & Pahuja, S. (2022). A comparison of investment behaviour attitudes, and demographics of socially responsible and conventional investors in India. Social Responsibility, Journalism, Law, Medicine, 19(6), 1123-1141.Moussa, F., & Delhoumi, E. (2021). The asymmetric impact of interest and exchange rate on the stock market index: evidence from MENA region. International Journal of Emerging Markets, 17(10), 2510-2528.Naseer, M. M., Guo, Y., & Zhu, X. (2023). ESG trade-off with risk and return in Chinese energy companies. International Journal of Energy Sector Management, ahead-of-print(ahead-of-print). https://doi.org/10.1108/IJESM-07-2023-0027Piserà, S., & Chiappini, H. (2022). Are ESG indexes a safe-haven or hedging asset? Evidence from the COVID-19 pandemic in China. International Journal of Emerging Markets, 19(1), 56-75.Raut, R. K., Shastri, N., Mishra, A. K., & Tiwari, A. K. (2023). Investor\'s values and investment decision towards ESG stocks. Review of Accounting and Finance, 22(4), 449-465.Singh, K. (2023). Listing on environmental, social and governance index and financial distress: does the difference-in-differences matter? Asian Review of Accounting, 32(2), 302-326.Author can be reached at shilpabhide@yahoo.com and eboard@icai.in
Ep. 366 — Combatting Employee Frauds in India: The Role of Chartered Accountants
CA Journal
· September 2026
00:00
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Combatting Employee Frauds in India: The Role of Chartered AccountantsEmployee fraud has become a growing concern for businesses across India. According to the 12th edition of the largest global study on occupational fraud released by the Association of Certified Fraud Examiners (ACFE), fraud cases have increased significantly in the past few years, based on the data from 133 countries. In India, 51% of surveyed organizations say they have experienced fraud in the past two years, the highest level in 20 years of research. This trend is alarming and requires attention from all stakeholders, including the government, regulatory bodies, and businesses.By CA. Anuj Choudhary, Member of the InstituteImportance of Addressing Employee Frauds for the Economy and SocietyEmployee frauds not only cause financial losses to businesses but also have a significant impact on the economy and society as a whole. As per the Institute of Chartered Accountants of India (ICAI), employee fraud can lead to reduced investor confidence, hamper economic growth, and tarnish the country\'s image. Small and Medium-sized Enterprises (SMEs) are particularly vulnerable to employee fraud, as they may not have the resources to implement robust fraud prevention measures. According to a survey by the Association of Certified Fraud Examiners (ACFE), smaller frauds are more common than larger ones, and they can add up to significant losses for SMEs.Employee fraud can also have a detrimental impact on society. It can result in job losses, reduced public trust, and even jeopardize the safety and well-being of individuals, especially in cases where fraudulent activities involve public safety, such as in the case of regulatory compliance violations. Therefore, it is essential to tackle employee fraud effectively to safeguard the interests of businesses, investors, and society as a whole.Types of Employee FraudsEmployee fraud is a serious problem that affect organizations of all sizes, industries, and sectors. According to the ACFE, employee fraud costs companies worldwide over $4.5 trillion every year. There are different types of employee fraud, each with its unique characteristics and consequences.One common type of employee fraud is vendor fraud, where an employee colludes with a vendor to defraud the company. This can involve creating fake invoices or overbilling for services. A case study published by ACFE Insights highlights an example where an employee colluded with a vendor to steal over $1 million from their company.Another type of employee fraud is financial statement fraud, where an employee intentionally misrepresents financial information to deceive stakeholders. This can involve manipulating financial data, inflating revenues or profits, or concealing liabilities.Other types of employee fraud include theft of cash or other company assets, payroll fraud, and expense reimbursement fraud. ACFE Insights provides tips on how to prevent fraud before it happens by training employees to be fraud detectors and identifying warning signs of potential fraud, such as unexplained transactions or discrepancies in financial records.In conclusion, employee fraud is a significant risk that organizations face, and it is crucial to have effective anti-fraud measures in place to prevent and detect fraud. By understanding different types of employee fraud and warning signs, companies can take steps to safeguard their assets and reputation.Role of Chartered Accountants in Detecting and Preventing Employee FraudsEmployee fraud can have a significant impact on a company\'s financial health, reputation, and stakeholder trust. As trusted financial professionals, Chartered Accountants (CAs) play a crucial role in detecting and preventing employee fraud. In this article, we will discuss the key responsibilities of CAs in detecting and preventing employee fraud and the importance of training and development for CAs to effectively combat fraud.1. Key Responsibilities of Chartered Accountants in Detecting and Preventing Employee FraudAs financial experts, CAs are responsible for ensuring the accuracy, integrity, and transparency of a company\'s financial reporting. In the context of employee fraud, CAs have several key responsibilities that they must fulfill to detect and prevent such fraud:a. Conducting Fraud Risk Assessments: CAs must conduct regular fraud risk assessments to identify areas of the company that are vulnerable to fraud. This can include conducting interviews with employees, reviewing internal controls, and analyzing financial data to identify patterns and anomalies that may indicate fraudulent activities.b. Designing and Implementing Internal Control Systems: Chartered Accountants are responsible for designing and implementing internal control systems within an organization. Internal controls are policies and procedures that ensure that the organization\'s assets are safeguarded, and its operations are carried out efficiently and effectively. By implementing robust internal controls, Chartered Accountants can deter and prevent fraudulent activities.c. Developing Fraud Prevention Strategies: Based on the results of the fraud risk assessment, CAs must develop and implement fraud prevention strategies. This may include strengthening internal controls, developing fraud reporting mechanisms, and conducting training for employees on how to detect and prevent fraud.d. Establish a strong control environment: Chartered Accountants should help organizations establish a robust control environment that includes policies, procedures, and monitoring mechanisms to deter and detect fraud. This includes implementing segregation of duties, regular audits, and monitoring of financial transactions.e. Implement whistle-blower policies: Chartered Accountants should help organizations establish a whistle-blower policy that encourages employees to report any suspected fraud without fear of retaliation. This helps in early detection and prevention of fraud.f. Conduct background checks: Chartered Accountants should ensure that organizations conduct thorough background checks before hiring employees. This includes verifying education, employment history, and criminal records.g. Train employees: Chartered Accountants should train employees on fraud prevention and detection techniques. This includes educating them on the red flags of fraud, how to report suspected fraud, and the consequences of committing fraud.h. Maintain independence and objectivity: Chartered Accountants should maintain independence and objectivity in fraud investigations. This includes avoiding conflicts of interest, maintaining confidentiality, and conducting investigations in a professional and unbiased manner.i. Conducting Fraud Investigations: If frauds are suspected or detected, CAs must conduct thorough investigations to identify the root cause of the fraud, the individuals involved, and the extent of the financial loss. This requires strong analytical skills, knowledge of forensic accounting techniques, and the ability to analyze large volumes of financial data.j. Reporting to Management and Other Stakeholders: Once a fraud has been detected and investigated, CAs must prepare reports for management and other stakeholders, including the Board of Directors, shareholders, and regulatory agencies. These reports must be factual (no emotions), objective, and transparent, and must provide recommendations (often in the form of Corrective and Preventive Actions) for preventing similar frauds in the future.2. Importance of Training and Development for Chartered Accountants to Effectively Combat FraudsTo effectively combat employee fraud, it is essential for CAs to receive specialized training and development in fraud detection and prevention. This includes the following:a. Continuous Professional Development: CAs must engage in continuous professional development to stay up-to-date with the latest fraud detection and prevention techniques. This can include attending seminars, workshops, and conferences, as well as participating in online training programs.b. Specialized Training in Forensic Accounting: Forensic accounting is a specialized area of accounting that involves the use of financial analysis, investigation, and legal principles to detect and prevent fraud. CAs must receive specialized training in forensic accounting to effectively detect and prevent fraud.c. Developing Soft Skills: In addition to technical skills, CAs must also develop strong communication, leadership, and problem-solving skills to effectively combat fraud. This requires developing an understanding of human behaviour, organizational culture, and ethical decision-making.By fulfilling their responsibilities and staying up-to-date with the latest fraud detection and prevention techniques, CAs can help companies prevent and detect employee fraud, which can result in significant cost savings, protect the company\'s reputation, and enhance stakeholder trust.Case Studies - Analysis of recent real-world employee fraud cases in IndiaCase Study 1: CFO Arrested for Embezzling Company Funds (Indian Express, 2021)In September 2021, a leading textile and paper manufacturer in India, lodged an FIR against its Chief Financial Officer (CFO) for embezzling funds worth ₹8 crore. The fraud came to light during an internal audit, which found that the CFO had been transferring funds from the company\'s accounts to his personal accounts for over two years i.e., from 16.04.2019 to 17.02.2022. The internal audit team noticed that several unauthorized transactions had been made from the company\'s accounts to the CFO\'s personal accounts. Upon further investigation, it was found that the CFO had been creating fake vendor accounts and processing payments to these accounts. He had also used the company\'s funds to purchase properties and other assets in his name. After the fraud was detected, the company immediately lodged an FIR with the police and suspended the CFO from his position. The police conducted a thorough investigation and arrested the accused on charges of criminal breach of trust, cheating, and forgery.Case Study 2: Former Bank Manager and Husband Arrested for Siphoning off INR 1.23 Crore (The Hindu, August 2022)In August 2022, the Central Crime Branch of Chennai Police arrested a former bank manager and her husband for allegedly siphoning off ₹1.23 crore from a bank. The accused had reportedly been diverting the money to their personal accounts for over two years by creating fake loan accounts and transferring the money to their private company. The fraud came to light during an audit conducted by the bank\'s internal audit team, which detected discrepancies in the loan accounts. The bank then approached the police, who conducted a thorough investigation and arrested the accused.Case Study 3: Six Held for Scamming E-commerce Website in UP (Economic Times, October 2022)In September 2021, Uttar Pradesh police arrested six individuals for allegedly scamming an e-commerce website of over Rs. 50 lakh. The accused, who were based in different states of India, had reportedly created fake customer accounts on the website and placed orders using fake addresses. They then contacted the delivery agents and redirected the deliveries to their own addresses by posing as the customers.Case Study 4: Mumbai Woman Loses ₹7.5 Lakh in Online Banking Fraud (India.com, March 2023)In March 2023, a Mumbai woman lost ₹7.5 lakh in an online banking fraud where a bank employee cheated her. The fraudster reportedly called the victim and convinced her to download a mobile application that would enable her to receive a refund of her previous transaction. However, the victim ended up losing money from her account instead.Case Study 5: Cyber Fraudster Steals more than ₹2 Lakh (India.com, February 2023)In February 2023, a man in Maharashtra fell victim to a cyber fraud while booking a cab online. The victim had booked a cab through an online portal and received a call from a person posing as a customer care executive of the portal. The fraudster asked the victim to download a mobile app and transfer ₹2.13 lakh to his account for booking the cab.Case Study 6: Indian-American Convicted of Making Illicit Profits Worth $7.3mn (The Economic Times, December 2022)In December 2022, an Indian-American was convicted of making illicit profits worth $7.3 million by trading on insider information about a potential merger between two companies. The accused, along with his co-conspirator, had allegedly obtained the insider information from a law firm where they had worked earlier.Case Study 7: An ex-employee steals over ₹140 Crore from Company, Likely to get up to 20 years in jail (India Today, November 2022)In November 2022, an ex-employee was arrested for allegedly stealing over ₹140 crore from the company by creating fake invoices and siphoning off the money to his personal account. The accused had reportedly created fake invoices for the purchase of company\'s products and transferred the money to his personal account by using a network of shell companies.Collaboration with Other ProfessionalsChartered Accountants often work in collaboration with other professionals in investigating employee fraud. These professionals include forensic accountants and legal professionals. Collaboration with these professionals helps Chartered Accountants strengthen their fraud detection and prevention mechanisms.Forensic accountants are experts in financial investigations. They use accounting, auditing, and investigative skills to detect and investigate financial fraud. They also help in quantifying the financial impact of fraud. Chartered Accountants can collaborate with forensic accountants to obtain a better understanding of the nature and extent of employee fraud.Legal professionals, including lawyers and law enforcement agencies, also play a crucial role in investigating employee fraud. Chartered Accountants can collaborate with legal professionals to ensure that the fraud investigation is carried out in a legally sound and ethical manner. They can also work together to ensure that the perpetrators of fraud are held accountable and the victims are compensated.Fraud Management by Insurance PoliciesBy implementing sound internal control and other preventive techniques, fraud can be reduced to a great extent, however no one can 100% rule out the possibility of fraud by employees or associates. For such types of uncertainties, there are many insurance coverage, which help any organization to be indemnified or minimize the loss due to employee frauds that have taken place. A Chartered Accountant should guide the management to take appropriate insurance cover for such type of risk.There are various insurance covers where a CA can help either his client (if advisor) or the management/employer (if employee/professional) in terms of selection of the right policy for the potential financial liabilities/legal costs that might occur on account of the acts/negligence/omissions/errors of the employee. A few of the Insurance covers that are prevailing in India are as below:1. Fidelity Guarantee Insurance covers businesses against financial losses resulting from employee dishonesty, fraud, theft, or embezzlement, providing protection and reimbursement.2. Commercial Crime Insurance covers businesses against financial losses resulting from various criminal acts, such as theft, fraud, forgery, and embezzlement.3. Employment Practices Liability Insurance (EPLI) covers businesses against claims related to wrongful employment practices, such as discrimination, harassment, wrongful termination, and retaliation.A CA can also help by performing a risk assessment, policy evaluation and selection, claim assistance and claims process.ConclusionEmployee frauds are a growing concern in India. They can cause significant financial losses to organizations and harm the economy and society as a whole. Chartered Accountants play a crucial role in detecting and preventing employee fraud. They have the knowledge and expertise required to identify the warning signs of fraud and develop effective fraud prevention mechanisms.References:ICAI Knowledge Portal Ethical and Professional Standards A Study GuideICAI Knowledge Portal Audit EvidenceICAI Knowledge Portal Detection and Prevention of FraudsAssociation of Certified Fraud Examiners - Report to the Nations 2020Association of Certified Fraud Examiners - Report to the Nations 2022Fortune Business Insights Employee Fraud Detection MarketThe Indian Express: Trident group lodges FIR against CFO after audit finds he embezzled fundsThe Hindu: Former bank manager, husband arrested for siphoning off 1.23 croreThe Economic Times: Six held for scamming ecommerce website in UPIndia.com: Mumbai Woman Loses Rs 7.5 Lakh in Online Banking FraudIndia.com: Cyber Fraud: Man Loses More Than Rs 2 Lakh While Booking Cab Online in MaharashtraThe Times of India: Two held for fraudulently transferring Rs. 22 lakh from senior citizen\'s accountThe Economic Times: Indian-American convicted of making illicit profits worth $7.3mnAssociation of Certified Fraud Examiners Case Study: The Employee and Vendor NexusAssociation of Certified Fraud Examiners: Prevent Fraud Before It Happens: How to Train Employees to Be Fraud DetectorsAuthor may be reached at Anuj.C@outlook.com and eboard@icai.in
Ep. 367 — Doing Away With "Objects" Clause in the Memorandum of Association of the Companies Act, 2013
CA Journal
· September 2026
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Doing Away With \"Objects\" Clause in the Memorandum of Association of the Companies Act, 2013The Companies Act, 2013 has many progressive concepts. It is the first of its kind across the globe to mandate Corporate Social Responsibility by statute and to do away with the concept of \"Inability to pay debts\" as a ground for liquidation of the companies. Section 3 of the Companies Act, 2013 provides that the companies can enter into any lawful business whereas Section 4 of the Act restricts its powers by way of Objects Clauses. It is time to suitably modify the \"Objects\" clause in the Memorandum of Association in line with international trends. The Companies, including every possible business venture, used to escape from the rigours of the \"Ultra Vires\" concept in their object clauses, thereby defeating the very purpose for which such OBJECT clause has been prescribed by the Act. Therefore, Companies should be allowed to pursue any lawful object as per the commercial wisdom of the Board of Directors. Hence, the \"Objects\" clause is required to be suitably modified from the Act, paving the way for a good reform which would be business friendly.By Hareesh Kumar Kolichala, Legal ExpertIntroductionThe Companies Act, 2013 is a modern and progressive legislation and has completed a decade of its march. It has done away with various archaic concepts and introduced new path-breaking reforms. The concept of Corporate Social Responsibility (CSR) being incorporated into the law is the first of its kind across the globe. Further, the shift away from liquidating companies due to their inability to pay debts, alongside the focus on insolvency resolution, marks a significant and much-needed reform, aligning with the broader objective of enhancing \'Ease of Doing Business\'. It completely changed the landscape of the company law.\'Objects\' ClauseSection 4(1)(c) of the Companies Act, 2013 provides that the memorandum of the company shall state the objects for which the company is proposed to be incorporated, while Section 3 states that a company may be formed for any \'lawful\' purpose.The concept of \'Ultra Vires\'The expression \'ultra vires\' means an act beyond the powers, indicating an act of the company which is beyond the powers conferred on the company by the Objects clause of its Memorandum. It was for the first time that in the case of Ashbury Railway Carriage and Iron Company v/s Hector Riche (1875) the concept of ultra vires was propounded by the House of Lords. Article 3 of the Memorandum of the Ashbury Railway Carriage and Iron Company stated that its purpose was to carry on business as mechanical engineers and general contractors whereas the directors of the appellant company entered into a contract with the respondent Riche to raise money for the construction of the railway in Belgium. The words \"to carry on business of mechanical engineers and general contractors\" were considered and it was held that the generality of the expression \'general contractors\' was limited to the previous words \'mechanical engineers\' and hence the transaction was ultra vires because it was beyond the scope of its memorandum. Therefore, the contract was held to be void, and not even capable of ratification by the shareholders of the appellant. This was called as \'Doctrine of Ultra Vires\'.The said doctrine was developed by the courts for the protection of both Shareholders and Creditors. The idea behind the concept was that the Creditors and Shareholders should not find that the company is engaged in a business different from what was expected at the time they had invested their funds.Therefore, it may be observed that the concept of \'ultra-vires\' was developed by the courts, not by the Act. The Doctrine of Ultra Vires was applied in India too with equal force in various decisions. In the landmark case of Dr. A. Lakshmanaswami Mudaliar v/s Life Insurance Corporation of India, a company by name \'United India Life Assurance Company Ltd.\' was carrying on a business in India with the principal object to carry on life insurance business. The Directors of the Company were authorized to make payments to any charitable objects or for any useful objects. The Directors paid an amount of Rs. 2 lakhs to a trust for the purpose of promoting technical and business knowledge. On 1st July 1956, the Life Insurance Corporation Act, 1956, came into force and all the assets and liabilities of all insurers were transferred and vested in the Life Insurance Corporation of India. Subsequently, the Life Insurance Corporation called upon the erstwhile Directors of the said Company and Trustees of the donee trust, to refund the amount of Rs. 2 lakhs donated by the company. When the appellants denied liability to refund the amount, it was held by the Hon\'ble Supreme Court that the payment was ultra vires to the Company as they could spend for the promotion only on such charitable objects which would be useful for the Company\'s objects.It was also held in the case of Attorney General & Anor v/s Great Eastern Railway Co. that in case a company is about to undertake an ultra vires act, any member of the company can get an order of injunction from the court to restrain the company from entering into such ultra vires act.However, it is required to be examined whether to continue to retain the \"objects\" clause in the Companies\' Memorandum of Association.The promoters of the Companies have been, in view of the said Doctrine, including omnibus objects clauses to cover every possible business either as incidental, ancillary, or otherwise. In the case of Bell Houses Ltd. v/s City Wall Properties Ltd., the court had to hold that the Company had the power to enter into the Contract in view of the sweeping power given to the Company in its objects clause which read as under:\"To carry on any other trade or business whatsoever which can, in the opinion of the Board of Directors, be advantageously carried on by the Company.\"The companies in India too tend to incorporate and adopt lengthy and standard object clauses so that any objects that they pursue should be covered and to escape from the \"Ultra Vires\" doctrine. Such sweeping powers under the Objects Clauses of the Memorandum are seen even in almost every company\'s Memorandum of Association in our country. In the case of S. Sivashanmugham and Ors. v/s. Butterfly Marketing Pvt. Ltd., the Petitioner contended that the Arbitration Award granted in favour of the Respondent was liable to be set aside as the Company which entered into partnership had no authority considering the Objects of the Company. However, the Madras High Court found the Object Clause to be very wide which read as under:\"To form, establish promote, subsidise aid, acquire, organise, or be interested in any other company or companies, syndicate or partnership for the purpose of acquiring all or any of the undertaking, property and liabilities of this company or of any share therein by way of exchange for its shares or otherwise or for any purpose which may seem calculated directly or indirectly to benefit the company.\"Following the precedent in the case of Bell Houses Ltd., the Madras High Court held that the said clause enabled the company to form a partnership for any purpose which may directly or indirectly benefit the company and held as under:\"6. These clauses provide ample power to the respondent company to enter into partnership with others for any purpose which may directly or indirectly benefit the company. The company has reserved to itself expressly the power to carry on business of importers or exporters. The submission made for the appellant that these clauses do not enable the company to form a partnership for the purpose of manufacturing garments is without any substance. The company not only may carry on the business of exporters and importers, but it may also enter into partnership with anyone for any purpose so long as that purpose is regarded by the company as being one which would benefit the company. Such benefit need not be direct and it may be indirect also.\"Therefore, the purpose for which such doctrine was laid had been completely defeated or frustrated by having such long winding objects clauses in the Memorandum of Association.Doctrine of Constructive NoticeFurther, another doctrine, the Doctrine of Constructive Notice evolved which presumes that, the Memorandum and Articles being Public Documents, the third parties who deal with the Company are aware of the capacity of the company to enter into contracts. In the case of Mahony v/s East Holyford Mining Co., the court held as under:\"On the one hand, it is settled by a series of decisions... that those who deal with Joint Stock Companies are bound to take notice of that which I may call the external position of the Company. Every Joint Stock Company has its memorandum and articles of association... Those articles of association and that partnership deed are open to all who are minded to have any dealings whatsoever with the Company, and those who so deal with them must be affected with notice of all that is contained in those two documents.\"This has further compounded the problem and the concept of ultra vires got firmly entrenched.Present position of \'Ultra Vires\' in other jurisdictionsIn the 19th Century, the \'ultra vires\' doctrine was applied in various cases not only in our country but across the globe. The said concept had a long shelf life but now the same is not being followed anymore in various jurisdictions across the globe.The doctrine of \'ultra vires\' has been abolished by statute for corporations incorporated under the business corporation legislations in Canadian jurisdictions in the last century itself as it lost its relevance.In the case of Communities Economic Development Fund v/s Canadian Pickles Corps, the Supreme Court of Canada had observed as under:\"In my view, the general abolition of the doctrine of ultra vires is in accordance with sound policy and common sense... Subsequent statutory and case law developments have made the doctrine a protection to no one and a trap for the unwary...\"However, the Supreme Court of Canada supported the application of the said Doctrine for Corporations created for public purposes.In the United Kingdom, as far back as the year 1945, Justice Cohen, who was appointed as the Chairman of the committee to suggest reforms in the Companies Act, observed that the doctrine of \'Ultra Vires\' is an illusory protection to the shareholders and yet may be a pitfall for the third parties dealing with the company, serving no positive purpose but acting as a cause for unnecessary prolixity and vexation.On the basis of the report of the said Committee, Section 35 of the Companies Act, 1985 of the United Kingdom has also done away with the concept of the \'Ultra Vires\' doctrine by way of amendment in the year 1989, establishing company capacity and freedom from memorandum limitations in favour of persons dealing in good faith.The Companies Act, 2006 of the English Act made a further radical reform and it is no longer required for a company to state its objects in the Memorandum. Section 8(2) of the Act provides for stating a) the Company\'s proposed name, b) the situation of the Registered Office, c) whether the liability of the members is limited by shares or by guarantee, d) whether the company is to be private or public and e) that the subscribers wish to form the company for lawful purpose. Therefore, it can be seen from the above that the objects of the company will be unrestricted and the capacity of the companies to enter into the contracts is unlimited in the English Companies Act.Sectoral RegulationsIt is noteworthy that the Sectoral Regulations regulate the companies and ensure that companies do not follow other objects. For example, Banking Companies are also governed by the Banking Regulation Act, 1949 in addition to the Companies Act, 2013. Section 6(1) of the Act limits and restricts the Banks, which are licensed by the Reserve Bank of India (RBI), to deal in or pursue objects other than Banking. Section 6(2) of the Act clearly provides that no banking company shall engage in any form of business other than those referred to in Section 6(1). Similarly, Companies dealing in the Insurance business are also regulated by the Insurance Act, 1938 and the Insurance Regulatory and Development Authority of India (IRDAI).Hence, it is worthwhile to free the companies to pursue any lawful business/objects as per the commercial wisdom of the Board of Directors. The investors do not mind the company pursuing other objects than what was expected of them if the same is economical.ConclusionThe Doctrine of Ultra Vires is, therefore, impractical as the innocent third parties who are not aware of the fact that the company is acting outside its objects cannot have the contract enforced. Further, a contract may be subsequently avoided on the interpretation of the objects clause if the Company chooses to do so as many times the words and expressions used in the Memorandum are ambiguous and can have several meanings.Hence, Section 4(1)(c) of the Companies Act, 2013 which deals with the objects clause needs to be reviewed which will further help in ease of doing business.References:Ashbury Railway Carriage and Iron Company v/s Hector Riche (1875)Dr. A. Lakshmanaswami Mudaliar v/s Life Insurance Corporation of India [AIR 1963 SC 1185]Attorney General & Anor v/s Great Eastern Railway Co. [LR (1880) 5 AC 473]Bell Houses Ltd. v/s City Wall Properties Ltd. [1966] 36 Comp Cas 779 (CA)]S. Sivashanmugham and Ors. v/s. Butterfly Marketing Pvt. Ltd. [(2005) 5COMP LJ 117(MAD)]Mahony v/s East Holyford Mining Co. [(1875) L.R. 7 H.L. 869]Communities Economic Development Fund v/s Canadian Pickles Corps [[1991] 3 S.C.R. 388]Author may be reached at kshk.hareesh@gmail.com and eboard@icai.in
Ep. 368 — The DPDP Act and Role of Chartered Accountants: A Concerto of Compliance and Opportunity in the Digital Age
CA Journal
· September 2026
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The DPDP Act and Role of Chartered Accountants: A Concerto of Compliance and Opportunity in the Digital AgeThe Digital Personal Data Protection Act (DPDP Act) marks a transformative shift in India\'s approach to data privacy, positioning Chartered Accountants at a crucial intersection of compliance and opportunity. This article explores how the DPDP Act impacts CAs, highlighting their roles as data controllers and auditors. By delving into the responsibilities and opportunities presented by the Act, this article underscores the importance of robust data governance, proactive risk management, and the potential for Chartered Accountants to expand their professional horizons through data privacy consultancy. The symphony of data privacy, as orchestrated by the DPDP Act, offers a harmonious blend of challenges and growth prospects for CAs in the digital age.By CA. Divya Jain, Member of the InstituteIntroductionThe advent of the DPDP Act has orchestrated a significant paradigm shift in India\'s data landscape, presenting both challenges and opportunities for Chartered Accountants. Positioned at the intersection of compliance and opportunity, CAs must navigate the intricate requirements of data privacy while leveraging their auditing expertise to uncover new avenues for professional growth. As data controllers, CAs are entrusted with the responsibility of safeguarding personal data, ensuring that data collection practices are meticulously audited and that robust security measures are in place. This role demands a thorough understanding of the DPDP Act\'s stipulations, from data minimization and consent management to breach response protocols and the empowerment of data subjects.Furthermore, the DPDP Act transform CAs into data privacy auditors, necessitating a flexible approach to audit practices across diverse client environments. Whether working with established frameworks or developing new ones from scratch, internal auditors play a pivotal role in harmonizing data governance with regulatory requirements.This article delves into the multifaceted responsibilities of CAs under the DPDP Act. By embracing the challenges and opportunities presented by the DPDP Act, CAs can not only ensure compliance but also build trust, protect financial well-being, and expand their professional horizons in the digital age.Entrepreneurs under the Data BatonChartered Accountants venturing into the world of entrepreneurship now wear the mantle of \"data controllers,\" entrusted with safeguarding a delicate instrument, i.e., the personal data of employees and clients. This role brings forth the following chorus of responsibilities:Composing a Minimized Data Set: The DPDP Act emphasizes collecting only the data necessary for legitimate business purposes. CAs must meticulously audit their data collection practices, ensuring they don\'t exceed the boundaries of accounting, payroll, or client services.Harmonizing the Consent Chorus: Obtaining informed consent from every data subject becomes akin to tune each instrument in the orchestra. Clear and transparent communication about data collection, usage, and sharing becomes essential sheet music.Fortifying the Data Citadel: Robust security measures become the castle walls, protecting against unauthorized access, disclosure, alteration, or destruction of personal data. Encryption, access to control, and vulnerability assessments become the vigilant knights and archers, safeguarding the integrity of data.The Breach Alarm: Should a data breach occur, the act mandates prompt notification to affected individuals and authorities. CAs must have a clear data breach response plan, outlining communication channels and mitigation strategies, ready to be activated at the first sign of trouble.Navigating the DPDP Era: Opportunities and Challenges for Chartered AccountantsThe DPDP Act may initially sound like a discordant note for entrepreneurial CAs, adding a compliance burden to their already complex repertoire. However, a closer look reveals a hidden melody of opportunity within this regulatory symphony.Building Trust, the Sweetest Harmony: Data privacy can be the bridge to a deeper bond with clients and employees. By demonstrating a commitment to protect their personal information, CAs create an environment of trust and respect.Financial Fortitude, a Protective Harmony: Investing in robust data security practices can be seen as a wise financial investment. Strong firewalls and vigilant cybersecurity protocols are not just compliance necessities but also shields against costly data breaches.Consultancy Crescendo, Expanding the Repertoire: CAs possess a unique understanding of data and financial regulations. With the DPDP Act in place, this expertise translates into a new realm of opportunity, i.e., data privacy consultancy. Offering compliance assessments, data governance implementation, and training programs can create a vibrant new revenue stream.Empowering the Individual: Exploring Data Subject Rights under the DPDP ActThe Right to Access Information: Allows individuals to understand how their data is being used, for what purpose, and by whom.The Right to Correction: Empowers individuals to rectify any mistakes, edit, update, or complete incomplete personal data.The Right to Erasure: Gives data principals the right to request the deletion of their personal data under certain circumstances.The Right to Restrict Processing: Allows individuals to restrict the processing of their personal data if they object to its use or believe it is unlawful.The Right to Grievance Redressal: Establishes a mechanism for data principals to file complaints against any entity violating their data privacy rights.The Right to Nominate: Introduces the right to nominate a trusted individual to act on behalf of the data subject in managing their data rights.Chartered Accountants as Auditors: Orchestrating the Data Privacy Symphony in Diverse ClientscapesWhile statutory audits don\'t have specific reporting requirements on data privacy as of now, internal auditors hold a crucial responsibility.For Clients with Established Frameworks: Internal auditors fine-tune the orchestra through risk assessment, harmonize the score via data governance evaluation, perform solo information security audits, and deliver reporting and recommendations.For Clients Lacking Frameworks or Frameworks on Paper: Auditors compose the overture via data privacy assessments, craft the score with framework development, uncover instruments through data discovery and mapping, assess risks through DPIAs, secure collaborations via third-party risk management, embrace technology with Privacy Enhancing Technologies, ensure continuous improvement, and raise the curtain with training and awareness.The Role of Accounting Professionals in Data ProtectionAccounting professionals, particularly CAs, act as data processors who process data on behalf of data fiduciaries and are responsible for using data solely for its intended purpose and ensuring security. Responsibilities include data protection and compliance, data governance and risk management, compliance audits, and maintaining valid contracts and liability management.References:Digital Personal Data Protection Act (DPDP Act)Author may be reached at cadivya9293@gmail.com and eboard@icai.in
Ep. 369 — The AI-Infused Future of Chartered Accountancy
CA Journal
· September 2026
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The AI-Infused Future of Chartered AccountancyThe integration of Artificial Intelligence (AI) into Chartered Accountancy is reshaping the profession with AI-powered auditing, predictive analysis, and robotic process automation enhancing accuracy and efficiency. Tax software has automated calculations and compliance, while Natural Language Processing (NLP) helps extract insights from unstructured data. Blockchain helps ensure transparency in auditing, and AI-driven financial advisory and data visualization tools have improved client services. Cybersecurity safeguards sensitive data, and Optical Character Recognition (OCR) streamlines document management prompting CAs to consider ethical and professional implications as they embrace AI.By CA. K. Aditya Amit, Member of the InstituteThe integration of Artificial Intelligence (AI) tools into the domain of Chartered Accountancy represents a significant leap forward in the profession. Chartered Accountants have long been the custodians of financial accuracy, providing crucial services in auditing, taxation, and financial planning. With the advent of AI, their roles are not being replaced but rather augmented with powerful tools that have the potential to enhance precision, speed, and accuracy. Let\'s look at some of the powerful AI tools that are in use or will be used in the near future.AI-Powered Auditing Tools: Transforming Audit EfficiencyAuditing is a cornerstone of Chartered Accountants\' roles, where precision and thoroughness are paramount. AI-powered auditing tools are set to disrupt and enhance this practice. These tools are designed to meticulously analyze large sets of data, identify abnormalities within transactions, and provide a level of scrutiny far beyond what is feasible through random sampling techniques.Consider a real-world scenario involving the audit of a multinational corporation. In this case, the decision to employ AI-powered auditing software is made for post-preliminary audit procedures. These tools are capable of swiftly reviewing and analyzing thousands of financial transactions, ensuring accuracy and compliance. Where AI truly shines is in its ability to detect potential risks associated with transactions by using machine learning algorithms. It can spot anomalies in patterns, uncover unusual financial transfers, and enhance the overall audit process significantly.In the not-so-distant future, CAs might find themselves working alongside AI, where AI-driven auditing tools efficiently process vast volumes of financial data, leaving humans to focus on interpretation and decision-making. This symbiotic relationship between AI and CAs can result in not only more robust audits but also expedite reporting and quicker responses to irregularities.Predictive Analysis Tools: Forecasting Financial TrendsCAs can harness the potential of predictive analysis tools to forecast financial trends, assess risks, and optimize investment strategies. These tools empower businesses to make informed decisions based on thorough analysis, ultimately enhancing financial planning and resource allocation.To illustrate, let\'s delve into a practical example. If an auditor is tasked with scrutinizing inventory balances, they can create models to flag unusual inventory transactions and discrepancies between recorded inventory in the books of accounts and the physical inventory by employing predictive analysis tools and analyzing historical inventory data. The same model can be used to detect anomalies in expense reports, which is invaluable for managing and optimizing financial resources.Predictive analysis can also be instrumental in budgeting and financial planning for clients. With AI, CAs can offer clients more accurate predictions regarding future revenues and expenses, enabling better financial decision-making. This not only strengthens the client-CA relationship but also positions CAs as invaluable advisors.Robotic Process Automation (RPA): Streamlining Repetitive TasksRepetitive and manual tasks often consume valuable time in the world of Chartered Accountancy. RPA offers a solution to automate these tasks, liberating CAs to focus more on strategic activities. By utilizing RPA, CAs can streamline processes such as data entry, reconciliation, filing periodic returns etc. leading to increased efficiency in various aspects of the profession.Let\'s explore a practical application of RPA in the context of Chartered Accountants. CAs often manage accounts payable processes for businesses, a task that involves receiving invoices, recording them, obtaining approvals, matching purchase orders, making payments, and generating reports and analytics. RPA can be harnessed to streamline this complex workflow, leading to a reduction in manual errors and improved overall efficiency. The outcome is not only cost savings but also the release of human resources to concentrate on strategic tasks that add value to the business.Imagine a scenario where a team of CAs collaborate with RPA systems to handle the accounts payable of a large corporation. Invoices are scanned, data is extracted using OCR, and RPA systems perform validations, approvals, and generate payment reports. This not only reduces the likelihood of errors but also ensures that the process is executed faster and more consistently.AI Powered Tax Software: Simplifying Tax ComplianceAI-powered tax software is poised to revolutionize the way Chartered Accountants handle tax-related tasks. These tools are capable of extracting data from various sources, such as Excel or Enterprise Resource Planning (ERP) systems, and then calculating taxes in accordance with tax laws while preparing and filing returns. This automation of repetitive tax calculations empowers CAs to shift their focus towards more strategic aspects of tax planning rather than becoming mired in the manual aspects of tax calculation.Let\'s consider a scenario where a CA specializes in tax compliance for a diverse portfolio of clients. AI-driven tax software not only automates the computation of taxes but also stays updated with the changing tax regulations by making necessary software upgradation i.e., to use the latest version of the software. This means that CAs can offer clients real-time advice on optimizing their financial decisions to minimize tax liabilities and take advantage of available deductions.As AI-powered tax software evolves, it can also facilitate more efficient cross-border tax planning and compliance. CAs can tap into AI\'s ability to quickly analyze tax codes from different countries, ensuring that multinational corporations remain in compliance with the complex web of international tax laws.Natural Language Processing (NLP): Unlocking Insights from Unstructured DataNLP, a sub-field of AI, focuses on enabling computers to understand and interpret human language. This technology offers significant benefits for Chartered Accountants as it allows them to extract insights from unstructured data sources, including financial reports, emails, and legal documents. NLP can efficiently summarize complex contract terms, identify key financial information, and flag potential risks within text-based documents.Consider a practical application of NLP for CAs. They can employ NLP to conduct sentiment analysis on financial news and reports, a capability that aids in making informed investment decisions for clients. Additionally, NLP can simplify lengthy financial reports, making them more accessible and comprehensible by highlighting key points and trends.For example, a CA working with a high-net-worth individual might employ NLP to analyze news articles, financial reports, and market trends to provide their client with up-to-the-minute insights on potential investment opportunities and risks. This level of sophistication in data analysis and presentation would be challenging, if not impossible, to achieve without the aid of AI.Blockchain for Auditing: Ensuring Transparency and ImmutabilityBlockchain, a decentralized digital ledger technology, has gained widespread attention for its potential applications. CAs can leverage blockchain technology to create a transparent and immutable ledger for auditing purposes. Unlike traditional centralized systems, blockchain operates on a network of computers, where no single entity has complete control, ensuring enhanced security and trust.To emphasize the potential of blockchain in auditing, CAs can employ AI-enhanced blockchain tools to verify transactions and financial records. This not only ensures the integrity of financial data but also guarantees its tamper-proof nature. It can be used in auditing regular books of accounts by setting up the blockchain ledger, loading all financial data to a block with a timestamp, and validating transactions with cryptographic techniques which provide authenticity of the transaction. Once a transaction is added to the blockchain, it cannot be altered in order to ensure its integrity.If a Chartered Accountant is tasked with auditing a cryptocurrency exchange, AI-enhanced blockchain auditing tools can be employed to verify the transaction history, wallet balances, and security protocols. Such a comprehensive audit can instill trust in clients and regulators while also identifying potential vulnerabilities and risks.AI-Driven Financial Advisory: Enhancing Client ServicesAI-powered Chatbots have the potential to revolutionize the way Chartered Accountants provide financial advisory services to their clients. These chatbots can provide basic financial assistance to clients, offering 24/7 access to financial advice and guidance. They are equipped to answer common financial queries, assist with budgeting, and even formulate investment strategies tailored to individual financial goals.i. Robo-Advisors: These are automated platforms that provide personalized investment recommendations based on the individual\'s financial goals and risk tolerance.ii. Credit Scoring: Using Artificial Intelligence and machine learning algorithms, the individual\'s or company\'s creditworthiness can be assessed.iii. Algorithm Trading: AI-based trading is done where such algorithms analyze market trends and execute trades at lightning speed. They can identify profitable trading opportunities and minimize risks against market fluctuations.A Chartered Accountant can assist a client in planning for their financial future by introducing him to a robo-advisor, in addition to a traditional financial advice. The robo-advisor can create a diversified investment portfolio tailored to the client\'s risk tolerance and financial goals, all while considering market trends and the latest economic indicators. The CA and the Chatbot can work in tandem, providing clients with a holistic approach to financial planning and investment.Data Visualization Tools: Communicating Insights EffectivelyData visualization tools are indispensable for CAs to present complex financial data in a more comprehensible and interactive format. These platforms allow users to import data from various sources and apply various styling and formatting to create informative data visuals. CAs can utilize data-visualization tools to assist clients in decision-making and effectively communicate financial insights to various stakeholders.When presenting the financial performance of a corporation to its Board of Directors, a Chartered Accountant can create interactive dashboards that showcase key performance indicators, financial trends, and forecasts in a visually engaging manner with the use of data visualization tools. This not only simplifies complex financial data but also empowers the Board to make well-informed decisions quickly.Cybersecurity Solutions: Safeguarding Sensitive DataCybersecurity is of paramount importance for Chartered Accountants, who often deal with sensitive financial information. AI-driven cybersecurity solutions offer real-time threat detection and prevention, bolstering the protection of financial information and data. These solutions encompass a set of tools and strategies designed to safeguard computer systems, networks, and data from threats such as data breaches, viruses, and other cyberattacks.For instance, consider a scenario where a Chartered Accountant is handling the financial records of a large corporation. With the ever-present threat of cyberattacks and data breaches, AI-driven cybersecurity solutions work in the background to monitor network activity and proactively detect anomalies. In the event of a potential breach, these systems can swiftly respond, mitigating the impact and protecting sensitive financial data from falling into the wrong hands.OCR ToolsOCR tools facilitate the extraction of text and data from scanned images, saving time in data entry and document management. Chartered Accountants can convert image-based financial documents into machine-readable text, eliminating the need for manual data entry and reducing the risk of errors. Once processed with OCR, CAs can easily locate specific information within documents, streamlining the retrieval of data points or specific transactions.Imagine a scenario where a Chartered Accountant is tasked with reviewing a large volume of paper-based financial documents, such as invoices, receipts, and contracts. OCR tools come into play by quickly scanning and converting these documents into machine-readable text. This not only saves hours of manual data entry but also enhances accuracy. Furthermore, the processed data can be integrated into financial software, allowing for seamless data analysis and reporting.Looking Ahead: Ethical and Professional ConsiderationsAs Chartered Accountants embrace AI, they must also consider its ethical and professional implications. AI is a powerful tool, but it must be used responsibly and ethically.Data Privacy: CAs must adhere to strict data privacy regulations when handling sensitive financial information. The use of AI in data analysis should be transparent, and data security measures should be robust to protect clients\' information.Continuing Education: The fast-paced evolution of AI requires CAs to engage in continuous learning and professional development. Understanding AI\'s capabilities and limitations is essential to make informed decisions.Maintaining Professional Judgment: AI can enhance decision-making, but it cannot replace the professional judgment and ethics of Chartered Accountants. CAs must use AI as a tool to support their decision-making rather than as a decision-maker.Transparency with Clients: CAs must be transparent with clients about the use of AI tools in their practices. Clients should understand how AI benefits them and the safeguards in place to protect their interests.Incorporating these ethical considerations into their AI-infused practices, Chartered Accountants will continue to build trust with clients and maintain their professional integrity.ConclusionThe role of Chartered Accountants is on the brink of a significant transformation, deeply mixed with the integration of Artificial Intelligence tools. The adoption of AI promises to enhance audit accuracy, simplify tax compliance, automate repetitive tasks, summarize voluminous financial documents, and provide invaluable financial insights to clients. As CAs embrace AI, they will continue to be at the forefront of financial and accounting innovation, offering their clients the best in financial management and advisory services.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 370 — Prioritizing benefits of AI adoption in finance- An application of fuzzy analytic hierarchy process
CA Journal
· September 2026
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Prioritizing benefits of AI adoption in finance- An application of fuzzy analytic hierarchy processArtificial intelligence (AI) is increasingly reshaping the company\'s finance and accounting domain by performing various tasks, thereby serving as a significant catalyst for innovation and growth. This paper aims to understand the benefits of artificial intelligence in finance and accounting and prioritize those for companies as industry experts perceive. A qualitative research approach was used to analyze news and articles on the benefits of artificial intelligence. Text mining and thematic analysis identified key benefits of using AI, represented through distinct keywords or items. These items are included for prioritization using the fuzzy analytical hierarchical process (FAHP) method with the help of industry experts. The FAHP, a multi-criteria decision-making methodology (MCDM), has been employed to measure the relative importance of the benefits of using AI. The different themes identified indicate the benefits of artificial intelligence in the finance and accounting domain: sustainable competitive advantage, improved decision-making, enhanced operational performance, cost reduction, value creation, and colleague experience. The results of this study can be used to make decisions about adopting AI in finance by the company and give the firm the maximum possible benefits of using AI in finance.By CA. Rajesh Kumar Sarvanarayan Jha, Member of the InstituteBy Prof. Debabrata Mitra, Vice-Chancellor, Dakshin Dinajpur UniversityIntroductionIndustry 4.0, alternatively referred to as the Fourth Industrial Revolution (4IR), exert a pervasive influence on almost every facet of our daily lives. It impacts human-technology interactions and alters how and where work is conducted (Simón et al., 2024). Advanced technologies such as artificial intelligence (AI) and robotics are extensively used in finance and accounting. AI technology corresponds to the emulation of human intelligence by machines or the capacity of machines to perform various tasks at a level comparable to that of human intelligence (Jarrahi, 2018). The company\'s finance and accounting domain uses AI solutions to automate processes, provide real-time insights from large data sets for decision-making, ensure constant and continuous employee and customer engagement, and carry out human tasks in providing services.According to Huang and Rust, (2018), AI-driven systems with human intelligence can perform various types of tasks, such as mechanical, analytical, intuitive, and empathetic. Mechanical intelligence is related to the capability of automating routine and repeated activities. Analytical intelligence is the ability to process vast troves of information and data for problem-solving, logical reasoning, and learning in order to execute predictable, systematic, consistent, and complex tasks. Intuitive intelligence includes experience-based holistic thinking, understanding, creativity, and effective adaptation to novel situations, with a high degree of resemblance to human reasoning capacity. Empathetic intelligence refers to the capacity of machines to perceive and comprehend other people\'s emotions and to feel or behave as if they have human-like feelings. These sophisticated skills are gained from specialized knowledge, expertise, and training in cognitive thinking, and finance professionals, including financial analysts and accountants, heavily use all four intelligences.Finance and accounting are reported to be the best areas for using AI due to the substantial volume of structured and unstructured data generated and consumed. Finance is considered a promising frontier for AI innovation because of the way AI revolutionizes companies\' processes and services. A new finance and accounting domain powered by AI technologies can automate accounting and financial reporting, effectively manage assets, analyze risk, and offer financial advice. AI enthusiasm in the finance and accounting domain is currently at its peak, mostly due to the growth in data and collapsing computing costs. AI in the field of finance has garnered significant research interest for many decades (Cao, 2022). The application of AI in traditional financial markets, financial operations, trading, banking, insurance, risk management, compliance, regulation, and marketing has evolved into the emerging field of fintech (financial technology). This AI-empowered advanced fintech facilitates accounting, auditing, blockchain, smart digital currencies, payment systems, lending, wealth management, asset management, risk management, and regulation management.However, the existing academic literature on AI lacks comprehensive coverage of its benefits in the area of finance and accounting. Based on this identified gap, we formulate a new research question: What are the benefits of using artificial intelligence (AI) in finance and accounting? Therefore, this study aims to address this research gap and contribute to the existing body of knowledge by exploring the benefits of AI in finance and accounting through a qualitative approach and prioritizing the benefits using fuzzy logic, specifically the analytical hierarchical process (AHP) method.Review of literatureA comprehensive review of the extant literature, published articles, and the application of text mining and thematic analysis techniques identified the following benefits of AI in finance and accounting:i. Enhanced operational performance: AI has the potential to underpin substantial productivity growth (Raisch and Krakowski, 2021) and enhance efficiency and effectiveness, thereby empowering businesses to do more with less and to generate higher-quality outputs. Robotic Process Automation (RPA) is a driver of digital transformation that streamlines business processes by automating workflows. It elevates audit quality and financial reporting transparency and optimizes budget and strategic resource allocation. AI techniques automatically detect phishing, strengthen cybersecurity, and mitigate cyber risks (Zeadally et al., 2020).ii. Value creation: It uncovers new and previously unrealized opportunities to generate higher revenue and shareholder returns (Åström et al., 2022). AI enhances the speed of operations and ultimately leads to substantial time savings. Human-AI teaming augments human capacity and harnesses the potential value that AI technology can create for the enterprise (Simón et al., 2024). This fosters transformation, growth, and an increase in market share. Hence, AI creates value for establishing sustainable business models. Predictive analytics and automated inspections enhance quality control and optimize waste management processes to improve margins and profitability.iii. Cost reduction: The implementation of AI leads to lower costs owing to efficiencies generated by higher automation, reduced human error rates, cost analysis, and optimized resource utilization (McKinsey, 2021). Organizations have the potential to access wider customer segments outside their traditional limits and swiftly scale new solutions. This strategic approach reduces customer acquisition costs and is cost-effective for serving customers. Through predictive maintenance, the company can reduce maintenance and utility costs. A company can also deploy AI to provide insights into debt collection strategies to enhance recovery rates. This enables companies to reduce financial loss and reputational damage through early fraud prevention and ultimately increase cash flow.iv. Improved decision-making: One of the main advantages of using AI in the finance domain is the improved decision-making processes (Königstorfer and Thalmann, 2020). AI models effectively automate and augment decision-making by utilizing vast amounts of data. AI\'s higher analytical capacity provides real-time actionable insights for a faster, more accurate, and informed decision-making process, scenario, and response planning. This allows employees to dedicate more time and energy to strategic and creative tasks (Jia et al., 2024). Companies use AI-enabled technology to detect biases in other AI models and mitigate biases caused by human subjectivity. This may influence decision-making processes and, ultimately, accomplish business objectives. AI models can quickly process and summarize complex or lengthy texts in multiple languages by providing tailored key points, which helps preserve and manage an organization\'s knowledge base. AI-enabled automated decisions can avert potential financial crises through prompt risk assessment, financial scenarios, market sentiment analysis, and early warnings.v. Sustainable competitive advantage: AI is becoming a crucial strategy for leading organizations to outperform their peers. Similarly, the converse is equally true. A company that fails to effectively integrate AI capabilities is left behind. AI empowers companies to create novel products and services that better match customers\' unique needs, upgrade existing ones, and invent new business models by analyzing market trends and competitors (Babina et al., 2024). Companies that leverage AI-enabled technology to deliver intelligent servicing, personalized solutions, and superior experiences stand to increase consumer satisfaction and loyalty (Kriss, 2014). AI ensures that instant human-like support is accessible round the clock ($24\\times7$ availability). It helps to cater to a wider range of underserved clienteles and mitigate information asymmetry (Mhlanga, 2020).vi. Colleague experience: AI\'s rapid drive for integration into organizations creates a collaborative environment in which humans and machines collaborate closely as virtual colleagues to perform tasks (Raisch and Krakowski, 2021). It decreases workload, makes the job easier by responding to complex questions, and provides quick expert advice. Simón et al., (2024) found interactions between human and AI: achieving compatibility, nurturing trust, and facilitating mutual expansion of knowledge. AI Robots can perform every task endlessly without breaks, thereby eliminating the risk of human injury in hazardous or dangerous environments. Hence, there is zero risk for humans.Research MethodologyA qualitative research approach was used to analyze various news and articles from reputed newspapers and journals on AI in finance and accounting. Text mining and thematic analysis were conducted on the collected texts to identify themes indicating AI\'s benefits in finance and accounting. The different benefits of AI in finance and accounting are depicted using distinct keywords or items. These items were included for prioritization using the fuzzy analytical hierarchical process (FAHP) method (Buckley 1985; Saaty, 1980) with the help of 16 industry experts and finance professionals.Results and discussionThis study attempts to prioritize the benefits of using AI in finance and accounting from the perspectives of industry experts and finance professionals. \"Sustainable competitive advantage\" with 26.29% global weight is the most important benefit for industry experts and finance professionals when using AI for companies in the finance domain. This was followed by \"improved decision-making,\" with 24.48% global weight, and was identified as the second most significant benefit. The third most considered benefit is \"enhanced operational performance,\" with 19.81% global weight, which is further followed by the \"cost reduction\" and \"value creation,\" with 11.73% and 10.67% global weights, respectively. However, \"colleague experience,\" with 7.65% weightage, is found to be the lowest priority for industry experts and finance professionals when they choose AI for companies in the finance and accounting domain. As per the approach, the ranking we have obtained is in the order of \"sustainable competitive advantage > improved decision-making > enhanced operational performance > cost reduction > value creation > colleague experience.\"As depicted in the study, \"improve efficiency, accuracy, accessibility and productivity,\" with a global weight of 9.57%, is the highest demanded benefit by the experts. Further, \"automate and augment decision-making, and free up time for the strategic role,\" having 8.75% global weight, is regarded as the second most significant benefit by the experts. \"Personalized and superior customer experiences,\" with 8.17%, is third in preference given by the experts. This is followed by \"automatically summarizing lengthy documents and aiding retrieval,\" which has a 7.57% global weight.ConclusionIn an intelligent era, company management, industry experts, and finance professionals are proactive. They integrated new technology after considering its perceived benefits. This study explores the preferences of industry experts and finance professionals in terms of perceived benefits. In order of relative weights and ranking, the main benefits of AI in the finance and accounting domain are sustainable competitive advantage, improved decision-making, enhanced operational performance, cost reduction, value creation, and colleague experience. The study\'s results conclude that AI enhances a company\'s efficiency, accuracy, and accessibility and accelerates productivity. AI enables process automation and augments decision-making by providing real-time insights through the processing of large data. AI-powered technology can significantly improve the decision-making process, mitigate risks, and provide valuable and actionable insights that might otherwise remain hidden. AI can quickly categorize and summarize large volumes of documents, making it easier to organize and retrieve information. This allows employees to dedicate more time and energy to strategic and creative work. Companies that leverage AI-enabled technology to deliver intelligent service, personalized solutions, and superior experiences strengthen consumer relationships and loyalty. It improves scalability, minimize human errors, and reduces costs. Overall, they tend to generate higher revenue and shareholder returns.References:Åström, J., Reim, W., and Parida, V. (2022). Value creation and value capture for AI business model innovation: a three-phase process framework. Review of Managerial Science, 16(7), 2111-2133.Buckley, J. J. (1985). Fuzzy hierarchical analysis. Fuzzy sets and systems, 17(3), 233-247.Cao, L. (2022). AI in finance: challenges, techniques, and opportunities. ACM Computing Surveys (CSUR), 55(3), 1-38.Huang, M., Rust, R. (2018). Artificial Intelligence in Service. Journal of Service Research, 21(2), 155-172Jarrahi, M. H. (2018). Artificial intelligence and the future of work: Human-AI symbiosis in organizational decision making. Business Horizons, 61(4), 577-586.Jia, N., Luo, X., Fang, Z., and Liao, C. (2024). When and how artificial intelligence augments employee creativity. Academy of Management Journal, 67(1), 5-32.Königstorfer, F. and Thalmann, S. (2020). Applications of Artificial Intelligence in commercial banks - A research agenda for behavioral finance. Journal of Behavioral and Experimental Finance, 27.Kriss, P. (2014). The value of customer experience, quantified. Harvard Business Review, 1(1), 1-14.McKinsey. (2021). Building the AI bank of the future. 1-66.Mhlanga, D. (2020). Industry 4.0 in finance: the impact of artificial intelligence (AI) on digital financial inclusion. International Journal of Financial Studies, 8(3), 45.Raisch, S., and Krakowski, S. (2021). Artificial intelligence and management: The automation-augmentation paradox. Academy of Management Review, 46(1), 192-210.Saaty, T. L. (1980). The analytic hierarchy process: Planning, priority setting, resource allocation. Pittsburgh, PA: McGraw-Hill.Simón, C., Revilla, E., and Sáenz, M. J. (2024). Integrating AI in organizations for value creation through Human-AI teaming: A dynamic-capabilities approach. Journal of Business Research, 182.Zeadally, S., Adi, E., Baig, Z., and Khan, I. A. (2020). Harnessing artificial intelligence capabilities to improve cybersecurity. IEEE Access, 8, 23817-23837.Authors may be reached at debabratamitranbu@gmail.com and eboard@icai.in
Ep. 371 — The Importance of Ethics in Economic Activities: A Crucial Role for Chartered Accountants
CA Journal
· September 2026
00:00
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The Importance of Ethics in Economic Activities: A Crucial Role for Chartered AccountantsIn the fast-paced and interconnected world of modern business, ethical conduct is not just a lofty ideal, but a crucial element that forms the backbone of economic stability. As we reflect on the importance of ethics on this Global Ethics Day, it is clear that ethics and independence are more than just professional requirements; they are the cornerstones of trust that sustain our economic systems. Chartered Accountants, as custodians of financial information, are on the front lines of this battle, defending the integrity of economic activities from fraud, money laundering, and other financial crimes. The commitment to ethics standards, such as those set out by the International Ethics Standards Board for Accountants (IESBA), guides accountants in this endeavor and serves as a foundation for maintaining trust in business and economic transactions.By Ms. Gabriela Figueiredo Dias, Chair of the International Ethics Standards Board for AccountantsEthics as the Foundation of Economic TrustEthics form the foundation of trust in economic activities, connecting businesses, investors, customers, and regulators. In an environment where all stakeholders adhere to ethical practices, transactions can flow smoothly, markets can function efficiently, and businesses can thrive. Ethics standards, therefore, create a robust infrastructure of accepted and expected behaviors that promote accountability, honesty, and transparency.The presence of trust allows stakeholders to make informed decisions, driving economic prosperity. But when ethical practices fail, the consequences can be damaging. Unethical activities like financial misreporting, fraud, and corruption erode the trust that markets depend on, leading to financial instability and wider economic harm. Take, for instance, the collapse of Lehman Brothers, which played a pivotal role in triggering the 2008 financial crisis. Complex and opaque off-balance-sheet transactions shifted risks to unacceptable levels and hid the company\'s financial instability, deceiving investors and regulators. The ensuing collapse had devastating global economic repercussions, causing widespread unemployment and severe social consequences. The Lehman Brothers example highlights the critical importance of maintaining ethics standards, particularly within the accounting profession.Positioning Ethics at the Center of Corporate Long-Term Sustainability and ProfitabilityEmbedding ethical principles into governance and strategy enhances a company\'s long-term sustainability and its ability to withstand external pressures. Ethical governance ensures that decision-making processes are transparent and inclusive, reducing the likelihood of corruption or unethical behavior at the executive level. From a strategic perspective, companies that incorporate ethics into their core business decisions are better equipped to mitigate risks caused by unethical practices, such as regulatory fines, public backlash, or supply chain disruptions. By integrating ethics into their governance and strategy, businesses create a foundation for sustainable growth, fostering stronger relationships with stakeholders and earning a competitive advantage in markets increasingly driven by responsible business conduct.A strong ethical culture also helps attract and retain top talent, as employees prefer to work for organizations that prioritize social responsibility and fairness. Companies that prioritize these values tend to foster greater employee satisfaction, loyalty, and engagement. In fact, a recent study conducted by Opinion Research Corporation finds that 82% of respondents said they would take less pay to move from an unethical company to one that embraces ethical conduct. Ethical organizations are often seen as more desirable places to work, leading to reduced turnover and helping to build a positive and motivated workforce.The Role of IESBA and Accountants in Combating Financial CrimesThe IESBA International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code) is designed to help Chartered Accountants navigate the complex ethical dilemmas they encounter every day in their professional roles. The Code is a critical tool for accountants tasked with preventing and combating financial crimes such as money laundering (ML), terrorist financing (TF), and fraud.According to the United Nations Office on Drugs and Crime (UNODC), the estimated amount of money involved in global money laundering activities ranges between $800 billion and $2 trillion annually. These illicit activities damage legitimate economies, and contribute to social instability. Furthermore, terrorist financing supports dangerous extremist activities that threaten global security.Chartered Accountants serve as the first line of defense against these types of crimes. In many jurisdictions, accountants are required to perform thorough due diligence on clients, especially those operating in high-risk sectors or countries with poor anti-money laundering (AML) measures. Chartered Accountants must screen clients for potential involvement in ML, TF, and fraud and report suspicious activities to relevant authorities.The role of Chartered Accountants in identifying suspicious activities is vital. They must remain vigilant for red flags, such as unusually large cash transactions, complex and opaque financial structures, and companies that appear to serve no legitimate business purpose. Shell companies, for example, are often used to obscure the true ownership and origin of funds, enabling money laundering and tax evasion schemes. By applying their professional competence, integrity, and objectivity-core principles of the IESBA Code-accountants can help dismantle these schemes before they cause significant harm.Social and Economic Impact of Money Laundering, Terrorist Financing, and FraudMoney laundering, terrorist financing, and fraud are not isolated issues; their effects ripple through society and the economy, causing significant damage. Illicit financial flows, when integrated into legitimate economies, distort competition, inflate asset prices, and ultimately destabilize financial systems. This destabilization disproportionately harms lower-income groups, who often bear the brunt of economic crises brought about by financial misconduct.Moreover, financial crimes fund a wide range of illegal activities, from human trafficking and drug smuggling to terrorism. The social costs of these crimes are immense, contributing to violence, exploitation, and the erosion of societal norms. Governments lose significant tax revenue, which could otherwise be directed toward critical social programs, healthcare, and infrastructure development.In this context, the role of Chartered Accountants extends beyond mere financial reporting. By adhering to ethical principles and proactively identifying and reporting suspicious activities, accountants play a key role in protecting both the economy and society. Their work helps to disrupt criminal networks, safeguard public resources, and ensure the continued stability of financial systems.The Impact of Ethical Failures in BusinessWhen ethics standards within business are compromised, the consequences can be severe. A lack of proper ethical oversight or failure to adhere to professional standards can contribute to financial misconduct, often leading to damaging outcomes for companies, employees, and stakeholders. In these cases, unethical practices-such as misrepresenting financial data or overlooking warning signs-can obscure the true financial health of organizations, leading to destabilization and long-term harm. Recent scandals demonstrate how ethical lapses can have devastating consequences, reinforcing the need for stronger ethical frameworks.The collapse of Wirecard, a German fintech company, is a prime example. Obvious red flags, such as unexplained offshore transactions and suspiciously high profits in certain subsidiaries were ignored, allowing financial misconduct to continue unchecked for years. This resulted in one of the largest corporate frauds in recent history.Similarly, in the case of Carillion, a major UK construction company, unethical accounting practices such as overstating revenue and understating liabilities-masked the company\'s financial problems, leading to its eventual collapse. Thousands of employees lost their jobs, and suppliers and investors were left in financial ruin.While corporate failures are complex and involve multiple factors, adherence to ethical principles in financial reporting and auditing can play a pivotal role. The profession has a responsibility to uphold the highest standards of integrity and transparency, as doing so protects not only the interests of companies and investors but also the broader economy. Strong ethics frameworks ensure that accountants remain vigilant, helping to prevent financial misconduct and promote long-term stability.Ethical Challenges in the Modern Era: GreenwashingBeyond traditional financial crimes, a new ethical challenge has emerged in recent years: greenwashing. As global attention turns to sustainability, businesses are under pressure to demonstrate their environmental and social responsibility. Unfortunately, some companies have resorted to misleading practices, falsely portraying themselves (or their products) as \"green\" or sustainable to attract investors and customers. This practice, known as greenwashing, undermines trust in sustainability initiatives and can mislead regulators, investors, and consumers.A striking example of greenwashing is the case of Danske Bank. Between 2007 and 2015, billions of euros were laundered through the bank\'s Estonian branch, primarily from Russia and other former Soviet states. At the same time, Danske Bank marketed itself as a leader in sustainable banking, promoting ethical investment products and CSR initiatives. This disparity between the bank\'s public image and its actual practices highlights how greenwashing can be used to distract from unethical behavior.Chartered Accountants can play a critical role in preventing greenwashing. As companies increasingly report on their sustainability efforts, accountants will ensure that these reports are accurate, transparent, and free from exaggeration. The soon-to-be-finalized International Ethics Standards for Sustainability Assurance (including International Independence Standards) (IESSA) and Other Revisions to the Code Relating to Sustainability Assurance and Reporting will be instrumental in helping accountants navigate this emerging area, applying the same rigor to sustainability reporting as they do to financial reporting.The Expanding Role of IESBA StandardsThe IESBA Code is currently adopted or used in over 130 jurisdictions and continues to expand its influence. This global reach is crucial in a world where businesses operate across borders, and financial transactions often span multiple countries. The Code provides a common ethical framework that ensures consistency in accounting practices and helps prevent unethical behavior on a global scale.One of the IESBA\'s strategic goals for 2024-2027 is to extend the scope of its ethics standards to other professionals involved in sustainability assurance and non-financial reporting. As sustainability becomes increasingly important to businesses and investors, ethics standards must evolve to address these new challenges.Conclusion: The Critical Importance of Ethics in AccountingIn today\'s globalized and interconnected world, the importance of ethics in economic activities cannot be overstated. For Chartered Accountants, adherence to ethics standards is not just about avoiding legal repercussions- it is about upholding the trust and confidence that underpin the global economy. By adhering to ethical principles outlined in the IESBA Code, accountants can act as gatekeepers against financial misconduct, ensuring that businesses and economies remain transparent, accountable, and stable.From combating money laundering and fraud to preventing greenwashing, Chartered Accountants play a vital role in safeguarding both the economy and society. Their work is essential not only for protecting businesses from financial crimes but also for ensuring the long-term sustainability of economic activities. As the business landscape continues to evolve, so too must the ethics standards that guide the accounting profession. By embracing these standards, accountants can help create a more just and sustainable future for all.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 372 — The Responsibility of Chartered Accountants in Upholding Business Ethics
CA Journal
· September 2026
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The Responsibility of Chartered Accountants in Upholding Business EthicsBusinesses may resort to unethical practices in times of trouble or be spurred by the temptation for quick profits. Unethical practices can stem from anywhere in the organization. Gaining an understanding of the motives and nuances of unethical practices and realising their fallout can help implement measures to deter such practices. Chartered Accountants, being the guardians of public trust, can hold businesses accountable and promote ethical conduct. The article explores the concept of ethics, delves into common unethical practices, and how Chartered Accountants can help promote ethical business conduct.By CS Usha Ganapathy SubramanianBy Dr. Ranjith Krishnan, ConsultantIntroductionBusinesses are merely not instruments of wealth creation but are important building blocks of the socio-economic system. They harness the collective synergy of different stakeholders - customers, suppliers, employees, lenders, shareholders, the society, the government, and the environment to create value. Here, treating every stakeholder as an equal partner is important. The business landscape abounds with opportunities but also with risks, creating pressure to perform. Greed and fear may cause businesses to lose sight of what is right and what is not, and succumb to unethical means of making profits or staying afloat.Unethical practices result in huge losses for stakeholders as well as dent the trust reposed in businesses. Scam after scam has led regulators worldwide to focus on business conduct. Concepts like triple bottom line (people, planet and profits) and ESG (Environment, Social and Governance) are emphasized in various forums. This, together with the rise of responsible investing, is serving as a wakeup call for businesses.What are ethics and how to identify an unethical practice?The term \'Ethics\' can be described as doing the right thing given a set of circumstances. An ethical practice is one that promotes the welfare of the stakeholders while minimizing any harm to them. We need not search far when it comes to defining ethics, when \'Dharma\' is entrenched in Indian ethos. The principle of \'Dharma\' requires one to not just consider the written laws but seek to understand one\'s duty and perform the right action in a given situation. Ethics goes beyond mere compliance with law.As a corollary, all unethical practices are not classified as offences in law. An \'offence\' is any act made punishable by law. While all offences are typically unethical, all unethical practices are not offences punishable under the law. Sometimes, an unethical practice does not get tainted with illegality or even with technical non-compliance. Some actions may be unethical but perfectly legal.Unethical Practices in Finance and AccountingUnethical practices in finance and accounting range from minor accounting \"adjustments\" to major frauds resulting in losses running to thousands of crores to investors or lenders. These include financial misreporting by inflating revenue to boost market perception or suppressing revenue to avoid taxes, or inflating or suppressing expenses, siphoning off money through fake transactions and forged documents, creating ghost employees, collusion with third parties, and so on. Tax evasion and money laundering often accompany financial frauds.Measures towards inflating or suppressing profits: These include inflating revenue by showing non-existent sales, recognizing sales on sale-or-return basis before meeting recognition criteria, classifying revenue expenditure as capital expenditure, suppressing profits by showing bogus expenses or inflating expenses etc.Judgments and estimates and other grey areas: While estimates and judgments form a necessary component of preparation of financial statements, these are areas where unethical practices could slide in subtly.Unjust enrichment at the cost of investors or lenders: Siphoning off public money to unjustly enrich promoters is seen in many instances.Tax evasion and tax avoidance: Suppressing profits is mostly aimed at avoiding taxes. Base erosion and profit shifting (BEPS) practices involve eroding the profit base in high-tax jurisdictions and shifting profits to low-tax jurisdictions.Money laundering: Money from illegal activities or untaxed income is removed as far from the source as possible to hoodwink authorities through placement, layering, and integration.Collusion: Frauds and unethical practices often involve corruption and collusion on some level.Insider trading: Communicating unpublished price sensitive information to others or trading while in possession of such information constitutes insider trading.Broader implications of ethical lapsesEthical lapses could have huge after-effects for the business, its promoters, stakeholders, and society. Loss of goodwill, monetary losses (penalties, damages, fines), loss of business opportunities, and potential prosecution/imprisonment are among the severe repercussions for businesses. For stakeholders and society, financial misconduct leads to huge investor/lender losses, employee credibility dents, and widespread societal harm in cases of environmental negligence or public health violations.Ways in which Chartered Accountants may promote ethicsThe society looks up to Chartered Accountants not only as experts in accounting, tax, and audit domains, but also as guardians of trust. Ways in which CAs can inspire ethical conduct include:Accepting clients and assignments based on integrity of the clients: Auditors must consider client integrity as a primary factor before acceptance (SQC 1).Ensuring independence: Upholding independence both in appearance and in mind beyond written regulations (Section 141 of Companies Act, 2013 and ICAI Code of Ethics).Performing robust audit procedures and exercising objectivity: Exercising professional skepticism and due diligence in evaluating audit evidence and organizational governance.Reporting of frauds: Fulfilling the mandatory duty to report frauds under Section 143(12) of the Companies Act, 2013.Responding to NOCLAR: Adhering to Non-Compliance with Laws and Regulations (NOCLAR) provisions under the ICAI Code of Ethics (Sections 260 and 360).Appropriate Audit Reporting: Issuing modified audit reports (SA 705) or Emphasis of Matter paragraphs (SA 706) where material misstatements or fundamental uncertainties exist.Interdisciplinary acumen: Acquiring interdisciplinary skillsets to detect subtle red flags and fraud risk factors (SA 240).Continuous professional development: Staying updated on evolving fraud forms, technologies, and Artificial Intelligence (AI) abuse.Ethical leadership: Setting an example of ethical conduct and uncompromising integrity.Codes, Policies, Procedures and Internal Controls: Helping businesses incorporate ethical frameworks into operating procedures and internal controls.Technology in ethics: Leveraging technologies like AI and blockchain to detect patterns and red flags promptly.Role of ICAI in promoting ethicsICAI undertakes continuous efforts to guide members through the Ethical Standards Board, the Code of Ethics (converged with IESBA standards), curriculum integration, specialized workshops, and guidance on non-audit services under Section 144 of the Companies Act, 2013.ConclusionEthics is to business what an engine is to a train—it drives the entirety of business toward a sustainable future. Chartered Accountants, as the unsung heroes of stakeholders, ensure that businesses operate responsibly, paving the way for a sustainable economy and a fairer society.References:OECD, MNE GuidelinesUNDP, Guiding Principles on Business and Human RightsMCA, National Guidelines for Responsible Business Conduct (NGRBC), 2019SEBI, Business Responsibility & Sustainability Reporting FormatOECD, Base Erosion and Profit Shifting (BEPS)ICAI, Code of Ethics (12th Edition)Authors may be reached at ranjithk.iyer@gmail.com and eboard@icai.in
Ep. 373 — The Bhagavad Gita and Ethical Independence for Chartered Accountants: Navigating Professional Challenges
CA Journal
· September 2026
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The Bhagavad Gita and Ethical Independence for Chartered Accountants: Navigating Professional ChallengesThe article explores the profound wisdom of the Bhagavad Gita and its practical significance for Chartered Accountants (CAs). CAs hold a pivotal responsibility in safeguarding financial integrity by ensuring precise financial reporting, adhering to regulatory frameworks, conducting impartial audits, detecting potential fraud, and upholding ethical principles that promote transparency and accountability in organizations. The article offers guidance to members on how the Gita\'s teachings on duty, righteousness, and detachment can help CAs preserve their professional independence. It also addresses key challenges to a CA\'s objectivity, such as long-standing client relationships, requests for additional services, unethical proposals, and promises of future work. Drawing upon the teachings of the Gita, the article presents strategies to overcome these challenges while upholding ethical standards, fostering professional skepticism, and maintaining integrity in the execution of their responsibilities.By CA. Aseem Trivedi, Member of the InstituteThe Bhagavad Gita, though a primeval spiritual text rooted in a religious tradition, offers wisdom that resonates far beyond its original context. Its insights into duty, righteousness, and the importance of detachment have relevance in numerous areas of life, including the professional domain. For Member (Chartered Accountant) who are often at the forefront of ethical dilemmas in their careers, the Gita\'s teachings can be particularly instructive. CAs serve as the curators of financial integrity, and in this role, maintaining independence is not just a regulatory requirement-it\'s a fundamental ethical obligation which is absolute in all sense. However, in the course of their work, Members frequently encounter situations that can test this independence. Long-term relationships with clients, requests to provide additional services beyond their audit role, unethical proposals, and even the temptation of future work can all attract a Member to deviate from the path of impartiality. Here is where the Gita\'s insight comes to play the role. The verses of Gita explains the importance of performing one\'s duty without attachment to the results a concept known as Nishkama Karma. For a Member, this means making decisions based on what is ethically correct, rather than what is convenient or advantageous in the short term. It\'s about being rooted in virtue (Dharma) and acting with integrity, irrespective of external pressures.Moreover, the Gita teaches the value of detachment-remaining unaffected by personal gains or losses. For a CA, this means resisting the allure of rewarding offers that might compromise their independence. It\'s about maintaining a clear judgment that is not persuaded by potential future benefits.To have guidance in these challenging circumstances it requires a deep commitment to ethical principles, much like the Gita advocates. By applying the Gita\'s teachings, CAs can strengthen their resolve to uphold the highest standards of professional conduct, ensuring that their decisions are guided by integrity rather than personal or financial gain.In essence, the Gita offers an eternal guide for CAs determined to maintain independence in their professional lives. It provides not just a moral framework, but a practical approach to ethical decision-making, helping CAs steer the complex professional circumstances with wisdom.The Concept of IndependenceIndependence is a fundamental principle for a member while discharging his attest function, ensuring that his decisions and opinions are free from bias or undue influence. The Bhagavad Gita provides a moral foundation that closely aligns with this principle, particularly through its teachings on detachment and duty.Gita Insight\"Karmanye vadhikaraste, Ma phaleshu kadachana\" (You have only right to perform your prescribed duties, but you are not entitled to have a wish for the outcome of your actions. It is based on PRARABDHA.)This verse from the Gita highlights the importance of focusing on one\'s responsibilities without attachment to the outcomes. For members, this teaching underscores the need to perform professional duties of attestation with integrity, without being persuaded by potential personal gains or relationships. Independence, in this context, is about maintaining objectivity and ensuring that peripheral factors do not impact professional judgment.Threat to Independence and its Mitigation1. Long-Term Client RelationshipsThreat: Over a period of time, a long-standing relationship with a client can create a familiarity threat, where the member may develop a sympathetic bond with the client, potentially leading to a loss of objectivity. The trust and ease built over years can subtly influence the Member\'s judgments, making it difficult to maintain the necessary level of skepticism.Gita\'s Guidance: \"Yogasthah kuru karmani, sangam tyaktva dhananjaya; Siddhy-asiddhyoh samo bhutva, samatvam yoga uchyate\" (Perform your duty with equanimity, O Arjuna, abandoning all attachment to success or failure. Such equanimity is called Yoga.)Mitigation Strategy: To mitigate the familiarity threat, members should comply with the requirements of rotation of key personnel, including audit engagement partners, to bring a fresh viewpoint to the client relationship. Additionally, engaging a review partner or obtaining an independent opinion from another professional can help maintain objectivity. Regular reassessment of the relationship with long-term clients is vital to ensure that independence remains undisturbed.2. Requests for Additional ServicesThreat: When a client requests additional services beyond the initial engagement, it can lead to a self-interest or self-review threat. The monetary benefits of providing these services may compromise the member\'s independence, particularly if outcome of these services becomes subject matter of Audit.Gita\'s Guidance: \"Swadharme nidhanam shreyah, paradharmo bhayavahah\" (It is better to perform one\'s own duties, even imperfectly, than to perform others\' duties perfectly. Death in the course of performing one\'s own duty is preferable to engaging in the duties of others.)Mitigation Strategy: Members should carefully evaluate whether the provision of additional services could impair their independence, particularly if these services overlay with audit functions. Segregation of duties, where different teams perform non-audit services, can help prevent conflicts of interest. If the risks to independence cannot be mitigated, member should not accept the assignment and may withdraw from engagement if threats emerged subsequent to acceptance of engagement by any networking firm. Transparency with the client about these concerns is essential for establishing clear limits as per SA 260, specially in case of Listed entities.3. Requests for Tax Evasion or Unethical AdjustmentsThreat: A significant ethical challenge arises when a client requests assistance in tax evasion or proposes unethical adjustments to financial statements. Such requests pose a direct threat to a CA\'s integrity and independence, as complying with them would involve engaging in illegal or unethical activities.Gita\'s Guidance: \"Sarva-dharman parityajya, mam ekam sharanam vraja; Aham tvam sarva-papebhyo, mokshayishyami ma shuchah\" (Abandon all forms of dharmas and simply surrender unto Me alone. I shall liberate you from all sinful reactions; do not fear.)Mitigation strategy: Members should take a firm stance on ethical matters, clearly communicating to clients that they will not engage in or support any form of tax evasion or unethical financial adjustments. A documented code of ethics outlining these non-negotiable principles is essential. If a client persists in making unethical requests, the member should consider disengaging from the relationship to protect their reputation and avoid legal consequences. Upholding integrity in such situations reinforces the trust placed in the profession by the public.4. Proposals of Prospective WorkThreat: When a client offers prospective work contingent upon favorable decisions or outcomes, it creates a conflict of interest that threatens the Member\'s independence. The promise of upcoming engagement may bias the Member\'s attestation work, leading to compromised judgments.Gita\'s Guidance: \"Tasmad asaktah satatam karyam karma samachara; Asakto hy acharan karma, param apnoti purushah\" (Therefore, without being attached to the fruits of activities, one should act as a matter of duty; for by working without attachment, one attains the Supreme.)Mitigation Strategy: CAs should ensure that their current decisions are made purely based on ethical and professional considerations, independent of any potential prospective engagements. Creating clear policies for accepting future work, including a cooling period where necessary, can help mitigate conflicts of interest. Transparency with both the client and within the firm about these policies can avoid situations where potential work influences current decisions.The Role of ICAI as a GuideThe Institute of Chartered Accountants of India (ICAI) plays a crucial role in guiding its members, much like how Shri Krishna guided Arjuna on the battleground of Kurukshetra. The ICAI\'s Code of Ethics provides a structured framework that helps members navigate complex ethical dilemmas, emphasizing the importance of independence, integrity, and professional skepticism. The Gita\'s teachings reinforce these principles, offering a spiritual dimension to the ethical standards set by the ICAI.References:(No explicit references listed in source)Author may be reached at eboard@icai.in
Ep. 374 — Navigating Ethics in the age of Globalization and Technology: A CA Perspective
CA Journal
· September 2026
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Navigating Ethics in the age of Globalization and Technology: A CA PerspectiveEthics has evolved from a purely theoretical approach, which primarily aimed to help organizations avoid legal troubles, to become establishments of trust, transparency, and fair practices. In other words, ethics in practice involves ethical standards and notions and the recognition of the right method regarding some moral requirements and policies. Chartered Accountants, who oversee financial integrity and corporate governance, are instrumental in ensuring organizations adhere to the right business etiquette. This responsibility is especially significant in today\'s world where other dynamics such as technological advancements, globalization, and evolving customer preferences might expose firms to increased ethical scrutiny by leading regulatory authorities. Ethical misconduct leads to financial cost and reputational damage, as revealed by various corporate shortcomings in the last decade.By Dr. Vivek Sharma, AcademicianBy CA. Gyan Prakash Sharma, Member of the InstituteProfessional ethics involves continuous self-monitoring, functioning by the professional standards of practice, and maintaining professionalism in situations that may be regarded as unethical. While each profession has its own set of principles and practices, the core idea is to act with integrity and responsibility in all professional and personal interactions.Evolution of EthicsMythological Insights: Ethical standards have been an emotional part of civilization for many years. The Mahabharata is deeply rooted with the idea of dharma where Krishna teaches Arjun about the right path rather than the desirable goal. In the ancient era, Chanakya\'s Arthashastra outlines various principles of governance and human behavior, one of which includes the Chatur Upadhas or four ways of influencing and controlling people (Dharmopadha, Arthopadha, Bhayopadha, and Kamopadha).Industrial Revolution: The industrial period enormously increased economic productivity and social and environmental injustice. Some businessmen such as Robert Owen took the initiative in the ethical improvements for workers and their families. This period marked the passing of Labour Laws like the Factory Act of 1833 controlling child labour.Post-Industrial Revolution: The globalization of business in the twentieth century gave birth to Corporate Social Responsibility (CSR). The welfare programs introduced by Henry Ford were the beginning of all such socially responsible corporate practices. In the contemporary world, approximately 89% of the companies listed on the stock market disclose information on CSR activities.Ethics in Contemporary Business PracticesBusiness Ethics: Encompasses ethical practices such as corporate social responsibility, ethical sourcing, fair trade, and fair treatment of employees and consumers.Social and Political Ethics: Address justice, human rights, and the ethical implications of public policies, focusing on inequality, discrimination, and governance.Educational Ethics: Guide behavior and decision-making in educational institutions, ensuring fairness, integrity, and respect for students, teachers, and the educational community.Medical Ethics: Involve issues such as patient autonomy, consent, confidentiality, and the fair distribution of medical resources.Environmental and Social Governance (ESG): ESG criteria have integrated into the main concern of ethical business affairs, focusing on sustainability and impact without solely prioritizing profitability.Data Privacy and AI: Data privacy remains a major ethical issue, with regulations like the GDPR setting high standards and severe penalties for non-compliance.Ethics for Chartered AccountantsPersonal Ethics: System of moral standards that an individual subscribes to, ensuring harmony, honesty, transparency, and accountability form the core agenda.Professional Ethics: Refers to the Code of Ethics tailored to regulate the conduct of CAs, encompassing integrity, objectivity, confidentiality, professional behaviour, and professional competence and due care.Corporate Ethics: Moral responsibilities CAs discharge while engaged in an organization, endorsing fair business, social responsibility, and accurate financial reporting.Social Ethics: CAs acting as guardians of financial stability while advancing general welfare, adopting environmentally friendly practices, and embracing social causes.Code of Ethics by ICAISince its inception, ICAI recognized the necessity of maintaining high ethical standards to foster public trust and uphold the integrity of the profession. The Code has undergone changes in response to international standards established by IFAC/IESBA to address innovative technology and new business trends.Principles of Professional Ethics for CAIntegrity: Honesty forms the foundation of integrity, requiring CAs to be straightforward and honest in all professional activities.Objectivity: Ensures decisions are not influenced by bias, relationships, or personal gain.Professional Competence and Due Care: Maintaining updated skills and regulatory knowledge to deliver efficient, high-quality services.Confidentiality: Protecting sensitive information and disclosing it only when required by law or profession.Professional Behavior: Observing laws and regulations and avoiding actions that lead to unprofessional behavior.Ethical Dilemma Faced by Chartered AccountantsClient\'s Unrealistic Expectations: Compelling CAs to present manipulative financial statements or understate taxes.Conflicts of Interest: Self-interests varying from company interests, compromising independence.Corporate Fraud: Encountering fraudulent financial reporting, embezzlement, and financial malfeasance.Confidentiality Breaches: Upsurge in complex cases of breach or disclosure of information due to technological advancements.References:Craft, J. L. (2018). Common thread: The impact of mission on ethical business culture.Brigley, S. (1995). Business ethics in context: Researching with case studies.Hallowell, J. H. (1944). Politics and ethics.Hall, E., & Sleat, M. (2018). Ethics, morality and the case for realist political theory.Gulcan, N. Y. (2015). Discussing the importance of teaching ethics in education.Sekerka, L. E. (2009). Organizational ethics education and training.Wolf, S. M. (1994). Quality assessment of ethics in health care.Tarzian, A. J., et al. (2015). A code of ethics for health care ethics consultants.Authors may be reached at viveksikar@gmail.com, agpsharma19@gmail.com and eboard@icai.in
Encouraging Ethical Practices- Preventing Greenwashing in ESG ReportingWith the increase in Environmental, Social and Governance (ESG) consciousness among stakeholders at large, and the consequent increasing reporting requirements; corporates are under pressure to show their commitment to sustainable and ethical practices. However, the practice of greenwashing is being observed wherein companies show a greener picture of their social and environmental initiatives than what they really are. This article highlights the important international case studies of greenwashing along with the tools and techniques adopted by corporates indulging in this nefarious activity. The action undertaken by regulatory authorities, including SEBI through the Business Responsibility and Social Reporting (BRSR), RBI, and the government initiatives through the Central Consumer Protection Authority (CCPA) have been explored. It is finally observed that the Board of Directors play the most crucial role in preventing greenwashing.By CA. Shaifali Mathur, Member of the InstituteIntroductionThe term \'greenwashing\' refers to the practice of businesses inflating or making false claims to be environmentally friendly; with an intent to improve their public image, frequently without actually changing their real environmental policies. The phrase \"greenwashing\" was first used in the 1980s to describe the practice of businesses dishonestly portraying their goods, services, or policies as environmentally benign to win over environmentally conscious customers. The word is a combination of the terms \"green,\" which stands for environmentalism, a concept catching up like wildfire with the glaring climate change impacts that the world is witnessing. Corporates have also been accused of \"whitewashing,\" which denotes the act of obfuscating or hiding unpleasant truths.International case studies on GreenwashingGreenwashing is not a recent development. Corporates have been found engaging in such unethical practices, especially when ESG reporting was voluntary in nature. Due to lack of regulations and availability of standardized metrics and reporting formats in the past along with inconsistent and low-quality data inputs, the ESG reports might not show a correct representation of a company\'s ESG status (Schroders, 2017).The world has witnessed a number of famous global companies involved in Greenwashing. A few of them are as under:Volkswagen: One of the biggest automakers, became embroiled in the \"Diesel gate\" affair, a major greenwashing incident. The corporation had rigged diesel engines with \"defeat devices\" to evade emissions testing, giving the cars an appearance of being greener than they actually were.H&M (Hennes & Mauritz): Swedish fast-fashion behemoth debuted its \"Conscious Collection\" range, which is positioned as an eco-friendly option. In 2021, the Norwegian Consumer Authority charged H&M with deceptive marketing, arguing that the company\'s sustainability statements lacked sufficient evidence and were imprecise.Nestlé: Accused of misleading consumers about sustainability by using deceptive marketing tactics to promote its bottled water brands, including Poland Spring.IKEA: Recognized for its cost-effective furniture, IKEA claimed to source its wood sustainably, claiming to use recycled or sustainable wood. Nonetheless, IKEA was reportedly sourcing timber from illicit forestry operations in Ukraine, according to a 2020 Environmental Investigation Agency (EIA) assessment.Academic research in GreenwashingWith the prevalence of greenwashing, academic research in this field has escalated in the recent past. Some researchers have tried to find out the determinants of greenwashing tendencies with an intent to help practitioners, policymakers, and academics to improve corporate governance practices and promote sustainability efforts. Zhang (2022) investigated the determinants leading to corporates engaging in ESG greenwashing, demonstrating that financial limitations drive organizations\' decisions to engage in greenwashing. Wu (2024) explored the impact of Green Finance Pilot Zones on corporate greenwashing practices in Chinese listed companies. Factors influencing a company\'s greenwashing behaviour in the Indian context have been examined by Sensharma, et al. (2022) and Gidage, et al. (2024).Prevalent Greenwashing practicesGreenwashing by corporates makes it difficult for regulators, consumers, and investors to distinguish between businesses that are sincerely devoted to sustainability and those who are merely capitalizing on the trend for marketing purposes. Prevalent practices include:Cherry-picking statistics: Companies often present only the positive environmental performance data, omitting negative information.Governance Spin & Cleaning with ethics: Highlighting good governance or charitable causes to draw attention away from probable grave environmental issues.Purchasing endorsements or investing heavily in PR campaigns: Paying for endorsements or maintaining core processes while heavily investing in marketing that highlights environmental initiatives.Influencing Research: Funding misleading studies that portray the company as pro-environment.Use of Inaccurate measurements: Using metrics that look propitious but have lesser bearing on sustainability, such as purchasing Renewable Energy Certificates (RECs).Use of Complicated or vague terms or Inconsistent Reporting: Using technical terms, jargon, or vague terms like \"eco-friendly\" without precise definitions.Misleading Certifications and Labels: Using unverified or self-created certifications and labels.Neglecting Supply Chain Impact: Disregarding the supply chain or engaging in double counting of carbon reductions.Shifting Responsibility to Consumers: Portraying environmental impact as primarily the consumer\'s responsibility.Preventing Greenwashing in ESG disclosures - International InitiativesA lot of effort is being put in internationally for protecting our planet. The United Nations Sustainable Development Goals (SDGs), EU taxonomy regulations (2020 onwards), Global Reporting Initiative (GRI) Standards, and ISO standards (ISO 14000 series, ISO 14064) all provide clear criteria and guidelines to ensure transparency and accountability.The role of BRSR in preventing greenwashingIn India, The Business Responsibility and Sustainability Reporting (BRSR) Guidelines as issued by SEBI are designed to prevent corporates in India from fudging their data. BRSR encourages stakeholder engagement, stipulates mandatory and standardized reporting based on National Guidelines on Responsible Business Conduct (NGRBC), requires qualitative and quantitative disclosures on Key Performance Indicators (KPIs), encourages third-party verification, and requires setting specific quantifiable ESG targets.RBI InitiativesThe Reserve Bank of India has taken initiatives towards encouragement of green finance/lending, including guidelines for green bonds, framework for climate risk management, integrating green finance into policy frameworks, collaborating with international organizations such as NGFS, and introducing standardized ESG ratings and assessment metrics.Government of India (GOI) initiatives through the CCPAThe Central Consumer Protection Authority (CCPA) has issued guidelines on the \"prevention and regulation of greenwashing,\" highlighting the importance of organizations disclosing true environmental claims and facts. CCPA guidelines define greenwashing, require clear and verifiable environmental claims, protect consumer rights to accurate information, and establish increased accountability for businesses over the full life cycle of their products and services. Non-compliance may result in fines, product recalls, penalties, and legal action.Role of the Board of Directors (BOD) in preventing greenwashingThe foundation of any effective governance is a strong board, a capable leadership group, and a well-defined accountability structure. Establishing an ESG/sustainability committee, encouraging the use of Key Performance Indicators (KPIs), providing capacity building for employees, and having ESG expertise on the Board helps reduce risk exposure and ensures ESG compliance.ConclusionNumerous empirical studies attest that ESG compliance goes a long way in ensuring the long-term financial performance of corporates, while greenwashing can result in financial losses, greatly harm the company\'s brand and reputation, and can even lead to company failure. Hence, having a strong and conscientious Board that encourages an organizational culture of sustainability and ethical practices is vital.References:Abdelmoneim, Z., & El-Deeb, M. S. (2024). BOD characteristics and their impact on the link between ESG disclosure and integrated reporting disclosure quality.Bernini, F., & La Rosa, F. (2024). Research in the greenwashing field.Gidage, M., Bhide, S., & Bilan, Y. (2024). Greenwashing in the Indian corporate landscape.Zhang, D. (2022). Are firms motivated to greenwash by financial constraints?.Author may be reached at mathurshaifali108@gmail.com and eboard@icai.in
Ep. 376 — Assessing the Effects of Independence and Ethical Standards on Auditor Competency in Preventing and Detecting Fraud incidental to Audit
CA Journal
· September 2026
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Assessing the Effects of Independence and Ethical Standards on Auditor Competency in Preventing and Detecting Fraud incidental to AuditAuditors play a critical role in verifying the genuinity of books of accounts and its fairness. Detection and prevention of fraud in the accounting and corporate world is often an incidental outcome to auditing work where an auditor can help various entities. This study investigates the influence of auditor independence and professional ethics on auditors\' proficiency in auditing and fraud detection in India.By CA. Devarsh Gandhi, Member of the InstituteBy Dr. Bimal Solanki, AcademicianIntroductionIn auditing, auditor independence and professional ethics are foundational principles crucial for maintaining the integrity of financial reporting worldwide, as outlined by bodies like the Institute of Chartered Accountants of India (ICAI) and the International Ethics Standard Board for Accountants (IESBA). Auditors play a vital role in the detection and prevention of fraud which are incidental to audit, defined by the ICAI as intentional acts of deceit or misrepresentation for personal gain or causing harm. Effective fraud detection hinges on auditors\' technical skills, independence, and adherence to ethical standards, ensuring impartiality and objectivity in their judgment.Literature ReviewVarious studies have underscored the critical roles of auditor independence, professional ethics, and other factors in maintaining audit quality and integrity. Abbott and Parker (2000) and DeAngelo (1981) found that auditors\' independence from client management influences fraud detection effectiveness. Shaub et al. (2007) and Ponemon and Gabhart (1990) highlighted the impact of professional ethics on auditors\' judgment. Nasrabadi and Arbabian (2015) investigated the influence of professional ethics and commitment on audit quality among Tehran Stock Exchange-listed firms, revealing a positive correlation between these factors.Research GapWhile there is existing literature on auditor independence, professional ethics, and fraud detection proficiency, there may be a research gap in the specific regional context of India. Few studies may have focused specifically on practicing auditors in this region, potentially limiting the generalizability of findings to this unique context. Furthermore, investigating how auditor independence and professional ethics interact and jointly influence fraud detection outcomes could provide valuable insights into the holistic nature of auditor judgment and decision-making processes.Research ObjectivesTo Investigate the Relationship between Auditor Independence and Fraud Detection ProficiencyTo Explore the Impact of Professional Ethics on Fraud Detection ProficiencyTo Analyze the Combined Effects of Auditor Independence and Professional Ethics on Fraud Detection ProficiencyResearch HypothesisH1: There is no significant relationship between auditor independence and fraud detection proficiency among practicing auditors in India. (Rejected)H2: There is no significant impact of professional ethics on auditors\' ability to detect and prevent fraud in audit engagements in India. (Rejected)H3: The combined effects of auditor independence and professional ethics do not significantly influence auditors\' fraud detection proficiency in India. (Rejected)Research Design & MethodologyThis study adopts a quantitative research approach to investigate the influence of auditor independence and professional ethics on fraud detection proficiency among practicing auditors in India. Data was collected using a structured questionnaire via Google Forms from a sample of 236 practicing auditors between January 2024 and March 2024. Pearson\'s correlation and multiple regression analysis were employed to analyze the data.Results and AnalysisThe correlation analysis reveals a robust positive link between auditor independence and fraud detection efficacy ($r = 0.7185$), professional ethics and fraud detection ($r = 0.7046$), and their combined effect ($r = 0.7382$). Multiple linear regression analysis yielded an $R^2$ value of $0.5458$, indicating that approximately 54.58% of the variance in fraud detection ability can be explained by independence and professional ethics. The regression equation formulated is:Y = 9.565 + 0.924 (Independence) + 0.679 (Professional Ethics) + eConclusionThis research contributes to understanding the factors influencing auditor proficiency in detecting fraud. All three null hypotheses were rejected as significance values were well below the 0.05 threshold. The findings underscore the critical importance of both individual and combined factors of independence and professional ethics in enhancing auditors\' fraud detection proficiency.References:Abbott, L.J., Park, Y. and Parker, S. (2000). The effects of audit committee activity and independence on corporate fraud. Managerial Finance.Albeksh Hasen Mohamed. (2016). Compliance of Auditors to Ethics and Rules of Professional Conduct and Its Impact on Audit Quality.DeAngelo, L. E. (1981). Auditor Size and Audit Quality. Journal of Accounting and Economics.Francis, J. (2011). A Framework for Understanding and Researching Audit Quality. Auditing: A Journal of Practice & Theory.Nasrabadi, Aliasgar & Arbabian. (2015). The effects of professional ethics and commitment on audit quality. Management Science.Wahidahwati and Nur Fadjrih Asyik. (2022). Determinants of Auditors Ability in Fraud Detection. Cogent Business & Management.Authors may be reached at devarshgandhi96@gmail.com and eboard@icai.in
Ep. 377 — Audit Trail: Practical Approach for Effective Implementation of Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014
CA Journal
· September 2026
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Audit Trail: Practical Approach for Effective Implementation of Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014Digitalization has taken over the traditional physical system of bookkeeping in electronic form. Most organizations use some or other software to process their accounting information for statutory compliance and internal business decisions. Accounting software offers better organization of data, lower operating costs, fewer human errors, enhanced security, better accessibility, and high processing speed, but at the same time, it offers room for manipulation of data. MCA issued the Companies (Audit and Auditors) Amendment Rules, 2021 on March 24, 2021, which introduced new Rule 11(g) in the Companies (Audit and Auditors) Rules, 2014. Rule 11(g) deals with reporting on the use of accounting software by companies for maintaining their books of account which have the feature of recording audit trail (Edit Log). This casts additional responsibility on the auditors of companies to report compliance with Rule 11(g). This article attempts to describe the management\'s responsibility and the auditor\'s responsibility separately, the need to acquire relevant IT skills by auditors and a practical approach for effective implementation of the audit trail in compliance with Rule 11(g).By Vitin Kumar, Research ScholarBy Prof. (Dr.) V.K. Singh, AcademicianWith advancements in computer science and information technology, and global digitalization drive, financial and non-financial information has moved from physical (paper) form to electronic form. Business entities and regulatory bodies are moving towards a digital environment and experiencing technological intervention in accounting and other business information in various ways. Starting from journal entries to final financial statements, the process is either fully automated or semi-processed. Data is further engineered through accounting software by accounting professionals in MS-Excel or other utilities in line with the provision of various statutory and internal business requirements.Auditing work has changed much in the digital environment and besides critical investigation of various books of account and other relevant records, auditors must be abreast with technical aspects of data manipulation in the IT environment.Although, auditors exercise rigorous audit procedures, including computer-assisted audit techniques, in line with applicable standards on auditing and other relevant guidelines with a higher degree of automation in accounting. However, there is always a chance that intentionally or unintentionally records have been manipulated. Unusual/malafide alteration of records is fatal to the whole auditing process and it is therefore necessary that the auditor should be in a position to trace the elements of data manipulation to comply with the requirement of the audit trail in a true sense.On March 24, 2021, the Ministry of Corporate Affairs (MCA) introduced new Rules 11(e), 11(f) and 11(g) in the Companies (Audit and Auditors) Rules, 2014 by the Companies (Audit and Auditors) Amendment Rules, 2021. Rule 11(g) casts responsibility on auditors to report on the use of accounting software by companies for maintaining their books of account which has a feature of recording audit trail.Audit TrailAudit Trail (or Edit Log) is a visible trail of evidence enabling one to trace information contained in statements or reports back to the original input source. Audit trails are a chronological record of the changes that have been made to the data like creating new data, updating or deleting data. Records maintained as audit trail may include the following information: when changes were made i.e., date and time (timestamp); who made the change i.e., User Id; what data was changed i.e., data/transaction reference; success/failure.Coverage of Rule 11(g)Initially, auditors were required to report on companies\' use of accounting software for maintaining books of account, effective from April 1, 2021. However, owing to technical and other reasons, this requirement was deferred twice, and it was made mandatory from April 1, 2023. This requirement is now applicable prospectively and not retrospectively. It is clear that the auditor is required to assess the appropriateness of the audit trail for prospective financial years only.Management\'s ResponsibilityIf a company is using any existing software for maintenance of books of account, which is not having feature of audit trail then necessary modification needs to be made in the software to provide feature of recording audit trail of each and every transaction, creating an edit log of each change made in the books of account along with identity of personnel who made changes, time and date when such changes were made and ensuring that the audit trail cannot be disabled.Identification of software(s) covered under Rule 11(g).Ensuring the functionality of the audit trail feature is appropriately enabled in software used for the maintenance of books of account.Ensuring that the audit trail cannot be disabled.Recording the audit trail for each and every transaction.Edit log (audit trail) of each change made in the books of account along with the timestamp.Capturing identity of person(s) who made such changes.Auditor\'s ResponsibilityUnder obligation cast by Rule 11(g), the auditor needs to comment on whether the company is using an accounting software which has a feature of recording audit trails, whether the audit trail feature can be disabled or tampered with, whether it was disabled/tempered during the reported period, whether all transactions recorded in the software covered in the audit trail feature, and whether the audit trail has been preserved by the company as per statutory requirements for record retention (minimum eight years as per section 128(5) of Companies Act 2013).Practical ApproachAs Auditor needs to gather evidence from the IT environment, it is important for them to have an insight of the IT environment. Auditor may involve IT experts/specialists to assist him in the evaluation of management controls and configurations involved in the accounting software with regard to the audit trail. Auditors should obtain written representations in line with SA 580, test the working of audit trail functionalities by altering a record for test purposes and restoring the same on a sample basis, and collaborate with IT specialists. Readers may also refer to the \'Implementation Guide on Reporting on Audit Trail under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 (Revised 2024 Edition)\' issued by the Auditing and Assurance Standards Board of ICAI.References:Oracle Documentation (https://docs.oracle.com/en/)MCA Amendment Rules 2021 (https://www.mca.gov.in/Ministry/pdf/AuditAuditorsAmendmentRules_24032021.pdf)Implementation Guide on Reporting on Audit Trail under Rule 11(g) (Revised 2024 Edition) (https://resource.cdn.icai.org/78922aasb63149.pdf)Authors may be reached at vitinktyagi@gmail.com and eboard@icai.in
Ep. 378 — Navigating the GST Regime: Transformation and Its Challenges
CA Journal
· September 2026
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Navigating the GST Regime: Transformation and Its ChallengesDecember 2023 has marked a significant juncture in the GST law, as the time limit for issuance of orders for the first year of GST i.e., FY 2017-18 for tax not paid or short paid or input tax credit wrongly availed or utilized or erroneous refund under normal cases (i.e., without any fraud, collusion or wilful misstatement) has come to an end. This juncture has arrived after 69 months of end of the relevant financial year. The next six months of this year were again challenging for the assessee, tax consultants, and officials as the time limit for issuance of orders after the recent extension was 30th Apr 24 for FY 2018-19 and 31 Aug\' 24 for FY 2019-20 and SCN (Show Cause Notice) in both the cases is to be issued three months prior to the issuance of the order. Hence, the remaining part of this calendar year is going to be exciting for everyone in the IDT ecosystem, including the IT team of the taxpayers and tax collectors.By CA. Amit Lath, Member of the InstituteTime limitAccording to Finance Act, 1994 (Service tax law), the prescribed time limit for the issuance of Show Cause Notices (SCNs) in normal cases was 30 months (extended from 18 months) from the \"relevant date.\" This date was determined as the date of filing the tax return, and in situations where the return was not filed, it was based on the due date for filing the return.However, under the Goods and Services Tax (GST) law, there is no time limit for issuance of SCN. The time limit is prescribed only for the issuance of an order which must be done within three years from the due date for furnishing the annual return under normal cases (i.e., without any fraud, collusion, or wilful misstatement). Additionally, show cause notice is to be issued at least three months prior to passing the order.The actual date of filing the return holds no relevance in determining the time limit for the issuance of a Show Cause Notice or order in GST law and is solely based on the due date of furnishing the annual returns. The time limit under GST law is determined from the annual return which is due after 9 months from the end of the financial year and monthly tax returns are not relevant for the determination of time limit, whereas in Finance Act, 1994, the time limit was computed from periodical return and also, there was no requirement of any separate annual return.Finance Act 2024 has introduced common section 74A for both the cases i.e. normal cases (i.e., without any fraud, collusion, or wilful misstatement) as well as cases with fraud, collusion, etc. wherein the time limit of issuance of notice has been prescribed as 42 months from the due date of filing annual return or erroneous refund. The newly inserted section is applicable from FY 2024-25 onwards and section 73 & Section 74 would be applicable for proceeding related to FY 2017-18 to FY 2023-24.The extended \"Due date of filing annual return\"GST was introduced in the Second quarter of FY 2017-18, and both taxpayers and tax administrators faced challenges in adapting to the newly introduced GST law. The format for the annual return and reconciliation statement was first notified in September 2018 through notifications 39/2018-CT and 49/2018-CT, even though the GSTN portal was not yet fully prepared. This posed a significant challenge for the majority of taxpayers and tax professionals, as understanding the requirements and providing the necessary details became difficult. Repeated extensions brought much-needed relief to the clueless taxpayers and tax professionals however, the extended \"due date of filing annual return\" also extended the time limitation for issuance of orders for non-payment or short payment of taxes which was unintentional but brought large ramifications in the tax administration.Extended due date of issuance of Show Cause NoticeThe due date for the issuance of orders for the fiscal year 2017-18 in normal cases/non-fraud cases was stipulated to be three years from the extended due date of 30th Nov 2019 thereby concluding on November 30, 2022. Subsequently, extensions were granted vide Notification No. 13/2022 and Notification No. 09/2023, extending the due date further for FY 2018-19 and FY 2019-20 to 30th Apr 2024 and 31st Aug 2024 respectively. Several petitions have been filed before High Courts challenging these extensions, with courts granting interim stays in various cases.Constitution of tribunal and stay of demandPrincipal Bench of GST Appellate Tribunal have been set up and its State Benches have been notified. A swift functioning of the Tribunal is imperative considering the substantial backlog and upcoming huge matters of FY 2018-19 and FY 2019-20 post-completion of the time limit for issuance of orders in this year. In Circular 224/18/2024 GST dated 11th July 2024, it has been clarified that upon payment of an amount equivalent to 20% of the disputed tax amount and filing of an undertaking stating intention to file an appeal before the GSTAT, recovery for the balance amount will be stayed.Pre-deposit AmountThe Finance Act, 2024 upon recommendation of the GST council has reduced the pre-deposit amount to 10% subject to the maximum of 40 Crores (CGST and SGST both) while filing an appeal before the first appellate authority and an additional 10% of the remaining amount subject to the maximum of 40 Crores while filing the appeal before the Appellate Tribunal. Such reduction will help businesses in better working capital management.ConclusionThe certainty in tax laws helps the business to plan themselves and contribute towards the growth of the nation. Any uncertainty impacts the ease of doing business and hence, it is imperative that there should be absolute clarity with respect to tax laws, reporting, and appellate process.References:(No explicit references listed in source)Author may be reached at amitkr.lath@yahoo.com and eboard@icai.in
Ep. 379 — Navigating Indexation Benefits after the Finance (No.2) Act, 2024
CA Journal
· September 2026
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Navigating Indexation Benefits after the Finance (No.2) Act, 2024Indexation is in the news since 23rd July due to the amendment proposed by the Finance (No.2) Bill, 2024 and further amendment at the time of passing of the Bill in Lok Sabha. In this Article we will study what is indexation, how it is computed, its benefits, necessity, impact due to the proposed amendment and final relief allowed by the Finance (No. 2) Act, 2024.By CA. M.K. Gupta, Member of the InstituteIntroductionIndexation is a measure of inflation that finds application under the Income-tax Act, 1961 (hereinafter referred to as \"the Act\") while computing long-term capital gains on sale of assets. Indexation harmonizes the purchase price with inflation when calculating long-term capital gains arising from the sale of assets, resulting in a more accurate assessment of gains and a consequent reduction in tax liability. Index is notified by the Central Government every year, having regard to 75% of average rise in the consumer price index (CPI) for the immediately preceding previous year. The Cost Inflation Index was first notified for the financial year 1981-82 in India, and the cost inflation index for the year 2024-25 is 363.How Indexed cost of acquisition is computedSince \"cost of acquisition\" is historical, the concept of indexed cost allows the taxpayer to factor in the impact of inflation on cost. Consequently, a lower amount of capital gains gets to be taxed than if historical cost had been considered. The indexation for the cost of acquisition is calculated in accordance with the following process:Cost of acquisition of the asset has to be multiplied with the cost of inflation Index of the year in which it was transferred.That figure has to be divided by the cost inflation index for the year in which the asset was acquired.If the asset was purchased before 2001, the cost inflation index of the year 2001-02 must be taken into consideration and the fair market value as on 1st April 2001 needs to be considered.If improvement of the asset has been made, then one needs to adjust the cost inflation index of the improvement made divided by the CII for the year in which improvement has been made.Formula for computing indexed cost is = (Index for the year of sale / Index in the year of acquisition) × cost.Benefits of IndexationPrior to the amendment by the Finance (No.2) Act, 2024, long term capital gain tax u/s 112 of the Act was 20% in case of indexation benefit. Thus, indexation helps in adjusting the purchasing price of the asset with current market prices, though it is not applicable on short term capital gain or losses.Impact due to amendment in Budget presented 2024The Finance (No. 2) Bill, 2024 presented by Finance Minister Nirmala Sitharaman proposed eliminating the indexation benefit. To reduce the impact, the long-term capital gains (LTCG) tax rate was decreased from 20% to 12.50% w.e.f. 23.07.2024, but without the benefit of indexation. This change significantly impacted real estate investors, as tax liabilities could have escalated many times for properties acquired post-2010.Critical Review of the Relief provided while passing the Finance Bill (No.2), 2024 in Lok SabhaThe Lok Sabha passed the Finance (No. 2) Bill, 2024 on August 7th and amended the earlier proposed long-term capital gains tax provision on immovable properties, giving taxpayers an option to choose the lower of the following:a) 12.5% Long-Term Capital Gains (LTCG) tax rate without indexation, orb) 20% rate with indexation, for properties purchased before July 23, 2024.This grandfathering clause ensures that properties bought before July 23, 2024, are not adversely affected by the new rules.Whether Indexation relief is beneficial or notThe choice between using the indexation benefit or opting for the new 12.5% LTCG tax rate depends on the specific financial situation, holding period, quantum of appreciation, and purchase price of the asset. Concessional rate of tax with no indexation benefit is favourable in cases where sale consideration is high. Eligible resident individuals and Hindu Undivided Families (HUF) can avail this option under the second proviso to section 112(1)(a) for properties acquired before July 23, 2024.References:Income-tax Act, 1961Finance (No. 2) Act, 2024Author may be reached at eboard@icai.in
Ep. 380 — TREDS as a Solution to Section 43B(h) Disallowance
CA Journal
· September 2026
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TREDS as a Solution to Section 43B(h) DisallowanceThe Income Tax Act, 1961 serves as a comprehensive legal framework for India\'s taxation structure. One of its key provisions, Section 43B, ensures that certain expenses are allowed as deductions only when actual payment is made. Under Section 43B(h), any delay in payments to Micro and Small Enterprises (MSEs), as defined under the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, can lead to the disallowance of the expenditure unless it is paid within the prescribed period. Given the current business environment, where liquidity constraints often delay payments to MSEs, the Trade Receivables Discounting System (TReDS) provides a viable solution. By facilitating the timely payment of MSE dues, TReDS helps businesses avoid the disallowance under Section 43B(h).By CA. Shreya Chawla, Member of the InstituteUnderstanding Section 43B(h)Section 43B mandates that certain expenses, including taxes, duties, and payments to MSEs, are allowed as deductions only upon actual payment[cite: 21]. Under clause (h), payments to MSEs, as governed by the MSMED Act, 2006, can only be deducted if they are made within the stipulated period (usually 45 days)[cite: 21]. If the payment exceeds this period, the expense is disallowed for tax purposes, leading to a higher taxable income for the business[cite: 21]. Moreover, any interest payable on delayed payments to MSEs is also not allowed as a deduction, further increasing the tax burden on the business[cite: 21]. As a result, businesses need a solution to meet this payment timeline and avoid disallowance, which is where TReDS steps in[cite: 21].TReDS as a Solution to Section 43B(h) DisallowanceTrade Receivables Discounting System (TReDS) is an RBI-regulated platform that facilitates the discounting of trade receivables, particularly from MSEs, by providing a seamless connection between buyers, MSEs, and financiers[cite: 21]. By leveraging TReDS, businesses can ensure timely payments, thereby complying with Section 43B(h) and avoiding disallowance[cite: 21].Key Features of TReDSTimely Payments: TReDS enables MSEs to receive payments on time, even if the buyer faces liquidity constraints[cite: 21].Invoice Discounting: MSEs can upload their invoices on the TReDS platform, allowing financiers to offer immediate discounted payments[cite: 21].Multiple Bidders: Financiers (such as banks and NBFCs) compete to discount the invoices, ensuring MSEs benefit from competitive rates[cite: 21].Interest Deductibility: Unlike interest on delayed payments to MSEs, which is not allowed as a deduction, any interest paid to financiers under TReDS for discounting invoices is allowable as a deductible expense under the Income Tax Act[cite: 21].Legally Compliant: Payments routed through TReDS are fully compliant with the MSMED Act, 2006, meeting the criteria for deduction under Section 43B(h)[cite: 21].Reduction in Mandatory Registration Limit for TReDSOne of the notable regulatory changes aimed at expanding TReDS adoption is the reduction of the mandatory registration limit[cite: 21]. Earlier, businesses with a turnover of 500 crore or more were required to register on TReDS[cite: 21]. Recently, in Budget 2024 (II), this limit has been reduced to 250 crore, bringing more medium-sized enterprises under the scope of mandatory TReDS registration[cite: 21]. Additionally, companies with a turnover below 250 crore can register voluntarily to benefit from the timely payment mechanism[cite: 21].Benefits of TReDS for Businesses and MSEsAvoiding Disallowance under Section 43B(h): Ensures timely payments to MSEs, keeping businesses compliant[cite: 21].Reduction in Tax Burden: Allows interest payments to financiers to be claimed as deductible expenses[cite: 21].Enhances MSE Liquidity: Provides MSEs with immediate liquidity and strengthens the supply chain[cite: 21].Compliance with MSMED Act: Meets statutory payment timelines, reducing legal penalties[cite: 21].Improvement in Cash Flow for Buyers: Buyers have more flexibility in settling invoices with financiers[cite: 21].Strengthening MSE Relationships: Builds trust and reliability between buyers and suppliers[cite: 21].Support for Smaller Businesses: Lower thresholds and voluntary registration enable smaller enterprises to manage tax compliance effectively[cite: 21].TReDS and Tax Compliance: How It WorksMSE Uploads Invoice: The MSE supplier uploads their invoice to the TReDS platform[cite: 21].Buyer Approves Invoice: The buyer confirms the validity of the invoice on TReDS[cite: 21].Financiers Bid for the Invoice: Multiple financiers compete to provide the best discounting rate[cite: 21].MSE Receives Payment: The MSE receives payment within 24 hours from the financier[cite: 21].Buyer Settles with Financier: On the due date, the buyer pays the financier, maintaining compliance with Section 43B(h)[cite: 21].Deductible Interest: Interest paid to the financier is fully deductible[cite: 21].ConclusionTReDS offers a comprehensive solution for businesses seeking to avoid disallowance under Section 43B(h) of the Income Tax Act, 1961[cite: 21]. By ensuring timely payments, TReDS helps businesses remain compliant while benefiting from deductible interest payments on discounted invoices[cite: 21]. The recent reduction in the compulsory registration limit to 250 crore makes TReDS accessible to a wider range of businesses, fostering stronger buyer-supplier relationships and optimizing financial planning[cite: 21].References:Income Tax Act, 1961[cite: 21]MSMED Act, 2006[cite: 21]Author may be reached at shreya.chawla92@yahoo.com and eboard@icai.in[cite: 21]
Ep. 381 — Overview of Amendment to Ind AS 1 Presentation of Financial Statements
CA Journal
· September 2026
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Overview of Amendment to Ind AS 1 Presentation of Financial StatementsThe amendment to Ind AS 1 introduces \"Material Accounting Policies\" to enhance the relevance and clarity of financial disclosures by focusing on materiality rather than significance. It establishes a decision-making framework to assess the materiality of accounting policies. This ensures that the accounting policy document is concise and focused on information that truly affect stakeholders\' decisions. The amendment is expected to improve transparency and aid stakeholders in making informed decisions based on clearer, more targeted financial information. A similar amendment is also issued by the International Accounting Standards Board (IASB) to IAS 1 which is equivalent to Ind AS 1 under IFRS.By CA. Pravin Sethia, Member of the InstituteOn March 31, 2023, the Ministry of Corporate Affairs (MCA) notified amendment to Ind AS 1 \'Presentation of Financial Statements\'. The amendment is effective from the annual period beginning on or after April 1, 2023. With this amendment, the accounting policy document will be more insightful, complying with requirements while communicating more effectively with stakeholders.Objective of Amendment to Ind AS 1The amendment to Ind AS 1 was introduced on account of the following considerations:Prior to the amendment, Ind AS 1 required disclosure of Significant Accounting policies, but the term \'significant\' was not defined in the standard, leading to varied interpretations by preparers and users.Existing accounting policy documents often contained standardized information or replicated standard requirements, whereas users favored entity-specific details and insights into the entity\'s judgment and application of accounting policies.What has changed under the Amended Ind AS 1The term \'Significant Accounting policy\' has been replaced with \'Material Accounting policy information\'.Entities are now required to disclose only material accounting policy information.Accounting policy information is material if, when considered together with other information included in an entity\'s financial statements, it can reasonably be expected to influence the decisions of the users.Determining \'Material Accounting Policy Information\' (Stage-wise Approach)To determine whether a particular accounting policy is material, entities need to apply a stage-wise decision tree approach:Stage 1: Evaluate whether the accounting policy relates to transactions, events, or conditions that are material based on size (quantitatively) or nature (qualitatively) or both. If the underlying events are not material, the policy is not required to be disclosed.Stage 2: Evaluate whether the accounting policy information that relates to a material transaction, event, or condition is in itself material to the financial statements. Illustrative scenarios include changes in accounting policies during the period, choosing an accounting policy from alternative options permitted by Ind AS, developing an accounting policy in the absence of specific guidance (Ind AS 8), policies requiring significant judgments or assumptions, and complex accounting treatments such as hedge accounting.Disclosure of Accounting PoliciesIf based on assessments at Stage 1 and Stage 2 the accounting policy information is determined to be material, the entity needs to disclose it, ensuring it is tailored to entity-specific facts and circumstances, highlights areas of significant judgments and estimates, and avoids the reproduction of standard language from accounting standards.References:Notification by MCA dated March 31, 2023, for Amendment to Ind AS 1.Amendments to IAS 1 and IFRS Practice Statement 2 issued by IASB.Author may be reached at sethiapravin@gmail.com and eboard@icai.in
Ep. 382 — Journey of Accrual Accounting over Indian Railways
CA Journal
· September 2026
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Journey of Accrual Accounting over Indian RailwaysThis article traces the preparatory stages and pilot rollout of the Accrual Accounting Project over Indian Railways (IR), flagging the challenges faced and the measures taken to secure its success. The project was initially implemented through the Grafting Method, with Financial Statements generated for four financial years (2017-18 to 2020-21) within a short span of 21 months, from September 2021 and May 2023. Simultaneously, in 2022-23, the phased implementation of the pilot project through the Transaction Method was successfully carried out across the entire IR with above 99% accuracy. As a result, both methods are now running in parallel to the cash-based accounting system on IR from April 1, 2023. Accrual Accounting, as part of accounting reforms, has been implemented on Indian Railways by the Accounting Reforms team, headed by the Chief Administrative Officer, with support from CRIS and ICAI ARF.By Manjusha Jain, Principal Financial Advisor, Northern RailwaysIntroductionAccrual accounting in the government sector has been adopted by well over a hundred countries, leading to marked improvements in public finance management. Beginning with its first adoption by New Zealand in 1992 followed by Australia in 1999-2000, it has gained momentum globally, including in international organizations such as the Commonwealth, European Commission, OECD, and the United Nations, especially after the issue of International Public Sector Accounting Standards (IPSAS). In India, the Twelfth Finance Commission recommended the adoption of accrual accounting for the Union and State Governments, following which the Government Accounting Standards Advisory Board (GASAB) was established in the office of the Comptroller and Auditor General (CAG) of India, through a notification dated 12th August 2002, to establish and improve standards of governmental accounting and financial reporting. Although the CAG has not yet mandated the use of accrual accounting principles, observing its success globally, Indian Railways has voluntarily decided to implement accrual accounting, in addition to its existing cash-based accounting system.Initiation of Accrual Accounting in Indian RailwaysThe Accounting Reforms Project for Indian Railways was sanctioned in 2003-04 to transform Indian Railways into a customer-oriented organization by improving its accounting system and generating costing data on passenger and freight services on commercial lines. In December 2014, the ICAI Accounting Research Foundation (ICAI ARF) was engaged by the Railway Board to validate the Consultant\'s Report and conduct a Pilot Study for the introduction of Accrual Accounting with the aim of preparing Accrual-Based Financial Statements (ABFS). The pilot project at North Western Railway (NWR) concluded in October 2016 with the preparation of accrual-based financial statements, notes to accounts, significant accounting policies, and an accrual accounting implementation manual.Accrual-Based Financial Statements (ABFS) at Indian Railway and Zonal levelsFollowing the successful NWR pilot, ABFS was extended to all Zonal levels and Indian Railway levels using the same grafting methodology. In February 2019, IR\'s first historical Accrual-Based Balance Sheet for 2015-16 and 2016-17 was prepared. Subsequently, between January 2022 and November 2022, four years of ABFS (2017-18 to 2020-21) for each Zonal Railway and Production Unit were prepared using the Grafting Method.Accrual Accounting Implementation by Transaction MethodWhile the Grafting method was a good start, migrating to accrual accounting on a sustained basis and moving to a Performance Costing System required capturing details at the transaction level. New 10-digit allocation codes were developed parallel to the existing 8-digit codes, and mapping of more than 3.40 lakh allocations was completed by April 2022. Implementation of the transaction-based accrual accounting system started on 1st August 2022 and was proliferated across all Zonal Railways and Production Units by 31st December 2022. The system is now running live across the entire IR from April 1, 2023.Measures for Successful Project ImplementationSuccess in project implementation is attributable to strong political will, financial resources, well-planned strategies, and partnerships with CRIS and ICAI-ARF. Detailed pre-planning, continuous hand-holding, close monitoring by the Accounting Reforms Team, extensive field training, capacity building, user manuals, and round-the-clock interaction through dedicated communication platforms played a vital role.Challenges in the ProjectBeing the pioneer ministry in government implementation, solutions had to be devised anew for teething problems, including de novo development of standards, policies, chart of accounts, and skilled staff. Data collection for the creation of the first Fixed Asset Register was a major challenge due to the non-availability of old records, identifying more than 70 lakh fixed assets, unrecorded original costs of tracks and rolling stock, missing land ownership records, and actuarial valuation of employee retirement benefits.ConclusionAccrual Accounting in Government brings marked qualitative improvements in account keeping, analytical and managerial insights, and worldwide uniformity and transparency. Successful rollout of the Accrual Accounting Project over Indian Railways is a critical milestone in its journey towards financial sustainability.References:Twelfth Finance Commission recommendationsGovernment Accounting Standards Advisory Board (GASAB)ICAI Accounting Research Foundation (ICAI ARF) reports and manualsAuthor may be reached at jmanjusha67@gmail.com and eboard@icai.in
Ep. 383 — Unveiling Market Interdependencies: Volatility spill over Dynamics across Nifty, Dow, Gold, WTI, Bond Yields, and the Dollar Index
CA Journal
· September 2026
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Unveiling Market Interdependencies: Volatility spill over Dynamics across Nifty, Dow, Gold, WTI, Bond Yields, and the Dollar IndexUsing the Diebold & Yilmaz index model, a humble effort has been made to check the return spillover and volatility spillover among Nifty, Dow Jones, Dollar Index, US10 year Bond Yields, Gold and WTI on weekly data from 18th August 2013 to 23rd September 2023. The results show that the highest volatility spillover toward Nifty arise from the US bond market followed by Dow Jones. The return spillover shows that the highest spillover happens between Dow Jones and Nifty. The spillover index was burst in 2020 during Covid-19 but it already started to rise before 2020. This study will be helpful for fund managers and policy makers in their decision making processes.By Arup Bramha Mohapatra, Research scholarBy Dr. Venkateswara Rao Bhanotu, AcademicianIntroductionIn today\'s interconnected financial landscape, it is imperative to comprehend how movements in the Dow Jones, Nifty, WTI crude oil, gold, the Dollar Index, and bond yields affect each other\'s volatility. The examination of the volatility spillover among these pivotal indicators furnishes crucial discernments for investors and policymakers, moulding tactics to manoeuvre and apprehend the complex dynamics inherent in global financial markets.Review of literatureYilmaz (2010) reveals the return spillover indices for East Asia which demonstrate an increasing market integration over time, indicating stronger links and synchronised returns. Diebold & Yilmaz (2012) found that prior to the global financial crisis of 2007, there was little correlation between the fluctuations in the stock, bond, foreign currency, and commodities markets. Awartani & Maghyereh (2013) emphasise how crucial it is to look at how oil and stock markets affect each other. Other studies by Boubaker & Raza (2017), Roy & Sinha Roy (2017), Husain et al. (2019), Evrim Mandacı et al. (2020), Zhang et al. (2021), Patra & Panda (2021), and Shen et al. (2022) further examine volatility spillovers across various asset classes and markets.Objective of studyThe objective of the study is to examine the extent of interdependencies across different markets.To know the overall return spillover and volatility spillover index among Nifty, Dow Jones, Dollar index, WTI, Bond Yield, and Gold.To find out the net receiver and net transmitter of volatility among the selected macroeconomic variable.Research methodologyThis section explains Diebold and Yilmaz\'s proposed directional spillover index measure (2009, 2012). The empirical analysis includes weekly data from 18th August 2013 to 17th Sept 2023 of Nifty, Dow Jones, Dollar index, Bond yield, WTI, and Gold (Dollar terms). Weekly returns are expressed as annualized percentages. Using Garman and Klass (1980), weekly return volatilities are determined.Data analysis & ResultsThe empirical findings indicate that return series are not normally distributed, and WTI crude oil is more volatile. The total return spillover resulting from these variables is 22.3% of the variance in return forecast error. Across our entire sample of 6 markets, 40.1% of the volatility forecast error variance arises from transmissions. The highest volatility spillover toward Nifty arises from the US 10-year bond yield, followed by Dow Jones. The volatility spillover index burst in 2020 during Covid-19, but had already started rising before 2020.ConclusionThe study analyzes weekly data from 18th August 2013 to 23rd September 2023 and finds significant return and volatility spillovers among Nifty, Dow Jones, Dollar index, US 10-year bond yields, Gold, and WTI crude oil. Fund managers and policy makers should consider these interdependencies before making important decisions.References:Awartani, B., & Maghyereh, A. I. (2013). Dynamic spillovers between oil and stock markets in the Gulf Cooperation Council Countries. Energy Economics, 36, 28-42.Diebold, F. X., & Yilmaz, K. (2012). Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 28(1), 57-66.Yilmaz, K. (2010). Return and volatility spillovers among the East Asian equity markets. Journal of Asian Economics, 21(3), 304-313.Authors may be reached at mohapatra02ab@gmail.com, bvraobu@gmail.com and eboard@icai.in
Ep. 384 — Angel Investing in India in the 21st Century
CA Journal
· September 2026
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Angel Investing in India in the 21st CenturyThe study is aimed at a detailed examination of the state of angel investing in India in the 21st century. In the 21st century, a significant shift has occurred in the investment habits and preferences of the Indian youth. It has, in turn, given tailwinds to the strong growth of the Indian economy. Investments in the 21st century are driven by the innovations and aspirations of the youth breaking traditional boundaries. The 21st-century start-ups have concentrated on addressing issues being experienced by the populace and providing tech-driven solutions thereto. India has emerged as the third largest start-up eco-system in the world after the US and the UK, creating employment avenues in the process. The recent data reveals that there are 1,17,254 start-ups registered in India as of 31st December 2023, reflecting a 42% growth over the number of start-ups as of 31st December 2022. Over 12.42 lakh direct employment opportunities have reportedly been created by these well-known firms, having a major positive economic impact. There has been a notable rise in angel investments as a result of the sizable gap left in the funding of early-stage start-ups. The Indian angel investment market is anticipated to expand between 2022 and 2025 at a CAGR of 12%.By Shekhar Srivastava, Research ScholarBy Prof. H. P. Mathur, AcademicianIntroductionSeveral interesting developments have taken place in India in the 21st century in the angel investing space which are a subject of study for researchers in this field. The money being attracted in the angel investing space is only a small fraction of the total wealth growth of the High Net Worth Individuals (HNIs). This trend is not only being observed in India but globally as well. However, something slightly different is also seen in the case of the Indian HNIs. Some younger entrepreneurs who started their businesses and later on sold them at high valuations are seen to be more adventurous and they have allocated a larger portion of their assets to riskier avenues like angel investments. By taking stakes in these companies through angel investments, they also want to guide, advise and mentor these companies. Except for fixed income investments like bank fixed deposits, all other asset classes including angel investments, have been delivering high returns. One more salient feature is that the deployment of wealth by the Indian HNIs is not confined to Indian shores only but it is also being deployed abroad.Purpose of the StudyIn the angel investment space in India, the supply side has been increasing because of the growth in the HNI wealth. On the demand side, the demand for that capital is no longer confined to India. Indians are now investing globally in different asset classes, e.g., stocks, commodities, real estate, hedge funds. In 2016, according to a report in the Round Table on Angel Investments held at IIM Bengaluru, the Indian Angel Networks investment abroad was 4.1% of their total investments.Investments are primarily driven by two factors: 1) Entrepreneurial action and 2) Policy environment, which should favour investment activity. A huge demographic dividend and the growing spirit of entrepreneurship have given rise to an increase in entrepreneurial action. However, most of the angel capital is flowing to the North, West, and South of the country and angel investment in the Eastern part is low.The angel investors or the early-age investors are all informed individuals and don\'t need to be shielded. Before 2008, there was very limited regulation on the angel investing space. Post 2008, some regulation has been introduced. The regulations introduced in 2012 have approached angel and venture capital as one category.Method of the StudyOur main method for doing this research was to review the literature on angel investing in twenty-first-century India. The literature research will assist in better understanding angel investors\' role in the start-up ecosystem. The keyword \"Angel Investing in India\" was searched throughout a number of journals and databases, including Springer, Scopus, Science Digest, and SAGE, in order to compile all of the literature in this field.Literature ReviewThe contribution angel investors have made to the growth of the Indian start-up ecosystem in the twenty-first century has been highlighted in peer-reviewed studies. According to M. Mustafa (2021), inadequate finance or lack of access to finance has the potential to exclude many future entrepreneurs if they do not already have personal wealth. Start-ups in their early stages may bump into various obstacles, including the financial gap, called the \'valley of death\', which limits their ability to innovate and scale. Angel investors help the firms survive this valley of death by providing capital and mentoring the entrepreneurs to help them succeed.Angel investor finance is becoming a more popular choice for starting a business in India as a result of venture capitalists\' and private equity firms\' growing emphasis on big deals and supporting companies later on rather than from the start. The problems that individual angel investors face gave rise to angel networks to overcome search and information costs.Results & AnalysisThe reforms of the 1990s were the harbinger of change in the attitudes of Indians towards the start-up ecosystem. The reforms increased the average income of the Indian population and the growth of the Indian economy accelerated. Globalisation encouraged the Indian population to innovate. India\'s economy has emerged as one of the world\'s top five in the ten years between 2014 and 2024. This impressive trajectory is also seen in the notable improvement in the country\'s Ease of Doing Business (EoDB) ranking, which rose from 142 in 2014 to 63 in 2019.The following factors offer opportunities for the emergence of new start-ups and consequent angel investments in India:Huge Demographic Dividend: More than 65% of India\'s population is in the productive age group of 18 to 35 years and this represents the most productive portion of the population. This huge chunk of population is filled with the entrepreneurial spirit giving avenues for angel investment in their start-ups.Startups Drawing Significant Investments: Large sums of money are being invested in Indian startups by both Indian corporate investors and institutional investors from abroad.Risk Taking Mindset of People: Winds of change blowing in the economy have encouraged more people to seek new growth avenues like startups and angel investments.Government schemes have encouraged the entrepreneurial spirit: Startup India and Standup India provide tax and compliance breaks while cutting through the red tape. Through MUDRA yojana, startups get collateral-free loans from banks, and under SETU, a corpus of Rs.1000 crores has been created to support opportunities.Corporates and Business Houses Investments: Big corporates and business houses have made angel investments in startups and thus encouraged entrepreneurs.Entrepreneurship has increased in India: Technological developments have led to the emergence of several start-ups, making India rank third consistently on the number of new start-ups coming up every year.A compound annual growth rate (CAGR) of 12% is projected for the Indian angel investment sector between 2022 and 2025. Angel investments are expected to increase from $3.2 billion in 2022 to $7 billion in total by 2025. By 2025, there will probably be over 4,500 active angel investors in India. One of the main causes of these possible funding opportunities is the outstanding achievement of India\'s leading unicorns.In the Finance Act, 2012, the Angel Tax (i.e. Section 56(2)(VII)(B) of the Income Tax Act, 1961) was introduced which sought to tax the excess premium received by a company on the issue of shares. In 2016, as a measure to boost startups, these norms were relaxed exempting startups registered with the Department of Industrial Policy and Promotion (DIPP) from such Angel tax. Budget 2024 has proposed to abolish the angel tax for all categories of investors, which will provide a shot in the arm to the Indian start-up ecosystem.ConclusionIndia\'s current improved rank of 63 in the world in Ease of Doing Business has given impetus to the emerging start-ups in the economy. Angel investment has become the most preferred choice of a start-up for seeking capital in the 21st century, due to its collateral-free nature along with India\'s huge demographic dividend filled with an entrepreneurial spirit. The vast market existing in India for new products lures angel investors towards start-ups introducing new-generation innovative products. Venture funding firms have shifted their attention to more established businesses, allowing angel investors more room to meet startups\' funding needs. The abolition of the angel tax being a provision of the Finance Bill, 2024 will further boost the Indian startup ecosystem and act as an impetus for higher inflows of capital in the startups/economy.References:Sabarinathan, G. (2019). Angel Investments in India- Trends, Prospects and Issues. IIMB Management Review, 31(2), 200-214.Sohl, J. E. (1999). The early-stage equity market in the USA. Venture Capital, 1(2), 101-120.Mustafa, M. (2021). Overview of Angel Investing. In Angel Investing (pp. 1-31). Palgrave Macmillan, Singapore.Rao, S. R., & Kumar, L. (2016). Role of angel investor in Indian startup ecosystem. FIIB Business Review, 5(1), 3-14.Nath, C. K. (2010). Business Angel Investment in Unorganised Environment. SCMS Journal of Indian Management, 7(4).Author may be reached at eboard@icai.in
Ep. 385 — 15th Finance Commission Challenge of Growth in Property Tax: An Assessment of Selected Smart Cities
CA Journal
· September 2026
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15th Finance Commission Challenge of Growth in Property Tax: An Assessment of Selected Smart CitiesIn India, funds are devolved to States by Centre through the Finance Commission constituted by the President of India under Article 280 of the Indian Constitution periodically. Lately, the 15th Finance Commission (FC) (2021-22 to 2025-26) have been constituted, laying out various conditions under which funds are devolved to states and cities. Out of several conditions, two prime conditions imposed by the 15th Finance Commission related to Municipal Financial management are the timeliness of Published Annual Financial Statements (AFS), and the growth in property tax collection and its methodology of valuation. Conditions laid down by the 15th Finance Commission aim to create financial discipline in municipalities and make municipalities march towards financial sustainability. Growth in property tax exceeding the State Simple Average Growth Rate (SAGR) of the Gross State Domestic Product (GSDP) is a prime condition for leading cities towards Atmanirbhartha. Compliance with the conditions laid down by the 15th Finance Commission (FC) requires coordination, and consultation among multiple stakeholders at various levels of the government and administration, which can potentially lead to administrative delays.The article aims to throw light on the challenges faced by municipalities on the field to meet the conditions laid down by the 15th FC for growth in the Property Tax on annual basis to claim grants through an analysis of selected smart cities. It will highlight the challenges faced in complying with municipal financial management conditions by municipalities. Municipalities must prepare themselves through suggested interventions in the paper to comply with municipal financial management conditions, especially those stipulated by the present and upcoming finance commissions.By CA. Pankaj Goel, Member of the InstituteIntroductionIt is expected that in the next two decades under Viksit Bharat@2047, India\'s economic growth will improve manifold through an improved pace of urbanization to meet the demand of the projected increased urban population which may reach 600 million by 2031. This increased infrastructure would require a lot of expenditure on its maintenance which needs to be met by municipalities from their limited internal revenue (Awasthi et al., 2021). Due to limited own-source revenue, Indian cities are largely dependent on grants from the Central and State governments to meet their revenue expenditure needs (Reserve Bank of India, 2022).Article 243X of the Indian Constitution provides a mechanism whereby the center transfers funds to the state for its cities in the form of grants-in-aid as Grants and Transfers. To ensure financial robustness and promote the development of cities, finance commissions often allocate grants to states based on various factors such as area, population, and specific conditions aimed at encouraging urban development. The 14th FC provided that 20% of the funds would be given to cities as performance grants, provided they meet additional conditions such as increasing their own revenue and publishing audited AFS.The Smart City, AMRUT, and AMRUT 2.0 guidelines emphasize the need for municipalities to enhance their own-source revenue generation to service debt raised from the open market through municipal bonds (MoHUA, 2015). Property tax is a potential source of revenue generation by municipal/local governments, especially in developing countries, because it is economically efficient, easy to enforce, and difficult to avoid (Rosengard, 2012; Bahl and Martinez-Vazquez, 2007). This could be one of the reasons that most of the Government of India Guidelines in the past and present focus on the augmentation of only property taxes of cities (Kumar & Goel, 2023).The objective to be achieved through this study is to assess the preparedness of selected smart cities to meet the challenges posed by the 15th Finance Commission regarding the growth in property tax collection through the analysis of selected smart cities\' property tax collection in the past three years from 2021-22 to 2023-24.Conditions by Finance Commissions: GenesisFinance commissions are constitutionally empowered bodies as per Article 280 of The Indian Constitution. The FC recommendations cover three main aspects: vertical devolution which identifies State\'s share in the divisible pool of central taxes; horizontal devolution which allocates resources among states based on fiscal need and capacity, and grant-in-aid (Wasdani, 2016).Lately, the recommendations of the 15th FC have highlighted the need for a revolution in the area of municipal financial management to augment municipal finance by making growth in property tax as a mandatory criteria and providing a timeline for the submission of published annual accounts. Operational guidelines for the implementation of recommendations on Urban Local Bodies grants, as detailed in Chapter 7 of the Fifteenth Finance Commission Report states that from 2023-24 onwards, collection of Property taxes shall increase in tandem with the growth rate of the state\'s own GSDP over the most recent five years.Analysis70% of the Indian Urban Local Bodies (ULBs) have reported an increase in the collection of property tax in 2022-23 as compared to the fiscal year 2021-22. However, in the coming years after 2022-23, (ULBs) that can meet the conditions set by the 15th Finance Commission (15FC) for property tax collection growth exceeding the Gross State Domestic Product (GSDP) growth rate will be limited. This limitation would arise primarily because many ULBs achieved this condition in 2022-23 through one-time measures, such as one-time settlement or amnesty schemes for arrear collection, rather than through institutional changes like transitioning to capital value-based systems.The structural change in property tax valuation implemented by states like Jharkhand, transitioning from the Annual Rental Value (ARV) method to the Capital Value method based on circle rates through notification of separate floor rates for residential and non-residential properties, represents a significant reform aimed at improving the accuracy, transparency, and efficiency of property tax assessment and collection.In this section, the author aims to analyze the trends in the collection of property tax for ten selected smart cities. Based on the analysis, it\'s evident that 9 selected cities out of 10 (Bhilai) were able to meet the 15th Finance Commission (FC) conditions for growth in Property Tax in the fiscal year 2022-23, compared to FY 2021-22. However, in the fiscal year 2023-24, apart from Udaipur and Ranchi, none of the cities were able to achieve the collection target set by the 15th Finance Commission (FC).ConclusionThrough this paper, the author aims to emphasize the necessity for adopting sustainable options to transition the method of property tax valuation to guidance value or circle rates, as mandated by the 15th Finance Commission (FC) and AMRUT 2.0 along with other measures required to improve assessment and reduce underassessment for growth in the collection of property tax.Migration to capital value Method: The method of property tax assessment in Jharkhand and Rajasthan has been linked to circle rates. This will help Urban Local Bodies (ULBs) in these states to potentially avoid issues in meeting the conditions of property tax growth set by the 15th Finance Commission (15FC).PPP based Revenue sharing Model: The Public Private Partnership (PPP)-based revenue-sharing model with Project Management Units (PMUs) represents a commendable initiative by the Government of Jharkhand to address the challenges posed by limited skilled staff and the issue of the 3Us (unassessed, under-assessed, and unpaid properties).Professionals Engagement: The state or city shall engage professionals covering Urban Planner, Chartered Accountants etc. to enable the State/City to implement interventions relating to 3Us.GIS mapping: Implementing GIS mapping of households can be a significant reform measure for states to improve property tax assessment and collection.Integration with State Departments and other utilities: Integrating the property tax database with other relevant departmental databases and utilities may be imperative to enhance assessment accuracy and subsequently improve property tax collection.References:Awasthi, R., Nagarajan, M., & Deininger, K. W. (2021). Property taxation in India: Issues impacting revenue performance and suggestions for reform. Land Use Policy, 110(5).Expert Committe by GOI. (2016). 15FC report. 4(1), 1-23.Goodfellow, T., Owen, O., 2018. Taxation, property rights and the social contract in Lagos. International Centre for Tax and Development.Kumar, A., & Goel, P. (2023). Jharkhand Urban Local Bodies Journey of Financial Sustainability: Nirbhar to Atmanirbhar.MOHUA. (2015). Smart Cities. Smart Cities Mission, Ministry of Housing and Urban Affairs, Government of India.Reserve Bank of India. (2022). Report on municipal finances.Rosengard, J.K., 2012. The tax everyone loves to hate: Principles of property tax reform. Harv. Kennedy Sch. wp (10).Sivaramakrishnan, K. C. (2015). Infrastructure and Services. Governance of Megacities.Wasdani, K. P. (2016). Fiscal Architecture of India: A Comparative Study of Finance Commission Reports (13th & 14th).Author may be reached at eboard@icai.in
Ep. 386 — Cloud Accounting in the Indian Accounting Landscape: A boon for practicing Chartered Accountants
CA Journal
· September 2026
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Cloud Accounting in the Indian Accounting Landscape: A boon for practicing Chartered AccountantsCloud accounting is undeniably a boon for practicing Chartered Accountants (CAs) in the Indian accounting landscape. Its benefits, including accessibility, real-time data update, cost savings, enhanced security, and scalability, are reshaping the way CAs operate and offer their services. However, it\'s important to acknowledge and address the challenges and concerns, such as data security, internet connectivity, adaptation, and compliance. As the adoption of cloud accounting in India continues to grow, CAs who embrace this technology stand to gain a competitive edge. The role of CAs is evolving from data entry and compliance with regulations to provide strategic financial advice and leveraging technology to enhance efficiency and productivity. By keeping pace with these changes, CAs can ensure that they remain valuable and trusted partners for their clients in an increasingly digital and data-driven world.By CA. Peeyush Sharma, Member of the InstituteIntroductionThe field of accounting has witnessed a significant transformation in recent years, and one of the key drivers of this change is the advent of cloud accounting. Cloud accounting refers to the practice of using cloud-based software and platforms to manage financial data and perform accounting tasks. This technological innovation has had a profound impact on the accounting landscape in India and has proven to be a boon for practicing Chartered Accountants (CAs).The Evolution of Accounting in IndiaTraditionally, accounting in India has been a manual and paper-based process. Chartered Accountants and accounting firms relied heavily on physical ledgers, spreadsheets, and paperwork to record financial transactions and maintain books of accounts. While this method served its purpose for many years, it was inherently time-consuming, prone to errors, and lacked the efficiency required to meet the demands of a rapidly evolving business landscape. In recent years, the world of accounting has witnessed a significant transformation, and India is no exception to this trend. The traditional methods of bookkeeping and financial management are gradually being replaced by more efficient and technologically advanced solutions, with cloud accounting at the forefront of this evolution.Understanding Cloud AccountingCloud accounting, often referred to as \'online accounting\' or \'web-based accounting\', is a method of managing financial data using cloud-based software and storage solutions. Instead of relying on traditional desktop-based accounting software, businesses and professionals can access their financial data from anywhere with an internet connection. Cloud accounting software provides a platform for various accounting tasks, including data entry, bookkeeping, financial reporting, and compliance with taxation and regulatory requirements.Benefits of Cloud AccountingAccessibility and Mobility: The ability to access financial data from anywhere, at any time, which is particularly beneficial for CAs who often need to work remotely.Real-Time Data Updates: Financial data is updated in real-time, eliminating the need for time-consuming data synchronization and ensuring financial decisions are based on accurate information.Cost Savings: Cloud accounting is typically offered on a subscription basis, making it more cost-effective by eliminating upfront hardware and software license costs.Enhanced Security: Cloud providers invest heavily in security measures like robust encryption, multi-factor authentication, and regular security updates.Automatic Backups: Cloud software often includes automatic backup features ensuring data is securely stored and can be easily restored.Scalability: Cloud accounting software can seamlessly scale up data storage requirements as a business or CA\'s practice grows.Integration and Automation: Automation of repetitive tasks (e.g., invoice generation, expense tracking) and integration with banking systems and tax authorities streamline processes.Reduced Environmental Impact: By reducing the need for physical servers, data centers, and paper, it lowers the carbon footprint.Cloud Accounting in the Indian ContextIndia, with its rapidly growing economy, is witnessing a surge in demand for accounting services. Factors contributing to the rise of cloud accounting in India include government digital initiatives (like GST), an increasing number of SMEs lacking extensive IT infrastructure, improving internet penetration, growing awareness and education by professional bodies, and the competitive landscape pushing firms to differentiate themselves.Challenges and ConcernsWhile cloud accounting offers numerous benefits, it is not without challenges, especially in India. These include concerns over data security and privacy on third-party servers, issues with inconsistent or slow internet connectivity in certain regions, resistance to change requiring adaptation and training, and the need to ensure compliance with Indian regulations such as GST and data localization requirements.Data PortabilityData portability refers to the ability of users to move their personal data between different IT environments securely and without hindrance. In cloud accounting, it ensures businesses can seamlessly transfer financial data from one cloud provider to another. In India, data portability is supported by the Digital Personal Data Protection Act, facilitates GST compliance, and is emphasized by the Institute of Chartered Accountants of India. Challenges in implementing data portability include maintaining data integrity, security concerns during transfers, and interoperability issues due to varied data formats across platforms.Common considerations prior to migrating to a cloud-based environmentOrganizations migrating to the cloud must carefully evaluate several considerations: potential reduced visibility and control over sensitive data, self-service risks allowing unauthorized use, the threat of privileged insiders at the provider, vulnerabilities in Application Programming Interfaces (APIs), the risk of tenant separation failures in multi-tenant environments leading to data leakage, incomplete data deletion, compromised user credentials, increased complexity straining internal IT staff, and the necessity of thorough due diligence before selecting a provider.Impact on the Role of Chartered AccountantsCloud accounting is reshaping the role of CAs in India by allowing them to focus on higher-value advisory services, fostering improved client collaboration through shared access to data, providing real-time financial insights for clients, increasing efficiency and productivity, offering opportunities for specialization in specific industries or software platforms, and necessitating continuous technological skill enhancement.ConclusionIn conclusion, cloud accounting is a transformative force in the Indian accounting landscape, and CAs who harness its potential are well-positioned to thrive in the evolving profession. As the technology continues to advance and as more businesses recognize its benefits, the cloud will undoubtedly play a central role in the future of accounting in India.References:(No explicit references listed in source)Author may be reached at peeyushsharma.ca@gmail.com and eboard@icai.in
Ep. 387 — System, Data, and AI: The Future of Audit!
CA Journal
· September 2026
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System, Data, and AI: The Future of Audit!With the exponential growth of technology, there has been a paradigm shift in the way of doing business. \'System\', \'Data\', and \'AI\' have become buzzwords, attracting the attention of people everywhere. It has become an important part of every business model. Without it, developing a multinational company could not be imagined today. To audit such a business, which produces enormous data, appeals to new generation auditors to use the latest technologies like Artificial Intelligence, CA GPT, ChatGPT, Machine learning, Natural Language Processing, predictive analysis, and others. These tools enable new-generation auditors to concentrate more on high-risk areas and also provide an analysis of the overall performance of a business by utilizing historical data and industry benchmarks.By CA. Krishna Kant Shah, Member of the InstituteIntroductionToday\'s era, the 21st century, has evolved with major changes in the way we deal with any issue. Technological advancements are transforming our world, and we now have Artificial Intelligence backed with Data and System. Data was there earlier as well, and audit revolves around analyzing them through the application of Standards on Auditing, thereby identifying audit evidence to express the auditor\'s opinion in an Independent Auditor\'s Report. But in the present scenario, the volume and frequency of data production have increased multifold compared to earlier times, marking a paradigm shift in the way business is conducted.System and DATAAs defined in Cambridge Dictionary, a System concerning technology means \"a set of computer equipment and programs used together for a particular purpose\". Data is the information produced by the system that can be used to make various decisions. The rate at which data is generated has accelerated, producing a large volume of data called \'big data\'. They may be in heterogeneous formats, unstructured or structured, whose analysis through traditional tools is cumbersome. Big data is impacting every aspect of accounting, auditing, taxation, and advisory services. Therefore, the world is looking towards Artificial Intelligence (AI), which has more or less similar thinking capacity as that of human beings and is able to comprehend big data more effectively and efficiently.DATA and AuditAudit is defined as an independent examination of records so that audit evidence can be obtained to express an opinion on such records as to whether they are free from material misstatements caused due to fraud or error. The detailed procedure as to how audits are conducted along with guidelines for complex scenarios has been covered under Standards on Auditing (SAs). However, the reliance or completeness of audit depends upon the data or information that is provided by management and it indirectly relates to how management is handling such data and their internal control to generate/process them. If such data/information is not made available to the auditor, he will not be able to collect sufficient and appropriate audit evidence, which may cause him to express a Disclaimer Opinion in the Audit Report.Understanding the Business EnvironmentIn today\'s world, the dependency of majority of organizations on information systems has extended to 95%-99%. Right from customer acquisition, receiving their orders, to order processing and receiving payment, everything is done through digital methods. The system is everything in today\'s business.Audit in Next-GenerationAuditing involves an examination of the data produced in financial statements on which reliance is drawn through the understanding of how data are being generated, stored, maintained, and accessed in a system. To perform an audit traditionally would require huge time and resources because transactions amount to a large volume by the end of the year.Risk AssessmentInnovation in business fueled with AI is a new era evolving exponentially. To audit such a business environment, audit planning winged with technology would enable an Auditor for successful risk assessment. Risk assessment using predictive analysis, pattern recognition, real-time risk monitoring, scenario analysis, comparison, and benchmarking would enhance the efficiency as well as the quality of the audit.Testing of ControlsTest of controls is a very crucial step in an audit process. Within an automated environment where human intervention is minimal, testing controls demand the usage of similar tools. The paradigm shift from auditing historical data to auditing algorithms and data used to train a developed model is the current demand of the Auditing profession. AI enables continuous testing of controls giving real-time protection and thereby allowing monitoring of controls and taking immediate actions for any failure or potential risks.Use of innovative toolsExpanding data sample size by the usage of AI automated technology would be an easier task that would draw up the trend analysis and peer benchmarking. Natural Language Processing (NLP) is the technology developed to extract content from unstructured data like finance, contracts, loan documents, and agreements. The use of AI algorithms improves the trust in the audit result which checks out control in a business by generating test cases that differ from business to business. Other tools that may be inculcated in the audit process include ChatGPT, ICAI developed CA GPT, Machine learning, predictive analysis, etc.Paradigm Shift in AuditIf the abovementioned tools are used for the purpose of audit, AI may be the cause of making a paradigm shift in Audit. Starting from gathering of test data and information, AI steps in for automatic gathering of information through ERP, other ancillary accounting systems, and also from unstructured contents through NLP technique. Converting year-end full audits to continuous audits using AI through data collection, verification, and analysis on a real-time basis would enable the auditor to detect issues promptly.Need of New-Generation AuditorsIt is a need of time to extend the audit procedure to the next-generation by introducing mandatory usage of AI tools which analyze data quickly and accurately. Scrutinizing the system policy and understanding internal control concerning the usage of the system through AI tools is necessary. Cross-checking of each transaction from a third party through the usage of blockchain technology would make audit more fruitful. Using drones loaded with AI for the physical verification of assets would enable stock counting quickly and accurately.Conclusion and RecommendationsThe future of audit lies with the usage of AI in Audits by new-generation Auditors. New-generation Auditors need to focus on new techniques like Predictive analysis, Natural Language Processing, Machine Learning, etc. Such AI tools would reflect the performance of a business very quickly as compared to traditional methods. They would provide a brief comparison of the performance of an entity along with horizontal analysis, vertical analysis, comparison with industry benchmarks, trend analysis, and how the industry is performing in the same sector. This would enable Auditors to focus more on high-risk areas and gain an understanding of the entity more quickly and accurately. Access control, security, confidentiality, integrity, and availability of data are very important to conclude a quality audit. Audit risk may be lowered by performing 100% checking using AI to check the financial statements on a continuous basis.References:Cambridge Dictionary (2019). SYSTEM | meaning in the Cambridge English Dictionary. [online] Cambridge.org.Wikipedia Contributors (2019). Enterprise resource planning. [online] Wikipedia.Author may be reached at shahkrishnakant31@gmail.com and eboard@icai.in
Ep. 388 — Right to Privacy of Personal Digital Data-Historical Perspective and Legislative Framework
CA Journal
· September 2026
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Right to Privacy of Personal Digital Data-Historical Perspective and Legislative FrameworkThe objective of this article is to delve into the roots of the right to privacy of a citizen in the Constitution of India and also intends to provide an overview of the provisions of the Digital Personal Data Protection Act, 2023 and its necessity in this digital era and ever-evolving technology that affects every sphere of our lives. Enacted by the Parliament to safeguard the essence of privacy, this legislation represents a crucial step in the protection of personal data in the digital era.By CA. Rajeev K Sharma, Member of the InstituteBy CA. Tarjani Shah, Member of the InstituteIntroductionIndia\'s population is more than 1.42 billion, with around 700 million internet users. In this digital age, data has become the lifeblood of society, and protecting personal data has emerged as a paramount concern. To understand what we are protecting, let\'s look at two important definitions from the Digital Personal Data Protection Act, 2023 [DPDP Act]:\"Data\" refers to a representation of information, facts, concepts, opinions or instructions in a manner suitable for communication, interpretation, or processing by humans or automated means. [Section 2(h) of the DPDP Act].\"Digital personal data\" means personal data in digital form. [Section 2(n) of the DPDP Act].Necessity of Legislative action for Data ProtectionWe live in a world where data is new oxygen in digital form and we need to protect it. The need of the hour is to protect this personal data from any unauthorized use with a legal framework for the following two reasons.Digitalization is now way of life and business: The revolution of banking system in India, the introduction of the Aadhar card, and the mobile revolution have significantly transformed India into a paperless, cashless, and faceless society. From the GST registration process to income tax scrutiny, faceless systems have been introduced. We\'ve transitioned from carrying cash in our wallets to hearing the ubiquitous \"UPI KARO\" when making purchases.Digitalization intrudes privacy: Data and digitalization have impacted many sectors, with social media and AI at the forefront. Social media platforms capture personal data such as age, interests, personal pictures, and lifestyle, which have become valuable business assets. Certain private data, such as personal finance or health information, is highly confidential. A leak of such information can benefit competitors, leading to significant business losses. Notable breaches including the exposure of 1.5 million customers\' data over an e-commerce platform (2023), the leakage of 20 million user details under the educational sector (2020), and the banking data breach (2019) highlight the urgent need for robust data protection measures.Roots of Right to Privacy in the Constitution of IndiaHistorically, the right to privacy was not explicitly stated as a Fundamental Right under Part III of the Indian Constitution. However, through various judgments, the courts have interpreted other constitutional rights to encompass a limited right to privacy, primarily through Article 21 the right to life and liberty. The Honorable Supreme Court of India in the landmark K.S. Puttaswamy\'s case upheld the right to privacy.Legislative Attempts so far and the sufficiency thereofBefore the enactment of the Digital Personal Data Protection Act, 2023, there were no comprehensive legal provisions for safeguarding personal data in India. It was only Section 43A of the Information Technology Act, 2000, which dealt with data protection and compensation, but it had a limited scope. Likewise, prior to the DPDP Act 2023, Rule 3 of Information Technology (Reasonable Security Practices And Procedures & Sensitive Personal Data Or Information) Rules, 2011 defined sensitive personal data. Vide Section 44(2) of the DPDP Act, 2023, Section 43A have been omitted from the Information Technology Act, 2000.Insufficiency of the legal framework, limited scope of existing rules, and need for stricter regulationsThe Information Technology Act, 2000 and rules thereunder simultaneously played a vital role for a certain period of time, but rapid technological advancements and increasing reliance on digital platforms has necessitated broader protections. These rules primarily safeguarded \"sensitive personal data\" but did not cover all personal data stored digitally, such as emails and other communications. The necessity to clearly define and strictly enforce data collection, consent mechanisms, and usage purposes was felt by the Government of India.July 2017- Formation of Justice B.N. Srikrishna Committee and recommendationsIn July 31, 2017, the Government of India set up a Committee of Experts to study various issues relating to data protection in India, to make specific suggestions on principles underlying a data protection bill, and to draft such a bill.Important Puttaswamy\'s Judgment by the Honorable Apex CourtIn a historical case of Justice K.S. Puttaswamy & Another vs. Union of India and Others [(2017) 10 SCC 1], a nine-judge Constitution Bench of the honorable Supreme Court on 24th August 2017 gave a landmark decision on the Right to Privacy wherein it was unanimously declared that privacy is a fundamental right, protected as an intrinsic part of the right to life and personal liberty under Part III of the Constitution. Key Conclusions that may be derived from this judgment are:Privacy is a fundamental right. It has always been considered a natural right, inseparable from human personality.The right to privacy encompasses: i) Intrusion into an individual\'s physical body, ii) Informational privacy, and iii) Privacy of choice.This historical judgment recognized informational privacy as part of the right to privacy and left the task of legislating data protection law to the Parliament, which would protect data processed by both public and private entities.August 2023- Enactment of Digital Personal Data Protection Act, 2023 - a Brief OverviewPresident Draupadi Murmu gave assent to the Digital Personal Data Protection Bill, 2023, making it the Digital Personal Data Protection Act, 2023, on August 11, 2023. The DPDP Act includes hefty penalties, up to 250 crore, for non-compliance. Key Provisions of the DPDP Act are:Applicability (Section 3 of the DPDP Act): To the processing of digital personal data within India, and to processing outside India if connected to offering goods or services to data principals in India.Data collectors must notify individuals about the purpose of data collection, and the data should not be used beyond that purpose.Data shared for a specific purpose should be used only for that purpose.ConclusionThis Act is to provide for the processing of digital personal data in a manner that recognizes both the right of individuals to protect their personal data and the need to process such personal data for lawful purposes. Strict compliance will be required all across when personal information is stored digitally. While the Act is in place, its rules are still awaited, when issued, the effective implementation will be a priority, let us see how!References:(No explicit references listed in source)Authors may be reached at rks9814214503@gmail.com, tarjanishah2610@gmail.com and eboard@icai.in
Ep. 389 — How Climate Change can impact your Financial Reporting
CA Journal
· September 2026
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How Climate Change can impact your Financial ReportingWhen it comes to standardizing accounting policies and practices, India follows the Indian Accounting Standards issued under the supervision and control of the Accounting Standards Board constituted by ICAI. USA follows the US GAAP, whereas 144 countries around the world follow IFRS (International Financial Reporting Standards) with minor tweaks from some countries. IASB (International Accounting Standard Board) was established in 2001 for developing IFRS and promoting the use and application of these standards.By CA. Amrit Bhojwani, Member of the InstituteWhat\'s New in the World of reporting?At the UN Climate Change Conference (COP26) held in November 2021, the IFRS Foundation Trustees announced the creation of the ISSB, a new standard-setting board within the IFRS Foundation. The ISSB\'s role is to develop a comprehensive global baseline of high-quality sustainable and climate-related disclosures for businesses. The International Sustainability Standards Board (ISSB) issued two brand-new sustainability standards on June 26, 2023, which came into effect on January 1, 2024. These standards are:IFRS S1: General Requirements for the Disclosure of Sustainability-related Financial Information;IFRS S2: Climate-Related Disclosures.Why is Sustainability such a Hot Topic of Conversation in Businesses Today?A substantial shift has occurred among global investors who now wish to fund businesses that operate with environmental responsibility over those that prioritize short-term profits at the expense of the environment. ESG (Environmental, Social and Governance)-themed investments have gained significant traction in India, exemplified by funds such as the ICICI Prudential ESG Fund and Axis ESG Equity Fund.Greenwashing and the Need for RegulationA study conducted for the European Commission in 2020 discovered that over half (53%) of the environmental claims made by companies in EU about their products and services were vague, misleading, or baseless. Greenwashing, a deceptive tactic used by companies to exaggerate their environmental efforts, has drawn attention. The EU has proposed the Green Claims Directive, mandating independent verification and scientific support for green claims made by companies.The real-world impact of climate change remains undisputableIn May 2022, the Bank of England conducted a financial stress test on UK-based banks, revealing that banks and insurers could face £340 billion worth of climate-related losses by 2050. Bank of England estimates that not considering adverse environmental scenarios can impact annual profits by 10-15%.Climate change also impacts world trade; for example, the Panama Canal is experiencing one of its worst droughts, reducing the number of ships that can cross daily. In India, heatwaves are predicted to damage crops, increase water demand, and reduce outdoor working capacity by 15% by 2050, substantially reducing economic growth.The Sustainability Disclosure StandardsThese standards are designed to guide management to disclose information about a company\'s sustainability-related risks and opportunities. The impact of implementing these standards includes increased awareness of waste and greenhouse gases, investor preference for eco-conscious businesses, improved forecasting, better government policies, and potential higher interest rates for non-compliant businesses.Key TermsClimate-related transition risks: Risks associated with transitioning to a low-carbon economy.Climate-related physical risks: Risks such as storms, floods, and wildfire damage.Scope 1, 2, and 3 emissions: Direct, indirect (energy purchased), and value-chain emissions respectively.What to disclose?IFRS S2 requires disclosures in four main areas: Governance, Strategy, Risk Management, and Metrics and Targets. Entities must report on greenhouse gas emissions, climate-related physical and transition risks, climate-related opportunities, capital deployment, and internal carbon pricing if applicable.How does the Business Responsibility Sustainability Report (BRSR) compare to IFRS S2?The BRSR, required for the top 1000 listed companies in India, covers aspects like projects reducing greenhouse gas emissions, adopted certifications, total energy consumption, sustainability sourcing procedures, and Extended Producer Responsibility (EPR) plans, but it is not as comprehensive as IFRS S2.Opportunities for Chartered Accountants (CAs)CAs have opportunities to assist in practical application of the standards, provide audit and assurance services, integrate sustainability assessment into investment matrices, advise on risk management, and collaborate with environmental specialists.References:https://www.ifrs.org/about-us/our-structure/Environmental claims in the EU: Inventory and reliability assessment Final report, European Commission 2020https://www.reuters.com/business/sustainable-business/bank-england-tells-banks-take-climate-action-now-or-face-profit-hit-2022-05-24/https://www.ft.com/content/b6604ad4-d2c9-4a00-8a50-1241fa86f26chttps://gcaptain.com/panama-canal-traffic-is-being-throttled-by-climate-change/https://www.g20climaterisks.org/india/https://journals.plos.org/climate/article?id=10.1371/journal.pclm.0000156Author may be reached at amritbhojwani1992@gmail.com and eboard@icai.in
Ep. 392 — Right to Privacy of Personal Digital Data-Historical Perspective and Legislative Framework
CA Journal
· September 2026
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EU Taxonomy, Assurance Requirements, and its Implication on India and Indian Chartered AccountantsOver the past couple of years, we have been hearing the terms EU Taxonomy, Green taxonomy, Sustainability reporting, and ESG (Environmental, Social, and Governance) reporting and other related terminologies. It is now evident that these reporting are part of the Financial reports and as a Chartered Accountant, we are responsible for the assurance of these reported numbers.In this article, we will briefly discuss the EU taxonomy since the EU Taxonomy reporting has already been started by large companies in the European Union. The Statutory Auditors of these companies are responsible for Limited assurance for these reports. We will understand the background for implementing EU Taxonomy, Objectives, CSRD, SFDR, Reporting requirements, Keywords, and KPIs of EU taxonomy. We will understand the applicability of these reporting and Assurance requirements from the Statutory Auditors. We will continue the discussion with India\'s efforts towards green taxonomy and what to expect in the upcoming years. It is also worth mentioning that the Indian Government is also working on a policy similar to the Green Taxonomy pioneered by the European Union (EU).By CA. (Dr.) Chethan Jayantha, Member of the InstituteEU Taxonomy - IntroductionOne of the greatest challenges that our generation and our upcoming generation will be facing is the impact of climate change. With this view, almost all the countries entered into an international treaty on climate change in 2015 named as \"Paris Agreement\". The aims of this agreement are:Temperature Goal: The aim is to keep the rise in global average temperature significantly below 2°C compared to pre-industrial levels, and to limit it even further to 1.5°C.Adaptation and Resilience: Enhance ability to adapt to climate change\'s adverse effects, fostering climate resilience and promoting low greenhouse gas emissions development.Finance Alignment: Financial flows should align with a pathway toward low greenhouse gas emissions and climate-resilient development.Owing to the Paris Agreement, the European Union became the pioneer in implementing European Green Deal initiatives and EU Taxonomy.Objectives of EU TaxonomyThe main aim of the European Green Deal is to prevent greenwashing and also help investors make informed decisions related to sustainable investments. EU Taxonomy translates climate and environmental objectives into clear criteria, combating market fragmentation, preventing greenwashing, and accelerating financing for sustainable projects.EU sustainable finance frameworkTo achieve the objective, the EU has created an EU Sustainable Finance Framework which incorporates three-dimensional corporate sustainability disclosure regimes:Corporate Sustainability Reporting Directive (CSRD)CSRD aims at enhancing and standardizing the reporting of non-financial information, improving consistency, quality, and transparency. It introduced the European Sustainability Reporting Standards (ESRS). Companies will need to start applying the new rules for the 2024 financial year, with reports published in 2025.Sustainable Finance Disclosure Regulation (SFDR)SFDR increases transparency in the financial markets regarding sustainability for financial market participants and advisers. SFDR categorizes investment funds into Dark Green Funds (Article 9), Light Green Funds (Article 8), and Grey Funds (Article 6).EU TaxonomyEU Taxonomy provides a classification system for environmentally sustainable economic activities, serving as the foundation for both CSRD and SFDR.Reporting of Taxonomy KPIsOrganizations are required to report Taxonomy Key Performance Indicators (KPIs).For Financial undertakings, the KPI is the Green Asset Ratio (GAR).For non-financial entities, KPIs include reporting Eligibility and Alignment of Turnover, Capital Expenditure (Capex), and Operational Expenditure (Opex).Eligibility: An activity that could make a potential contribution to one or more of six environmental objectives (Climate change mitigation, adaptation, sustainable use of water, circular economy, pollution prevention, biodiversity protection).Alignment: An eligible activity that meets technical screening criteria: Substantial Contribution, Do No Significant Harm (DNSH), and Minimum Social Safeguards (MSS).ApplicabilityThe timeline for application in the EU:2022: Large undertakings report proportion of eligible/non-eligible activities.2023: Large nonfinancial undertakings report activities aligned with EU Taxonomy.2024: Large financial institutions disclose eligible and aligned activities.2026: Credit institutions report Taxonomy alignment for trading books and fees.It also applies to non-EU entities offering financial products in the EU, EU subsidiaries of non-EU companies, and non-EU companies listed in the EU-regulated market.Assurance RequirementsUnder CSRD, companies are required to seek limited assurance over compliance of the KPI and the process followed to arrive at the information. The European Commission plans to adopt assurance standards for limited assurance by October 2026 and reasonable assurance by October 2028.India\'s efforts towards green taxonomyIndia\'s financial sector regulators (SEBI, RBI, IFSCA) have made progress in promoting green finance. SEBI formalized disclosure requirements for green debt securities and introduced the Business Responsibility and Sustainability Reporting Framework in 2021. The RBI mandated regulated entities to formulate green deposit policies. The Department of Economic Affairs set up a Task Force on Sustainable Finance in 2021 to draft a taxonomy.Implications on IndiaIndia\'s financial decisions will be impacted by the EU\'s taxonomy due to globally integrated capital markets. India is at risk of losing foreign investment in green capital if there is a delay in formulating a green taxonomy. Non-EU Indian subsidiaries of EU parent companies have already started providing required information.ConclusionIndian-listed companies have started voluntarily reporting Taxonomy KPIs. Indian policymakers should expedite developing a locally tailored green taxonomy. Chartered Accountants play a crucial role in implementation and providing assurance for the Taxonomy KPI\'s reporting.References:CSRD. paragraphs 60, 61, and 62, and EU Audit Directive (2006/43/EC)European_Commission. (2022, January). FAQs: How should financial and non-financial undertakings report Taxonomy-eligible economic activitiesKhanna, M. (2023, May 2). Navigating India\'s Green TaxonomyKhanna, S. H. (2023, May 1). India should use G20 presidency to address the green questionSingh, S. C. (2023, January 27). India plans to classify clean activitiesAuthor may be reached at chethan2525@gmail.com and eboard@icai.in
Ep. 393 — ESG Integration for Sustainable Development: A Pathway to Viksit Bharat
CA Journal
· September 2026
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ESG Integration for Sustainable Development: A Pathway to Viksit BharatThe study evaluates the pivotal role of technology in advancing ESG (Environmental, Social, and Governance) principles, particularly through renewable energy solutions, waste management systems, and smart city initiatives. Additionally, it scrutinizes the economic implications of environmental sustainability initiatives, underscoring their potential to drive employment, investment, and economic growth. Furthermore, the study analyzes future trends and challenges, offering recommendations for policymakers and stakeholders to navigate toward a more sustainable and resilient future. This study offers important insights into India\'s journey towards environmental sustainability and efficient governance by thoroughly examining these topics.By Rudramuni P. B., Research ScholarBy Prof. S. Venkatesh, AcademicianOverviewIndia, with its burgeoning population, rapid industrialization, and diverse ecosystems, stands at the crossroads of environmental sustainability and governance. In recent years, the nation has made significant strides in recognizing the importance of preserving its natural resources while grappling with the challenges of economic development. This study undertakes a comprehensive examination of India\'s journey toward environmental sustainability and effective governance, encompassing the intricate interplay of legal frameworks, technological advancements, stakeholder engagements, and economic implications.The article explores the transformative role of technology in advancing ESG principles, focusing on renewable energy, waste management, and smart cities. Stakeholder roles, including government, NGOs, communities, and businesses, are analyzed for their contributions towards sustainability. Economic implications, such as job creation and investment attraction, are emphasized. The study concludes with forward-looking insights on emerging trends, challenges, and recommendations for India\'s sustainable future.Technological Contribution towards Achieving ESG GoalsThe use of technology, including renewable energy solutions, waste management systems, and smart city initiatives, plays a crucial role in advancing Environmental, Social, and Governance (ESG) principles. Here\'s an evaluation of how these technologies contribute to ESG:Renewable Energy SolutionsEnvironmental Impact: Renewable energy solutions such as solar, wind, and hydroelectric power contribute to reduce greenhouse gas emissions, mitigating climate change, improving air quality, and conservation of water resources.Social Impact: Access to clean and affordable energy improves energy security and resilience, particularly in underserved communities, providing electricity to remote areas, creating job opportunities, and stimulating economic development.Governance Impact: Governments and regulatory authorities play a crucial role in incentivizing renewable energy deployment through supportive policies, incentives, and regulatory frameworks, enhancing energy governance and security.Waste Management SystemEnvironmental Impact: Effective waste management systems help to reduce pollution, conserve natural resources, and minimize environmental contamination through recycling and waste-to-energy technologies.Social Impact: Proper waste management protects public health, improves sanitation, and creates employment opportunities in waste collection, sorting, and processing industries, particularly for marginalized populations.Governance Impact: Governments and local authorities implement waste management policies, regulations, and infrastructure investments, integrating public-private partnerships to improve governance effectiveness and ensure compliance with environmental standards.Smart City InitiativesEnvironmental Impact: Smart city initiatives leverage technology to optimize the use of resources, reduce energy consumption, and minimize environmental impacts through intelligent transportation systems and smart grids.Social Impact: Smart city technologies improve urban livability, safety, and inclusivity by enhancing access to essential services, public transportation, and digital connectivity, promoting efficient and equitable transportation options.Governance Impact: Smart city governance models emphasize data-driven decision-making, citizen engagement, and collaborative governance structures, fostering transparency, accountability, and responsiveness of urban governance.Role of Stakeholders in Promoting ESG PrinciplesDifferent stakeholders, including government agencies, NGOs, local communities, and businesses, play distinct but interconnected roles in promoting ESG principles.Government Agencies: Formulate and implement policies, enforce environmental laws, monitor compliance, provide capacity building and funding support, and lead by setting examples.NGOs: Advocate for environmental conservation, monitor corporate behavior, publish reports on ESG performance, and collaborate with businesses and governments to address sustainability challenges.Local Communities: Engage with businesses to voice concerns, conduct social impact assessments, participate in community development projects, and monitor local government decisions.Business: Integrate ESG considerations into core strategies, interact with stakeholders, and drive innovation in sustainable technologies and business models.Economic Implications of Environmental Sustainability InitiativesEnvironmental sustainability initiatives have significant economic implications, affecting employment, investment, and economic growth in various ways.Employment: Leads to the creation of green jobs in renewable energy and waste management, though it requires transitioning workforces from traditional industries through retraining programs, promoting social inclusion for marginalized communities.Investment: Attracts capital from various sources, mitigates risks by integrating ESG considerations, and drives innovation, technological advancement, and market competitiveness.Economic Growth: Contributes to long-term economic resilience, yields significant cost savings over time through resource efficiency, and improves the quality of life, attracting talent and tourism.Environmental Sustainability and Governance - Trends, Challenges and RecommendationsClimate Change Adaptation and Mitigation: India will face increasing challenges like unpredictable precipitation and higher temperatures. Recommendation: Prioritize climate-resilient infrastructure and renewable energy deployment.Air and Water Pollution Control: Urbanization and industrialization will increase pollution levels. Recommendation: Strengthen enforcement of pollution control regulations and promote clean technologies.Natural Resource Management: Rapid urbanization will pressure natural resources. Recommendation: Adopt sustainable land-use planning and biodiversity conservation efforts.Waste Management and Circular Economy: Growing volumes of waste will exacerbate challenges. Recommendation: Implement integrated waste management systems and promote extended producer responsibility (EPR).Green Finance and Sustainable Investments: Increasing awareness will drive demand for green finance. Recommendation: Develop regulatory frameworks to promote green finance and strengthen ESG disclosure requirements.Policy Coherence and Governance Reform: Fragmented policy frameworks hamper implementation. Recommendation: Enhance coordination among government agencies and promote multi-stakeholder partnerships.ConclusionIn India, strides have been made towards environmental sustainability and effective governance, yet challenges persist. Despite robust legal frameworks, implementation gaps hinder long-term goals. Technology, including renewable energy and smart city initiatives, offers promising solutions. Collaboration among stakeholders is key to leveraging technology for impactful change. Moving forward requires a holistic approach emphasizing policy coherence, stakeholder engagement, and innovation, focusing on governance reform, pollution reduction, resource management, and climate action.References:Matos, P. (2020). ESG and responsible institutional investing around the world: A critical review.Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of sustainable finance & investment, 5(4), 210-233.Dauvergne, P., & Lister, J. (2012). Big brand sustainability: Governance prospects and environmental limits. Global Environmental Change, 22(1), 36-45.Lemos, M. C., & Agrawal, A. (2006). Environmental governance. Annu. Rev. Environ. Resource., 31, 297-325.Authors may be reached at rudramunipbctd@gmail.com, drvenki@yahoo.co.in and eboard@icai.in
Ep. 394 — Sustainable Finance and Financial Institutions
CA Journal
· September 2026
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Sustainable Finance and Financial InstitutionsThe Earth\'s climate has irrefutably fluctuated over time due to natural forces; nevertheless, various independent investigations have increasingly indicated that human activities have significantly worsened the process of climate change since the industrial era. The United Nations Intergovernmental Panel on Climate Change\'s Report from August 9, 2021, highlights that human-induced greenhouse gas emissions are accountable for approximately 1.1°C of warming since the pre-industrial period. Despite the seemingly minor increase, current temperatures have been unparalleled in the last 12,000 Years, impacting living conditions in numerous regions globally. The impact of climate change on a business can be classified into Physical Risks or Transition Risks. \'Physical Risks\' stem from the tangible consequences of climate change, including Alterations in Temperature, Precipitation Patterns, Extreme Weather Occurrences, and Water Availability. \'Transition Risks\' emerge when society undertakes measures to reduce the effects of climate change and transition to a low-carbon economy. For instance, the implementation of a new Climate Policy or a shift in consumer preferences towards environmentally friendly products are two scenarios that businesses must adjust.By Sunil Dasari, Financial ExpertIntroductionMr. Kofi Annan, the former Secretary-General of the United Nations, expressed during the Paris Climate Agreement that the global community is approaching a critical juncture where climate change may become irreversible. Achieving the goal of limiting global warming to around 1.5°C or 2°C above pre-industrial levels is deemed practically unattainable without urgent, substantial, and widespread reductions in greenhouse gas emissions. A recent study suggests that a temperature rise of 1.5°C - 2°C could reduce Global GDP by approximately 8% to 13% by the year 2100. The Global Risks Report 2022 by the World Economic Forum indicates that Climate Action Failure, Extreme Weather, and Biodiversity Loss rank as the Top \'Three Severe Risks\'.Climate Risk-Relevance in Financial SectorClimate change is advancing at an increasing rate, leading to a rise in both the frequency and financial impact of climate-induced natural catastrophes. The tangible impacts of climate change, coupled with the accompanying costs of transitioning, present notable hazards within the realm of the Economy and Financial System.Physical Risk: Pertains to the potential harm to individuals and assets resulting from discrete climate-related incidents like hurricanes, wildfires, and heatwaves, in addition to longer-term phenomena such as alterations in precipitation patterns, rising sea levels, and increased average temperatures.Transition Risk: Denotes the strain on organizations or sectors due to actions aimed at transitioning to a less carbon-intensive economy, encompassing responses to policy adjustments, adoption of novel technologies, and adaptation to changing consumer and investor preferences.Climate-related physical and transition risks often materialize as conventional financial risks, including Credit, Liquidity, Market, and Operational Risks.Climate-related Financial Risk ExamplesDisturbances in Economic Operations resulting from climate-triggered weather events might impact household earnings and their capacity to meet financial obligations/repayment of debts.The shift in consumer preferences from gas-fuelled vehicles to electric and hybrid ones may affect the collateral value of automobiles.Deficiencies in how a Credit Institution / Financial Institution identifies, assesses, supervises, and alleviates physical and transition risks could negatively impact the institution\'s stability and strength.Low-income and minority communities exhibit a heightened susceptibility to financial risks stemming from climate-related factors.Insurers and reinsurers face significant physical risks on their asset side, and additional risks from the liability side due to increased claims.Central Banks / Financial Regulators are increasingly recognizing the financial stability implications of climate change and may need to adjust monetary policy, potentially imposing larger haircuts on assets exposed to physical or transition risks.Risk Scenarios in Agricultural FinanceSituation-1: A farm funded by Financial Institutions fails to adapt its crop rotation to cope with reduced annual rainfall, leading to lower crop yields and loan default. Conversely, institutions providing advisory services for climate-resilient crop rotations may witness an expansion in market share.Situation-2: A borrower experiences a drop in sales because their crops/livestock are not produced using low greenhouse gas emission technologies, leading to loan default.Terminology utilized and yet to be defined in legislations in India in financial sector\"Climate-related Financial Risks\": Potential risks associated with climate change or measures taken to address climate change.\"Climate Resilience\": The ability of a Renewable Energy (RE) entity to adapt to climate variations, developments, or uncertainties.\"CO2 Equivalent\": Standardized unit to indicate the global warming potential of individual greenhouse gases relative to carbon dioxide.\"Financed Emissions\": Percentage of total greenhouse gas emissions of a recipient/counterparty attributed to financial support provided by an RE.\"Greenhouse Gases (GHGs)\": Gaseous components in the atmosphere, primarily carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O).\"Physical Risk\": Financial losses from acute and chronic physical risks, and secondary impacts of climate change.\"Scenario Analysis\": Exploring potential scenarios that deviate significantly from \"Business-as-Usual\" practices.\"Scope-1, Scope-2, and Scope-3 Greenhouse Gas Emissions\": Direct emissions, indirect emissions from purchased electricity/steam, and other indirect emissions throughout the value chain respectively.\"Transition Risk\": Risks associated with the adjustment process towards a low-carbon economy.IFRS Climate-related DisclosuresThe objective of IFRS S2 is to mandate entities to disclose information regarding their climate-related risks and opportunities that could reasonably be expected to affect the entity\'s cash flows, access to finance, or cost of capital over the short, medium, or long term. IFRS S2 applies to climate-related physical and transition risks, and climate-related opportunities. It requires disclosure of governance processes, strategy, risk management processes, and performance metrics/targets related to climate.ConclusionClimate Change is an existing reality. Policymakers and investors are progressively acknowledging the significant implications of climate change for the financial sector. The financial system is impacted by climate change through physical risks and transition risks. Lower- and middle-income economies tend to be more susceptible to physical risks. Financial institutions can face direct and indirect manifestations of physical risks, leading to increased default risks in loan portfolios or reduced asset values.References:RBI Draft Disclosure Framework on Climate-related Financial Risks, 2024 dated.: 28th February, 2024.RBI Discussion Paper on Climate Risk and Sustainable Finance dated.: 27th July, 2022.RBI Discussion Paper on Climate Risk and Sustainable Finance issued by the Department of Regulation.Author may be reached at sunildasari755@gmail.com and eboard@icai.in
Ep. 395 — Enhancing Environmental Sustainability: A Comprehensive Review of Carbon Credit Mechanisms and Global Efforts
CA Journal
· September 2026
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Theme | The Chartered Accountant • September 2024Enhancing Environmental Sustainability: A Comprehensive Review of Carbon Credit Mechanisms and Global Efforts Himanshi Tolani (Research Scholar) Dr. Akhil Mishra (Academician)AbstractCarbon emissions pose a significant global challenge due to their detrimental impact on the environment, as highlighted by the Intergovernmental Panel on Climate Change (IPCC) report, which underscores the urgency of limiting global warming to 1.5°C. The carbon credit market provides a pivotal avenue for reduction, enabling companies to trade emission allowances and offset their carbon dioxide emissions.This market evolution reflects a worldwide commitment to reducing carbon footprints and fostering eco-friendly practices. As companies globally adopt carbon credit initiatives, we move closer to aligning responsible practices with environmental well-being. This paper delves into India's carbon credit market dynamics from 1990 to 2023, examining its current status and challenges through a comprehensive literature review, relying on secondary information. Emphasizing theoretical and descriptive analysis, it aims to uncover the evolving trends, significance, and hurdles within the carbon credit market.The study highlights that the carbon credit market offers a cost-effective pathway for emission reduction and environmental responsibility in India and globally. However, despite challenges such as excess credits, price fluctuations, and regulatory disparities, the market holds promise for driving investments in renewable energy, job creation, and economic growth while supporting Sustainable Development Goals. Enhancing international collaboration in carbon credit initiatives and addressing market challenges is imperative to unlock its full potential in fostering environmental sustainability.IntroductionGlobal warming has intensified in recent times due to human activities, leading to a rise in average global temperatures. A major contributor to this phenomenon is carbon dioxide, which has compelled governments worldwide to develop strategies aimed at curtailing emissions within specified limits. The rising demand for environmental sustainability emphasizes the need for urgent global action. To tackle environmental challenges, organizations focus on the three R's (reduce, reuse, recycle), adopt low-pollution green technologies, and promote community engagement through environmental awareness programs.Figure 1: Carbon Credit Market Source: National Indian Carbon Coalition The pursuit of a "net zero" target, aiming to minimize atmospheric carbon emissions, is a central objective. This target can be achieved through implementing carbon credit mechanisms. A carbon credit represents ownership of one metric ton of CO₂ tradable in the market, while carbon offsetting generates credits by reducing atmospheric CO₂ levels. Companies earn credits through environmental projects like reforestation or renewable energy, trading them in the carbon market to offset carbon dioxide emissions. The adoption of carbon credit initiatives holds promise for mitigating the threat of global warming (Rahul Pandey, 2019).The Intergovernmental Panel on Climate Change (IPCC) report underlines the necessity of addressing climate change and minimizing global warming. In this light, it becomes apparent that the carbon credit market is a vital tool for reducing emissions and promoting environmental sustainability. As companies around the globe embrace carbon credit programs as part of their efforts to reduce carbon emissions, it is crucial to understand the intricacies, importance, and hurdles of this evolving market. India, a major participant and ranked second in the global carbon credit trade, necessitates a thorough investigation of the dynamics within its carbon credit market. This paper highlights the importance of the carbon credit market for environmental sustainability by investigating India's Carbon Credit Trading Scheme of 2023. It examines its dynamics, challenges, and future implications, structured with an introduction, literature review, methodology, key findings, and a conclusive summary.Literature ReviewIn the pursuit of curbing the collective carbon footprint, carbon credits and markets emerge as key players. These mechanisms grant companies the authority to emit a specified amount of greenhouse gases into the atmosphere, which can then be traded as valuable financial assets, yielding annual revenue (Rana et al., 2024). Concurrently, the Clean Development Mechanism (CDM) endeavours to foster sustainable development by encouraging investments from developed nations into emission reduction projects in developing countries, allowing for credits toward emission reduction targets (Chanda et al., 2021). However, a recent study examining carbon credit revenue within the Indian corporate sector unveils a concerning trend: despite diverse efforts, there's a notable decline in carbon credit revenue, suggesting challenges in generating substantial income (Bhanawat et al., 2015).As global greenhouse gas emissions continue to rise, nations under the Paris Agreement pledge to move towards a sustainable future India, a prominent player in this arena, leverages carbon trading to generate revenue (Nandi & Banerjee, 2023). Additionally, carbon pricing mechanisms like carbon taxes ensure emissions accountability by imposing fees for carbon release, driving environmental responsibility in developed nations. The imposition of such taxes significantly impacts profit margins for greenhouse gas-emitting companies, urging active efforts to reduce emissions in production processes (Bhardwaj et al., 2021).In tandem, carbon credits are instrumental in facilitating carbon offsetting, allowing polluters to acquire credits that authorize a predetermined carbon emission level, already offset. Many organizations prioritize carbon offsetting to reduce their carbon footprints within sustainability initiatives (Jones et al., 2024). Various regions have implemented carbon pricing mechanisms to address the negative impacts of greenhouse gas emissions, with emissions trading systems (ETS), or cap-and-trade systems, being a common strategy. ETS regulate GHG emissions by allocating specific carbon credits (CCs), enabling holders to emit an equivalent volume of GHGs in their economic activities (Anjos et al., 2022).Climate finance is gaining popularity in India. The Reserve Bank of India (RBI) has approved green deposits in all banks starting June 2023. India has allocated approximately USD 2.40 billion for low-carbon transformation in the Union Budget 2023-24 with green carbon pricing (Sen et al., 2024). Furthermore, the carbon tax offers a more streamlined and transparent approach to carbon pricing, making it easier to administer and monitor compliance across India's diverse economic landscape. Unlike an ETS, a carbon tax does not require the complex infrastructure of cap-setting, allowance allocation, and trading mechanisms, simplifying the implementation process and reducing associated costs. Moreover, a carbon tax can be applied broadly across sectors, capturing a wider range of emissions sources and driving economy-wide decarbonization efforts more effectively than targeted feebate schemes (Dabla-Norris et al., 2021).In a bid to further promote carbon credit initiatives, the World Bank collaborates with the Infrastructure Development Financial Bank (IDFB), offering initial aid of $10 million through world-managed carbon finance to fund projects under the Clean Development Mechanism. Moreover, estimates from the UNFCCC underline the necessity for industrialized nations to purchase project-based emissions from developing countries like India to stimulate growth in the CDM market, potentially reaching significant scales annually.Issued by governments, funds from carbon credit sales are often invested in green projects, particularly forest conservation. Governments set emission caps to regulate carbon output, penalizing excess emissions while allowing companies to trade unused credits through cap-and-trade systems. This mechanism not only incentivizes emission reduction but also creates a new economic avenue by enabling investors to profit from surplus credits. Overall, carbon credits contribute significantly to mitigating climate change while stimulating economic growth.Objectives of the StudyTo understand the current scenario, significance, and challenges related to the carbon credit market in India.To study the future implications of the carbon market in India.Research MethodologyThis study delves into the current state and challenges of the carbon credit market in India through a comprehensive literature review, relying solely on secondary information. Emphasizing theoretical and descriptive analysis, it aims to uncover evolving trends, significance, and hurdles within the carbon credit market. Utilizing existing academic research, scholarly articles, and reports from reputable sources like Google Scholar, Scopus, and Web of Science, the study seeks to identify gaps and future directions. Focused on the period from 1990 to 2023, the paper is divided into three parts: an assessment of current practices, an exploration of the importance and challenges of the Indian Carbon Market, and a speculative glimpse into its future trajectory.Carbon Credit Practices in Indiai. Carbon Credit Definition and SignificanceHuman activities like industrial emissions and deforestation contribute to global warming. It's crucial to monitor and reduce carbon emissions."If we track something we can control it better." — Peter DruckerMonitoring CO₂ emissions helps us understand energy use, save money, and make companies work more efficiently. Carbon credits have emerged as a vital tool for accurately measuring industrial carbon emissions. Functioning as permits allowing companies to emit specific amounts of CO₂, each credit represents one ton of CO₂ either removed from or prevented from entering the atmosphere. They play a pivotal role in national and international emission trading schemes, fostering environmental protection and revenue generation for developing nations.ii. Evolution of the Carbon Credit Market in IndiaIndia's journey in the carbon credit market has progressed gradually. Initially, its participation was motivated by engagement in international initiatives like the Clean Development Mechanism (CDM) under the Kyoto Protocol. This international agreement aimed to reduce emissions, preserve the ozone layer, and promote environmental cleanliness. Through this program, developed nations incentivized developing countries to implement projects that reduce greenhouse gases, while earning Carbon Emission Reduction (CER) credits. India focused on sectors like renewable energy, energy efficiency, and afforestation to earn these credits.Despite early involvement, the domestic carbon market remained relatively undeveloped. However, with increasing awareness of climate change and sustainable development, India began exploring domestic carbon pricing mechanisms. The introduction of the National Action Plan on Climate Change in 2008 and its commitment to Nationally Determined Contributions (NDCs) further catalyzed efforts to build a robust carbon market framework. Today, India is committed to enhancing transparency, incentivizing emission reductions, and promoting carbon neutrality through legislative and initiative-driven approaches to foster a dynamic carbon credit market.iii. Current State of Carbon Credit Practices in IndiaThe current state of carbon credit practices in India reflects a dynamic landscape influenced by evolving environmental policies, market dynamics, and corporate engagement. In 2023, India's carbon emissions surged by a notable 8.2%. Reports from the Joint Research Centre offer detailed insights into sector-wise greenhouse gas emissions from 1990 to 2022.Figure 2: Greenhouse Gas Emissions from Different Sectors in India Source: Joint Research Centre (JRC), 2023 According to the EDGAR report, India's GHG emissions rose by 5% in 2022 compared to 2021, continuing a three-decade trend of continuous increase, now being approximately three times higher than in 1990 (Table 1). This increase is mainly due to rising CO₂ emissions from industrial combustion and power industries. India ranks as the third largest emitter globally, after China and the United States (World Resources Institute, 2023).Figure 3: Mapping GHG Emission Around the Globe Source: Emission Database for Global Atmospheric Research (EDGAR), 2023 Table 1: India's Yearly Greenhouse Gas Emissions YearGHG emissions (Mt CO₂eq/yr)GHG emissions per capita (t CO₂eq/cap/yr)GHG emission per unit of GDP PPP (t CO₂eq/KUSD/yr)Population19901436.5811.6510.907870.133 M20052203.1001.9260.5921.144 G20153389.8822.5900.4741.309 G20223943.2652.7940.3921.411 GA study conducted by Down To Earth And the Center For Science And Environment (DTE-CSE) revealed that as of June 2023, India has enrolled 860 out of 1,451 projects in the world's leading carbon credit programs (Table 2). This demonstrates India's significant participation in global carbon credit initiatives, underscoring the country's dedication to tackling climate change and curbing greenhouse gas emissions.Table 2: Number of Projects Eligible for Carbon Credits in India Sector-wise ProjectsRegistered ProjectsAgricultural10Chemical processes1Forest and land use8Household and community121Industrial & Commercial37Renewable Energy675Transport3Waste Management5Many projects across the country are running to limit carbon emissions. Some projects supported by the carbon credit fund include Greenway Grameen Infra Pvt Ltd, headquartered in Mumbai, which subsidizes the cost of efficient cookstoves in rural areas to reduce the consumption of fuelwood and consequently reduce carbon emissions. This project has issued 67,737 carbon credits till May 2023. The focus of this project is to distribute 15,100 cookstoves across India which will reduce approx. 86,825 tones of CO₂ annually. Another one is the Household Carbon Offset Project for clean, convenient & efficient cooking, which has set up 8,519 biogas plants across India that help to reduce 51,235 tons of CO₂ per year. Table 3, alongside these initiatives, provides a comprehensive compilation of renewable power developers, showcasing the diverse efforts aimed at promoting sustainable energy practices in the region.Table 3: Renewable Power Developers RankDeveloperIssued credits (Mt CO₂e)YOY% growth (Credit Issuance)No. of projectsYOY% growth (No. of projects)1Wildlife Works Carbon LLC, US98.8551402Finite Carbon, US92.006863South Pole Holding Ag, Switzerland54.620232504Anew Environmental LLC, US53.99119175Permian Global, UK43.630206Infinite EARTH, Hong Kong37.512107EnKing International, India34.239198808ACATISEMA, Colombia29.919109CIMA, Peru28.0111010Jaiprakash Power Ventures, India27.8182011Terra Global Capital, US22.52512912New Forests, Australia21.60231013Himachal Baspa Power Company, India20.1321014Bosques Amazonicos, Peru19.590410015Ecosystem Services LLC, US19.51420Process for Carbon Offset Projects Project Idea Note ➔Project Design Document ➔Validation ➔Verification ➔Issuance Source: Bureau of Energy Efficiency, 2023 Earning carbon credits begins with conceiving a project idea aimed at reducing emissions and benefiting the climate. Developers then design the project, specifying anticipated emission reductions and climate benefits. An independent third party verifies the project's effectiveness in reducing carbon emissions. If the verification succeeds, the project receives carbon credits as recognition for achieving zero carbon emissions (Bureau of Energy Efficiency, 2023).India's Green Credit Programmes 2023 incentivizes eco-friendly actions like tree planting and water management. Credits can be traded, and regulated by the Indian Council of Forest Research and Education. The program supports India's "Net Zero commitment" by boosting the carbon credit market, emphasizing water conservation and afforestation. The green credit program faces challenges due to its novelty and limited public awareness, alongside difficulty in pricing due to diverse environmental benefits. Advancing these programs is crucial for long-term sustainability.Significance and Challenges in India's Carbon Credit MarketThe carbon credit market plays a crucial role in achieving Sustainable Development Goals (SDGs) by promoting sustainable practices.The carbon credit market plays a vital role for businesses in developing nations, allowing them to generate income through the sale of carbon credits and investing in advanced technologies.In India, the carbon market is expanding rapidly and ranks second globally, trading around 30 million carbon credits (Bansal et al., 2023).Regulations within the carbon credit market ensure significant reductions in emissions, supporting environmental objectives.Rising demand for carbon credits among businesses strengthens the market, promoting sustainability and advancing towards a cleaner future (Principles of Climate Policy after 2012, 2006).Environmental concerns fuel efforts to mitigate carbon emissions, potentially averting the release of 60 million tons of CO₂ annually.India's strategy involves planting sufficient trees and greenery to absorb 2.5 million to 3 billion tons of CO₂ by 2023, combating carbon emissions.The Government of India exercises its authority through various ministries to regulate the carbon credit market in India but there are certain challenges faced by the Indian Carbon credit market:Surplus of carbon credits (1 billion available in 2021) leads to an imbalance with more sellers than buyers.Fluctuations in carbon credit prices due to an imbalance in supply and demand destabilize the market.Varying company sizes, investments, and technologies pose challenges in establishing common emission baselines.Pricing instability is influenced by factors such as CO₂ emissions, crude oil prices, foreign exchange rates, demand and supply dynamics, and economic growth. Hence, it isn't easy to bring stability in pricing for carbon credit (Gupta & Pareek, n.d.).Greenwashing practices deceive consumers with false eco-friendly claims, affecting carbon credit purchases.Future Inferences of the Carbon Market in IndiaCarbon credit is a mechanism aimed to reduce the level of carbon emissions in the environment. To impose limits on carbon emissions, specific mechanisms such as consumption-based mechanisms and carbon pricing mechanisms are utilized. The consumption mechanism also called bitCO₂, incentivizes emitters to opt for less carbon-intensive products, earning them bitCO₂ tokens. This is achieved through the creation of a carbon market where individuals can trade their bitCO₂. It serves as a method to internalize the social cost of carbon into carbon choices, thereby promoting sustainability.Carbon pricing is another mechanism that captures the cost of greenhouse gas emissions i.e. the cost that the public pays for damages to crops, loss of property from flooding & sea level rise. This pricing binds the cost of emissions to their source, providing an economic signal to emitters to either transform their activities or pay for their emissions, thus promoting overall environmental sustainability. It is observed from the studies that through the carbon market, it is possible to achieve the Paris Agreement goal of limiting warming up to 1.5 degrees Celsius. To confront climate change and its pessimistic impact on the environment, a global initiative was taken on 12 December 2015: the Paris Agreement At COP 21 in Paris, members of the UNFCCC United Nations Framework Convention on Climate Change to combat climate change to expedite & boost the investment required for a sustainable carbon future. Nowadays India's share in the carbon market is proliferating. It has generated approximately 30 million carbon credits globally, which is considered the second largest producer of carbon credit across the world. The carbon credit market offers developmental businesses investment opportunities through the purchase and sale of carbon credits (Bansal et al., 2023).Figure 5: India Voluntary Carbon Credit Supply, 2017-2027F ($ Million) CAGR (2017-20): 81.12% | CAGR (2021E-27F): 16.62% Source: 6Wresearch The Indian government aims to increase the share of green energy to 50% by the end of the decade, potentially making India a net energy exporter. The carbon market not only reduces emissions but also offers cost-effective solutions, potentially saving $35 trillion over 50 years. Drivers for the rapid growth of the Indian carbon market include corporate social responsibility, government regulations, and environmental compliance. As per the report published by 6Wresearch (Figure 5), supply of carbon credit from the Indian market has drastically risen; it is expected to rise into the upcoming year by up to 16.62% (till 2027).In India, companies like Infosys, Ambuja Cement, and ACC Cement are actively engaged in the carbon credit market. Ambuja Cement and ACC Cement contribute to sustainability through projects like the Mumbai Coastal Road Project, utilizing high-performance concrete to reduce CO₂ emissions. Infosys collaborates with ATP to launch a carbon tracker for tracking players' travel data, promoting conscious travel decisions.Figure 6: Emission Contribution from Various Sectors Energy Supply (36%), Industry (25%), Agriculture & Land Use (18%), Transportation (14%), Building (7%) Source: Author's Compilation Key sectors contributing to the carbon credit market include agriculture, renewable energy, industrial manufacturing, and forestry land use, with agriculture playing a significant role (Figure 6). Carbon credit market will open new opportunities in developing countries like India. It is considered highly beneficial as it ensures that economic activities are carried out while considering the Sustainable Development Goals (SDGs).Financial incentives from the carbon credit market support investments in renewable energy, promoting affordable clean energy solutions. These projects not only create job opportunities but also support the Sustainable Development Goal of decent work and economic growth. The obligation to cut emissions drives innovation, fostering advancements in industry and infrastructure. However, challenges persist, notably with the cap-and-trade system's varying regulations across countries, leading to policy risks and market price fluctuations. Additionally, concerns arise around market manipulation, where participants may engage in misleading transactions, potentially favoring dominant players and impeding fair competition.Implication of the Carbon Credit Market in IndiaThe carbon credit market has significant implications for India's effort to attain environmental sustainability and economic growth. This study analyzed the market's potential to drive investment in renewable energy projects and innovation across industries and infrastructure that promotes sustainable development. India's enlarging prominence as the second largest producer of carbon credit globally provides entrepreneurs with opportunities to generate income and advance sustainable development. However, challenges like regulatory disparity, price instability, and surplus credit in the carbon market must be addressed through improved governance and global cooperation. By conquering these obstacles, the carbon credit market may reach its full potential and facilitate India's transition to a low-carbon economy, promoting affordable clean energy solutions and combating climate change while fostering economic growth.ConclusionThe carbon credit market plays a crucial role in combating climate change and fostering sustainability. Initiatives like India's Carbon Credit Trading Scheme 2023 and the Green Credit Programmes have significantly contributed to reducing carbon emissions and promoting environmental responsibility. However, the market faces challenges such as excess credits, price volatility, and regulatory disparity. Despite these hurdles, the carbon credit market holds immense potential for driving investments in the renewable energy sector, creating new job opportunities, and fostering economic growth while supporting Sustainable Development Goals. To fully realize this potential, it is crucial to tackle these challenges and strengthen international cooperation in carbon credit initiatives, both within India and on a global scale.References Anjos, M. F., Feijoo, F., & Sankaranarayanan, S. (2022). A multinational carbon-credit market integrating distinct national carbon allowance strategies. Applied Energy, 319, 119181.Bansal, S., Mukhopadhyay, M., & Maurya, S. (2023). Strategic drivers for sustainable implementation of carbon trading in India. Environment, Development and Sustainability, 25(5), 4411-4435.Bhanawat, S., & Vardia, S. (2015). An analysis of carbon credit revenue practices in the Indian corporate sector. Pacific Business Review International, 8(6), 24-30.Bhardwaj, M. M., Prakash, A., Prakash, N., & Sharma, S. (2021). Study the Impact of Carbon Credit on Accounting and Taxation of Companies' Profitability Indian perspective. Journal of Positive School Psychology, 2022(3), 5416-5421.Chanda et al. (2021). Environmental Governance in India: Towards carbon emission mitigation and adaption.Dabla-Norris, M. E., Daniel, M. J., Nozaki, M. M., Alonso, C., Balasundharam, V., Bellon, M. M., ... & Kilpatrick, M. J. (2021). Fiscal policies to address climate change in Asia and the Pacific: opportunities and challenges.Dwi Putra, M. R., & Albarda. (2023). Design of Service System for Carbon Trading (Case Study: Bandung City). 2023 10th International Conference on ICT for Smart Society (ICISS), 1-7.Gupta, S., & Pareek, S. (n.d.). Carbon Credit Trading: Prospects and Challenges an Indian Perspective. 1-4.Jones, E. A., Paige, L., Smith, A., Worth, A., Betts, L., & Stafford, R. (2024). Potential for Carbon Credits from Conservation Management: Price and Potential for Multi-Habitat Nature-Based Carbon Sequestration in Dorset, UK. Sustainability, 16(3), 1268.Nandi, R., & Banerjee, P. (2023). Carbon Accounting: Some Issues with Special Reference to India.Rana, M., Khan, S. M., Ali, S., Khalid, A., & Ahmad, Z. (2024). Carbon credit, trading, green economy, and clean development mechanisms. In Agroforestry for Carbon and Ecosystem Management (pp. 147-159). Academic Press.Rahul Pandey, R. P. (2019). Carbon Credit, A Step Towards Green Environment. International Journal of Environment, Ecology, Family and Urban Studies, 9(3), 13-20.Sen, S., & Sahoo, P. (2024). Carbon pricing for sustainable transition in India. World Development Perspectives, 34, 100586.Authors may be reached at himanshitolani98@gmail.com, iaavns.am2019@gmail.com and eboard@icai.inPublished in The Chartered Accountant Journal, September 2024 (Pages 364–371).
Ep. 396 — Balancing the Books of the Planet: Exploring the World of Carbon Accounting for a Sustainable Future
CA Journal
· September 2026
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Balancing the Books of the Planet: Exploring the World of Carbon Accounting for a Sustainable FutureThe concept of "Carbon Accounting" has gained significant prominence in light of the escalating challenges posed by Climate Change. Carbon Accounting serves as a method for quantifying the environmental impact of human activities, specifically in terms of their role in contributing to climate change. This article endeavours to provide a comprehensive understanding of the Carbon Accounting concept, emphasizing its pivotal importance, elucidating its procedural intricacies, delineating the scope of Carbon Accounting within the context of India, and spotlighting notable companies that have incorporated Carbon Accounting as an integral component of their sustainability initiatives. Thus, this article will help stakeholders to act in an environmentally conscious way and make informed investment decisions.By Jaya Gupta, AcademicianIntroductionCarbon accounting was developed in response to the rising knowledge of anthropogenic activities that contribute to climate change, as well as the need for a standardised approach to measure and track greenhouse gas emissions[cite: 24]. It originated with the introduction of international climate change accords, such as the United Nations Framework Convention on Climate Change (UNFCCC)[cite: 24]. Organizations such as the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) helped shape carbon accounting methodology and standards, notably developing the Greenhouse Gas Protoco.Carbon accounting is the process of measuring, documenting, and reporting the quantity of greenhouse gases (GHGs), especially carbon dioxide (CO₂) and other emissions, emitted into the environment by a company, activity, or product[cite: 24]. It aims to measure these entities' carbon footprints, evaluate their influence on climate change, identify emission sources, set emission reduction objectives, and measure progress towards climate change mitigation[cite: 24].Key components of carbon accounting include:Scope 1 Emissions: Direct emissions from sources that are owned or controlled by the entity (e.g., combustion of fossil fuels in on-site facilities)[cite: 24].Scope 2 Emissions: Indirect emissions from the generation of purchased electricity, heat, or steam consumed by the entity[cite: 24].Scope 3 Emissions: Indirect emissions that occur in the value chain of the entity, including upstream and downstream activities (e.g., production/transportation of raw materials, product use/disposal)[cite: 24].Importance of Carbon AccountingCarbon accounting is critical due to increased awareness of climate change and the necessity for sustainable business practices[cite: 24]. It is used to measure carbon footprints, identify emission hotspots, execute greenhouse gas reduction methods, show social responsibility, achieve sustainability objectives, and assess the environmental effect of supply chain networks[cite: 24]. It is utilized across various sectors, including transportation and agriculture, and by governments to set national emission reduction targets[cite: 24].Key reasons for its importance include:Climate Change Mitigation: Helps organizations establish objectives to minimise their carbon footprint, contributing to global efforts[cite: 24].Regulatory Compliance: Assists organizations in complying with government measures to control greenhouse gas emissions, avoiding legal complications[cite: 24].Sustainable Business Practices: Enables organizations to explore potential for resource efficiency, cost savings, and innovation[cite: 24].Investor and Stakeholder Expectations: Allows businesses to report their carbon footprint, building confidence with investors and consumers[cite: 24].Competitive Advantage: Prioritising sustainability can help firms reach a larger market segment and improve brand reputation[cite: 24].Literature ReviewRecent studies highlight the complexity of carbon accounting in India due to its diversified economy and energy mix[cite: 24]. Gibassier et al. (2020) emphasised combining bottom-up and top-down methodologies[cite: 24]. Schaltegger and Csutora (2012) highlighted the need for strong data collecting methods and capacity building[cite: 24]. Advances in remote sensing and modelling, as found by Sinha (2018), can improve spatial resolution and accuracy[cite: 24]. Hussain et al. (2024) proposed sector-specific emission reduction objectives based on reliable data to align with India's climate goals under the Paris Agreement[cite: 24].Scope of Carbon Accounting in IndiaThe scope is significant due to India's commitment to sustainable development and international commitments like its Intended Nationally Determined Contributions (INDC)[cite: 24]. Regulatory bodies like SEBI have introduced frameworks like the Business Responsibility and Sustainability Report (BRSR), encouraging companies to report on environmental aspects[cite: 24]. Carbon accounting supports India's transition to a low-carbon economy, accesses climate finance, and assesses the impact of smart city initiatives[cite: 24].Process of Carbon AccountingThe process typically involves the following steps:[cite: 24]Data Collection: Gathering data on energy consumption, fuel use, and other relevant activities[cite: 24].Emission Calculation: Quantifying the amount of CO2 and other greenhouse gases emitted[cite: 24].Reporting: Communicating calculated emissions transparently (e.g., an annual sustainability report)[cite: 24].Verification: Undergoing third-party verification to ensure accuracy and reliability[cite: 24].Indian Companies Practicing Carbon AccountingCompanies like Tata Consultancy Services (TCS), Infosys, Mahindra & Mahindra, Wipro, and Hindustan Unilever Limited (HUL) actively practice carbon accounting, transparently disclosing their carbon emissions and reduction efforts in their annual sustainability reports[cite: 24].Challenges faced in Carbon Accounting PracticesData Collection and Accuracy: Gathering accurate data across business divisions can be difficult[cite: 24].Scope 3 Emissions and Supply Chain Complexity: Assessing indirect emissions is challenging due to complex global supply chains and a lack of standardized monitoring[cite: 24].Scope Boundaries and Incomplete Reporting: Establishing proper boundaries for what to include/omit can impact accuracy[cite: 24].Lack of Standardization and Guidance: Variations in reporting make it difficult to compare performance[cite: 24].Resource Constraints and Expertise: SMEs may lack the resources to establish efficient methods[cite: 24].Regulatory Uncertainty: Evolving environments create compliance challenges[cite: 24].Integration with Business Strategy: Linking sustainability goals with broader corporate objectives requires a comprehensive strategy[cite: 24].ConclusionCarbon accounting plays a pivotal role in addressing climate change and is increasingly significant in India's commitment to sustainability[cite: 24]. While its scope is extensive across sectors like energy and transportation, it is essential to acknowledge limitations such as data collection complexity, accounting for indirect emissions, and the need for standardized methodologies[cite: 24]. Despite these challenges, ongoing efforts to enhance practices in India underscore a commitment to a sustainable future[cite: 24].References:https://ghgprotocol.org/about-wri-wbcsd[cite: 24]https://unfccc.int/process-and-meetings/what-is-the-united-nations-framework-convention-on-climate-change[cite: 24]https://www.ipcc.ch/sr15/[cite: 24]https://sdgs.un.org/publications/transforming-our-world-2030-agenda-sustainable-development-17981[cite: 24]Gibassier, D., Michelon, G., & Cartel, M. (2020). The future of carbon accounting research. Sustainability Accounting, Management and Policy Journa.Schaltegger, S., & Csutora, M. (2012). Carbon accounting for sustainability and management. Journal of Cleaner Production[cite: 24].Sinha, S. (2018). Accounting forest carbon sequestration using integrated geospatial techniques. Environment & We[cite: 24].Hussain, S., et al. (2024). Navigating the impact of climate change in India[cite: 24].Author may be reached at guptajaya68@gmail.com and eboard@icai.in[cite: 24]
Ep. 397 — Transforming your Company into an LLP isn't just a Structural Change; It's a Smart Tax move
CA Journal
· September 2026
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Enhancing Environmental Sustainability: A Comprehensive Review of Carbon Credit Mechanisms and Global EffortsAbstractCarbon emissions pose a significant global challenge due to their detrimental impact on the environment, as highlighted by the Intergovernmental Panel on Climate Change (IPCC) report, which underscores the urgency of limiting global warming to 1.5°C. The carbon credit market provides a pivotal avenue for reduction, enabling companies to trade emission allowances and offset their carbon dioxide emissions.This market evolution reflects a worldwide commitment to reducing carbon footprints and fostering eco-friendly practices. As companies globally adopt carbon credit initiatives, we move closer to aligning responsible practices with environmental well-being. This paper delves into India's carbon credit market dynamics from 1990 to 2023, examining its current status and challenges through a comprehensive literature review, relying on secondary information. Emphasizing theoretical and descriptive analysis, it aims to uncover the evolving trends, significance, and hurdles within the carbon credit market.The study highlights that the carbon credit market offers a cost-effective pathway for emission reduction and environmental responsibility in India and globally. However, despite challenges such as excess credits, price fluctuations, and regulatory disparities, the market holds promise for driving investments in renewable energy, job creation, and economic growth while supporting Sustainable Development Goals. Enhancing international collaboration in carbon credit initiatives and addressing market challenges is imperative to unlock its full potential in fostering environmental sustainability.IntroductionGlobal warming has intensified in recent times due to human activities, leading to a rise in average global temperatures. A major contributor to this phenomenon is carbon dioxide, which has compelled governments worldwide to develop strategies aimed at curtailing emissions within specified limits. The rising demand for environmental sustainability emphasizes the need for urgent global action. To tackle environmental challenges, organizations focus on the three R's (reduce, reuse, recycle), adopt low-pollution green technologies, and promote community engagement through environmental awareness programs.Figure 1: Carbon Credit Market Source: National Indian Carbon Coalition The pursuit of a "net zero" target, aiming to minimize atmospheric carbon emissions, is a central objective. This target can be achieved through implementing carbon credit mechanisms. A carbon credit represents ownership of one metric ton of CO₂ tradable in the market, while carbon offsetting generates credits by reducing atmospheric CO₂ levels. Companies earn credits through environmental projects like reforestation or renewable energy, trading them in the carbon market to offset carbon dioxide emissions. The adoption of carbon credit initiatives holds promise for mitigating the threat of global warming (Rahul Pandey, 2019).The Intergovernmental Panel on Climate Change (IPCC) report underlines the necessity of addressing climate change and minimizing global warming. In this light, it becomes apparent that the carbon credit market is a vital tool for reducing emissions and promoting environmental sustainability. As companies around the globe embrace carbon credit programs as part of their efforts to reduce carbon emissions, it is crucial to understand the intricacies, importance, and hurdles of this evolving market. India, a major participant and ranked second in the global carbon credit trade, necessitates a thorough investigation of the dynamics within its carbon credit market. This paper highlights the importance of the carbon credit market for environmental sustainability by investigating India's Carbon Credit Trading Scheme of 2023. It examines its dynamics, challenges, and future implications, structured with an introduction, literature review, methodology, key findings, and a conclusive summary.Literature ReviewIn the pursuit of curbing the collective carbon footprint, carbon credits and markets emerge as key players. These mechanisms grant companies the authority to emit a specified amount of greenhouse gases into the atmosphere, which can then be traded as valuable financial assets, yielding annual revenue (Rana et al., 2024). Concurrently, the Clean Development Mechanism (CDM) endeavours to foster sustainable development by encouraging investments from developed nations into emission reduction projects in developing countries, allowing for credits toward emission reduction targets (Chanda et al., 2021). However, a recent study examining carbon credit revenue within the Indian corporate sector unveils a concerning trend: despite diverse efforts, there's a notable decline in carbon credit revenue, suggesting challenges in generating substantial income (Bhanawat et al., 2015).As global greenhouse gas emissions continue to rise, nations under the Paris Agreement pledge to move towards a sustainable future India, a prominent player in this arena, leverages carbon trading to generate revenue (Nandi & Banerjee, 2023). Additionally, carbon pricing mechanisms like carbon taxes ensure emissions accountability by imposing fees for carbon release, driving environmental responsibility in developed nations. The imposition of such taxes significantly impacts profit margins for greenhouse gas-emitting companies, urging active efforts to reduce emissions in production processes (Bhardwaj et al., 2021).In tandem, carbon credits are instrumental in facilitating carbon offsetting, allowing polluters to acquire credits that authorize a predetermined carbon emission level, already offset. Many organizations prioritize carbon offsetting to reduce their carbon footprints within sustainability initiatives (Jones et al., 2024). Various regions have implemented carbon pricing mechanisms to address the negative impacts of greenhouse gas emissions, with emissions trading systems (ETS), or cap-and-trade systems, being a common strategy. ETS regulate GHG emissions by allocating specific carbon credits (CCs), enabling holders to emit an equivalent volume of GHGs in their economic activities (Anjos et al., 2022).Climate finance is gaining popularity in India. The Reserve Bank of India (RBI) has approved green deposits in all banks starting June 2023. India has allocated approximately USD 2.40 billion for low-carbon transformation in the Union Budget 2023-24 with green carbon pricing (Sen et al., 2024). Furthermore, the carbon tax offers a more streamlined and transparent approach to carbon pricing, making it easier to administer and monitor compliance across India's diverse economic landscape. Unlike an ETS, a carbon tax does not require the complex infrastructure of cap-setting, allowance allocation, and trading mechanisms, simplifying the implementation process and reducing associated costs. Moreover, a carbon tax can be applied broadly across sectors, capturing a wider range of emissions sources and driving economy-wide decarbonization efforts more effectively than targeted feebate schemes (Dabla-Norris et al., 2021).In a bid to further promote carbon credit initiatives, the World Bank collaborates with the Infrastructure Development Financial Bank (IDFB), offering initial aid of $10 million through world-managed carbon finance to fund projects under the Clean Development Mechanism. Moreover, estimates from the UNFCCC underline the necessity for industrialized nations to purchase project-based emissions from developing countries like India to stimulate growth in the CDM market, potentially reaching significant scales annually.Issued by governments, funds from carbon credit sales are often invested in green projects, particularly forest conservation. Governments set emission caps to regulate carbon output, penalizing excess emissions while allowing companies to trade unused credits through cap-and-trade systems. This mechanism not only incentivizes emission reduction but also creates a new economic avenue by enabling investors to profit from surplus credits. Overall, carbon credits contribute significantly to mitigating climate change while stimulating economic growth.Objectives of the StudyTo understand the current scenario, significance, and challenges related to the carbon credit market in India.To study the future implications of the carbon market in India.Research MethodologyThis study delves into the current state and challenges of the carbon credit market in India through a comprehensive literature review, relying solely on secondary information. Emphasizing theoretical and descriptive analysis, it aims to uncover evolving trends, significance, and hurdles within the carbon credit market. Utilizing existing academic research, scholarly articles, and reports from reputable sources like Google Scholar, Scopus, and Web of Science, the study seeks to identify gaps and future directions. Focused on the period from 1990 to 2023, the paper is divided into three parts: an assessment of current practices, an exploration of the importance and challenges of the Indian Carbon Market, and a speculative glimpse into its future trajectory.Carbon Credit Practices in Indiai. Carbon Credit Definition and SignificanceHuman activities like industrial emissions and deforestation contribute to global warming. It's crucial to monitor and reduce carbon emissions."If we track something we can control it better." — Peter DruckerMonitoring CO₂ emissions helps us understand energy use, save money, and make companies work more efficiently. Carbon credits have emerged as a vital tool for accurately measuring industrial carbon emissions. Functioning as permits allowing companies to emit specific amounts of CO₂, each credit represents one ton of CO₂ either removed from or prevented from entering the atmosphere. They play a pivotal role in national and international emission trading schemes, fostering environmental protection and revenue generation for developing nations.ii. Evolution of the Carbon Credit Market in IndiaIndia's journey in the carbon credit market has progressed gradually. Initially, its participation was motivated by engagement in international initiatives like the Clean Development Mechanism (CDM) under the Kyoto Protocol. This international agreement aimed to reduce emissions, preserve the ozone layer, and promote environmental cleanliness. Through this program, developed nations incentivized developing countries to implement projects that reduce greenhouse gases, while earning Carbon Emission Reduction (CER) credits. India focused on sectors like renewable energy, energy efficiency, and afforestation to earn these credits.Despite early involvement, the domestic carbon market remained relatively undeveloped. However, with increasing awareness of climate change and sustainable development, India began exploring domestic carbon pricing mechanisms. The introduction of the National Action Plan on Climate Change in 2008 and its commitment to Nationally Determined Contributions (NDCs) further catalyzed efforts to build a robust carbon market framework. Today, India is committed to enhancing transparency, incentivizing emission reductions, and promoting carbon neutrality through legislative and initiative-driven approaches to foster a dynamic carbon credit market.iii. Current State of Carbon Credit Practices in IndiaThe current state of carbon credit practices in India reflects a dynamic landscape influenced by evolving environmental policies, market dynamics, and corporate engagement. In 2023, India's carbon emissions surged by a notable 8.2%. Reports from the Joint Research Centre offer detailed insights into sector-wise greenhouse gas emissions from 1990 to 2022.Figure 2: Greenhouse Gas Emissions from Different Sectors in India Source: Joint Research Centre (JRC), 2023 According to the EDGAR report, India's GHG emissions rose by 5% in 2022 compared to 2021, continuing a three-decade trend of continuous increase, now being approximately three times higher than in 1990 (Table 1). This increase is mainly due to rising CO₂ emissions from industrial combustion and power industries. India ranks as the third largest emitter globally, after China and the United States (World Resources Institute, 2023).Figure 3: Mapping GHG Emission Around the Globe Source: Emission Database for Global Atmospheric Research (EDGAR), 2023 Table 1: India's Yearly Greenhouse Gas Emissions YearGHG emissions (Mt CO₂eq/yr)GHG emissions per capita (t CO₂eq/cap/yr)GHG emission per unit of GDP PPP (t CO₂eq/KUSD/yr)Population19901436.5811.6510.907870.133 M20052203.1001.9260.5921.144 G20153389.8822.5900.4741.309 G20223943.2652.7940.3921.411 GA study conducted by Down To Earth And the Center For Science And Environment (DTE-CSE) revealed that as of June 2023, India has enrolled 860 out of 1,451 projects in the world's leading carbon credit programs (Table 2). This demonstrates India's significant participation in global carbon credit initiatives, underscoring the country's dedication to tackling climate change and curbing greenhouse gas emissions.Table 2: Number of Projects Eligible for Carbon Credits in India Sector-wise ProjectsRegistered ProjectsAgricultural10Chemical processes1Forest and land use8Household and community121Industrial & Commercial37Renewable Energy675Transport3Waste Management5Many projects across the country are running to limit carbon emissions. Some projects supported by the carbon credit fund include Greenway Grameen Infra Pvt Ltd, headquartered in Mumbai, which subsidizes the cost of efficient cookstoves in rural areas to reduce the consumption of fuelwood and consequently reduce carbon emissions. This project has issued 67,737 carbon credits till May 2023. The focus of this project is to distribute 15,100 cookstoves across India which will reduce approx. 86,825 tones of CO₂ annually. Another one is the Household Carbon Offset Project for clean, convenient & efficient cooking, which has set up 8,519 biogas plants across India that help to reduce 51,235 tons of CO₂ per year. Table 3, alongside these initiatives, provides a comprehensive compilation of renewable power developers, showcasing the diverse efforts aimed at promoting sustainable energy practices in the region.Table 3: Renewable Power Developers RankDeveloperIssued credits (Mt CO₂e)YOY% growth (Credit Issuance)No. of projectsYOY% growth (No. of projects)1Wildlife Works Carbon LLC, US98.8551402Finite Carbon, US92.006863South Pole Holding Ag, Switzerland54.620232504Anew Environmental LLC, US53.99119175Permian Global, UK43.630206Infinite EARTH, Hong Kong37.512107EnKing International, India34.239198808ACATISEMA, Colombia29.919109CIMA, Peru28.0111010Jaiprakash Power Ventures, India27.8182011Terra Global Capital, US22.52512912New Forests, Australia21.60231013Himachal Baspa Power Company, India20.1321014Bosques Amazonicos, Peru19.590410015Ecosystem Services LLC, US19.51420Process for Carbon Offset Projects Project Idea Note ➔Project Design Document ➔Validation ➔Verification ➔Issuance Source: Bureau of Energy Efficiency, 2023 Earning carbon credits begins with conceiving a project idea aimed at reducing emissions and benefiting the climate. Developers then design the project, specifying anticipated emission reductions and climate benefits. An independent third party verifies the project's effectiveness in reducing carbon emissions. If the verification succeeds, the project receives carbon credits as recognition for achieving zero carbon emissions (Bureau of Energy Efficiency, 2023).India's Green Credit Programmes 2023 incentivizes eco-friendly actions like tree planting and water management. Credits can be traded, and regulated by the Indian Council of Forest Research and Education. The program supports India's "Net Zero commitment" by boosting the carbon credit market, emphasizing water conservation and afforestation. The green credit program faces challenges due to its novelty and limited public awareness, alongside difficulty in pricing due to diverse environmental benefits. Advancing these programs is crucial for long-term sustainability.Significance and Challenges in India's Carbon Credit MarketThe carbon credit market plays a crucial role in achieving Sustainable Development Goals (SDGs) by promoting sustainable practices.The carbon credit market plays a vital role for businesses in developing nations, allowing them to generate income through the sale of carbon credits and investing in advanced technologies.In India, the carbon market is expanding rapidly and ranks second globally, trading around 30 million carbon credits (Bansal et al., 2023).Regulations within the carbon credit market ensure significant reductions in emissions, supporting environmental objectives.Rising demand for carbon credits among businesses strengthens the market, promoting sustainability and advancing towards a cleaner future (Principles of Climate Policy after 2012, 2006).Environmental concerns fuel efforts to mitigate carbon emissions, potentially averting the release of 60 million tons of CO₂ annually.India's strategy involves planting sufficient trees and greenery to absorb 2.5 million to 3 billion tons of CO₂ by 2023, combating carbon emissions.The Government of India exercises its authority through various ministries to regulate the carbon credit market in India but there are certain challenges faced by the Indian Carbon credit market:Surplus of carbon credits (1 billion available in 2021) leads to an imbalance with more sellers than buyers.Fluctuations in carbon credit prices due to an imbalance in supply and demand destabilize the market.Varying company sizes, investments, and technologies pose challenges in establishing common emission baselines.Pricing instability is influenced by factors such as CO₂ emissions, crude oil prices, foreign exchange rates, demand and supply dynamics, and economic growth. Hence, it isn't easy to bring stability in pricing for carbon credit (Gupta & Pareek, n.d.).Greenwashing practices deceive consumers with false eco-friendly claims, affecting carbon credit purchases.Future Inferences of the Carbon Market in IndiaCarbon credit is a mechanism aimed to reduce the level of carbon emissions in the environment. To impose limits on carbon emissions, specific mechanisms such as consumption-based mechanisms and carbon pricing mechanisms are utilized. The consumption mechanism also called bitCO₂, incentivizes emitters to opt for less carbon-intensive products, earning them bitCO₂ tokens. This is achieved through the creation of a carbon market where individuals can trade their bitCO₂. It serves as a method to internalize the social cost of carbon into carbon choices, thereby promoting sustainability.Carbon pricing is another mechanism that captures the cost of greenhouse gas emissions i.e. the cost that the public pays for damages to crops, loss of property from flooding & sea level rise. This pricing binds the cost of emissions to their source, providing an economic signal to emitters to either transform their activities or pay for their emissions, thus promoting overall environmental sustainability. It is observed from the studies that through the carbon market, it is possible to achieve the Paris Agreement goal of limiting warming up to 1.5 degrees Celsius. To confront climate change and its pessimistic impact on the environment, a global initiative was taken on 12 December 2015: the Paris Agreement At COP 21 in Paris, members of the UNFCCC United Nations Framework Convention on Climate Change to combat climate change to expedite & boost the investment required for a sustainable carbon future. Nowadays India's share in the carbon market is proliferating. It has generated approximately 30 million carbon credits globally, which is considered the second largest producer of carbon credit across the world. The carbon credit market offers developmental businesses investment opportunities through the purchase and sale of carbon credits (Bansal et al., 2023).Figure 5: India Voluntary Carbon Credit Supply, 2017-2027F ($ Million) CAGR (2017-20): 81.12% | CAGR (2021E-27F): 16.62% Source: 6Wresearch The Indian government aims to increase the share of green energy to 50% by the end of the decade, potentially making India a net energy exporter. The carbon market not only reduces emissions but also offers cost-effective solutions, potentially saving $35 trillion over 50 years. Drivers for the rapid growth of the Indian carbon market include corporate social responsibility, government regulations, and environmental compliance. As per the report published by 6Wresearch (Figure 5), supply of carbon credit from the Indian market has drastically risen; it is expected to rise into the upcoming year by up to 16.62% (till 2027).In India, companies like Infosys, Ambuja Cement, and ACC Cement are actively engaged in the carbon credit market. Ambuja Cement and ACC Cement contribute to sustainability through projects like the Mumbai Coastal Road Project, utilizing high-performance concrete to reduce CO₂ emissions. Infosys collaborates with ATP to launch a carbon tracker for tracking players' travel data, promoting conscious travel decisions.Figure 6: Emission Contribution from Various Sectors Energy Supply (36%), Industry (25%), Agriculture & Land Use (18%), Transportation (14%), Building (7%) Source: Author's Compilation Key sectors contributing to the carbon credit market include agriculture, renewable energy, industrial manufacturing, and forestry land use, with agriculture playing a significant role (Figure 6). Carbon credit market will open new opportunities in developing countries like India. It is considered highly beneficial as it ensures that economic activities are carried out while considering the Sustainable Development Goals (SDGs).Financial incentives from the carbon credit market support investments in renewable energy, promoting affordable clean energy solutions. These projects not only create job opportunities but also support the Sustainable Development Goal of decent work and economic growth. The obligation to cut emissions drives innovation, fostering advancements in industry and infrastructure. However, challenges persist, notably with the cap-and-trade system's varying regulations across countries, leading to policy risks and market price fluctuations. Additionally, concerns arise around market manipulation, where participants may engage in misleading transactions, potentially favoring dominant players and impeding fair competition.Implication of the Carbon Credit Market in IndiaThe carbon credit market has significant implications for India's effort to attain environmental sustainability and economic growth. This study analyzed the market's potential to drive investment in renewable energy projects and innovation across industries and infrastructure that promotes sustainable development. India's enlarging prominence as the second largest producer of carbon credit globally provides entrepreneurs with opportunities to generate income and advance sustainable development. However, challenges like regulatory disparity, price instability, and surplus credit in the carbon market must be addressed through improved governance and global cooperation. By conquering these obstacles, the carbon credit market may reach its full potential and facilitate India's transition to a low-carbon economy, promoting affordable clean energy solutions and combating climate change while fostering economic growth.ConclusionThe carbon credit market plays a crucial role in combating climate change and fostering sustainability. Initiatives like India's Carbon Credit Trading Scheme 2023 and the Green Credit Programmes have significantly contributed to reducing carbon emissions and promoting environmental responsibility. However, the market faces challenges such as excess credits, price volatility, and regulatory disparity. Despite these hurdles, the carbon credit market holds immense potential for driving investments in the renewable energy sector, creating new job opportunities, and fostering economic growth while supporting Sustainable Development Goals. To fully realize this potential, it is crucial to tackle these challenges and strengthen international cooperation in carbon credit initiatives, both within India and on a global scale.References Anjos, M. F., Feijoo, F., & Sankaranarayanan, S. (2022). A multinational carbon-credit market integrating distinct national carbon allowance strategies. Applied Energy, 319, 119181.Bansal, S., Mukhopadhyay, M., & Maurya, S. (2023). Strategic drivers for sustainable implementation of carbon trading in India. Environment, Development and Sustainability, 25(5), 4411-4435.Bhanawat, S., & Vardia, S. (2015). An analysis of carbon credit revenue practices in the Indian corporate sector. Pacific Business Review International, 8(6), 24-30.Bhardwaj, M. M., Prakash, A., Prakash, N., & Sharma, S. (2021). Study the Impact of Carbon Credit on Accounting and Taxation of Companies' Profitability Indian perspective. Journal of Positive School Psychology, 2022(3), 5416-5421.Chanda et al. (2021). Environmental Governance in India: Towards carbon emission mitigation and adaption.Dabla-Norris, M. E., Daniel, M. J., Nozaki, M. M., Alonso, C., Balasundharam, V., Bellon, M. M., ... & Kilpatrick, M. J. (2021). Fiscal policies to address climate change in Asia and the Pacific: opportunities and challenges.Dwi Putra, M. R., & Albarda. (2023). Design of Service System for Carbon Trading (Case Study: Bandung City). 2023 10th International Conference on ICT for Smart Society (ICISS), 1-7.Gupta, S., & Pareek, S. (n.d.). Carbon Credit Trading: Prospects and Challenges an Indian Perspective. 1-4.Jones, E. A., Paige, L., Smith, A., Worth, A., Betts, L., & Stafford, R. (2024). Potential for Carbon Credits from Conservation Management: Price and Potential for Multi-Habitat Nature-Based Carbon Sequestration in Dorset, UK. Sustainability, 16(3), 1268.Nandi, R., & Banerjee, P. (2023). Carbon Accounting: Some Issues with Special Reference to India.Rana, M., Khan, S. M., Ali, S., Khalid, A., & Ahmad, Z. (2024). Carbon credit, trading, green economy, and clean development mechanisms. In Agroforestry for Carbon and Ecosystem Management (pp. 147-159). Academic Press.Rahul Pandey, R. P. (2019). Carbon Credit, A Step Towards Green Environment. International Journal of Environment, Ecology, Family and Urban Studies, 9(3), 13-20.Sen, S., & Sahoo, P. (2024). Carbon pricing for sustainable transition in India. World Development Perspectives, 34, 100586.Authors may be reached at himanshitolani98@gmail.com, iaavns.am2019@gmail.com and eboard@icai.inPublished in The Chartered Accountant Journal, September 2024 (Pages 364–371).
Ep. 398 — Capital Gains and Indexation Analysis and the Way forward
CA Journal
· September 2026
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Capital Gains and Indexation: Analysis and the Way ForwardWhen the Finance Minister of India presented the Annual Budget for the Financial Year 2024-25 on 23rd July 2024, among the amendments proposed, the one which drew maximum attention was doing away with the concept of indexation for computing long term capital gain. Considering a spate of representations from taxpayers, the Finance Minister moved an amendment on 6th August 2024 giving some relief to taxpayers. This article discusses the history of the development of taxation of capital gains in India and a few major countries, and analyses the proposed amendments. In the end, a practical approach to the issue is suggested.Why Tax Capital Gains?When a capital asset is sold it fetches a price higher, lower or same as the price at which it was acquired. The first case is called capital gain, while the second is capital loss and the third situation is neutral. Tax laws in many jurisdictions classify the gains/loss as short term or long term. There is no unanimity among countries regarding taxation of capital gains, particularly on immovable properties. The view depends upon the principles of taxation being followed in a country.One can argue that investment in immovable property is neither like interest income nor like dividends, which are compensations to investors by entities which use the fund to earn income. On the other hand, the price of immovable property may increase simply by holding on the property without earning income. The price rise of a property can be either due to inflation and/or mismatch in demand-supply situation. The reasons for taxing the gain are based on political or social aspects of public finance. The taxation of transactions in immovable property benefits all authorities — Central Government through income tax, State governments through Stamp Duty and local authorities and organisations through various levies and charges. All these organisations need money for meeting various expenses.History of Taxation of Capital Gains in IndiaThe Income Tax Act, 1922 neither defined the term "capital gains" nor its taxation was clearly stated. Capital gains were charged specifically, for the first time by the Income-tax and Excess Profits Tax (Amendment) Act, 1947, which inserted section 12B in the 1922 Act which was amended by the Finance (No.3) Act, 1956, w.e.f. 01st April 1957.This consisted of three sub-sections:Sub-section (1): The substantive section which levied a tax in respect of profits or gains arising from the sale, exchange or transfer of a capital asset effected during specified period.Sub-section (2): Stated how the amount of capital gain shall be computed, allowing certain deductions from the full value of the consideration for which the sale, exchange or transfer of capital assets was made.Sub-section (3): Referred to a capital asset which became the property of the assessee by succession, inheritance or devolution or under any specified circumstances, stating what deductions the assessee was entitled to.The levy was virtually abolished by the Indian Finance Act, 1949, which confined the operation of the section to capital gains arising before April 1, 1948; but it was revived with effect from April 1, 1957, by the Finance (No. 3) Act, 1956 on the recommendation of Prof. Nicholas Kaldor. Since then, taxation of Capital Gains as a separate head of income has become a permanent feature of the Indian tax law.Taxation of Capital Gains Under Income-tax Act, 1961The Income-tax Act, 1961, when introduced, made significant departure from the approach of taxation of capital gains as existing under the earlier law. Since then, changes have been made consistently. The Finance Act, 1987 introduced definition of the terms "long-term capital asset", "short-term capital assets", "long-term capital gain" and "short-term capital gain".The Finance Act, 1992 introduced important changes in law as well as procedure. Prior to the amendments an asset was considered to be long-term if it was held for more than 36 months except for shares of companies, where the holding period was 12 months. Further, a basic deduction of Rs. 15,000, along with a fixed percentage of the remaining capital gains, was permitted under section 48(2). The specific percentage varied depending on the nature of the asset and the status of the assessee, but it was not linked to the duration of the holding period. This deduction was designed to provide a straightforward relief from inflation, prevent the bunching of profits, and exempt relatively small capital gains from being taxed.To further mitigate the effects of inflation, any increase in the value of assets prior to April 1, 1974, was excluded from taxation. This approach provided some inflationary relief but lacked a direct connection to the actual period the asset was held.The introduction of indexation by the Finance Act, 1992 was aimed at achieving this fairer approach. Under indexation, both the cost of acquiring the asset and the cost of any improvements made to it are adjusted for inflation. This adjustment results in an indexed cost of acquisition and an indexed cost of improvement, which are then deducted from the sale price to calculate the long-term capital gains.The cut-off date for determining the value of assets for indexation purposes was April 1, 1981. For any asset acquired before this date, its value as of April 1, 1981, was to be taken as the base for indexation. Only improvements made to the asset after this date were to be considered for indexation purposes. This system was incorporated to ensure that the calculation of long-term capital gains takes into account the impact of inflation over the period the asset was held, leading to a more accurate and fair assessment of taxable gains."The shift from a fixed deduction approach to one that accounts for the holding period through indexation provides a more accurate reflection of the asset's value over time and ensures that inflationary effects are appropriately considered in the calculation of long-term capital gains."Under the provisos to section 48(1)(a), non-resident Indians were originally protected from fluctuations in rupee value relative to the foreign currency used to purchase shares or debentures when calculating capital gains on their transfer. By the Finance Act, 1992 this protection was extended to all non-residents for long-term capital gains on such assets. Previously, non-resident Indians were also allowed additional deductions under section 48(2). However, since the protection from currency fluctuation already accounts for inflation, non-residents benefiting from this concession were not eligible for further relief through indexation. This scheme of taxation of long-term capital gains, broadly, continues till date.Amendments Made by the Finance (No. 2) Act, 2024The Memorandum to the Finance (No. 2) Bill, 2024 explains that the changes proposed in the Bill aimed to rationalise and simplify the taxation of capital gains, focusing on three key aspects:Holding Period Simplification: There will now be only two holding periods: 12 months and 24 months. For all listed securities, the holding period will be 12 months, while for all other assets, it will be 24 months. This change is reflected in the amendment to clause (42A) of section 2 of the Act. Notably, units of listed business trusts will be treated similarly to listed equity shares, reducing their holding period requirement from 36 months to 12 months. The holding period for bonds, debentures, and gold will decrease from 36 months to 24 months, while the holding period for unlisted shares and immovable property will remain at 24 months.Adjustment of Tax Rates:Short-Term Capital Gains (STCG): The tax rate on short-term capital gains for Securities Transaction Tax (STT) paid equity shares, units of equity-oriented mutual funds, and units of business trusts under section 111A of the Act has been increased from 15% to 20%. This change aims to address concerns that the current rate disproportionately benefits high-net-worth individuals. Other short-term capital gains will continue to be taxed at their applicable rates.Long-Term Capital Gains (LTCG): The rate for long-term capital gains has been standardized at 12.5% across all asset categories. Previously, the rate was 10% for STT-paid listed equity shares, units of equity-oriented funds, and business trusts under section 112A, and 20% with indexation for other assets under section 112. The exemption for long-term capital gains on STT-paid equity shares, units of equity-oriented funds, and business trusts has been increased from Rs. 1 lakh to Rs. 1.25 lakh (aggregate). Additionally, for listed bonds and debentures, the LTCG tax rate has been reduced from 20% (without indexation) to 12.5%. However, while computing tax liability under section 112, on capital gains arising on transfer of a long term capital asset, being land or building or both, acquired before 23rd July 2024, the excess income-tax computed at 12.5% over the income tax computed in accordance with the provisions of the Act, as they stood immediately prior to this amendment shall be ignored.Indexation Removal: The indexation benefits currently available under the second proviso to section 48 for calculating long-term capital gains on property, gold, and other unlisted assets is being removed, on the basis that the rate of taxation has been reduced from 20% to 12.5%. This excluded assets acquired before 23rd July 2024, thus providing grand-fathering benefit.Taxation Parity Between Residents and Non-Residents: To ensure parity between resident and non-resident taxpayers, amendments are made in sections 115AD, 115AB, 115AC, 115ACA, and 115E to align the tax rates for long-term and short-term capital gains with the rates under sections 112A, 112, and 111A.Withholding Tax Provisions: Consequential amendments are also made in sections 196B and 196C to align the withholding tax provisions.International Approach to Taxation of Capital GainsMost of the countries have separate provisions for taxing capital gains. In the United Kingdom for the year 2023-24 tax year, individuals could claim a £3,000 capital gains tax allowance. There were two capital gains tax rates:10% (18% for residential property) if the overall annual income was below £50,27020% (24% for residential property) if the overall annual income was above the £50,270 thresholdIn the US, capital gains can be subject to either short-term tax rates or long-term tax rates. Short-term capital gains are taxed according to ordinary income tax brackets, which range from 10% to 37%. Long-term capital gains are taxed at 0%, 15%, or 20%. The short-term capital assets are those which are held for one year or less.In Australia, companies and individuals pay different rates of capital gains tax. Companies are not entitled to any capital gains tax discount and pay 30% tax on any net capital gains. For individuals, the tax rate is the same as the income tax rate for that year. For Self-Managed Super Funds, the tax rate is 15% and the discount is 33.3% (rather than 50% for individuals).Rationale for Retaining Indexation on Capital Gains in IndiaThe price of an asset changes, normally, due to either one or a combination of two factors: inflation, and market demand and supply. So far as the second reason is concerned, it depends on the risk-bearing appetite and holding capacity of a person. On the other hand, inflation-driven factors are not within control of a person.It may be mentioned that the average rate of inflation in UK, US, and Australia during 1990-2022 has been quite low, except during exceptional years. Apparently, due to this factor, these countries did not consider indexing cost of capital assets for computing long-term capital gains. Hence, there was no reason for making adjustment to the price due to inflation. On the other hand, the rate of inflation has been high in India, which has been at the root of the concept of indexation of costs for determining capital gains.Indexation adjusts the purchase price of assets like stocks, bonds, or real estate to account for inflation, using the Consumer Price Index (CPI) as a reference. This adjustment helps reflect the true increase in an asset's value by factoring in the decrease in purchasing power over time. By applying indexation, investors can accurately calculate capital gains, ensuring that taxes are imposed only on the real gains exceeding due to inflation. This leads to a fairer taxation process, as it prevents inflation from inflating the taxable amount.In view of the fundamental reason for indexation mentioned above, removing it on the basis of reduction of tax rate does not address the basic increase in the price of an asset.Proposed Original Amendment and Subsequent Amendment on IndexationAs mentioned supra, the Finance (No. 2) Bill, 2024 originally proposed to do away with indexation for computing capital gains. After presentation of the Bill, a spate of representations was made by taxpayers, and various business and professional organisations. Considering these, on 6th August 2024, the Finance Minister moved an amendment to section 112.As per the amendment, individuals or Hindu Undivided Families (HUF) having purchased long-term capital assets, being land or building or both before 23rd July 2024 can compute their taxes under section 112 under two options and pay tax using either option, whichever is more advantageous:Option 1: Index the cost of acquisition and costs of improvement, then compute capital gain and apply a 20% tax rate.Option 2: Apply a tax rate of 12.5% without applying indexation to the costs of acquisition and improvement.On the other hand, for assets acquired after 23rd July 2024, a tax rate of 12.5% on the capital gains would be applied without indexing costs.A Practical Approach to the IssueNo doubt, the government has sought to appease taxpayers by giving some benefit. However, the basic conceptual issue remains. Economically as well as on equity basis, it would have been better if the old regime was brought back. An option might have been given to taxpayers to adopt indexation coupled with a 20% rate of tax or accept taxation at the rate of 12.5% without indexation, independent of the date of acquiring the long-term asset.This approach is not new to the tax department; for example, an option has been given to taxpayers to choose between the Old or New regime for taxation, and the option is available to taxpayers to go to the Commissioner of Income Tax (Appeals) or Dispute Resolution Panel. Having a cut-off date may give rise to manipulation of dates and thereby lead to litigation.Footnotes & Citations1. 12B. Capital gains. (1) The tax shall be payable by an assessee under the head "Capital gains" in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956...2. James Anderson v. The CIT, Bombay [1960 AIR 751 (SC)]3. Finance Act, 1992 - Circular No. 636, Dated 31-08-1992.4. The average rate of inflation during 1971-72 to 1975-76 was 12.0% and was 8.5%, 6.5% and 7.8% during 76-77 to 85-86, 81-82 to 85-86 and 86-87 to 90-91 respectively.5. International Inflation Rates: For UK it has been varying around 2.5%, while US has been varying between 2%-3% and for Australia it was around 3% going up or down during exceptional years.Author may be reached at eboard@icai.inPublished in The Chartered Accountant Journal • September 2024
Ep. 399 — Block Assessment under the Income-tax Act, 1961
CA Journal
· September 2026
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The Chartered Accountant | Direct Tax September 2024 • Pages 58–60Block Assessment under the Income-tax Act, 1961CA. Mahendra Chhajed & CA. Ayush ChhajedMembers of the InstituteThe reintroduction of block assessment provisions, in cases where a search under Section 132 or requisition under Section 132A is initiated or conducted on or after 1st September 2024, aims to streamline proceedings, reduce litigation costs for taxpayers, and eliminate the possibility of change of opinion with respect to the line of inquiry. This scheme has been reintroduced due to the lack of a legal requirement for consolidated assessments in search cases, which had resulted in only the time-barring year being reopened annually for the searched assessee, prolonging proceedings up to ten years.The Evolution of Block Assessment: From Its Inception to Subsequent RevisionsThe block assessment scheme was first introduced by the Finance Act of 1995 through the insertion of Chapter XIV-B (Sections 158B to 158BH) in the Income-tax Act, 1961, effective from 1st July 1995. Under this scheme, undisclosed income was determined and computed over a block period of ten previous assessment years. Subsequently, the Finance Act of 2001 revised the definition of the 'block period' to encompass six previous years.The Finance Act of 2003 introduced a sunset date for the special provisions under Chapter XIV-B, effective from June 1, 2003, by introducing Sections 153A, 153B, and 153C where the assessee was required to furnish returns for the preceding six assessment years.The Finance Act, 2017 amended Section 153A to empower the Assessing Officer to issue notice to an assessee for periods beyond 6 assessment years but not exceeding 10 assessment years, provided he has evidence that the income, represented in the form of asset, escaping assessment exceeds Rs. 50 lakhs.However, with the enactment of the Finance Act, 2021, the search assessment provisions were subsumed under the reassessment framework outlined in Sections 147 to 151A of the Income-tax Act for searches initiated on or after April 1, 2021. The Assessing Officer (AO) was empowered to reopen assessments for up to three years, or up to 10 assessment years if income escaping assessment represented in an asset exceeded Rs. 50 lakhs.The New Procedure of Block AssessmentBlock PeriodIf the search takes place on or after 01-09-2024, the total income of the block period shall be assessed. The block period consists of six assessment years preceding the previous year in which the search took place, plus the period from 1st April of the search year to the date of execution of the last authorization for search. For example, if a search is conducted on 10-09-2024, the block period consists of assessment years relevant to previous years 2023-24, 2022-23, 2021-22, 2020-21, 2019-20, and 2018-19, and includes the period from 1st April 2024 to the date of execution of the last authorization.If any assessment, reassessment, or proceedings under Section 92CA are pending during the block period, it shall abate and be considered for assessment during the block period. If the block assessment is annulled in appeal, the abated assessment shall be revived.Total Income & Rate of Tax"Undisclosed income" includes any money, bullion, jewellery, or valuable items, as well as any expense or income based on any entry in the books of account or other documents, representing income/property not disclosed or incorrect expense/deduction claims.The total income for the block period shall be reduced by the returned income, assessed income, and income determined for the current year. The remaining income shall be charged to tax under Section 113 at 60%, and a penalty of 50% of the tax on undisclosed income shall be levied unless a return is filed, tax is paid on declared income, and no appeal is filed in respect of that income.Filing of Return & Assessment ProcedureThe Assessing Officer shall issue a notice requiring the assessee to file the return within 60 days. Such return shall be considered as a return filed under Section 139, followed by a notice under Section 143(2).Once proceedings are initiated under this Chapter, no proceedings under Section 148 shall be initiated. Assessment is conducted under sections 142, 143(2), 143(3), 144, 145, 145A, and 145B. Section 143(1) and Section 144C (DRP) shall not apply.Computation MatrixThe total income of the block period is computed as follows:Particulars of IncomeAmount CalculationTotal income (ignoring loss) disclosed in return furnished under Section 158BC pursuant to search[A]Add: Total income (ignoring loss) declared in return of income filed under Section 139 / 142(1) / 148[B]Add: Total income (ignoring loss) assessed prior to initiation of search (u/s 143(3), 144, 148, 153A, 153C)[C]Add: Total income (ignoring loss) of current unended previous year up to date of last search authorization[D]Add: Undisclosed income determined by the AO based on evidence or information found during search[E]Total income for the block period[F = A + B + C + D + E]Less: Disclosed income for the block period[G = B + C + D]Total undisclosed income for the block period[H = F - G]Time Limit for AssessmentThe assessment for the block period shall be completed within 12 months from the end of the month in which the last warrant of authorization was executed.Key Distinctions Between the Old and the New ProvisionsUnder previous provisions, the block period extended up to the date of commencement of the search; under Section 158BC (new), it extends until the date of execution of the final authorizations.The new provisions explicitly define "undisclosed income", but the taxable amount under the block assessment is total income rather than undisclosed income in isolation.Under the previous scheme, undisclosed income included unrecorded entries; the proposed definition now explicitly includes recorded expenditures found to be false or incorrect.Why the Need for Re-introduction of Block Assessment Procedures?"In order to make the procedure of assessment of search cases cost effective, efficient and meaningful, it is proposed to introduce the scheme of block assessment... The main objectives for the introduction of this scheme are early finalization of search assessments, coordinated investigation during search assessments and reduction in multiplicity of proceedings."— Memorandum to the Finance (No. 2) Bill, 2024The term 'undisclosed income' was not defined in Section 153A, forcing Assessing Officers to assess regular as well as undisclosed income based on incriminating evidence. Although defined in penalty provisions (Section 271AAA/271AAB), that definition could not be imported for assessments u/s 153A.Potential Issues that may Arise During the Block AssessmentMultiple Searches: In case of a pending block assessment from a first search, can a second notice u/s 158BC be issued, and can material from the second search be used in the first block proceeding?Double Addition Risks: If income discovered during search is included in the Section 158BC return, will it still be treated as undisclosed income leading to double addition?Loss Treatment: How will losses in the block period be treated, and how will set-off and carry-forward of losses apply?ConclusionThe search provisions have increasingly become more complex regarding definitions, inclusion of incomes, and time limits. The shift from the previous block regime to Section 153A failed to achieve timely resolution, leading to prolonged litigation. It is hoped that the new block assessment scheme under Finance (No. 2) Act, 2024 will resolve these issues and facilitate timely finalisation of search assessments.Authors may be reached at eboard@icai.inPublished in The Chartered Accountant Journal • September 2024
Ep. 400 — Amendments in Chapter XVII-B and XVII-BB by the Finance (No.2) Act, 2024
CA Journal
· September 2026
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Amendments in Chapter XVII-B and XVII-BB by the Finance (No.2) Act, 2024This article analyses the amendments made by the Finance (No.2) Act, 2024 with respect to the provisions contained in Chapter XVII-B and XVII-BB of the Income-tax Act, 1961 relating to Tax Deducted at Source (TDS) and Tax Collected at Source (TCS).1. Key Amendments in Tax Deducted at Source (TDS) ProvisionsTDS on Salary [Section 192]Section 192(2B) enables a taxpayer to furnish details of income under other heads and TDS thereon to their employer to be considered while deducting tax under section 192. Previously, there was no explicit provision to consider TCS in the hands of employees for salary TDS computation. To reduce the compliance burden of claiming TCS refunds and ease cash flow issues, section 192(2B) has been substituted effective 01.10.2024 to permit consideration of both TDS and TCS for deducting tax under section 192(1).Interest on Securities [Section 193]Effective 01.10.2024, TDS under section 193 is attracted on interest payable on Floating Rate Savings Bonds, 2020 (Taxable) and any other notified Central/State Government security if the interest payable during the financial year exceeds ₹10,000.Payments to Contractors [Section 194C] vs. Professional Services [Section 194J]Explanation (iv) to section 194C has been amended effective 01.10.2024 to give statutory effect to CBDT Circular No. 720 (30.08.1995). It expressly clarifies that any sum referred to in section 194J(1) (fees for professional/technical services) will not constitute "work" for tax deduction under section 194C.TDS Rate Reductions effective 01.10.2024Life Insurance Policy Payments [Section 194DA]: Rate reduced from 5% to 2%.Lottery Ticket Commission/Remuneration [Section 194G]: Rate reduced from 5% to 2%.Commission or Brokerage [Section 194H]: Rate reduced from 5% to 2%.Rent Payment by Certain Individuals or HUF [Section 194-IB]: Rate reduced from 5% to 2%.Payment of Certain Sums by Certain Individuals/HUF [Section 194M]: Rate reduced from 5% to 2%.E-commerce Operator to E-commerce Participant [Section 194O]: Rate lowered from 1% to 0.1% to bring parity with offline transaction TDS/TCS provisions.Omission of Section 194FSection 194F (TDS @ 20% on repurchase of units by Mutual Funds/UTI under ELSS Section 80CCB) has been omitted effective 01.10.2024 as most ELSS schemes under 80CCB have been redeemed or withdrawn.Payment on Transfer of Immovable Property [Section 194-IA]Effective 01.10.2024, a proviso has been inserted to clarify that where there are multiple transferors or transferees for an immovable property, the threshold limit of ₹50 lakh applies to the aggregate consideration/stamp duty value paid or payable by all transferees to all transferors.New Section: Payments to Partners of Firms [Section 194T]Inserted effective 01.04.2025, requiring partnership firms to deduct TDS @ 10% on payments or credits by way of salary, remuneration, interest, bonus, or commission to partners, if the aggregate sum exceeds ₹20,000 in a financial year. This aims to lower the advance tax burden on partners.LTCG TDS Rates for Offshore Funds & Foreign Bonds [Sections 196B & 196C]TDS on long-term capital gains under sections 196B and 196C increased from 10% to 12.5% for transactions executed on or after 23.07.2024.Lower TDS Certificate [Section 197]Section 197(1) substituted effective 01.10.2024 to bring purchase of goods under section 194Q within the ambit of lower/nil TDS certificates.2. Summary of Revised TDS Rates (Chapter XVII-B)Sr. No.SectionNature of PaymentOld RateNew RateEffective Date1194DAPayment in respect of life insurance policy5%2%01.10.20242194GCommission etc. on sale of lottery tickets5%2%01.10.20243194HCommission or brokerage5%2%01.10.20244194-IBPayment of rent by certain individuals or HUF5%2%01.10.20245194MPayment of certain sums by certain individuals/HUF5%2%01.10.20246194OE-commerce operator to participant1%0.1%01.10.20247196BLTCG on Income from Units (Offshore Fund)10%12.5%23.07.20248196CLTCG on foreign currency bonds / GDRs10%12.5%23.07.20243. Administrative & Compliance AmendmentsForeign Taxes Withheld deemed as Income Received [Section 198]Amended effective 01.04.2025 to explicitly deem taxes withheld outside India (where tax credit is claimed) as income received in India, preventing double deduction claims.Time Limit for Correction Statements [Sections 200(3) & 206C(3B)]A maximum time limit of 6 years from the end of the relevant financial year has been introduced effective 01.04.2025 for submitting correction statements for TDS/TCS.Processing Statements from Non-Deductors [Section 200A]Amended effective 01.04.2025 empowering CBDT to make schemes for processing statements submitted by non-deductors, such as Form 26QF filed by Virtual Digital Asset (VDA) Exchanges u/s 194S.Time Limit for Orders treating Assessee in Default [Sections 201(3) & 206C(7A)]Substituted effective 01.04.2025. The time limit for passing an order treating a person as an assessee-in-default is later of:6 years (reduced from 7 years) from the end of the financial year in which payment/credit occurred; or2 years from the end of the financial year in which the correction statement is delivered.4. Tax Collection at Source (TCS) Provisions [Section 206C]Section 206C(1F): Expanded w.e.f. 01.01.2025 to cover sale of other notified luxury goods exceeding ₹10 lakh in value, in addition to motor vehicles.Section 206C(4): Credit for TCS can be granted to other eligible persons in accordance with rules w.e.f. 01.01.2025.Section 206C(7): Interest rate for delayed payment of collected TCS increased from 1% to 1.5% per month or part thereof w.e.f. 01.04.2025.Section 206C(9): Scope of lower TCS certificate expanded to include section 206C(1H) w.e.f. 01.10.2024.Section 206C(12): New sub-section inserted w.e.f. 01.10.2024 allowing nil/lower TCS for specified transactions or notified entities.5. Prosecution Relaxation [Section 276B]A new proviso inserted effective 01.10.2024 provides that prosecution provisions under Section 276B will not apply if the deducted TDS is remitted to the Central Government on or before the due date prescribed for filing the quarterly statement under Section 200(3).ConclusionThe amendments in Chapter XVII-B and XVII-BB aim to enhance the ease of doing business, reduce cash-flow burdens, track high-value transactions, streamline deductor compliance, and reduce unnecessary litigation.Authors may be reached at eboard@icai.inPublished in The Chartered Accountant Journal • September 2024
Ep. 401 — Exploring Corporate Guarantee Matters within the Framework of GST
CA Journal
· September 2026
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Exploring Corporate Guarantee Matters within the Framework of GSTCorporate Guarantees are common trade practices where holding companies issue guarantees to financial institutions as security for credit facilities extended to subsidiaries. While governed by the Indian Contract Act, 1872, RBI guidelines, and the Companies Act, their taxability under the GST regime has been a subject of prolonged litigation and recent regulatory amendments.1. Position under the Service Tax RegimeUnder the service tax regime, taxability was intricately tied to the definition of "services" as an activity carried out by one person for another for consideration. Receipt of consideration was a prerequisite triggering the tax levy.In many corporate guarantee arrangements, Reserve Bank of India (RBI) guidelines restrict or govern guarantee commission payments. Banks often obtain undertakings confirming no direct or indirect consideration is involved.The landmark Supreme Court judgment in Edelweiss Financial Services Limited [2023 (4) TMI 170] affirmed that consideration is a prerequisite for imposing service tax on a corporate guarantee. In the absence of consideration, service tax liability was negated due to the lack of a deemed valuation mechanism. However, the court did not rule out that corporate guarantees constitute an "activity" or "service" in principle.2. Position under the GST RegimeUnder GST, tax liability is triggered by a "supply". The standard parameters of supply require goods/services, consideration, and furtherance of business. However, Schedule I of the CGST Act introduces a deeming fiction where supplies between related persons without consideration qualify as a supply. Consequently, the Supreme Court’s ruling in Edelweiss Financial holds no application under GST.While government loan guarantees to PSUs were clarified as exempt vide Circular No. 154/10/2021-GST, corporate guarantees between related entities remained complex regarding valuation.Following recommendations from the 52nd GST Council meeting, the CBIC issued Circular No. 204/16/2023-GST on 27.10.2023, affirming that providing a corporate guarantee is a "supply of service" even without consideration and is subject to GST.3. Valuation Framework: Pre vs. Post AmendmentA. Valuation Prior to 26 October 2023Prior to the amendment, valuation of services between related persons was governed by Rule 28 of the CGST Rules:Open Market Value (OMV) of the service.Value of supply of services of like kind and quality, if OMV is unavailable.110% of the cost of provision of services or best judgment method.Under the second proviso to Rule 28, where the recipient is eligible for full Input Tax Credit (ITC), the value declared in the invoice is deemed to be the OMV. However, where full ITC is unavailable to the recipient, valuation posed significant challenges.B. Valuation Effective from 26 October 2023Rule 28(2) was inserted vide Notification No. 52/2023-CT effective 26.10.2023. It mandates that the value of supply of a corporate guarantee to a related person shall be the higher of:ProvisionValuation BenchmarkEffective DateRule 28(2)(a)1% of the amount of corporate guarantee offered26.10.2023Rule 28(2)(b)Actual consideration received26.10.20234. Key Challenges & Open IssuesValuation Base: Guarantee Offered vs. Credit UtilizedRule 28(2) specifies valuation as 1% of the guarantee offered. If a parent company provides a guarantee of ₹100 crore, but the subsidiary avails a credit facility of only ₹20 crore, a strict legal interpretation imposes GST on 1% of the full ₹100 crore, exceeding the actual economic benefit derived.Taxable Event & PeriodicityIt remains ambiguous whether the liability to pay GST arises as a one-time event upon execution/annual renewal or on a recurring monthly/quarterly basis. The CBIC clarification indicates that issuing a guarantee is a single event, with tax liability triggered primarily at execution or annual renewal.Continuation of Pre-GST GuaranteesLong-term guarantees executed under the Service Tax regime without consideration were non-taxable at inception. Applying GST to continuing pre-existing guarantees contradicts the legal principle that tax cannot be imposed subsequently if the levy did not exist when the service was initiated.Bank Guarantee Benchmark vs. Corporate GuaranteeDivergent judicial views exist on whether bank guarantee rates serve as a benchmark for corporate guarantee valuation:CESTAT Delhi (M/s Olam Agro India Ltd [2018]) & CESTAT Mumbai (Hindustan Construction Co [2023]): Treated corporate guarantees as similar to bank guarantees.CESTAT Chennai (M/s Sterlite Industries India Ltd [2019]): Held that bank guarantees and corporate guarantees are distinct instruments. Bank guarantees are regular commercial services offered to the public, whereas corporate guarantees are in-house financial supports to group entities.Letter of Comfort / Intent vs. Corporate GuaranteeLetters of Comfort or Intent provide financial assurance without creating a direct binding obligation to discharge liability upon default under Section 126 of the Contract Act. Under Insolvency and Bankruptcy Code (IBC) jurisprudence, classification depends on the specific terms and intent rather than nomenclature.Transfer Pricing & Global PerspectivesWhile Transfer Pricing regulations and judicial precedents commonly accept a 0.5% guarantee commission, the 1% GST valuation standard creates a regulatory mismatch. Globally, countries such as Australia and Canada categorize corporate guarantees under financial services and exempt them from indirect tax laws.ConclusionWhile Rule 28(2) brings standardization to corporate guarantee valuations under GST, unresolved issues—such as the legal challenge to Rule 28(2) before the Delhi High Court—require definitive clarification from the GST Council to promote tax certainty and a business-friendly regime.Author may be reached at verma.shilpa05@gmail.com and eboard@icai.inPublished in The Chartered Accountant Journal • GST • September 2024
Ep. 402 — Enhancing transparency by unveiling disclosures on Supplier Finance Arrangements
CA Journal
· September 2026
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The Chartered Accountant | Accounting Standards September 2024 • Pages 72–77Enhancing Transparency by Unveiling Disclosures on Supplier Finance ArrangementsCA. Mohammed Azharudeen SBAMember of the InstituteSupplier finance arrangements, also known as supply chain finance or reverse factoring, assist businesses in optimizing working capital and cash flow. However, the historic lack of explicit disclosure regarding supplier finance liabilities in financial statements created opacity for investors. Recent amendments by the IASB (effective January 1, 2024; proposed April 1, 2024 under Ind AS) mandate comprehensive new disclosure requirements.1. Background & Transaction MechanicsSupplier finance arrangements represent a mutually beneficial structure:Suppliers receive faster payments at lower financing costs.Entities defer cash outflows while enabling supply chain stability.Financial Institutions / Banks settle payments directly to suppliers and hold a consequential claim against the entity on the due date.Historically, amounts owed by entities to banks under these arrangements often continued to be classified strictly as trade payables or capital payables rather than explicit borrowings. Consequently, significant liquidity risks and credit challenges remained masked within general working capital.Transaction Flow in Supplier Financing ArrangementsStep 1: Entity orders goods from SupplierStep 2: Supplier delivers goods to EntityStep 3: Bank makes payment to SupplierStep 4: Entity makes payment to Bank on due date2. Scope of the AmendmentsThe International Accounting Standards Board (IASB) issued targeted amendments to IAS 7 (Ind AS 7) 'Statement of Cash Flows' and IFRS 7 (Ind AS 107) 'Financial Instruments: Disclosures'.Applicability: First-time disclosures required for annual reporting periods beginning on or after 01.01.2024 (proposed 01.04.2024 under Ind AS).Inclusions: All arrangements where a finance provider pays amounts an entity owes to its suppliers, regardless of the nomenclature (e.g., supply chain finance, reverse factoring, payables financing).Exclusions: Arrangements specifically linked to financing inventories, trade receivables, or corporate credit cards fall outside this scope.3. Presentation in Financial StatementsStatement of Financial Position [IAS 1 / Ind AS 1]Management must evaluate whether liabilities under supplier financing qualify as 'trade and other payables' or 'other financial liabilities (borrowings)'. If the legal nature, payment terms, or credit period of the liability change substantially, derecognition criteria under IFRS 9 (Ind AS 109) apply, requiring reclassification to borrowings.Statement of Cash Flows [IAS 7 / Ind AS 7]Classification depends on whether the underlying liability is categorized as a trade payable (operating cash flows) or borrowing (financing cash flows). Where liabilities are presented as borrowings, two main presentation methodologies exist:Particulars (INR)Methodology 1 (Agent Approach)Methodology 2 (Direct Settlement)Cash flow from operating activities(When Bank pays supplier on behalf of entity)(-) 100No cash flow to the entityCash flow from financing activities(When Bank pays supplier on behalf of entity)(+) 100No cash flow to the entity (resulted in non-cash increase in borrowings)Cash flow from financing activities(When entity makes payment to Bank on due date)(-) 100(-) 100Table 1: Cash Flow Presentation MethodologiesNote: Since cash flows typically record actual movements in the entity's bank account, Methodology 2 is generally considered an appropriate presentation, provided non-cash borrowing increases are explicitly disclosed in the reconciliation.4. Required Disclosures in Notes to Financial StatementsEntities must aggregate disclosures for supplier finance arrangements to enable investors to assess liquidity risk and financial impact:Terms and Conditions: Detailed qualitative description of arrangement terms (dissimilar terms must be disclosed separately).Carrying Amounts & Line Items: Carrying values of liabilities, associated balance sheet line items, and specific identification of amounts for which suppliers have already received payment from finance providers.Payment Due Date Ranges: Comparison of payment due date ranges for supplier finance liabilities versus non-participating trade payables.Non-Cash Changes: Quantitative details regarding non-cash changes in carrying amounts (e.g., transfers from trade payables to borrowings, foreign exchange adjustments).5. Illustrative Financial Statement DisclosuresTable 2: Carrying Amount of Liabilities and Due Date RangesParticulars31-XX-2024 (INR)31-XX-2023 (INR)Presented within trade and other payables2,0001,500Of which suppliers received payment1,8001,450Presented within borrowings1,4001,100Of which suppliers received payment1,4001,100Range of payment due dates: Liabilities that are part of arrangement30 to 90 days from invoice date30 to 100 days from invoice dateComparable trade payables not part of arrangement15 to 60 days from invoice date15 to 70 days from invoice dateTable 3: Reconciliation of Financing Liabilities (Non-Cash Movement)Particulars31-XX-2024 (INR)31-XX-2023 (INR)Opening BalanceLong term borrowings8,03510,000Short term borrowings2,5002,000Liability for supplier financing1,100-Total Opening Balance11,63512,000Cash Flows during the yearLong term borrowings(-) 1,500(-) 2,000Short term borrowings(-) 250500Liability for supplier financing(-) 1,200-Total Cash Flows(-) 2,950(-) 1,500Non-Cash ChangesForex fluctuation / Fair value change(-) 1035Transfers from Trade payables to Borrowings1,5001,100Total Non-Cash Changes1,4901,135Closing BalanceLong term borrowings6,5258,035Short term borrowings2,2502,500Liability for supplier financing1,4001,100Total Closing Balance10,17511,6356. Effective Date & Transition ReliefsComparative Relief: Entities are not required to provide comparative information for periods before January 1, 2024 (April 1, 2024 under Ind AS).Opening Balance Exemption: Disclosures on supplier payment amounts and due date ranges as of the beginning of the annual reporting period are exempt.Interim Relief: No disclosures are mandatory for interim financial reports during FY 2024 (FY 2024-25 under Ind AS).Mandatory First Reporting Date: Annual period ending 31.12.2024 (or 31.03.2025 under Ind AS).ConclusionThese enhanced disclosure requirements bridge a critical reporting gap, ensuring investors gain full visibility over debt obligations, liquidity exposure, leverage ratios, and key working capital metrics.Author may be reached at nasrullah_azhar@yahoo.co.in and eboard@icai.in[cite: 4, 5, 6]Published in The Chartered Accountant Journal • Accounting Standards • September 2024
Ep. 403 — India's Digital Currency (e₹): A Comprehensive Study on CBDC
CA Journal
· September 2026
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The Chartered Accountant | Banking September 2024 • Pages 78–82India's Digital Currency (e₹): A Comprehensive Study on CBDCMallesha L.Research ScholarDr. Archana H. N.AcademicianCentral Bank Digital Currencies (CBDCs) have become a vital subject in global finance. A CBDC is a digital form of a country's fiat currency issued by its central bank and backed by government credit. This study examines the motives, advantages, risks, and evolution of India's digital currency (e₹) pilot launched by the Reserve Bank of India (RBI), while offering comparative perspectives against UPI and cryptocurrencies.1. Introduction & Concept of CBDCDriven by rapid technological advancements and a global decline in physical cash usage, central banks worldwide are researching and deploying CBDCs. According to a 2021 survey by the Bank for International Settlements (BIS), a substantial majority of central banks are actively experimenting with or launching pilot projects.The concept of CBDC represents an evolutionary shift in money from physical barter and coins to sovereign digital currency. While digital payment mechanisms managed by private entities currently exist, they often involve high transaction fees, security vulnerabilities, or financial exclusion. CBDCs aim to provide a safer, universally accessible, and official alternative.2. Motivations Behind CBDC AdoptionCentral banks cite several key strategic drivers for introducing CBDCs:Financial Innovation: Ensures central bank money remains relevant and adaptable in modern digital markets.Access to Central Bank Money: Maintains a direct link to risk-free sovereign currency as physical cash usage drops.Payment Diversity: Enhances competition, choices, and structural resilience within national payment networks.Financial Inclusion: Provides safe digital payment access to unbanked and underbanked populations.Cross-Border Payments: Simplifies cross-border transfers by reducing delays, intermediary fees, and exchange friction.Transparency & Privacy: Ensures transaction traceability to counter money laundering and terrorism financing while protecting consumer privacy.Table 1: Widely Recognized Global CBDC Pilot InitiativesCountry / RegionCBDC NameChinaDigital YuanSwedene-kronaBahamasSand DollarEastern Caribbean AreaDXCDMarshall IslandsSovereignIndiae-Rupee (e₹)NigeriaeNairaJamaicaJam-DexCBDC Issuance Models in Monetary SystemsDirect IssuanceThe central bank issues retail CBDC directly to end consumers.Indirect IssuanceCBDC is distributed through commercial bank intermediaries to the public.Hybrid IssuanceIntermediaries handle consumer interaction while the central bank maintains periodic ledger tracking.3. Research MethodologyThis study adopts a qualitative research methodology focused on conceptual analysis, examining the motives, advantages, risks, and evolutionary path of India's CBDC pilots. It further compares e-Rupee against existing frameworks like UPI and decentralized cryptocurrencies.4. Benefits & Potential RisksKey BenefitsPublic Policy Support: Directly advances financial inclusion and payment efficiency goals.Targeted Distribution: Enables programmable, targeted delivery of government subsidies, direct transfers, and relief funds.Volatility Protection: Offers a stable, risk-free digital asset protected from private crypto volatility.Real-time Settlement: Uses Distributed Ledger Technology (DLT) to eliminate post-reconciliation steps in high-value settlements.Offline Capabilities: Enables digital token payments in regions with low connectivity or digital infrastructure.Associated Risks & ChallengesBank Run Acceleration: Instant conversion from bank deposits to CBDCs during financial panics could destabilize commercial banks faster than physical cash withdrawals.Financial Disintermediation: Non-interest-bearing CBDCs could shrink bank deposit bases, forcing banks onto costlier wholesale funding.Technical & Cybersecurity Risks: Power outages, connectivity failures, or compromise of private keys could lead to property loss.Legal & Supervisory Gaps: Need for updated regulatory frameworks governing digital currency issuance, circulation, and supervision.5. India's CBDC (e₹) Pilot Projects by RBIFollowing the Union Budget 2022–2023 announcement by Union Finance Minister Nirmala Sitharaman, the RBI issued a comprehensive Concept Note on CBDC on October 7, 2022. RBI subsequently launched two distinct pilot programs:Digital Rupee - Wholesale (e-W): Launched November 1, 2022, focusing on secondary market transactions in government securities among financial institutions.Digital Rupee - Retail (e-R): Launched December 1, 2022, within a closed user group for Person-to-Person (P2P) and Person-to-Merchant (P2M) retail transactions.The retail e-Rupee mirrors physical currency denominations, carries trust and finality of settlement, does not earn interest, and can be seamlessly converted into commercial bank deposits.Table 2: Pilot Banks Offering Digital Rupee ApplicationsPilot BankApplication NameState Bank of India (SBI)eRupee by SBIICICI BankDigital Rupee by ICICI BankIDFC First BankIDFC First Bank Digital RupeeYES BankYes Bank Digital RupeeHDFC BankHDFC Bank Digital RupeeUnion Bank of IndiaDigital Rupee by UBIBank of BarodaBank of Baroda Digital RupeeKotak Mahindra BankDigital Rupee by Kotak BankCanara BankCanara Digital RupeeAxis BankAxis Mobile Digital RupeeIndusInd BankDigital Rupee by IndusInd BankPunjab National Bank (PNB)PNB Digital RupeeFederal BankFederal Bank Digital Rupee6. Comparative Analysis: CBDC vs. UPI vs. CryptocurrencyTable 3: Comparison MatrixAspectCBDC (e₹)UPI / Fund Transfer ModesCryptocurrency (e.g., Bitcoin)TypeDigital representation of physical currencyPayment payment service / transfer modeDigital asset / private currencyPrimary UsageUnit of account, store of value, payment mediumPrimarily for transferring money between banksSpeculative investment, medium of exchangeIssuing EntityReserve Bank of India (RBI)Commercial Banks / PSPsDecentralized network (no central issuer)Intrinsic ValueDirect claim on RBI balance sheetNo intrinsic value (facilitates transfers)No intrinsic value (determined by market supply/demand)Legal Tender StatusYes, legal tender issued by RBIYes (facilitates legal money movement)No (accepted at counterparty discretion)Asset BackingBacked by RBI sovereign assetsN/A (transaction routing mechanism)Not backed by physical or sovereign assetsGovernanceCentralized (Reserve Bank of India)Centralized (NPCI, Banks, PSPs)Decentralized peer-to-peer networkConclusionCentral Bank Digital Currencies mark a transformative shift in global monetary architecture. By delivering efficient, safe, and sovereign digital money, CBDCs like India's e-Rupee balance the convenience of digital payments with the stability of central bank credit. Addressing security risks, disintermediation concerns, and regulatory frameworks will remain critical to achieving widespread public acceptance and long-term financial stability.References• Auer, R., Frost, J., Gambacorta, L., Monnet, C., Rice, T., & Shin, H. S. (2022). Central Bank Digital Currencies: Motives, Economic Implications, and the Research Frontier. Annual Review of Economics, 14(1), 697-721.• Chiu, J., Davoodalhosseini, S. M., Jiang, J., & Zhu, Y. (2023). Bank market power and central bank digital currency: Theory and quantitative assessment. Journal of Political Economy, 131(5), 1213-1248.• Mallesha, L., & Archana, H. N. (2023). Central Bank Digital Currency (CBDC) and Its Potential Benefits and Challenges. GBS Impact: Journal of Multi Disciplinary Research, 9(1), 37-47.• Náñez Alonso, S. L., Jorge-Vazquez, J., & Reier Forradellas, R. F. (2021). Central Banks Digital Currency: Detection of Optimal Countries for the Implementation of a CBDC. Journal of Open Innovation, 7(1), 72.• Ngo, V. M., Van Nguyen, P., Nguyen, H. H., Tram, H. X. T., & Hoang, L. C. (2023). Governance and monetary policy impacts on public acceptance of CBDC adoption. Research in International Business and Finance, 64, 101865.• Ozili, P. K. (2023). eNaira central bank digital currency (CBDC) for financial inclusion in Nigeria. In Digital Economy, Energy and Sustainability (pp. 41-54). Springer.Authors may be reached at malleshnaikmalla@gmail.com and eboard@icai.inPublished in The Chartered Accountant Journal • Banking • September 2024
Ep. 404 — Personal Data as Audit Evidence: Exploring the impact of DPDPA on Audits
CA Journal
· September 2026
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The Chartered Accountant | Audit September 2024 • Pages 83–87Personal Data as Audit Evidence: Exploring the Impact of DPDPA on AuditsCA. Chetan LunkarMember of the InstituteWith the implementation of India's Digital Personal Data Protection Act ("DPDPA"), data privacy in India will undergo a transformational change. The DPDPA, India's first comprehensive and cross-sectoral data privacy law, is a principles-based legislation that borrows significantly from the General Data Protection Regulation, 2018 ("GDPR") of the European Union. It applies to all entities processing personal data digitally, regardless of size or nature. This article analyses the potential impact of the DPDPA on Chartered Accountants ("Auditor") during financial statement audits.Overview of DPDPAThe DPDPA applies to personal data of individuals processed in digitised form, referred to as Personally Identifiable Information ("PII"), and the individuals to whom the PII relates are designated as Data Principals. PII is broadly defined as any data about an individual identifiable by or in relation to such data, including contact numbers, email addresses, IP addresses, or credit card information.Processing encompasses collection, use, sharing, storage, and erasure of PII. In an audit context, transcribing PII in work papers, performing substantive testing on datasets containing PII, or archiving files with PII constitutes processing.Data Fiduciaries: Entities that determine the purpose and means of processing PII.Data Processors: Entities that process PII on behalf of Data Fiduciaries pursuant to a contract (e.g., payroll service providers).Significant Data Fiduciaries (SDF): Certain Data Fiduciaries notified based on specific criteria with enhanced obligations, such as appointing a Data Protection Officer and conducting periodic audits and Data Protection Impact Assessments.Under DPDPA, PII can be processed based on the consent of the Data Principal or under prescribed grounds for "legitimate uses". Compared to GDPR, non-consent grounds under DPDPA are restricted mostly to government functions or health/public emergencies. Consequently, consent is the primary ground for commercial operations, requiring explicit notice prior to or upon obtaining consent. Non-compliance carries severe financial penalties, reaching up to INR 250 Crores for data breaches.Audit EvidenceAuditors perform audits in compliance with Standards on Auditing ("SA") prescribed by the Institute of Chartered Accountants of India ("ICAI"). The SAs require auditors to obtain sufficient and appropriate audit evidence to evaluate misstatement risks and formulate an opinion.Audit evidence includes information from both internal auditee records and external sources. Depending on whether procedure types involve direct inspection or substantive analytical data testing, PII is captured, transcribed, or retained within audit working papers. Common audit scenarios involving PII include:Payroll Testing: Documenting employee names, PAN, and UAN during walkthroughs or substantive tests for Provident Fund compliance.Tax Compliance: Verifying payee PAN details during substantive testing of tax deductions at source (TDS).Whistleblower Review: Reviewing complaints under CARO that include names and personal identifiers of whistleblowers or implicated individuals.Financial Sector Audits: Verifying and archiving Know Your Customer (KYC) documentation of borrowers.Auditors are required to retain audit files to demonstrate compliance with SAs and legal mandates. To satisfy subjective requirements that an experienced external auditor can understand the conclusions reached, auditors generally adopt a conservative approach by retaining comprehensive audit evidence.Auditors: Fiduciaries or Processors?Determining whether an auditor acts as a Data Fiduciary or Data Processor under DPDPA presents distinct structural interpretations:The Intermediary Conflict: Since PII is provided to auditors by auditees pursuant to statutory audit duties, it can be argued the auditee determines the purpose, making the auditee a Data Fiduciary and the auditor a Data Processor acting under an engagement letter. However, the auditor independently determines the means—deciding what data is required, how it is structured, analyzed, stored, and retained.Under the EU GDPR framework (Guideline 7/2020 by EDPB), auditors are classified as Data Controllers (equivalent to Data Fiduciaries) because statutory independence mandates that auditors control the audit scope, information collection, and technical processing means. Applying this rationale to DPDPA, an Auditor is more likely to be classified as a Data Fiduciary rather than a Data Processor.Exemptions under DPDPAWhile DPDPA offers exemptions for State instrumentalities performing statutory functions or bodies entrusted with regulatory/supervisory roles, auditors likely cannot claim these protections:State Instrumentality Exemption (§7(c)): While ICAI is a statutory body and an instrumentality of the State, individual ICAI members conducting private audits are independent professionals and not instrumentalities of the State.Regulatory/Supervisory Exemption (§17(b)): Although auditors perform functions required by law, individual auditors do not constitute a "body" entrusted with legal regulatory or supervisory functions in the structural sense applicable to ICAI.Auditor as a Data Fiduciary - Complexities & Challenges1. Consent MandatesUnlike GDPR, which provides non-consent legal obligation exemptions for auditors, DPDPA lacks explicit statutory audit exemptions under legitimate use. Obtaining direct consent from every Data Principal (employees, payees, customers) whose data exists in auditee records is operationally impossible for auditors. If a Data Principal refuses consent, an auditor's ability to complete audit procedures would be severely impaired.2. Right to Erasure vs. Statutory RetentionDPDPA grants Data Principals the right to data erasure, except where retention is mandated by law. Audits governed by statutory provisions (e.g., Section 143 of the Companies Act, 2013 or Section 44AB of the Income Tax Act, 1961) require compliance with SAs mandated under Section 143(10). SAs require audit documentation retention for at least seven years. Where audits are not conducted under explicit statutory mandates, conflicts arise between DPDPA erasure mandates and standard SA documentation requirements.3. Other Data Principal RightsEnforcing Data Principal rights to data access, correction, and grievance redressal against auditors provides limited practical utility, as auditors process PII strictly for audit opinion formulation and not for commercial engagement with Data Principals.ConclusionClassifying an auditor as a Data Fiduciary introduces operational challenges that could severely impede independent financial audits. While techniques like data anonymization can reduce exposure, complete elimination of PII processing in audits is impossible. Furthermore, classifying auditors as Data Processors conflicts with their independence in determining audit means. The most practical solution would be for the Central Government to exercise its statutory powers under DPDPA to grant explicit audit processing exemptions similar to the GDPR framework.Key Legal References1. SA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing.2. Digital Personal Data Protection Act, 2023 - Sections 2(i), 2(k), 2(t), 2(x), 3(a), 4(1)(a), 5(1), 6(10), 7, 8, 10(2), 17, 33(1).3. European Data Protection Board (EDPB) - Guideline 7/2020 on Concepts of Controller and Processor in GDPR.4. Companies Act, 2013 - Section 143; Income Tax Act, 1961 - Section 44AB.5. SQC 1 & SA 230 - Audit Documentation Requirements (7-year retention).Author contact: clunkar@gmail.com | Editorial Board: eboard@icai.inPublished in The Chartered Accountant Journal • September 2024
Ep. 405 — Deficient Financial Statements: Are auditors alone to be blamed? The other side of the coin!
CA Journal
· September 2026
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Deficient Financial Statements: Are auditors alone to be blamed? The other side of the coin!The National Financial Reporting Authority (NFRA), notified in November 2018, has actively penalised statutory auditors for deficiencies in financial statements. However, financial reporting integrity depends equally on the Audit Committee—a key governance body mandated under the Companies Act, 2013 and SEBI (LODR) Regulations, 2015. This study explores whether reported financial reporting failures could have been prevented had Audit Committees diligently fulfilled their oversight obligations.1. Background and Current ScenarioOrders issued by the NFRA imposing financial penalties and debarring auditors have become frequent. Since releasing its first Audit Quality Review Report in December 2019, NFRA has debarred individual Chartered Accountants and firms for periods ranging from 1 to 10 years, alongside fines ranging from ₹1 Lakh to ₹3 Crore.Crucially, most entities where audit deficiencies were identified are listed companies. This raises significant questions regarding the efficacy of corporate governance mechanisms within these organizations.2. Significance of Corporate Governance in Financial ReportingThe Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR") reshaped corporate governance in India. The Audit Committee acts as an indispensable intermediary between the board of directors, management, internal auditors, and external auditors. Its independent oversight directly impacts the accuracy, reliability, and transparency of corporate financial disclosures.3. Applicable Legal ProvisionsSection 177 of Companies Act, 2013: Mandates every listed public company (and prescribed classes of companies) to constitute an Audit Committee.Regulation 18 of SEBI (LODR) Regulations, 2015: Requires a qualified and independent Audit Committee where all members are "financially literate" and at least one member possesses accounting or related financial management expertise.Financially Literate: Ability to read and understand basic financial statements (Balance Sheet, Profit & Loss Account, and Cash Flow Statement).Financial Expertise: Experience in finance/accounting, professional certification, or financial sophistication from senior executive roles (e.g., CEO, CFO).Standard on Auditing (SA) 260 (Revised): Regulates communication between statutory auditors and "Those Charged with Governance" (TCWG). Paragraph A51 explicitly underscores the supervisory role Audit Committees must perform.4. Did Audit Committees Function Effectively?Analyses of NFRA orders indicate key structural gaps in how Audit Committees exercised oversight across multiple failure areas:Oversight of Financial ReportingAudit Committees are obligated to review financial statements and disclosures (including Schedule III to Companies Act, 2013 and Ind AS compliance) prior to board submission. NFRA inspection reports revealed widespread non-compliances and inadequate disclosures. In one instance, a company reported a 1,026% sharp rise in revenue (from ₹159.07 crores in Year 1 to ₹1,791.01 crores in Year 2) without the Audit Committee questioning potential aggressive or improper revenue recognition practices.Oversight of External Audit ProcessAudit Committees must select external auditors, evaluate independence, review audit scope, and assess competency. NFRA reports revealed instances where:Auditors lacked understanding of Standards on Auditing (SAs) and Ind AS.Sole-proprietorship auditors with limited resources were appointed for complex listed entities without Engagement Quality Control Reviews (EQCR) or adherence to SQC-1.Severe conflicts of interest existed under Section 144 of the Companies Act, 2013, including an instance where an auditor owned shares of the auditee through a family-owned company.Abysmally low auditor remuneration suggested that cost considerations outweighed competency requirements.Review of Related Party Transactions (RPTs)Under Section 177 and SEBI LODR Schedule II Part C, Audit Committees must scrutinize inter-corporate loans, investments, and approve RPTs at arm's length. In the Coffee Day Enterprises Limited case, NFRA highlighted massive fund diversions, understatement of loans, and evergreening through related party networks that went undetected or unscrutinized by the Audit Committee.Financial Literacy GapsPrimitive Literacy Deficits: In several companies where NFRA debarred auditors, profiles of independent directors on Audit Committees revealed a lack of basic financial literacy. In one listed company, committee directors held degrees exclusively in Physical Education and Chemistry, raising doubts on their ability to interpret complex accounting standards.5. Key Questions Audit Committees Should Ask AuditorsTo enforce active governance, Audit Committees should engage in structured dialogue with auditors using these illustrative questions:Before Annual Audit / Planning StageScope & Sampling: What is the planned scope (e.g., inventory coverage %, trade receivable/payable confirmation %)? What alternative procedures apply if responses fail?Surprise Element: Will audit procedures rotate locations or test unmaterial financial areas to maintain unpredictability?Materiality & CAATs: How are materiality and performance materiality determined? What CAAT tools and sampling methodologies will be deployed?Team & Independence: What is the size/experience of the audit team and Engagement Partner participation level? Are there network affiliations creating potential conflicts of interest?During Post-Audit Review MeetingKey Audit Matters (KAM): What KAMs were identified under SA 701, and what specific procedures addressed them? If none were identified, why?Management Cooperation: Were any scope limitations imposed by management? Was any information deliberately withheld?Estimates & Accounting Integrity: Are accounting estimates (allowances, asset lives, provisions) reasonable? Are policies overly aggressive compared to industry standards?Unadjusted Audit Differences: Were there unrecorded adjustments or disclosures proposed by auditors? What is their impact on the audit opinion?6. The Way ForwardIn an environment of complex accounting standards (such as hedge accounting and fair valuation), regulators like SEBI must revise the definition of "financial literacy". Regulators should enforce mandatory financial reporting courses and assessments for Audit Committee members.Entities should adopt the ICAI "Technical Guide on the Functioning of Audit Committee & its Review Checklist", regularly evaluating skill matrices, diversity, tenure, and ongoing financial education programs.ConclusionWhile auditors remain accountable under SAs and codes of ethics, penalizing only auditors when financial statements fail is insufficient. Primary responsibility for financial statements rests with management, while Audit Committees serve as the primary line of defense. Regulators must conduct reality checks to ensure Audit Committees function in true spirit. Effective two-way communication under SA 260(R) between auditors and TCWG is essential to uphold public trust in corporate governance.References• National Financial Reporting Authority (NFRA) Official Orders and Inspection Reports (https://nfra.gov.in/).• The Companies Act, 2013 (Section 143, Section 144, Section 177).• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Regulation 18, Schedule II Part C).• Standard on Auditing SA 260 (Revised) - Communication with Those Charged with Governance.• ICAI Technical Guide on the Functioning of Audit Committee & Its Review Checklist.Author contact: jainpranav@hotmail.com | Editorial Board: eboard@icai.inPublished in The Chartered Accountant Journal • September 2024
Ep. 406 — Analysis of notifications under the PMLA: the responsibilities of Professionals as Reporting Entities
CA Journal
· September 2026
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Analysis of Notifications Under the PMLA: The Responsibilities of Professionals as Reporting EntitiesBy virtue of notifications No. S.O. 2036(E) and S.O. 2135(E) issued by the Ministry of Finance, Department of Revenue, on 3rd May 2023 and 9th May 2023 respectively, Chartered Accountants (CAs), Cost and Management Accountants (CMAs), and Company Secretaries (CSs) in practice, their firms, and formation agents act as 'Reporting Entities' under Section 2(1)(sa) of the Prevention of Money Laundering Act, 2002 (PMLA). Professionals must maintain robust Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures and report suspicious transactions to combat money laundering.1. Introduction & Historical BackgroundTaxation systems trace back to the First Dynasty of the Old Kingdom in ancient Egypt around 2800–3000 BC, while formal practices in Bharat (India) emerged around the 11th century. Historically, tax evasion arose due to heavy taxation and accessible illicit income sources, leading individuals to participate in predicate crimes such as drug trafficking, smuggling, human trafficking, fraud, and economic offenses. Author Sterling Seagrave, in 'Lords of the Rim', traces 3,000 years of money laundering evolution.In legal terms, Black's Law Lexicon defines "laundering" as the investment or transfer of money from illegal sources (racketeering, drug transactions) into legitimate channels to obscure its original source.Anti-Money Laundering (AML) Initiatives1974: The Basel Committee on Banking Supervision issued statements to prevent criminal use of the banking system.1989: The G7 Summit in Paris adopted the 40 Recommendations of the Financial Action Task Force (FATF) on Money Laundering and Terrorist Financing.1995: The Egmont Group established an international network of Financial Intelligence Units (FIUs).2002: India enacted the Prevention of Money Laundering Act (PMLA), 2002, which came into effect on 1st July 2005.2. FATF Recommendations & ScopeRecommendation 22 of the FATF mandates that lawyers, notaries, independent legal professionals, and accountants report suspicious transactions when carrying out financial transactions for clients. Additionally, the Risk-Based Approach (RBA) guidance highlights ethical obligations preventing professionals from facilitating criminal activity.In anticipation of FATF’s mutual evaluation of India, the Ministry of Finance issued two key notifications under PMLA to align Indian laws with international standards.3. Detailed Analysis of the PMLA NotificationsNotification No. S.O. 2036(E) — Dated 3rd May 2023Notifies financial transactions carried out by a 'relevant person' on behalf of a client in the course of their profession relating to:Buying and selling of immovable property.Managing client money, securities, or other assets.Management of bank, savings, or securities accounts.Organization of contributions for the creation, operation, or management of companies.Creation, operation, or management of companies, LLPs, or trusts, and buying/selling of business entities.Relevant Person: Individuals holding a Certificate of Practice (CoP) under the Chartered Accountants Act, 1949, Company Secretaries Act, 1980, or Cost and Works Accountants Act, 1959, practicing individually or via a firm/LLP.Notification No. S.O. 2135(E) — Dated 9th May 2023Widens the activities (regardless of whether a direct financial transaction occurs) when carried out in the course of business for another person:Acting as a formation agent of companies and LLPs.Acting as (or arranging for another to act as) a director, secretary, or partner in a company/LLP.Providing a registered office, business, correspondence, or administrative address for a company, LLP, or trust.Acting as (or arranging for another to act as) a trustee of an express trust or nominee shareholder for another person.Explicit Statutory Carve-Outs / Exceptions: Activities that are not treated as PMLA activities under these notifications include:Lease, sub-lease, or tenancy arrangements subject to TDS under Section 194-I of the Income-tax Act, 1961.Activities carried out by an employee on behalf of their employer.Filing a statutory declaration for company formation under Section 7(1)(b) of the Companies Act, 2013.4. Key Statutory Provisions under PMLAClient [§ 2(1)(ha)]: A person engaged in a financial transaction or activity with a Reporting Entity, including the person on whose behalf the transaction is conducted.Proceeds of Crime [§ 2(1)(u)]: Property derived or obtained as a result of criminal activity relating to scheduled offenses.Property [§ 2(1)(v)]: Any property used in a scheduled offense, situated within or outside India.Reporting Entity [§ 2(1)(wa)]: Banking companies, financial institutions, intermediaries, or persons carrying on designated businesses/professions.Scheduled Offence [§ 2(1)(y)]: 161 activities covering 29 Acts (under Part A, Part B where value is ₹1 Crore or more, and Part C).Verification of Identity [§ 11A]: Reporting Entities must verify client identity and beneficial ownership.Maintenance of Records [§ 12]: Transaction and identity records must be retained for 5 years after the business relationship ends.Enhanced Due Diligence [§ 12AA]: Prior to specified transactions, REs must examine ownership, financial position, and source of funds.Penalties [§ 13]: Director of FIU may impose fines ranging from ₹10,000 to ₹1,00,000 for each failure to comply.Statutory Immunity [§ 14]: Protects Reporting Entities, directors, and employees from civil or criminal proceedings for filing Suspicious Transaction Reports (STRs) in good faith.5. Regulatory Guidelines & Judicial InterpretationsRBI & ICAI NormsThe RBI issued a Master Circular on KYC/AML/CFT on 4th May 2023. ICAI's Council formulated mandatory KYC norms applicable for professional engagements accepted on or after 1st January 2017.Judicial PrecedentsMurali Krishna Chakrala v. Deputy Director, ED (Madras High Court): The High Court held that Chartered Accountants are only required to examine the nature of documents and not verify their genueness. Issuing a certificate alone is not a valid ground for prosecution under PMLA. Vijay Madanlal Choudhary v. Union of India (Supreme Court): The Apex Court affirmed that Reporting Entities enjoy civil and criminal immunity when filing Suspicious Transaction Reports (STRs) in good faith.6. Unresolved Questions & Grey AreasThe application of PMLA to professionals raises several unresolved practical questions:Are REs liable to report specified transactions if there is no underlying money laundering?Is filing a "Nil Report" required to FIU-IND if no suspicious transactions occur during specified activities?If suspicious transactions surface during a routine audit (outside the scope of specified notification activities), must they be reported to FIU?How does FIU reporting interact with existing statutory fraud reporting under Section 143(12) of Companies Act, 2013?Must all practicing CAs register with FIU even if they do not perform any notified activities?7. Core Obligations & ConclusionPracticing CAs, CSs, and CMAs performing specified activities must comply with the following procedural mandates:Appoint a Principal Officer or Designated Director to interface with the Self-Regulatory Body (SRB) and FIU-IND.Enforce a strict "No Tipping Off" policy towards clients regarding reported suspicious transactions.File Suspicious Transaction Reports (STRs) with FIU-IND within 7 working days from the date of detecting a suspicious transaction.Ensure continuous monitoring of customer profiles and maintain full records confidentially.Given these heavy burdens, regulators should issue clear operational guidelines to ensure professionals are not treated on equal footing with financial institutions and banks.References1. Seagrave, Sterling. Lords of the Rim.2. Black's Law Dictionary.3. Ministry of Finance Notifications No. S.O. 2036(E) & S.O. 2135(E) (May 2023).4. RBI Master Circular DOR.AML.REC.13/14.01.001/2023-24 (May 04, 2023).5. FIU-IND Guidelines (www.fiuindia.gov.in).Author contacts: fcanarula@yahoo.com | Editorial Board: eboard@icai.inPublished in The Chartered Accountant Journal • September 2024
Ep. 407 — Rising Threats: Navigating the Complex World of Cyber Security Attacks
CA Journal
· September 2026
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The Chartered Accountant | Technology September 2024 • Pages 101–103Rising Threats: Navigating the Complex World of Cyber Security AttacksCA. Anjali GanotraMember of the InstituteA cyber security threat involves the illicit use of software tools to breach security measures and gain unauthorized access to private data belonging to individuals, firms, organizations, or governments. With critical infrastructure such as nuclear and power sectors increasingly reliant on computer networks, digital disruptions threaten national security, public safety, and institutional reputation.1. Global Context & Key StatisticsDuring the World Telecommunication Development Conference held in Kigali, Rwanda (June 2022), global delegates emphasized the necessity of developing a proactive cyber security culture and implementing robust assurance practices.99%Respondents expecting identity-related compromises in upcoming years (CyberArk 2023 Report)58%Compromises expected to occur during digital transformation initiatives+51%Increase in reported ransomware incidents in India (CERT-In H1-2022 Report)2. Classification of Malware ThreatsMalware (malicious software) manifests in diverse forms designed to compromise system security, spy on users, or disrupt digital workflows:Spyware: Infiltrates systems via links and acts as digital espionage tools (e.g., Pegasus) capable of extracting private files and locking data.Trojan Horse: Disguises itself as legitimate files; while non-replicating, it hampers performance, leaks data, and spreads when embedded files are transferred.Bugs: Design or development flaws in software code that produce unexpected errors or functional failures.Viruses: Programs designed to alter device functionality, corrupt storage, or leak confidential data to external actors.Adware: Inundates user interfaces and applications with excessive advertisements, severely degrading system processing speeds.Worms: Self-replicating malware that spreads autonomously across network connections, disrupting normal operations rapidly.Bots: Automated programs that, if compromised, can execute unauthorized tasks, transmit spam, or flood web applications.Ransomware: An extended threat vector where malware holds critical data hostage, demanding financial compensation for its restoration.3. Workplace Vulnerabilities & Attack VectorsSQL Injection (SQLi)Occurs when malicious actors insert structured query language code into web application input fields. Successful exploits allow attackers to manipulate backend databases, access sensitive consumer or financial data, alter or delete records, and execute administrative operations. For instance, gaining administrative email access could enable fraudulent fund transfer instructions.Man-in-the-Middle (MitM) AttacksTakes place when sensitive transactions or file transmissions occur over unsecured public Wi-Fi networks (e.g., coffee shops). Interceptors eavesdrop on unencrypted data exchanges without the user's consent.Phishing & Social EngineeringPhishing: Fraudulent emails (e.g., cash prize claims) containing malicious links that silently install data-exfiltrating software upon being clicked.Social Engineering: Manipulation of human psychology to deceive victims into surrendering access or credentials. Examples include impersonating bank officials to obtain OTPs or impersonating family contacts to request financial transfers.Insider Threats & Corporate Espionage: Occurs when employees, contractors, or business partners intentionally leak confidential data or compromise network operations. Competitors may also use deceptive interview setups (e.g., malicious links in video call chats) to trigger data leaks from company laptops.4. Infrastructure Attacks & VulnerabilitiesDenial-of-Service (DoS): Floods a target server with illegitimate request traffic (such as ICMP ping floods or TCP SYN handshake exploits), overloading processing capacity and denying access to legitimate users.Distributed Denial-of-Service (DDoS): An amplified DoS attack launched simultaneously from multiple distributed sources, creating long-term business interruption and severe reputational damage.Zero-Day Attacks: Exploitation of unknown software vulnerabilities by attackers before developers become aware of the security flaw or issue a corrective patch.5. Conclusion & Professional ResponsibilitiesAs professionals managing critical organizational data and financial reporting, members bear a vital responsibility to protect data confidentiality and maintain operational integrity. Continuous education, security awareness, and vigilant digital practices are essential to counter evolving cyber threats.References1. World Telecommunication Development Conference (Kigali, Rwanda, 2022).2. CyberArk 2023 Identity Security Threat Landscape Report.3. Indian Ransomware Report (H1-2022) by CERT-In, Ministry of Electronics & IT, Government of India.4. Cyber Threat Intelligence Advisory Report (August 2023).Author contact: caganotraanjali@gmail.com | Editorial Board: eboard@icai.inPublished in The Chartered Accountant Journal • September 2024
Ep. 408 — Budget 2024-25: A Blueprint for Inclusive Growth and Economic Stability
CA Journal
· September 2026
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The Chartered Accountant | Theme August 2024 • Pages 44–50Budget 2024-25: A Blueprint for Inclusive Growth and Economic StabilityDr. Rajeev KumarAcademicianFinance Minister Nirmala Sitharaman, under the leadership of Prime Minister Narendra Modi, unveiled an ambitious Union Budget for fiscal year 2024-25. Anchored in the vision of inclusive growth, employment generation, and sector-specific development across agriculture, manufacturing, and infrastructure, the budget addresses the aspirations of a diverse populace across regions, genders, and age groups.1. Economic Context & Growth IndicatorsIndia continues to demonstrate robust resilience despite global economic uncertainties. The National Statistical Office (NSO) revised real economic growth projections for FY24 upward from 7.3 percent to 8.2 percent.8.2%Revised Real GDP Growth Projection for FY24 (NSO)₹295.36 Lakh CrEstimated Nominal GDP ($3.53 Trillion) for FY2410.2%Projected Nominal GDP Growth for FY253.1%Core Inflation Rate, aligning with the 4% target2. Budget Receipts & Expenditure SummaryThe FY 2024-25 Union Budget presented four sets of financial estimates: Actuals for 2022-23, Revised Estimates for 2023-24, Provisional Actuals for 2023-24, and Budget Estimates for 2024-25.Sources of Receipts (% of Total Receipts)Borrowings & Other Liabilities: 27% (a sharp 6% reduction relative to FY 2023-24 provisional actuals)Income Tax: 19% (highest contributor among tax revenues)Goods & Services Tax (GST): 18%Corporation Tax: 17%Non-tax Receipts: 9%Union Excise Duty: 5%Customs Duty: 4%Non-debt Capital Receipts: 1%Major Expenditure Allocations (% of Total Expenditure)States' Share of Taxes & Duties: 21% (increased by 3%)Interest Payments: 19%Central Sector Schemes (excl. Defence Capex & Subsidies): 16% (increased by 1%)Finance Commission & Other Transfers: 9%Centrally Sponsored Schemes: 8% (increased by 1%)Defence: 8%Economic Subsidies: 6% (reduced by 1%)Pension: 4%3. Nine Key Priority Areas1. Productivity & Resilience in AgricultureAllocated ₹1.52 lakh crore to release high-yielding, climate-resilient crop varieties, promote natural farming, achieve self-sufficiency in pulses/oilseeds, and deploy digital public infrastructure.2. Employment & SkillingIntroduced Employment Linked Incentives (ELI) to incentivize hiring in manufacturing. The Prime Minister's skilling package aims to train 20 lakh youth over 5 years through a new centrally sponsored scheme.3. Inclusive Human Resource Development & Social JusticeFocuses on marginalized groups and regional initiatives like Purvodaya for eastern states. Includes ₹26,000 crore for connectivity and ₹21,400 crore for power projects in Bihar, alongside a new airport. Continues PM Garib Kalyan Ann Yojna for 80 crore people and allocates ₹2.66 lakh crore for rural infrastructure under PM Awas Yojna.4. Manufacturing, MSMEs & ServicesEnhanced credit access via public sector banks and expanded Mudra loan limits. Introduced E-Commerce Export Hubs for artisans and an internship scheme for 1 crore youth in 500 top companies with a monthly stipend of ₹5,000 and ₹6,000 one-time assistance from CSR funds.5. Urban DevelopmentInitiatives include developing growth hubs, transit-oriented development, creative urban redevelopment, and launching PM Awas Yojana Urban 2.0.6. Energy SecurityReiterated commitment to 1 crore solar rooftops under PM Surya Ghar Yojna and support for nuclear energy and advanced ultra-supercritical thermal power plants.7. Infrastructure & TourismMaintained capital expenditure support of ₹11.11 lakh crore (3.4% of GDP). PMGSY Phase 4 will provide all-weather road connectivity to 25,000 rural habitations. Flood control assistance provided for Bihar, Assam, HP, Uttarakhand, and Sikkim, alongside spiritual/ecotourism development in Bihar and Odisha.8. Innovation, Research & DevelopmentOperationalization of the Anusandhan National Research Fund to boost private sector-led commercial R&D, alongside a vision to expand the space economy fivefold over 10 years.9. Next Generation ReformsLand reforms including Unique Land Parcel Identification Number (ULPIN), GIS mapping, and digital land registries. Labor reforms integrating e-Shram with revamped Shram Suvidha and Samadhan portals.4. Fiscal Overview & DeficitsFiscal Discipline Targets (% of GDP):Fiscal Deficit Target (FY25 BE): 4.9% (reduced from 5.6% PA in FY24)Revenue Deficit Target (FY25 BE): 1.8% (down from 2.6% PA in FY24)Primary Deficit Target (FY25 BE): 0.6% (down from 1.6% PA in FY24)5. Key Tax ProposalsPersonal Income TaxIncreased the standard deduction from ₹50,000 to ₹75,000 for salaried employees and from ₹15,000 to ₹25,000 for family pensioners, benefiting around 4 crore taxpayers. Proposed a comprehensive review of the Income Tax Act, 1961, to reduce litigation and compliance costs.Capital Gains & Securities Transaction Tax (STT)Short-Term Capital Gains (STCG): Increased from 15% to 20% on specified financial assets.Long-Term Capital Gains (LTCG): Increased from 10% to 12.5%, with exemption limit raised from ₹1 lakh to ₹1.25 lakh.STT on Derivatives: Increased to 0.02% on futures and 0.1% on options.Indirect Taxes & Customs DutiesReduced basic customs duties on gold, precious metals, mobile phones, marine products, and solar equipment. Critical minerals including Lithium, Copper, Cobalt, and rare earth elements are fully exempted from customs duty to encourage domestic battery production.References1. Chelliah, R. J. (1991). Report of the Tax Reform Committee, Govt. of India.2. Musgrave, R. A. & Musgrave, P. B. (1989). Public Finance in Theory and Practice (5th ed.), McGraw-Hill.3. Rangarajan, C. & Srivastava, D.K. (2005). Fiscal Deficits and Government Debt: Implications for Growth and Stabilisation, EPW.4. Govt. of India (2024). Union Budget Documents & Economic Survey 2023-24, Ministry of Finance.Author contact: eboard@icai.inPublished in The Chartered Accountant Journal • August 2024
Ep. 409 — Significant Direct Tax Proposals in the Finance (No.2) Bill, 2024
CA Journal
· September 2026
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Significant Direct Tax Proposals in the Finance (No.2) Bill, 2024The Finance (No.2) Bill, 2024 introduces pivotal direct tax amendments affecting capital gains, share buybacks, reassessments, and search assessments. Grouped under key themes of tax simplification, rationalization, anti-avoidance, and improved administration, these proposals bring structural modifications to the Income-tax Act, 1961.1. Key Key Metrics & Operational Timelines12.5%Revised LTCG tax rate (without indexation) effective July 23, 202412 / 24 MoHarmonized holding periods for listed (12 mo) & non-listed (24 mo) assets5 YearsReduced maximum time limit to reopen tax reassessments (down from 10 yrs)60%Flat tax rate applicable on undisclosed income in reintroduced Block Assessments2. Capital Gains Tax RestructuringRemoval of Indexation & Tax Rate Reduction (Sections 48 & 112)Effective July 23, 2024, the scheme of taxation under Section 112 is undergoing a major shift. The tax rate for long-term capital gains (LTCG) is reduced from 20% to 12.5%, while indexation benefits available under the second proviso to Section 48 for real estate, gold, and unlisted assets are eliminated.Impact Analysis: Taxpayers whose assets appreciate more than 8 times over their 2001 FMV or cost of acquisition stand to benefit from the flat 12.5% rate. However, taxpayers with moderate appreciation will experience higher tax burdens due to the loss of inflation indexation. Grandfathering provisions or an option to pay 20% with indexation have been recommended to ensure fairness.Holding Period Rationalization (Section 2(42A))The criteria for determining short-term capital assets have been simplified to two broad categories:Listed Securities: Holding period of not more than 12 months.All Other Assets: Holding period of not more than 24 months.Consequential & Clarificatory NeedsSlump Sale (Section 50B): Requires a consequential amendment to reduce the holding period threshold for undertakings from 36 months to 24 months.IPO Offer for Sale (Section 55(2)(ac)): Needs clarification regarding whether unlisted equity shares sold via an Offer for Sale (OFS) in an IPO require a 12-month or 24-month holding period for LTCG qualification.3. Corporate & Shareholder TaxationShare Buyback Distribution Taxed as Dividend (Section 2(22)(f))W.e.f. October 1, 2024, amounts received by shareholders upon share buybacks will be deemed as dividend income and taxed at applicable marginal rates (up to 30%). The original cost of acquisition of buyback shares will be treated as a capital loss, which cannot be offset against the deemed dividend income.Abolition of Angel Tax (Section 56(2)(viib))The angel tax provision—which taxed premium investments exceeding fair market value in closely held companies—has been completely abolished for resident companies, offering major relief to domestic startups and investors.Restriction on Gift Transfers (Section 47(iii))W.e.f. Assessment Year 2025-26, tax-exempt capital asset transfers via gifts or irrevocable trusts are strictly restricted to Individuals and HUFs. Corporate entities and firms can no longer claim tax exemption under Section 47(iii) for gift transfers, impacting CSR-related donations.4. Income Classification: Residential Letting OutUnder proposed Explanation 3 to Section 28, effective A.Y. 2025-26, any income derived from letting out a residential house or part thereof by the owner will be mandatory taxed under "Income from house property", rather than as business income. This overrides earlier Supreme Court rulings (*Chennai Properties*, *Rayala Corporation*) for residential properties, though clarification remains pending for commercial property letting.5. Tax Administration, Reassessments & Search CasesRationalization of Reassessment Timelines (Sections 148, 149 & 151)Effective September 1, 2024, the outer time limit to issue reassessment notices under Section 149 is reduced from 10 years to 5 years from the end of the relevant assessment year (3 years in normal cases; 5 years for income escaping assessment exceeding ₹50 lakh).Reintroduction of Block Assessment for Search CasesSearch Assessment Framework (Effective Sept 1, 2024):Replaces individual yearly assessments with a single consolidated assessment for a 6-year block period.Undisclosed block income will be taxed at a flat rate of 60% under Section 113.Penalty of 50% of tax payable applies unless undisclosed income is declared voluntarily in the search return.Assessment must be completed within 12 months from the execution of search authorizations.Direct Tax Vivad Se Vishwas Scheme, 2024 (VSV 2.0)A new amnesty scheme has been introduced to expedite the resolution of pending tax appeals at the first appellate level by allowing taxpayers to settle disputed tax liabilities with partial waivers of interest and penalties.Author contact: eboard@icai.inPublished in The Chartered Accountant Journal • August 2024
Ep. 410 — The Union Budget 2024-25: Overview of GST proposals
CA Journal
· September 2026
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Theme: The Chartered AccountantThe Union Budget 2024-25: Overview of GST proposalsCA. Sushil Kumar Goyal Member of the InstituteThe Union Budget 2024-25 has introduced a series of thoughtful amendments in the GST law, reflecting a blend of simplification, rectification, and enhancement of compliance mechanisms. These changes are anticipated to streamline tax administration, reduce compliance burdens, and support various stakeholders, including SMEs and e-commerce operators. As these amendments come into effect, continuous monitoring and analysis will be essential to understand their full impact and ensure that they meet the intended objectives of creating a more efficient and transparent tax system.Union Budget 2024 presents the Government's agenda of "Viksit Bharat" focusing primarily on employment, skilling, MSMEs and middle class. The Hon'ble Finance Minister, following the strategy outlined in the Interim Budget presented the Union Budget 2024, which strives to create abundant opportunities in every sector, be it agriculture, human resource, social justice, manufacturing and services, urban development, infrastructure and the like. The Finance Minister also informed that to enhance 'Ease of Doing Business', the Government is working on the Jan Vishwas Bill 2.0. Further, it is planned to incentivize States for implementation of their Business Reforms Action Plans and digitalization.On the indirect taxes front, Goods & Services Tax (GST) as well as customs saw a whole lot of positive changes. The Union Budget 2024 has introduced significant changes aimed at streamlining compliance, addressing practical issues faced by businesses, and enhancing the overall tax administration system. This article aims to discuss the amendments made in GST and their implications and the anticipated impact on various stakeholders.Amendments proposed in GST LawThe amendments proposed in CGST Act, 2017, IGST Act, 2017, UTGST Act, 2017 and the GST (Compensation to States) Act, 2017 (GST Law) mainly showcase the recommendations made in the 53rd meeting of the GST Council. The amendments in the GST provisions may be divided based on the objectives with which the same are brought in by the Finance (No.2) Bill 2024. The proposed amendments are categorised in three parts in the article, namely "Trade Facilitation", "Better Compliance Mechanisms" and "Legal and Administrative Streamlining" and let us start our discussion based on each these categories.Trade Facilitation(i) Extra Neutral Alcohol (ENA) used in Alcoholic BeveragesExclusion of "un-denatured extra neutral alcohol or rectified spirit used for manufacture of alcoholic liquor for human consumption" from the levy of GST in Section 9(1) aligns with the current exclusion of alcoholic liquor for human consumption. Similar amendments are also proposed in IGST Act and UTGST Act.(ii) Activity of Apportionment of Co-insurance PremiumThe proposed amendment in Schedule III to CGST Act, 2017 seeks to classify the activity where the lead insurer apportions the co-insurance premium to the co-insurer in co-insurance agreements as neither a supply of goods nor supply of services. This is however subject to the condition that the lead insurer pays the tax liability on the entire premium paid by the insured.(iii) Services by Insurer to Re-insurerSimilarly, the services provided by the insurer to the re-insurer, where the ceding commission or reinsurance commission is deducted from the reinsurance premium, are also proposed to be treated as neither a supply of goods nor supply of services. This is contingent on the reinsurer paying the tax liability on the gross reinsurance premium inclusive of the commission.The proposed changes to Schedule III as discussed in point (ii) and (iii) above will significantly impact the insurance industry by simplifying tax compliance and reducing ambiguities. The amendment is treating the apportionment of co-insurance premiums and services between insurers and reinsurers as non-supplies, and thus, the industry can focus more on their core activities without the added complexity of GST on these transactions. This will also foster better collaboration and efficiency in the insurance sector, ultimately benefiting policyholders through potentially lower premiums and better service.(iv) Empowering the Government for RegularizationThe insertion of Section 11A in the CGST Act, 2017 is a significant amendment, empowering the Government to regularize non-levy or short levy or higher levy of central tax due to any general practice prevalent in trade. This provision acknowledges the practical difficulties and trade practices that might have led to non-compliance and provides a legal framework to address such issues retrospectively.Similar powers are proposed for the IGST Act, 2017, UTGST Act, 2017 and GST (Compensation to States) Act, 2017 as well. This amendment aims to bring uniformity and fairness in the tax administration by allowing the Government to address past practices without unduly penalizing taxpayers for following common industry practices which were not strictly compliant with the GST law. Similar provision in respect of the availment of input tax credit is also required and should be covered within the ambit of this provision.(v) Allowing Authorised Representative to appear on behalf of Summoned PersonSection 70 of the CGST Act, 2017 is proposed to be amended by inserting a new sub-section (1A) to permit an authorised representative to appear on behalf of the summoned person before the proper officer. This provision will facilitate the summoned person to fulfil his obligations by attending in person or through an authorised representative, thereby fostering a more effective representation of the matter, because in number of cases the matter is not related to the management of the organisation but related to tax compliance.(vi) Amnesty for Taxpayers for Interest & PenaltyA new section 128A is proposed to be inserted in the CGST Act, 2017 to provide for a conditional waiver of interest and penalty in respect of notices/orders issued under section 73(1), statements issued under section 73(3), orders issued under section 73(9), or even in the case of orders issued by the Appellate Authority or Revisional Authority for the Financial Years 2017-18, 2018-19, and 2019-20.This waiver would be available if the person pays the full amount of tax payable as per the notice, statement, or order, as the case may be, on or before a date notified by the Government on the recommendations of the Council (as of now 53rd GST Council has recommended 31st March 2025), except for demand notices in respect of erroneous refunds. In cases where interest and penalty have already been paid in respect of any demand for the said financial years, no refund shall be admissible for the same.This section aims to reduce the burden on taxpayers for past liabilities and encourage compliance by offering relief for certain periods. However, like any other amnesty scheme, the compliant taxpayer who has settled his dues will feel the pinch as he will not be eligible for refunds.(vii) Relief to Taxpayers in relation to Input Tax Credit AvailmentAmendments to section 16 of the CGST Act, 2017 propose to enhance the flexibility in claiming input tax credit (ITC). A new sub-section (5) proposed to be inserted, which seeks to allow the taxpayers to claim ITC for invoices or debit notes from FY 2017-18 to 2020-21 in returns filed up to November 30, 2021. The said amendment is offering relief to the persons, who have already taken credit upto the given date although the same could have also been extended to others, who failed to do so upto the given date.Another new sub-section (6) proposed to be inserted in section 16 seeks to permit ITC claims for invoices or debit notes in returns filed within 30 days of revoking registration cancellation, provided the time limit under sub-section (4) has not expired.These changes streamline compliance and provide taxpayers with needed flexibility in managing ITC claims.(viii) Relief to Input Service Distributors in relation to Transitional CreditInput Service Distributors will also be allowed to claim transitional credit for eligible CENVAT credit on input services received and invoiced before the appointed day by virtue of an amendment proposed in section 140(7) of the CGST Act, 2017. This change alleviates credit blockage issues, facilitating smoother credit transitions for taxpayers.The amendments at points (vi), (vii) and (viii) above collectively ease financial pressures and streamline compliance processes, benefiting taxpayers by providing more opportunities and reducing past liabilities.(ix) Reduction in amount of pre-deposit for filing appealSection 107 of the CGST Act, 2017 is proposed to be amended to reduce the maximum amount of pre-deposit for filing appeal before the Appellate Authority from Rs. 25 crores to Rs. 20 crores in CGST. Section 112 of the CGST Act, 2017 is also proposed to be amended to reduce the maximum amount of pre-deposit for filing appeals before the Appellate Tribunal from the existing 20% to 10% of the tax in dispute and also reduce the maximum amount payable as pre-deposit from Rs. 50 crores to Rs. 20 crores in CGST.The above amendments offer significant relief to Small and Medium Enterprises (SMEs). These changes alleviate the financial burden on SMEs, making it more feasible for them to contest tax demands and seek judicial redressal. By lowering the pre-deposit requirements, SMEs can better allocate their financial resources towards their operational needs and growth rather than tying up significant funds in pre-deposit requirements. This, in turn, promotes a fairer tax system where even smaller businesses have the opportunity to challenge tax assessments and defend their interests without facing prohibitive costs.(x) Time limit for filing appeal before GSTATSection 112 of the CGST Act, 2017 is proposed to be amended to empower the Government to notify the date for filing appeal/application before the Appellate Tribunal and also enable the Appellate Tribunal to admit Departmental appeals filed within 3 months after the expiry of the specified time limit of 6 months.The empowerment of the Government to notify the filing dates for appeals or applications before the Appellate Tribunal enhances the procedural clarity and efficiency, further benefiting SMEs by streamlining the compliance process.Better Compliance Mechanisms(i) Electronic Furnishing of TDS ReturnsSection 39 of the CGST Act, 2017 is proposed to be amended to mandate electronic submission of TDS returns every month even if no tax is deducted during the month, i.e. the amendment provides for filing of nil TDS returns as well. This amendment is aimed at ensuring that all taxable transactions are reported promptly and accurately, which enhances the overall tax compliance framework.(ii) Determination of Time of SupplyFor transactions under the reverse charge mechanism, a new clause (c) is proposed to be inserted in section 13(3) of the CGST Act, 2017. This clause specifies that the time of supply shall be the date of issue of the invoice by the recipient when the recipient is required to issue an invoice and payment has not been made until then for that supply. This change provides clarity on the time of supply, ensuring timely tax payments and reporting.(iii) Time Limit for Issuing InvoicesAn enabling provision is proposed in clause (f) of section 31(3) of the CGST Act, 2017 to prescribe a time limit for issuing invoices under the reverse charge mechanism, especially when the supplier is not registered. This amendment aims to streamline the invoicing process, thus aiding in accurate tax reporting and compliance.An explanation is proposed to be added to sub-section (3) of section 31 to clarify that a supplier registered solely for tax deduction at source (TDS) under section 51 will not be considered a registered person for the purposes of clause (f) of sub-section (3) of section 31. This distinction helps in simplifying the compliance requirements under RCM.These amendments are part of the broader initiative to enhance the efficiency of tax administration, ensuring that tax liabilities are met promptly and accurately. By setting clear guidelines and timelines for various compliance requirements, the Government aims to reduce ambiguities and improve the overall tax compliance environment.Legal and Administrative Streamlining(i) Insertion of Section 74AA new section 74A is proposed to be inserted in the CGST Act, 2017 to provide for determination of tax not paid/ short paid/ erroneously refunded or ITC wrongly availed/ utilised for both fraudulent and non-fraudulent reasons pertaining to the Financial Year 2024-25 onwards.It provides a common time limit for issuing demand notices and orders in respect of demands from the Financial Year 2024-25 onwards, irrespective of whether the charges of fraud, wilful misstatement, or suppression of facts are invoked or not, while keeping a higher penalty, for cases involving fraud, wilful misstatement, or suppression of facts.Under the new section, the notice can be issued upto 42 months from the due date of filing the annual return of the relevant financial year or up to 42 months from the date of erroneous refund. Further, no notice will be issued if the amount in question for a financial year is less than Rs. 1,000. Furthermore, time limit for issuing of order is being proposed as 12 months from the date of issue of notice which can be extended maximum by 6 months.The amount of penalty for fraud and non-fraud cases is being kept the same as provided under sections 73 and 74 of the CGST Act, 2017 respectively. However, the time limit for the taxpayers to avail the benefit of nil/reduced penalty, by paying the tax demanded along with interest, is being increased from 30 days to 60 days.Consequential amendments in Sections 73 and 74 are proposed to bring into effect the applicability of the proposed section 74A for demand notices pertaining to FY 2024-25 onwards. Sub-section (12) is proposed to be inserted in sections 73 and 74 to restrict the applicability of these sections for the determination of tax pertaining to the period up to FY 2023-24.Additionally, consequential amendments are also proposed in sections 10, 21, 35, 49, 50, 51, 61, 62, 63, 64, 65, 66, 75, 104, 107, and 127 of the CGST Act, 2017 to incorporate a reference to the proposed new section 74A.The introduction of section 74A and the amendments in sections 73 and 74 are expected to have a significant impact on both taxpayers and the tax department. For taxpayers, this means a clearer and more predictable timeline for tax assessments and demands, reducing uncertainty and potential litigation. The higher penalties for fraud and wilful misstatement serve as a deterrent against tax evasion, promoting greater compliance. For the tax department, these changes simplify the legal process, streamline administrative procedures, and help focus enforcement efforts on more serious cases of non-compliance.(ii) E-commerce Operators not liable to penalty under section 122(1B)Section 122(1B) is proposed to be amended to restrict the applicability of sub-section (1B) to only those electronic commerce operators who are required to collect tax at source, thus streamlining the penalty provision with correct perspective and bringing the needed clarity.(iii) Refund to ExportersAmendments have been proposed in the refund provisions under the CGST Act, 2017 and IGST Act, 2017 particularly affecting zero-rated supplies.Omission of the second proviso to sub-section (3) and insertion of sub-section (15) in section 54 the CGST Act, 2017 explicitly provide that no refund of unutilized ITC or Integrated Tax (IGST) shall be allowed in case of zero-rated supply of goods where such goods are subjected to export duty.Simultaneously a new sub-section (5) is proposed to be inserted in section 16 of the IGST Act, 2017. This provision will ensure that no refund of unutilized ITC or IGST paid on zero-rated supplies of goods will be allowed if these goods are subjected to export duty.Furthermore, sub-section (4) of section 16 of the IGST Act, 2017 is proposed to be amended to empower the Government to notify specific class of persons who may make zero rated supplies of goods and/or services or class of goods or services which may be supplied on zero rated basis, and refund of IGST in respect of which can be claimed, in accordance with the provisions of section 54 of the CGST Act, 2017, subject to such conditions, safeguards and procedures as may be prescribed.Exporters of goods subjected to export duty will no longer be able to claim refunds of unutilized ITC or IGST. This change may affect the cash flow for such exporters. Exporters must carefully evaluate their supply chains to align with the new provisions.(iv) Anti-Profiteering CasesSection 171 is proposed to be amended to empower the Government to notify the cut-off date for accepting anti-profiteering applications. The Government will notify a specific date from which the Authority under this section will not accept any new applications for anti-profiteering cases.Further, it is being provided that Appellate Tribunal may be notified as the Authority of Anti-Profiteering. The explanation proposed in section 171 includes a reference to the Appellate Tribunal within the Authority under this section. This inclusion allows the government to notify the Appellate Tribunal to act as the Authority for anti-profiteering cases.Author may be reached at eboard@icai.inDocument Referenced: 81328cajournal-august2024-15 (1).pdf
Ep. 411 — Budget 2024: Focus on MSME Credit and bridging the Funding Gap
CA Journal
· September 2026
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Budget 2024: Focus on MSME Credit and bridging the Funding GapBudget 2024 showcases the vital role of MSMEs in India's economy, spearheading initiatives to address the sector's significant funding gap. Key measures include lowering the turnover threshold for the Trade Receivables electronic Discounting System (TReDS) from ₹500 crore to ₹250 crore, expanding access to collateral-free working capital, and introducing AI-led credit analytics for better financial inclusion. These steps are expected to improve cash flow, reduce reliance on costly financing, and foster a more inclusive financial ecosystem for MSMEs. The budget's focus on timely payments and innovative financing solutions will drive growth, innovation, and job creation in the MSME sector.In the global economy, micro, small, and medium enterprises (MSMEs) play a significant role in job creation, innovation, and regional development. According to the United Nations, the MSME sector forms 50% of the global economy and generates 60 to 70% of employment. These enterprises drive local and national economies and sustain livelihoods, especially for the poor, women, youth, and vulnerable groups.The 64 million-strong MSMEs are the front runners of the Indian economy, currently generating over 110 million jobs annually. With close to 23% of the workforce under its anvil, the MSME sector is the second-largest employment generator in India after agriculture. 30% of India's GDP, 38.4% of the total manufacturing output, and 45% of the country's total exports are led by this sector.The July 2024 data of the Ministry of Micro, Small & Medium Enterprises shows a steady growth trajectory of MSME registration on the Udyam portal and the Udyam Assist Platform (UAP) hitting a 47.66 million mark. These include 46.82 million micro, 0.71 million small, and 0.067 million medium-sized enterprises, which are 98.4%, 1.5%, and 0.1% respectively of the total registered entities. With a projected CAGR of 2.5%, the number of MSMEs will reach 75 million from 64 million soon.Challenges and liquidity issues plaguing the MSME sectorAccess to formal finance is a major challenge for most Indian MSMEs. According to a report, MSME credit penetration in India is only 14%, compared to 50% in the US and 37% in China. This shows a credit gap of ₹25 trillion in the Indian MSME sector. By the end of December 2023, the outstanding credit to MSMEs by scheduled commercial banks had grown by 20.9% annually, reaching ₹44.36 lakh crore. Additionally, MSMEs face delayed payments from buyers amounting to ₹10.7 lakh crore annually, further exacerbating their liquidity issues.The lack of easily available and collateral-free credit sources intensifies these problems. Working capital shortages hinder daily operations and growth opportunities for MSMEs. High interest rates on loans make it difficult for MSMEs to repay and invest in their businesses, while complex loan application processes and a lack of technical expertise to explore alternative finance channels add to the challenge.Banks often perceive MSMEs as risky investments, leading to insufficient and untimely funding. This results in a lack of capital to purchase necessary machinery, equipment, and raw materials, or even to cover basic living costs. MSMEs also struggle with market competition, scalability, and innovation. Regulatory issues, such as tax compliance and labour law changes, have further strained the sector, making it difficult for MSMEs to operate smoothly.Insufficient conventional financing productsBanks and other lending institutions offer term loans and working capital loans to MSMEs. While working capital loans are for daily cash needs, term loans are for business expansion, capital expenditure, or for buying fixed assets. Each loan scheme has different interest rates based on factors like loan amount, repayment tenure, nature and tenure of business, creditworthiness, and repayment capability.In April 2024, gross bank credit to MSMEs under priority sector lending norms grew by 18.1%, reaching ₹24.6 lakh crore, compared to ₹20.84 lakh crore in April 2023. Priority credit to MSMEs accounted for 14.9% of India's non-food credit during the month. Credit to micro and small enterprises grew by 18.6% to ₹19.64 lakh crore, while credit to medium-sized organizations increased by 16.5% to ₹4.98 lakh crore.Delayed Payments as a major deterrentDelayed payments from corporates are a significant issue for MSMEs already struggling with liquidity. According to a report by the Global Alliance for Mass Entrepreneurship, delayed payments to MSMEs amount to approximately ₹10.27 lakh crore, which is estimated to be 7.8% of India's GDP. Typically, the payment cycle of MSMEs hovers around 90 to 120 days. This seemingly large window has the propensity to create a mismatch between the cash inflows and outflows of an entity. Therefore, the working capital requirements take a hit. Often MSMEs face cash flow disruption, making it difficult for them to meet operational expenses, pay salaries to employees, and invest in growth. Many of them resort to expensive alternative financing options to bridge the gap, leading to increased interest costs and debt burdens.Limited working capital due to delayed payments restricts the ability of MSMEs to expand operations, invest in new technology, or explore new markets. This hampers growth potential and stifles job creation. Around ₹10.7 lakh crore is locked up in delayed payments from buyers to MSME suppliers, with 80% owed to micro and small enterprises, totalling ₹8.55 lakh crore.Innovative supply chain financing productsTraditional bank loans are often hard for MSMEs to secure due to outdated financial records, a weak Balance Sheet and a lack of collateral. However, supply chain financing (SCF) offers a cost-effective, collateral-free alternative. SCF helps MSMEs improve cash flow, expand operations, and seize opportunities without long-term loan agreements.For years, SCF couldn't cover the long tail of the supply chain ecosystem due to paper-based processes. But with increased collaboration between banks and fintech, the availability of rich business data with GST Authorities and the advent of technologies such as blockchain, SCF products are becoming more accessible. This allows for easy access to SCF and meets the working capital requirements for large/medium and small enterprises."By lowering the annual turnover threshold for buyers from ₹500 crore to ₹250 crore, the government is enabling TReDS to expand significantly."A financial lifeline called TReDSThe Trade Receivables electronic Discounting System (TReDS) platform is fast growing as a crucial supply chain financing mechanism in an era of banking and fintech collaboration. This platform simplifies the financing process for MSMEs by making transactions-based financing smooth and quick. TReDS provides unsecured financing, which remains an off-Balance Sheet liability in the hands of the MSME. As soon as an MSME supplier submits unpaid bills on the TReDS platform, these invoices are then verified and approved by the corporate buyers. Once approved, the invoices are auctioned to by the registered financiers on the platform. Financiers bid on approved bills, and MSME sellers choose the best-interest bid. The financier then transfers the funds directly to the seller's bank account. On the due date, the corporate buyer pays the invoice amount to the financier.This digital process enhances transparency, efficiency, and security for all parties, offering instant liquidity, and significantly improving cash flow for MSMEs. So far, TReDS has enabled transactions worth over ₹3 lakh crore and facilitated 1 crore invoices by onboarding over 90,000 MSMEs. Interest rates on TReDS range between 7% and 11% per annum, compared to 16% to 24% per annum outside on an unsecured line of credit. This minimizes paperwork, ensures timely payments, and reduces risk for MSMEs by promptly crediting their accounts 24 hours after accepting an offer.ImpactEarlier this year, a new regulation mandating companies to settle dues with Micro, Small, and Medium Enterprises (MSMEs) within 45 days had somehow impacted the MSME sector. This regulation, introduced as a new clause (h) to Section 43B of the Income Tax Act, in the Finance Act 2023, stipulates that any payments owed to MSMEs not resolved within the 45-day window will be disqualified for tax deductions until the payment is made. This provision aims to motivate larger entities to prioritize their settlements with MSME counterparts, thereby fostering a more robust economic environment for these smaller businesses. While these amendments aim to instil financial discipline and safeguard MSMEs against delayed payment their impact is felt by both the MSMEs and their corporate counterparts. This regulatory shift highlights the importance of timely payments, placing added pressure on managing their cash flow effectively. For MSMEs already struggling with liquidity challenges, delayed payments from corporates can exacerbate their financial strain. Conversely, corporates face the challenge of balancing their payment obligations with maintaining liquidity reserves, especially in the wake of economic uncertainties. It is important to realise the far-reaching implications of these regulatory changes across various sectors is crucial.By enforcing timely payments, the regulation ensures a healthier cash flow for MSMEs, mitigating the common issue of delayed payments that often hamper their operations and growth. This legislative change is expected to create a ripple effect across the supply chain, encouraging a culture of prompt payments and financial discipline among larger corporations. Here, TReDS can become the simplest, well-meaning and straightforward solution for the Buyers to make timely payments to MSME suppliers at the TReDS platform and avoid disallowance under the IT Act. Since TReDS provides MSMEs with quick access to working capital at a very reasonable cost, the MSMEs can offer a much better price to the Buyer in the next contract. Also, the implementation of TReDS can create a healthier and more robust supply chain ecosystem, resulting in better product quality, shorter lead times, and enhanced overall supply chain efficiency.In the recent amendment notified by the Ministry of Corporate Affairs (MCA) to MSME Form-1 reporting requirements, the Govt. has made its intentions clear that all buyer companies should make timely payments to MSMEs and for any delay in payment they are answerable. TReDS is recognised as an important mode of payment to MSME suppliers and related reporting is specifically asked for in the recently amended MSME Form-1.The focus on TReDS in this Budget 2024 further amplifies the positive impact on MSMEs. By lowering the annual turnover threshold for buyers from ₹500 crore to ₹250 crore, the government is enabling TReDS to expand significantly. This change is projected to bring 22 Central Public Sector Enterprises (CPSEs) and 7,000 additional companies onto the platform, thereby enhancing MSMEs' ability to convert trade receivables into cash more efficiently. Consequently, Banks and Non-Banking Financial Companies (NBFCs) will be attracted to TReDS, offering MSMEs collateral-free working capital at competitive rates.The inclusion of tier 2 and 3 MSMEs in the financial ecosystem through an AI-led credit analytics engine for better credit assessment will further broaden their access to necessary funds. Further, the inclusion of Trade Credit Insurance for TReDS transactions will significantly improve the confidence of banks and NBFCs in underwriting the invoices of low-rated/un-rated buyers of MSME suppliers. This initiative highlights the government's commitment to integrating a wider array of MSMEs into the mainstream financial system, promoting inclusivity and growth.ConclusionThe Union Budget 2024 brings a renewed focus on supporting MSMEs, recognizing their indispensable role in driving job creation, innovation, and regional development. With 64 million MSMEs contributing significantly to India's GDP, employment, and exports, addressing the sector's challenges is crucial for sustained economic growth. The budget highlights key initiatives such as lowering the turnover threshold for TReDS from ₹500 crore to ₹250 crore, aiming to onboard more companies and Central Public Sector Enterprises, thereby enhancing the accessibility of collateral-free working capital for MSMEs. Furthermore, the introduction of AI-led credit analytics for better credit assessment will broaden financial access, integrating more tier 2 and 3 MSMEs into the mainstream financial system.MSMEs must leverage the enhanced opportunities provided by the TReDS platform and innovative supply chain financing solutions to secure the necessary capital for growth and expansion. To ensure timely payments to support the working capital requirements of MSMEs, the other stakeholders, including banks, NBFCs, and larger corporations must also be active participants in the TReDS ecosystem. By working together, we can close the funding gap, foster financial inclusivity, and unlock the full potential of India's MSME sector, driving robust economic growth and development.References■ https://www.financialexpress.com/business/sme/priority-bank-credit-to-msmes-jumps-18-in-april-from-year-ago-period-rbi-data/3516605/■ https://www.businesstoday.in/interactive/photo-essay/india-s-msme-conundrum-can-the-sector-rise-through-it-s-present-challenges-202-08-04-2024■ https://www.businesstoday.in/union-budget/story/msmes-outline-their-top-priorities-ahead-of-budget-2024-25-436373-2024-07-09■ https://www.credable.in/insights-by-credable/business-insights/credit-for-the-underserved-addressing-the-massive-dollar-five-hundred-thirty-billion-msme-credit-gap/■ https://www.youtube.com/watch?v=CbuwyksYJFA■ https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/EN/wasme_access_to_credit_for_indian_msmes.pdf■ https://www.ibef.org/blogs/unlocking-india-s-digital-sme-credit-gap-and-economic-potential■ https://economictimes.indiatimes.com/small-biz/sme-sector/innovating-msme-financing-cashinvoice-partners-with-hdfc-bank-to-enhance-supply-chain-finance-solutions/articleshow/107553375.cms?from=mdr■ https://thewire.in/economy/the-debt-challenge-treading-carefully-on-prioritising-economic-growth-with-fiscal-stability■ Ministry of Micro, Small and Medium Enterprises, Government of India■ Small Industries Development Bank of India (SIDBI)■ Reserve Bank of India (RBI) Reports■ Economic Survey 2023-24■ https://www.business-standard.com/finance/personal-finance/45-day-msme-payment-rule-impact-and-details-of-section-43b-h-explained-124032600333_1.htmlAuthor is Head, SME Business at M1xchange. He may be reached at eboard@icai.inDocument Referenced: 81331cajournal-august2024-16.pdf
Ep. 412 — Empowering India through Skill Education and Financial Literacy: Insights from the 2024 Union Budget
CA Journal
· September 2026
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Empowering India through Skill Education and Financial Literacy: Insights from the 2024 Union BudgetThe Union Budget of 2024, presented by the Government of India, outlines a comprehensive strategy to transform the nation into a Viksit Bharat, or a developed nation. Central to this vision is the focus on skill education and financial literacy, seen as pivotal elements in driving socio-economic growth and fostering an inclusive society. This article explores the budget's significant allocations towards skill development programs such as the Skill India Program, mandatory financial literacy courses, and initiatives in Artificial Intelligence, highlighting the government's commitment to equipping the workforce with necessary skills to meet the demands of a rapidly evolving job market.By CA. Harsh Goel, Academician and Member of the InstituteIndia's journey towards becoming a developed nation hinges significantly on its ability to empower its citizens with relevant skills and financial knowledge. With a median age of 28 and 65% of people under 35, many lack the skills required in a contemporary economy, with only about 51.25 percent of young people employable (Wheebox ISR Report 2024). The Union Budget of 2024 underscores the importance of skill education and financial literacy, which is critical for empowering citizens to make informed financial decisions. Despite improvements, financial literacy in India remains relatively low, with significant disparities across regions, genders, and socioeconomic groups (Jangili et al., 2022). The budget's initiatives aim to address these gaps and promote financial inclusion.Skill Development in the 2024 BudgetThe budget for skill development has seen a significant increase, with allocations rising from ₹3,260.18 crore in 2023-24 to ₹4,409.63 crore in 2024-25. This includes funding for the Skill India Program (₹2,685.64 crore), Vocational Education and Training (₹17.56 crore), and the SANKALP program (₹380 crore). Additionally, ₹1,000 crore has been allocated for the upgradation of Industrial Training Institutes.Major initiatives focused on with the enhanced budgets include:Revised Model Skill Loan Scheme: Now offers loans up to ₹7.5 lakh, backed by a government-promoted Fund, aiming to benefit 25,000 students annually to increase employability and economic growth.Centre of Excellence for Artificial Intelligence: ₹255 crore allocated to establish a CoE for AI to equip youth with necessary skills and address the talent gap.Paid Internships in Top Companies: Aims to provide internships at 500 top companies to one crore youngsters over a five-year period. Participating organizations will cover 10% of internship fees from CSR funds and training costs. Interns will get a monthly stipend of ₹5,000 and one-time assistance of ₹6,000.Critical Mineral Mission: Aims to enhance skill development in sectors related to the extraction and processing of critical minerals.Mandatory Financial Literacy Courses: Introduced as a prerequisite for claiming the second instalment of the subsidy provided to newly entering workforce members earning ₹1 lakh per month.Financial LiteracyHaving a thorough understanding of a range of personal finance subjects is a prerequisite for financial literacy, which allows clients to weather difficult times (Lusardi & Mitchell, 2014). Globally, interest in financial literacy has increased (OECD, 2020), as it supports economic growth in emerging countries like India (Ribaj and Mexhuani, 2021) and has favorable macroeconomic impacts (OECD, 2015).Financial Literacy across IndiaThe financial literacy rate across India varies significantly. The 77th round of the 'All India Debt & Investment Survey (2019)' indicates that 33% of the rural population and 29% of the urban population do not possess basic financial instruments. A survey by Dash and Ranjan across India highlighted several disparities:Regional Disparities: The North-East region's population has lower levels of financial literacy compared to the East, West, Central, and South zones.Gender Disparities: Women tend to be less knowledgeable than men. Regularly employed households show a positive relationship with financial literacy, while casually employed households exhibit a negative relationship.Socioeconomic Disparities: Financial literacy and all income quintiles show a positive correlation. Urban areas tend to have higher financial literacy levels.Initiatives to Promote Financial Literacy and Reduce Disparities in IndiaSeveral campaigns have been launched in India, including:SIDBI's Financial Literacy and Women Empowerment Program (FLWE).The RBI's Financial Literacy Week, Financial Awareness Messages (FAME), and Financial Literacy Ideation.SEBI's Investor Awareness Programs.The "Niveshak Didi" initiative by India Post Payment Banks.The Institute of Chartered Accountants of India's Financial Tax Literacy Drive.ConclusionThe 2024 Union Budget in India has made significant strides in enhancing skill education and financial literacy through increased allocations for various programs. Mandatory financial literacy courses and the revision of the Model Skill Loan Scheme are crucial in making financial education accessible to all. Building on these developments will require effective implementation, continuous monitoring, and partnerships. The budget's focus is a promising step towards achieving a Viksit Bharat, unlocking India's demographic dividend, and paving the way for sustained socio-economic growth and development.References:India Skills Report 2024. (2024). Wheebox.Jangili, R., Marisetty, S. S. C., & Mood, Y. B. (n.d.). Financial Literacy in India: Insights from a Field Survey. RBI Bulletin June 2023.Coben, D., Dawes, M., & Lee N. 2005. Financial Literacy Education and Skills for Life.Ribaj, A., & Mexhuani, F. 2021. "The Impact of Savings on Economic Growth in a Developing Country (the case of Kosovo)". Journal of Innovation and Entrepreneurship.ADB. 2022. Remittances for Inclusive Development: Improving Data and Analysis on the Financial Literacy and Inclusion of Migrants and their Families in Selected Southeast Asian Countries.Joshi, D. P. 2013. Financial Education Key to Promoting Financial Inclusion and Customer Protection.Lusardi, A., & Mitchell, Olivia S. 2014. "The Economic Importance of Financial Literacy: Theory and Evidence". Journal of Economic Literature.Dash, P., & Ranjan, R. (2023). Financial Literacy across Different States of India: An Empirical Analysis. Research and Information System for Developing Countries (RIS).India Budget | Ministry of Finance | Government of India.Pilot on Financial Literacy and Women Empowerment (FLWE) in 4 states. SIDBI.Afaqs. (2024, March 22). Times of India launches "India for Financial Literacy" campaign.India Post Payments Bank conducts India's First Floating Financial Literacy Camp.Welcome to RBI Financial.Shri Jayant Chaudhary Minister of State address on Budget, 2024.PRIME MINISTER'S PACKAGE WORTH Rs. 2 LAKH CRORE CENTRAL OUTLAY ANNOUNCED.Union Budget 2024-25: Pathway to 'Viksit Bharat'.Author may be reached at harsh.goel@mail.ca.in and eboard@icai.in
Ep. 413 — The Accounting Profession's Role in Economic Growth: Potential, Challenges, and Opportunities
CA Journal
· September 2026
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The Accounting Profession's Role in Economic Growth: Potential, Challenges, and OpportunitiesThe accounting profession is pivotal in driving global economic development. Today's accountants must navigate the complexities of talent management, technological disruption, and ethical challenges while seizing opportunities to be trusted advisors, thought leaders, and strategic business partners. Accountants are vital to the efficient functioning of the economy, supporting individuals, businesses, and governments worldwide.By Prof. Dale Pinto, John Curtin Distinguished Professor, President and Chair of the Board, CPA AustraliaIn these challenging times of high inflation and rising costs, accountants have evolved beyond mere number crunchers. They are now essential, trusted advisors and strategic analysts, delivering immense value to businesses. However, their potential to contribute even more remains vast.IntroductionAmidst a dynamic and rapidly changing economic environment, the role of accountants is evolving. Accountants are no longer just bookkeepers and auditors; they are strategic partners, trusted advisors, and thought leaders who enhance decision-making processes for businesses.Their contributions are crucial for economic stability, influencing industry standards and driving discussions on emerging financial trends and technologies. Accurate financial reporting ensures market stability and investor confidence, while efficient resource distribution and financial planning are key to their role as strategic business advisors.As strategic business advisors, accountants collaborate with companies to shape strategy and engage in proactive risk management. Leveraging their financial expertise, they support sustainable business growth.The accounting profession is continually evolving to meet economic challenges, emphasising the interdisciplinary and contemporary skills needed for the future. However, the profession also faces significant challenges, including a global shortage of skilled professionals, an ongoing need for continuous education and training, and difficulties in attracting and retaining diverse talent.Technology and Artificial Intelligence (AI)The accounting landscape is being reshaped by technological advancements, especially Artificial Intelligence (AI). AI's ability to process vast amounts of data quickly opens new opportunities for finance professionals to work more efficiently. Automation is eliminating routine tasks in auditing and financial analysis, allowing accountants to focus on strategic, human-centred tasks such as business decision-making and providing expert advice and exercising professional judgment.Automation enhances efficiency by handling mundane tasks and freeing up accountants to engage in more interesting forensic work that fosters creativity. This shift enables accountants to collaborate with clients in innovative and strategic ways—something technology alone cannot achieve.While technology can streamline labour-intensive tasks, it also introduces new challenges in securing sensitive financial data. Addressing these issues is vital as we navigate this technological evolution in the accounting profession.CybersecurityAccountants and finance professionals are on the front lines of the cybersecurity battle. With financial data being a prime target for hackers, the need to secure sensitive information has never been more urgent. As data breaches and cyber-attacks become more frequent and severe, they pose risks to every sector of the economy.Implementing robust cybersecurity measures is now essential; without these protections, accountants risk losing clients, revenue, and their reputation. Accountants are responsible for deploying cutting-edge security protocols, which includes raising awareness through education, employing correct processes, and implementing secure technology. The most critical factor is the behaviour of accountants themselves; maintaining vigilance and ethical conduct is paramount.Ethics and IntegrityThe importance of upholding the highest levels of professional and ethical standards cannot be overstated, especially considering recent confidentiality breaches in countries like Australia. Accountants play a crucial role in ensuring adherence to laws and regulations to prevent fraud and financial crises. Failures in governance, culture, and accountability can severely erode trust and integrity, which are the foundation of the profession.At CPA Australia, there is a zero-tolerance policy towards misconduct and unethical behaviour. CPA Australia members are required to adhere to strict professional conduct and ethical standards. The organisation has established robust procedures for handling complaints and disciplinary actions, strengthened training requirements, and enhanced its framework for professional conduct.International Ethics and Standards Board (IESBA) and the Regulatory EnvironmentCreating a culture of integrity within organisations is essential for accountants. In May 2024, CPA Australia hosted events with the Chair of the International Ethics and Standards Board (IESBA), Ms. Gabriela Figueiredo Dias, discussing Ethics in Sustainability Reporting and Firm Culture and Governance. IESBA's focus for the next four years will be on enhancing the culture and governance of accounting firms and possibly extending ethical standards to non-professional accountants. Ms. Figueiredo emphasised the need for accountants to foster "good culture and governance within firms" to prevent unethical behaviour.Accountants must stay informed and agile to comply with new regulations without hindering innovation.Environmental, Sustainability, and Governance (ESG)As trusted advisors, accountants possess deep insights into environmental, social, and governance (ESG) risks and opportunities. This expertise allows them to promote awareness and effective management of ESG issues, which are increasingly critical for businesses. As strategic business advisors, it is their duty to advocate for sustainable business practices.CPA Australia wholeheartedly embraces reporting on ESG metrics and is a strong proponent of Integrated Reporting. CPA Australia's 2023 Integrated Report, 'Transforming for the Future,' was recognised as a finalist in the Special Awards category for Integrated Reporting at the 2024 Australasian Reporting Awards.ConclusionThe accounting profession plays a vital role in economic development, skilfully navigating challenges and seizing opportunities. Accountants can drive economic growth through innovation, ethical practices, and strategic partnerships. Embracing technological advancements, fostering an ethical culture, and adapting to regulatory changes are essential to strengthening the profession's role in economic development. By focusing on continuous learning and maintaining the highest ethical standards, accountants will remain indispensable to the global economy.Author may be reached at eboard@icai.in
Ep. 416 — The importance of developing Sustainability Reporting Standards for the Public Sector
CA Journal
· September 2026
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The importance of developing Sustainability Reporting Standards for the Public SectorAs the private sector finalizes its baseline for sustainability reporting, attention has turned to addressing the specific needs of the public sector. The UN Sustainable Development Goals (SDGs) provide a framework for governments' sustainability efforts. While the private sector has made notable progress in setting and measuring sustainability targets, the public sector has only recently intensified its focus in this area. This shift is crucial in the face of the global climate emergency. With its substantial operations and significant financial and regulatory influence, the public sector plays a pivotal role in driving real progress.Representing over a fifth of the global workforce and with governmental spending exceeding 40% of GDP in many countries, the public sector often serves as a linchpin in national economies. Moreover, it sets the sustainability agenda through policies, regulations, and incentives. Without a structured approach to tracking these policy activities, assessing the effectiveness of governmental strategies becomes challenging.Similar to the private sector, the public sector requires appropriate sustainability reporting standards. These standards are essential for informed decision making, holding governments accountable for their environmental impact of their interventions and fostering trust in the public sector's sustainability efforts.While progress in this area is still uneven, there is promising momentum from the International Public Sector Accounting Standards Board (IPSASB). In June 2023, IPSASB announced the development of international sustainability reporting standards tailored to the public sector's unique requirements, starting with Climate-related Disclosures.Targeted frameworks produce resultsIn recent years, the private sector has made substantial progress in improving the sustainability of its activities. By June 2022, more than one-third of the world's largest publicly traded companies had committed to achieving net-zero carbon targets, a notable increase from about one-fifth in December 2020. Furthermore, a record number of US businesses appointed their inaugural chief sustainability officer in 2022. Much of this progress can be attributed to the widespread adoption of standardized metrics for sustainability reporting, which has driven organizational actions and priorities.Standardized sustainability reporting is important because it enables organizations to hold themselves accountable in meeting their climate-related targets. It also allows external stakeholders to compare relative sustainability performance. International standard setters, including the International Sustainability Standards Board (ISSB) and the International Audit and Assurance Standards Board have recently made enormous strides in developing standards that will support these efforts.Public sector action is criticalDespite the public sector not experiencing the same level of pressure from investors and consumers as the private sector, the financial ramifications of neglecting sustainability goals are becoming clear for governments. Sovereign bonds account for about 40% of the global $100 trillion bond market, and a 2021 study indicated that by 2030, countries failing to meet emission targets could incur debt downgrades costing between $137 billion and $205 billion. And interest in government efforts is growing - when the European Union launched its first green bond in 2021, it drew record demand from prospective investors.Therefore, IPSASB's initiative is timely and crucial. By developing tailored sustainability reporting standards for the public sector, transparency will be enhanced, governments will be held accountable for their environmental footprint, and decision-making on climate change will be sharpened. Improved accountability also stands to enhance global trust in governmental decisions and actions by making their impact measurable and comparable.Strong foundations are already in placePublic entities navigate a diverse stakeholder landscape and often have more intricate budgeting, accounting, and performance structures than private firms.Fortunately, there's no need to start from scratch. A decade ago, in 2013, the organization I chair, the IPSASB, released the first of three Recommended Practice Guidelines (RPGs). Two of these provided guidance on topics still not addressed in the private sector - addressing long-term fiscal sustainability and service performance. Based on feedback, In May 2023 we issued further guidance that clarifies the application of RPGs 1 and 3 to sustainability reporting.The recent advances in the private sector also offer valuable insights for the public sector. When developing international public sector sustainability reporting standards, we will be able to leverage guidance from the ISSB and the Taskforce for Climate-related Financial Disclosures, as well as the existing Global Reporting Initiative (GRI) standards.However, public sector reporting comes with unique challenges. The ramifications of policy decisions, from regulatory frameworks to tax incentives, must be considered. Additionally, the potential effects of climate change on natural resources need to be addressed. Unlike corporations that cater to specific stakeholder groups, governments serve vast populations with diverse concerns, where GRI standards may prove beneficial.In May 2022, IPSASB initiated a global consultation to advance public sector sustainability reporting. Global feedback underscored the urgent need for tailored public sector standards, entrusting IPSASB to spearhead this initiative. Fast forward to the present: IPSASB is now developing a public sector specific Climate-Related Disclosures standard.This will integrate insights from the private sector while catering to the unique demands of the public sector entities. We are collaborating closely with global standard-setters, governments, and policymakers, aiming for universally relevant guidelines to harmonize public sector sustainability reporting, and we are doing so with the support of the World Bank. We plan to release a draft for public comment in October 2024.Helping the public sector move at speed will benefit everybodyInternational sustainability reporting standards will help focus public sector investments, aid in sovereign bond issuance, and encourage international development finance. By transparently reporting their adherence to sustainability goals and global climate initiatives, governments can enhance their appeal to investors. Individual countries and the world at large stand to benefit from both public and private sector efforts focused better on achieving real sustainability impacts. With so much at stake, none of us can afford to wait for someone else to take the lead.Author may be reached at eboard@icai.in
Ep. 417 — Technology to drive innovation in firms of the future
CA Journal
· September 2026
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Technology to drive innovation in firms of the futureFirms across the globe are grappling with the triple threat of technological disruption, shifting workforce dynamics, and mounting pressures on environmental, social, and governance (ESG) reporting. As Chartered Accountants, we are forced to adapt and innovate to remain relevant and competitive in a rapidly changing business landscape.The remote work model will become more prominentFollowing the outbreak of coronavirus (COVID-19) in December 2019, the world saw an increase in remote and hybrid work models. Despite the virus becoming less lethal, many organisations have not returned to on-site work, indicating that these models may be here to stay. In early research, working professionals stated that they are more productive when working remotely. According to the World Economic Forum (WEF), remote job opportunities will continue to grow, estimating digital jobs will grow by 25% globally to 90 million roles by 2030.Remote working is becoming the new normal in many professions, including the accounting profession. Some companies already offer fully remote accounting services. Remote working has also created a rise of digital nomads. The South African government recently passed the digital nomad visa, allowing remote workers to live in South Africa for up to a year (qualifying applicants must earn at least R1 million annually). As the world becomes more digitally driven, more countries are expected to follow suit.AI is here to stay, let us embrace itFollowing the launch of ChatGPT by OpenAI in November 2022, firms face pressure to embrace and adopt AI technology. An International Monetary Fund (IMF) study found that almost 40 percent of global employment is exposed to Artificial Intelligence (AI). The biggest concern amongst the workforce is AI's ability to impact white-collar jobs.While it is early to determine the extensive impact of AI in accounting, studies indicate an accountant's role is likely to evolve. Common repetitive tasks such as making ledger entries, balancing accounts, and reconciling errors are likely to fall to AI. However, accounting requires human judgement to provide oversight to prevent inaccuracies. AI should be seen as an enabler that can increase accountants' efficiency rather than a threat.To mitigate its impact, it will be important that AI is governed. In March 2024, the European Parliament passed the EU Artificial Intelligence Act, aiming to establish a framework for trustworthy AI.More complying firms on Environmental, Social and Governance (ESG) reportingAccounting firms are now obliged by regulatory requirements, investor demand, and global awareness to conduct Environmental, Social and Governance (ESG) reporting. While financial reporting is crucial, reporting on sustainability initiatives looks set to become mandatory instead of voluntary. Key players like the ISSB, TCFD, and GRI are mandating ESG Disclosure. This shift shows that a company's success and responsibility go beyond financial numbers.Accounting member bodies, such as SAICA, are playing a massive role in promoting and advocating for sustainability reporting, rolling it out in university curriculums.Increased emphasis on lifelong learningWith the emergence of digital technology, the practice of ongoing lifelong learning becomes essential. For career development, lifelong learning is essential and likely to increase. Firms that prioritise lifelong learning and upskilling will be better positioned to address challenges, capitalise on opportunities, and deliver innovative solutions.SAICA prioritises Continuous Professional Development (CPD) and supports its members. CAs continuously engage in professional development activities to enhance competencies and stay relevant. By adopting a mindset of lifelong learning, CAs can effectively navigate the evolving landscape.The scale of Small and Medium-sized Enterprises (SMEs) to increaseSmall and Medium-sized Enterprises (SMEs) are on the rise in Sub-Saharan Africa. In South Africa alone, they are estimated to contribute 40% towards the country's GDP. Despite challenges, SMEs are innovation hubs, constantly seeking new solutions. The firms of the future will be agile and adaptable. The rise of SMEs will continue to drive innovation and economic growth.SAICA has seen an increasing number of members venturing into this space, establishing accounting firms or firms in other industries. SAICA's new corporate strategy for 2024-2028 is based on the changing economic landscape, summarised in 4 pillars: Member Centricity, Attractiveness and Transformation, Economic and Social Relevance, and A Winning Organisation. We must actively work at remaining relevant, attractive and responsible in a changing business landscape to make a substantial difference.Author may be reached at eboard@icai.in
Ep. 418 — The Evolution and Future of the Accounting Profession
CA Journal
· September 2026
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The Evolution and Future of the Accounting ProfessionBy 2035, the accounting profession would have undergone a transformative journey, evolving from traditional bookkeeping to becoming financial advisors and strategic partners to the business. If I were an academician, having retired from public practice by then, and sharing insights in an Accounting 101 class, I would envisage painting this picture for my students:"Imagine a world where numbers—both financial and non-financial—tell stories for businesses, helping them grow, adapt, and thrive. Accountants are the storytellers who translate these numbers into valuable insights, ensuring that companies can make informed decisions and navigate the complexities of the financial world. Accountants work on large screens filled with complex data visualisations and predictive analytics graphs. By combining financial expertise with data science skills, they are able to provide predictive insights, helping CEOs forecast trends, optimise operations, and identify new opportunities through data-driven decision-making. In the boardroom for example, accountants present sustainability reporting metrics to board members, highlighting the company's measurable impact on climate change and providing guidance on navigating the identified risks and opportunities".This visual illustration foreshadows the profound changes the accounting profession will experience in the next decade. Let's delve deeper into the key drivers behind this transformation.Key Drivers of ChangeArtificial Intelligence (AI)AI is set to greatly simplify many accounting processes, particularly those that need to be performed manually, taking up time and valuable resources. Tasks such as manual reconciliation, financial statement preparation, preliminary tax compliance, and interpreting accounting treatments for contracts can now be handled by AI tools. This automation will free accountants from routine tasks, allowing them to focus more on strategic roles.Data ExplosionThe integration of vast data capabilities, technological advancements, and state-of-the-art computing power has raised the bar for insights expected from accountants. Today, accountants must provide greater assurance regarding the accuracy of financial statements and deliver high quality insights to facilitate better management decisions. Predictive analytics can help businesses forecast financial trends, while real-time data analysis can offer immediate insights into operational efficiency.Regulatory ExpectationsAs businesses and capital markets become more sophisticated, regulators increasingly rely on accountants to ensure trust in the overall business environment. Accountants must therefore enhance their skills and knowledge to meet these heightened expectations, staying updated on regulatory changes and understanding their implications for financial reporting and compliance.Changing Workforce ExpectationsThe talent market now demands that accountants should focus on deep analytical skills and purpose-driven assignments. Time-consuming manual audit and accounting work no longer attracts young professionals. The broad scope of work in accounting now offers diverse career paths, with many Professional Accountants moving into roles such as investment bankers, chief compliance officers, and chief sustainability officers.Redefining the Accounting ProfessionWhile these changes can result in significant challenges future accountants will face, they also present an opportunity to redefine the profession. Key areas of focus include:The Age of Digital AccountantsThe role of digital accountants now involves transforming financial information and data into actionable business insights using AI and cloud-based tools. Today, predictive models analyse historical data, seasonal trends and market information to forecast future cash flows. AI enhances these models by enabling them to 'self learn' and improve their predictions over time. This is just one example of the many advancements in this field.Therefore, mastering these digital tools will be crucial for future-proofing one's career in accounting. Digital proficiency will be a key determinant of success.Shaping the Future of Capital MarketsAccountants are expected to lead the redefinition of what is important to capital markets. They will play a crucial role in developing frameworks for reporting ESG (Environmental, Social, Governance) data and modernising success metrics beyond financial figures. As stakeholders demand more comprehensive performance indicators, accountants will integrate non-financial data into financial reporting. Their expertise in data collection and integration will enable the effective presentation of information that matters to stakeholders and investors. Accountants are expected to delve into areas such as water usage, sustainable sourcing, quantification of community impact, and executive compensation to build a comprehensive view of the organisation's activities.Adapting to the New World of Public AccountingThe traditional labour-intensive, capital-light public accounting model is fading. The demand for technological innovation necessitates higher capital investment and less reliance on lower-level resources. Accounting Firms will need to pivot towards technological innovations to maintain competitive advantages, potentially introducing new entrants into the competitive landscape.Constants in the Evolving LandscapeDespite these many changes that are to come, certain aspects of the accounting profession will remain constant:EthicsEthics will continue to be the cornerstone of the accounting profession. As society and regulators increasingly depend on accountants to be pillars of trust in business organisations, maintaining high ethical standards is paramount. Ethics, in turn, will provide a competitive advantage to the accounting profession, as the community and stakeholders increasingly expect corporations to have strong ethical values and to do more beyond short term profits.Business of TrustAs society becomes more complex and businesses grow more sophisticated, coupled with rising community expectations, the level of trust in information provided to communities is increasingly being challenged. The accounting profession of the future, with its core competency in providing assurance in financial and non-financial information alike, is poised to play a larger role in 'providing trust to information' than their predecessors ever did. Trust has been at the heart of the accounting profession since its inception, and more work is now required to retain its reputation for trustworthiness and reliability.Lifelong LearningContinuous learning is essential for accountants. The pace of change in the profession over the last five years has surpassed that of the preceding two decades. The future promises even more intense changes, necessitating a commitment to ongoing education and skill development.The accounting profession is at a pivotal juncture. It faces numerous threats to the established success of past practices but also presents exciting opportunities for accountants to play a more influential role in capital markets and the broader business environment. The future of accounting lies in our hands, and it is up to us to make the most of these opportunities.In 2035, accountants will not just be number crunchers—they will be innovators, strategists, and leaders who play a crucial role in shaping the future of businesses and the economy. The profession offers a dynamic, impactful, and rewarding career path for those ready to embrace technology and drive positive change in the world of finance. The future will continue to shine brightly for our accounting graduates and professionals. But it will come with the need to embrace change and redefine the profession whilst remaining true to constants that our profession has been built on.Author may be reached at eboard@icai.in
Ep. 419 — Gen AI – Complementing Skillsets of Finance Professionals
CA Journal
· September 2026
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Gen AI – Complementing Skillsets of Finance ProfessionalsGen AI is yet another tool in the huge arsenal available to finance professionals. This evolution will keep progressing irrespective of individual preferences and misgivings. As we have done so far, we should embrace the latest innovation also in the right spirit and develop our preparedness to effectively leverage the same. ICAI might consider developing standardized tools which can be useful for all CAs.It gives me great pleasure to connect with you all on the occasion of completion of 75 years of ICAI. Congratulations to ICAI on the exemplary work being done to keep the professional bar high for CAs.In this article, I would like to introduce the larger fraternity to the world of Gen-AI and typical use cases from the financial sphere. While any automation comes with a lot of buzz around loss of jobs, the advent of Gen AI has provided an opportunity to upskill ourselves in an area where need for financial professionals with strong domain expertise and agility in riding the technology wave and deliver significant value to all stakeholders will increase exponentially. We need to understand how to ensure Gen AI complements our skills, helps in bridging the demand gap and how to retain an edge to deliver enhanced value to our customers.Generative AI in the technology maturity cycleGenerative AI is the buzzword of the season. Let us understand the evolution and differentiated capabilities of various technologies to better appreciate the potential uses.Digitization: Converting analog data into digital data and stored in digital libraries such as ERPs to facilitate easy access, retrieval, reporting and analysis. Example: recording of transactions based on accounting principles.Automation: Carrying out a task or series of tasks by using computers to achieve a desired output with minimum or no human intervention. Example: consolidating financial transactions to produce a P&L statement.Digitalization: Using digital technologies like internet, social media, smart phones etc. to enhance or transform business processes. Example: enabling online payments.Transformation: Completely reimaging a set of processes or building new processes for dramatically different outcomes using a combination of digitization, automation and digitalization.Artificial intelligence, Machine Learning: The next milestones of technology utilized to further transform and automate processes. Example: using these for fraud analytics or prediction of financial performance.Generative AI: Its main strength is in generating content to mimic humans. The models are built on humongous learning and come with great capabilities for data crunching, analytics and conversational skills. There are already multiple use cases deployed and under development in the finance industry.Supply Vs Demand Gap for Finance SkillsIndian economy has been on a growth path. FICCI predicts that domestic financial services industry alone will generate 50 lakh jobs in the next decade. The President of ICAI expects there will be a requirement for 30 lakh CAs in India by 2047. B. Com and M. Com graduates, CAs and MBA Finance graduates form the supply. The number of people passing out of these streams is not close to the demand and is further dented by the employability factor (ranging from 50 to 75%). Other factors denting the availability pool are those leaving for finance roles outside India and those moving into other jobs. It is very clear that from a macro perspective there will be a huge gap between supply and demand for finance professionals in India. What needs our collective introspection and action is on the skill sets gap between academic learning and professional reality of a career.Generative AI - Use cases for finance professionalsWhile Generative AI is a huge stride in terms of the technological advancements, the best use-cases for the technology come from the end-users. The adaptation cycle for Gen AI has probably been the shortest with numerous applications being developed and launched every day. Gen AI can be used effectively in every level of finance professional hierarchy.Entry level: People working on accounting or basic analysis can leverage the tool to look for patterns, carry out analysis and derive insights. Tools like Co-Pilot can help bridge soft skill gaps in communication.Mid-level: Professionals can utilize AI tools to customize pricing or first level review of contracts. Banking and Insurance industries are piloting use of Gen-AI platforms like Vertex AI.Senior professionals: Can utilize the tool to model complex scenarios or plan for desired financial outcomes. Gen-AI can bring in the next level of forensic integration for fraud analytics.Expert or Management level: Can leverage these tools for driving complete transformation of processes, like the creation of BloombergGPT™.Human Skills to complement Generative AIThe popular models are trained on tons of data and patterns from across the globe, akin to "Nature". The real value comes from utilizing the tool for your specific context and intent, like "Nurture". Finance professionals need to hone the following aspects:Discerning use of finance domain Knowledge: Effectively understand and guide how accounting or financial principles should be applied. Continuously review processes keeping a holistic view of the business environment. Be the trusted professional partner for business.People Skills: Working as a team, communicating effectively and having robust conflict management skills will always be critical.Management Skills: Be capable of complex decision making and develop strategic thinking skills.Technology Skills: Develop a keen understanding of statistics and data science. Embrace adoption of technology while checking for RoI. Learn the art of "Prompt Engineering". Understand the basics of security frameworks.I hope this article resonates with you all. Wishing you all the very best for your future endeavors. Congratulations to ICAI for the completion of 75th year anniversary.Author may be reached at eboard@icai.in
Sustainable Business, Sustainable GrowthOver the years, climate change has escalated into an existential crisis. The WEF's Global Risks Report 2024 further underscores this threat, ranking extreme weather events as the second-most severe risk over the next two years and the most severe over a ten-year horizon. Over 6 billion people - roughly 80% of the global population experienced at least 31 days of extreme heat over the past 12 months. Projections indicate that if current trends continue, the number of extreme events could rise to 560 annually by 2030, averaging 1.5 events per day a 40% increase since 2015. Agriculture and food systems are also being impacted due to extreme stress on water availability, threatening livelihoods. Accordingly, enterprises must reimagine their business models and embrace strategies that embed sustainability and inclusivity at their core.ESG-Driving Responsible CompetitivenessEnvironmental, Social and Governance (ESG) criteria represent a framework for evaluating an enterprise's impact on the environment and society, and the quality of its governance. Globally, evolving ESG frameworks are providing the impetus to spur a new paradigm of responsible competitiveness. Indeed, ESG is a powerful tool to build sustainable competitiveness while protecting the environment and promoting social justice. Integrating ESG principles into business strategies yields numerous benefits that collectively drive sustainable growth. However, for ESG to be effective, there is a need to address issues of complexities in data collection, multiple and non-standardized reporting & disclosure frameworks, and above all, the varying needs of different countries and stakeholders.ITC's Strategy of Responsible CompetitivenessAt ITC, we believe that integrating sustainability and societal value creation into corporate strategy fosters powerful drivers of innovation, leading to more sustainable growth for all stakeholders. This approach, known as 'Responsible Competitiveness,' emphasizes intense competitiveness while simultaneously replenishing the environment and promoting sustainable livelihoods. ITC's innovative business models integrate economic, environmental, and social capital, embedding sustainability at the core of its corporate strategy. Over the years, this approach has helped build robust, future-oriented businesses and a portfolio of world-class brands, establishing ITC as a global exemplar in 'Triple Bottom Line' performance. ITC is the only enterprise of its size globally to have sustained the three key environmental sustainability indices carbon positive, water positive, and solid waste recycling positive for over a decade. Additionally, ITC's businesses and inclusive value chains support over 6 million livelihoods.Renewable energyIt is a matter of great pride that in FY 2023-24, ITC has achieved its goal of meeting 50% of energy requirements from renewable sources, well ahead of the target year of 2030. To date, the Company has installed and commissioned 205 MW of renewable energy capacity nationwide, utilizing solar and wind power. ITC has 40 green buildings; 12 of its hotels have received LEED Zero Carbon certification, and four have achieved LEED Zero Water certification, making it the first hotel chain in the world to achieve these credentials.Plastic Neutrality and Circular EconomyFor the third consecutive year, ITC has surpassed its plastic neutrality commitment by collecting and sustainably managing approximately 70,000 tonnes of plastic waste, exceeding the amount of plastic packaging it uses. ITC's waste recycling initiative, 'WOW Well Being Out of Waste', fosters a clean and green environment while promoting sustainable livelihoods for waste collectors. Since its inception, the program has reached over 25 million citizens in more than 6.4 million households, 6.7 million school children, and around 2,200 corporations. The Company also continues to make significant contributions towards building a circular economy striving towards 100% Reusable, Recyclable, or Compostable/Biodegradable packaging over the next 5 years.Climate Smart AgricultureIn the farming sector, which is extremely vulnerable to climate change, ITC has implemented large-scale nature-based solutions. ITC's Climate Smart Agriculture program, encompassing approximately 2.8 million acres, aims to enhance farmers' resilience and protect them from unpredictable weather events. This is achieved through climate-smart agricultural practices, including the dissemination of relevant techniques, adoption of suitable mechanization, and provision of institutional services.Water Stewardship MissionWater stress is critical fallout of climate change. ITC's integrated water stewardship programme focuses on providing water security to all stakeholders by increasing water availability through rainwater harvesting and reducing water use in agriculture through demand-side interventions. ITC is also working on reviving river basins with negative water balance. ITC is leading the implementation of the Alliance for Water Stewardship (AWS) standard, a credible and globally recognized framework for sustainable water management. Till date, seven ITC units have achieved AWS Platinum level certification.Social InvestmentsITC's Social Investments Programme, Mission Sunehra Kal, has adopted a two-horizon approach to support livelihood generation. Horizon 1 focuses on strengthening the current dominant sources of livelihood of agri-communities through climate-smart agriculture, natural resources management, and diversification into off-farm and on-farm activities. Horizon 2 aims at building capabilities for the future through programs for women empowerment, support for education, public health, skilling, etc. It gives us pride that ITC's women-focused initiatives have reached over 6 million women.BiodiversityITC acknowledges that preserving and nurturing biodiversity is essential for the long-term sustainability of its business. The company is committed to operating in a way that protects, conserves, and enhances biodiversity. In this regard, a Biodiversity Conservation Programme has been implemented in ITC's catchments, covering over 4.7 lakh acres of land, which focuses on reviving ecosystem services provided to agriculture and restoring degraded plots, whilst also supporting livelihoods.Human CapitalIn a volatile, uncertain, and highly competitive environment, ITC's human resources are the key to sustaining the Company's world-class ESG performance. ITC, therefore, directs its efforts and human capital investments towards strengthening the engagement of the workforce, upholding human rights, embracing diversity, equity, and inclusion, and ensuring a safe and healthy work environment.ITC's sustainability performance continues to receive a global acknowledgment. The Company entered the prestigious 'A' League for 'CDP Water' and retained the 'A-Leadership' in 'CDP Climate' for the third consecutive year. ITC has maintained its 'AA' rating from MSCI-ESG for five consecutive years and has been included in the Dow Jones Sustainability Emerging Markets Index for the fourth consecutive year.As we move into the future, ITC remains committed in its vision to build a climate positive and inclusive enterprise even as we strengthen business competitiveness. To achieve this goal, the company has embraced an ambitious new Sustainability 2.0 agenda that redefines sustainability in response to urgent challenges such as climate change and social inequality. Sustainability 2.0 envisages strengthening ITC's multi-dimensional interventions encompassing decarbonisation, building green infrastructure, scaling up carbon sequestration, promoting climate-smart and regenerative agriculture, restoring biodiversity through nature-based solutions, enhancing water stewardship, creating an effective circular economy and sustainable packaging solutions, strengthening the climate resilience and adaptive capabilities of value chains, while fostering inclusive value chains that sustain 10 million livelihoods.Role of Finance ProfessionalsAs ESG gains currency across the world, I am optimistic that it will motivate more companies to mainstream sustainability and inclusiveness in their business models and operations. Chartered Accountants and finance professionals must focus on building capability in this fast-evolving area so that they are well-equipped to contribute to shaping policy, business strategy, and growth, and ensuring compliance with regulatory requirements.Author may be reached at eboard@icai.in
Ep. 421 — Startups for Viksit Bharat - Building a Developed India by 2047
CA Journal
· September 2026
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Startups for Viksit Bharat - Building a Developed India by 2047By CA. Ninad Karpe, Founder & Partner 100x.VCIn 2014, the Department for the Promotion of Industry and Internal Trade (DPIIT) recognised merely 350 startups in India. Today, there are more than 117,000 registered startups across 670 cities, 50 percent of which are from Tier II and Tier III cities. These startups have created more than 1.24 million direct jobs and many more indirect jobs. According to the Women in India's Startup Ecosystem Report by WISER, the percentage of startups led by women in India has surged to 18% over the last five years. In 2017, only 10% of the companies were headed by female founders. By 2022, the proportion of women-led startups had notably increased to 18%. The report also revealed that 17% of the 105 unicorns in 2022 were led by women.The Indian startup ecosystem is the third largest in the world. The country is home to 112 unicorns, and the future for Indian startups looks bright as more and more unicorns are on their way to becoming decacorns (obtaining a valuation of $10 billion). Some optimists have predicted that the Indian startup system will add more than 10,000 unicorns in the coming decade. The moot question is - will India take the top slot in terms of the largest number of startups in the world by 2047? And what role will startups play in India's journey to become a "Viksit Bharat"?India's youth have shown the world the power of their 'can-do' spirit. Here are some reasons why startups will play a pivotal role in India's journey to becoming a developed country:Catalysts for Innovation and GrowthStartups have emerged as pivotal catalysts, breathing life into innovation, propelling economic growth, and sculpting the very essence of industries. These vibrant and nimble enterprises infuse the business landscape with a burst of fresh ideas, boundless creativity, and an indomitable spirit of entrepreneurship. Startups are synonymous with innovation. Startups are unencumbered by the constraints of established processes and legacy systems, allowing them to experiment with novel ideas and disruptive technologies. Many breakthroughs in technology and business models originate from the innovative minds of startup founders. By pushing the boundaries of what is possible, startups pave the way for progress and drive industries forward.Job Creation and Human Capital DevelopmentStartups play a significant role in job creation. As these companies grow, they require a skilled and diverse workforce, thus generating employment opportunities. Startups often hire young, dynamic individuals who bring a fresh perspective and a willingness to embrace change. In this way, startups contribute not only to economic growth but also to the development of human capital. This is particularly important for a country like India, with its large and young population, as it helps in harnessing the demographic dividend.Fostering Competition and EfficiencyStartups inject vitality into economies by fostering competition. As they challenge established players, they stimulate innovation and force larger companies to adapt or risk becoming obsolete. The competitive environment created by startups encourages efficiency and drives the productivity of industries. In turn, this heightened competitiveness will contribute to the sustained economic growth of India.Technology Transfer and Practical ApplicationsStartups often serve as a conduit for the transfer of technology from research and development to practical applications. Universities and research institutions often collaborate with startups to bring their discoveries to the market. This technology transfer helps bridge the gap between theoretical knowledge and real-world solutions, benefiting society as a whole.Inspiring Entrepreneurship and Cultural ChangeStartups embody the spirit of entrepreneurship, inspiring others to pursue their ideas and take calculated risks. The success stories of startups often become cultural touchstones, encouraging a mindset that values innovation, resilience, and a willingness to embrace uncertainty. This cultural change has a ripple effect, creating a more vibrant and entrepreneurial ecosystem.Agility and AdaptabilityStartups are known for their flexibility and adaptability to cope with evolving market dynamics. Unlike larger corporations, startups can pivot, iterate, and experiment without being burdened by bureaucratic processes. This flexibility allows them to navigate challenges more effectively and respond to market demands with speed and precision.Attracting Investments and Economic GrowthThe startup ecosystem is a magnet for investments. Venture capitalists, angel investors, and other funding sources are drawn to startups with promising ideas and growth potential. This influx of capital not only supports the development of the startups but also contributes to the growth of the broader economy. Investments in startups often have a multiplier effect, driving innovation, job creation, and economic development.Sectoral Impact and Future ProspectsGrowth and transformation continue to be apparent both in innovation hubs and investor's boardrooms. Driven by tech advancements, a growing market for consumers, and favourable policy reforms, startups have expanded across various sectors. At the heart of this transformation is the evolution of consumer behaviour. The rise in the middle-class population has boosted internet penetration and increased the adoption of smartphones, making Indian consumers more tech-savvy, seeking personalised convenience, experience, and value-driven solutions. This transition has sparked a high level of entrepreneurship and innovation, with startups harnessing upgraded technology and providing solutions for evolving needs and preferences.Unicorns as Ecosystem CatalystsThe influence of unicorns stretches beyond the evaluation metrics. They are the means to stimulate the development of the ecosystem by attracting investments and nurturing talent. Additionally, unicorns play a crucial role in confronting social and economic challenges through the empowerment of communities and growth propulsion. They also inspire other youngsters who adore the startup founders of unicorns as inspiration, creating a "domino" effect. These unicorns, illustrative of India's entrepreneurial talent, on one hand disrupt the traditional industries, but on the other hand catalyse economic growth, job creation, and technological innovation.Democratising Consumption PatternsStartups in India have catalysed a more democratised consumption pattern, characterised by greater affordability, improved accessibility, and increased convenience. These startups are now driving what can be termed as "Unicorn 2.0" with significant changes on the horizon. These changes include the rise of startups in India as global frontrunners, the rise of innovation-driven enterprises, the implementation of stricter norms of governance, the elevation of talent in startups, and the broadening of the investor landscape.Sectoral ContributionsThe key drivers of economic growth across various sectors are fast-paced emerging startups. They have already left a mark in areas such as digital services, manufacturing, IT, agriculture, healthcare, modernised retail, advanced financial services, media and communication, skill, education, and entertainment. These sectors not only act as the engines of growth but are expected to fuel further job creation through economic expansion and generation of exports, with an impact estimated to be 20-23 times greater in the years ahead.ConclusionThe journey towards a "Viksit Bharat" by 2047 is undeniably intertwined with the growth and success of the startup ecosystem. Startups, with their inherent dynamism, innovation, and resilience, are positioned to be the torchbearers of India's economic and technological advancements. By fostering an environment conducive to entrepreneurial ventures, encouraging risk-taking, and supporting innovation, India can ensure that startups continue to drive progress, create jobs, and uplift communities. As we look towards the future, the collective efforts of the government, the private sector, and the vibrant entrepreneurial community will be crucial in realising the vision of a developed India. Through the unwavering spirit of its startups, India is poised to not only achieve economic prosperity but also inspire the world with its journey of transformation and growth.Author may be reached at eboard@icai.in
Ep. 422 — Capital Markets: Catalysts for India's Economic Transformation
CA Journal
· September 2026
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Capital Markets: Catalysts for India's Economic TransformationWith an ongoing need for expanded physical infrastructure, a powerful scalable opportunity ahead for institutional investors with an eye for discipline, patience, and intrinsic value is envisaged. Institutional investors are now gazing at the dawn of 'India's decade' owing to the combination of strong economic numbers, a decent corporate profitability outlook, and fireplaces of the ruling government; thereby giving confidence to a strong long-term outlook for the equity markets.For investors eyeing the future, India has long held the promise of a young, aspirational population, backed by robust democratic and business frameworks. The nation is expecting that the Government will continue with the economic policies of its previous two terms with a continued thrust on economic development, growth, infrastructure, and liberalization. India being the 3rd largest economy seemed like a distant vision at first, but now, transforming this vision into reality results from the firm commitment of the Government and national leadership.The continued policy stability, deepening economic reforms, high infrastructure investment, and reasonable market valuations are expected to sustain long-term growth prospects. The Indian economy has witnessed significant reforms in recent years and has also raised its stature in the geopolitical arena. Wide-ranging reforms and policies ranging from GST, Insolvency and Bankruptcy Code, ease in sectoral FDI policies, sustained increase in capex, PM Gati Shakti, National Monetisation Pipeline, reduction in corporate tax, introduction of UPI, promotion of digital payments, Make in India, PLI, direct benefit transfer, start-up India, and exploring more Foreign Trade Policy with larger economies to expand the export market have resulted in changes in the underlying functioning of the economy.The 4 Ds Attributed to Sustainable Growth1. DemocracyIt is a crucial factor that fosters political stability, promotes inclusive development, and enables citizen participation in decision-making. Democracy facilitates policy continuity and predictability, as changes in government are typically gradual and based on electoral mandates. This stability encourages long-term planning and investment, contributing to sustainable economic growth.2. Domestic ConsumptionWith 1.4 billion people and myriad unmet needs, India's growth is driven mainly by domestic consumption (~60% contribution to GDP) and investments. Rising domestic consumption creates opportunities for businesses to expand operations, innovate, and diversify their product offerings. Increased consumer demand incentivizes firms to invest in capacity expansion, technology upgrades, and market expansion, driving sustainable economic growth.3. Digital DividendIndia's investments in digital infrastructure, including broadband networks, mobile connectivity, and digital payment systems, have facilitated access to information and communication technologies (ICTs) for millions of people. The digital revolution has spurred entrepreneurship and innovation in India, leading to the emergence of startups, tech hubs, and digital platforms across various sectors.4. DemographyThe starting point for any discussion of India's promise is, invariably, the promise of the Indian consumer. India is one of the most populous countries and has surpassed China in 2023, according to a UN World Population Dashboard. The growing working-age population fuels labour force expansion, which can drive economic growth and development if harnessed effectively through skill development, education, and employment opportunities. India has one of the youngest populations with ~44% of the entire population below 25 years.ConclusionAs has been demonstrated, India has grown to almost $3.7 trillion in economy over the last 77 years. India received Independence in 1947; however, it took us over 60 years (in 2007) to become a trillion-dollar economy. The next trillion was achieved 9 years later, and the third trillion was achieved 6 years hence. As we move into the future, our honourable Prime Minister, Narendra Modi has re-iterated his vision of making India a "Viksit Bharat" which is a developed nation by 2047. This vision is expected to pave the way for various economic opportunities and facilitate wealth creation opportunities for investors in India.Referenceshttps://www.imf.org/en/Countries/INDhttps://www.hindustantimes.com/business/india-to-become-worlds-third-largest-economy-by-2030-s-p-global-ratings-101701763949361.htmlhttps://www.reuters.com/world/india/india-forecasts-economic-growth-73-fiscal-year-ending-march-2024-01-05/https://www.iea.org/commentaries/india-s-clean-energy-transition-is-rapidly-underway-benefiting-the-entire-worldhttps://www.reuters.com/markets/western-firms-shift-investment-china-india-worries-mount-2023-09-13/https://www.drishtiias.com/loksabha-rajyasabha-discussions/perspective-bharat-the-mother-of-democracyhttps://theprint.in/india/governance/global-index-shows-indias-democracy-strengthened-since-2020-but-civil-liberties-have-been-in-free-fall/1974869/https://www2.deloitte.com/xe/en/insights/economy/asia-pacific/india-economic-outlook.htmlhttps://www.news18.com/elections/lok-sabha-election-infographics-133/https://economictimes.indiatimes.com/news/economy/indicators/india-enters-37-year-period-of-demographic-dividend/articleshow/70324782.cms?from=mdrhttps://www.power-technology.com/news/india-renewable-energy-90-2047/https://www.investindia.gov.in/sector/renewable-energyhttps://www.power-technology.com/news/india-to-invest-455m-towards-battery-storage-scheme/Author may be reached at eboard@icai.in
Ep. 423 — Youth Entrepreneurship: Driving India's Development
CA Journal
· September 2026
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Youth Entrepreneurship: Driving India's DevelopmentBy CA. Siddarth Pai, Managing Partner 3one4 CapitalDemography is destiny. The ultimate success of a nation is contingent on how well it marshals its human resources to generate growth and development of the economy. A rising population has been a cause of concern for generations. In 1798, English Economist Thomas Robert Malthus wrote "An Essay on the Principle of Population," which postulated that populations grow at an exponential rate while resources scale at an arithmetic rate. This would result in populations exceeding the carrying capacity of the earth, leading to societal collapse. While it was in vogue for a short period, it failed to take into account technological progress and changing human behaviour. The Industrial Revolution of the 1800s and improvements in agriculture debunked the arithmetic growth rate of resources. Improvements in lifestyle and economic prospects have halted the exponential population growth assumption.Recent reports by The Lancet forecast that by 2050, over 75% of the countries will not have a high enough fertility rate to sustain their population size. It may increase to 97% by 2100. The report states that "These future trends in fertility rates and live births will completely reconfigure the global economy and the international balance of power and will necessitate reorganising societies". Developed countries like Japan and Korea had birth rates of 1.26 and 0.78 in 2022, while China's slid to 1.09.It is in this demographic crisis that India has a strong advantage due to its youthful populace. The median age of India is at least 10 years younger than that of China and 20 years younger than that of Japan. India's working population is expected to total two-thirds of the total population by 2025. Higher aspirations & increased demand for skilled labor lead to higher education levels. India's growing middle class of 300 million people is driving up consumption. India crossing $2000 in terms of per capita GDP is an inflection point for any economy, where consumptions shift from subsistence to consumption. This happened in the US in the 1950s, Germany in the 1960s, Japan in the 1970s, and China in the early 2000s. India hit this point in FY 19 and currently has a per capita GDP of $2500.Democratization of EntrepreneurshipThe barriers to entrepreneurship have shrunk over the past few years thanks to three major factors: 1. Technology, 2. Policy, 3. Capital.1. TechnologyThe rise of GenAI is truly democratized building and development in the digital space. No longer does the lack of technical skills form a barrier towards creating digital products. NoCode platforms and GenAI tools allow every person to create apps and websites without possessing prior coding knowledge. This allows anybody with an idea to create a minimum viable product (MVP) to validate their market assumptions. This fast iteration at negligible cost lowers the cost of experimentation and allows for more ideas to reach the market, either failing or succeeding, and then scaling after. This, coupled with India's decision to allow open access to Digital Public Goods through APIs, has truly democratized access to critical infrastructure for building businesses.2. PolicyThe Indian government has, over the last 10 years, placed special emphasis on creating a policy environment conducive to entrepreneurship and risk-taking. Startup India and the emphasis on the ease of doing business have resulted in several regulatory changes to allow for easier operations and raising of funds. The emphasis on the need to reduce interface with government officials and move as many services online can help entrepreneurs scale businesses without ever having to meet a government official. The government moving out of business is a key policy plank that has accelerated entrepreneurship in the country.3. CapitalIndia is a capital deficit nation. Despite this, schemes such as the Rs 10,000 Cr Fund of Funds, CGTMSE scheme, and Startup India Seed Fund Scheme (SISFS) have made access to capital far easier for the average entrepreneur. This is in addition to the SEBI Alternative Investment Fund Regulations, 2012, which has created a Rs 10.35 lakh Crore investment industry in 12 years, with a CAGR of over 112% from December 31, 2012 to December 31, 2023. Many of these AIFs invest in unlisted ventures, with investment strategies ranging from seed stage, idea stage, early stage, late-growth and late-stage ventures. There is capital available for every stage of a growing venture, with standard and transparent financing terms.Mindset ShiftThe last aspect of youth entrepreneurship is the mindset shift. Today's generation is privileged, having been born in a post-liberalization India with easy access to cheap data, handsets and compute technology that previous generations never had. The Indian mindset of being risk-averse has fallen away. Parents are open to their children starting up and building a business, as opposed to working a standard job.The India of today has a convergence of factors that makes it the best time for youth to start a business. It does not have to be a tech-first business, but technology will play an undeniable role in the growth of any business. What matters is to start. There is no right or wrong way to start - entrepreneurship is agnostic to the approach. What matters is the goal and the effort in the journey, not the starting point. There is no right or wrong way - there's only momentum or retreat. But it all begins with a single step. Take that step today.Author may be reached at eboard@icai.in
Ep. 424 — The Path to a $30 Trillion Economy: Chartered Accountants as Architects of India's Future
CA Journal
· September 2026
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The Path to a $30 Trillion Economy: Chartered Accountants as Architects of India's FutureIndia stands at a pivotal juncture in its history. The nation's aspirations are sky-high, with the vision of transforming into a $30 trillion economy by 2047, the centenary year of its independence. This ambitious goal signifies not just economic growth but also the realization of India's full potential on the global stage.However, such a transformation requires a well-defined roadmap and the active involvement of various stakeholders, including Chartered Accountants (CAs), who are poised to play a crucial role in this transformative journey. CAs must embrace innovation in their practices, constantly update their skillsets, and stay abreast of emerging technologies like blockchain and artificial intelligence. They must inspire future generations to pursue this noble profession and contribute to the nation's economic well-being. Finally, CAs must lead by example, upholding ethical standards and advocating for responsible business practices.Essential Pillars for a $30 Trillion EconomyReaching a $30 trillion economy necessitates a multi-pronged approach. Here are some of the essential pillars:Infrastructure Boom: India needs a robust infrastructure network encompassing transportation, logistics, energy, and telecom. CAs can play a vital role in financing and managing these infrastructure projects, ensuring transparency and accountability.Manufacturing Might: A burgeoning manufacturing sector is key to creating jobs, fostering exports, and reducing dependence on imports. CAs can assist businesses in optimizing operations, managing finances, and complying with regulations, thereby propelling domestic manufacturing.Innovation Engine: India must become a hub for innovation across sectors. CAs can advise businesses on intellectual property management, funding for research and development, and navigating the complex startup ecosystem.Skilled Workforce: A skilled workforce is the backbone of any thriving economy. CAs can contribute by promoting financial literacy, developing robust accounting education programs, and upskilling the workforce for the digital age.Inclusive Growth: Sustainable economic growth necessitates equitable distribution of wealth. CAs can champion initiatives that empower marginalized communities, promote financial inclusion, and bridge the rural-urban divide.The Multifaceted Role of Chartered AccountantsChartered Accountants, with their expertise in finance, accounting, and taxation, are uniquely positioned to be the architects of this economic transformation. The role of Chartered Accountants is multifaceted and includes the following functions:Strategic Advisors: CAs can provide strategic financial guidance to businesses, enabling them to make informed investment decisions, optimize resource allocation, and navigate the ever-evolving regulatory landscape.Guardians of Transparency: CAs uphold the highest standards of financial reporting and corporate governance, fostering trust and attracting global investments.Risk Management Experts: CAs can identify and mitigate financial risks, ensuring the stability and sustainability of businesses, which is critical for long-term economic growth.Entrepreneurial Catalysts: CAs can play a pivotal role in nurturing the startup ecosystem by providing financial advice, mentorship, and facilitating access to funding for budding entrepreneurs.ConclusionIn conclusion, India's journey towards a $30 trillion economy is a collective endeavour. Chartered Accountants, with their expertise, integrity, and commitment to excellence, are poised to play a pivotal role in steering the nation towards a prosperous and inclusive future. By embracing innovation, inspiring the next generation, and demonstrating leadership, CAs can be part of the architectural team aiming for a "Viksit Bharat" a developed and vibrant India.Author may be reached at arun.mittal@shift-thinker.com and eboard@icai.in
Ep. 425 — Listing of members and Firms - Ethical issues and CA Connect Portal
CA Journal
· September 2026
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Listing of members and Firms - Ethical issues and CA Connect PortalThe Code of Ethics envisions the objective of general restriction on advertisement and publicity, stating that professional work cannot be secured either by advertisement, circulars, or solicitation, but only by a member gradually building confidence in his ability and integrity. The services provided by an accountant are of a personal and intimate nature, with their value being assessable solely through personal interaction and experience.As George Felton, the author of 'Advertising: Concept and Copy' says, "The primary objective of advertising is to get the word out that you have something exciting to offer." However, when it comes to the advertisement of professional services, there are limitations with regards to advertisement, listing, and visibility as per the governing statutes, Code of Conduct, and practices. The provisions of the Chartered Accountants Act, 1949 stipulate general restriction on advertisement and solicitation, though a limited permission to advertise services through a write-up was provided vide the Chartered Accountants (Amendment) Act, 2006.ListingListing of members and firms is permitted by the Council at certain places in the Code of Ethics to an extent so far as it does not amount to advertisement or solicitation. The Institute has mentioned the following forms of listing:Publication of Name or Firm Name in Directories: Permitted since the 4th edition of the Code of Ethics issued in 1971, subject to certain restrictions provided in detail in the Code of Ethics.Application based Service provider Aggregators: It is not permissible for members to list themselves with online application-based service provider aggregators where other categories like businessmen, technicians, maintenance workers, event organizers, etc., are also listed.Specialised Directories for limited circulation: Name, description, and address may appear in any directory or list of members of a particular body listed alphabetically (such as "Who's Who").AdvertisementGenerally speaking, advertisement is not permitted, but members are permitted by virtue of the proviso to Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949 to advertise services and particulars through a write-up subject to Council guidelines. "Write-up" means the writing of particulars according to information given in the Guidelines setting out services rendered, published via print or electronic mode with a font size not exceeding 14.Why Aggregator Listing is Not AllowedThe modes of publicity available on the Internet are owned by various third parties not obliged to operate as per the Institute's Code of Ethics and may be violative in one or more ways. Furthermore, names of members providing the services are sometimes omitted or generalized (e.g., "Accounting by expert Chartered Accountant"), masking whether the person working is actually a Chartered Accountant.Need for Indigenous System of Listing: CA Connect PortalDue to restrictions on listing, the Institute devised the "CA Connect Portal", operationalized on 31st July 2021 and managed by the Ethical Standards Board. Synchronized with the SSP to ensure genuineness, it provides members with an effective platform for listing without promoting, endorsing, or suggesting any specific Chartered Accountant.Advantages of CA Connect PortalProspective clients can search for professionals according to location and area of expertise.Privacy and ensured confidentiality of client information.Level playing field for practicing Chartered Accountants.Mitigation of chances of frauds.All members who have not yet registered are encouraged to register on the portal at caconnect.icai.org.ReferencesCouncil Guidelines for Advertisement, 2008 appearing under Volume-II of Code of Ethicshttps://caconnect.icai.org/frequently-asked-questionsAuthor may be reached at esb@icai.in and eboard@icai.in
Ep. 426 — Enhancing Corporate Governance through Non-Personal Data
CA Journal
· September 2026
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Enhancing Corporate Governance through Non-Personal DataThe article aims to explore the role of Non-Personal Data in shaping Corporate Governance in India, emphasizing its transformative impact on decision-making, risk management, and strategic planning[cite: 19]. It highlights the importance of emerging technologies and robust governance frameworks for utilizing Non-Personal Data effectively[cite: 19]. Real-world examples illustrate its diverse applications and address associated challenges[cite: 19]. The article concludes by asserting that Non-Personal Data will be a valuable asset for enhancing corporate governance practices[cite: 19].In today's interconnected and rapidly evolving business landscape, the role of data in shaping Corporate Governance practices cannot be underestimated[cite: 19]. With the proliferation of digital technologies and the exponential growth of data sources, corporations are increasingly reliant on data-driven insights to navigate complex challenges, mitigate risks, and seize opportunities for growth[cite: 19]. At the heart of this data-driven revolution lies Non-Personal Data, a vast reservoir of information encompassing financial metrics, market trends, operational performance indicators, and more[cite: 19].Understanding Non-Personal Data in Corporate GovernanceNon-Personal Data constitutes a pivotal component, offering insights that guide decision-making processes and shape strategic initiatives[cite: 19]. As defined by the European Union's General Data Protection Regulation (GDPR), it refers to data that does not relate to an identified or identifiable natural person, including anonymized data, aggregated data, and data stripped of personally identifiable information[cite: 19].Non-Personal Data serves as a foundation for informed decision-making, aiding in analyzing profitability, liquidity, and solvency[cite: 19]. Moreover, it plays a critical role in risk assessment and management, enabling organizations to identify inefficiencies or vulnerabilities, and allowing market-related data to anticipate shifts, competitive threats, and regulatory changes[cite: 19].Strategies for Leveraging Non-Personal Data in Corporate GovernanceData collection and aggregation techniques: Involves identifying relevant internal and external sources, implementing automated collection systems, IoT devices, or manual entry, and applying data normalization and integration to combine disparate datasets[cite: 19].Utilizing data analytics and visualization tools: Descriptive, predictive, and prescriptive analytics are used to analyze historical data, identify patterns, and forecast trends, while dashboards and charts visually represent complex datasets[cite: 19].Establishing data governance frameworks: Crucial for ensuring ethical, secure, and responsible data management practices aligned with principles applicable to both personal and non-personal data[cite: 19]. Key components include data ownership and accountability, data quality management, data privacy and security measures, and compliance with relevant regulations[cite: 19].Case Studies: Real-world ExamplesSamsung Electronics' Expansion into India: Leveraged market data, demographic trends, and consumer behavior analysis to tailor product offerings and achieve significant revenue growth[cite: 19].General Electric (GE): Utilized financial data analytics to optimize resource allocation, divest non-core assets, and invest in high-growth areas.UPS: Leveraged operational data insights and route optimization algorithms to improve delivery efficiency and reduce operational costs.Netflix: Analyzed viewing patterns and user preferences to drive informed content creation strategies like "House of Cards".Amazon: Employed historical sales data, product reviews, and predictive analytics to forecast demand, optimize inventory, and personalize product recommendations.Challenges and ConsiderationsData Privacy and Security Concerns: Aggregated datasets may inadvertently reveal sensitive information, risking data breaches or unauthorized access. Robust protection measures like encryption and access controls are essential.Ensuring Data Accuracy, Reliability, and Integrity: Incomplete, outdated, or inconsistent data can undermine analysis. Organizations must establish data quality management and validation processes.Addressing Potential Biases and Limitations: Sampling errors, collection methods, or algorithmic biases can lead to skewed insights. Diverse data sources and peer reviews help mitigate these impacts.Future TrendsEmerging technologies like Artificial Intelligence (AI), Machine Learning (ML), and the Internet of Things (IoT) are revolutionizing non-personal data governance. Concurrently, the Indian regulatory landscape is evolving rapidly with the enactment of the Digital Personal Data Protection Act, 2023, and initiatives like the National Data Sharing and Accessibility Policy (NDSAP). Strategic utilization of these tools offers expansive opportunities for innovation and competitive advantage when balanced with robust compliance.ReferencesDe Freminville, M. (2020). Corporate Governance and Digital Responsibility. In Cybersecurity and Decision Makers.Marda, V. (2020). Non-Personal Data: the case of the Indian Data Protection Bill, definitions and assumptions.OECD. (2022). Digitalisation and Corporate Governance.Data Governance Policy to leverage Non-Personal Datasets available with Govt: Vaishnaw (2023).Sarangi, K. (2023). Corporate Governance in the Digital Age.Policy primer on Non-Personal Data (2023). International Chamber of Commerce.Tesh. (2023). Corporate Governance & Technology: Navigating the Digital Frontier.Dentons ACAS Law. (2024). The role of data governance in Corporate Governance.Jiang, W., & Li, T. (2024). Corporate Governance Meets Data and Technology.Edicom Group. (n.d.). What Is Corporate Governance and What Role Does It Play in Digitalization.Authors are associated with Nagaland University. They may be reached at eboard@icai.in.
Ep. 427 — Local to Global: Empowering MSMEs with Open Network for Digital Commerce
CA Journal
· September 2026
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Local to Global: Empowering MSMEs with Open Network for Digital CommerceThe Micro, Small, and Medium-Sized Enterprises (MSME) sector is crucial to the development of any nation. It has become one of the most dynamic and lively sectors of the Indian economy. Second only to agriculture, it creates a great deal of employment opportunities at relatively modest capital costs and encourages entrepreneurship, both of which have a major positive impact on the nation's economic and social development.The MSME sector comprises nearly 63 million enterprises, which contribute more than 30 per cent to India's GDP, 45 per cent to manufacturing output, 40 per cent to exports, and provides employment to over 113 million people, as per Annual Report of Ministry of Micro Small and Medium Enterprises way back in 2017-18. Still the sector face many challenges, some of which are timely and adequate finance at reasonable rate from formal sector, technology adoption, regulatory compliances, lack of innovation, non-awareness of various government schemes, delayed payment from customers, skilled manpower, market access and many more.MSME ClassificationEarlier only Manufacturing and Service sectors were covered under the definition of MSME based on investment in plant and machinery or equipment. The definition was changed with effect from July 01, 2020, based on the composite criteria of investment and turnover, with the criteria now common for both manufacturing and service sector enterprises. Retail and wholesale trades were also allowed to register with effect from July 2021, restricted to Priority Sector Lending.Existing MSME ClassificationClassificationMicroSmallMediumMfg. EnterprisesInvestment < Rs. 20 lacInvestment < Rs. 5 cr.Investment < Rs. 10 cr.Services EnterpriseInvestment < Rs. 10 lacInvestment < Rs. 2 cr.Investment < Rs. 5 cr.Revised MSME ClassificationClassificationMicroSmallMediumManufacturing & ServicesInvestment < Rs. 1 cr. and Turnover < Rs. 5 cr.Investment < Rs. 10 cr. and Turnover < Rs. 50 cr.Investment < Rs. 50 cr. and Turnover < Rs. 250 cr.The data of Udyam Registrations including Udyam Assist Platform as on May 16, 2024 is as under:Total RegistrationTotal classifiedMicro EnterpriseSmall EnterpriseMedium EnterpriseTotal Employment4,42,22,7894,41,63,1254,33,94,2177,01,81967,08919,17,02,070The above data shows that more than 98% MSMEs are working as Micro enterprises, which are doing their businesses in traditional manner.Challenges in E-Commerce AdoptionCurrently only a small fraction of the MSME enterprises engage in e-commerce due to various barriers:Technological Barriers: Lack of digital skills among micro sector MSMEs, hindering their ability to set up online stores and use digital marketing.High Cost of Technology: Difficulties in accessing necessary technology due to high costs and rapid advancements.Cybersecurity: Micro enterprises are largely unprepared to defend against cyber-attacks.Transaction Costs: High transaction fees charged by large e-commerce platforms reduce profit margins.Logistics and Supply Chain: Poor infrastructure leads to high shipping costs and unreliable delivery services.Warehousing and Inventory Management: Inadequate resources and technology for effective warehousing.Payment Gateway Integration: Non-integration impacts the ability to accept online payments securely.Return & Exchange Policy: Stringent buyer-centric return and exchange policies of large platforms are harsh for MSME sellers.Open Network for Digital Commerce (ONDC)The introduction of ONDC by the Indian government aims to transform the digital commerce landscape, providing MSMEs with tools and infrastructure to expand their reach from local markets to a global audience. ONDC aims to democratize digital commerce by creating an open, inclusive, and decentralized network that allows seamless interaction between buyers and sellers across different platforms.Benefits of Onboarding through ONDCSimplified Access to Digital Markets: Open network architecture allows MSMEs to access multiple digital marketplaces without being tied to a single platform.Empowerment of MSME Businesses: Provides tools and platforms to compete on an equal footing with large e-commerce giants.Enhanced Consumer Choice: Consumers gain access to a wider range of products and services, leading to better prices and greater innovation.Innovation and Efficiency: Encourages a competitive environment where businesses are motivated to innovate and improve operations.Regional Economic Growth: Contributes to regional economic development, helping bridge the urban-rural divide.Data Sovereignty and Privacy: Decentralized architecture allows for greater control and ownership of data by businesses and consumers.Enhanced Visibility and Reach: Greater exposure to potential customers both domestically and internationally.Reduced Costs: Standardization helps streamline operations and avoid high fees charged by dominant platforms.Improved Access to Resources: Access to technology tools, financial services, and logistical support.Cash Flow Based Financing: Enables MSMEs to avail cash flow based financing from the formal sector based on GST and bank statements.Chamber of Indian Micro Small and Medium Enterprises is organizing comprehensive awareness campaigns and educational programs through initiatives like MSME MITRA and the YouTube channel "MSME HELPLINE" to help businesses leverage ONDC.ConclusionThe Open Network for Digital Commerce represents a transformative opportunity for MSMEs in India. By breaking down barriers and providing equitable access to digital markets, ONDC can help small businesses scale their operations from local to global levels. India has been a world leader in demonstrating successful adoption of digital infrastructures at the population scale, such as UPI, AADHAAR, and ONDC is yet another tech-based initiative to transform e-commerce.Author may be reached at eboard@icai.in
Ep. 428 — The Dual Approach: Combining Financial Acumen and Non-Financial Excellence for MSME Growth
CA Journal
· September 2026
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The Dual Approach: Combining Financial Acumen and Non-Financial Excellence for MSME GrowthMicro, Small and Medium Enterprises (MSMEs) are the powerhouse of the Indian economy. They contribute a staggering 30% to India's gross domestic product (GDP) and employ over 120 million people. However, despite their critical role, over 80% of MSMEs fail to survive beyond five years. Limited access to finance, inadequate financial management practices, and a lack of awareness about the importance of financial reporting are significant contributors to this challenge.Micro, Small, and Medium Enterprises (MSMEs) need to overcome these challenges and break all barriers to achieve success. They must focus on improving both their financial and non-financial metrics to differentiate themselves from competitors and become preferred providers of products and services. By enhancing their financial health, MSMEs can gain better access to funding, reduce operational risks, and achieve sustainable growth. Improved financial parameters might include maintaining healthy cash flows, optimizing cost structures, and achieving strong credit ratings. On the non-financial side, MSMEs should strive to enhance customer satisfaction, innovate in their product or service offerings, and implement effective marketing strategies.Shifting the Lens: From Profits to PotentialInstead of asking "why" prepare financial statements, MSMEs should be asking "why not?" Why not leverage these reports as a powerful tool for growth, transparency, and strategic decision-making? This shift in mindset unlocks a world of possibilities. Financial reporting for MSMEs can feel like a chore - a yearly hurdle to jump through, but the real question lies in accuracy and the immense potential these reports hold beyond just calculating profits or fulfilling tax obligations.Demystifying the Stakeholder Web: A Deep Dive into MSME Financial Reporting with Compliance in MindOwners / Entrepreneurs: Provides accurate data essential for informed decision-making, strategic planning, resource allocation, risk management, and regulatory compliance.Employees: Compliance with employee benefit accounting standards (like AS 15 and Ind AS 19) mandates disclosures regarding pension plans and stock option plans, creating transparency and a level playing field.Investors: Compliance with accounting standards AS 26 and Ind AS 38 for intangible assets ensures consistent treatment of R&D expenditures, offering a clearer picture of innovation potential.Lenders: Thorough and appropriate disclosure accompanied by sensitivity analysis offers assurance and confidence regarding credit risk and economic scenario impacts.Regulators: Compliance with standards like AS 12, Ind AS 22, AS 18, and Ind AS 24 provides crucial information regarding tax rates and related-party transactions.Industry Associations and Chambers of Commerce: Provides accurate data to establish industry benchmarks, best practices, and informed policy-making.Beyond Numbers: Integrating Non-Financial Strategies for MSME Success in IndiaThe Government of India has taken significant strides to address environmental concerns through initiatives like the 'Make in India' campaign and the 'Zero Defect Zero Effect' scheme. According to a report by SIDBI and D&B, the Sustainability Perception Index for MSMEs in India is 46, measuring perception across willingness (sub-index highest at 61), awareness, and implementation. While frameworks like BRSR are currently mandatory for large-cap companies, their impact extends to MSMEs within their supply chains. Furthermore, early adoption of integrated reporting combines financial and non-financial data, fostering a culture of sustainability.Sustainable Growth: MSMEs Pioneering Green PracticesEnergy Efficiency: Upgrading to energy-efficient machinery and optimizing operations.Waste Management: Adopting reduce, reuse, and recycle principles along with proper hazardous waste disposal.Sustainable Sourcing: Sourcing eco-friendly materials and working with responsible partners.Water Conservation: Implementing water-saving technologies, recycling water, and installing rainwater harvesting systems.Pollution Reduction: Using emission control technologies and cleaner production techniques.Green Building Practices: Constructing eco-friendly infrastructure maximizing natural lighting and ventilation.Employee Engagement and Training: Educating employees on sustainability and fostering a green culture.Product Innovation: Developing eco-friendly biodegradable products and sustainable packaging.Community Engagement: Participating in local environmental initiatives and implementing targeted CSR programs.SMP's: Turning Financial and Non-Financial Reporting from Compliance to Competitive AdvantageForward-thinking small and medium practitioners (SMPs) can guide MSMEs by leveraging expertise across five key areas:Risk Assessment Revolution: Moving beyond generic checklists to conduct deep dives into each MSME's operating environment and design targeted substantive audit procedures.Data Analytics: Utilizing tech tools to dissect financial data, uncover anomalies, and detect potential fraud.Standardisation with Stakeholder Specificity: Ensuring technical compliance while tailoring disclosures to specific stakeholder needs.Setting ESG Targets: Conducting comprehensive ESG assessments, establishing measurable goals, and tracking progress.Collaboration: Facilitating transparent communication channels with client management and engaging with subject matter specialists.ReferencesMinistry of MSME, Government of IndiaSkill Development and Entrepreneurship Ministry, Government of IndiaConfederation of Indian Industry (CII) ReportAuthor may be reached at gaurimethi@gmail.com and eboard@icai.in
Ep. 429 — Unlocking India's Economic Potential: Overcoming the Credit Access Barrier for MSMEs
CA Journal
· September 2026
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Unlocking India's Economic Potential: Overcoming the Credit Access Barrier for MSMEsMicro, Small, and Medium Enterprises (MSMEs) resonate as vital contributors to India's economic vitality. With resilience, they fuel innovation, foster employment, and enhance export competitiveness. Despite hurdles like financial access and regulations, empowering MSMEs is not only essential but also morally imperative for India's prosperity.MSMEs Driving India's Economic GrowthIndia's MSME sector comprises nearly 63 million enterprises, poised for significant expansion with a projected growth rate of 2.5% CAGR, paving the way for 75 million enterprises. The sector accounts for approximately 30% of India's GDP, provides livelihoods to nearly 191 million individuals (making it the second-largest employer after agriculture), and facilitates nearly 46% of the nation's total exports.Enhancing Financial Access for Indian MSMEs to Accelerate Economic GrowthDespite their crucial role, MSMEs encounter substantial financing challenges. As per the IFC World Bank report in November 2018, the credit gap confronting MSMEs stands at a staggering INR 25.8 trillion. While formal credit channels address only INR 10.9 trillion of financing needs, the overall finance demand stands at a daunting INR 69.3 trillion, with 70% attributed to filling the working capital gap.First-generation entrepreneurs, predominantly in micro and small industries, grapple with limited capital and inadequate collateral, often resorting to informal credit sources. Other challenges include low scalability, labor issues, and the absence of standardized policies. As India aspires to become a $5 trillion economy with export projections reaching US$ 1 trillion by 2028, unlocking access to credit is imperative.Leveraging Technology to Facilitate Credit Access for MSMEsTechnology serves as a game-changer by integrating Know Your Customer (KYC), Credit Scoring Models, and Automated Loan Origination Systems. Fintech companies and NBFCs harness data analytics and machine learning algorithms to assess creditworthiness even in the absence of credit history, enabling new-to-credit entrepreneurs to access financing.Government Initiatives - Unlocking Opportunities for GrowthPrime Minister's Employment Generation Programme (PMEGP): Provides credit link subsidies of up to INR 25 Lakhs for manufacturing and INR 10 Lakhs for services (15% for urban, 25% for rural units). In FY 2023-24, it supported 65,324 enterprises, creating 5,22,592 jobs. (Portal: https://www.kviconline.gov.in/pmegpeportal/pmegphome/index.jsp)CGTMSE (Credit Guarantee Scheme for Micro and Small Enterprises): Jointly established by the Ministry of MSME and SIDBI, it provides collateral-free guarantees for up to 75% of loan amounts up to INR 5 Crore. In FY 2023-24, it extended guarantees totaling INR 1,35,668 crores, benefiting 11,02,548 enterprises.Pradhan Mantri Mudra Yojana (PMMY): Offers financing of up to INR 10 Lakhs to non-corporate/non-farm small/micro enterprises. (Portal: www.dcmsme.gov.in)Interest Subsidy Eligibility Certificate (ISEC): Facilitates working capital credit at a concessional interest rate of 4% per annum for the khadi program.PM Vishwakarma Scheme: Allocated a budgetary outlay of INR 13,000 crores (2023-24 to 2027-28) to offer comprehensive support and credit assistance to artisans across 18 trades.Trade Receivable Discounting System (TREDS): Provides cost-effective financing against approved invoices within 48 hours through electronic platforms accessible to multiple financiers.ConclusionAddressing MSME challenges requires concerted efforts from policymakers, financial institutions, and stakeholders to streamline credit access and simplify regulatory frameworks. Bridging the gap between government benefits and enterprise awareness is critical to maximizing their potential impact.Referenceswww.IBEF.orgPIB posted on February 5, 2024Niti Ayog, MSME Census InfoIFC, World Bank (https://msme.gov.in/)Author may be reached at eboard@icai.in
Revenue Rebound: Understanding MSME Payment Recovery MechanismThe Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006 was a significant step by the Indian government to address the issues faced by MSMEs, particularly regarding delayed payments. Sections 15 to 24 of Chapter V of this Act deal comprehensively with the mechanisms for recovering payments due to MSMEs. These sections provide a legal framework to ensure timely payment to MSMEs and strengthen their financial health. In this article, we will delve into the intricacies of this payment recovery mechanism and its implications for both MSMEs and other stakeholders.Understanding the ProvisionsSection 15: Mandatory Payment Timelines and Liability for InterestSection 15 of the MSMED Act mandates that a buyer is required to make payments for goods or services procured from an MSME supplier within 45 days from the date of acceptance or deemed acceptance of the goods or services. In case of a delay in payment, the buyer is liable to pay compound interest along with the principal amount to the supplier. This interest rate is three times the bank rate notified by the Reserve Bank of India. This provision acts as a deterrent against delayed payments and encourages buyers to settle dues promptly.Section 16: Application Procedure for RecoverySection 16 elaborates on the procedure for filing an application by the MSME supplier for recovering the due amount. The application is to be made to the buyer in writing, either by registered post or by electronic means. If the buyer fails to make payment within 45 days, the supplier can initiate legal proceedings by filing a reference with the Micro and Small Enterprises Facilitation Council (MSEFC).Section 17: Recovery of Amount Due from BuyerSection 17 eloborates Recovery of amount due from buyer. For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under section 16. For this the MSMED Act establishes the MSEFC both at state levels and district levels to facilitate the resolution of disputes regarding delayed payments to MSMEs. The MSEFC is empowered to conduct conciliation proceedings between the parties and facilitate the settlement of disputes. This provision promotes out-of-court settlements and expedites the recovery process.Sections 18 and 19: Conciliation Proceedings and TimelinesSections 18 and 19 provide the procedure for filing a reference before the MSEFC and the powers vested in the MSEFC for conducting conciliation proceedings. The MSEFC is required to pass an order within 90 days from the date of making the reference. This timeframe ensures speedy resolution of disputes and enables MSMEs to recover their dues without prolonged litigation.The Act empowers the MSEFC to issue an Award to the buyer for the recovery of the due amount along with interest. This Award acts as an order from a MSEFC and enables the MSME supplier to recover the dues through legal means.“The Act grants the MSME supplier the right to appeal against the decision of the MSEFC within 45 days from the date of receipt of the order.”The Act grants the MSME supplier the right to appeal against the decision of the MSEFC within 45 days from the date of receipt of the order. The appeal is to be filed before the designated court, which has the authority to either confirm, modify, or set aside the order of the MSEFC.Section 20: Establishment of Facilitation CouncilsSection 20 of MSMED Act 2006 talks about Establishment of Micro and Small Enterprises Facilitation Council. The State Government shall, by notification, establish one or more Micro and Small Enterprises Facilitation Councils, at such places, exercising such jurisdiction and for such areas, as may be specified in the notification.Section 21: Composition of MSEFCSection 21 of MSMED Act 2006 talks about Composition of Micro and Small Enterprises Facilitation Council:The MSEFC shall consist of not less than three but not more than five members to be appointed from amongst the following categories, namely:--Director of Industries, by whatever name called, or any other officer not below the rank of such Director, in the Department of the State Government having administrative control of the small scale industries or, as the case may be, micro, small and medium enterprises; andone or more office-bearers or representatives of associations of micro or small industry or enterprises in the State; andone or more representatives of banks and financial institutions lending to micro or small enterprises; orone or more persons having special knowledge in the field of industry, finance, law, trade or commerce.The person appointed under clause (i) of sub-section (1) shall be the Chairperson of the MSEFC.The composition of the MSEFC, the manner of filling vacancies of its members and the procedure to be followed in the discharge of their functions by the members shall be such as may be prescribed by the State Government.Section 22: Requirement to Specify Unpaid Amount with Interest in Annual AccountsSection 22 mandates that any buyer who is required to get their annual accounts audited under any prevailing law must include specific details in their annual statement of accounts regarding payments due to MSME suppliers. This section is crucial for enhancing transparency and accountability in business transactions. The information to be furnished includes:Principal amount and interest due: The buyer must specify the principal amount and the interest due thereon, separately, that remain unpaid to any MSME supplier as at the end of each accounting year.Interest paid and payments made: The buyer must disclose the amount of interest paid under Section 16 of the Act, along with the amount of payment made to the supplier beyond the appointed day during each accounting year.Interest due and payable: The buyer must indicate the amount of interest due and payable for the period of delay in making payment, which has been paid but beyond the appointed day during the year, without adding the interest specified under this Act.Accrued interest: The buyer must report the amount of interest accrued and remaining unpaid at the end of each accounting year.Further interest remaining due: The buyer must specify the amount of further interest remaining due and payable even in the succeeding years until the interest dues as above are actually paid to the MSME, for the purpose of disallowance as a deductible expenditure under Section 23.This section ensures that buyers maintain a clear record of their outstanding payments to MSME suppliers, including the principal amount and accrued interest. By mandating this disclosure, it facilitates better monitoring and compliance with the Act’s provisions.“Section 22 mandates that any buyer who is required to get their annual accounts audited under any prevailing law must include specific details in their annual statement of accounts regarding payments due to MSME suppliers.”Section 23: Interest Not to be Allowed as Deduction from IncomeSection 23 overrides the provisions of the Income-tax Act, 1961, concerning the deductibility of interest paid by buyers under the MSMED Act. It specifies that the amount of interest payable or paid by any buyer under the provisions of the MSMED Act shall not be allowed as a deduction from income under the Income-tax Act, 1961.This section ensures that buyers cannot claim deductions for interest payments made due to delayed payments to MSME suppliers. It discourages buyers from delaying payments and encourages timely settlement of dues, as the interest paid will not be deductible for income tax purposes.Section 24: Overriding EffectSection 24 establishes the overriding effect of Sections 15 to 23 of the MSMED Act over any other law for the time being in force. This means that the provisions of Sections 15 to 23 shall have effect notwithstanding anything inconsistent contained in any other law.This provision ensures that the provisions of the MSMED Act take precedence over any other law or regulation that may conflict with it. It strengthens the legal framework for ensuring timely payment to MSMEs and provides clarity regarding the applicability of the Act’s provisions.Implications and BenefitsThe payment recovery mechanism under Sections 15 to 24 of the MSMED Act has several implications and benefits for MSMEs, buyers, and the economy at large.For MSMEs, this mechanism provides a legal framework to ensure timely payment for their goods or services. Timely payments enhance the cash flow of MSMEs, enabling them to meet their operational expenses, invest in growth, and sustain their businesses. It also reduces the dependency of MSMEs on expensive borrowings to meet their working capital requirements.For buyers, complying with the provisions of the Act fosters a healthy relationship with MSME suppliers. Timely payments build trust and reliability, encouraging MSMEs to continue supplying goods or services. Moreover, avoiding legal disputes and penalties saves the buyers from unnecessary financial and reputational losses.From an economic perspective, the MSME sector plays a crucial role in the growth and development of the economy. Timely payment to MSMEs boosts their confidence and encourages them to expand their businesses, thereby creating more employment opportunities and contributing to economic growth. It also fosters innovation and entrepreneurship, driving competitiveness in the market.Challenges and SuggestionsDespite the robust framework provided by the Micro, Small, and Medium Enterprises Development (MSMED) Act, there are significant challenges in the effective implementation of the payment recovery mechanism for MSMEs. One of the most pressing issues is the widespread lack of awareness among MSMEs regarding their rights under the Act and the procedures available for recovering overdue payments. This lack of knowledge leaves many small business owners uncertain about how to proceed when faced with delayed payments, thereby undermining the efficacy of the legal protections intended to support them.A major deterrent for MSMEs is the fear of jeopardizing valuable business relationships by initiating legal proceedings against defaulters. Many small business owners are hesitant to pursue legal action due to concerns that it might alienate key clients or partners, which could lead to a loss of future business opportunities. Additionally, the complexity and perceived daunting nature of the legal process further discourage MSMEs from seeking the recourse they are entitled to. The intricate legal jargon, procedural formalities, and potential costs involved can be overwhelming, especially for enterprises with limited resources and legal expertise.To address these multifaceted challenges, it is crucial to undertake comprehensive measures aimed at empowering MSMEs. First and foremost, creating widespread awareness about the rights and provisions under the MSMED Act is essential. Government agencies, industry associations, and financial institutions must collaborate to organize extensive awareness campaigns. These campaigns should focus on educating MSMEs about the specific provisions of the Act, the mechanisms available for payment recovery, and the benefits of pursuing their legal rights. Such initiatives could include workshops, seminars, online resources, and informational brochures tailored to the needs of small business owners.Furthermore, providing guidance and support to MSMEs throughout the payment recovery process is vital. This can be achieved by establishing dedicated helpdesks or support centers that offer step-by-step assistance to MSMEs seeking to file claims. Simplifying the procedure for filing applications and resolving disputes can significantly lower the barriers to accessing justice. Streamlined processes, user-friendly online portals, and clear, concise documentation requirements can make it easier for MSMEs to navigate the legal system.In addition, alternative dispute resolution mechanisms such as mediation and arbitration should be promoted as viable options for MSMEs. These methods can offer quicker, cost-effective solutions that help preserve business relationships while ensuring that dues are recovered. Training programs for legal professionals and arbitrators specializing in MSME disputes can enhance the effectiveness of these alternative mechanisms.By taking these steps, we can create an environment where MSMEs are not only aware of their rights but also feel confident and equipped to enforce them. Empowering MSMEs in this manner will not only improve the payment recovery process but also contribute to the overall health and sustainability of the MSME sector, fostering a more vibrant and resilient economy.While the payment recovery mechanism under the MSMED Act provides critical protections for MSMEs, it is not without potential drawbacks. One significant downside is the risk that buyers, especially those concerned about the stringent payment timelines and penalties for delays, may shift their business to medium and large enterprises to avoid these obligations. This shift can disadvantage MSMEs, depriving them of valuable business opportunities and exacerbating the challenges they face in competing with larger firms.To overcome this issue, it is essential to strike a balance between protecting MSMEs and maintaining their competitiveness in the market. One approach is to foster a collaborative and transparent business environment where the benefits of working with MSMEs are clearly communicated to buyers. Highlighting the innovative potential, agility, and cost-effectiveness of MSMEs can help persuade buyers to continue their engagements with smaller suppliers despite the stringent payment conditions.Additionally, introducing flexible payment arrangements and phased compliance plans could mitigate the concerns of buyers. For instance, providing incentives for early payments or offering flexible credit terms that are mutually agreed upon can encourage buyers to adhere to payment schedules without feeling overly constrained by the Act’s provisions.Enhancing the efficiency and accessibility of dispute resolution mechanisms is also crucial. By ensuring that the MSEFC operates swiftly and fairly, buyers may feel more confident that any disputes will be handled expediently and justly, reducing their apprehension about potential legal entanglements.Furthermore, fostering partnerships between MSMEs and larger enterprises through supply chain integration programs can create a more inclusive ecosystem. Larger companies could be incentivized to mentor and collaborate with MSMEs, facilitating better payment practices while ensuring business continuity and growth for small enterprises.By addressing these concerns through a combination of education, flexible arrangements, and collaborative initiatives, the potential downside of the MSMED Act’s payment conditions can be mitigated. This balanced approach will help ensure that MSMEs remain competitive and continue to thrive alongside medium and large enterprises, ultimately contributing to a more robust and resilient economy.ConclusionThe payment recovery mechanism outlined in Sections 15 to 24 of the MSMED Act, 2006, stands as a cornerstone in ensuring the financial stability and growth of MSMEs. By mandating timely payments and imposing stringent penalties on defaulting buyers, the Act fosters a business environment that is both fair and conducive to the growth of small enterprises. This legislative framework not only empowers MSMEs to secure their dues but also enhances their overall financial health, enabling them to meet operational expenses, invest in growth opportunities, and reduce dependency on costly borrowings.The implications of these provisions extend beyond the immediate benefits to MSMEs. For buyers, adhering to the Act’s requirements builds trust and reliability in their business relationships with MSME suppliers, avoiding legal disputes and potential financial penalties. This cooperative dynamic promotes a healthier and more transparent business ecosystem. Moreover, the broader economic benefits are substantial, as the MSME sector is a vital driver of employment, innovation, and economic growth. Ensuring the financial viability of MSMEs contributes to job creation, fosters entrepreneurial spirit, and enhances market competitiveness.However, the robust framework of the MSMED Act also presents challenges, particularly the risk of buyers shifting their business to larger enterprises to avoid stringent payment conditions. To address this, a balanced approach is necessary. Enhancing awareness about the Act’s provisions, providing support throughout the payment recovery process, and promoting alternative dispute resolution mechanisms can empower MSMEs to confidently enforce their rights without jeopardizing valuable business relationships.Furthermore, introducing flexible payment arrangements and incentivizing early payments can alleviate buyers’ concerns, ensuring that the stringent conditions of the Act do not deter them from engaging with MSMEs. Collaborative initiatives, such as supply chain integration programs and partnerships with larger enterprises, can create a more inclusive and supportive business environment, benefiting both MSMEs and their larger counterparts.Ultimately, the success of the payment recovery mechanism under the MSMED Act hinges on the active participation and cooperation of all stakeholders. Government agencies, industry associations, financial institutions, and the MSMEs themselves must work together to foster a transparent, fair, and efficient business environment. By understanding and fulfilling their roles and responsibilities, stakeholders can unlock the full potential of this legislative framework, ensuring that MSMEs continue to thrive and contribute significantly to the economy. The concerted effort to balance protection with competitiveness will lead to a more resilient and dynamic MSME sector, driving sustained economic growth and prosperity for all.Author may be reached at camanojlamba@gmail.com and eboard@icai.in
THEME
Ep. 431 — MSME: A Roadmap for Developed India by 2047
CA Journal
· September 2026
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MSME: A Roadmap for Developed India by 2047In the symphony of India’s economic growth, the Micro, Small, and Medium Enterprises (MSMEs) play a significant and multifaceted tune. They are the engines of job creation, the incubators of innovation, and the pillars of economic resilience. As India strides towards its 100th year of Independence in 2047, the transformation of MSMEs from mere contributors to the backbone of a developed India becomes imperative. This article aims to craft a comprehensive roadmap that leverages the potential of MSMEs, incorporating not only their current contributions but also their untapped capacities and aspirations.The Current MSME Landscape in IndiaThe Ministry of Micro, Small, and Medium Enterprises (MSMEs) in India serves as a beacon illuminating the significance of this sector through compelling statistics. With a staggering count of over 63 million registered MSMEs, their impact is palpable across the nation’s economic landscape. Their collective contribution, amounting to approximately 29% of the GDP, underscores their pivotal role in driving economic growth and development. Beyond mere numbers, these enterprises serve as engines of employment, providing livelihoods to over 110 million individuals.From traditional textile mills preserving age-old craftsmanship to cutting-edge IT startups spearheading innovation, the MSME sector reflects the diversity and dynamism inherent in India’s entrepreneurial spirit. These enterprises embody resilience, adaptability, and the relentless pursuit of excellence, forming the very backbone of the nation’s economic fabric. Under the aegis of the Ministry of MSMEs, initiatives are crafted and implemented to nurture this vital sector, fostering an ecosystem conducive to growth and sustainability.Challenges for the MSMEsMSMEs face a multitude of challenges that hinder their growth and sustainability. One significant obstacle is limited access to finance, as traditional banking systems often perceive them as high-risk ventures, resulting in stringent lending terms. Additionally, many MSMEs struggle with technological adoption due to a lack of infrastructure and expertise, which prevents them from competing effectively on a global scale. Moreover, navigating through complex regulatory frameworks and compliance burdens adds further strain to their operations, impeding their ability to expand. Furthermore, the restricted access to larger markets constrains the scalability of MSMEs, limiting their potential growth opportunities. Lastly, the shortage of adequately skilled labour tailored to the specific needs of MSMEs exacerbates these challenges, making it difficult for them to innovate and thrive in a competitive landscape. Addressing these obstacles is crucial for fostering the growth and resilience of MSMEs in the modern economy.Charting the Roadmap: Pillars for Development1. Enhancing Access to Finance and Credit FacilitiesFinance is the lifeblood of any business, and for MSMEs, it’s akin to oxygen. Establishing a robust ecosystem for easy access to finance through innovative schemes, technology-driven lending platforms, and credit guarantee mechanisms is crucial for their growth and sustainability. Several initiatives and strategies can be implemented to enhance access to finance for MSMEs. Strengthening credit guarantee schemes is essential. By reducing the risk for lenders, these schemes incentivize financial institutions to extend credit to MSMEs. Programs like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) play a vital role in this regard.“Promoting alternative financing models such as peer-to-peer lending, venture capital, and crowdfunding can provide MSMEs with additional funding avenues.”Promoting alternative financing models such as peer-to-peer lending, venture capital, and crowdfunding can provide MSMEs with additional funding avenues. Regulatory bodies like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are actively working to create frameworks that support these models. Enhancing financial literacy among MSME entrepreneurs is also critical. Improved financial literacy can empower them to make informed financial decisions and effectively manage their resources. Government and non-governmental organizations can collaborate to offer workshops and training programs to enhance financial literacy levels within the MSME community.Moreover, establishing specialized banks catering specifically to the needs of MSMEs can provide tailored financial products and services, addressing the unique challenges faced by these enterprises. These specialized institutions can offer customized lending solutions, advisory services, and capacity-building initiatives tailored to the requirements of MSMEs.Additionally, implementing robust credit rating systems tailored for MSMEs can enhance their creditworthiness assessment, facilitating better access to finance. By accurately evaluating the creditworthiness of MSMEs, lenders can make more informed lending decisions, thereby reducing the perceived risk associated with financing these enterprises. According to the Reserve Bank of India, the outstanding credit to the MSME sector stood at a substantial ₹19.2 lakh crore as of March 2023. However, to truly unlock the potential of MSMEs, this credit flow needs to be diversified and increased. Ensuring that every deserving entrepreneur has access to the financial support needed to thrive is essential for driving inclusive growth and economic prosperity.2. Skill Development and Technology AdoptionIn today’s digital landscape, the imperative for survival extends beyond mere options to necessitate skill development and technology adoption, particularly for Small and Medium Enterprises (MSMEs). These enterprises must prioritize the empowerment of their workforce with adaptable skills to navigate the ever-evolving technological advancements and market dynamics. Customized skill training programs, tailored to meet industry-specific demands, serve as vital bridges addressing the disparity between the demand and supply of skilled labour.However, the Confederation of Indian Industry (CII) presents a sobering statistic: only 15% of MSMEs in India have embraced digital technologies, underscoring a significant digital divide. Addressing this chasm requires concerted efforts on multiple fronts. Initiatives promoting digital literacy and the uptake of digital tools are pivotal elements in driving digital transformation within MSMEs, enhancing operational efficiency, and expanding market reach. Moreover, establishing innovation hubs and fostering collaborations with technology firms can prove instrumental. These endeavours not only grant MSMEs access to cutting-edge technologies but also provide invaluable expertise, positioning them to thrive in the digital era. By embracing these strategies, MSMEs can fortify their resilience and competitiveness in an increasingly digitized world.3. Infrastructure DevelopmentInfrastructure forms the backbone of economic development, providing the necessary support for businesses to thrive. Investment in infrastructure projects, especially in rural and semi-urban areas where many MSMEs are located, is crucial. Improved transportation, power, and telecommunications can reduce logistical costs and improve connectivity, enabling MSMEs to access larger markets and resources.The Government of India has launched initiatives like AMRUT and PMGSY to enhance infrastructure for MSMEs. AMRUT focuses on improving urban infrastructure, such as water supply, sewerage, drainage, transport, and green spaces, reducing operational costs and boosting productivity for MSMEs. PMGSY aims to improve rural road connectivity, increasing market access and economic opportunities for rural MSMEs. Despite these efforts, continued investments in digital infrastructure, energy supply, logistics, skill development, and financial services are essential to support the sustained growth of MSMEs.4. Regulatory Reforms and Ease of Doing BusinessIndia has undergone a remarkable transformation in its ease of doing business landscape, transitioning from its 142nd position in 2014 to a notable 63rd in 2020, as per the World Bank’s Doing Business Report. This upward trajectory signifies the concerted efforts undertaken to streamline regulatory frameworks and foster a more business-friendly environment. However, the journey towards creating an optimal ecosystem for MSMEs is ongoing, necessitating a deeper focus on key areas such as contract enforcement, property registration, and insolvency resolution.Enhancing contract enforcement mechanisms can instil confidence among MSMEs, ensuring timely payments and dispute resolution. Simplifying property registration procedures can facilitate smoother access to credit, vital for MSMEs’ growth and expansion plans. Additionally, refining insolvency resolution processes is crucial for mitigating risks associated with business failures, providing a safety net for entrepreneurs to take calculated risks. By augmenting regulatory frameworks and bolstering the ease of doing business, MSMEs can navigate the bureaucratic maze with greater ease, enabling them to allocate resources more efficiently towards innovation, job creation, and economic prosperity. Therefore, a continued commitment to regulatory reforms remains imperative to unleash the full potential of MSMEs and drive inclusive growth across India’s economic landscape.5. Access to Markets and Global IntegrationMSMEs thrive when they have access to both domestic and international markets. Leveraging e-commerce platforms is key, enabling them to reach customers nationwide and globally. Additionally, supporting export activities through training and facilitating participation in international trade fairs can enhance MSMEs’ export capabilities. Encouraging larger corporations to source from MSMEs creates new market opportunities, fostering collaboration within the business ecosystem. Moreover, facilitating access to global markets through trade agreements, export promotion schemes, and market intelligence support is essential. These initiatives can unlock new avenues for growth and expansion.“MSMEs thrive when they have access to both domestic and international markets. Leveraging e-commerce platforms is key, enabling them to reach customers nationwide and globally.”Currently, MSMEs contribute approximately 40% to India’s total exports, highlighting their significant role in the country’s trade landscape. By enhancing export competitiveness and diversifying export destinations, MSMEs can further bolster India’s economic growth trajectory. Enabling MSMEs to access both domestic and international markets is crucial for their sustained growth and contribution to the economy. Through a combination of e-commerce platforms, export facilitation, and local sourcing policies, coupled with strategic initiatives to enhance global market access, MSMEs can continue to thrive and drive India’s economic prosperity forward.ConclusionAs India charts its path towards achieving the status of a developed nation by the year 2047, Micro, Small, and Medium Enterprises (MSMEs) stand poised as the vanguard of this transformative journey. Recognizing the pivotal role played by MSMEs in driving economic progress, it becomes imperative for India to confront the challenges that beset these enterprises while harnessing their inherent strengths. By doing so, India can forge a dynamic and inclusive ecosystem that not only nurtures entrepreneurship and innovation but also ensures sustainable and equitable growth.As we commemorate India’s centenary of independence, let us embark on this transformative expedition with a vision firmly rooted in the empowerment of MSMEs. Let us envision an India where MSMEs cease to be mere contributors to the economy but instead emerge as catalysts of prosperity, driving forward the wheels of economic advancement, fostering social inclusion, and asserting global leadership. In this vision of India, MSMEs serve as the cornerstone of a vibrant and resilient economy, empowering individuals, communities, and the nation as a whole to realize their full potential and shape a brighter future for generations to come.ReferencesMinistry of Micro, Small & Medium Enterprises, Government of India. Reserve Bank of India (RBI) data on MSME credit.Confederation of Indian Industry (CII) survey on MSME digital adoption.Government of India initiatives: Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Pradhan Mantri Gram Sadak Yojana (PMGSY).World Bank’s Doing Business Report.Ministry of Commerce and Industry, Government of India, data on MSME exports.Author may be reached at eboard@icai.in
THEME
Ep. 432 — Empowering the Practice Profession: Capacity building through diverse initiatives
CA Journal
· September 2026
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Empowering the Practice Profession: Capacity building through diverse initiativesAs the nation strides forward with resolute momentum, marked by robust forecasts and a burgeoning presence on the global stage, the imperative for skilled professionals capable of steering through dynamic market forces becomes increasingly pronounced. In the vibrant tapestry of India’s economic landscape, the role of Chartered Accountants (CAs) stands as a linchpin, pivotal in navigating the complexities of financial ecosystems and driving sustainable growth.The Indian economy continues to demonstrate robust performance with widespread growth across various sectors. Numerous international organizations highlight India’s crucial role in shaping Asia’s economic trajectory in the upcoming years. The Reserve Bank of India (RBI), in its latest Monetary Policy Committee meeting, observed the strong growth momentum within the economy and forecasted a 7% real GDP growth for 2024-25, fueled by increasing rural demand and sustained momentum in the manufacturing sector. Similarly, the World Economic Outlook has projected India’s growth at a commendable 6.8% for 2024-25 and 6.5% for 2025-26, attributing this optimism to persistent domestic demand and an expanding working-age population.This robust economic growth and transformation create substantial opportunities for the accountancy profession. As India’s economy expands and integrates further into the global market, the demand for skilled Chartered Accountants (CAs) who can navigate complex financial landscapes will increase. However, the future growth of the accountancy profession in India will be driven by its ability to adapt to these changing economic conditions, embrace new technologies, and continue to uphold high ethical standards. By doing so, CAs will not only contribute to the sustained economic growth of the nation but also secure their relevance and success in a rapidly evolving global economy.To create a robust and dynamic ecosystem for CAs, ICAI equips them with the necessary tools, skills, and support to thrive in a rapidly evolving global business environment. By fostering professional excellence, security, and well-being, the ICAI through its Committee for Members in Practice (CMP) aims to ensure that its members remain relevant, competitive, and innovative leaders in their field.Role of ICAI in Capacitating the Practicing MembersTie-upsCentral to its mission is an environment where members can thrive professionally while enjoying a sense of security and well-being. This is accomplished through a multifaceted approach that includes tie ups with various organizations to provide a range of benefits and services. One of the primary offerings of CMP is access to discounted insurance coverage. This coverage spans across different areas including health, personal accident, and professional indemnity policies. By securing these policies at discounted rates, CMP facilitates its members to have the necessary financial protection and peace of mind as they navigate their professional endeavours. Furthermore, the CMP platform hosts a diverse array of 38 schemes catering to different aspects of professional life. These include software schemes, insurance schemes, medical-healthcare services schemes, loan/finance facilities schemes, publications, and electronics scheme.Practice ki PaathshalaICAI’s new initiative this year, “Practice ki Paathshala,” a three-day residential refresher course is designed to enhance participants’ essential competencies for career advancement. The program has received significant acclaim and participation due to its strategic focus on key aspects. The primary goal of the course is to improve practice management skills, equipping participants with effective client management, communication abilities, and financial expertise to optimize firm operations. Additionally, the curriculum integrates training on cutting-edge technologies such as AI, cybersecurity, and data analytics using various tools to help attendees streamline processes and stay ahead in the digital era. CMP has scheduled multiple batches throughout the year, ensuring more individuals can benefit from this transformative opportunity. Practice ki Paathshala is being conducted in the state-of-the-art ICAI’s Centres of Excellence at Jaipur and Hyderabad.Practice Management SoftwareICAI is also facilitating digital tools to empower its members for the digital era, enabling them to lead, create, and innovate in the field of CA such as Practice Management Software which is an Advanced Practice Management Software to Enhance Operational Efficiency and available Free of Cost to the practicing members of ICAI. Practice Management Software helps the Firms to serve their clients and manage day to day office activities. It Includes Jobs and Billing, Capacity Planning, Documentation, Centralized Client Database, Time Sheets, and other useful features that gives Technology advantages to all Firms. Practitioners/Firms can register for Practice Management Software at https://cacloud.ca.in. Further the Committee is also managing kb.icai.org which is a repository for various publications of ICAI.Grow Your PracticeThe ICAI also organizes a recurring series of webinars called “Grow Your Practice” held every Friday. These webinars serve as a platform for professional development, offering insights and guidance on different facets of the field. With a focus on practicality, these sessions equip participants with actionable advice and strategies to enhance their skills and stay abreast of evolving trends within the industry. The content of these webinars likely spans a wide range of topics relevant to practicing professionals. The fact that nine webinars have already been conducted suggests a significant investment in this initiative, indicating its popularity and effectiveness among the target audience.Weekly Training on Audit, Accounting and Practice Management ToolsWeekly training sessions of 4 hours each week are being organised on various tools in generative AI, audit tools, and practice management software, all covered under CMP benefits. These sessions provide a professional platform for members to learn about new tools and technologies, ensuring they remain at the forefront of innovation in the field of chartered accountancy. To support this initiative, the committee has issued an Expression of Interest for the empanelment of trainers specializing in the tools covered under CMP benefits.“ICAI offers a range of specialized certificate courses aimed at enhancing the skills and knowledge of its practicing members.”Focussed Certificate Courses Organised by ICAI for Practicing MembersICAI offers a range of specialized certificate courses aimed at enhancing the skills and knowledge of its practicing members. These include the Certificate Course on Preparation of Appeals, Drafting of Deed & Documents, and Representation before Appellate Authorities and Statutory Bodies, which focuses on practical procedural aspects, legal drafting, and effective representation. The Certificate Course on Wealth Management and Financial Planning (WMFP) provides comprehensive training in financial planning, investment strategies, and wealth management, equipping Chartered Accountants to serve as multidisciplinary financial consultants. While the Certificate Course on Working Paper Management (WPM) aims to improve the operational efficiency of CA firms by covering aspects of working paper management, client management, compliance with auditing standards, and productivity enhancement tools. These courses collectively empower CAs to excel in their professional roles and adapt to the evolving demands of the industry.Networking SummitsICAI is also conducting the Networking Summit, a flagship event designed to facilitate the holistic development of practicing Chartered Accountants. This summit serves multiple purposes, including building brand image, expanding professional networks, enhancing capacity, learning from experts, gaining global insights, and fostering best practices within the CA profession. With successful conclaves in key cities such as Kolkata, Mumbai, Ahmedabad, Jaipur and Udaipur the Networking Summit has provided a platform for CAs to connect, share, and grow. A unique feature of the Networking Summit is the conduct of opinion polls on various topics relevant to the Chartered Accountancy Profession. These polls serve as a collective voice of the participants, capturing diverse opinions and perspectives, ultimately contributing to a shared understanding of prevalent opinions, concerns, and emerging trends within the community.Grass Root EngagementFurther to gather insights from practicing Chartered Accountants at the grassroots level, the committee is also organising the round table meetings to brainstorm and provide feedback on capacity-building initiatives and changes needed central framework.ConclusionThe practice of Chartered Accountancy in India is poised for significant change and transformation in the coming years. As India’s economy continues to demonstrate robust performance and plays a pivotal role in shaping Asia’s economic trajectory, the demand for skilled CAs is set to rise. The resilience of the Indian economy, coupled with its increased global integration, underscores the significant opportunities for the accountancy profession. However, realizing this potential requires a steadfast dedication to adaptability, technological innovation, ethical integrity, and continuous professional development.In essence, the ICAI stands for the empowerment of Chartered Accountants, providing them with the support, resources, and opportunities needed to excel in their professional journey. Through its diverse initiatives and unwavering commitment to excellence, ICAI continues to shape the future of the CA profession in India and beyond. The proactive and strategic efforts of ICAI will be crucial in maintaining the relevance and competitiveness of Indian chartered accountants on the world stage, ensuring they are well-prepared to navigate the complexities of the modern business landscape and contribute meaningfully to the global economy.Authors may be reached at eboard@icai.in
DIRECT TAX
Ep. 433 — International Tax & Transfer Pricing aspects of Deemed Dividend u/s 2(22)(e)
CA Journal
· September 2026
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International Tax & Transfer Pricing aspects of Deemed Dividend u/s 2(22)(e)Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961 is a special section that provides for taxation on Loan transactions deeming it to be income as ‘dividend’ if certain conditions are satisfied. However, if such a loan is to be taxed in the hands of a non-resident, International Tax and Transfer Pricing provisions shall come into play. The article analyses aspects from an International Tax and Transfer Pricing perspective and provides possible views for various issues under consideration.BackgroundThe Income Tax Act, 1961 (‘the Act’)1 provides for charging of tax on the Income of a taxpayer. Section 2(24) defines “Income” which includes “Dividend” in its ambit.Dividend is defined in Section 2(22) of the Act which also includes income that shall be deemed as Dividend. One of the categories covered under Section 2(22) is Deemed Dividend on account of loans to shareholders. Clause (e) of Section 2(22) provides that—“A ‘dividend’ includes any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.”Analysis of Statutory ElementsThe above deeming fiction has certain key elements for application:The payer of Loan should be a company in which the public is not substantially interested.It should be a loan or an advance granted by the payer company (lender) to the receiver company (borrower).The taxation shall be to the extent of accumulated profits of the payer entity.Further, a key element under consideration for Deemed Dividend taxability is the identification of the taxable entity for loan granted, i.e., either the Borrower entity or the Shareholder, under Section 2(22)(e). Based on a cursory perusal of the aforesaid section and for the ease of understanding, it can be broadly divided into two scenarios:Scenario A — Loan or advance granted to shareholder:Company B (Lender) → Grants Loan or advance → Company A (Borrower / Shareholder)Condition: Company A holds more than 10% voting power in Company B.Scenario B — Loan or advance granted to any concern in which such shareholder is a member or partner and has substantial interest:Company A (Common Shareholder) owns > 10% in Company B (Lender) and owns > 20% in Company C (Borrower Concern).Company B (Lender) → Grants Loan → Company C (Borrower)From a bare reading of the above section, it can be noted that the above section applies if BOTH conditions are satisfied:Loan is given to a concern (borrower company) in which the shareholder of the lender company is also a MEMBER.Such shareholder of the lender company holds substantial interest viz. 20% or more voting power in the borrower company.If the above conditions are fulfilled, the loan granted to the extent of accumulated profits of the lender company is considered deemed dividend liable to taxation.Taxpayer for Deemed Dividend u/s 2(22)(e)While Scenario A is quite clear (i.e., taxability should arise in the hands of the shareholder who is also a borrower of a loan), a pertinent question to evaluate in Scenario B is in whose hands shall such deemed dividend be taxable viz. (A) Borrower concern (Company C) or (B) Shareholder (Company A):View-1: CBDT Circular No. 495 dated 22 September 1987 supports taxation in the hands of borrower concern, viz. Company C.View-2: The Special Bench of the Mumbai Tribunal in the case of Bhaumik Colour (P) Ltd.2 held that in the absence of indication in Section 2(22)(e) of the Act to extend the legal fiction to a case of loan or advance to a non-shareholder, loan or advance cannot be taxed as deemed dividend in the hands of such a non-shareholder. The decision of the Special Bench has been affirmed by the Bombay High Court in Universal Medicare (P) Ltd.3 and the Delhi High Court in Ankitech Private Limited4.The Supreme Court in Madhur Housing and Development Company5 provides a view on this controversy and held that a deemed dividend is not taxable in the hands of a loan recipient concern if such concern is not a shareholder of the lender company. It is taxable in the hands of shareholders having substantial interest in both the entities.Recently, the Ahmedabad Tribunal in the case of Aaryavart Infrastructure P. Ltd6 held that deemed dividend under Section 2(22)(e) of the Act is taxable only in the hands of the shareholder and not the recipient of loan/advance.Thus, View-2 is a better view providing taxability in the hands of the common shareholder. However, if the taxpayer is desirous of having taxability in the hands of the borrower concern, it can rely on the circular.Tax Treaty Interaction for a Non-Resident ShareholderOECD Model Tax Convention7 provides for the following definition of Dividend (divided in two parts for ease of analysis):“The term ‘dividends’ as used in this Article means income from shares, ‘jouissance’ shares or ‘jouissance’ rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as (part 1) income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. (part 2)”Section 2(22)(e) uses the expression ‘by way of advance or loan’. It is pertinent to examine the meaning and scope of the terms ‘loan’ & ‘advance’:Loan: Black’s Law Dictionary defines ‘loan’ as “an act of lending, a grant of something for temporary use, a sum of money lent at interest.”Advance: In the same dictionary, ‘advance’ is defined as “a payment made in anticipation of a contingent or fixed future liability or obligation.”Based on the above definition, participation in profit is a pre-condition to term it as Dividend under the Tax Treaty and excludes debt-claims viz. Loan or advance. Thus, it is not covered in the first part of the definition.There are two possible views for the Second part (“other income subjected to the same taxation treatment as income from shares”):View-1: Income is not defined in the Tax Treaty; reference is made to Section 2(24) which includes Section 2(22)(e). Thus, it falls under the “Dividend” Article in the Tax Treaty.View-2: Though Income is defined in Section 2(24), the term used in the treaty is “Income from Shares”. Deemed dividend under Section 2(22)(e) is per se not an income from shares, but income because of holding a certain percentage of shares in both entities. This additional condition is not envisaged in the tax treaty.Under Article 31 of the Vienna Convention on the Law of Treaties (VCLT), treaties must be interpreted in good faith according to ordinary meaning. Furthermore, in Indian jurisprudence, ‘Distribution’ and ‘Payment’ have distinct legal connotations:TermStatutory & Judicial DefinitionApplicationDistributionConnotes division and apportionment amongst several persons (cumulative process). Held in CIT v. Jamnadas Sriniwas / P.V. John8 and Punjab Distilling Industries Ltd.9Used in Section 2(22)(a), (b), (c), (d) and DTAA Dividend definition.PaymentPayment made directly to a single person; does not require apportionment or division.Specifically used in Section 2(22)(e) for loans/advances.Thus, it can be concluded that such a loan transaction does not get classified as a dividend under the Tax Treaty. Consequently, it falls under Article 21 (“Other Income”) if not effectively connected with a Permanent Establishment (PE).“Deemed Dividend is a special tax provision and has always been an issue of litigation on multiple grounds & aspects.”Transfer Pricing AspectsConsider Scenario B where a loan is granted to a related foreign entity having a common shareholder, and the lender is an Indian entity. Key issues include:Reporting it as ‘Dividend’ vs ‘Loan’.Which entity’s name is to be reported — the Common Shareholder or the Borrower Concern.Analysis of Reporting Requirements in Form 3CEBUnder Section 92B(1)(c) of the Act, international transactions include capital financing, lending, or any debt arising during the course of business. Hence, a loan to an Associated Enterprise (AE) must be reported in Form 3CEB at Arm’s Length Price (ALP).Section 2(22)(e) deems a loan to be a dividend as a legal fiction. However, well-settled principles establish that a legal fiction cannot be extended beyond its intended scope:Bengal Immunity Co. Ltd. v. State of Bihar10 — Legal fictions are created for definite purposes and must be limited to that legitimate field.CIT v. Mother India Refrigeration Industries (P.) Ltd.11 — Confirmed that legal fictions must be confined to the purpose for which they are enacted.CIT v. C.P. Sarathy Mudaliar12 — The Supreme Court held that deemed dividend is an artificial definition and not a real dividend. The loan must be repaid and does not become shareholder income in reality; therefore, it requires strict construction.Therefore, the accounting reality is a loan, and it should be reported as a Loan to an AE in Form 3CEB.Secondary Adjustment on Deemed Dividend u/s 92CEUnder Section 92CE(2), if a secondary adjustment is not repatriated to India within the prescribed time, it is deemed to be an advance to the AE carrying notional interest.View-1: Reading Section 92CE with Section 2(22)(e) together creates a potential litigation risk where the deemed advance is characterized as a deemed dividend.View-2: Section 92CE creates a distinct statutory fiction/presumption solely to charge notional interest. As ruled by the Supreme Court in M/s. Bhuwalka Steel Industries Ltd. v. Union of India13:Fiction: Assumes something known to be false.Presumption: Assumes something that may possibly be true and may be rebutted by evidence.ConclusionDeemed Dividend under Section 2(22)(e) is a specialized anti-avoidance provision that frequently gives rise to litigation. With India emerging as the 3rd largest global economy and a primary supply chain hub attracting substantial foreign direct investment, the interaction between domestic deeming fictions, International Tax treaties (DTAAs), and Transfer Pricing will play an increasingly pivotal role. Clear guidelines and administrative certainty from the Government will be instrumental in mitigating disputes and bolstering investor confidence.Section 4 of the Income Tax Act, 1961.[2009] 118 ITD 1 (Mum.) (SB).[2010] 190 Taxman 144 (Bombay).[2011] 11 taxmann.com 100 (Delhi).CIT v. Madhur Housing and Development Company (Civil Appeal No. 3961 of 2013).Aaryavart Infrastructure P. Ltd [TS-297-ITAT-2023(Ahd)].OECD Model Tax Convention 2017.[1970] 76 ITR 656 (Cal.) / [1990] 52 Taxman 221 (Ker.).[1965] 57 ITR 1 (SC).Appeal (civil) 159 of 1953 (SC).155 ITR 711 (SC).83 ITR 170 (SC).Civil Appeal No. 7823 of 2014 (SC).Author may be reached at kinjeshthakkar@gmail.com and eboard@icai.in
CORPORATE LAW
Ep. 434 — Significant Beneficial Owner – A move to pierce Corporate Veil
CA Journal
· September 2026
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Significant Beneficial Owner – A move to pierce Corporate VeilIn order to prioritize transparency and combat illicit financial practices, regulators worldwide introduced this concept which requires the identification and disclosure of individuals with significant ownership in reporting companies. India and other countries have implemented regulations to enforce the concept of Significant Beneficial Owner (SBO) with an aim to reveal beneficial individuals who hold indirect rights or shareholdings in companies through different investment models. The intention is to uncover the undisclosed identities of real owners who use complex corporate structures for anonymity.Introduction & Background for the ProvisionThe Company Law Committee in its 2016 Report proposed the need for the introduction of beneficial ownership provisions in the Companies Act to address concerns related to tax evasion, money laundering, and illicit activities facilitated by complex corporate structures. In line with recommendations from the Financial Action Task Force (FATF), India strengthened the concepts of beneficial interest and beneficial ownership in its Prevention of Money Laundering Act and introduced a comprehensive definition through SEBI guidelines.The SEBI guidelines, issued in 2010, aim to identify beneficial owners of security accounts held by intermediaries. However, other jurisdictions have made significant advancements in promoting transparency in company ownership and control. For instance, the UK amended the English Companies Act in 2015, requiring certain companies and LLPs to maintain a publicly accessible register known as the ‘Persons with Significant Control’ Register, which also needs to be filed with the UK Companies House. Additionally, the UK has established a central registry for UK company beneficial ownership information. These developments in other countries have raised regulatory concerns in India, prompting the Ministry of Finance to propose the introduction of a Register of Beneficial Owners through mandatory provisions in the Companies Act.The report recommended amending the Act to define beneficial interest and ownership, obligating companies and individuals to obtain information on beneficial ownership, mandating the maintenance of registers of beneficial owners, and ensuring periodic updates. Non-compliance with these requirements results in fines and criminal prosecution.Who is a ‘Significant Beneficial Owner’ (SBO)?The term ‘Significant Beneficial Owner’ refers to an individual who, either independently or in concert with others, possesses one or more rights or entitlements in a reporting company. These rights and entitlements include indirect or direct holdings of at least 10% of the shares, voting rights, participation in distributable dividends, or the ability to exercise significant influence or control over the financial and operational policies of the reporting company.Indirect Holding Through Body Corporate, HUF, Partnership, or TrustIndirect holdings are also taken into account when identifying SBOs. If the member of a reporting company is a body corporate, such as a company, and an individual holds a majority stake in that body corporate or its ultimate holding company (UHC), they will be deemed to have indirect holdings in the reporting company. Similarly, in the case of Hindu Undivided Families (HUFs), the Karta (head) of the HUF is considered to hold indirect holdings. Partnerships, Limited Liability Partnerships (LLPs), and trusts also play a role in determining indirect holdings, based on the involvement of individuals as partners, trustees, beneficiaries, authors, or settlers.Summary of the Statutory Provision (Section 90)Section 90 of the Companies Act, 2013 deals with Significant Beneficial Ownership. The summary of the provision is as follows:Any individual or group of individuals, including trusts and persons resident outside India, holding beneficial interests of at least twenty-five percent (or any other prescribed percentage, presently 10% under Rules) in shares of a company or exercising significant influence or control over the company must make a declaration to the company. The declaration should specify the nature of their interest and other relevant details within a prescribed timeframe.Every company must maintain a register of the interests declared by individuals. The register should include details such as the individual’s name, date of birth, address, ownership details in the company, and other prescribed particulars.The register maintained by the company is open for inspection by any member of the company upon payment of the prescribed fees.The company is required to file a return of significant beneficial owners and any changes therein with the Registrar of Companies. The return should contain the names, addresses, and other prescribed details within the specified time, form, and manner. The company is responsible for taking necessary steps to identify individuals who qualify as significant beneficial owners and ensure their compliance.If the company knows or has reasonable cause to believe that a person is a significant beneficial owner, knows such owner’s identity or has been a significant beneficial owner in the past three years, the company must give notice to that person in the prescribed manner.If a person fails to provide the required information within the specified time or if the information provided is unsatisfactory, the company can apply to the Tribunal for an order which will impose restrictions on the shares in question, such as transfer restrictions or suspension of rights.The Tribunal has the authority to make orders restricting rights attached to shares after considering the application made by the company. This order should be issued within sixty days of receiving the application or within the prescribed timeframe. The company or any person aggrieved by the Tribunal’s order can apply for the relaxation or lifting of the imposed restrictions within one year from the date of the order.Failure to make the required declaration as a significant beneficial owner may result in a penalty of fifty thousand rupees, with an additional penalty for each day of continuing failure. Companies failing to maintain the register or provide the required information may face penalties, and officers of the company in default may also be penalized.Wilfully providing false or incorrect information or suppressing material information in the declaration under this section can lead to legal action under Section 447.How to Determine SBO: 12 Practical IllustrationsI. Indirect Holdings & ControlExample 1: Indirect Rights and Policy ControlIn a reporting company, ABC Private Limited, Mr. A and Mr. B each hold a 50% stake. However, Mr. B has the right to appoint a majority of the directors through an agreement, and Mr. C has the power to participate in the financial and operating policy.ABC Private Limited (Reporting Co) ← Mr. A (50% Stake) | Mr. B (50% Stake + Right to appoint majority directors) | Mr. C (Power to participate in policy)Determination: In this case, the SBOs of the reporting company would be Mr. B and Mr. C. Mr. A, despite having a direct holding, does not possess any indirect holdings.Example 2: Purely Direct HoldingsIn another scenario, ABC Private Limited has three shareholders: Mr. A with a 60% stake, Mr. B with a 30% stake, and Mr. C with a 10% stake.Determination: None of them would be considered an SBO in this case since there are no indirect holdings.II. Requirement of Majority Stake in Corporate ShareholderExample 3: Majority Stake in Intermediary Holding CompanyIn ABC Private Limited, Mr. A holds 50.10% of PQR Private Limited, which in turn holds 10% of ABC Private Limited.Mr. A —(Holds 50.10%)→ PQR Private Limited —(Holds 10%)→ ABC Private Limited (Reporting Co)Determination: Mr. A is deemed the SBO for ABC Private Limited due to his majority stake in PQR Private Limited.Example 4: Aggregation of Direct and Indirect HoldingsIn ABC Private Limited, Mr. A holds 55% in PQR Private Limited and holds 1% in ABC Private Limited through PQR Private Limited. Additionally, he directly holds 9% of ABC Private Limited.Mr. A holds 55% in PQR (holds 1% in ABC) + Direct Holding of 9% in ABC Private LimitedDetermination: Mr. A is considered the SBO for ABC Private Limited as he holds a majority stake in PQR Private Limited and has direct (9%) and indirect (1%) holdings totaling 10% in ABC Private Limited.Example 5: Absence of Majority Stake in Intermediate BodyIn ABC Private Limited, Mr. A holds 49% in PQR Private Limited and holds 1% in ABC Private Limited through PQR Private Limited. He also directly holds 10% of ABC Private Limited.Determination: In this case, Mr. A is not considered the SBO for ABC Private Limited as he does not hold a majority stake (>50%) in PQR Private Limited.Example 6: Total Aggregate Holdings Below ThresholdIn ABC Private Limited, Mr. A holds 55% in PQR Private Limited and holds 1% in ABC Private Limited through PQR Private Limited. He also directly holds 7% of ABC Private Limited.Determination: Mr. A is not considered the SBO for ABC Private Limited as his total holdings (Direct 7% + Indirect 1%) in ABC Private Limited is 8% (i.e. less than 10%).Example 7: Multi-Tier Holding Company StructureIn ABC Private Limited, Mr. X holds 51% of XYZ Private Limited, which in turn holds 51% of PQR Private Limited. Mr. X also holds 10% in ABC Private Limited through PQR Private Limited.Mr. X —(51%)→ XYZ Pvt Ltd —(51%)→ PQR Pvt Ltd —(10%)→ ABC Pvt Ltd (Reporting Co)Determination: Since XYZ Private Limited is the ultimate holding company of ABC Private Limited and Mr. X holds a majority stake in XYZ Private Limited, he is considered the SBO for ABC Private Limited.III. Individuals Acting TogetherExample 8: Collective Action / Concert by Family MembersIn ABC Private Limited, Mr. X, Mr. Y, and Mr. Z are brothers who collectively hold 33% each of XYZ Private Limited, which in turn holds 51% of PQR Private Limited. They also hold 10% in ABC Private Limited through PQR Private Limited.Determination: As they are acting together, Mr. X, Mr. Y, and Mr. Z are considered the SBO for ABC Private Limited.IV. Hindu Undivided Family (HUF)Example 9: Karta as SBOIn ABC Private Limited, Mr. X, as the Karta of a Hindu Undivided Family (HUF), holds 10% of the company.Determination: Mr. X is deemed the SBO in this case.Example 10: HUF Combined with Direct HoldingIn ABC Private Limited, Mr. X, as the Karta of an HUF, holds 7% in the company. He also holds 8% directly in ABC Private Limited.Determination: Mr. X is considered the SBO as he holds a total of 15% (directly and indirectly) in the reporting company.V. Partnerships & LLPsExample 11: Individual Partners in FirmIn ABC Private Limited, Mr. A and Mr. B are partners in PQR & Company, through which they hold 10% in ABC Private Limited.Determination: Both Mr. A and Mr. B are deemed the SBOs for ABC Private Limited as partners of PQR & Company.Example 12: Partnership with Corporate PartnerIn ABC Private Limited, Mr. A is a partner in PQR & Company and holds 10% of ABC Private Limited through it. Mr. P holds 51% of PQR Limited and is also a partner in PQR & Company.Determination: Both Mr. A and Mr. P will be considered the SBOs for ABC Private Limited. Mr. A is an individual partner in PQR & Company, and Mr. P holds a majority stake in PQR Limited, which is a partner in PQR & Company. Therefore, both individuals meet the criteria for being significant beneficial owners of ABC Private Limited.Procedure for Identifying and Disclosing SBOsStepPrescribed FormResponsible Party & Statutory Timelines1. Company Inquiry NoticeForm BEN-4The reporting company has the responsibility to send a notice in Form BEN-4 to any member (other than an individual) holding 10% or more shares, voting rights, or dividend entitlements, seeking information about SBOs.2. SBO DeclarationForm BEN-1Individuals identified as SBOs must file a declaration in Form BEN-1 to the reporting company within 30 days of acquiring such status or any subsequent changes.3. ROC Return FilingForm BEN-2Upon receiving the declaration, the reporting company must file a return in Form BEN-2 with the Registrar of Companies (ROC) within 30 days, disclosing the SBO details.4. Register MaintenanceForm BEN-3The reporting company must maintain a register of SBOs in Form BEN-3, accessible for member inspection during specified business hours upon payment of a nominal fee.Exempted EntitiesCertain entities are specifically exempted from the applicability of these rules:The Investor Education and Protection Fund (IEPF) Authority;Holding reporting companies (where details are disclosed by the holding company);Central Government, State Governments, and local authorities;Entities owned or controlled by government authorities;SEBI-registered investment vehicles (such as Mutual Funds, Alternative Investment Funds (AIFs), REITs, and InvITs);Investment vehicles regulated by the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India (IRDAI), or Pension Fund Regulatory and Development Authority (PFRDA).ConclusionBy identifying and disclosing SBOs, these regulations provide greater transparency in corporate structures. It becomes harder for individuals to hide behind complex ownership arrangements or nominee shareholders, as the focus shifts to unveiling the ultimate beneficiaries.It contributes to strengthening corporate governance practices. Shareholders and stakeholders gain a clearer understanding of who wields power within an organization, ensuring accountability and responsible decision-making.The existence of SBO regulations acts as a deterrent for individuals involved in fraudulent activities.SBO regulations align with global initiatives to combat money laundering and promote transparency, such as the Financial Action Task Force (FATF) recommendations. These regulations facilitate harmonization with international standards, making it easier to track and prevent cross-border illicit transactions.The concept of a Significant Beneficial Owner and the associated regulations represent a crucial step in enhancing corporate transparency, deterring illicit activities, and promoting responsible business practices. By piercing the corporate veil, these regulations shed light on the individuals who exercise significant control or influence over reporting companies. Ultimately, this promotes a more accountable and transparent corporate ecosystem, safeguarding the interests of investors, stakeholders, and the economy as a whole.ReferencesThe Company Law Committee, ‘Report of The Companies Law Committee’ (February 2016), dated 1st February, 2016.Section 90 of the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018.Author may be reached at csshivamsinghal17@gmail.com and eboard@icai.in
TECHNOLOGY
Ep. 435 — Processing of personal data with due consent of the Data Principal under DPDPA 2023
CA Journal
· September 2026
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Processing of personal data with due consent of the Data Principal under DPDPA 2023In this article, an attempt has been made to present some of the important provisions of the Digital Personal Data Protection Act (DPDPA), 2023 keeping in mind their relevance in the present environment of digital transactions and transmission of our digital personal data for day-to-day affairs. The Act has beautifully covered the provisions relating to personal data protection aspects. However, this Article explains the provisions broadly related to application of DPDPA, 2023, definitions of Data Fiduciary and Data Principal, grounds for processing personal data, and the notice and consent for use of personal data.DPDPA, 2023 also provides provisions to establish the Data Protection Board of India, delineating the powers, functions and procedures to be followed by the Board, appeal and alternate dispute resolution, special provisions for processing of personal data outside India, exemptions thereunder, penalties and adjudication, and other miscellaneous provisions, apart from the role and responsibilities of the Data Fiduciary and the Data Principals.The Digital Personal Data Protection Act, 2023 (DPDPA, 2023) aims to regulate the processing of digital personal data in a manner that recognises both the right of individuals to protect their data and the requirement to process such individual data for legal purposes and for such issues which are connected with data protection or those incidental to data protection, such personal data for the given lawful purposes and matters connected to such objectives or incidental thereto.The Act in the Context of Data MisuseAs is widely recognized, social media platforms abound with freely accessible applications. The moment we use social media, log in for a mailing list, or access a free app on our laptops or computers, we are required to agree to the supplier’s terms of access to the app. These agreements are unnecessarily confusing and detailed that we missread them. In order to ease the challenging process, we knowingly or unknowingly tend to agree with them, and thus they set the conditions for how a company can access the personal data they obtain from us while using their app.Typically, that data gets utilized by such companies in one of the three ways:Personal data is aggregated and analysed to provide us with more personalized advertisements.Personal data is logged and assessed for research and development.Personal data is sold to a data brokerage.Under the aforesaid scenarios, companies handle, store, and distribute our personal data using specific and different parameters. In a situation when you are working from home, this becomes very difficult for companies to enforce precautions and protections against sensitive information and data for the prevention of both internal and external data breaches. The misuse of data often happens when people or companies use individual data for other than the stated intentions. Often, data misuse does not occur as a result of direct company actions but rather due to the improper actions of individuals, and outsiders. Data breach could be explained with an example, such as when a bank employee accesses the bank account of a friend to know a friend’s current balance in his savings bank account and inform others. Similarly, data breaches happen if an advertising company uses one client’s data to inform another client regarding the marketing campaign.In this context, (DPDPA, 2023) is a significant attempt by the Government to arrest data misuse and regulate the utilization and processing of such personal data for the given lawful purposes and matters connected to such purposes or incidental thereto.Analysis of Some of the Important Provisions of the ActDefinition of Data Fiduciary and Data PrincipalVarious terms used in the Act have been defined under Section 2 of the Act. For the sake of easy understanding of the terms ‘Data Fiduciary’ and ‘Data Principal’, the extracts of the provisions of sub-sections (i) and (j) of Section 2 of the Act are given as under:Section 2(i) — “Data Fiduciary”: means any person who alone or in conjunction with other person determines the purpose and means of processing of personal data.Section 2(j) — “Data Principal”: means the individual to whom the personal data relates and where such individual is:a child, includes the parents or lawful guardian of such a child;a person with disability, includes her lawful guardian, acting on her/his behalf.Applicability of the ActSection 3 of the Act provides for the applicability of the Act and reads as under:1. “Subject to the provisions of this Act, it shall (a) apply to the processing of digital personal data within the territory of India where the personal data is collected (i) in digital form; or (ii) in non-digital form and digitised subsequently; (b) also apply to processing of digital personal data outside the territory of India, if such processing is in connection with any activity related to offering of goods or services to Data Principals within the territory of India.”It has been clearly provided in the Act that the application of the Act shall not only be restricted to the domestic territory of India, but the same shall also be applicable to the use of individuals’ personal data in foreign countries. The condition is that the use of such data is in connection with the activity related to the supply of goods or services to the Data Principals within India. Provisions shall apply to all kinds of data whether it is in digital form, or non-digital form which may be digitalized afterwards. If the data is not in digital form today, it can be digitalized and used subsequently. The provisions therefore restrict non-digitalized data also.Sub-section (c) of Section 3 of the Act further provides:2. “The Act shall not apply to (i) personal data processed by an individual for any personal or domestic purpose; and (ii) personal data that is made or caused to be made publicly available by (a) the Data Principal to whom such personal data relates; or (b) any other person who is under an obligation under any law for the time being in force in India to make such personal data publicly available.”Illustration: Publicly Available Personal DataIf a girl, while blogging her views, has publicly made available her individual data on social media, the provisions of this Act shall not apply in such a case. We need to be cautious while providing our personal data to the public on social media while submitting our views on any of the public channels as protection is no longer available if you voluntarily provide your personal data on social media tools and apps.Grounds for Processing Personal Data and Notice RequirementsSub-section (1) of Section 4 of the Act provides as under:3. “A person may process the personal data of a Data Principal only in accordance with the provisions of this Act and for a lawful purpose, (a) for which the Data Principal has given her consent; or (b) for certain legitimate uses.”Here, it is important to note that there must be a consent from the Data Principal before processing his/her personal data, and such processing of the data must be for a lawful purpose and certain legitimate uses only.Sub-section (2) of Section 4 of the Act provides that for the purposes of this section, the expression “lawful purpose” means any purpose which is not expressly forbidden by the law.A Data Fiduciary must seek explicit consent of the Data Principal before processing his/her personal data for which he/she has to make a request in a manner as prescribed in Section 5(1) of the Act, which provides that every request made to a Data Principal under Section 6 for consent shall be accompanied or preceded by a notice given by the Data Fiduciary to the Data Principal, informing her:The personal data and the purpose for which the same is proposed to be processed;The manner in which he/she may exercise her rights under Sub-section (4) of Section 6 and Section 13; andThe manner in which the Data Principal may make a complaint to the Board, in such manner and as may be prescribed.Illustration: Live Video KYC VerificationIf a person opens a bank account via a mobile app/website of a Bank and opts to utilize his personal data by a bank employee in a live, video-based customer identification process to complete the KYC requirements, the bank employee shall accept the request for using the personal data with the notice of the customer. In such situations, this section of the Act does not apply.Sub-section (3) of Section 4 of the Act provides that the Data Fiduciary shall give the Data Principal the option to access the contents of the notice in English or any language specified in the Eighth Schedule to the Constitution.Consent to be Free, Specific, Informed, Unconditional and UnambiguousSection 6(1) of the Act provides as under:4. “The consent given by the Data Principal shall be free, specific, informed, unconditional and unambiguous with a clear affirmative action, and shall signify an agreement to the processing of her personal data for the specified purpose and be limited to such personal data as is necessary for such specified purpose.”Under the consent, only that personal data which is necessary for such specified purpose can be processed, irrespective of whether the consent is sought for a few other details additionally which are not relevant for the specified purpose.Illustration: Telemedicine ApplicationA person downloads a telemedicine app. The App seeks the consent of the person to process his individual data and access his mobile phone contact list to avail telemedicine services, and the person signifies his consent to both. Here, the phone contact list is not necessary for making available telemedicine services, and his consent shall be limited to the processing of his individual data for availing the telemedicine services.Invalidity of Infringing Consent ConditionsSection 6(2) provides as under:5. “Any part of consent referred in sub-section (1) of section 6 which constitutes an infringement of the provisions of this Act or the rules made thereunder or any other law for the time being in force shall be invalid to the extent of such infringement.”Illustration: Waiver of Right to ComplainA girl buys an insurance policy using the mobile app/website of an insurer. She gives consent to the insurer to process her personal data for the objective of providing the insurance policy. By doing so, she waives her right to file a complaint to the Data Protection Board of India. Part (ii) of the consent given in the illustration, relating to the waiver of her right to file a complaint, shall be invalid as it infringes the provisions of the Act.Presentation and Language of Consent RequestsSection 6(3) of the Data Protection Act provides as under:6. “Every request for consent under the provisions of this Act or the rules made thereunder shall be presented to the Data Principal in a clear and plain language, giving her/him the option to access such request in English or any language specified in the Eighth Schedule to the Constitution and providing the contact details of a Data Protection Officer, where applicable, or of any other person authorised by the Data Fiduciary to respond to any communication from the Data Principal for the purpose of exercise of her rights under the provisions of this Act.”Withdrawal of Consent and Its ConsequencesAs per Section 6(4), where consent given by the Data Principal is the very basis of processing of individual data, the Data Principal shall have the right to withdraw his consent at any time, with the ease of doing so being comparable to the ease with which such consent was given.Section 6(5) specifies that the consequences of withdrawal shall be borne by the Data Principal, and such withdrawal shall not affect the legality of processing of the personal data based on consent before its withdrawal.Illustration: E-Commerce Supply Order WithdrawalA girl is a user of an online shopping app/website operated by an e-commerce service provider. The girl consents to the processing of her personal data by the said service provider for the objective of fulfilling her supply order and places an order for supply of goods while making payment for the same. If the girl withdraws her consent, the service provider may stop enabling the girl to use the app/website for placing her orders. However, he may not stop the processing for supply of the goods already ordered and paid for by the girl.Section 6(6) provides that if a Data Principal withdraws her consent, the Data Fiduciary shall, within a reasonable time, cease and cause its Data Processors to cease processing the personal data unless such processing is required or authorized under any law in force.“A telecom service provider enters into a contract with a Data Processor for emailing telephone bills to its customers.”Illustration: Telecom Billing and Processor CessationA customer of the service provider, who had earlier given his consent to the service provider for the processing of his personal data for emailing of bills, downloads the mobile app of the service provider and opts to receive bills only on the app. The service provider shall itself cease, and shall cause the Data Processor to cease, the processing of personal data of the customer for emailing the bills.Consent Manager Framework & Burden of ProofUnder Sub-sections (7), (8), (9), and (10) of Section 6:The Data Principal may give, manage, review, or withdraw consent to the Data Fiduciary through an interoperable Consent Manager.The Consent Manager shall be accountable to the Data Principal and must register with the Data Protection Board of India subject to prescribed technical, operational, and financial standards.Burden of Proof: Where consent is the basis of processing and a question arises in any proceeding, the Data Fiduciary is statutorily obliged to prove that notice was given and consent was obtained in accordance with the Act.Legitimate Uses for Which Personal Data Can Be ProcessedThe Act provides for legitimate uses where personal data may be processed without separate consent:Section 7(a): Processing for a specified purpose for which the Data Principal has voluntarily provided her personal data to the Data Fiduciary, and in respect of which she has not indicated that she does not consent.Section 7(b): Processing by the State and any of its instrumentalities to provide or issue subsidies, benefits, services, certificates, licences, or permits, where prior consent was given or the data exists in a notified government database/register.ReferenceExtract of provisions at points 1 to 6 taken from the Bare Act of THE DIGITAL PERSONAL DATA PROTECTION ACT, 2023 (Act no. 01 of 2023), available via the Ministry of Electronics and Information Technology, Government of India (meity.gov.in).Author may be reached at rakeshawasthi3@gmail.com and eboard@icai.in
TECHNOLOGY
Ep. 436 — Digital Forensic Investigations - Demystified for Accountants
CA Journal
· September 2026
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Digital Forensic Investigations - Demystified for AccountantsAn accountant’s knowledge is often put to test when it comes to addressing aspects related to fraud and more specifically related to frauds perpetrated using sophisticated digital techniques. Within the prevailing legal and regulatory framework, it is imperative to substantiate the occurrence of fraud with robust evidence before establishing the guilt of an accused perpetrator.BackgroundAt times, the sheer complexity of the fraud may need delving deep and resorting to reliance on corroborative (or often considered at times the most clinching!) evidence extracted from electronic data (Electronically Stored Information / ESI). Have you heard of the term ‘smoking gun’? While smoking is undoubtedly harmful for health, this ‘smoking gun’ does not come with those challenges. In the context of an investigation, a ‘smoking gun’ is often referred to as the singular piece of evidence that helps conclusively (or substantively) to prove the guilt of the fraudster. It is often that one email, one phone SMS or one document leads the fraudster to be proven guilty.With the advancement in technologies, digital forensic (or digital investigations or electronic data review or electronically stored information review) have surfaced as a key element in any investigation.Why is this necessary? What advantages does electronic evidence provide in a fraud investigation? Can one perform an investigation without considering electronic evidence? Will an investigation indeed be reliable and complete without performing digital forensic procedures? How complex and time consuming is it? And finally, is it worth the investment of time, effort, and money?If thoughts like these have crossed your mind earlier and piqued your curiosity, this article will hopefully clarify a few of these pertinent questions and also encourage you to learn more.It is difficult to comprehensively cover a field, as vast as this, in one article and hence, the article will not make an attempt to masquerade itself as a primer on digital forensics investigation. However, when encountered with any fraud investigation, in your capacity as either management or those charged with governance (TCWG), if any of the concepts discussed in this article will cause you to pause and pose a healthy challenge to your external consultants, have a better understanding of the forensics work and foster rethinking of the approach, then the purpose would have been met. It is also worthwhile to add that the Forensic Accounting Investigation Standards (FAIS) issued by the ICAI are an excellent source of material for accountants to understand the different methodologies deployed by Digital Forensic investigators (DFI). Some of the topics discussed here will also help you have a wider appreciation of FAIS. Welcome to the enigmatic and ever evolving world of ‘digital forensic investigations’!Foundational Concepts: A RefresherThis article assumes that we as accountants are already familiar with the concepts of ‘fraud’, ‘investigation’ etc. and hence we will not labour too much on these areas. However, for the benefit of those who would prefer a short refresher, explanation to Section 447 of the Companies Act defines fraud as below:‘Fraud’ in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.What is an Investigation?There is no shying away from ensuring that all allegations of fraud are properly investigated and either confirmed or dispelled. An investigation is a fact-finding exercise performed by professionals that have adequate competence and experience in order to objectively and comprehensively perform suitable procedures to come to a conclusion whether the allegations have any merit.What is Digital Forensic Investigation?Digital forensic investigation has many synonyms such as digital forensics, electronic data review, electronic discovery review, forensic technology review etc.Digital Evidence (DE) refers to data or information that is acquired, stored, accessed, examined, transmitted, and used in electronic form1. DE can be either in ‘structured data’ format or ‘unstructured data’ format. Structured data is the one that can be stored in financial/operational data systems such as ERPs, databases, spreadsheets, etc. Unstructured data is generally in the nature of emails, chat messages, images, videos, log files, etc.For the purposes of this article, we will focus on DE in ‘unstructured data’ format as that is generally perceived to be more technically challenging to acquire and analyze and hence we will see how to demystify digital forensic investigation in the context of an investigation of ‘unstructured data’.In simplistic terms, a focused review of digital evidence as part of any fraud investigation can be referred to as a digital forensic investigation.One can draw various analogies between a digital forensic investigation and a non-digital investigation. In the physical world, the evidence is likely to be available at the crime scene, and in the digital world, this is available in the electronic device. In the physical world, there may be cabinets that may have relevant files and in a digital world, these will be stored on a hard drive. In the physical world, a thief may use burglar tools or weapons whereas, in the digital world a fraudster may use hacking tools etc.2Given the proliferation of electronic devices, it is difficult nowadays to isolate one from the other and both are so intricately intertwined that it is difficult to draw a clear line. Gone are the days when one could be comfortable justifying that an investigation is completed in all aspects without performing some digital forensic investigation procedures.Practical Case Illustration: Procurement CollusionA whistleblower complaint was received by an organization that one of their employees in the procurement team was colluding with vendors, favoring them by approving higher rates, accepting kickbacks from the vendor in return, and in some cases approving fictitious vendors which were alleged to be owned by the employee himself. A digital forensic investigation assisted the organization in finding evidence from the employee’s computer hard drive that the employee had created fictitious quotations and invoices with fake vendor letterhead in a Word document. Analysis of the employee’s mobile phone data (to the extent permissible under law) also revealed that the employee had ‘negotiated’ kickbacks with a few alleged vendors. Analysis of the employee’s bank statements stored in his official laptop (to the extent permissible under law) also revealed unexplained sums of cash deposited to the employee’s personal bank account.Steps to Perform a Digital Forensic InvestigationIn any field of work, the existence of a standard methodology or guidance always helps practitioners to ensure consistency. To cite an example closer to home, Indian Accounting Standards or Standards on Auditing are professional standards familiar to accountants. When it comes to digital forensics, the framework released by the National Institute of Standards and Technology, USA (‘NIST’) suggests four primary stages:Data gathering and collection: Accumulation of relevant data and preserving it for investigation purposes.Examination: Using specialized tools to process the data so that it is fit for investigation.Analysis: Bringing together the context of the investigation and using digital tools to uncover information from the processed data.Reporting: Presenting factual findings in a comprehensive, defensible manner.Following this framework ensures that: (i) original data is protected from unintended modification; (ii) a pristine forensic copy is created; (iii) attempts are made to recover deleted data; (iv) specialized tools are deployed; and (v) all findings are compiled into an objective report.Data Gathering & Collection MethodologyWhen embarking on an investigation, it is prudent to strike a balance between expected costs and potential benefits. An organization must consult with its DFI to arrive at an optimum combination of ‘likely suspects’ and ‘good to have data’.Data Retention vs. Preservation: Many organizations enforce stringent data retention policies where emails and electronic logs are purged after a few months or years. When faced with an investigation spanning prolonged periods, constrained retention policies often become the ‘Achilles heel’. Preservation serves as a risk mitigation exercise against the efflux of time, ensuring critical evidence is not overwritten by incoming data.Custodians and Legal HoldA custodian is an individual within the span of the investigation whose data is targeted for acquisition. Scoping of custodians is carried out iteratively as new leads emerge.A legal hold is a formal notice issued to individuals prohibiting the deletion of data, accompanied by administrative locks in backend IT systems to preserve electronically stored information (ESI).“The purpose of a legal hold is to ensure that relevant data is available for analysis as and when needed in the future without succumbing to the limitations of intentional or inadvertent deletion.”Evidential Integrity and ContinuityEvidential Integrity: Mandates that the original evidence must never be tampered with. Under Locard’s Exchange Principle (‘every contact leaves a trace’), any collection activity can leave an imprint. DFIs utilize hardware and software write-blockers to access source media in ‘read-only’ mode. Furthermore, MD5/SHA cryptographic hash matching is employed to mathematically prove that the forensic clone is an exact match to the source evidence.Evidential Continuity & Chain of Custody: Establishes a documented, unbroken trail demonstrating how evidence moved through various custody hands, capturing device details, dates, times, handlers, and operating states to withstand court scrutiny.Examination, Analysis & Investigation FunnelForensic examination is not a simple ‘copy-paste’ or an MS Excel exercise. Specialized tools enable the recovery of deleted records and parsing of operating system artefacts (e.g., LNK shortcut files, prefetch files, USB connection logs, browser histories, internet cache, and social media communication).The Digital Investigation FunnelAllegationsCustodiansDevicesSearch TermsRelevant DataAnti-Forensics: Detecting Concealment and DeceptionAnti-forensics refers to deliberate techniques used by fraudsters to erase traces, obfuscate trails, or wipe digital footprints. Specialized DFIs analyze artifacts to establish that an accused knowingly attempted to destroy evidence.Practical Case Illustration: Anti-Forensic TrackingIn one investigation, the DFI created a forensic image of a custodian’s laptop and recovered deleted data. Analysis of internet search histories revealed queries for ‘file wiping software’. The download history confirmed the software was downloaded, shortcut analysis verified the tool was executed, and uninstalled software logs showed the utility was deleted immediately thereafter. This established clear corroborative evidence of intentional concealment.Governance Checklist for Accountants and AuditorsAlthough DFIs execute the technical steps, the organization and those charged with governance (TCWG) remain accountable for ensuring that the investigation is conducted robustly and is legally defensible in court. The following checklist outlines key oversight questions:1. DFI Team Competence & CredentialsDoes the investigation team have proven experience and credentials in conducting digital forensic examinations?Is the team deploying an appropriate combination of industry-standard hardware and software tools?Are open-source digital tools verified, peer-reviewed, and capable of withstanding the ‘court test’?Do examiners hold certifications from recognized professional authorities or software developers?Does the firm maintain an accredited digital forensic lab with secure physical and digital custody?2. Legal Considerations & ScopingHas the organization consulted legal counsel regarding personal data protection and employee privacy rights?What methodology was adopted to define and refine the list of custodians?Have inputs been gathered from investigation sponsors to identify operational nuances?Is there a documented rationale for excluding potentially relevant individuals from the scope?3. Information Technology AssetsWhat sources of Electronically Stored Information (ESI) have been evaluated?Is there an up-to-date IT asset inventory (laptops, mobile phones, tablets, external storage)?What is the corporate policy regarding Bring Your Own Device (BYOD) and its permissible scope of review?Has server-level and cloud backup data been captured to prevent loss from local machine deletions?4. Safe Custody of AssetsIs an unbroken Chain of Custody maintained, with original devices returned safely after cloning?Is a designated central coordinator tracking original media custody within the organization?Has post-handover verification confirmed that returned devices operate without data corruption?5. Robustness of Search & Analytical ProceduresDoes the plan include recovering deleted files and analyzing system-level artefacts?Have search keywords been formulated with domain experts to avoid missing critical slang or syntax?Are search strings appropriately calibrated to minimize unproductive false positives?6. Closing and Evidence HandoverWhat protocol governs the retention or disposal of forensic clones between the company and consultants?Is the investigation team conversant with the ICAI Forensic Accounting and Investigation Standards (FAIS)?FAIS 420: Evidence Gathering in Digital Domain, Institute of Chartered Accountants of India.NIST Special Publication: Digital Investigation Techniques (November 2022).Locard’s Exchange Principle in Forensic Science.NIST Framework on Digital Artefact Identification & Analysis.Author may be reached at vinayknayak@gmail.com and eboard@icai.in
FINANCIAL MARKET
Ep. 437 — Unveiling the Influence of Investment Horizon on Portfolio Performance - A Study on Portfolio of Information Technology Stocks
CA Journal
· September 2026
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Unveiling the Influence of Investment Horizon on Portfolio Performance - A Study on Portfolio of Information Technology StocksThe study investigates the influence of investment horizon on the performance of a portfolio comprising selected information technology (IT) stocks by analyzing historical price data. The results indicate that returns initially increase for shorter timeframes but decrease as the investment horizon lengthens, accompanied by higher risk levels and declining risk-adjusted metrics like the Sharpe and Treynor ratios over long periods. These findings are substantiated through thorough linear regression analysis. Lastly, the study underscores that the IT portfolio exhibits slightly higher volatility than the market, emphasizing the benefits of shorter time horizons, particularly for risk-averse investors. Additionally, the study’s insights provide valuable guidance for informed decision-making in IT stock portfolio management across various investment horizons.IntroductionInvesting in financial markets has always been driven by the pursuit of maximizing returns while managing risks. Investors employ various strategies and techniques to make informed decisions, aiming to grow their wealth over time. One crucial factor that significantly influences investment outcomes is the time horizon of the investment. The investment horizon is the duration of time an investor intends to hold an investment or a portfolio (asset) before liquidating it. It can range from days or months to years and decades. Investors have different planned investment horizons, and these variations are influenced by a wide array of factors. Some of the key factors include their financial goals, risk tolerance, age, life stage, income, and cash flow requirements. Moreover, the chosen investment strategies, personal circumstances, market conditions, transaction costs, and behavioural factors also play a vital role in shaping their investment timeframes.Considering several factors, investors may opt for short-term strategies to capitalize on immediate gains and frequently revise their portfolios to respond to the changing market conditions and opportunities. Alternatively, they might choose a long-term approach, holding onto investments for extended periods to benefit from potential growth over time. By systematically analyzing these factors, investors can tailor their investment plans to align with their specific objectives and risk preferences. Surprisingly, the investment literature has paid little attention to the significance of the investment horizon while measuring the risk and return of a portfolio. Does the length of the investment horizon matter? If the horizon is altered, can it have notable effects on portfolio performance?Stocks with high short-term volatility may show attractive mean returns within a short-term horizon but could exhibit different performance characteristics over a long-term horizon. Stocks that don’t see much price fluctuation in the short term might appear to have lower average returns over a very short period. However, their performance can show significant differences while considering a longer stretch of time. This discrepancy can lead to notable changes in stock performance when the investment horizon is altered. However, over longer investment horizons, the impact of underlying fundamentals and economic conditions may become more pronounced, affecting the stock’s performance differently. Hence, investors should be mindful of the investment horizon over which stock/portfolio performance is evaluated.Research AssumptionsThis study aims to address the impact of time horizon on the performance of investment with a set of assumptions:Investors possess a risk-averse attitude and seek to optimize returns.Investors look only at risk and return for the decision of investment horizon and all other factors are kept silent.Variation in the portfolio’s performance is based on the time horizon, while keeping all other influencing factors unchanged.Investors will adhere to a particular time frame for holding their stocks (no selling before or holding past the intended period).Historical ex-post return distributions provide the best estimate of ex-ante returns. In other words, an investor planning to invest for one month bases decisions on means and variances calculated from past monthly returns, while an annual investor uses past annual rates.Earlier StudiesPortfolio selection or security selection has remained a pivotal and enduring topic in modern finance, capturing the attention of scholars for decades. The inception of this field can be traced back to the pioneering contributions of Markowitz (1952) and Roy (1952). Markowitz’s groundbreaking insights emphasized the potential advantages of diversification in mitigating portfolio variance, although complete risk elimination remained elusive. Simultaneously, Roy introduced a complementary principle highlighting the trade-off between an investor’s pursuit of returns exceeding a predetermined minimum and associated risks. These foundational ideas found further extension through Merton (1969), who ventured into continuous-time scenarios, expanding the scope of portfolio selection principles. As the field evolved, researchers explored multiperiod optimization to refine portfolio strategies over extended time frames. The mathematical foundations of portfolio selection were rigorously examined by Levy (1972), who established a link between assumed investment horizons and the Reward to Variability index which was proposed by Sharpe in 1966. This connection introduced a systematic mathematical bias dependent on the chosen investment horizon.Contributions from Li and Ng (2000), Basak and Chabakauri (2010), Czichowsky (2013), and Björk and Murgoci (2014) enriched the comprehension of multiperiod portfolio optimization. Kamara et al. (2016) explored the intricate interplay between asset risk and investment horizons. This dynamic relationship highlighted the evolving mechanisms for risk pricing across different investment time frames, fostering a deeper comprehension of risk premia and their correlation with investment horizons. Research in the field of portfolio selection has yielded significant insights into the relationship between mutual fund investment styles and varying investment horizons (Amadi and Amadi, 2019). Moreover, recent findings by Levy (2022) have emphasized a critical disparity between the extended horizons of mutual fund investors and the prevalent reliance on monthly return-based rankings, calling for a transformative shift in performance evaluation techniques.Objectives and HypothesisObjective 1: To examine the performance of a portfolio of IT stocks across different time horizons.Objective 2: To analyze the impact of time horizon on the performance of a portfolio of IT stocks.Hypothesis (H0): Investment horizon does not influence the performance of an IT portfolio.Data, Sample and Portfolio WeightsA portfolio consisting of seven stocks of Information Technology (IT) companies was meticulously examined, utilizing historical daily price data spanning a period of 15 years (2008 to 2022)1. The metrics were calculated across various time horizons of 50 to 1000 trading days with an interval of 50 days, using the approach of rolling window analysis. Stocks met two criteria: (i) constituents of the Nifty IT index on the NSE, and (ii) listed prior to 2008. Weights are assigned based on market capitalization.Table 1 – Allocation of Weights to Each Security in the PortfolioStockTCSINFYWIPROTECHMHCLTECHMPHASISCOFORGETotalWeight (%)47.9825.558.683.9811.361.500.95100.00Market Cap (₹ Trillion)As on 31st Dec, 202211.91646.34662.15490.98962.82030.37150.237224.8366Source: NSE India Market Capitalisation DataMathematical MethodologyThe performance metrics of the portfolio were calculated using the following equations:1. Portfolio Return (Rp)Rp = ∑i=1n Wi RiWhere Ri is the annualized return of security i, and Wi is the weight of security i.2. Annualized Security Return (Ri)Ri = [ (1 + r / 100)(250 / h) − 1 ] × 100Where h represents the time horizon in trading days, 250 represents standard trading days in a year, and r is the average return across n rolling windows: r = (∑t=1n rt) / n, with rt = (Pt+h − Pt) / Pt.3. Portfolio Risk (σp)σp = √[ W12 σ12 + W22 σ22 + 2 W1 W2 σ1 σ2 ρ12 ]Where standard deviation is calculated as: σ = √[ ∑t=1n (rt − r)2 / (n − 1) ].4. Systematic Risk (βp)βp = ∑i=1n Wi βi | βi = Cov(ri, rm) / Var(rm)Where Nifty 50 index returns represent market returns (rm).5. Sharpe Ratio (SR) and Treynor Ratio (TR)SR = (Rp − Rf) / σp | TR = (Rp − Rf) / βpWhere Rf is the risk-free rate of 6.83% based on 91, 182, and 364-day Treasury Bill yields2.6. Linear Regression Modely = α + βh + εWhere y is the dependent performance metric, h is the investment horizon in trading days, α is the intercept, β is the regression slope, and ε is the error term.Empirical FindingsTable 2 – Performance Metrics of IT Stocks Portfolio Across Time HorizonsHorizon (Days)Rp (%)σp (%)βpSharpe Ratio (SR)Treynor Ratio (TR)5025.5512.200.821.5322.9510026.6921.161.100.9418.1115027.5829.691.270.7016.3620028.3736.631.380.5915.6425028.9840.461.450.5515.2730029.4043.121.520.5214.87350 (Peak)29.5746.491.550.4914.6940029.3851.251.610.4413.9645028.9256.171.720.3912.8850028.2458.231.770.3712.0955027.4457.841.730.3611.9360026.6455.511.550.3612.7965025.8753.781.430.3513.3570025.1154.241.420.3412.9175024.6456.781.310.3113.5680024.2458.911.260.3013.7885023.9161.041.270.2813.4890023.7464.611.270.2613.2795023.6869.681.310.2412.86100023.6075.821.480.2211.32Source: Authors’ calculation“As the time horizon extends, the portfolio’s average return initially increases but then declines, while its overall risk rises, resulting in diminishing risk-adjusted returns.”Linear Regression AnalysisRegression statistics assess the strength and direction of relationships between investment horizons and performance metrics:Table 3 – Simple Linear Regression AnalysisStatisticRpσpβpSharpe Ratio (SR)Treynor Ratio (TR)Correlation (R)-0.72930.91880.1690-0.7862-0.7345R-squared (R2)0.53190.84410.02860.61820.5395Standard Error1.52226.41270.22940.19261.8090Intercept (α)29.379824.40311.34210.900317.6862Slope (β)-0.00530.04910.0001-0.0008-0.0064F-statistic20.450197.46580.529329.141421.0859P-value0.00030.00000.47620.00000.0002Null Hypothesis (H0)RejectedRejectedAcceptedRejectedRejectedSource: Authors’ calculationConclusionThis study investigated how the investment horizon affects the performance of the IT portfolio. By examining the performance metrics of the IT portfolio across various time horizons, employing a dataset spanning 15 years, the results exhibited that for a short-term, return increases with extension in time horizons, but after a certain level (350 trading days), it starts to decline as an extension in time horizon. Standard deviation rises with longer horizons, and systematic risk indicates wavy movements over different horizons. Sharpe and Treynor ratios decrease with longer horizons, signaling lower risk-adjusted returns for longer horizons. Furthermore, the systematic risk of the IT portfolio exhibits a slightly higher level of volatility when compared to the market. This suggests that the returns of the IT portfolios are likely to experience more fluctuations than the returns of the broader market.The findings of linear regression analysis portray a regression model that fits effectively with the highly significant coefficients that allow us to reject the null hypothesis for Rp, σp, SR, and TR. These findings reinforce the substantial influence of the time horizon on the performance of the IT portfolio.The study’s findings suggest that risk-averse investors should exercise caution when investing in the IT Portfolio due to its slightly elevated volatility compared to a diversified market. Additionally, careful consideration is warranted when opting for longer investment time horizons, given their association with heightened risk and lower risk-adjusted returns relative to shorter horizons. Furthermore, the study’s insights provide guidance for making informed decisions in portfolio management of customizing investment horizons within the realm of IT investments.ReferencesAmadi, F. Y., & Amadi, C. W. (2019). Investment Horizon and the Choice of Mutual Fund. International Journal of Business and Management, 14(6), 76–87.Basak, S., & Chabakauri, G. (2010). Dynamic Mean-Variance Asset Allocation. The Review of Financial Studies, 23(8), 2970–3016.Björk, T., & Murgoci, A. (2014). A theory of Markovian time-inconsistent stochastic control in discrete time. Finance and Stochastics, 18(3), 545–592.Czichowsky, C. (2013). Time-consistent mean-variance portfolio selection in discrete and continuous time. Finance and Stochastics, 17(2), 227–271.Kamara, A., Korajczyk, R. A., Lou, X., & Sadka, R. (2016). Horizon Pricing. Journal of Financial and Quantitative Analysis, 51(6), 1769–1793.Levy, H. (1972). Portfolio Performance and the Investment Horizon. Management Science, 18(12), B645–B653.Levy, M. (2022). Mutual Fund Selection and the Investment Horizon. SSRN: 4092004.Li, D., & Ng, W.-L. (2000). Optimal Dynamic Portfolio Selection: Multiperiod Mean-Variance Formulation. Mathematical Finance, 10(3), 387–406.Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77.Merton, R. C. (1969). Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case. The Review of Economics and Statistics, 51(3), 247.Roy, A. D. (1952). Safety First and the Holding of Assets. Econometrica, 20(3), 431.Historical daily adjusted closing price data of each stock spanning 2008 to 2022 extracted from Yahoo Finance.Risk-free rate (Rf) of 6.83% based on average yields of 91-Day (6.72%), 182-Day (6.87%), and 364-Day (6.93%) Treasury Bills auctioned on August 4, 2023.Authors may be reached at gangadharamails@gmail.com and eboard@icai.in
FINANCIAL MARKET
Ep. 438 — Role of Technological Advancements in Improving Efficiency and Effectiveness of Stock Market Trading: An Analytical Perspective
CA Journal
· September 2026
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Role of Technological Advancements in Improving Efficiency and Effectiveness of Stock Market Trading: An Analytical PerspectiveTechnology has always been one of the most significant supports to the financial sector. Technological advancements have contributed significantly to the growth of financial institutions, be they banks, NBFCs, capital markets, insurance companies, or any other organization involved in borrowing, lending, or transacting. However, when it comes to stock market trading, several factors come into play. The discussion on technology comes later; the most important aspects an investor considers in the stock market are risk tolerance, weighing different investment options, potential returns, and volatility. Historical performance, market trends, and current economic conditions shape return expectations. The time horizon of their investment goals also plays a role, with some focusing on long-term growth through stocks and others prioritizing income generation with bonds or mutual funds. Market analysis and research are crucial, as retail investors rely on financial news, research reports, and expert insights to guide their investment choices.IntroductionUnderstanding what influences our investment decisions is crucial because it helps us make more intelligent choices and align our strategies with our goals. It also gives financial institutions and experts valuable insights to design services that cater to our needs. By identifying the factors that shape our investment perspective, we can confidently navigate the ever-changing investment landscape and make the most of the opportunities available. It’s like having a roadmap that guides us through the complexities of the market.Earlier, technology contributed mainly to the transactional efficiency of the trades in the stock market. However, it has advanced to the level of trading intelligence. We now have online trading platforms, mobile apps, and robot advisors that have transformed how we invest. These tools make it incredibly convenient to research, buy, and monitor our investments from the comfort of our homes.Conversely, changing technology and new investment avenues bring exciting opportunities for retail investors. The availability of diverse investment options empowers retail investors to expand their portfolios and achieve higher returns. The accessibility of information through technology equips investors with valuable insights for making informed decisions. Besides, the emergence of automation and robo-advisory services provides cost-effective solutions for managing investments. Lower transaction costs have made investing more affordable, and the ability to participate in global markets opens doors to new growth prospects. Access to diverse investment options has increased significantly.Technological Pillars Transforming Stock Market TradingAs technology advances, the financial world also experiences a shift. The integration of these technologies is reshaping the way traders interact in financial markets. This change has been driven by diverse trading tools designed to enhance effectiveness, efficiency, and profitability in investments and financial transactions:1. Algorithmic Trading2. Mobile Trading Apps3. Advanced Charting Tools4. Robot / Auto Trading Software5. Real-Time News Platforms1. Algorithmic TradingAlgo Trading, powered by Gen AI (Generative AI), employs computer programs following predefined algorithms to execute trades quickly and systematically. This method capitalizes on profit opportunities with unparalleled speed and frequency compared to human traders. The algorithms are constructed around timing, price, quantity, or mathematical models. Beyond individual gains, algo trading enhances market liquidity and systematizes trading by mitigating the impact of human emotions. Strategies such as trend-following, arbitrage, and index fund rebalancing are executed based on trading volume or time. High-frequency trading dominates current algo-trading, capitalizing on rapid order placements across multiple markets and decision parameters.Investors, from long-term to short-term, find algorithmic systems very efficient as they cater to systematic trading involving trend followers, hedge funds, and pairs trading while offering a precise and automated approach. Since it is systematic in its approach, there is minimal human error. It enables back-testing to validate trading strategies.“Algo Trading, powered by Gen AI (Generative AI), employs computer programs following predefined algorithms to execute trades quickly and systematically.”While algorithmic trading presents advantages such as instant order confirmation, potential for best prices, and eliminating human error, it also has its challenges. These include the lack of real-time human judgment, the potential for increased market volatility, high capital outlays, regulatory scrutiny, and limited customization. Other limitations include potential latency issues, susceptibility to unforeseen events, dependence on technology, market impact, regulatory complexities, high capital costs, and limited customization.For algorithmic trading, there are technical requirements like programming knowledge, network connectivity, access to trading platforms, market data feeds, back-testing capabilities, and historical data for testing. Algorithmic trading legality is established, and its learning process requires expertise in quantitative analysis, financial market knowledge, and coding skills. Popular programming languages for algorithmic traders include C++ and Python, which emphasize handling extensive data volumes efficiently. Algorithmic trading continues to shape financial markets, allowing traders to optimize trading strategies precisely and quickly.2. Mobile Trading AppsMobile trading apps enable people to execute trades from their smartphones. These apps provide real-time market information. Selecting the right mobile trading app is crucial for efficient trading. One should thoroughly research the options available, consider functionality, check reviews, and ensure security. The chosen app should provide real-time market data, advanced charting tools, customizable alerts, and various order types. Features like Margin Trading Facility enhance the app’s capabilities. Discipline, focus, and preparation are essential to trade like a pro on a mobile app. Staying updated with market trends and news, setting up alerts, analyzing charts, making research-based decisions, and leveraging customization options contribute to maximizing trading potential on a small screen.Mobile apps provide the convenience of trading anytime, anywhere, real-time trading opportunities, easy access to account information, and user-friendly interfaces. Customization options allow tailoring the app to individual preferences and strategies. One should also avoid common mistakes like overtrading, impulsiveness, and neglecting risk management, as these can lead to losses. Understanding the app’s functionality, analytical tools, and customization options is essential for effective decision-making.3. Advanced Charting ToolsCharting tools offer visual representations of price action through bar charts, trend lines, and advanced charts. These play a crucial role in enhancing trading strategies. Their effectiveness is further elevated when integrated with artificial intelligence (AI). AI-powered tools, when combined with advanced charting features, can identify key trading opportunities, and significantly improve the precision of trading strategies. AI’s ability to process vast amounts of data quickly and accurately can identify patterns beyond historical data, including news events and social media trends. Integrating both fundamental and technical analysis provides a holistic view of the market. It enables traders to make more informed decisions.Some critical features of stock charting tools are technical and fundamental indicators that give insights into past market data. They also provide information about a company’s financial health. Real-time market data access is essential for day traders. Advanced charting includes infographics and heat maps. Choosing the right stock charting software involves considering one’s trading style, objectives, and specific feature requirements. Understanding how to interpret the provided data to use charting tools effectively, educational resources such as webinars, video tutorials, and online courses can help master these tools.4. Robot or Auto Trading SoftwareRobot trading is powered by trading software that includes a technical architecture supporting electronic trading activities. The grasp inputs directly influence a firm’s profitability and reputation. At the same time, building and maintaining such a robust system is a challenge that requires careful planning, investment, and consistent effort.Key Distinction: Robot Trading vs. Algorithmic TradingAlgorithmic trading involves the computer automating only the execution portion of trading; the computer does not make the buy or sell decisions.Automated / Robot trading is done entirely automatically, down to the computer making the buy/sell decisions.Maintaining powerful trading software is essential for uninterrupted trading operations. Redundancy is crucial as it helps backup systems minimize downtime while reducing the risk of financial losses during failures. Scalability is also critical to accommodate the evolving needs of trading firms. Software must efficiently handle increased volumes of voice, data, and transactions as firms grow. Conversely, it should scale down when necessary, allowing firms to stay competitive and capitalize on emerging opportunities.Security is another crucial factor, especially for trading firms with sensitive financial information. A well-designed security procedure safeguards against unauthorized access, protects client information, and builds trust. Two approaches to building a robust IT infrastructure include using cloud computing and working with specialized IT providers. Cloud computing can offer scalability, flexibility, and external management of maintenance and updates, therefore freeing up internal resources. Technical IT providers can help trade technology and security by tailoring the infrastructure to a firm’s unique needs.5. Real-Time News PlatformsInternational events significantly impact trading activities in the era of global interconnectedness of markets. For traders, whether to use a news feed depends on their trading style and the securities involved. While long-term traders might consider news as temporary noise, day traders dealing with currencies, oil, or stock index futures need real-time information.Technology has enabled many options for traders. Social media lists and feeds can also be customized for specific trading interests, and it is a cost-effective alternative. Online news providers offer free news coverage, sometimes with a slight delay. Professionals willing to invest in a premium service can find services, though pricey, providing around-the-clock coverage on macroeconomics, global breaking news, forex trends, and more. The right fit depends on trading frequency, time frame, and specific trading plans. Traders can try out free trials that these services offer to decide the best match for their needs. The exemplary news service is an invaluable asset and helps traders navigate market volatility and recoup the cost of the news feed in just a few minutes.Conclusion: The Retail Revolution & Robo-AdvisoryAdvancements in technology have helped investors in many ways, such as automated trading, accurate predictions, and visualization of financial data through charts as well as graphs. They aid in the identification of market patterns and trends. Traders can personalize their strategies by creating custom indicators based on their unique trading styles. These technological advances enable better connectivity to the market for traders by providing real-time data access, market trend analysis, customizable alerts, and access to research and educational resources, ensuring seamless trading experiences regardless of location or activity. The innovations have simplified trading, made it more accessible, and improved its effectiveness. Traders can now work in the markets more precisely while staying ahead of the curve and achieving success in their strategies.Lower transaction costs have made investing more affordable for retail investors. Online trading platforms often offer reduced brokerage fees, eliminating the need for intermediaries. This cost reduction enables retail investors to participate in the market without a significant financial burden. Changing technology has also made it easier for retail investors to participate in global markets, providing access to international stock exchanges to diversify portfolios globally.“Robo-advisors have emerged as our virtual investment companions, providing personalized advice and portfolio management services.”Robo-advisors have emerged as our virtual investment companions, providing personalized advice and portfolio management services. These automated advisory services use sophisticated algorithms to assess our risk tolerance, financial goals, and time horizon. They offer us tailored investment strategies and handle portfolio rebalancing, tax optimization, and administrative tasks. Robo-advisors have brought professional-grade portfolio management within our reach, saving us time and effort. Also, fintech innovations like automated savings apps, micro-investment platforms, and digital wallets have opened new avenues for us to grow our wealth and explore alternative investment opportunities.Social media platforms and online investment communities have transformed how we gather information and insights. We can now connect with like-minded individuals, share investment ideas, and stay current with market trends. At the same time, it is crucial to approach social media cautiously and critically evaluate the information we come across, as misinformation as well as herd mentality can be prevalent.ReferencesEconomic Times: Trading Tools & Tech Harnessing Innovation for Successful TradingInvestopedia: Basics of Algorithmic Trading Concepts and ExamplesEconomic Times: Mobile Trading App - How to Trade Like a Pro on a Small ScreenModest Money: Understanding the Role of Charting Tools for Successful TradingSpeakerbus: Importance of Robust IT Infrastructure in TradingTrade Pro Academy: The Best News Feed for Day TradingAuthors may be reached at eboard@icai.in
BANKING
Ep. 439 — Financial Inclusion and Central Bank Digital Currency in India Building Blocks and Future Road Ahead
CA Journal
· September 2026
00:00
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Financial Inclusion and Central Bank Digital Currency in India Building Blocks and Future Road AheadThe objectives of the study are to explore the factors affecting Central Bank Digital Currency (CBDC) designs and identify the opportunities and challenges in a CBDC rollout for financial inclusion in India. The study finds that factors such as the status of the nations, distribution methods, and choice of technology affect the CBDC design choices. For an emerging nation like India, choosing retail-based CBDC over wholesale can be a path-breaking decision to enhance financial inclusion, financial stability, payment safety, and payment efficiency. However, overdependency on cash, distribution, circulation cost of CBDC, and technological challenges may act as major threats to the CBDC implementation in India.IntroductionFinancial inclusion is a critical aspect of India’s economic development strategy, aiming to provide access to financial services to all segments of society, particularly those who have been traditionally excluded from the formal banking system. The Reserve Bank of India (RBI) defines financial inclusion as the process of ensuring access to a range of financial services, including banking, credit, insurance, and payments at an affordable cost to all individuals and businesses, irrespective of their socio-economic status or geographical location.CBDCs can enhance accessibility to financial services by offering a digital currency that does not require a traditional bank account. This is particularly beneficial for vulnerable sections of society, such as low-income individuals and those residing in remote areas with limited banking infrastructure. Moreover, CBDC can facilitate low-cost transactions, ensuring that even small value transactions remain affordable. Also, CBDC have the potential to create a level playing field by providing access to the same financial infrastructure for all individuals, regardless of their background or location. This can help reduce disparities and promote inclusive economic growth. By leveraging blockchain technology, CBDC transactions can be recorded on a transparent ledger, reducing the risk of discrimination, and promoting fair treatment for all users.RBI stated that CBDC is a digital token that represents legal tender and is being issued in equivalent denominations to paper currency and coins. Participating banks will offer a digital wallet to transact with digital currency (e-R) for the users. Transactions can take place between both person to person (P2P) and person to merchant (P2M). Also, CBDC will not bear any interest similar to cash and can be converted into alternative forms of currency such as bank deposits.“CBDCs can enhance accessibility to financial services by offering a digital currency that does not require a traditional bank account.”According to Finance Minister, Ms. Nirmala Sitharaman, digital currency will lead to a more efficient and cost-effective currency management system. Also, adopting CBDC as a national currency can help India add $1 trillion to its economy by 2032, as per a recent estimate. As of March 2023, the circulation of CBDC or e-rupee amounted to Rs. 16.39 crore, according to RBI’s Handbook of Statistics on the Indian Economy for the fiscal year 2022-23. Among the overall e-rupee circulation, Rs. 10.69 crore constituted Wholesale CBDC, while Rs. 5.70 crore represented retail CBDC. Daily transactions for retail CBDC are currently hovering around 18,000, significantly below the RBI’s ambitious goal of achieving one million transactions per day by the end of 2023.Literature ReviewThe development of Central Bank Digital Currency (CBDC) is at a nascent stage. According to (BIS, 2018), CBDC is a fiat currency issued by central banks in digital form with a store of value and unit of account. (Ozili, 2022) defines CBDC as a currency in digital form issued by central banks that appears on the liability side of the balance sheet of the issuing banks. The most widely accepted definition of CBDC is that it is a digital legal tender (IMF), coming under the direct liability of the monetary authority.Designs and Approaches of CBDCCBDC represents a digital legal tender with the core functions of money: medium of exchange, unit of account, store of value, and standard of deferred payments. CBDC designs fall into distinct classifications:Ledger Architecture: Token-based (anonymity, bearer asset like physical cash) vs. Account-based (requires centralized digital identity verification).Wholesale vs. Retail: Wholesale CBDC is restricted to financial institutions for interbank settlements (e.g., Project Jasper in Canada, Ubin in Singapore, and Inthanon in Thailand). Retail CBDC (‘general purpose’) is distributed directly to households and businesses.Interest-Bearing vs. Non-Interest-Bearing: Interest-bearing CBDCs mimic bank deposits and can directly transmit monetary policy, whereas non-interest-bearing CBDCs function as digital cash.One-Tier vs. Two-Tier Distribution: In a one-tier model, the central bank directly manages accounts. Under a two-tier model (adopted in India and China’s DCEP), the central bank issues CBDC backed by reserves, but commercial banks and financial intermediaries distribute digital wallets to the public.Research Objectives and MethodologyObjective 1: To explore the factors affecting CBDC designs and approaches.Objective 2: To identify the opportunities and challenges in a CBDC rollout for financial inclusion in India.The study utilizes a systematic literature review methodology, retrieving scholarly contributions from the SCOPUS database using keywords such as ‘CBDC’, ‘Digital currency’, ‘Design of CBDC’, ‘CBDC implementation’, and ‘CBDC and Financial Inclusion’.Factors Affecting CBDC Design ChoicesAcceptance by Merchants and Intermediaries: Digital payment volumes reached approximately 5,763 trillion by November 2023. Merchant acceptance is critical, requiring seamless point-of-sale processing and supportive RBI incentives.Value Propositions: Offering zero-cost or fee-free transactions, simplicity, and safety to incentivize adoption among financially underserved groups.Facility for Offline Use: Developing tokenized offline hardware/software wallets enabling peer-to-peer settlement in areas without internet connectivity.Capability of Use in Remote Areas: Designing lightweight, affordable, user-friendly solutions that complement existing initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY).Figure 1: Strategic Pillars of National Strategy for Financial Inclusion (RBI, 2019–2024)Strategic Vision: To make financial services available, accessible, and affordable to all citizens in a safe and transparent manner to support inclusive and resilient multi-stakeholder led growth.1. Universal Access to Financial Services2. Providing Basic Bouquet of Financial Services3. Access to Livelihood & Skill Development4. Financial Literacy & Education5. Customer Protection & Grievance Redressal6. Effective Co-ordinationFoundation: Leveraging technology and adopting a multi-stakeholder approach for sustainable financial inclusion“Poverty is the worst form of violence.” — Mahatma GandhiAccording to the RBI (Committee on Financial Inclusion, Chairman: Dr. C. Rangarajan, 2008), financial inclusion is defined as “the process of ensuring access to financial services, timely and adequate credit for vulnerable groups such as weaker sections and low-income groups at an affordable cost”. Approximately 190 million adults in India lack formal bank accounts, placing India second globally after China.Opportunities and Challenges in a CBDC Rollout1. Opportunities for Financial InclusionAlternative for High-Volume, High-Value Transactions: RBI’s Financial Inclusion Index rose from 49.9 (2019) to 53.9 (2021). Total RTGS volume increased by 37%, UPI scaled past 456 crore transactions per month, supported by a ₹1,300 crore government incentive scheme.Countering AML and Financial Terrorism: Transparent distributed ledgers provide regulatory authorities with real-time auditability to trace suspicious fund flows and curb illicit financing.Improved Security and Operational Resilience: Mitigates cyber fraud through robust cryptography; CERT-In recorded over 39,000 cybersecurity incidents in 2022, highlighting the necessity of sovereign-backed cyber-resilient infrastructure.Figure 2: Growth Rate in Selected Payment Systems (Y-o-Y Growth)Payment SystemTransaction Volume Growth (Y-o-Y, %)Transaction Value Growth (Y-o-Y, %)Nov-2020Nov-2021Dec-2020Dec-2021Nov-2020Nov-2021Dec-2020Dec-2021RTGS2.924.920.217.9-8.037.53.321.7NEFT24.624.131.622.327.94.331.76.5UPI81.389.470.8104.4106.696.5105.598.7IMPS48.721.538.724.536.331.938.635.6NACH2.515.728.0-2.75.77.132.25.1NETC257.671.5115.274.9171.651.183.359.7BBPS78.7148.686.2137.078.1175.397.9165.2Source: Reserve Bank of India (RBI, 2022)2. Systemic ChallengesOverdependence on Cash: Cash remains the predominant medium for small transactions among low-income households.Connectivity & Device Chasm: Approximately 550 million individuals use feature phones lacking internet, and 845 million smartphone owners do not regularly utilize mobile banking.Circulation & Operational Costs: Substantial technological outlay required to sustain secure, zero-failure sovereign ledgers.Figure 3: Preferred Payment Mode Distribution (RBI Survey 2022)Payment ModePreferred Mode of Payment (%)Preferred Mode to Receive Money (%)Cash54.249.7Digital40.944.2Cheque2.94.1No Comment2.02.0Transaction Amount TierCash Preference (%)Digital Preference (%)Cheque Preference (%)Below ₹10087.126.4—₹100 – ₹20083.933.6—₹200 – ₹50073.844.3—₹500 – ₹2,00052.157.7—₹2,000 – ₹5,00038.357.39.5Above ₹5,00030.053.616.7Source: Reserve Bank of India Survey Data (RBI, 2022)Way Forward & ConclusionTo accelerate adoption, the RBI is enabling full interoperability between e-Rupee wallets and UPI QR-code networks, and exploring CBDC integration into the wholesale call money market. Targeted merchant incentives, fee-free structures, and offline usability will be pivotal to overcoming cash inertia.A thoughtfully designed Retail CBDC emulates cash without credit risk, serving as an accessible on-ramp to formal finance for excluded populations. Addressing infrastructural, literacy, and technological hurdles will ensure CBDC drives sustainable, inclusive growth across India.ReferencesAbraham, M. P. (2021). Bitcoin threat and the emergence of Central Bank Digital Currency: Regulatory and valuation challenges. SSRN Electronic Journal.Agur, I., Ari, A., & Dell’Ariccia, G. (2019). Designing Central Bank Digital Currencies. IMF Working Papers, 2019(252).Andolfatto, D. (2020). Assessing the Impact of Central Bank Digital Currency on Private Banks. AJR.Bech, M., & Garratt, R. (2017). Central bank cryptocurrencies. BIS Quarterly Review.Bindseil, U. (2019). Central Bank Digital Currency: Financial System Implications and Control. International Journal of Political Economy, 48(4), 303–335.BIS. (2018). Committee on Payments and Market Infrastructures: Central bank digital currencies.Boar, C., & Wehrli, A. (2021). Ready, steady, go? – Results of the third BIS survey on CBDC. BIS Papers, 114.Davoodalhosseini, S. M. (2022). Central bank digital currency and monetary policy. Journal of Economic Dynamics and Control, 142.Deloitte. (2021). Central Bank Digital Currencies: Building Block of the Future of Value Transfer.Reserve Bank of India (RBI). Annual Reports & Handbook of Statistics on the Indian Economy.Authors may be reached at eboard@icai.in
SUSTAINABILITY
Ep. 440 — Sustainable Development Practices in the India-Middle East-Europe Economic Corridor (IMEC)
CA Journal
· September 2026
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Sustainable Development Practices in the India-Middle East-Europe Economic Corridor (IMEC): Environmental and Social Impacts on Regional EconomiesThe India-Middle East-Europe Economic Corridor (IMEC) exemplifies the evolving landscape of global economic cooperation, highlighting not only just trade and growth but also the integration of sustainable development practices. While stressing over resource efficiency, cost savings, and innovation, sustainable initiatives enhance operational efficiency, attract conscientious consumers, and spur economic growth. Recognizing the interplay between economic, social, and environmental factors, prioritizing sustainability emerges as an ethical imperative and a strategic pathway for enduring success. Empirical research delves into the intricate web of environmental and social impacts woven by sustainable practices within the IMEC and their consequential influence on regional economies across India, the Middle East, and Europe.IntroductionThe India-Middle East-Europe Economic Corridor (IMEC) holds profound significance in fostering economic collaboration among the participating regions, signalling a transformative era of cross-continental trade and cooperation. This corridor serves as a strategic conduit for economic integration, connecting South Asia, the Middle East, and Europe in a seamless network. Its importance lies in the facilitation of enhanced trade opportunities, providing an efficient and streamlined pathway for the exchange of goods and services. By breaking down trade barriers and optimizing transportation routes, the IMEC aims to create a more interconnected economic landscape, promoting diversification of economic partnerships and expanding market access for participating countries.Furthermore, the corridor is a catalyst for infrastructure development, attracting investments that fuel the growth of transportation networks and logistics facilities. This, in turn, not only improves the efficiency of trade operations but also contributes to regional economic growth. The IMEC also plays a pivotal role in promoting regional economic integration, aligning policies to create a more cohesive economic bloc. As a driver of job creation, technology transfer, and sustainable development, this corridor is not merely a physical pathway but a symbolic link fostering mutual understanding, cultural exchange, and lasting economic collaboration among nations.“The India-Middle East-Europe Economic Corridor (IMEC) strategically aligns with several key Sustainable Development Goals (SDGs), reflecting a commitment to holistic and sustainable development across the participating regions.”At its core, the corridor strategically addresses key United Nations Sustainable Development Goals (SDGs):SDG 8: Decent Work & Economic GrowthSDG 9: Industry, Innovation & InfrastructureSDG 10: Reduced InequalitySDG 11: Sustainable Cities & CommunitiesSDG 17: Partnerships for the GoalsBy addressing these key SDGs, the economic corridor underscores a commitment to comprehensive and integrated development that encompasses economic prosperity, social equity, and environmental sustainability.Objectives of the StudyThe primary objective of the study is to delve into the multifaceted impacts of sustainable development practices within the IMEC, assessing their influence on economic growth, social dynamics, and environmental sustainability.To evaluate the economic benefits derived from the implementation of sustainable development practices within the corridor (job creation, investment attraction, cost savings, and GDP growth).To explore the social implications of sustainable development within the corridor, including effects on local communities, cultural dynamics, displacement, and social cohesion.To examine the environmental impacts of sustainable development practices within the IMEC, including contributions toward pollution abatement, natural resource conservation, and ecosystem preservation.To identify policy implications and recommend actionable strategies for policymakers to strengthen regulatory frameworks and governance structures.To provide practical recommendations for stakeholders, including governments, businesses, NGOs, and multilateral organizations, to foster enduring regional prosperity.Assessing Environmental Impacts and Sustainable Solutions in the IMECThe IMEC stands as a monumental pathway for economic collaboration, but its rapid development raises critical concerns about its environmental footprint on the participating countries. The assessment of environmental impacts reveals potential challenges that necessitate thoughtful consideration. One such concern is deforestation, as the expansion of infrastructure and increased economic activity may lead to the clearing of forests. This, in turn, threatens biodiversity and disrupts ecosystems. Pollution emerges as another significant challenge, with heightened industrial activities contributing to air, water, and soil pollution. Additionally, the corridor’s resource-intensive development poses risks of depletion, impacting ecosystems and exacerbating environmental degradation.In response to these challenges, there is a pressing need to adopt sustainable practices and technologies to mitigate environmental impacts. The IMEC must prioritize green infrastructure and eco-friendly urban planning to minimize the ecological footprint. Sustainable transportation systems, including electric and hybrid modes, can significantly reduce emissions. The promotion of renewable energy sources, such as solar and wind power, aligns with the global shift towards a low-carbon economy. Furthermore, the incorporation of circular economy principles can enhance resource efficiency and minimize waste generation. Collaboration among the participating countries in implementing stringent environmental regulations and monitoring mechanisms is crucial.To address deforestation concerns, afforestation and reforestation initiatives can be integrated into the corridor’s development plan. Pollution control measures, such as advanced wastewater treatment and emissions reduction technologies, are essential components of sustainable practices. Moreover, resource depletion can be mitigated through responsible resource management, promoting sustainable agricultural practices, and investing in research and development for eco-friendly alternatives. By incorporating innovative sustainable practices, the corridor has the potential to set a precedent for responsible economic development, ensuring harmonious coexistence between economic prosperity and environmental preservation.“Balancing economic progress with social cohesion demands a nuanced approach that prioritizes the well-being of the communities traversed by the corridor.”Assessing IMEC’s Effect on Social Dynamics in LocalitiesThe IMEC represents a transformative force in the economic landscape, yet its effects extend beyond markets, reaching deep into the social fabric of local communities. An examination of the social implications reveals a complex interplay of opportunities and challenges. One critical concern is the potential for displacement as infrastructure development and urbanization take centre stage. Displacement can lead to the uprooting of communities, disrupting established social structures and eroding the sense of belonging. Furthermore, the corridor’s expansive reach may trigger cultural shifts, impacting local traditions, languages, and lifestyles. The influx of diverse influences may lead to a delicate balance between preservation and adaptation.Consideration of these issues is imperative, as the cultural impact of the IMEC on local communities can be profound. Indigenous practices and identities may face the risk of dilution or assimilation into a more globalized culture. Changes in lifestyle, driven by economic shifts and increased connectivity, can be both empowering and disorienting for local populations. The introduction of new industries and employment opportunities may alter traditional livelihoods, necessitating adaptation and skill transitions.To address these social implications, proactive measures are essential. Inclusive development policies that prioritize community engagement and participation can help mitigate the adverse effects of displacement. Cultural preservation initiatives, such as the documentation and promotion of local heritage, can safeguard unique identities in the face of globalization. Additionally, fostering dialogue between local communities and policymakers ensures that development strategies align with the aspirations and values of those directly impacted.Harmonizing Growth: 6 Case Studies on Sustainable Development in the IMECCase Study 1: Solar Power in Rajasthan – A Beacon of Sustainable EnergyRajasthan has emerged as a trailblazer in sustainable energy with its extensive adoption of solar power. The state’s arid landscape, bathed in abundant sunlight, forms an ideal canvas for large-scale solar projects. This initiative has significantly reduced carbon emissions by diminishing reliance on conventional fossil fuels. Beyond ecological gains, the economic landscape has flourished, witnessing job creation throughout the solar energy value chain. Skilled technicians, support staff, and those engaged in maintenance have found new opportunities. Moreover, surplus solar energy generated in Rajasthan has the potential to boost the overall energy grid, providing economic benefits through energy export to neighbouring regions within the IMEC network.Case Study 2: Mumbai’s Coastal Resilience Project – Urban Development & ConservationMumbai, a coastal megacity, grapples with rapid urbanization and climate risks. The Coastal Resilience Project epitomizes a delicate equilibrium between urban infrastructure and coastal conservation. By incorporating measures to restore coastal ecosystems, such as mangroves and wetlands, the project safeguards biodiversity and provides a natural buffer against sea-level rise and storm surges. Incorporating climate-resilient infrastructure attracts business, fosters tourism, and engages local communities to build disaster preparedness and social inclusivity.Case Study 3: Gujarat’s Blue Economy – Sustainable Fisheries and Coastal DevelopmentGujarat’s Blue Economy initiatives integrate sustainable practices into marine fisheries and coastal development policies. By enforcing balanced catch quotas and promoting eco-friendly fishing technologies, the state preserves marine biodiversity while securing the long-term livelihoods of artisanal fishing communities, demonstrating environmental stewardship along maritime trade routes.Case Study 4: Waste-to-Energy in Bangalore – Turning Trash into TreasureBangalore’s innovative Waste-to-Energy projects transform municipal solid waste into power, mitigating greenhouse emissions and diverting waste from overflowing landfills. This creates employment across sorting, technology, and power generation sectors, establishing an urban circular economy model scalable across the IMEC corridor.Case Study 5: Smart Cities Mission – Sustainable Urban Development Across IndiaThe Smart Cities Mission integrates sustainability into city master planning through efficient mass transit, green building codes, pedestrian networks, and sensor-driven municipal management. This balanced approach stimulates technology investments and jobs while fostering equitable, citizen-centric urban living.Case Study 6: Women’s Empowerment through Sustainable Agriculture in Himachal PradeshIn Himachal Pradesh, organic, eco-friendly farming practices intertwine with women’s empowerment. Providing rural women with agronomic training, seed resources, and market access enhances agricultural productivity and ensures financial independence, providing a rural inclusion blueprint for the corridor.Sustainable Business Practices: Catalysts for Resilient Regional EconomiesSustainable business practices play a pivotal role in enhancing economic outcomes and exert a consequential influence on regional economies:Resource Efficiency & Cost Savings: Energy-efficient processes, waste reduction, and circular material flows minimize operational costs and drive technological innovation.Consumer Preference & Brand Loyalty: Environmentally conscious consumers increasingly favor ethical brands, expanding market share and revenue for sustainable enterprises.Job Creation & Skill Upgradation: Clean energy, recycling, and green construction generate high-value employment requiring technical training.Community Cohesion: Corporate social investments in local education, health, and conservation strengthen social capital and workforce productivity.The Way Forward & Policy ImplicationsLooking ahead, the IMEC must prioritize green technologies, cross-border regulatory integration, and circular economy principles. Harmonized environmental standards and joint renewable energy grids will prevent carbon leakage and ensure balanced regional development.Policymakers must establish targeted incentive structures, green financing mechanisms, and community dialogue platforms to mitigate displacement risks, preserve cultural heritage, and safeguard regional ecosystems.ConclusionThis article establishes a critical link between sustainable development practices and regional economies within the India-Middle East-Europe Economic Corridor. By examining environmental and social impacts, the research underscores the symbiotic relationship between sustainability and economic resilience. As the corridor evolves, its commitment to sustainability serves as a blueprint for environmental stewardship and inclusive economic prosperity across the nations it connects.ReferencesSmith, John. “Revolutionizing Global Trade: Unveiling the India-Middle East-Europe Economic Corridor at G20.” International Trade Journal, vol. 42, no. 3, 2021, pp. 123-145.Smith, John. “The Impact of the India-Middle East-Europe Economic Corridor on Global Trade.” International Economic Review, vol. 25, no. 2, 2020, pp. 123-145.Agénor, P. R., Canuto, O., & Jelenic, M. (2012). Avoiding middle-income growth traps. Finance & Development, 49(3), 10.Klasen, S., & Lamanna, F. (2009). The impact of gender inequality in education and employment on economic growth: New evidence for a panel of countries. Feminist Economics, 15(3), 91-132.World Economic Forum. (2021). The Global Gender Gap Report 2021.Authors may be reached at singhal.richa78@gmail.com and eboard@icai.in
ACCOUNTING & VALUATION
Ep. 442 — Disguised Intellectual Capital in Luxury Industry: Do 4Ps of Marketing Lead to Accounting Valuation Anomaly?
CA Journal
· September 2026
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Disguised Intellectual Capital in Luxury Industry: Do 4Ps of Marketing Lead to Accounting Valuation Anomaly?The luxury industry has often witnessed a significant concern in the valuation of intellectual property (IP) which is deeply rooted in restrictive accounting practices. The current financial reporting framework seldom recognizes self-generated goodwill, being created through effective Product, Price, Place, and Promotion (4Ps of marketing). Consequently, this leads to a systematic undervaluation of a company’s assets and overall worth. This article argues whether the existing accounting standards succeed in capturing the tangible value of self-generated goodwill and optimally recognises the sources of all asset creation.IntroductionThe modern luxury goods industry operates within a complex backdrop where creativity, exclusivity, and brand value creation are pivotal. Intellectual property (IP) forms the core of these businesses, fuelling their reputation and market position. However, this article contends that the prevalent underestimation of IP within the luxury industry can be partly attributed to restrictive accounting recognition, particularly concerning the measurement of self-generated goodwill.In the current financial reporting framework, self-generated goodwill, often created through effective utilization of the 4Ps of marketing (Product, Price, Place, Promotion), is not recognized in the financial statements. This non-recognition induces a measurement bias, significantly understating the company’s assets and overall worth. For luxury brands, where the four parameters significantly contribute to brand value and influence consumer behaviour, this accounting practice may significantly undervalue their intellectual property and hence their market position. This article begins with an in-depth analysis of the luxury industry’s landscape, emphasizing the crucial role of IP rights such as copyrights, trademarks, patents, and design rights. It underscores the current accounting limitations that fail to capture the self-generated goodwill’s value.The marketing mix has been thoroughly examined and exemplifies how it contributes to the generation of goodwill in the luxury industry has been deep dived into. Each marketing mix component plays a substantial role in enhancing brand identity and consumer perception, thus indirectly affecting the financial performance. However, due to accounting constraints, this substantial value remains unaccounted for, depicting a distorted picture of the company’s actual worth. The article investigates the consequences of this underestimation, including exposure to counterfeit goods, dilution of brand equity, and financial implications. Further, it explores the apprehension between the desire for peculiar in the luxury industry and the valuation anomaly that facilitates access and sharing, worsening the IP protection challenge.Finally, the article advocates for an innovative rethinking of the current accounting standards, especially considering the luxury goods industry’s unique IP-dependent characteristics. It discusses potential strategies for a more comprehensive and accurate valuation approach that recognizes the value of self-generated goodwill. By highlighting the role of restrictive accounting in the underestimation of IP, the study triggers a critical reassessment of existing financial reporting standards. It prompts the luxury industry to strengthen its IP protection strategies and to address this measurement bias. As such, the article provides a valuable foundation for future research to establish a more inclusive and accurate accounting framework.“The ‘Pricing Strategy’ of luxury goods which is often significantly higher than the production cost includes intangible elements like brand reputation and perceived value.”Conceptual BackgroundThe luxury goods sector stands apart in its marketing strategies, exemplified by the distinct interpretation of the marketing mix. These factors not only build the identity of luxury brands but also add layers of complexity to their valuation, particularly due to the unrecognized intellectual capital inherent within this industry.Luxury products are steeped in artisanship, quality, and exclusivity, distinguishing them from their mainstream counterparts. They are not mere tangible objects but rather symbols of superior artistry, heritage, and premium materials. However, the intellectual capital embedded in these products – such as proprietary design innovations, and the very essence of brand prestige – is not adequately recognized in traditional accounting measures. This often leads to the underestimation of a product’s true value, thereby creating a measurement bias.The ‘Pricing Strategy’ of luxury goods which is often significantly higher than the production cost includes intangible elements like brand reputation and perceived value. However, these elements are a form of relational capital and therefore are not quantifiable in standard accounting terms, adding to the valuation complexity. The ‘Place’ element in luxury marketing encapsulates a unique brand experiences offered at exclusive boutiques and online platforms. Location exclusivity, superior service quality, and even the architecture and design of the stores contribute to a brand’s image and perceived value, forming a part of the brand’s structural capital. Yet, traditional accounting methods do not fully account for these elements in their valuation, further skewing the representation of a company’s worth.Promotion strategies in the luxury industry focus on building emotional connections, brand narratives, and consumer loyalty rather than just pushing sales. These strategies, which include high-profile events, etc., significantly enhance a brand’s intellectual capital. However, their impact on the overall value of a brand poses a challenge to measure its value in monetary terms and therefore, often remains unrecognized in accounting statements.The article’s first objective is to delineate the intellectual capital inherent in the luxury industry’s 4Ps of marketing and its contribution to a brand’s value and success. Secondly, the article seeks to explore how traditional accounting valuation methods can lead to measurement bias, overlooking key intangible aspects critical to the value of luxury brands. Lastly, it aims to emphasize the need for non-traditional valuation metrics, proposing a more inclusive approach for quantifying intellectual capital and providing a comprehensive understanding of a company’s worth.MethodologyThis secondary study employs a descriptive-analytical approach, integrating both qualitative and quantitative aspects. A critical analysis of the luxury industry’s marketing strategies, particularly the 4 parameters was conducted based on case studies of established luxury brands. This was complemented by a quantitative analysis of financial statements and accounting practices. The study also incorporated interviews with industry experts to gain insights into the luxury industry’s unique marketing dynamics.Figure 1: Concept Map of the Article4Ps of Marketing(Product, Price, Place, Promotion)→Sales Revenue→Accounting Standards(Revenue vs. Capital Expense)→Market Valuation & ReturnsSource: Authors’ CompilationThe 4Ps of Marketing in the Luxury IndustryFor the luxury industry, these principles take on unique characteristics, shaping the industry’s identity and its relationship with consumers. Luxury goods have often created a buzz due to a number of factors, some of which are difficult to quantify because they involve subjective or abstract elements beyond valuation:Brand Heritage and Prestige: Rich histories, traditions, and aura of exclusivity.Scarcity: Offered in limited quantities – naturally or artificially.Craftsmanship: Handcrafted by highly skilled artisans.Design and Innovation: Authentic originality, unique designs, and patent-protected innovations.Status Symbol: Matter of prestige and personal identity invoking premium pricing.Emotional Value: Sentimental attachments with brand heritage and story.Customer Experience: From high-end retail environments to personalized concierge service.Marketing and Advertising: Employing celebrity endorsements or high-profile events.Intellectual Property: Design, brand name, and trademarks associated with luxury goods.Table 1: The Peculiar Marketing Mix in the Luxury IndustryProductPricePlacePromotion• High Quality• Craftsmanship• Exclusivity• Brand Heritage and Story• Design and Aesthetics• Innovation• Personalization• Exceptional Service• Status Symbol• Premium Pricing• Perceived Price• Prestige Pricing (or Psychological Pricing)• Limited Edition Pricing• Value-Based Pricing• Dynamic Pricing• Cost-Plus Pricing (less common)• Bundle Pricing• Price Discrimination• Penetration Pricing• Fifth Avenue, New York, USA• Bond Street, London, UK• Champs-Elysées, Paris, France• Via Montenapoleone, Milan, Italy• Bahnhofstrasse, Zurich, Switzerland• Ginza, Tokyo, Japan• Rodeo Drive, Beverly Hills, USA• Avenue Montaigne, Paris, France• Kurfürstendamm, Berlin, Germany• DLF Emporio, New Delhi, India• Fashion Weeks• Celebrity Endorsements• Limited Edition Launches• Brand Collaborations (artists, designers)• Pop-Up Shops / Unique shopping experience• High-Profile Parties / Events• (Social) Cause Marketing• Digital Marketing• Influencer Marketing• Personalized Customer ExperiencesSource: Authors’ Compilation“The luxury industry has long been recognized for its distinctive approach to marketing and valuation.”Table 2: Examples of Marketing Strategies in the Luxury IndustryParametersOperational Strategy & Industry ExamplesProductA luxury bag is handcrafted by expert craftsperson, is not mass-produced, and has a limited availability, making it a coveted item of luxury.PriceThe premium pricing strategy aligns with the superior attribute it guarantees. The high price ensures that luxury brand watches remain exclusive to an affluent demographic.PlaceThe iconic store/high streets on the Champs-Elysées in Paris, Fifth Avenue in New York exudes luxury, offering an exclusive brand experience. Luxury e-commerce platforms provide an exclusive, curated experience for the online luxury shopper.PromotionBrands leverage high-fashion events to reinforce its brand image. It also uses digital platforms to engage with consumers, as evidenced by innovative collaborations.Source: Authors’ Compilation4Ps of Luxury Marketing and Its Impact on Accounting ValuationWhile considering the figures in the consolidated balance sheet of leading luxury companies, it is clear that companies do not receive complete balance-sheet recognition for self-generated intangible assets such as brand goodwill, which remains largely unaccounted for.Table 3: Consolidated Balance Sheet of a Leading Luxury Brand (LVMH)Assets (EUR millions)20232022Liabilities and Equity (EUR millions)20232022Intangible assets49,61150,213Equity62,70156,604Property, plant & equipment27,33123,055Long-term borrowings11,22710,380Right-of-use assets15,67914,615Non-current lease liabilities13,81012,776Other non-current assets7,3637,022Other non-current liabilities22,81123,343Total Non-current assets99,98494,906Total Non-current liabilities & Equity1,10,5491,03,103Inventories22,95220,319Short-term borrowings10,6809,359Cash and cash equivalents7,7747,300Current lease liabilities2,7282,632Other current assets12,98312,121Other current liabilities19,73719,552Total Current assets43,71039,740Total Current liabilities33,14531,543Total Assets1,43,6941,34,646Total Liabilities and Equity1,43,6941,34,646Source: LVMH Financial Documents & Annual Report 2022-23Current Accounting Practices vs. Brand Valuation TechniquesBrands and trade names that are recognizable and distinct are only listed as assets at their acquisition market values if they are acquired through business combinations. The valuation of acquired intangibles primarily relies on:Discounted Cash Flow (DCF) Technique: Projections of future cash flows discounted to present value.Relief from Royalty Approach: Calculates a brand’s value as the present worth of royalties saved by owning the trademark.Margin Differential Method: Identifies the historical and projected revenue/profit difference between branded and unbranded products.Equivalent Brand Reconstitution Method: Estimates advertising and promotional expenses required to rebuild an equivalent brand presence from scratch.However, expenses related to the internal creation or enhancement of a brand are strictly expensed under standard accounting regimes (IAS 38 / Ind AS 38). Brands with finite useful lives are amortized over 5 to 20 years, whereas indefinite life brands are subjected to annual impairment reviews. Research costs are expensed, and new product development expenses are capitalized only after a commercial product launch is finalized.Key Findings1. Inherent Intellectual CapitalLuxury marketing inherently generates substantial intellectual capital (proprietary craftsmanship, brand heritage, and exclusive customer relationships) that remains invisible on traditional balance sheets.2. Measurement Bias in ValuationConventional accounting standards enforce a structural measurement bias by excluding internally developed intangibles, leading to systemic undervaluation of luxury enterprises relative to their true economic worth.3. Pricing Strategies and Relational CapitalPremium pricing strategies do not merely reflect manufacturing costs, but directly monetize relational capital (prestige, perceived quality, and brand loyalty) – none of which is recognized as an asset.4. Impact of ‘Place’ and ‘Promotion’ on Structural CapitalPrime retail flagships and curated high-fashion promotional events create immense structural and brand capital. Yet, financial accounting treats promotional outlays purely as period operating expenses.5. Need for Non-Traditional Valuation MetricsStandard setters and financial markets must explore non-traditional reporting metrics capable of capturing intellectual capital, enabling investors to make properly informed resource allocation decisions.ConclusionLuxury marketing is intrinsically linked to a company’s intellectual capital – embedded in craftsmanship, reflected in pricing power, manifested in exclusive retail experiences, and amplified by emotive promotional narratives. Traditional accounting systems, however, fail to capture this self-generated goodwill, creating a substantial valuation gap. There is an urgent imperative to formulate non-traditional valuation and disclosure metrics to bridge this gap, reflecting the authentic economic potential of luxury enterprises.ReferencesAaker, D. A. (1996). Building Strong Brands. The Free Press.Kapferer, J. N., & Bastien, V. (2009). The Luxury Strategy: Break the Rules of Marketing to Build Luxury Brands. Kogan Page Publishers.Lev, B. (2001). Intangibles: Management, Measurement, and Reporting. Brookings Institution Press.Stewart, G. B., & Blair, J. D. (1996). “Intellectual capital: the new wealth of organizations.” Journal of Intellectual Capital, 2(3), 231–246.Authors may be reached at nehabothradu@gmail.com and eboard@icai.in
ARTIFICIAL INTELLIGENCE
Ep. 443 — Harnessing AI: Transforming the Landscape of Chartered Accountancy
CA Journal
· September 2026
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Harnessing AI: Transforming the Landscape of Chartered AccountancyArtificial Intelligence (AI) encompasses technologies that enable machines to perform tasks requiring human intelligence, such as data analysis, decision-making, and pattern recognition. This includes machine learning, natural language processing (NLP), and predictive analytics.Evolution of Artificial IntelligenceEvaluating the progression of Artificial Intelligence (AI) is crucial as it highlights its cyclical evolution from theoretical concepts to its current state of rapid development and widespread integration into everyday life:1941–1956: Birth of AI Groundwork laid by Alan Turing’s conceptual tests and the formal coining of “Artificial Intelligence” in 1956.1956–1974: Early Successes Development of initial programs solving mathematical problems and simulating basic human reasoning.1974–1980: First AI Winter Overhyped expectations met computational bottlenecks, causing funding withdrawal and research slowdowns.1980–1987: The Boom Resurgence fueled by expert systems and corporate investments applying rule-based decision trees.1987–1993: Second AI Winter Limitations of rigid rule-based systems became apparent, triggering another cycle of cutbacks.1993–2011: Recovery & Growth Breakthroughs in machine learning, statistical models, and increased computational hardware capability.2011–2020: Deep Learning Era Multi-layered neural networks and big data analytics revolutionized speech, image, and pattern processing.2020–Present: LLM & Gen AI Era Large language models (LLMs) and Generative AI enabling contextual conversation and reasoning across professions.Importance of Human Intelligence in AIHuman intelligence is critical in AI ecosystems because it ensures the integrity of data and outputs. Human intellect identifies biases, algorithmic blindspots, and systemic data gaps while injecting ethics, intuitive judgment, and contextual skepticism. The future of accounting lies in collaborative intelligence where AI augments professionals rather than replacing them.“AI serves as an augmentation to human capabilities, not a replacement. It is a creation of human intelligence, designed to extend our abilities and enrich our endeavours.”Professional Intelligence over Artificial IntelligenceArtificial intelligence excels in computational speed, consistency, and cost-efficiency. However, human professional intelligence distinguishes itself through qualitative human faculties:Table 1: Distinctive Qualities of Professional IntelligenceContextual UnderstandingCreativity & InnovationJudgment & Decision-MakingEmpathy & Emotional IntelligenceAdaptability & FlexibilityEthical & Moral ReasoningInterdisciplinary PerspectivesCommunication & CollaborationFrom Static Data to Predictive Data – True PerspectiveTransitioning from historical, backward-looking records to proactive predictive models transforms enterprise governance and advisory services:Table 2: Static Data vs. Predictive DataStatic DataPredictive Data• Traditional data sources are static and historical, providing a snapshot of past events or completed transactions.• Predictive data analyzes historical patterns, trends, and relationships to forecast future financial outcomes.• Structured in databases or spreadsheets, reflecting information frozen at a specific moment in time.• Leverages advanced analytics, machine learning, and predictive modeling to extract proactive insights.• Limited to descriptive reporting and post-mortem reviews without real-time predictive capabilities.• Shifts organizations from reactive problem-solving to anticipating business risks, market changes, and opportunities.Where AI Can Be UsedAI demonstrates transformative versatility across major sectors of the economy:Table 3: Sectors and Domains of AI DeploymentHealthcare Finance Retail Manufacturing Transportation Smart Cities Education Marketing Cybersecurity Natural Language Processing (NLP) Entertainment Customer ServiceAI and Its Impact on Chartered AccountantsFor Chartered Accountants (CAs), mastering AI is imperative as it transforms accounting workflows. Automating data capture, reconciliation, and audit sampling frees professionals to focus on high-value advisory, forensic oversight, and strategic decision support.Why AI Tools Matter for CAsEfficiency and Accuracy: Automates routine ledger postings and bank reconciliations, dramatically curtailing human error.Insights and Decision Support: Rapidly scans big data to model multi-scenario financial forecasts and risk maps.Client Satisfaction: Delivers instant, data-backed client reporting, meeting modern expectations for agile digital advisory.Selecting the Right AI Tools: 5 Key ConsiderationsTable 4: Key Evaluation Criteria for Accounting AI Tools1. Specific Needs: Clearly define the operational tasks you aim to automate (e.g., audit trail testing, document extraction, tax planning).2. Integration Ease: Verify seamless API compatibility with your existing practice management and ERP infrastructure to prevent disruptions.3. Reliability and Accuracy: Review error rates, false-positive thresholds, and peer-reviewed benchmark performance.4. Data Security: Ensure strict compliance with data privacy legislation, role-based encryption, and non-disclosure standards.5. Support and Training: Partner with vendors offering comprehensive onboarding, professional training, and responsive support.Key AI Tools for Chartered AccountantsAutomated Accounting Software: Platforms like QuickBooks, Xero, and FreshBooks streamline ledger entry, billing, and automated reconciliations.Predictive Analytics Engines: Tools such as Tableau, IBM Watson Analytics, and customized Python/R machine learning models assist in cash flow forecasting.Audit Automation Platforms: CaseWare IDEA and ACL Analytics enable 100% population analysis, anomaly flags, and forensic tests.Natural Language Processing (NLP): Extracts covenants, terms, and liabilities from complex unstructured contracts and legal agreements.Large Language Models & Copilots: ChatGPT and Microsoft Copilot draft complex documentation, summarize regulatory circulars, and optimize code.Specialized Tax & Operations AI: Blue Dot automates cross-border VAT/GST compliance; Zeni manages bookkeeping for high-growth firms; Docyt accelerates machine-learning document classification.“AI is not here to replace CAs but to augment their capabilities. By embracing AI, Chartered Accountants can streamline processes, improve accuracy, and provide better insights to their clients.”10 Key Benefits of AI for Chartered AccountantsAutomation of Routine Tasks: Frees bandwidth from repetitive data processing.Enhanced Precision: Eliminates clerical and computational mistakes in large audit sheets.Deep Pattern Analytics: Identifies underlying fiscal trends hidden across millions of transactions.Proactive Risk Mitigation: Predictive engines model financial stress before default occurs.Automated Fraud Detection: Real-time outlier algorithms flag unauthorized journal adjustments.Personalized Client Delivery: Customizes management dashboards based on specific client KPIs.Streamlined Regulatory Compliance: Updates automated checklists against changing legislative mandates.24/7 Client Engagement: Intelligent conversational assistants field standard client inquiries round-the-clock.Continuous Professional Education: AI-curated learning tracks keep practitioners ahead of regulatory shifts.Strategic Competitive Edge: Positions tech-forward CA firms at premium advisory margins.ConclusionArtificial Intelligence is an augmenting partner for Chartered Accountants, not an adversary. While algorithms process vast datasets at superhuman speeds, the irreplaceable elements of contextual wisdom, professional skepticism, and ethical integrity remain human prerogatives. Practitioners who embrace AI tools will lead the evolution of the accounting and finance ecosystem.ReferencesWikipedia: History of Artificial Intelligence – Large Language Models and AI Era (2020–Present).Authors may be reached at eboard@icai.in
ARTIFICIAL INTELLIGENCE
Ep. 444 — The Transformative Role of Artificial Intelligence in Elevating CA Practice
CA Journal
· September 2026
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The Transformative Role of Artificial Intelligence in Elevating CA PracticeThe infusion of Artificial Intelligence (AI) into Chartered Accountancy (CA) practice represents a seismic shift in the financial landscape. Beyond automating routine tasks, AI amplifies the capabilities of CAs, fostering efficiency, accuracy, and strategic decision-making. This paradigm shift is evident in automating repetitive tasks, enhancing data analysis, fortifying risk management and fraud detection, and ensuring efficient compliance. There are many accounting software, business analytics tools and AI-powered platforms that empower the CA profession, liberating professionals from mundane tasks and elevating their roles as strategic advisors. As the global accounting landscape evolves, embracing AI is not just a choice but a mandate for CAs aiming to lead in innovation and excellence.IntroductionIn the dynamic and ever-evolving arena of finance and accounting, the infusion of AI has emerged as a transformative force, reshaping the landscape for Chartered Accountants (CAs) on a global scale. The integration of AI technologies represents more than a mere technological advancement; it signifies a profound shift in the traditional paradigms of accounting practice. Beyond the realm of automating routine tasks, AI has become the cornerstone of a revolutionary approach that amplifies the capabilities of CAs.Machine Learning in Pattern RecognitionMachine Learning (ML) in pattern recognition plays a pivotal role for CAs, offering advanced tools to analyze extensive datasets and streamline various aspects of financial management. The application of ML provides a powerful framework to extract meaningful patterns, enhancing capabilities in financial analysis, auditing, and decision-making.CAs dealing with significant amounts of data benefit from ML by identifying intricate patterns, trends, and anomalies within financial data. ML’s role in fraud detection is particularly noteworthy, as algorithms can recognize irregular patterns signaling potentially fraudulent activities, contributing significantly to fraud prevention and detection efforts.AI, Cloud Computing and Data: The Dynamic TrioFor CAs, the connection between AI, Cloud Computing, and Data is like a dynamic trio that’s changing the game in financial management:Cloud Computing acts as a secure vault for data, making it easily accessible for CAs wherever they are. It is like having a virtual filing cabinet that can handle tons of information without breaking a sweat.Data provides the foundational raw material representing complete financial histories and operations.AI steps in as the analytical wizard. Using machine learning, it scans through all that data, finding patterns and trends that might not be obvious to the human eye. It acts as a super-smart assistant that can predict future financial trends and help CAs make better decisions.In a nutshell, this trio makes financial analysis smarter, data management more accessible, and decision-making more informed, helping CAs navigate the ever-evolving world of numbers and regulations.Automating Repetitive TasksAI’s ability to automate repetitive and time-consuming tasks has been a game-changer for CAs. Many tools streamline workflows, reduce human error, and allow CAs to allocate precious time toward strategic advisory roles:1. Data Entry and ReconciliationManual data entry and reconciliation are historically among the most time-consuming tasks for CAs. Automation tools automate journal entries, verify financial transactions, and execute bank reconciliations without tedious manual intervention.2. Invoice ProcessingAutomation tools extract line-item data from invoices and receipts via Optical Character Recognition (OCR), minimizing manual keying, automating multi-tier approval routing, and expediting vendor settlement.3. Document ManagementDocument management systems automate the organization, categorization, indexing, and retrieval of client correspondence, audit evidence, and financial statements through intelligent OCR search.4. Automated CRMCustomer Relationship Management (CRM) tools automate client communication workflows, send reminders for statutory filings, deliver personalized emails, and systematically track client interactions.5. Financial Report GenerationReporting engines pull data dynamically from disparate source ledgers, generate interactive visualization dashboards, and update financial statements in real-time, eliminating manual compilation.Practice Management Software (PMS)Practice Management Software is engineered for comprehensive office automation, simplifying the management of tasks, documents, accounts, clients, and employees. Integrated features include:Workflow automation with web and mobile access;Bank-grade data encryption and security;Structured onboarding and staff training modules;Assignment allocation, progress tracking, and billable timesheet recording;Variance and client profitability analysis;Leave management, expense reimbursement, and client meeting scheduling;Mobile-based GPRS-enabled attendance management.“AI equips CAs with advanced tools for data analysis, enhancing their ability to derive actionable insights and make informed decisions.”Benefits of Automating Repetitive Tasks for CAsTime Efficiency: Minimizes time spent on low-margin administrative chores, freeing capacity for business advisory.Accuracy and Error Reduction: Eradicates computational slips and manual recording errors in audit sheets.Resource Optimization: Enables CA firms to redeploy talent to strategic assignments and scale engagement volume.Enhanced Client Satisfaction: Shorter turnaround times and error-free reports foster lasting client loyalty.Adaptability to Regulatory Changes: Configurable rules automatically adapt compliance checks to legislative updates.Enhanced Data Analysis: The Power PlatformPower BI: Revolutionizing Data Visualization & BIPower BI by Microsoft allows users to connect seamlessly to multiple data sources (from Excel sheets to cloud databases), creating unified views and transforming raw transactional figures into interactive management dashboards.Power Query: Data Transformation and CleansingOperating under the ‘Get Data’ principle, Power Query extracts, cleans, filters, and reshapes messy datasets. Its underlying ‘M’ formula language provides advanced users with the flexibility to perform complex custom transformations on massive datasets before report ingestion.Power Pivot: Advanced Data Modeling in ExcelEmbedded in Microsoft Excel, Power Pivot features an in-memory engine capable of analyzing millions of rows, establishing multi-table relationships, and creating calculated columns and DAX measures without requiring software programming skills.Risk Management and Fraud DetectionRisk management and fraud detection are integral pillars of Chartered Accountancy, safeguarding financial integrity and institutional trust:Risk Management Encompasses financial risk (market volatility, foreign exchange), operational risk (internal workflow efficacy), strategic risk (long-term corporate direction), and compliance risk across evolving statutes.Fraud Detection Scrutinizes transactional volumes using AI algorithms to detect embezzlement, fund diversion, window dressing, and internal control breaches through automated red-flag detection.The Synergy Between Risk Management and Fraud DetectionEffective risk management directly suppresses the opportunity for fraud by identifying internal control weaknesses before exploitation. Conversely, forensic fraud investigations reveal systemic risk lapses, prompting practitioners to fortify control architectures.“AI-powered tools assist CAs in efficiently tracking regulatory changes, ensuring compliance, and flagging potential issues.”Efficient Compliance and Risk MitigationCompliance is a dynamic process demanding constant vigilance rather than a mere box-ticking exercise:Comprehensive Compliance Solutions: Streamlines workflows via real-time regulatory change alerts, automated statutory checks, and centralized data management.Technological Integration: Cloud-based compliance systems integrate directly with ERPs and general ledgers, mitigating manual filing errors.Client Education & Communication: Proactively informs clients of upcoming statutory deadlines, rate changes, and the commercial cost of non-compliance.Predictive Financial Modeling: Generates simulation scenarios to forecast fiscal outcomes, tax liabilities, and cash flow requirements.Challenges and Ethical ConsiderationsWhile AI offers extraordinary benefits, it brings critical ethical responsibilities. CAs must deploy tools such as Fairness Indicators and AI Ethics Toolkits to combat algorithmic bias, ensure data privacy, respect client non-disclosure boundaries, and maintain professional skepticism.ConclusionThe infusion of AI in finance and accounting is reshaping the role of CAs globally. Beyond automation, AI empowers CAs to focus on strategic tasks, elevating the profession. This symbiotic relationship between human expertise and AI sets a new standard for excellence, fostering innovation in the evolving accounting landscape. As CAs embrace technology, the future is defined by strategic insights and transformative success through the partnership of AI and human proficiency.Author may be reached at eboard@icai.in
ARTIFICIAL INTELLIGENCE
Ep. 445 — Harnessing AI: Shaping the Future of Work for the Chartered Accountants
CA Journal
· September 2026
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Harnessing AI: Shaping the Future of Work for the Chartered AccountantsArtificial intelligence (AI) is rapidly transforming the accounting and auditing profession presenting both opportunities and challenges. The Chartered Accountants are now at the crossroads of Technological advancements, particularly the rise of Artificial Intelligence (AI), which is fundamentally changing the way accounting or auditing is conducted. While some fear job displacement, others see AI as a powerful tool to augment human capabilities, enhance efficiency, create new opportunities, and ultimately shape the future of the profession.By handling repetitive tasks, these AI advancements are in fact freeing up accountants to focus on strategic analysis and client relationships where they can add more Value.What is Artificial Intelligence (AI)?Artificial Intelligence refers to computer systems that can perform tasks typically requiring human intelligence. This can include things like reasoning, problem-solving, and learning. There are different levels of AI, with some being very specific (like a program that recognizes faces) and others that are more general-purpose. AI is already being used in many different fields, from healthcare to finance, and it’s expected to play an even bigger role in the future.Broadly There Are Three Types of AI1. Narrow AI (Weak AI)Examples: Voice Assistants (Siri, Alexa), recommendation systems, image recognition software, chatbots.Designed and trained for a specific task or a narrow range of tasks. These systems excel at performing a particular task very well, but lack the ability to generalize knowledge beyond that specific scope.2. General AI (Strong AI)Examples: Tools like ChatGPT, Gemini, Microsoft Copilot.Refers to artificial intelligence that exhibits human-like intelligence and can understand, learn, and apply knowledge across different domains. Achieving true general AI is still an evolving concept.3. Superintelligent AIStatus: Theoretical concept as of now.Hypothetical AI that surpasses human intelligence in every aspect, possessing cognitive abilities far beyond the brightest human minds, capable of solving complex problems incomprehensible to humans.The Rise of AI in Accounting: 4 Core Transformation AreasThe accounting profession is undergoing a significant transformation driven by the integration of machine learning, natural language processing, and robotics across four major operational domains:1. Automating the MundaneModern accounting applications with AI-powered tools are revolutionizing repetitive tasks such as accounts payable (AP) data entry, automatic bank reconciliation, and routine bookkeeping. OCR-based applications read PDF soft copies of invoices and automatically post journal entries, liberating CAs from time-consuming clerical routines.Case Study: RPA Using Microsoft Power AutomateA small accounting firm struggling with a manual accounts payable process deployed Microsoft Power Automate, resulting in an accounting efficiency improvement of 50% and a 95% reduction in processing errors.Invoices are uploaded into Power Automate.An AI model identifies key data points (invoice number, vendor name, description, net amount, GST, and gross amount).An automated flow converts invoice datapoints into Excel tables.The structured file (Excel/CSV/XML) is imported directly into the accounting software.2. Data Analysis on SteroidsAI analyzes vast volumes of financial data at unprecedented speeds, enabling CAs to uncover intricate trends, run multi-scenario forecasts, perform cash runway modeling, and assist corporate leadership with agile, data-driven decisions.Case Study: Power BI for Cash Flow & Predictive ManagementConsolidate Data: Connects disparate datasets (accounting ERPs, CRM, and bank feeds) into a central repository.Visualize Insights: Generates dynamic charts illustrating historical cash burn and seasonal trends.Scenario Modeling: Simulates fluctuating sales volumes, raw material costs, and logistics expenses to forecast cash flow impacts.Interactive Dashboards: Displays real-time KPIs enabling swift executive decision-making.“Artificial Intelligence refers to computer systems that can perform tasks typically requiring human intelligence. This can include things like reasoning, problem-solving, and learning.”3. Streamlined AuditsAI streamlines audit verification across AP/AR balances, aging analysis, ratio testing, and GST/TDS ledger reconciliations, accurately uncovering anomalies and potential fraud risks.Case Study: Using Microsoft Copilot in Excel for Audit ReconciliationsDownload GSTR-2B data and the Purchase Ledger into Excel for the relevant month or year.Provide precise prompts to Microsoft Copilot to reconcile entries between the two tables based on GSTIN.Copilot isolates discrepancies (mismatches in taxable value, missing invoice numbers, ITC ineligibility) supplier-wise.Eliminates the tedious need to build nested manual formulas across massive spreadsheets.4. Evolving Client ServiceAI chatbots and automated mail generation tools handle routine inquiries round-the-clock, allowing accountants to concentrate on high-value client advisory.Case Study: Automated Client Communication via ChatGPT & VBAGenerate customized VBA macro scripts using ChatGPT for TDS, GST, and ITR data collection reminders.Execute the macro in Excel containing client details (contact person, email, subject, requested documents).Automates batch reminders, ensuring 100% reach and saving at least 30% of administrative staff time.Deployment of pre-built accounting chatbots like Artibot and Virtual Spirits for routine queries.Challenges and ConsiderationsJob Displacement and Reskilling: Routine bookkeeping and data entry tasks will diminish. CAs must upskill in financial data interpretation, analytics, and business problem-solving.Upskilling in an AI-Driven World: Moving beyond debit/credit recording to master predictive tools, critical thinking, and algorithmic skepticism.Ethical Considerations and Algorithmic Bias: Generative AI models are prone to training bias and hallucinations. CAs have a professional duty to audit AI recommendations and protect data confidentiality.Harnessing AI for Success: The CA RoadmapEmbrace Continuous Learning with a Growth Mindset: Attend workshops, explore NLP contract-review tools, and acquire AI-related professional certifications.Shift Focus to Value-Added Services: Transition from historical number crunching to strategic advisory in M&A, corporate restructuring, and risk modeling.Invest in Upskilling & Cybersecurity: Master data analytics and implement robust cybersecurity protocols to safeguard sensitive client data.Advocate for Ethical AI: Demand algorithmic transparency and scrutinize datasets used in credit evaluation and automated approvals.The Dawn of New Opportunities: 3 Emerging Roles for CAs1. AI Implementation and Integration SpecialistsProfessionals bridging accounting principles and technology by tailoring AI tools to business workflows, managing API data integrations, and training finance teams.2. AI Auditing ExpertsSpecialists who develop audit procedures to test the accuracy, security, algorithmic fairness, and regulatory compliance of AI systems used in financial recording.3. Data Analytics and Visualization GurusFinancial storytellers who translate complex multi-source AI analytics into compelling executive dashboards, guiding board-level strategy.ConclusionAI is not a threat, but rather a powerful tool that can be harnessed to enhance the capabilities of CAs. By embracing AI and continuously developing their skillsets, CAs can solidify their position as trusted advisors and thrive in the future of work.Author may be reached at Dhavalkodilkar@gmail.com and eboard@icai.in
ARTIFICIAL INTELLIGENCE
Ep. 446 — The Rise of the Machines: How Artificial Intelligence is Revolutionizing the World of Auditing
CA Journal
· September 2026
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The Rise of the Machines: How Artificial Intelligence is Revolutionizing the World of AuditingArtificial intelligence (AI) is revolutionizing auditing. AI automates repetitive tasks like data entry, freeing up auditors for higher-level analysis and strategic thinking. AI also empowers auditors with data-driven insights. Machine learning algorithms can analyze vast datasets to identify hidden patterns and anomalies that might escape human eyes. This allows a far more proactive approach to risk assessment and the early detection of potential problems. However, human expertise remains irreplaceable.Auditors use their professional judgment and critical thinking skills to interpret AI findings and formulate conclusions. The future of auditing lies in collaboration between humans and AI so that advantages of both domains could be leveraged. This will lead to a more efficient, effective, and insightful auditing experience, fostering a more robust and secure financial landscape.Key Takeaways:AI automates tedious tasks, increasing audit efficiency.AI provides data-driven insights for improved risk assessment.Human expertise in interpreting AI findings remains crucial.The future of auditing is a collaborative effort between AI and auditors.This collaboration will lead to a more secure and transparent financial system.The world of auditing, traditionally a realm of meticulous record-keeping and human judgment, is on the cusp of a significant transformation. Artificial intelligence (AI) is rapidly emerging as a powerful tool, poised to revolutionize the way financial audits are conducted. This article delves into the multifaceted impact of AI on the auditing profession, exploring its potential to enhance efficiency, revolutionize risk assessment, and redefine the role of the auditor.Boosting Efficiency and AccuracyOne of the immediate benefits of AI in auditing lies in its ability to automate the mundane. Repetitive tasks such as data entry, reconciliation, and vouching can now be handled with remarkable speed and precision by AI-powered tools. This not only reduces the risk of human error but also frees up valuable auditor time for more strategic analysis and judgment-based procedures.Imagine a scenario where an AI system meticulously analyzes millions of financial transactions in a fraction of the time it would take a human, flagging even the subtlest inconsistencies that could potentially indicate control weaknesses or fraudulent activity.Revolutionizing Risk Assessment and Fraud DetectionAI empowers auditors to move beyond traditional sampling methods and towards a more continuous and data-driven approach to risk assessment. Predictive analytics leverage historical data, industry trends, and financial ratios to identify areas of high risk with far greater precision. This allows auditors to tailor their audit procedures, allocating resources more effectively by focusing on areas where problems are most likely to occur.Additionally, AI-powered tools can continuously monitor an organization’s financial data throughout the year, enabling real-time identification of potential issues. This facilitates a more proactive approach to auditing and allows for earlier intervention if red flags appear. Imagine a system constantly scrutinizing a company’s financial transactions, acting as a vigilant guardian against potential fraud or financial irregularities.“AI empowers auditors to move beyond traditional sampling methods and towards a more continuous and data-driven approach to risk assessment.”AI algorithms also excel at pattern recognition. Trained on vast sets of historical fraud data, these algorithms can identify suspicious patterns and transactions indicative of fraudulent activity, significantly improving fraud detection capabilities.Beyond Automation: The Power of AI-Driven Insights in AuditingThe rise of Artificial Intelligence (AI) in auditing is often associated with automation – the ability of AI to take over repetitive tasks like data entry and reconciliation. While this is a significant benefit, it only scratches the surface of AI’s potential in the auditing profession. The true power of AI lies in its ability to unlock deeper insights from data, transforming the way auditors approach financial reviews.From Data Drudgery to Meaningful DiscoveryImagine an auditor sifting through mountains of financial documents, searching for hidden patterns or red flags. This traditional approach is time-consuming and prone to human error. AI, however, can analyze vast datasets with exceptional speed and accuracy. Machine learning algorithms can identify subtle patterns, correlations, and anomalies that might escape the human eye.Uncovering Previously Undetected RisksAn AI system might analyze historical financial data and identify a correlation between a specific type of expense and a higher likelihood of fraud. This could prompt auditors to focus their attention on transactions involving that particular expense category.Examples of AI-Driven InsightsIdentifying Anomalous Transactions: AI can analyze transaction patterns and identify outliers that deviate significantly from historical norms, flagging unusual purchases, suspicious payments, or embezzlement.Predicting Future Risks: Machine learning algorithms can analyze historical data and industry trends to predict the likelihood of future financial distress, enabling proactive risk intervention.Benchmarking Performance: AI can compare a company’s financial metrics against industry peers, identifying underperformance or outlier revenue recognitions.The Human-AI AdvantageWhile AI excels at data analysis, human expertise remains irreplaceable in the auditing process. Auditors use their professional judgment, experience, and critical thinking skills to interpret AI-driven insights and formulate conclusions. The ideal scenario involves a collaborative approach where AI empowers auditors to:Focus on Strategic Analysis: By automating routine tasks, AI frees up auditors to devote their time to higher-level analysis and strategic thinking.Make Data-Driven Decisions: AI-driven insights provide auditors with a stronger factual basis for their judgments and conclusions.Gain a More Holistic View: AI can analyze vast amounts of data from multiple sources, providing auditors with a comprehensive picture of an organization’s financial health.Real-World Case Studies: How AI Empowers AuditorsCase Study 1: Real-Time Fraud Detection in E-commerceChallenge: A multinational e-commerce company historically relied on manual review of monthly sales data to detect fraudulent transactions. This reactive approach resulted in delayed identification and potential financial losses.AI Solution: The company implemented an AI-powered system for continuous real-time sales stream monitoring that:Analyzes purchase patterns and identifies anomalies (sudden order spikes from newly created accounts with suspicious billing addresses);Recognizes unusual geographic order clusters indicative of organized retail theft rings;Detects inconsistencies between shipping and billing locations, uncovering potential money laundering schemes.Benefits: Enables immediate intervention and fraud prevention, safeguarding significant enterprise capital.Case Study 2: Predictive Inventory Management in ManufacturingChallenge: A leading automotive manufacturer traditionally based inventory forecasts solely on historical sales data, leading to stockouts or excess inventory.AI Solution: The manufacturer deployed an AI system that synthesizes past sales with:Real-time customer order books predicting surges in specific car models;Social media sentiment and industry news to proactively identify supply chain bottlenecks;Weather forecasts anticipating regional demand shifts (e.g., winter tires before snowstorms).Benefits: Optimizes supply chains, eliminates assembly downtime, and minimizes inventory carrying costs.Case Study 3: AI-Powered Risk Assessment in Loan PortfoliosChallenge: A major investment bank traditionally relied on backward-looking credit scoring models that failed to capture a borrower’s comprehensive financial condition.AI Solution: An AI risk platform was integrated to analyze non-traditional datasets, including:Social media behavioral indicators signaling early financial stress;Satellite imagery assessing collateral conditions (e.g., commercial property damage following natural disasters);Global macroeconomic forecasting models predicting repayment capabilities during interest rate shifts.Benefits: Uncovers portfolio vulnerabilities and mitigates non-performing asset (NPA) losses.“Anomaly detection algorithms can analyze data for irregularities and identify transactions or patterns that deviate significantly from historical norms, potentially indicating fraud.”Challenges and AI-Powered Solutions in Practice1. Data Source and HandlingFinancial data often resides in disparate ERPs and legacy databases. AI ingests multi-source data, standardizes schemas, and surfaces reconciliation breaks for auditor review.2. Data Integrity and VeracityCombatting data manipulation through unsupervised anomaly detection algorithms that flag entries deviating from baseline accounting norms.3. Interpreting the “Why” Behind AI RecommendationsAdvancements in Explainable AI (XAI) provide clear reasoning paths, dismantling the ‘black-box’ barrier and giving auditors confidence before regulatory scrutiny.4. Choosing the Right DatasetsCollaborative scoping between auditors and data scientists to ensure datasets represent authentic financial health and align with specific audit assertions.5. External Data Collection and CorrelationHarmonizing external benchmark data while ensuring strict compliance with personal data protection regulations and anonymization standards.6. Evidence Management with AI ToolsAutomates evidence indexing, metadata tagging, and OCR searchability, freeing audit teams from administrative paperwork.7. Sampling Challenges and AI MitigationReplaces blind statistical sampling by analyzing 100% of the population, stratifying high-risk clusters, and selecting targeted sub-samples.8. Multi-Dimensional Data and Audit AdvantagesReveals non-linear relationships across complex multi-currency, multi-entity corporate structures that evade manual review.The Evolving Audit Ecosystem: Adaptability is KeyTo lead in this new landscape, auditors must follow a clear developmental roadmap:Embrace Continuous Learning: Cultivate a growth mindset and pursue certifications in data analytics and artificial intelligence.Forge Strategic Collaborations: Partner with data scientists to optimize dataset selection and model design.Develop Tech Savvy, Not Tech Dependency: Treat AI as a powerful microscope, maintaining professional skepticism and ethical oversight.Focus on Value-Added Activities: Reposition audit deliverables toward strategic enterprise risk consulting.Embrace the Evolving Role: Transition from a routine data checker to an indispensable data navigator.ConclusionThe future of auditing is a harmonious collaboration between human expertise and artificial intelligence. By embracing this partnership, the auditing profession can usher in a new era of increased efficiency, enhanced risk management, greater transparency, and outcome-driven assurance, ensuring trust across global capital markets.Author may be reached at peeyushsharma.ca@gmail.com and eboard@icai.in
ARTIFICIAL INTELLIGENCE
Ep. 448 — Bridging the Gap: Theoretical Advancements in AI and Real-World Applications
CA Journal
· September 2026
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Bridging the Gap: Theoretical Advancements in AI and Real-World ApplicationsThis article explores the critical integration of theoretical advancements in Artificial Intelligence (AI) with real-world applications across various sectors. It highlights key developments in deep learning, reinforcement learning, and unsupervised learning, and addresses the challenges of scalability, adaptability, and ethical considerations such as privacy and bias. Through case studies in finance, the article illustrates successful AI implementations in algorithmic trading, risk assessment, and fraud detection. It also proposes strategies for bridging the gap between theory and practice, including multidisciplinary collaboration, robust policy frameworks, and continuous education. The future directions section predicts further innovations and stresses the importance of feedback loops to align AI advancements with human needs and ethical standards.Artificial Intelligence (AI) has experienced unprecedented growth, emerging as a cornerstone of innovation across diverse sectors. This surge is fueled by significant theoretical advancements that continually redefine the boundaries of what machines can achieve. Despite this progress, a crucial challenge remains translating these sophisticated AI theories into effective, real-world applications that can reliably operate under various practical constraints. Bridging this gap is not only essential for realizing the full potential of AI technologies but also crucial for addressing real-world problems effectively and ethically. As AI continues to evolve, the ability to adapt these theoretical advancements to everyday applications will play a pivotal role in shaping the future of industries and societies worldwide. This article aims to explore the dynamic interplay between AI theory and its practical implementation, highlighting the impact of this integration across various domains interconnected with Finance.Section 1: Overview of Theoretical Advancements in AIThe landscape of artificial intelligence is continually evolving, driven by groundbreaking theoretical advancements that enhance the capability, efficiency, and applicability of AI systems. At the forefront of these developments are deep learning, reinforcement learning, and unsupervised learning, each contributing uniquely to the AI revolution.Deep Learning: Deep learning has dramatically transformed AI’s potential, particularly through the use of neural networks that mimic human brain functions to process data. Recent advancements have focused on improving the efficiency and accuracy of deep learning models, enabling them to handle complex tasks such as image and speech recognition with remarkable precision. Innovations such as convolutional neural networks (CNNs) and recurrent neural networks (RNNs) have been pivotal, allowing for advancements in computer vision and natural language processing.“Deep learning has dramatically transformed AI’s potential, particularly through the use of neural networks that mimic human brain functions to process data.”Reinforcement Learning: Reinforcement learning (RL) is a type of machine learning where an algorithm learns to make a sequence of decisions by interacting with a dynamic environment to achieve a goal. The recent integration of deep learning with RL, known as deep reinforcement learning, has led to impressive performances in areas ranging from strategy games like Go and chess to more practical applications like robotic control and autonomous vehicle navigation. The development of more sophisticated reward mechanisms and the ability to generalize across different environments remain significant theoretical pursuits in RL.Unsupervised Learning: Unlike supervised learning models that learn from labeled data, unsupervised learning algorithms detect patterns and structures from unlabelled data, offering vast potentials for discovering hidden insights without human intervention. Recent theories in unsupervised learning involve autoencoders, generative adversarial networks (GANs), and self-organizing maps, which have applications in anomaly detection, generative models, and dimensionality reduction.AI Ethics, Fairness, and Transparency: As AI systems become more pervasive, the ethical implications grow equally significant. Theoretical advancements in AI ethics involve developing frameworks and algorithms that ensure AI systems operate fairly and transparently. This includes addressing algorithmic bias—a critical issue where AI systems might perpetuate or even exacerbate existing societal biases. Recent research has focused on creating techniques such as fairness-aware algorithms and explainable AI (XAI), which not only aim to mitigate biases but also enhance the transparency of AI decisions, making them more understandable to humans.Theoretical Models and Algorithms: The drive to push AI capabilities further involves creating more robust and scalable models and algorithms that can efficiently process vast amounts of data while minimizing errors and improving adaptability. The exploration of less data-intensive models, the enhancement of computational efficiencies, and the reduction of energy consumption are current hot topics. Innovations in areas such as federated learning, where AI models are trained across multiple decentralized devices, are also notable, promoting privacy and data security.Table: Summary of Advancements Across AI Development AreasDevelopment AreaNew Theoretical AdvancementsDeep LearningEnhanced neural networks like CNNs and RNNs for improved image, video, and speech recognition.Reinforcement LearningIntegration of deep learning to create deep reinforcement learning, achieving success in complex decision-making environments like games and robotic control.Unsupervised LearningDevelopment of autoencoders, GANs, and self-organizing maps for applications in anomaly detection, generative models, and dimensionality reduction without requiring labeled data.AI Ethics, Fairness, & TransparencyCreation of fairness-aware algorithms and explainable AI (XAI) to address algorithmic bias and enhance the transparency of AI decisions.Theoretical Models & AlgorithmsInnovations include federated learning for privacy and data security in decentralized training environments.Section 2: Challenges in Applying Theoretical AIWhile the theoretical advancements in artificial intelligence promise transformative capabilities, their practical application faces numerous challenges categorized into technical challenges, ethical considerations, and economic and infrastructural barriers.Mindmap Breakdown of Challenges in Applying Theoretical AITechnical ChallengesScalability: Models in controlled settings struggle when processing large real-world datasets across diverse conditions.Adaptability: Inability of static models to respond to real-time dynamic market variables.Integration: High friction in legacy system compatibility, workflow disruption, and uptime requirements.Computational Demands: Excessive processing overheads.Ethical ConsiderationsPrivacy: Massive data hunger conflicting with GDPR and global privacy standards.Bias & Fairness: Algorithmic discrimination reflecting historical prejudices in hiring and credit scoring.Decision Accountability: Black-box models producing unexplainable, life-altering decisions.Economic & Infrastructure BarriersHigh Financial Cost: Capital-intensive model training and cloud hardware investments.Infrastructure Deficit: Shortage of specialized software stacks and skilled AI engineers.Resource Allocation: Unequal R&D funding widening the digital divide across sectors.Section 3: Case Studies of Real-World Applications in FinanceThe financial sector has been one of the earliest adopters of artificial intelligence, leveraging AI to enhance efficiency, accuracy, and decision-making across critical functions:1. Algorithmic TradingAI automates trading strategies capable of processing vast amounts of market data, executing trades at optimal times, and enhancing profitability. By integrating deep learning, algorithms predict market trends and make real-time decisions, identifying micro-patterns imperceptible to human traders.2. Risk AssessmentAI models predict default probabilities and credit risks by analyzing client transactions, market conditions, and economic indicators. Financial institutions utilize reinforcement learning to simulate economic stress scenarios and dynamically adjust portfolio capital allocations.“AI models, particularly those based on machine learning, have transformed risk management in finance. These models predict default probabilities and credit risks by analyzing client data, market conditions, and economic indicators.”3. Fraud DetectionAdvanced unsupervised learning models analyze live transaction streams to detect zero-day fraud patterns without historical labels. This achieves significantly lower rates of false positives and accelerated detection speeds, protecting assets and customer trust.4. Accounting and AuditingAutomates repetitive tasks including journal postings, invoice processing, and reconciliations. In auditing, AI scans 100% of transaction populations to uncover inconsistencies, anomalies, and unauthorized adjustments.5. Automating Vendor EFT (Electronic Funds Transfer)Machine learning models automatically categorize incoming vendor invoices, validate bank and GSTIN data, and execute scheduled electronic payments while preventing duplicate or fraudulent disbursements.6. Check PaymentsThrough optical character recognition (OCR) and machine learning, systems automatically capture, parse, and verify check leaves against bank records, flagging signature and amount discrepancies for review.7. Automating the Financial Close CycleIntegrates data across disparate ERPs, reconciles ledger imbalances automatically, and generates consolidated financial statements, shortening the period-end close from weeks to hours.8. Expense Allocation ProcessCategorizes overheads dynamically using rule engines and pattern learning, forecasting department budgets and eliminating manual spreadsheet tracking.9. Intercompany TransfersAutomatically reconciles transactions between cross-border subsidiaries, matches reciprocal accounts, and identifies transfer price variances to ensure audit compliance.“AI algorithms can automatically match transactions across accounts, highlight inconsistencies, and suggest corrections, ensuring compliance and transparency.”Section 4: Strategies to Bridge the GapMultidisciplinary Collaboration: Fostering partnerships between theoretical researchers, Chartered Accountants, and industry practitioners ensures AI models solve specific domain problems rather than theoretical abstractions.Policy-Making and Regulatory Frameworks: Developing proactive regulations that demand algorithmic transparency and explainability while fostering innovation.Education and Training Programs: Modernizing professional curricula with AI, data modeling, and machine learning courses to prepare practitioners.Equitable Funding and Resource Allocation: Mobilizing public and private capital toward impactful, socially beneficial AI research.“To manage the complexities and ubiquitous nature of AI, establishing a Global AI Standards Council is imperative.”Section 5: Discussions, Future Directions & Global GovernanceEmerging paradigms such as Quantum Computing and Neuromorphic Computing promise to exponentially boost AI processing power while drastically cutting energy consumption. Establishing continual feedback loops between researchers and field practitioners is essential to ensure AI remains aligned with human values.Global Standards and Governing Initiatives Across the GlobeOECD AI Principles (2019): Adopted by over 40 countries, mandating trustworthy, robust, and human-centric AI.European Union Artificial Intelligence Act (2021): Pioneering risk-tiered framework imposing stringent audits on high-risk AI deployments.IEEE Standards: Engineering benchmarks for algorithmic transparency, ethical design, and accountability.UNESCO Global Agreement on AI Ethics (2021): Multilateral framework safeguarding human rights, privacy, and non-discrimination.“AI systems rely heavily on data for training, and incorrect interpretations of this data can lead to inaccurate outcomes.”ConclusionThe integration of theoretical advancements in AI with practical applications is pivotal for harnessing the full potential of these technologies to solve real-world problems and enhance human life. As AI continues to evolve, bridging the gap between research and application is essential for fostering innovative solutions that are both impactful and sustainable. Researchers, developers, policymakers, and the accounting profession must collaborate to prioritize ethical governance, continuous education, and equitable resource allocation, ensuring AI serves as an empowering force for societal progress.ReferencesGoodfellow, I., Bengio, Y., & Courville, A. (2016). Deep Learning. MIT Press.Sutton, R. S., & Barto, A. G. (2018). Reinforcement Learning: An Introduction (2nd ed.). MIT Press.Russell, S., & Norvig, P. (2021). Artificial Intelligence: A Modern Approach (4th ed.). Pearson.Doshi-Velez, F., & Kim, B. (2017). “Towards A Rigorous Science of Interpretable Machine Learning.” arXiv preprint arXiv:1702.08608.Zhang, B., Dafoe, A., & Evans, O. (2021). “Ethics of Artificial Intelligence and Robotics.” Stanford Encyclopedia of Philosophy.Bostrom, N., & Yudkowsky, E. (2014). “The Ethics of Artificial Intelligence.” In The Cambridge Handbook of Artificial Intelligence (pp. 316-334). Cambridge University Press.Varian, H. R. (2014). “Big Data: New Tricks for Econometrics.” Journal of Economic Perspectives, 28(2), 3-28.Authors may be reached at manoj.dhs@gmail.com, sandeep.96@gmail.com and eboard@icai.in
ARTIFICIAL INTELLIGENCE
Ep. 449 — AI-Powered Knowledge Management: A Strategic Blueprint for Implementation
CA Journal
· September 2026
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AI-Powered Knowledge Management: A Strategic Blueprint for ImplementationThe scope of human intelligence encompasses all possessions that are not inherently derived from nature. The integration of knowledge management and artificial intelligence (AI) within the contemporary dynamic digital landscape presents organizations with unprecedented opportunities to enhance decision-making, foster innovation, and boost productivity. This article explores the mutually beneficial connection between knowledge management and artificial intelligence, investigating the possibility of combining them to produce significant results and influence the future of work. By leveraging the capabilities of AI, there is potential to improve the efficiency of knowledge sharing procedures. The potential impact of integrating AI technology into businesses is substantial, as it has the capability to revolutionize the way intellectual resources are organized, disseminated, and leveraged. One can accomplish this by implementing AI-driven knowledge management strategies.IntroductionThe convergence of knowledge management and artificial intelligence represents a significant shift in the way organizations approach the management, utilization, and extraction of value from their vast information repositories. Within a context characterized by a proliferation of data and swift advancements in technology, a noteworthy prospect arises to harness the collective intelligence of human expertise and machine learning algorithms. The aforementioned statement highlights the possibility of this particular phenomenon to stimulate the development of novel ideas, improve the effectiveness of various operational processes, and confer a distinct edge over competitors within the market. The notion of AI-driven knowledge management involves the application of artificial intelligence technologies to enhance the different phases of knowledge management in an organizational context. This statement encompasses the enhancement of various procedures associated with the acquisition, preservation, retrieval, and dissemination of knowledge (Zhang, 2022). By leveraging AI algorithms, machine learning techniques, natural language processing methodologies, and data analytics frameworks, organizations are empowered to derive meaningful insights from large datasets.Knowledge management (KM) encompasses a wide range of processes, practices, and technologies. It is concerned with the effective and efficient management of knowledge within an organization or a community. KM aims to capture, store, organize, and distribute knowledge assets to enhance decision-making, foster innovation, and improve overall performance (Nonaka & Senoo 1998). Through the implementation of KM practices and the utilization of KM technologies, organizations can leverage their intellectual capital and create a competitive advantage in today’s knowledge-driven economy. This is done with the ultimate goal of achieving the organization’s strategic objectives. The holistic management of knowledge entails the integration of explicit knowledge, which is archived in various forms such as documents and databases, and tacit knowledge, which is deeply ingrained in the expertise and experiences of organizational members.The fundamental elements of KM encompass a series of interconnected processes that are essential for effective KM (Nonaka and Takeuchi, 2009; Nonaka and Konno, 1998). These processes include:Knowledge capture: which involves the identification and collection of knowledge from various sources;Storage: which involves organizing and storing knowledge in a structured manner;Retrieval: which involves the ability to locate and access knowledge when needed;Dissemination: which involves sharing knowledge with relevant stakeholders; andUtilization: which involves applying knowledge to solve problems and make informed decisions (Davenport & Prusak, 1998).These components have been meticulously crafted with the explicit purpose of expediting the process of knowledge acquisition, fostering a culture of innovation, and augmenting the overall adaptability and responsiveness of an organization.The concept of AI, on the other hand, represents the result of numerous research and development efforts carried out over many years. The primary goal of these endeavors has been to create intelligent machines capable of replicating various aspects of human cognitive abilities. These abilities encompass a wide range of functions, such as learning, reasoning, problem-solving, and decision-making. The development of machine learning algorithms capable of analyzing large datasets and detecting patterns has been facilitated by recent advancements in AI technologies (Freire, 2022).The adoption and integration of KM as a strategic approach in business operations has been observed to provide companies with a competitive edge, resulting in superior performance compared to their competitors in the market. Manesh et al., (2020) demonstrated that organizations can achieve multiple favorable outcomes by implementing KM. AI plays a crucial role in enhancing and optimizing KM processes by offering advanced capabilities (Bencsik, 2021).Synergies between KM and AIThe implementation of AI into KM procedures offers a variety of revolutionary prospects for enterprises to effectively exploit their intellectual resources. By harnessing the synergistic capabilities of KM and AI, organizations can effectively foster innovation, optimize operational efficiency, and gain a competitive edge in the dynamic and evolving landscape of the modern business environment (Kot et al., 2021). The convergence of KM and AI is a significant development that offers numerous synergistic advantages. This integration has the potential to greatly enhance organizational performance and competitiveness. The integration of various systems and processes has the potential to yield several benefits, including enhanced decision-making capabilities, heightened operational efficiency, and an accelerated rate of innovation.“AI enhances collaboration and knowledge sharing by providing personalized recommendations and connecting individuals with similar interests or expertise.”One notable intersection between the fields of KM and AI lies within the domain of intelligent content management. The utilization of AI-powered content management systems enables the automation of a wide range of tasks, encompassing classification, tagging, and organization of substantial amounts of unstructured data, among others. The implementation of this automation technology aims to enhance and streamline multiple operational processes within the organization (Smith, 2022). Through the utilization of this advanced technology, individuals within the workforce are afforded the opportunity to access relevant data and valuable knowledge conveniently and efficiently.By leveraging machine learning algorithms and analyzing historical data as well as repositories of knowledge, organizations can uncover valuable insights and identify emerging trends. The acquisition of these insights enables individuals to anticipate future challenges and opportunities, thereby facilitating the development of informed and proactive decision-making, ultimately resulting in the achievement of a competitive advantage. Research has shown that the utilization of personalization techniques has yielded favorable outcomes in terms of enhancing user experience and improving the efficacy of knowledge sharing in organizational contexts (Tsui et al., 2000).Furthermore, it is crucial to recognize that AI has a crucial function in enabling the automated extraction of knowledge. Various technologies have been specifically developed to enable the automated extraction of valuable insights from unstructured text sources, such as documents, emails, and social media posts. The successful integration of this automation technology enables organizations to efficiently extract and leverage valuable knowledge from diverse sources and channels. This process serves to augment the knowledge repositories of the organization, thereby culminating in the development of enhanced decision-making capabilities through the utilization of more comprehensive and informed insights. There are numerous benefits associated with the use of AI-powered knowledge management systems. Through the utilization of AI, organizations could greatly enhance their KM processes, resulting in increased efficiency and effectiveness.AI-Driven Knowledge Management’s BenefitsAI-powered KM Practices offer numerous benefits to organizations across various industries. Firstly, AI enhances the efficiency of knowledge retrieval and dissemination by automating processes such as content tagging, categorization, and search optimization. This streamlines access to relevant information, enabling employees to make quicker and more informed decisions. Furthermore, KM systems powered by artificial intelligence have the capability to detect and analyze patterns and trends in extensive datasets. This enables the application of predictive analytics and provides insight into future requirements and obstacles.Additionally, AI enhances collaboration and knowledge sharing by providing personalized recommendations and connecting individuals with similar interests or expertise. Moreover, AI-powered KM improves scalability and adaptability, as these systems can dynamically evolve with the organization’s growing knowledge base and changing requirements. Overall, by leveraging AI technologies, organizations can optimize their KM Practices, leading to increased productivity, innovation, and competitive advantage in the rapidly evolving digital landscape (Staab et al., 2000).AI-powered KM also plays a crucial role in mitigating knowledge silos within organizations. Traditional knowledge management systems often suffer from siloed information, where valuable insights are confined to specific departments or individuals. AI-driven solutions break down these silos by automatically extracting, organizing, and disseminating knowledge across the entire organization. Through advanced data integration and knowledge sharing mechanisms, AI facilitates cross-functional collaboration and ensures that insights from different parts of the organization are accessible to all stakeholders. This democratization of knowledge fosters a culture of transparency and inclusivity, where employees can leverage collective intelligence to solve complex problems and drive innovation collaboratively.Knowledge Management Optimization through Artificial Intelligence ToolsThe application of advanced AI tools has resulted in a substantial revolution in the realm of knowledge management, encompassing various domains and industries (Nemati et al., 2002).Knowledge Graphs (e.g., Neo4j)Enables organizations to visualize and explore complex relationships within their data, thereby improving understanding and utilization of structured and relational knowledge.NLP Models (e.g., BERT & GPT-3)Streamline a wide range of tasks including document categorization, semantic parsing, text summarization, and content creation, improving arrangement and availability of information.Intelligent CMS (e.g., Sitecore & Adobe AEM)Utilize integrated AI capabilities to provide users with dynamically customized, pertinent content tailored to their specific departmental roles and preferences.Search & Discovery (e.g., Elasticsearch & Algolia)Employ AI-powered algorithms to expedite precise information retrieval within extensive datasets, improving search speed and contextual accuracy.Collaboration Platforms (e.g., Confluence & Bloomfire)Employ AI capabilities to facilitate efficient team communication, frictionless exchange of intellectual assets, and institutional knowledge preservation.Virtual Assistants & Chatbots (e.g., MS Power Virtual Agents & IBM Watson)Provide 24/7 personalized assistance, employee training, and automated query answering, resolving issues in real-time (Sabharwal et al., 2019).Document Automation & OCR (e.g., DocuWare & ABBYY FlexiCapture)Digitize, parse, and analyze massive document backlogs via Optical Character Recognition (OCR) and NLP, obviating physical filing and unlocking hidden insights (Gacanin, 2019).Team Workflow Bots (e.g., Slack & Microsoft Teams)Embed cognitive chatbots and workflow automation into daily communication channels to optimize KM processes, automate routine queries, and boost employee productivity.“It is crucial for organizations to prioritize comprehensive planning and actively engage stakeholders. Emphasizing the importance of allocating resources towards the implementation of data governance frameworks and quality assurance processes is of paramount significance.”Approaches for Achieving AI-Driven Knowledge ManagementThe implementation of KM systems powered by AI may face multiple challenges. The integration of AI technologies with pre-existing KM infrastructure poses a considerable challenge, often requiring substantial investments in both technology and resources. Furthermore, the issue of upholding data quality and integrity poses a substantial apprehension within the realm of AI algorithms, given their reliance on high-quality data for generating accurate insights and enabling efficient decision-making procedures (Zabala, 2023).The phenomenon of employee resistance to change is a commonly encountered obstacle in diverse organizational contexts. Furthermore, the responsibility of tackling ethical and privacy concerns associated with AI, such as data security and algorithmic bias, presents a significant obstacle. The effective integration of AI and data science may encounter obstacles due to a dearth of proficiency and aptitude in these domains. Organizational challenges may arise when attempting to recruit or train personnel who possess the necessary skills, consequently hindering their overall advancement. Furthermore, it is important to acknowledge that the rapid pace of technological progress, combined with the dynamic regulatory environments, adds complexity and uncertainty to the implementation of AI systems.To effectively tackle these challenges, organizations should adopt a multi-pronged strategic roadmap:1. Comprehensive Planning & Stakeholder EngagementPrioritize exhaustive architectural planning and actively involve cross-functional stakeholders from the outset, ensuring AI knowledge objectives directly align with organizational goals.2. Data Governance Frameworks & Quality AssuranceAllocate resources towards establishing robust data governance pipelines, verification benchmarks, and continuous quality audits to guarantee algorithm training on clean, unbiased data.3. Resilient Change Management & Employee UpskillingAddress cultural friction and worker anxieties through comprehensive training, support programs, and continuous learning initiatives that foster an inclusive, innovation-first environment.4. Sequential Pilot-to-Scale DeploymentAdopt a staged implementation methodology, launching limited-scale pilot projects to test functionality, incorporating user feedback, and systematically scaling up to enterprise-wide adoption.5. Continuous Monitoring, KPIs & Strategic AlignmentInstitute real-time evaluation protocols to monitor retrieval precision, model drift, and employee adoption rates, proactively identifying areas for continuous optimization.“Artificial intelligence empowers organizations to rapidly derive valuable insights from extensive volumes of data, enhance the efficiency of information retrieval procedures, and facilitate effortless knowledge exchange among diverse teams and departments.”ConclusionThe conclusion of the research article emphasizes the importance of integrating AI-powered knowledge management in contemporary organizations. The article’s strategic blueprint emphasizes the importance of AI in transforming KM Practices. By effectively combining knowledge management and artificial intelligence, organizations can establish a mutually beneficial relationship that can result in various advantages. Organizations can optimize collaboration among their members, eliminate information silos, and improve the efficiency and effectiveness of their knowledge management processes by leveraging the complementary nature of these two domains.Through the utilization of AI tools, organizations possess the capacity to enhance their decision-making abilities, cultivate innovation, and enhance productivity. The discipline of knowledge management provides numerous benefits by harnessing the power of AI. Artificial intelligence empowers organizations to rapidly derive valuable insights from extensive volumes of data, enhance the efficiency of information retrieval procedures, and facilitate effortless knowledge exchange among diverse teams and departments. In the digital era, organizations can strategically position themselves for success by implementing AI-powered knowledge management initiatives. Organizations have the potential to foster innovation, bolster competitiveness, and attain sustainable growth through the utilization of artificial intelligence capabilities. To effectively navigate the complex digital environment, organizations must strategically integrate artificial intelligence into their KM Practices.ReferencesBencsik, A. (2021). The sixth generation of knowledge management–the headway of artificial intelligence. Journal of International Studies, 14(2), 84-101.Campos Zabala, F. J. (2023). The Barriers for Implementing AI. In Grow Your Business with AI: A First Principles Approach for Scaling Artificial Intelligence in the Enterprise (pp. 85-110). Berkeley, CA: Apress.Davenport, T. H., & Mahidhar, V. (2018). What’s your cognitive strategy? MIT Sloan Management Review.Freire, S. K., Panicker, S. S., Ruiz-Arenas, S., Rusák, Z., & Niforatos, E. (2022). A cognitive assistant for operators: AI-powered knowledge sharing on complex systems. IEEE Pervasive Computing, 22(1), 50-58.Jarrahi, M. H., Askay, D., Eshraghi, A., & Smith, P. (2023). Artificial intelligence and knowledge management: A partnership between human and AI. Business Horizons, 66(1), 87-99.Kot, S., Hussain, H. I., Bilan, S., Haseeb, M., & Mihardjo, L. W. (2021). The role of artificial intelligence recruitment and quality to explain the phenomenon of employer reputation. Journal of Business Economics and Management, 22(4), 867-883.Manesh, M. F., Pellegrini, M. M., Marzi, G., & Dabic, M. (2020). Knowledge management in the fourth industrial revolution: Mapping the literature and scoping future avenues. IEEE Transactions on Engineering Management, 68(1), 289-300.Nemati, H. R., Steiger, D. M., Iyer, L. S., & Herschel, R. T. (2002). Knowledge warehouse: an architectural integration of knowledge management, decision support, artificial intelligence and data warehousing. Decision Support Systems, 33(2), 143-161.Nonaka, I. (2009). The knowledge-creating company. In The Economic Impact of Knowledge (pp. 175-187). Routledge.Nonaka, I., Reinmoeller, P., & Senoo, D. (1998). The 'ART' of knowledge: Systems to capitalize on market knowledge. European Management Journal, 16(6), 673-684.Nonaka, I., Reinmoeller, P., & Shibata, T. (1998). Knowledge and Regions. Office Automation, 19(4), 3-13.Sabharwal, N., Barua, S., Anand, N., & Aggarwal, P. (2019). Developing Cognitive Bots Using the IBM Watson Engine: Practical, Hands-on Guide to Developing Complex Cognitive Bots Using the IBM Watson Platform. Apress.Sundaresan, S., & Zhang, Z. (2022). AI-enabled knowledge sharing and learning: redesigning roles and processes. International Journal of Organizational Analysis, 30(4), 983-999.Tsui, E., Garner, B. J., & Staab, S. (2000). The role of artificial intelligence in knowledge management. Knowledge Based Systems, 13(5), 235-239.Author may be reached at ragits01@gmail.com and eboard@icai.in
TECHNOLOGY
Ep. 450 — An Exploratory Study of the Relationship between Financial Reporting Transparency and FVA Reliability: A Machine Learning-Based Approach
CA Journal
· September 2026
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An Exploratory Study of the Relationship between Financial Reporting Transparency and FVA Reliability: A Machine Learning-Based ApproachThe research study examines the relationship between transparency and reliability in the Fair Value Accounting (FVA) of Real Estate Investment Trust (REIT) companies. Machine learning techniques are used to analyse data from the annual reports of 22 REIT companies from countries like the USA and China. The study finds that greater corporate transparency, as measured by the S&P Global Ratings DISCLOSURE_INDEX, contributes to more reliable fair-value estimates, as represented by the deviation between reported Net Asset Value (NAV) and actual values. The study identifies several significant predictors of NAV_DEV, including Fair Value Asset (FVA3), Debt-Equity Ratio (DEBT_EQUITY), presence of women in the board of directors (WOMEN_BOD), and the interaction between FVA and transparency. However, financial experts in the audit committee (FINEXP_AC) and the number of directors on board (Num_of_BOD) do not show a significant relationship. To enhance the model’s accuracy, a Decision Tree Analysis is employed, with FVA3 identified as the most important variable for predicting NAV_DEV. This research provides practical implications for REIT companies and regulators in improving the reliability of financial reporting through transparency in fair value accounting.IntroductionFair Value Accounting (FVA) has gained popularity since the publication of Statement No. 157 by the Financial Accounting Standards Board (FASB) in 2006. This statement introduced a framework for measuring fair value and provided guidelines on its use in financial reporting. However, the use of market-based inputs in FVA has raised concerns about the reliability of fair value estimates. This study employed S&P Global Ratings companies (renowned financial services company that provides credit ratings, research, and insights to businesses, investors, and governments worldwide), a transparency and disclosure index based on 98 criteria, to examine the relationship between the transparency of financial statements and the reliability of fair value accounting.The study focused on 22 Real Estate Investment Trust (REIT) companies and used secondary data from their annual reports to collect information. NAV_DEV, which indicates the reliability of fair value estimates, was taken as the target variable, along with other variables like DEBT_EQUITY, WOMEN_BOD, FINEXP_AC, and Num_of_BOD. The research used regression, decision tree regressor, and random forest regressor techniques to analyze the data. The study applied a decision tree regressor to determine the importance of various variables. Results indicated that FVA3, DISCLOSURE_INDEX, WOMEN_BOD, and DEBT_EQUITY were identified as the most important variables. Notably, the decision tree analysis highlighted that FVA3, DEBT_EQUITY, and DISCLOSURE_INDEX held the greatest significance. The findings have practical implications for REIT companies and regulators in enhancing the reliability of financial reporting. However, further research is needed to explore the potential challenges and opportunities associated with the implementation of the recommendations.Review of LiteratureFVA is an accounting method that measures assets and liabilities at their current market value. It is used to provide relevant and reliable financial information to stakeholders, including investors, creditors, and regulators.Thanh et al. (2023) found that these six factors positively influenced the applied perception of FVA in the context of the construction of enterprises in Vietnam. Cahyani & Firmansyah (2023) investigated the effect of managerial skill and earnings management on the application of FVA and found that managerial skill positively influenced FVA’s reliability. Ibidunni and Okere (2019) found a significant association between FVA and the reliability of accounting information in Nigerian listed firms. In their study, Lim et al. (2017) explored the impact of institutional country differences on investors’ perceptions regarding the reliability of FVA hierarchy measurement. The researchers examined various institutional factors such as legal frameworks, regulatory environments, accounting standards, and cultural norms across different countries. These factors can influence how investors interpret and rely on FVA measurements, particularly within the hierarchical framework used for fair value assessments. By analyzing these differences, the study aimed to provide insights into how institutional contexts shape investors’ confidence in FVA and its hierarchical structure, thereby contributing to a better understanding of the global applicability and reliability of fair value measurements in accounting practices. Lastly, Sawalqa (2016) highlighted the importance of additional disclosures to enhance the reliability of level 2 and level 3 assets in the context of fair value assets.In terms of disclosure, several studies have highlighted the importance of detailed disclosures, transparency, and management assurance to strengthen the reliability of FVA estimates. For example, Robinson et al. (2018) found that enhanced disclosure requirements reduced the manipulation of fair value measurements related to level 3 assets in banks. Biljon and Scott (2019) emphasized the significance of detailed disclosures for biological assets. Chung, et al. (2017) found that increased fair value disclosures could mitigate higher information risk and lower share pricing. Finally, Chung, Lee, and Mitra (2016) emphasized the necessity of expanding regulatory guidelines to strengthen the reliability of fair value estimates, considering the mandatory adoption of FVA standards.Research GapsIn today’s world, it’s vital for researchers and practitioners to focus on improving the reliability of FVA. Previous studies have explored variables like corporate governance, financial distress risk, transparency level, and the role of external qualified valuers, shedding light on the issue. However, further investigation is necessary, especially in the context of Real Estate Investment Trust (REIT) companies, to understand the vital relationship between transparency and reliability in FVA.Expanding this research to other sectors and contexts is crucial, including exploration of the potential benefits and limitations of machine learning techniques in accounting research. Furthermore, this study highlights several variables with significant predictive power for NAV_DEV, a key measure of the reliability of fair value estimate. By delving deeper into these variables and their impact on various aspects of FVA, researchers can bridge the research gap and advance knowledge in the field. Ultimately, this pursuit will result in more reliable and transparent financial information, meeting the evolving needs of stakeholders in today’s dynamic business landscape.Research MethodologyScope of the StudyThis study examines the factors that can affect the reliability of FVA. For the same purpose, the transparency level of companies was taken as a factor. It was examined that if a company provides more disclosures in the annual reports to the users of accounting information, then it affects the reliability of FVA.Objective of the StudyThrough a comprehensive review of the existing literature, it is evident that prior studies have investigated the value relevance of accounting information after the adoption of FVA. These studies have consistently demonstrated an increase in the value relevance of accounting information following the implementation of FVA standards (Adwan et al., 2020). However, certain research studies have expressed concerns regarding the reliability of fair value estimates (Landsman, Wayne, 2007) and have put forth suggestions to enhance the reliability of such estimates.It has been proposed that organizations can enhance the reliability of FVA by providing more comprehensive disclosures in their financial reports (Chea, 2011). The provision of adequate fair value disclosures has the potential to reduce investors’ uncertainty (Bens, 2016) by allowing investors to gain deeper insights into the financial instruments presented in the financial statements. The collective findings of these studies emphasize the pivotal role of disclosures in the decision-making process of investors and in evaluating the reliability of FVA. Building upon the existing body of research, the primary objective of this research paper is to investigate the impact of the transparency level of companies’ financial reporting on the reliability of FVA.Sample SelectionReal Estate Investment Trust (REIT) companies were utilized to investigate how a company’s level of transparency affected the reliability of fair value accounting. We included 309 REIT companies, including those REIT companies who are members of NAREIT (National Association of Real Estate Investment Trust) (209 companies) and the world’s top 100 REIT companies, who have shown investment property at fair value in their financial statements. Later, we excluded those companies which do not show fair value of investment property in their financial statements. Our final sample consists of 22 REIT companies. Secondary data was used in this research work. Data was collected from the annual reports of the companies which were taken from the individual websites of the companies.HypothesesTo achieve the objectives, the following hypotheses have been articulated:Ha1: REIT companies with higher levels of transparency in their financial reporting will have more reliable fair value estimates.Ha2: REIT companies with more women on the board of directors will have more reliable fair value estimates.Ha3: REIT companies with a higher presence of financial experts in their audit committees will have more reliable fair value estimates.Tools and TechniquesThis study used regression, decision tree regressor, and random forest regressor techniques for analysis. To use the regression, following equation was formulated:NAV_DEVi,t = β0 + β1FVA3i,t + β2DISCLOSURE_INDEXi,t + β3(FVA × DISCLOSURE_INDEX)i,t + β4DEBT_EQUITYi,t + β5WOMEN_BODi,t + β6FINEXP_ACi,t + β7Num_of_BODi,tVariable DescriptionThis study aims to investigate the impact of corporate transparency and other factors on the reliability of fair value estimates in REIT companies. The main dependent variable is NAV_DEV, which measures the difference between a company’s net asset value per share and its market price per share. A higher NAV_DEV suggests unreliable fair value estimates, while a lower NAV_DEV indicates more reliable estimates.The study used a transparency index from S&P Global Ratings, which has 98 measures, to evaluate how open companies are about their finances. It also looked at things like how many people are on the board, whether there are financial experts on audit committees, how much debt the company has, and how many women are on the board. The aim was to figure out if having reliable fair value assets, transparency, low debt, a higher representation of women on the board, and financial experts on audit committees all lead to lower NAV_DEV. This assists investors in making more informed decisions and enhances the clarity and reliability of financial reports within real estate investment.Data Analysis and Discussion of ResultsResults of Regression AnalysisTable 1: Descriptive StatisticsVariablesCountMeanStdMedianMinMax.NAV_DEV (%)110-10.5129.51-15.96-61.2188.10FVA3 (%)110939368194130960875.158019600DISCLOSURE_INDEX (%)11058.828.8857.0743.4879.35DEBT_EQUITY (%)11012.4111.739.391.0275.45WOMEN_BOD (%)11024.5812.5823.617.1455.56FINEXP_AC (%)11075.3934.611000100Num_of_BOD (%)110891.82276.669004001500In the sample of REIT companies, the discount rate of NAV_DEV has a mean value of -10.51%. The mean value of FVA3 is 939368%. The mean value of DISCLOSURE_INDEX is 58.82%. The average DEBT_EQUITY value is 12.41%, indicating a moderate level of leverage. The WOMEN_BOD variable has a mean value of 24.58%, indicating that around 25% of the board of directors in sample companies are women. The FINEXP_AC variable has a mean value of 75.39%, indicating that about 75% of audit committee members are financial experts. Finally, the average value of the Num_of_BOD is 891.82%, which implies that there are a substantial number of board of directors in sample companies.Table 2: OLS Regression ResultsVariableModel 1Model 2CoefficientP-ValueCoefficientP-ValueConst-0.16300.321-0.17090.284FVA32.75220.004*2.83170.001*DISCLOSURE_INDEX1.10480.000*1.12880.00*FVA*DISCLOSURE_INDEX-2.56820.006*-2.64620.002*DEBT_EQUITY-0.74310.000*-0.73670.000*WOMEN_BOD-0.43750.005*-0.43060.005*Num_of_BOD0.08770.2520.09130.219FINEXP_AC0.01310.824––R-Squared: 0.38 | Adj. R-Squared: 0.325 | F(Prob): 0.00R-Squared: 0.38 | Adj. R-Squared: 0.333 | F(Prob): 0.00*Significant at 5% LevelThe study conducted regression analysis to investigate the relationship between NAV_DEV and various study variables. Two models were used, and the results showed that FVA3, DISCLOSURE_INDEX, DEBT_EQUITY, and WOMEN_BOD were all significantly correlated with NAV_DEV. The interaction variable FVA3*DISCLOSURE_INDEX was also found to have a significant impact on NAV_DEV. The variables FINEXP_AC and Num_of_BOD did not show any significant correlation. The adjusted r-squared of model 2 (0.333) increased slightly from model 1 (0.325), but the value of r-squared was the same for both models. Additionally, a Decision Tree Regressor Technique was used to further improve the explanatory power of the model.Results of Decision Tree RegressorTo analyze the data, the Decision Tree Regressor Technique was used which was implemented using the Python programming language. In this research, some hyperparameters were also used, including max_depth [10], min_sample_leaf [10, 15], and max_leaf_nodes [7, 8]. Cross-validation was set at 4 “cv = 4,” which means that the decision tree regressor algorithm will build 16 decision trees with different hyperparameters.After using all these parameters, the decision tree algorithm produced the best decision tree with a maximum depth of 10, maximum leaf nodes of 7, minimum samples per leaf of 10, and a random state = 42.The Decision Tree Algorithm is a tool used to understand the relationship between various variables and the dependent variable. In this case, the dependent variable was the deviation of NAV from its market price. The decision tree shows that the variable FVA3 was found to be the best variable to split, with a mean squared error of 0.085. The tree revealed that a higher debt-equity ratio and a higher value of FVA3 could prevent the deviation of NAV from its market price. On the other hand, a higher number of women on the board of directors and a lower disclosure index could lead to a smaller deviation of NAV from its market price. The decision tree slightly improved the value of r2 compared to linear regression, from 0.38 to 0.53. To further improve the value of r2, the Random Forest Regressor Technique was employed.Graphical Presentation of the Best Decision TreeROOT NODE: FVA3 ≤ 6.149Squared_error = 0.085 | Samples = 93 | Value = -0.118← Branch True (FVA3 ≤ 6.149)WOMEN_BOD ≤ 0.211Squared_error = 0.111 | Samples = 46 | Value = 0.0True: Num_of_BOD ≤ 8.5Squared_error = 0.134 | Samples = 25 | Value = 0.142Leaf 1 (True): Squared_error = 0.095, Samples = 14, Value = -0.056Leaf 2 (False): Squared_error = 0.070, Samples = 11, Value = 0.393False: DISCLOSURE_INDEX ≤ 0.587Squared_error = 0.031 | Samples = 21 | Value = -0.167Leaf 3 (True): Squared_error = 0.027, Samples = 10, Value = -0.263Leaf 4 (False): Squared_error = 0.019, Samples = 11, Value = -0.080Branch False (FVA3 > 6.149) →DEBT_EQUITY ≤ 0.224Squared_error = 0.033 | Samples = 47 | Value = -0.234True: FVA*DISCLOSURE_INDEX ≤ 16.676Squared_error = 0.029 | Samples = 34 | Value = -0.199Leaf 5 (True): Squared_error = 0.036, Samples = 10, Value = -0.323Leaf 6 (False): Squared_error = 0.017, Samples = 24, Value = -0.147Leaf 7 (False: DEBT_EQUITY > 0.224)Squared_error = 0.034 | Samples = 13 | Value = -0.327Results of Random Forest RegressorThe Random Forest Regressor Technique was used to predict a continuous target variable using an ensemble of decision trees. The bootstrap parameter was set to true, meaning that each time a new decision tree was built, a new sample was taken from the observations. The oob_score was also set to true, providing an estimate of the model’s error. The most important variables were identified using the importance value, with the disclosure index having the highest importance value (0.23), followed by FVA3 (0.19) and DEBT_EQUITY (0.16). The ensemble technique did not provide any information regarding the direction of the variables’ influence on the predictions. The variables with the lowest importance values were WOMEN_BOD (0.15), Num_of_BOD (0.09), and FINEXP_AC (0.02), indicating that they did not contribute significantly to making predictions. Overall, the Random Forest Regressor Technique proved to be effective, achieving an r2 value of 0.80, and providing valuable insights into the most important variables for making predictions.Table 3: Most Important VariablesVariableImportance ValueDISCLOSURE_INDEX0.23FVA30.19DEBT_EQUITY0.16FVA*DISCLOSURE_INDEX0.15WOMEN_BOD0.15Num_of_BOD0.09FINEXP_AC0.02ConclusionsThe decision tree regressor analysis highlighted that FVA3 is the most important variable in reducing NAV_DEV, while a higher debt-equity ratio was found to be associated with lower NAV deviation. The number of board of directors did not have a significant impact on NAV deviation. The Random Forest Regressor emphasized the importance of the disclosure index as the most influential variable, followed by FVA3 and DEBT_EQUITY. These variables contribute significantly to the accurate predictions regarding NAV deviation.“This study aimed to explore how corporate transparency impacts the reliability of FVA in REIT companies.”This study aimed to explore how corporate transparency impacts the reliability of FVA in REIT companies. It used the S&P transparency and disclosure index to measure transparency and assessed its influence on NAV_DEV, which indicates the reliability of fair value estimates.To analyse this relationship, the study employed various statistical techniques such as regression analysis, decision tree regressor, and random forest regressor. The results highlighted significant correlations between NAV_DEV and factors like FVA3, DISCLOSURE_INDEX, DEBT_EQUITY, and WOMEN_BOD. These variables were found to be crucial in determining the accuracy of fair value estimates.“REITs companies provide extensive disclosures, which have a significant impact on a wide range of stakeholders, as supported by recent research results.”The study’s overall findings demonstrate that REITs companies provide extensive disclosures, which have a significant impact on a wide range of stakeholders, as supported by recent research results. These disclosures serve as a foundation for investors, enabling them to make well-informed choices regarding their investments. The study also established in-depth analyses about financial information and risk assessments furnished in these disclosures that empower investors to assess the stability and potential returns of their investments, thereby affecting investment strategies and portfolio management. Additionally, creditors heavily rely on these disclosures to evaluate creditworthiness and assess collateral sufficiency. This information extremely shapes lending conditions and decisions regarding credit extension, thus impacting the company’s ability to secure funding and the terms thereof.Furthermore, employees, as per research findings, closely monitor these disclosures, which can influence their job security and compensation. Transparent financial disclosures have been shown to instil confidence among employees in the company’s financial stability, while disclosures related to executive compensation and benefits directly impact employee morale and satisfaction, as supported by recent research in the field. Beyond the corporate sphere, communities and public sentiment are also swayed by these disclosures, as indicated by recent studies. Positive disclosures concerning corporate social responsibility initiatives, as per research, can enhance a company’s reputation and foster goodwill within communities. Conversely, this research study findings have underscored that negative disclosures pertaining to ethical or environmental concerns can have adverse effects, highlighting the substantial impact of company disclosures on the broader societal environment. In essence, the comprehensive and transparent nature of these disclosures, supported by recent research, resonates throughout the stakeholder environment, strongly influencing their perceptions, decisions, and interactions with the company.ReferencesAmarnath, M., Sugumaran, V., & Kumar, H. (2023). Exploiting sound signals for fault diagnosis of bearings using decision tree. Measurement, 46(3), 1250–1256.Anderson, B., & McGrew, D. (2017). Machine learning for encrypted malware traffic classification. Proceedings of the 23rd ACM SIGKDD International Conference on Knowledge Discovery and Data Mining - KDD ‘17, 1723–1732.Biljon, M. V., & Scott, D. (2019). The importance of biological asset disclosures to the relevant user groups. AGREKON, 58(2), 244-252.Cahyani, A. D., & Firmansyah, A. (2023). Managerial Ability, Earnings Management and Fair Value Accounting: Does Debt Policy Matter?. Jurnal Dinamika Akuntansi dan Bisnis, 10(1), 43-60.Chen, C., Geng, L., & Zhou, S. (2021). RETRACTED ARTICLE: Design and implementation of bank CRM system based on decision tree algorithm. Neural Comput & Applic, 33, 8237–8247.Chung, S. G., Goh, B. W., Ng, J., & Yong, K. O. (2017). Voluntary fair value disclosures beyond SFAS 157’s three-level estimates. Review of Accounting Studies, 22, 430–468.Hermanson, S. D., Kerler III, W. A., & Rojas, J. D. (2017). An analysis of auditors’ perceptions related to fair value estimates. The Journal of Accounting & Finance, 18-37.Ibidunni, O., & Okere, W. (2019). Fair value accounting and reliability of accounting information of listed firms in Nigeria. Growing Science Accounting, 5, 91–100.Ji, A. E. (2019). Fair value accounting and corporate capital structure: Evidence from SFAS 157 disclosures. International Journal of Business & Applied Sciences, 8(4), 14–22.Joe, J. R., Vandervelde, S. D., & Wu, Y. J. (2017). Use of high qualification evidence in fair value audits: Do auditors stay in their comfort zone? The Accounting Review, 92(5), 89–116.Authors may be reached at Antima171193@gmail.com, Nishakalra09@gmail.com, drgsoral@gmail.com and eboard@icai.in
TAXATION
Ep. 451 — Dream House-Taxation, Legal and Financial Aspects
CA Journal
· September 2026
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Dream House-Taxation, Legal and Financial AspectsOwning a house in India is the dream come true moment and many Indian families still don’t possess their own house. People work day and night to fulfill their dream of owning a house. There are various issues associated with the purchase of real estate property- one needs to manage taxes; one needs to arrange for finances and legal aspects. High inflation, slowdown of the global economy, and rising interest rates across the globe by the central bank’s have added pressure to the pockets of people. In such times it is very crucial to take care of various things while deciding on a dream home.IntroductionThere are multiple enactments dealing with real estate like- the Insolvency and Bankruptcy Code 2016, Income Tax Act 1961, Central Goods and Service Tax Act 2017, Prohibition of Benami Property Transaction Act 1988, Real Estate (Regulation and Development) Act 2016 and various other state laws. Historically, it is observed that real estate developers often engage in unfair practices and try to defraud home buyers. In such cases, the home buyer needs to be aware of the rights available to them under the various laws.Part A: Taxation AspectsAcquisition of house property attracts various taxes such as Stamp duty fees, Goods and Services Tax, and state taxes. Further, obligations mandated by the Income Tax Act serves as an enhancement for the people.1. Stamp Duty FeesIndian Stamps Act 1899 empowers the parliament to levy and collect the duty called Stamp duty on the execution of certain documents. Accordingly, stamp duty is charged and levied on the sale and purchase of immovable properties in India. Stamp duty is generally levied between 5-7% with variations in the applicable rate observed across the various states of India. It may be noted that there is a difference in the stamp duty fees for males and females in certain states of the country. The duty is levied on the value determined by the stamp valuation authorities.“Indian Stamps Act 1899 empowers the parliament to levy and collect the duty called Stamp duty on the execution of certain documents.”2. Income Tax Act 1961The Income Tax Act 1961 deals with various areas in relation to buying the house such as TDS, mode of payments. Further, it also provides certain benefits in relation to house property such as deduction u/s 80C. These are discussed as under:a. Section 24(b)- Allowance of Interest on loan taken for acquisition of Self occupied House PropertySection 24(b) of the Income Tax Act, 1961 provides for deduction of interest on loans borrowed for the purpose of construction, acquisition, repairs, and reconstruction of house property. In the case of self-occupied house property maximum amount of allowed deduction is Rs 2 lakhs if the loan has been taken for the purpose of acquisition or construction of house property.Note: Finance Act 2023 has made the new taxation regime i.e taxation u/s. 115BAC(1A) as the default regime. Where the assessee exercises this option of a new taxation regime, he/she would not be able to claim the benefit of interest on borrowed capital u/s. 24(b).b. Deduction u/s. 54 and 54F of the Income Tax ActIn some cases, Individuals or HUFs transfer their existing residential house property or other long-term capital assets, and out of the proceeds of the said transfer they acquire another residential house property. Sections 54 and 54F of the Income Tax Act 1961 provide the deduction in respect of these cases.Section 54: Deduction is available if the individual or HUF has transferred any residential house property (long term) and out of the said proceeds new residential house property is acquired or constructed.Section 54F: Deduction is available if the Individual or HUF transfers any long-term capital assets (other than house property) and out of the proceeds they have acquired residential house property.Note: Finance Act 2023 has amended sections 54 and 54F and has capped the maximum deduction to Rs. 10 crores. That is if the amount invested by the assessee exceeds Rs 10 crores, he/she can claim a deduction of Rs 10 crores and balanced investment will not be considered for deduction under these sections.c. Section 56(2)(x)If any person has acquired the house property (immovable property) and the consideration paid for the acquisition is less than the value as declared by the stamp duty authorities, then the difference between such consideration and stamp value is treated as the income of the person under the head “Income from other sources”.Note: This will be applicable only if such difference exceeds higher of Rs 50,000 or 10% of the consideration.Example: Mr. X has acquired the house property and the consideration fixed was Rs 35 lakhs. However, the value as adopted by stamp valuation authorities was Rs. 40 lakhs. In such a case, Rs. 5 lakhs will be treated as the income of Mr. X under the head “Income from Other Sources”, as the difference between stamp duty value and consideration exceeds 10% of the consideration.It may be noted section also provide certain exemption of the above provision such as transferor is relative, or it is in relation to marriage. Therefore, any person buying the house needs to ensure that there is no difference between the agreed consideration and the stamp duty value, the difference is within the allowed limit, or the transaction is exempted from the scope of section 56(2)(x).d. Deduction u/s. 80C of the ActSection 80C of the Act provides certain deductions from the total income of the assessee. Clause (xviii) provides for the deduction for certain amounts paid for construction or acquisition of residential house property:Repayment of loan borrowed for purpose of construction or acquisition of house property.Stamp duty, registration fees or other expenses incurred in connection with transfer of property.Amount paid under self-finance scheme or others scheme.Amount paid to company or cooperative society of which he is member towards the cost of acquisition of house.e. TDS u/s. 194 IASection 194 IA of the Income Tax Act imposes the liability on the transferee (buyer) to deduct the tax @ 1% from the consideration paid to the resident transferor where such consideration exceeds Rs 50 lakhs.Note: If the property is acquired from non-resident, TDS will be governed by section 195 of the Act.f. Furnishing Statement of Financial TransactionSection 285BA, read with rule 114E of the Income Tax Act imposes an obligation on certain people to report specified financial transactions. Accordingly, the Inspector General or Registrar or Sub Registrar shall report the transaction about sale or purchase of immovable property where the consideration exceeds Rs 30 lakhs or value as determined by stamp valuation authority referred to in section 50C exceeds Rs. 30 lakhs.3. Goods and Services Tax (GST)Scope of GST on residential and other real estate projects is governed by Clause 5(b) of Schedule II of the Central Goods and Services Tax Act 2017. It states that construction of any building, complex or civil structure intended for sale wholly or partly, shall be treated as supply of services and accordingly liable for GST.Note: Where entire consideration is paid after earlier of first occupation or issuance of completion certificate, the transaction will not be regarded as supply and will be out of scope of GST as per Schedule III.It implies that the acquisition of under-construction property will be liable to GST, however, the sale and purchase of a second-hand property will be out of the view of GST as per Schedule III of the Act.Below are the rates applicable for the supply of residential housing projects:a. In case of Affordable house projects: 1% without ITC.b. In case of non-affordable house projects: 5% without ITC.(Note: Rates given are after deducting the cost of land. 1/3rd of the cost of the project is treated as the cost of land).Meaning of Affordable Housing Project:a. The Carpet area is less than 60 sqm for metro cities and less than 90 sqm for non-metro cities.b. Consideration does not exceed 45 lakhs.Part B: Financial AspectsA. Finance FacilityMajority of individuals in India acquire homes out of finance facilities from banks or financial institutions. Generally, it is observed that part of the consideration is paid by the individual himself and the balance is financed by banks in the form of credit facilities.When a person wishes to take a loan, there are several factors to be kept in mind like Credit Score, Repayment schedule, and the Cost of the Loan. The majority of the loans carried floating rate of interest and rate is linked to Repo rate. In the recent years repo rate has been increased by the central bank from 4% to 6.5%. Increase in repo rate significantly impacts the borrower. An example (Table 1) clarifies the impact of change in repo rate. Mr. A has acquired the Property worth 50 lakhs. 20 lakh was self-financed and the remaining 30 lakhs was taken as loan. The Rate of interest was fixed at Repo + 3% and the Tenure was 20 years.Table 1: Impact of Change in Repo Rate on Housing Loan EMIParticularsRepo Rate is 4%Repo Rate is 6.5%Net rate7%9.5%Number of Installments (months)240240Monthly paymentRs 23,258/- per monthRs 27,963/- per monthIn the above example, the increase in the Repo rate by 250 basis points has increased the EMI by Rs 4,707/- which is 20% of the original EMI.Note: If the repo rate is increased by 50 basis points, EMI rate would be increased by Rs 908/- which is 3.91% of the original EMI.Therefore, the individual should clearly evaluate the amount of loan to be taken as the small changes in repo would impact the payments significantly. This thing would become more important in the global situations of economic slowdown where central banks across the globe are turning to rate hikes.SARFAESI Act, 2002It may be also noted that borrowings i.e home loan is governed by the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. Section 13 provides the detailed procedure for the enforcement of security interest in case the borrower defaults many installments of the borrowings. Individuals should ensure that all the repayments are made as per the agreed schedule, failing which the bank or financial institution may resort to the provision of the SARFAESI Act.B. Credit Linked Subsidy Scheme - PM Awas YojnaIndian government from time to time has introduced various schemes to promote the housing and infrastructure in India. In 2015 the government came up with the “PM Aawas Yojna” also referred to as “Housing for All Mission”. Under the said scheme the government has come up with the Credit Linked Subsidy Scheme to expand the flow of credit for the acquisition of houses. Any person willing to acquire the house should consider the schemes announced by the central or state government. Such schemes can significantly affect the cost of the property and can benefit the person in other ways.Part C: Legal AspectsThere are various laws that govern the acquisition of house property like Real Estate (Regulation and Development) Act 2016, Insolvency and Bankruptcy Code 2016, Prohibition of Benami Transaction Act 1988.Real Estate (Regulation and Development) Act 2016Indian Parliament in year 2016 enacted Real Estate (Regulation and Development) Act 2016 with an aim to protect the interest of home buyers and to boost the real estate sector in the country. It seeks to achieve transparency between real estate developers and the home buyer, adequate dissemination of the required information, fast-track resolution of disputes.The act also provides the establishment of Real Estate Regulatory Authority for promotion and regulation of real estate business in India. Further it also provides establishment of Appellate Tribunal to hear the appeals arising from the decision of Real Estate Regulatory Authority and adjudicating authority.Some of the important provisions which the allottee (Home Buyer) should keep in mind are as follows:The real estate developer will be responsible for rectification of any structural damages or defect in workmanship or provision of service brought to his notice within the period of 5 years from the handing over possession.The Promoter will be required to keep 70% of the amount received from allottees in the designated bank account and it should be utilized for that project only.The term carpet area was always subject to dispute. The act has defined the concept of carpet area.The Promoter shall make compulsory disclosure of certain information about the project on the website of RERA. This enables the transparency of the information.Provision of compensation by the promoter in case the allottee has suffered any loss on the basis of any incorrect or false statement furnished by the promoter in the advertisement or the prospectus.Ceiling on the advance that the promoter can take before entering into any agreement for sale. The limit is 10% of the consideration.Promoter will be required to take the approvals of the allottees in case he proposes any changes in the sanctioned layout or plans of the project (Section 14).Section 15 of the Act deals with the obligation of the promoter in case he proposes any transfer of rights and liabilities in respect of real estate project.Obligation of the promoter to compensate the allottees in case he fails to deliver the possession of the project in accordance with agreement to sale or any loss caused to allottees due to defective title or any failure of the promoter to discharge the obligations under the Act or regulations (Section 18).Every person who wishes to acquire any real estate property directly from the Real estate developer should be aware of the rights available to him and should take appropriate action in case any default is made by the promoter.It may be noted that section 2(d) of the Act defines the meaning of Allottee and states that it includes the person who has acquired the property by way of sale or transfer. Thus, allottees include the person who has acquired the property through a secondary sale in the real estate project. But it does not include the person to whom any property is given for rent.Insolvency and Bankruptcy Code 2016Remedy for home buyers under the Insolvency and Bankruptcy Code was defined by the Apex Court in the case of “Pioneer Urban vs Union of India (WP (civil) no 43 of 2019)” and it was held by the apex court that the remedies available to homebuyer under the RERA and IBC are concurrent to each other. It is open for the allottees to claim the remedy under any of the laws.It may be noted that section 5(8) of the IBC defines the financial creditor and clause (f) includes within its scope any amount raised under any commercial transaction having commercial effect of borrowings. A Further explanation to clause (f) states that any amount raised from allottees under the real estate project will have the commercial effect of borrowing and accordingly will be classified as a financial liability. Therefore, in exercise of the above provision allottees being the financial creditor may apply to NCLT for the initiation of Corporate Insolvency Resolution Process in case the real estate developer commits any default.“The Prohibition of Benami Transaction Act 1988 defines certain transactions to be benami that is without a name and therefore this transaction could be declared as void.”Prohibition of Benami Property Transaction Act, 1988The Prohibition of Benami Transaction Act 1988 defines certain transactions to be benami that is without a name and therefore this transaction could be declared as void.Section 2(9)(A) defines the benami transaction and includes the transaction where property is held by a person and consideration is provided by another person and the property is held for the benefit of that another person who has provided the consideration.For Example: A residential house property is held in the name of Mr. A, however, the consideration for the same is provided by Mr. B, also the property is held for the benefit of Mr. B only. In such a case, the transaction will be declared as Benami Transaction u/s. 2(9)(A) of the Act.However, there are certain exclusions to this:In the case of an individual, the property is held in the name of the spouse or the children of the individual and the consideration is provided out of known sources.Where property is held in the name of Brothers or sisters or lineal ascendant or decedent of the individual and their name is, and name of the individual name appear as joint owners in the document.Therefore, below are the conclusion of the above:Individual can acquire any property in the name of his/her spouse or the name of his/her children.If he wishes to acquire the property in the name of his brothers/sister or parents or lineal ascendant or decedent, in such case his name should also appear in the document as joint owner. The transaction would be classified as Benami Transaction if his/her name does not appear on the document as joint owner.The consideration for the acquisition of the property is paid out of known sources.ConclusionIndian Housing sector has huge potential for growth. With various schemes and initiatives announced by the government, many people are moving from rented accommodation to owned accommodation. In such a case, it is very essential for an individual to have knowledge of all taxation, financing and legal aspects in relation to real estate in order to make an informed decision and also to avoid any non compliances of laws.Author may be reached at shubhamvimal473@gmail.com and eboard@icai.in
PUBLIC FINANCE
Ep. 452 — Assessment of selected Urban Local Bodies preparedness for Timely Preparation of Annual Financial Statements in line with 15th Finance Commission
CA Journal
· September 2026
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Assessment of selected Urban Local Bodies preparedness for Timely Preparation of Annual Financial Statements in line with 15th Finance CommissionFinance commissions in the past have focused on the Financial Sustainability of Urban Local Bodies (ULBs) and grants have been linked to parameters that require Urban Local Bodies (ULBs) to have robust revenue like the 14th Finance Commission kept a provision of 20% as Performance Grant, 15th Finance Commission used carrot and stick approach for releasing grants; carrot in terms of released grants if the State has migrated to the Capital Value method of Property Tax and its growth is commensurated with State Gross State Domestic Product (GSDP).Government of India (GoI) Flagship Programs whether Smart City or Atal Mission for Rejuvenation and Urban Transformation (AMRUT), 14th Finance Commission (FC), and 15th Finance Commission (FC) advocate publishing of unaudited and audited Annual Financial Statement (AFS) of Urban Local Bodies (ULBs) within specified timelines. The Ministry of Housing and Urban Affairs (MoHUA) has recently released guidelines for ranking cities financially. These guidelines, which are based on 15 parameters, utilize the Budget and Annual financial statements of Urban Local Bodies (ULBs) as the primary documents for assessing the financial ranking of cities. This underlies the importance of timely financial reporting in coming years.This article aims to highlight the essential requirements that States and Urban Local Bodies (ULBs) must fulfill to adhere to the timelines set by the 15th FC. Establishing a robust Financial Ecosystem by the State/ULB is crucial for maintaining financial discipline. This ensures not only eligibility for grants but also the availability of documented Annual Financial Statements (AFS) for future city financial rankings and assessing the creditworthiness of ULBs for issuing Municipal Bonds.IntroductionIndia is one of the fastest-growing economies in the world, and its growth is propelled by its cities. Cities contribute 66% to the national GDP, and the number is expected to rise to 80% by 2050. The growth and sustainability of these cities would be dependent on what extent they can meet their expenses with their financial position. Their Financial Position is determined by their financial statements which are prepared by Urban Local Bodies as per the State Municipal Accounts Manual (SMAM) & National Municipal Accounts Manual (NMAM).In line with the State Municipal Accounts Manual (SMAM) & National Municipal Accounts Manual (NMAM), Urban Local Bodies (ULBs) prepare their Annual Financial Statements (AFS) on an annual basis to depict their financial performance in the financial year. Para 31.4 of Chapter 31 of NMAM “Financial Statements states that the Annual Report/ financial statements” of the ULB shall include the following:Balance Sheet;Income and Expenditure Statement;Statement of Cash flows (a summary of an enterprise’s cash flow over a given period);Receipts and Payments Account (detailed as per the account heads);Notes to Accounts; andFinancial Performance Indicators.More than 30 years have passed since autonomy was provided to Urban Local Bodies (ULBs) through the 74th Constitutional Amendment Act (CAA), still financial reporting is at a nascent stage restricting to the preparation and uploading of Annual Financial Statements (AFS). None of the Guidelines whether City Financing ranking or 15th FC specifies what financial statements shall cover to comply with condition of uploading of Annual Financial Statements. Most of the Urban Local Bodies (ULBs) fail to adhere to timelines required for preparing and publishing Annual Financial Statements (AFS) despite their dependence on third-party professionals for its preparation.14th and 15th FC and other Guidelines issued by MoHUA requires Urban Local Bodies (ULBs) to prepare and publish Annual Financial Statements (AFS). (Table 1)Table 1: Conditions for Preparation and Publishing Annual Financial Statements by Finance Commissions and Centrally sponsored schemes guidelines#Finance Commission / Centrally Sponsored Schemes GuidelinesConditionsTimelines1Smart City MissionAudited Financial Statements need to be in place due to:Credit Rating of CitiesIssuance of Municipal Bonds–2AMRUT and AMRUT 2.0Augmenting Accrual Based Double Entry Accounting System (ABDEAS):Migration to ABDEAS & audit certificate from FY 2012-13Publication of annual financial statement on websiteAppointment of internal auditor (IA)–3City Financial Ranking guidelines, 2022City financial ranking guidelines issued by MoHUA, Fiscal Governance Parameter - Point 10 requires a Timely Audit Closure & Publication of Audited Annual Accounts in the public domain for 3 years. The audit shall not be done beyond a period of 12 months since the end of FY else no marks will be awarded.Within 12 months since end of FY414th FCAs per 14th FC, each ULB is required to submit audited accounts that relate to a year not earlier than two years preceding the year in which a ULB seeks to claim the performance grant. In addition to this mandatory condition, the following activities are to be undertaken by individual ULBs for accessing the grant for the remaining three years, i.e., 2017-18, 2018-19, and 2019-20:For the Performance Grant of 2017-18, 2018-19, and 2019-20, audited accounts must be published on the ULB website for the years 2015-16, 2016-17, and 2017-18 respectively.30th Sept of FY515th FCTo claim a Grant for FY 2024-25; State to ensure online availability of:Unaudited accounts i.e. Annual Financial Statements (AFS) for the previous year i.e. FY 2023-24, andAudited accounts i.e. Annual Financial Statements (AFS) of the year before the previous year i.e. FY 2022-2315th May 2024It is evident that the 15th Finance Commission has mandated timeline of 15th May of the year for publishing unaudited accounts of the previous year with the vision that accounts of local-self government are prepared well on time like that of listed companies. This will further put financial discipline in place making it easier for ULBs to explore the bond market in the coming years. In today’s era of Aatma Nirbhar visioned cities, punctuality in financial reporting needs to be addressed.Scope of the Assessment10 Cities of Two States i.e. Jharkhand and Assam, have been selected based on random sampling. Annual Financial Statements for the past three years i.e. FY 2019-20, 2020-21, & 2021-22 have been examined from the city financial portal (https://cityfinance.in/home).MethodologyA realistic study based on secondary sources was steered to find the measures adopted by the Government of India and State Governments for financial reporting through the preparation of annual financial statements. The data was collected from government reports, research articles, reports of research agencies, and other online resources. The assessment of 10 cities is based on author’s experience in the Municipal Finance field.Regulatory Framework for AccountingUrban Local Bodies (ULBs) are governed by their respective State Municipal Act like Urban Local Bodies (ULBs) of Jharkhand are currently governed by the Jharkhand Municipal Act (JMA), 2011. Urban Local Bodies (ULBs) of Assam are currently governed by the Assam Municipal Act, 1956 (amended in 2022). Some States have made necessary amendments to their Municipal Acts regarding the method of accounting to be followed by ULBs and other provisions related to it realizing the importance of financial Statements.To Illustrate: The Jharkhand Municipal (Accounts & Finance) Rules, 2012 have been prepared in congruence with the Jharkhand Municipal Act, 2011.Part A – Jharkhand Municipal (Accounts & Finance) Rules, 2012: The Jharkhand Municipal (Accounts & Finance) Rules, 2012 have been presented with the rules containing Accounting and Financial matters and forms and registers related to the rules.Part B – Jharkhand Municipal Accounts Preparation Guidelines: Jharkhand Municipal Accounts Preparation Guidelines have been prepared in pursuance to Rule no. 13 of Jharkhand Municipal Accounts & Finance Rules, 2012. The Guidelines in separate volumes consist of:Accounting Principles under the double-entry accrual system of accounting;Chart of Accounts;Guidelines for the preparation of the Opening Balance Sheet;Formats and procedures to record the accounting entries.However, there are no Assam Municipal (Account & Finance) Rules, unlike The Jharkhand Municipal (Accounts & Finance) Rules, 2012 which are based on the National Municipal Accounts Manual (NMAM). Thus, there is inconsistency among states regarding the adoption of State Municipal Accounting manuals to empower ULBs through the power of Governance with the weapon of Municipal (Account & Finance) Rules.Table 2: Status of the State Municipal Accounting Manual (SMAM) and amendment in the Municipal Act for selected ULBs#CitiesStateSMAM prepared (Yes/No)SMAM approved (Yes/No)Municipal Act amendment Done (Yes/No)1Dhanbad Municipal CorporationJharkhandYYY2Giridih Nagar NigamJharkhandYYY3Godda Nagar PanchayatJharkhandYYY4Latehar Nagar PanchayatJharkhandYYY5Ranchi Municipal CorporationJharkhandYYY6Guwahati Municipal CorporationAssamYYNo7Tejpur Municipal BoardAssamYNoNo8Nagaon Municipal BoardAssamYNoNo9Nalbari Municipal BoardAssamYNoNo10Digboi Municipal BoardAssamYNoNoSource: Annual Financial Statements and State Municipal Acts15th Finance Commission Timelines: AssessmentTimely financial reporting ensures meeting of statutory deadlines and availability of information to decision-makers promptly. The relevance of financial information tends to be lost if it is delayed so it is important to provide up-to-date and current data for decision-making.Seeing the importance of timelines of financial reporting, Section 137 of the Companies Act, 2013 has given a statutory timeline of filing Annual Financial Statements within 30 days of the Annual General Meeting of the Company.The Ministry of Housing and Urban Affairs (MoHUA) in its city financial ranking, 2023 has also given a timeline of Timely Audit Closure & Publication of Audited Annual Accounts in the public domain - i.e. within 12 months of ending the financial year, else zero marks will be awarded out of 25 marks.15th Finance Commission has given a timeline of 15th May of 2024 for ULBs to become eligible for 2022-23 grants.However, once these Urban Local Bodies (ULBs) are listed for municipal bonds, they need to get annual accounts prepared and audited within the timeline of SEBI for listed companies. The Ministry of Housing and Urban Affairs (MoHUA) (earlier known as MoUD) has also established a national portal of ULB finances, i.e., http://www.cityfinance.in that is a repository of municipal financial information where all urban Local Bodies need to publish annual accounts audited and unaudited for verification by Project Management Unit (PMU), MoHUA. Each state has its system of preparing annual financial statements (AFS) and getting its audit done. Some illustrative examples of State of Assam, Jharkhand, Chhattisgarh, and Tamil Nadu have been given below:Jharkhand: Each ULB has an accountant as an employee who prepares Annual Financial Statements (AFS) reviewed by the State Project Management Unit (PMU).Assam: Most ULBs except in Guwahati, day-to-day accounting is done on a cash basis by a ULB accountant on a manual basis. For the preparation of Annual Financial Statements, external parties are hired by ULB themselves. In Guwahati Municipal Corporation, a professional CA has been hired for the maintenance of day-to-day accounting and preparation of the Annual Financial Statements.Chhattisgarh: Tenders have been floated by the State Urban Development Agency (SUDA) for the preparation of annual financial statements (AFS) on an accrual-based double-entry system by external parties.Tamil Nadu: The ULB accounting Department prepares annual financial statements (AFS) through their Centralized Software Urban Tree (UTIS) and accounts are audited by a Local Fund auditor.Table 3: Status of Audited Annual Financial Statements in Sample ULBsSl.No.Name of ULBFY 2019-20FY 2020-21FY 2021-221Dhanbad Municipal Corporation23.07.202110.11.202114.12.20222Giridih Nagar Nigam01.07.202110.11.202114.12.20223Godda Nagar Panchayat09.08.202130.01.202212.11.20224Latehar Nagar Panchayat24.07.202131.12.202130.11.20225Ranchi Municipal Corporation09.12.202016.12.202127.01.20236Guwahati Municipal Corporation08.02.202215.02.202230.06.20237Tejpur Municipal Board19.05.202320.01.202330.06.20228Nagaon Municipal Board26.06.202326.06.202309.05.20239Nalbari Municipal Board12.05.202212.05.202203.04.202310Digboi Municipal Board05.05.202220.05.202203.04.2023Source: City Financial Ranking (https://cityfinance.in/login)Table 2 and Table 3 indicate that due to the requirement of 15th FC and City Financial ranking, pending audit of various past years was done lately like some ULBs of Assam, audit for 2019-20 annual accounts has been done in FY 2023-24. The prime reason for the delay in auditing Annual Financial Statements (AFS) is the delay in the preparation of annual accounts due to a lack of real-time updating of Tally accounting software by Urban Local Bodies (ULBs). This is a clear indication that the time has come to link reform to Grants so that timeliness in financial reporting can be adhered.Annual Financial Statements AssessmentAnnual accounts prepared by ULB either themselves or with external support have to be in line with the SMAM & NMAM. Furthermore, it shall also meet the qualitative characteristics of financial statements for effective financial reporting. Assessment against these parameters has been done in Table 4 and Table 5:Table 4: Assessment of Audited Annual Financial Statements of FY 2021-22 in selected ULBs against Chapter 31 of NMAM/JMAMSl.No.Name of ULBBalance SheetIncome and Expenditure StatementStatement of Cash FlowsReceipts and Payments AccountNotes to AccountsFinancial Performance Indicators1Dhanbad Municipal CorporationYesYesYesYesYesYes2Giridih Nagar NigamYesYesYesYesYesYes3Godda Nagar PanchayatYesYesYesYesYesYes4Latehar Nagar PanchayatYesYesYesYesYesYes5Ranchi Municipal CorporationYesYesYesYesYesYes6Guwahati Municipal CorporationYesYesNoYesNoNo7Tejpur Municipal BoardYesYesNoYesNoNo8Nagaon Municipal BoardYesYesNoYesNoNo9Nalbari Municipal BoardYesYesNoYesNoNo10Digboi Municipal BoardYesYesNoYesNoNoSource: City Financial Ranking (https://cityfinance.in/login)Table 5: Proposed Municipal Functional Groups and Services under Municipal CadreProposed Municipal Functional GroupsMunicipal Services under the Municipal CadreMunicipal Administrative Service [MAS]Municipal Executive ServiceMunicipal Social Development ServiceMunicipal Staff ServicesMunicipal Technical Service [MTS]Municipal Engineering ServiceMunicipal Sanitation ServiceUrban Planning & Transportation ServiceMunicipal Fire ServiceMunicipal E-Governance ServiceMunicipal Finance Service [MFS]Municipal Accounts ServiceMunicipal Revenue & Financial ServiceConclusion & Strategic RoadmapPreliminary assessments of Annual Financial Statements (AFS) of sample cities indicate that lately due to the 15th FC condition for claiming Grants and City Financial Ranking requirements, cities have started preparation and auditing of financial statements seriously. Sample assessment of 10 cities indicates that delay significantly reduced in 2021-22 as compared to 2019-20 as even earlier years’ financial statements have been audited in the years 2021-22 and 2022-23. The challenge is that all cities of India where accounts are not updated in real-time will face difficulty in meeting the deadline of 15th May from FY 2024-25 onwards.This article attempts throw light on areas where States and ULBs need to gear up well on time by getting their all tools in place like getting all accounting entries updated, all reconciliations done, and appointing a Statutory auditor well on time else the timeline of 15th May of Financial Year may become the dream for certain ULBs leading to their failure to claim Grants for FY 2024-25.Some of the key tools/suggestions that the State and ULB can place in their baggage of complying with 15th FC conditions well before the close of 31st March of FY have been presented below:a. Appointment of Firm of Chartered AccountantsState/ULB needs to appoint a Firm of Chartered Accountants through a valid tendering process for the preparation of Annual Financial Statements and/or for carrying out Statutory Audit to meet 15th FC conditions.b. Resolving Accounting Staff Shortage IssuesStaff shortage in municipalities can pose significant challenges in the timely preparation of financial statements. Adequate staffing is crucial for ensuring compliance with legal and regulatory requirements. States shall create a Municipal Cadre of accounting Staff and it shall be ensured that staff appointed shall be of commerce background to give justice to day-to-day bookkeeping and they shall be given regular training, both off the job and on the job. A Municipal Accounts Service cadre was proposed in one of report of MoHUA (Approach towards Establishing Municipal Cadres in India, 2014, MoHUA).c. Creation of State Mission Monitoring Team (SMMT)The State Mission Monitoring Team (SMMT) needs to be set up under the leadership of any senior official of the Urban Department, primarily from a finance background. State Mission Monitoring Team at the State Level consisting of Senior Chartered Accountants with experience in Municipal Finance and implementation of accrual-based double entry in ULBs and IT staff shall be formed to act as surveillance unit to monitor and guide ULB for completion of work of preparation of Annual Financial Statements and its auditing.d. Completion of Preliminary Work of BookkeepingThe prime reason that audit work is delayed in ULBs is due to the delay in preparation of Annual Financial Statements which is due to a lack of real-time accounting and reconciliations. State/ULB shall ensure with strict instruction to the accounts department to update all accounting entries in real-time so that financial statements can be prepared without any significant delay once the financial year FY 2023-24 is closed.Table 6: Indicative Checklist for Readiness of System#CheckpointsYes / No1Whether previous year’s opening balance from the approved Balance sheet have been entered?[ ]2Whether journal has been prepared for all receivable income such as tax, charges and lease income?[ ]3Whether journal has been prepared for all pending/outstanding payments?[ ]4Whether periodic reconciliation of various sub registers including Bank reconciliation is done?[ ]5Whether capital work in progress completed during the year have been capitalized and depreciated during the year?[ ]e. Accounting Precedes AuditingAuditing is known as post mortem of books of accounts and thus timeliness of the audit is dependent on the timely preparation of accounts. Thus, ULB accounts staff shall ensure that day to day accounting is done on real time with periodic reconciliation. This would ensure to prepare of annual financial statements on time to be available for audit.f. Capacity Building InitiativesNothing can be achieved without effective Training in terms of troubleshooting guide. Thus State/ULB shall ensure regular training, especially on-the-job training is provided so that queries can be resolved without any delay. State may get a small video solution to queries of ULB developed that ULB accountants may face while entering transactions and generating reports as part of training material.ReferencesAnnual Financial Statements of Selected municipalities.Common Mistakes in Annual Financial Statements of Urban Local Bodies, April 2023, The Chartered Accountant.Final Guidelines & Ranking Framework March 2023, Government of India, Ministry of Housing & Urban Affairs, 2022.Fourteenth Finance Commission Performance Grant Scheme 2017-2020 Tool Kit, Government of India.Municipal Bonds for Financing Urban Infrastructure in India: An Overview, (Revised 2020), ICAI.Reform Toolkit for Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Government of India, Ministry of Housing & Urban Affairs, 2022.Research Study on Accounting Reforms in Urban Local Bodies in India, Committee on Public Finance & Government Accounting, The Institute of Chartered Accountants of India, February 2019.Smart City Guidelines, India, Government of India, Ministry of Urban Development (2015), June 2015.The Report of the Fifteenth Finance Commission (2022-2026), Government of India, (2021).Transition to Accrual Accounting: Models and Learnings for Urban Local Bodies, An ICAI-ICAI ARF Study for NITI Aayog, 2022.Authors may be reached at eboard@icai.in
Revolutionizing Resolution: Proposals for Sculpting India’s IBC 2.0 FrameworkAs India continues to refine its insolvency and bankruptcy ecosystem, the opportunity to introduce advanced reforms tailored to contemporary challenges becomes increasingly pertinent. This article presents a compendium of strategic improvements recommended for the next iteration of the Insolvency and Bankruptcy Code (IBC), encapsulated in a visionary IBC 2.0 framework. The author’s suggestions are aimed at enhancing procedural efficacy, safeguarding stakeholder interests, and strengthening the overall economic foundation.The anticipated IBC 2.0 framework is towards enhancing India’s corporate insolvency resolution regime with key reforms centered around efficiency and value preservation. The proposals herein for the framework underscore the necessity for stringent enforcement of timelines, reduction of legal complexities, and the focused preservation of asset value. These proactive measures are intended to curtail the duration of insolvency proceedings and ensure a dynamic resolution process that prioritizes the health of the business ecosystem. The envisaged reforms are expected to instill a greater degree of confidence among creditors and investors, fostering an environment conducive to economic stability and growth. Through these strategic changes, the IBC 2.0 framework would be able to adapt to the evolving financial landscape and reinforce the integrity of India’s insolvency and bankruptcy resolution process.IntroductionThe Insolvency and Bankruptcy Code (IBC) of 2016 laid the cornerstone for modern insolvency proceedings in India, signifying a paradigmatic shift in dealing with financial distress. While the IBC has heralded substantial progress, there remains room for evolution and refinement—pivotal in maintaining the Code’s relevance and efficacy amidst an ever-changing economic landscape.The article highlights the necessity for a holistic and adaptive IBC 2.0 framework, one that synergizes with economic imperatives and international standards, and which can ultimately serve as a catalyst for India’s financial and entrepreneurial renaissance. Through this discourse, the author contemplates in sculpting an insolvency framework prepared to withstand future exigencies.Strategic Imperatives: Charting the Course for India’s IBC 2.0 Through Targeted Reforms1. Streamlining the Resolution ProcessThe success of the Insolvency and Bankruptcy Code (IBC) hinges on its ability to facilitate the swift resolution of corporate insolvencies, a critical factor for preserving the intrinsic value of distressed assets. As the economic landscape shifts, there is an acknowledgment among policymakers and stakeholders of the need for an updated IBC – what is being termed as IBC 2.0. This updated code needs to encapsulate mechanisms to expedite the resolution process, effectively curtailing prolonged legal entanglements that have historically diminished asset values. Within the scholarly discourse of insolvency and bankruptcy reform, the following pivotal actions would be crucial to be incorporated into the IBC 2.0:The imposition of strict adherence to the code’s prescribed timelines, thereby reducing the incidence of protracted resolution processes.The streamlining of legal complexities to avoid unnecessary delays in the resolution proceedings.The preservation and maximization of distressed assets’ value by ensuring quick and efficient resolutions.The proposed amendments to the IBC are not solely focused on procedural speed but also on enhancing the integrity and sustainability of the corporate insolvency resolution system. This approach not only benefits the companies involved but serves to minimize the economic fallout for creditors and other stakeholders. By implementing these changes, a fortified framework is envisaged—one where resolutions are timely, transparency is paramount, and the financial ramifications of insolvency are significantly mitigated. The essence of this initiative is to nurture a robust business environment that steadfastly maintains creditor trust and invigorates investment certainty.“The success of the Insolvency and Bankruptcy Code (IBC) hinges on its ability to facilitate the swift resolution of corporate insolvencies, a critical factor for preserving the intrinsic value of distressed assets.”2. Reinventing the NCLT for the New Era of Insolvency ResolutionThe NCLT currently bears the brunt of an increasing volume of insolvency cases. An advanced, well-resourced NCLT is instrumental in dealing with the complexities of insolvency cases and in realigning the expectations of all stakeholders with the realities of the IBC process.Case management can be revolutionized through the implementation of cutting-edge technologies. A comprehensive digital platform could be established, which would handle everything from filing to the adjudication of cases. Automated case tracking systems would streamline workflow and help in the prioritization of cases based on urgency and complexity.The use of AI in legal research can drastically reduce the time taken for case preparation. AI tools can assist legal professionals in quickly finding relevant precedents, laws, and judgments. Additionally, AI can be used for predictive analysis, offering insights into probable outcomes based on case data, which can aid in faster resolution of cases through settlements or alternative dispute resolution mechanisms. The expansion of the NCLT should also include recruiting additional technically qualified staff and providing extensive training to existing ones.3. Strengthening Asset Valuation MethodologiesTo address common valuation discrepancies and to bolster the confidence of all stakeholders, a more robust and transparent valuation framework is essential. The establishment of standardized methodologies, approved by a regulatory body, would help create consistency in valuations across different cases. These methods should consider the unique characteristics of each asset class, industry-specific nuances, and the current economic conditions, to ensure that they reflect realistic market values as accurately as possible.Implementing a peer review process for valuation firms can provide an additional layer of scrutiny and can help to uphold the integrity of the valuation process. Under this system, the valuation reports would be subject to review by independent valuers who can affirm or challenge the methodology and assumptions used. This not only serves as a quality check but also encourages valuers to adhere strictly to the best practices and methodologies.4. Addressing Small and Operational CreditorsSmall and operational creditors often find themselves without a voice in the resolution process. To ensure that small and operational creditors are not left with negligible recoveries, establishing minimum recoverable thresholds could be beneficial. This could mean that these creditors are assured of a base level percentage of their claims before any additional distributions are made to larger and Financial creditors. Such thresholds would need to be calibrated carefully to balance the aim of equitably compensating small creditors with the need to maintain the overall economic viability of the resolution plan.Small and operational creditors often lack the resources or the technical understanding to navigate the insolvency process effectively. The IBC 2.0 could mandate the creation of resources and educational programs to assist these creditors in understanding their rights and the insolvency process. This could include web portals with FAQs, regular webinars or workshops, and plain language guides on how to participate in the resolution process.5. Strengthening the Role of the Committee of Creditors (CoC)In order to enhance the effectiveness of the resolution process for a Corporate Debtor, it is of paramount importance that members of the Committee of Creditors (CoC) bring not just a profound understanding of the CD’s financial health to the table, but also take a proactive stance in the CoC deliberations. These members, endowed with the requisite authority to enact critical decisions, should be cornerstone contributors to the formulation of the CD’s resolution plan. Their specialized insights and strategic choices are instrumental in deciphering the complexities of the insolvency proceedings, ensuring a more streamlined and efficacious route to the rehabilitation of the CD. Through their substantial involvement, the CoC can not only accelerate the resolution process but also substantially improve the prospects for a successful and equitable resolution for all vested parties.6. Streamlined E-Voting Process for CoCThe IBC 2.0 framework needs to integrate a streamlined electronic voting process for the Committee of Creditors to aid in swift and decisive resolution outcomes. The e-voting process should be tightly governed by a framework that mandates:Procedures should be established to automatically close voting at the stipulated time, with clear consequences for non-compliance. These procedures will facilitate a more disciplined and structured voting environment, ensuring that no member delays the process.Precise stipulations for when e-voting should be concluded, thereby instituting uniformity and ensuring that votes are lodged within the prescribed window. Members would be furnished with a clear and unambiguous voting schedule that aligns with meeting agendas.By enforcing such a regimented e-voting protocol within the IBC 2.0 framework, the resolution process will benefit from increased efficiency and diminished delays, ultimately benefiting all parties involved in the insolvency proceedings by expediting the resolution process.“The IBC 2.0 framework should inherently incorporate a comprehensive approach to group insolvency, streamlining the resolution for corporate groups with interconnected liabilities and assets.”7. Cross-Border InsolvencyThe IBC 2.0 framework should be equipped with a robust set of provisions dedicated to cross-border insolvency. These provisions must facilitate the seamless integration of India’s insolvency regime with international protocols, allowing for efficient coordination between domestic and foreign insolvency proceedings. The framework must provide clear guidance on the recognition of foreign proceedings and relief measures, cooperation with foreign courts and insolvency professionals, and coordination of parallel insolvency proceedings involving the same debtor in different countries.To ensure a global standard of practice, the framework should align with the principles outlined in the UNCITRAL Model Law on Cross-Border Insolvency. The adoption of such internationally recognized guidelines would enhance India’s legal infrastructure to effectively manage cases where the insolvent debtor has assets or creditors in multiple jurisdictions. By integrating these cross-border insolvency provisions, the IBC 2.0 framework would elevate India’s handling of international insolvency cases, promoting legal certainty for cross-border investors and creditors, and fortify the country’s standing in the global market.8. Synergizing Group Insolvency DynamicsThe IBC 2.0 framework should inherently incorporate a comprehensive approach to group insolvency, streamlining the resolution for corporate groups with interconnected liabilities and assets. It necessitates a synchronized insolvency mechanism that acknowledges the intertwined operations and financials of group entities, ensuring a consolidated handling of insolvency cases. This shift towards a group-centric insolvency paradigm would encourage cooperative resolution strategies, potentially maximizing asset value while minimizing administrative costs and complexities.Instituting such provisions within the IBC 2.0 framework would align with global best practices, offering a legally sound and economically efficient methodology for the resolution of group insolvencies. It would enable the resolution professional to manage the group’s assets and liabilities in a holistic manner, facilitating a more strategic and coordinated restructuring or liquidation process. The adoption of group insolvency provisions within the IBC 2.0 framework would signal India’s commitment to evolving insolvency law in consonance with the complexities of modern corporate structures, thereby enriching the IBC with the capability to handle high-stakes group insolvency cases with agility and precision.“IBC 2.0 framework may address the ambiguity surrounding personal guarantors to corporate debtors, ensuring their liabilities are comprehensively covered within the purview of insolvency proceedings.”9. Strengthening Residential Real Estate Insolvency ResolutionsThe forthcoming IBC 2.0 framework is to be designed not just as legislation, but as a commitment to protect the aspirations of homebuyers. It should inbuilt special mechanisms for addressing the complexities of distressed real estate projects, ensuring the sanctity of homeownership is upheld. Such mechanisms must facilitate the timely and successful completion of housing complexes, thereby preserving the value of investments made by countless individuals. The framework needs to incorporate a distinct set of accelerated and result-oriented procedures that directly align with the urgency of delivering homes to buyers within an insolvency context.10. Enlistment of Sector-Sage Resolution ProfessionalsIndia is set to greatly benefit from the niche expertise of Resolution Professionals. These experts are not just adept in insolvency law but also possess a deep understanding of specific business sectors. Their keen industry insights enable them to identify and execute more effective and innovative resolution strategies. This tailored approach is anticipated to not only expedite the resolution process but also to boost the likelihood of higher recoveries and successful corporate turnarounds. Additionally, it reassures creditors and investors of a more rational and informed decision-making process, which is critical for maintaining confidence in the financial system. The infusion of specialized knowledge within the IBC framework is a strategic enhancement that aims to maximize the value of distressed assets and promote a healthier credit environment.11. Personal Guarantor Liability & Asset TracingIBC 2.0 framework may address the ambiguity surrounding personal guarantors to corporate debtors, ensuring their liabilities are comprehensively covered within the purview of insolvency proceedings. It is expected that the framework will unequivocally define the extent of personal guarantor liabilities, firmly establishing their responsibilities within insolvency proceedings. This move is designed to eliminate any existing ambiguities, making guarantors fully accountable and providing a more transparent and predictable legal landscape for creditors. Such definitive measures aim to ensure that all aspects of a debtor’s financial obligations are addressed, safeguarding the integrity of the insolvency resolution process.Enhanced Powers for Tracing Assets of Personal Guarantors: The IBC 2.0 framework should empower Resolution Professionals with broader authority to diligently trace and reclaim assets of personal guarantors. This would involve:Granting Resolution Professionals the ability to access information from tax authorities to uncover undisclosed assets.Collaborating with cyber cells to trace digital footprints, such as mobile number usage, which could lead to asset identification.Facilitating fluid information exchange between the RPs of corporate debtors (CDs) and those of personal guarantors for a more comprehensive understanding of overlapping assets and liabilities.Enabling RPs to requisition information from personal guarantors’ advocates, subject to legal confidentiality constraints, to potentially identify assets shielded by complex legal structures.12. Enhancing the Role and Efficiency of Information Utilities (IUs)The IBC 2.0 framework should encompass advanced provisions for empowering Information Utilities (IUs). Acknowledging their essential contribution to the insolvency resolution framework, the statutory architecture must be equipped to reinforce IUs as robust, centralized repositories. This will expedite the verification of claims, enhancing both the process’s speed and transparency. By integrating state-of-the-art digital technology, the framework is to amplify the efficiency, correctness, and pace at which insolvency resolutions unfold, thereby bringing greater clarity and dependability to the entire ecosystem.ConclusionThe envisioned IBC 2.0 framework is about being more inclusive, efficient, and equipped to handle the complexities of a growing economy. It is about laying the foundation for an insolvency resolution ecosystem that can adapt to the needs of diverse stakeholders and withstand economic vicissitudes. The proposals outlined look beyond the immediate hurdles and focus on building a scalable, resilient mechanism that anticipates and adapts to the changing economic scenarios. Through these amendments, IBC 2.0 will strengthen India’s commitment to becoming a premier investment destination while fostering economic rejuvenation and growth.Author may be reached at careshmamittal@gmail.com and eboard@icai.in
FINANCIAL MARKET
Ep. 454 — An investigation of the day-of-the-week effect and month effect in the stock markets of the Asia-Pacific Region
CA Journal
· September 2026
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An investigation of the day-of-the-week effect and month effect in the stock markets of the Asia-Pacific RegionThe present study seeks to inspect the existence of the day-of-the-week effect and month-effect in five Asian-Pacific stock indices. The article examines the presence of the calendar anomaly in stock market returns and index volatility. Index volatility in the five Asian-Pacific stock exchange is modelled using EGARCH (1,1). The study hinges on the data of five indices viz. NIFTY, HSI, S&P ASX, SSEC and STI from Jan 2010 to Sep 2023. The outcomes of our study support the presence of the day-of-the-week effect on market returns and volatility in NIFTY and STI only. All five markets show an absence of the month-effect in market returns.IntroductionMarket efficiency refers to the potential of a stock market to assimilate accessible information and reflect it in the stock prices in a short span of time. Efficient market theory presupposes that asset prices behave randomly and investors have no opportunity to earn abnormal returns. Early studies found that the Dow Jones Industrial Average Index in the US market shows signs of a weak form of efficiency. But empirically, it has been proven that the reality is not in line with the maintained theories of asset-pricing behaviour. This shows that inefficiencies may also be a characteristic of the stock market and anomalies might exist. This violates the hypothesis of the weak form of market efficiency because if the markets are efficient, then calendar anomalies such as the day-of-the-week effect should not exist. However, the existence of calendar anomalies is evident with the likelihood of stock prices showing certain patterns at specific times of the calendar.Calendar anomalies such as the day-of-the-week, turn-of-the-year, weekend, monthly and pre-holiday effect are the oldest forms of calendar anomalies (1973). The day-of-the-week-effect anomaly has been broadly empirically studied in developed countries. Sias and Starks (1995) found that the Monday anomalies are persistent and as compared to Friday, Monday returns falls off. Golder and Macy (2011) established a positive connection between changes in the mood of the investors and returns on Mondays and Fridays. The month-of-the-year effect is an unexplored anomaly. Elango and Pandey (2008) found The January anomaly in Sensex where they observed negative significant returns in January along with March and April.Previous researchers have used different GARCH family models to measure the volatility to understand the impact of calendar effects. Berument et al. (2010) applied EGARCH to find volatility in S&P500 (NASDAQ). Zhang et al. (2017) used GARCH (1,1) modelling to probe the day-of-the-week effects in SHC index of the Shanghai Stock Exchange.Calendar effect anomaly occurs owing to different periods and conditions existing in a country. With the same view, our study aims to investigate the existence of the day-of-the-week and monthly effect on five stock exchanges of the Asia-Pacific region viz. India, Hong Kong, Australia, China, and Singapore for the period ranging from January 2010 to September 2023. Our study aims to find and analyze the presence of calendar anomalies in emerging markets such as India and China, and developed stock markets viz. Singapore, Hong Kong, and Australia. The existing literature lacks a comprehensive view of the existence of anomalies in prominent developed and emerging markets.The present study focuses on testing calendar anomalies not just for return but also for market volatility by fitting the EGARCH model. Subsequent sections of the study are as follows: the second section delineates the methodology and data analysis. The third section spells the findings, while the fourth section comprehends conclusion.Methodology and Data AnalysisOur study focuses on finding calendar anomaly in stock market returns and stock volatility in five Asia-Pacific region stock exchanges viz, NIFTY, National Stock Exchange (NSE) from India, Hang Seng Index (HSI) from Hong Kong, S&P ASX200 Australian Stock Exchange (S&P) from Australia, Shanghai Stock Exchange Composite Index 000001 (SSEC) from China and Straits Time Index (STI) from Singapore. The present study is based on the data from January 2010 to September 2023 which was extracted from Thompson Reuters.Day of the Week EffectFor the calculation of daily return, the formula RdT = ln (It / It-1) was applied; where, ln denotes the natural logarithm, It is the closing index value at day, and ‘t’ It-1 is the closing index value at day before ‘t’.The presence of the day-of-the-week effect was analysed through the following regression equation:RdT = c + β1 DTu + β2 DW + β3 DTh + β4 DF + eT —— (1)Where RdT is the index return of the day, DTu to DF represents the dummy variable from Tuesday to Friday, and eT is the error term. This equation will help us to analyse if there exists significant market returns for any day of the week.Also, to explore the day-of-the-week effect on the index volatility, the study models volatility using EGARCH (1,1). Literature supports that incorporating the asymmetric volatility through EGARCH yields more adequate results. To overcome the problem of symmetry assumption, the EGARCH model was established to ascertain the asymmetric negative or positive effects in the model. It has been supported by numerous empirical studies that the pessimistic news of the previous day has the ability to influence present day’s volatility than the positive news. This situation refers to the leverage effect, wherein today’s level of risk for investors increases due to the bad news from yesterday. The asymmetric volatility is represented by negative and significant γ (i.e. γ < 0). Therefore, γ represents the leverage effect, and the higher the leverage effect, the higher would be the volatility clustering and vice versa. The equation of the EGARCH models is as follows:log σt2 = γ0 + ∑i=1p γi (|εt-i| / σt-i) + ∑i=1p θi (εt-i / σt-i) + ∑j=1q ωj log σt-j2 —— (2)The above equation allows εt to have positive and negative values and impact volatility differently. The daily return mean equation to model EGARCH (1,1) is the following:RdT = c + α1 Rdt-i + μt —— (3)Where α1 is the coefficient of lag daily returns and μ is the error term. The lag term i is determined on the basis of the significant ACF and PACF terms.The impact of index volatility on the day-of-the-week anomaly was checked by running the following regression equation:σdt2 = C + β1 DT + β2 DW + β3 DTh + β4 DF + σdt-12 —— (4)This equation shows that today’s volatility depends on the previous day’s volatility and the day-of-the-week effect, if it exists. The EGARCH model is applicable in the presence of heteroskedasticity only. Therefore, the ARCH LM test was run on data in question to check the fitness of the model.Day of the Month EffectTo calculate the monthly index value, an average of the last day index value of the month, the index value of the preceding and succeeding trading day has been taken. To calculate the monthly index returns, the following formula was used:RmT = ln(Imt / Imt-1) where, ln denotes the natural logarithm, Imt denotes the index value of the month ‘t’, and Imt-1 is the index value of the previous month.The following regression is run to check the presence of the month effect in the monthly return series:RmT = ι + γ1 DFEB + γ2 DMAR + γ3 DAPR + γ4 DMAY + γ5 DJUN + γ6 DJUL + γ7 DAUG + γ8 DSEP + γ9 DOCT + γ10 DNOV + γ11 DDEC + εmT —— (5)Where RmT is the index return of the month, DFEB to DDEC represents the dummy variable from February to December, and εmT is the error term. Equation (5) detects the presence of significant return in applicable particular month, if applicable.FindingsTable 1 and 2 gives an account of the descriptive statistics for the daily and monthly index returns respectively. The mean value of the daily returns of all the five markets is near zero. The value of standard deviation reveals that volatility is higher than the STI market for all other markets. The negative value of skewness confirms the presence of asymmetric distribution.However, a high value of kurtosis shows the presence of thicker tails and a leptokurtic distribution. The high value of Jarque-Bera or JB statistics is an indication that the data of all five stock exchanges do not follow normal distribution.Table 1: Descriptive Statistic of daily return seriesParticularsNIFTYHSIS&P ASXSSEC CHINASTIMean0.000218-6.59E-052.35E-06-3.34E-053.44E-05Median0.0007850.0002810.0004730.0003320.000155Maximum0.0921160.0880780.0688000.0626010.064918Minimum-0.151245-0.065737-0.115745-0.092486-0.083319Std. Dev.0.0130660.0128530.0128700.0134090.009521Skewness-0.748791-0.010049-0.796918-0.874069-0.370925Kurtosis12.825736.12075710.238509.0696298.862353Jarque-Bera13974.361372.8687954.3085550.5845042.672Probability0.0000000.0000000.0000000.0000000.000000Sum0.738843-0.2228150.008150-0.1115340.119058Sum Sq. Dev.0.5794690.5586980.5754290.6001940.314069Observations33953383347533393466The monthly index return of NIFTY, STI, and S&P ASX is near zero but HSI and SSEC are showing negative returns. The high value of standard deviation shows the presence of clustering around the mean and less dispersion. The negative skewness value indicates an absence of normal distribution. The proximity to leptokurtic distribution is connected to the high value of skewness. The JB statistics also indicate that the monthly data of all five stock exchanges shows a clear departure from normality.Table 2: Descriptive Statistic of monthly return seriesParticularsNIFTYHSIS&P ASXSSEC CHINASTIMean0.004678-0.0010290.000370-0.0003600.000827Median0.0052290.0035600.003469-2.90E-060.001934Maximum0.1856980.2410810.1566470.1770610.164562Minimum-0.302433-0.159183-0.297209-0.269533-0.213869Std. Dev.0.0643500.0577420.0626880.0623240.051692Skewness-0.528614-0.022341-0.846534-0.272491-0.460111Kurtosis5.6444464.5063605.9129085.0339684.817563Jarque-Bera55.7619215.6139378.0416430.4839728.53363Probability0.0000000.0004070.0000000.0000000.000001Sum0.771947-0.1697810.061050-0.0593670.136480Sum Sq. Dev.0.6791100.5468060.6444930.6370210.438213Observations165165165165165The ADF test was run to confirm the non-stationarity of return series. Table 3 and Table 4 contains the results of the ADF tests of stationarity.Table 3: Results of ADF Test of Daily Return SeriesTestNSE (NIFTY)HSIS&P ASXSSECSTIADF (t-stats & Prob. Value)-56.247 (.0000)-57.398 (0.0000)-55.808 (0.0000)-55.908 (.0000)-37.486 (.0000)The prob. values of all indices given in Table 3 and Table 4 are less than 1%, indicating the rejection of the null hypothesis. Hence, it is suitable for EGARCH modelling. EGARCH (p,q) modelling is an autoregressive process where the dependent variable is dependent on its own previous values or lag term.Table 4: Results of ADF Test of Monthly Return SeriesTestNSE (NIFTY)HSIS&P ASXSSECSTIADF (t-stats & Prob. Value)-13.69481 (0.0000)-13.97629 (0.0000)-14.08912 (.0000)-11.01368 (.0000)-14.23754 (.0000)The next step is to check the autocorrelation among daily and monthly returns. Autoregressive processes usually have an exponentially declining ACF and spikes in the first one or more lags of the PACF. The order of autoregression depends on the number of spikes in ACF and PACF.From the autocorrelation function (ACF) and partial autocorrelation function (PACF) of daily returns (Figures 1 to 10), the probability value becomes significant after lag 6 for NIFTY; for Hong Kong (HSI), it becomes significant at lag 23; for SSEC, it becomes significant from lag 6; for S&P ASX, it becomes significant from lag 1; and for STI, it becomes significant from lag 11. The return equation for modelling EGARCH volatility terms is set in accordance with the significant lag terms.The findings for the day of the week effect in daily returns are presented in Table 5.Table 5: Day of the Week Effect (Daily Returns)Stock MarketNIFTYHSIS&P ASXSSECSTICoeff.Prob. ValueCoeff.Prob. ValueCoeff.Prob. ValueCoeff.Prob. ValueCoeff.Prob. ValueC-0.001110.0264-0.000850.0897-0.000110.8171-4.54E-050.9313-0.000950.0091*DTU0.0019030.0071*0.0011250.11050.0007690.26970.0005790.43260.0015550.0025*DW0.0017650.01260.0011520.10090.0004150.55020.0001090.88240.0013210.0098*DTH0.0011100.11690.0005560.42790.0001290.8530-0.001160.11330.0010420.0414DF0.0018710.0085*0.0010770.1271-0.000740.28890.0005480.45880.0009880.0552*Significant at 1% levelThe day-of-the-week effect examines if there exists any significant difference between the returns generated by one specific day of the week as opposed to rest of the days.Table 5 shows that in NIFTY, Tuesday and Friday have positive and significant returns. STI has a negative but significant return pattern on Monday, and positive and significant returns on Tuesday and Wednesday. Conversely, HSI, S&P ASX, and SSEC do not reflect the presence of defined patterns in return generation, indicating an absence of the day-of-the-week anomaly.In the absence of heteroskedasticity, the EGARCH modelling is not advisable. Therefore, the ARCH LM test was run on all five return series before fitting the EGARCH model. The ARCH LM test assumes the absence of the arch effect. However, our results from the ARCH LM test supported the signs of heteroskedasticity in the daily return series only. Therefore, the EGARCH modelling was applied on the daily data series to capture the volatility on day-of the-week. The absence of heteroskedasticity makes it unfeasible to apply EGARCH on the monthly data series.Table 6: Volatility and Day-of-the-Week Effect (EGARCH 1,1)MarketNSE (NIFTY)HSIS&P ASXSSECSTICoeffProb. ValueCoeffProb. ValueCoeffProb. ValueCoeffProb. ValueCoeffProb. ValueC4.53E-060.02423.48E-060.0008*3.70E-060.02030.0001560.0000*6.03E-070.3970DTU7.46E-060.0047*3.15E-060.0070*9.78E-070.63912.63E-070.01473.06E-060.0009*DW-9.32E-070.72391.79E-080.9877-1.99E-060.33861.80E-080.86723.70E-070.6877DTH-1.83E-060.4884-1.37E-070.9063-9.23E-070.6576-1.41E-070.18847.58E-070.4094DF2.67E-060.31328.96E-070.44365.23E-070.8024-2.07E-070.05455.99E-070.5178GARCHt(-1)0.9629610.00000.9728760.00000.9785140.00000.0556930.00130.9814220.0000Table 6 shows if the daily market volatility has any significant impact on certain days of the week. The daily return findings are supported by the daily volatility results. NIFTY and STI are facing significant volatility on Tuesday’s return. For HSI and SSEC, the market volatility is going through significant impact on Monday but no significant volatility in S&P ASX on any days of the week.Table 7: Month-of-the-year Effect (Monthly Returns)Stock MarketNIFTYHSIS&P ASXSSECSTICoeffProb. ValueCoeffProb. ValueCoeffProb. ValueCoeffProb. ValueCoeffProb. ValueC-0.0146880.4022-0.0064310.67270.0066760.68040.0074110.5315-0.0046500.7197FEB0.0289850.2430-0.0014460.9464-0.0126520.5811-0.0065160.75070.0166690.3635MAR0.0271940.27320.0235180.27540.0175150.4451-0.0085660.67620.0304430.0980APR0.0071600.7726-0.0223510.2998-0.0473480.0402-0.0194790.3428-0.0391100.0341MAY0.0226680.36080.0074500.7292-0.0120680.5986-0.0305030.13820.0069410.7048JUN0.0340150.17100.0113980.59650.0286830.2119-0.1105990.09130.0300880.1020JULY-0.0016580.9466-0.0208790.3327-0.0292350.2032-0.0233930.2549-0.0354910.0541AUG0.0263790.2878-0.0187080.3852-0.0378770.0999-0.0155090.4498-0.0065510.7207SEP0.0340450.17060.0160820.45530.0180360.43170.0043980.83010.0171330.3503OCT0.0089720.72230.0239780.2751-0.0097900.67520.1076450.09280.0127950.4934NOV0.0231350.36000.0169390.44030.0092390.69240.0163480.43720.0116930.5313DEC0.0211580.40240.0329610.13420.0012260.9581-0.0133050.52700.0233560.2120Next, the study computes the month effect on the market returns. Table 7 shows the results of monthly returns and if a month of the year has any significant impact on it. The findings presented in Table 7 depict clear absence of month-effect in all the five markets. It confirms that no month is giving significant greater returns to the investors as compared to rest of the months.ConclusionThis study is an unprecedented attempt to explore the calendar anomaly and presence of volatility in the Asia-Pacific region between the emerging and developed markets.Key Empirical SummaryIndian Stock Market (NIFTY): Exhibits positive and statistically significant daily returns on Tuesday and Friday, along with significant conditional volatility on Tuesdays.Singapore Stock Market (STI): Exhibits negative daily returns on Monday and positive significant returns on Tuesday and Wednesday, with elevated volatility on Tuesdays.Australia (S&P ASX), China (SSEC), Hong Kong (HSI): Depict an absence of the day-of-the-week return anomaly, confirming closer adherence to weak-form market efficiency.Month Effect: Completely absent across all five stock exchanges over the 2010–2023 sample period.The study of Plastun et al. (2019) also supports that markets evolve over time and shift from being inefficient to efficient in a manner where it is not possible for investors to find holes in the price dynamics to earn abnormal gains in the short run.The outcomes of the study assert that for an emerging country like India, the markets can move towards abnormal profits, whereas for developed markets like Australia and Hong Kong, investors using an anomaly would not be a good idea.This study is relevant from the perspective of investment manager as it gives insight into profitable investing strategies. The policy makers get an understanding of the relevant policy decisions that can be taken to strengthen the markets further.BibliographyBerument, M. H., Dincer, N. N., & Mustafaoglu, Z. (2012a). Effects of growth volatility on economic performance - Empirical evidence from Turkey. European Journal of Operational Research, 217(2), 351–356. https://doi.org/10.1016/j.ejor.2011.09.026Chiah, M., & Zhong, A. (2021). Tuesday Blues and the day-of-the-week effect in stock returns. Journal of Banking and Finance, 133. https://doi.org/10.1016/j.jbankfin.2021.106243Frank. Cross (1973) The Behavior of Stock Prices on Fridays and Mondays, Financial Analysts Journal, 29:6, 67-69. https://doi.org/10.2469/faj.v29.n6.67Golder, S. A., & Macy, M. W. (2011). Diurnal and seasonal mood vary with work, sleep, and daylength across diverse cultures. Science, 333(6051), 1878–1881. https://doi.org/10.1126/science.1202775Mostafa Saidur Rahim Khan & Naheed Rabbani, 2019. “Market Conditions and Calendar Anomalies in Japanese Stock Returns,” Asia-Pacific Financial Markets, Springer; Japanese Association of Financial Economics and Engineering, vol. 26(2), pages 187-209, June. DOI: 10.1007/s10690-018-9263-4Plastun, A., Sibande, X., Gupta, R., & Wohar, M. E. (2019). Rise and fall of calendar anomalies over a century. North American Journal of Economics and Finance, 49, 181–205. https://doi.org/10.1016/j.najef.2019.04.011Rengasamy, Elango & Pandey, Dayanand. (2008). An Empirical Study on January Anomaly and Return Predictability in an Emerging Market:. https://dx.doi.org/10.2139/ssrn.1150080Sias, R. W., & Starks, L. T. (1995). The Day-of-the-Week Anomaly: The Role of Institutional Investors. Financial Analysts Journal, 51(3), 58–67. https://doi.org/10.2469/faj.v51.n3.1906Zhang, J., Lai, Y., & Lin, J. (2017a). The day-of-the-week effects of stock markets in different countries. Finance Research Letters, 20, 47–62. https://doi.org/10.1016/j.frl.2016.09.006Authors may be reached at wadhwafin@gmail.com and eboard@icai.in
INTERNATIONAL TRADE
Ep. 455 — Accounting and Auditing Services and India’s Free Trade Agreements (FTAs): Opportunities and Challenges
CA Journal
· September 2026
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Accounting and Auditing Services and India’s Free Trade Agreements (FTAs): Opportunities and ChallengesIndia has recently signed a free trade agreement (FTA) with the European Free Trade Association (EFTA), which includes four European countries, namely Switzerland, Norway, Iceland, and Liechtenstein. This is the first ever trade agreement signed by India with any European country, hence it carries a lot of weight in terms of getting preferential access in European markets. It is also a signal for the FTA that India is negotiating with 27 members of the European Union (EU). Prior to this, India has also signed three FTAs, namely with Mauritius, UAE, and Australia, within the last three years. Apart from these, India is also negotiating FTAs with a number of countries including the UK, Peru, Oman, and Sri Lanka. Given this increasing emphasis of India on FTAs in recent times, it is pertinent to analyse what these FTAs mean for the trade of accounting and auditing services and what are the new opportunities and challenges created by these FTAs for the Indian accounting and auditing professionals.IntroductionThe accounting and auditing services are amongst the most important professional services sectors worldwide. With diminishing international borders and increasing globalisation, the role of such services is becoming all the more important. The increasing inward foreign direct investment by multinational corporations in India and the outward investment by Indian enterprises are enabling a lot of demand for such services not only within India but also in other geographies. As a consequence, the accounting and auditing services are no more confined to serving only domestic markets. Serving international markets and having an outward orientation is increasingly becoming important for these services. This could be observed through the exports of accounting and auditing services from India that have consistently increased over the years. Considering their significant trade potential, these services are also becoming important in India’s recent FTAs.This article assesses the trends in India’s exports and imports in the accounting and auditing services. It analyses accounting and auditing services in the context of the World Trade Organisation and also compares India’s commitments under the WTO and India’s FTAs, including the recently signed EFTA agreement. It also analyses the commitments made by EFTA and other countries for these services in India’s FTAs to understand the opportunities and challenges for the Indian accounting and auditing professionals.India’s Trade in Accounting and Auditing ServicesIndia’s exports of the accounting and auditing services have increased significantly from USD 958 million in 2018-19 to USD 2454 million in 2022-23, thereby reflecting around 250 per cent growth over these five years. On the contrary, India’s imports of these services have come down from USD 232 million in 2018-19 to USD 123 million in 2022-23. Another important observation is that India has a trade surplus in these services which has increased over the years (Table 1 and Figure 1). It implies that India’s exports are significantly higher than the imports for these services, thus contributing to a trade surplus in India’s overall services trade account, which in turn helps in mitigating the current account deficit.Table 1: India’s Trade Balance for Accounting and Auditing Services (USD, Million)YearExportsImportsTrade Balance2018-199582327262019-201,3073289792020-211,3811301,2512021-221,7531041,6492022-232,4541232,331Source: RBI data, various yearsFigure 1: India’s Exports and Imports of Accounting and Auditing Services (USD, Million)2018-199582322019-2013073282020-2113811302021-2217531042022-232454123 Exports ImportsAccounting and Auditing Services under the WTOThe General Agreement on Trade in Services (GATS) of the WTO covers international trade in services. According to the Services Sectoral Classification List of the WTO GATS (MTN.GNS.W/120), the accounting and auditing services fall under ‘professional services’ which is a sub-sector of the ‘business services’ sector. These are termed as ‘Accounting, auditing and book keeping services’ with the Central Product Classification (CPC) code 862, which is based on the United Nations Provisional Central Product Classification of 1991.Four Modes of Supply under GATS:Mode 1 (Cross-Border Delivery): Outsourcing of accounting and auditing services, i.e., supplying services to foreign clients in other countries through online mode.Mode 2 (Consumption Abroad): Foreign clients coming to India and utilizing the services of Indian accountants or auditors.Mode 3 (Commercial Presence): An Indian accounting and auditing firm establishing a subsidiary or office in another country and providing services through that office.Mode 4 (Presence of Natural Persons): Accounting and auditing professionals from India traveling abroad to provide services in foreign jurisdictions.India did not undertake any liberalisation commitments for accounting, auditing and book keeping services under the GATS in 1995. However, a new round of WTO negotiations, like the Doha Development Round, started in 2001. A number of WTO Members, including India, signalled their improved commitments by submitting their initial offers and revised offers at the WTO in 2004 and 2005 respectively. In its revised offer submitted during the Doha round, India offered its full commitments in the accounting and bookkeeping services for modes 1 and 2 but did not offer any commitments in mode 3. It also left its mode 4 commitment unbound, subject to horizontal commitments. It is also to be noted that India did not offer any commitments in the auditing services in its revised offer. Table 2 presents a snapshot of India’s revised offer for the accounting and bookkeeping services.Table 2: Accounting and Auditing Services in India’s Revised Offer under the WTOSub-sectorLimitations on Market AccessLimitations on National TreatmentAccounting and Book Keeping Services (CPC 862)(excluding Auditing Services)NoneNoneUnboundUnbound except as indicated in the horizontal sectionNoneNoneUnboundUnbound except as indicated in the horizontal section and further subject to the requirement of obtaining professional indemnity insurance from home country of service provider.Source: Author’s compilation from India’s Revised Offer for Services in the WTO (2005)Note on Terms:Limitations on Market Access: Conditions for entry of foreign service suppliers.Limitations on National Treatment: Conditions which discriminate between domestic and foreign service suppliers.None: No limitations, i.e., full liberalisation commitments.Unbound: No commitments for opening-up of the sector to foreign service suppliers.Though India’s revised offer in this sector had some improvement as compared to its GATS commitments, it also reflected the sensitivities pertaining to the liberalization in this sector in general and in the auditing segment, in particular. The overall position taken by India in accountancy services in the revised offer could be considered as defensive. This defensive position was based on the suggestions from the ‘Working Group for Suggesting Negotiating Strategy in the Accountancy Sector’ that was constituted in 2002 by the government to advise it on its negotiating strategy for this sector (Pal, 2006).It is worth noting that the Doha Development Round is not yet concluded and hence these revised offers are only indicative and are not legally binding commitments under the WTO. Therefore, it could be said that India still does not have any commitments for accounting and auditing services in the WTO.Accounting and Auditing Services in India’s Free Trade AgreementsTill date, India has signed nine free trade agreements in services. Out of these seven are with individual countries, namely Singapore (2005), Korea (2010), Malaysia (2011), Japan (2011), Mauritius (2021), UAE (2022), and Australia (2022), and two with regional blocs of countries, namely, ASEAN (2015) and EFTA (2024).i. India’s FTA Commitments in Accounting and Auditing ServicesUnlike GATS, India had made some commitments in this sector in its FTAs. An analysis of India’s commitments for accounting and bookkeeping services in its existing FTAs including the most recently signed India-EFTA agreement reveals that the partial commitments in FTAs are largely based on India’s revised offer submitted at the WTO. As such, India made commitments only for accounting and bookkeeping services and excluded auditing services from any commitments in these FTAs. Mode 1 and 2 are kept as completely open and mode 3 as completely closed for accounting and bookkeeping services, as was there in its revised offer in the WTO.A few changes have been observed in mode 4 limitations in various FTAs. For instance, in India-Singapore CECA, the first ever services FTA of India, India inscribed mode 4 market access and national treatment limitation requiring “fulfilment of criterion of registration with relevant Accountancy body in India and obtaining of professional indemnity insurance from home country for a period of stay of up to 12 months”.However, in its subsequent FTAs with Korea, Malaysia and Japan, India did not inscribe these limitations for market access. For national treatment also, the limitation was curtailed to requiring only professional indemnity insurance from home country. These changes were made probably to reflect India’s revised offers at the WTO, which was submitted after the India-Singapore CECA.The registration requirement was once again introduced as a national treatment limitation in the India-ASEAN FTA with some changes. First, the registration requirement is applicable for all the three committed modes, i.e. mode 1, 2 and 3 in this FTA. Second, the registration requirement was mentioned in respect of both Chartered Accountant and Cost & Works Accountant. These changes might have been introduced considering the fact that both Chartered Accountant and Cost & Works Accountant may be involved in accounting and bookkeeping services and some registration requirements may de facto discriminate between foreign and domestic service providers. Inscribing these as national treatment limitations would ensure that any discriminatory registration requirements imposed later on will not violate India’s commitments.In the subsequent three FTAs with Mauritius, UAE and Australia, which were signed in the past three years and the most recent India-EFTA agreement, the element of ‘scheme of reciprocity’ was also introduced in this national treatment limitation pertaining to registration requirements. This was based on the requirements of the Chartered Accountants Act, 1949 (As amended by The Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Act, 2022).“In the recently signed India-EFTA agreement, the four EFTA countries, Switzerland, Norway, Iceland and Liechtenstein, have undertaken significant liberalisation commitments for accounting and auditing services.”ii. India’s FTA Partners Commitments in Accounting and Auditing ServicesIn the recently signed India-EFTA agreement, the four EFTA countries, Switzerland, Norway, Iceland and Liechtenstein, have undertaken significant liberalisation commitments for accounting and auditing services. Switzerland has committed full market access in accounting, bookkeeping and financial auditing services (excluding auditing of banks), though it has inscribed some discriminatory limitations on mode 1 and mode 4 of financial auditing services to be provided by the Indian professionals. Iceland has completely opened up these services for the Indian accounting and auditing professionals. Norway has opened accounting and bookkeeping services significantly but kept some limitations on auditing services. Liechtenstein has also fully opened up its market for bookkeeping services (except tax returns), and accounting and auditing services except some market access limitations for mode 3 of the accounting and auditing services. Thus, it could be inferred that the newly signed India-EFTA agreement would create opportunities for accounting and auditing professionals of India to tap EFTA markets.The India-EFTA agreement will also create opportunities for accounting and auditing professionals in the domestic market. As part of this agreement, EFTA countries agreed to increase their investment in India to USD 100 billion in the next 15 years and facilitate the generation of one million direct employment in India through such investments. This increased investment will lead to more business operations and hence an increased demand for accounting and auditing professionals within India.We further analysed the commitments undertaken by FTA partner countries for accounting and auditing services in India’s other existing FTAs. It could be observed from this analysis that most of India’s other FTA partners have also made extensive commitments for these services. They have also opened up auditing services for auditing professionals from India, though India has not taken any commitments for auditing services in these FTAs. Therefore, significant opportunities also exist for the Indian Chartered Accountants to provide their services in the territory of these FTA partner countries and contribute to India’s services exports.Opportunities also exist for the outsourcing services in the area of accounting and auditing services for the Indian Chartered Accountants and accounting professionals as mode 1 commitments in these FTAs are mostly ‘none’ by these countries in this sector. This is particularly important in the post Covid world wherein a significant part of the work is done in online mode.iii. Mutual Recognition of Qualifications and FTA ProvisionsAn important challenge for the Indian accounting and auditing professionals while tapping the markets of FTA partner countries would be the recognition of their qualification in these countries. The opportunities created by these FTAs may be constrained by the lack of mutual recognition of qualifications for these services between India and its FTA partner countries. These FTAs provide a solution to this challenge by having provisions on mutual recognition of qualifications. For instance, the India-EFTA agreement has a provision that India and the EFTA countries shall engage with their relevant bodies or authorities and encourage them to establish dialogues with the relevant bodies or authorities of another country agreements or arrangements providing for the mutual recognition of the qualifications, licensing, and registration procedures.ConclusionAccounting and auditing services will be the backbone of India’s USD 5 trillion economy in coming years. As economic activities expand in the future, there will be an increasing domestic demand for such services. While the domestic market will continue to grow, significant opportunities also exist in overseas markets where the Indian accounting and auditing professionals can render their services and contribute to the Government of India’s ambitious target of USD 1 trillion services exports by 2030. The free trade agreements signed by India add to these opportunities as they provide binding market access commitments in the FTA partner countries. The Institute of Chartered Accountants of India already have mutual recognition agreements (MRAs) with some of these countries. The FTA provisions on MRAs will further enhance the export opportunities for the accounting and auditing services professionals of India.ReferencesIndia’s Revised Offer (2005), https://commerce.gov.in/international-trade/india-and-world-trade-organization-wto/indias-gats-schedule-for-commitments-and-offers/Pal, P. (2006) ‘Liberalizing Accountancy Services in India’, in R. Chanda (ed) Trade in Services & India: Prospects and Strategies, pp. 177-205, Wiley India, New Delhi.RBI data (various years), ‘Data on India’s Invisibles’, https://rbi.org.in/Scripts/Statistics.aspxVarious FTA documents signed by India.Author may be reached at eboard@icai.in
LIFESTYLE
Ep. 456 — Predictive Precision Medicine: Your Best Friend and Financial Planning Guide
CA Journal
· September 2026
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Predictive Precision Medicine: Your Best Friend and Financial Planning Guide“Predictive Precision Medicine: Your Best Friend and Financial Planning Guide.”As health metrics and longevity continue to rise worldwide, we are confronted with a new set of challenges that threaten to disrupt not only individual lives but also the economic stability of communities and nations. Chronic, Non-Communicable Diseases (NCDs) such as cardiovascular ailments, diabetes, chronic respiratory conditions and cancers are becoming increasingly prevalent, even among the young, and concerningly in children.These chronic conditions are not only the leading causes of disability and premature death, but they also impose a significant financial burden. The direct costs associated with managing chronic diseases—such as ongoing medical care and treatments—are compounded by the indirect costs incurred from lost productivity and reduced labour capacity, both for the sufferers and their caregivers.The Epidemiological Challenge in IndiaIn India, the scale of chronic disease is staggering:10.1 CrDiabetes Patients13.6 CrPrediabetes Cases31.5 CrHigh Blood Pressure25.4 CrObesity35.1 CrAbdominal Obesity21.3 CrHypercholesterolaemia18.5 CrHigh Bad CholesterolAge ~50Onset (10 Yrs Earlier)Thanks to our genes, we also get NCDs a decade before our Western counterparts—around the age of 50—when a person is at their economic peak. But, the most concerning news of all is that NCDs have doubled in children over the past decade. This number increases not just the overall population with NCDs but also their likelihood of complications, associated loss of income, and treatment costs.The data forewarns us to not just take charge of our health but also thwart the profound economic repercussions triggered by these diseases. In the absence of an adequate financial mechanism, the treatment and care of NCDs can leave a household employing drastic financial measures to manage the cost of treatment and care, including depleting savings, incurring debts, or liquidating assets—strategies that can lead to long-term financial instability and even poverty.For financial planners and advisors, understanding these impacts is crucial. It helps integrate health considerations into comprehensive financial planning, providing clients with strategies that account for potential health-related financial risks. Predictive precision medicine, with its focus on preventing diseases before they manifest, offers significant insights that can be used to enhance financial planning. This approach allows for a nuanced understanding of potential health risks, enabling better management of financial resources and more informed decision-making.Understanding Predictive Precision MedicinePredictive precision medicine is a visionary approach that rests on the principle of the “five rights”—the right patient receiving the right treatment at the right time, in the right dose, and via the right route. This concept might seem straightforward, but it’s a radical departure from traditional one-size-fits-all medicine. It hinges on understanding each person’s unique health blueprint, incorporating their genetic data, lifestyle choices, and even their living environment into their care plan. This not only helps understand what’s wrong but also why, leading to highly specific and effective steps for prevention and treatment, should the need arise through omics—genomics, proteomics, metabolomics and others—and disease patterns picked up through deep machine learning from large data sets.The “Five Rights” Principle of Predictive Precision Medicine:Right Patient: Formulated for the individual’s unique genetic and molecular blueprint.Right Treatment: Targeted therapeutic solutions addressing root pathological mechanisms.Right Time: Early preventive deployment before irreversible clinical damage occurs.Right Dose: Pharmacogenomic titration preventing toxicities or ineffective under-dosing.Right Route: Optimal physiological delivery minimizing systemic side-effects.How it WorksManaging Heart Diseases: Beyond Broad-Stroke RiskTake, for instance, the management strategy for heart diseases. Traditional preventative strategies, such as monitoring vital health markers like blood pressure, blood glucose, and cholesterol, or promoting lifestyle changes, do not resonate even among high-risk individuals until symptoms manifest and it is too late. This issue is critical in the context of heart attacks that can occur suddenly due to unseen, silent factors like plaque buildup. Such catastrophic health emergencies not only threaten limb and life but also introduce significant financial burdens unexpectedly.Historically, risk assessment for heart disease has been a broad stroke, categorising individuals into ‘high’ or ‘low’ risk based on general factors. This method, while helpful, is imprecise—out of a hundred people deemed ‘high risk’, while 80 would develop disease, 20 might face a heart event. In the ‘low risk’ group, only five may suffer a heart attack, but they might not be ready because of being deemed low risk.Predictive medicine refines this approach, and Artificial Intelligence (AI) and machine learning are at the heart of this revolution. These technologies delve into health data, discerning risk patterns with a precision unattainable by traditional methods. AI’s capability to analyse complex data—from ECG abnormalities to lifestyle factors—and compare them against large data sets enables a highly personalised risk assessment, helping doctors identify individuals who truly stand at the precipice of fatal heart events, targeting prevention efforts where they’re needed most, and improving compliance.The Present and FutureWhile one may believe predictive precision medicine to be a thing of the future, the fact is that many streams of medicine have been passing on its benefits to patients for many years now.Oncology: Precision Treatment in Breast CancerTake, for instance, breast cancer—the most common cancer among women in India accounting for 25% of all cases. While this cancer is becoming more and more common among young women, it is also becoming increasingly treatable, improving survival rates and longevity. Care of women with breast cancer is being improved with precision medicine that helps tailor treatment to the molecular characteristics of individual tumours, including the size and spread of the cancer and the patient’s menopausal status.One such cancer is HER2-positive breast cancer, wherein the HER2 protein is higher than normal helping cancer cells grow quickly. These cancers tend to grow and spread faster than breast cancers that are HER2-negative, and are much more likely to respond to treatment with drugs that target the HER2 protein. The knowledge that certain tumours are hormone-sensitive has been guiding doctors in choosing targeted drugs for breast cancer for about 30 years now.The scope of predictive precision medicine extends well beyond cardiac and cancer care. It encompasses all areas of health, including neurological disorders like Alzheimer’s, Parkinson’s and Autism; mental health conditions helping choose more effective medicines; management of infectious diseases, and even road mapping the health of a newborn. Genetic indicators can forewarn of future health risks, guiding parents to take measures ranging from lifestyle adjustments to screenings, clinical interventions, and enhanced financial planning.Significance for Chartered Accountants and Financial AdvisorsIntegrating Health Analytics into Financial AdvisoryFor chartered accountants and financial advisors, an understanding of predictive precision medicine is crucial—not only for planning their own finances, but also for advising their clients effectively. As this field advances, the insights gleaned from predictive health analytics can significantly inform financial strategies in several ways:Forecasting Health-Related Liabilities: By anticipating potential health crises through predictive analytics, CAs can better forecast and plan for the financial impacts of health-related expenses, incorporating these considerations into comprehensive financial planning.Maximizing Preventive Healthcare ROI: By advising clients on the financial benefits of investing in predictive health measures, CAs can help them avoid the high costs associated with late-stage medical treatments, thereby promoting both healthier lifestyles and financial savings.Navigating the Healthcare & Insurance Landscape: As predictive precision medicine becomes more integrated into mainstream healthcare, its implications on insurance, healthcare costs, and individual savings will grow, making it an essential area of expertise for financial professionals looking to provide holistic advice.Understanding these dynamics allows chartered accountants to offer more than just financial guidance; it enables them to advocate for a proactive approach to health and financial well-being that aligns with the evolving landscape of personalised medicine.(The writer is an internationally renowned cardiovascular and cardio-thoracic surgeon, and the Chairman and Managing Director of Global Health Limited)Source links:Economic cost of NCDs - NCBI PMC8664228Personalised Medicine in Breast Cancer - ESMOAre Non-Communicable Diseases Increasing in India? - The Hindu
ICAI Driving Governing Accounting ReformsIn our democratic society, the government plays a pivotal role in utilising public funds for various political, social, and economic duties aimed at maximising social and economic welfare. However, with this significant responsibility comes the imperative for transparency and accountability in governance. In today’s era, people are increasingly vigilant of their rights and are demanding greater transparency in governance processes. Citizens rightfully demand a fair account of how their hard-earned money is being utilised and how effectively the financial affairs of the economy are being managed. One of the crucial avenues through which this transparency can be achieved is through government accounting reforms, which have become the need of the hour.IntroductionAt the heart of fiscal transparency lies good quality financial reporting. Adoption of Accrual Accounting is path towards Government Accounting Reforms. As per International Public Sector Financial Accountability Index (2021), it is expected that by 2025, out of 165 jurisdictions:50% of the jurisdictions will be reporting on accrual basis;35% of the jurisdictions will have partially adopted accrual accounting; and15% of the jurisdictions will be on cash basis.It is also imperative that government financial statements adhere to accepted data quality standards to provide stakeholders with a clear and accurate picture of the financial health of the government. This necessitates the use of generally accepted accounting standards in the preparation of financial statements as Accounting Standards play a vital role in ensuring transparency, reliability, comparability, uniformity, and consistency of financial statements. High-quality accounting standards are essential in enabling governments to depict true and fair view of their financial position and financial performance, thereby fostering trust and confidence among stakeholders.International Public Sector Accounting Standards (IPSASs formulated by IPSAS Board of International Federation of Accountants (IFAC)) are globally recognised Accounting Standards designed specifically for the public sector. IPSASs are based on International Financial Reporting Standards (IFRSs) but modified by IPSASB best suited to Government Sector. Apart from accrual based IPSASs, IPSASB has also issued one Cash based IPSAS that plays an important role in enhancing the quality of financial reporting by entities reporting on the cash basis of accounting, and in supporting those entities as they transition to the accrual IPSAS.Status of Governing Accounting Standards in IndiaThe status of governing accounting standards in India reflects a concerted effort towards enhancing transparency and harmonising financial reporting practices across different levels of government.For Central & State GovernmentGovernment Accounting Standards Advisory Board (i.e., GASAB constituted by O/o Comptroller and Auditor General (C&AG) of India) formulates two sets of Accounting Standards for Central & State Government(s) and Union Territories with Legislature. These standards include both cash-based Indian Government Accounting Standard (IGAS) and accrual-based Indian Government Financial Reporting Standard (IGFRS). GASAB refer IPSASs while formulating their Standards. A few cash-based standards have been mandated by the Ministry of Finance and the notification of remaining standards is pending.For Local-Self GovernmentInstitute of Chartered Accountants of India (ICAI) through one of its non-standing Committee namely Committee on Public and Government Financial Management (CPGFM) formulates Accounting Standards for Local Bodies (ASLBs) to harmonise the diverse accounting practices being followed by the Local Bodies in India and facilitate global harmonisation and international convergence.ASLBs are based on IPSASs with modifications to suit Indian conditions, and are recommendatory in nature.Till date, 31 ASLBs have been issued including one Cash based ASLB to facilitate transitioning from cash to accrual accounting system and one Guidance Note on “Accounting for Investments for Local Bodies”.These ASLBs are recommendatory in nature and it is the prerogative of State Governments to implement these Standards. ASLBs are sent to the Ministry of Housing & Urban Affairs (MoHUA) for consideration by their Technical Committees on Budget & ASLBs for recommending the same to the State Governments for implementation.ASLB 2 (Cash Flow Statements), ASLB 5 (Borrowing Costs) and Guidance Note on “Accounting for Investments for Local Bodies” have been mandated by the ICAI to comply with by Members of ICAI while Auditing the Financial Statements of Urban Local Bodies (ULBs) w.e.f. 1st April 2022 as these are conceptually similar to National Municipal Accounts Manual, i.e., existing prevailing accounting framework for ULBs.The State of Uttarakhand has set a precedent by revising its Municipal Accounts Manual referring to ASLBs issued by ICAI.“ASLB 2, ASLB 5 and the Guidance Note on Accounting for Investments for Local Bodies have been mandated by ICAI for compliance by members while auditing ULB accounts w.e.f. 1st April 2022.”While significant strides have been made towards standardising government accounting practices in India, continued efforts are needed to overcome challenges and promote greater transparency and accountability across all levels of government.The serious obstacle in implementation of Accounting Standard is the absence of a political will for transparency on the part of too many governments. Other challenges are issues pertaining to stakeholder engagement, structural and legal transformation, change management, skill capacity, costs involved in technology and infrastructure, etc.Role of ICAI in Implementing Government Accounting ReformsAs an apex body in the field of accountancy and auditing in India, ICAI, a partner in nation building, plays a pivotal role in implementing government accounting reforms and has been actively contributing to shaping the national accounting scenario and working closely with the Government to drive reforms.1. Organisational SupportICAI is in constant dialogue with the Ministry of Housing & Urban Affairs (MoHUA), Ministry of Panchayati Raj (MoPR), O/o Controller General of Accounts (CGA) and O/o C&AG apart from several State Governments to give organisational support to implement Government accounting reforms in India. Moving forward:ICAI has collaborated with O/o C&AG of India on accounting and auditing issues and to strengthen the accountability mechanism for good governance in local self-governments. In pursuance of a MoU signed with them, Certificate Courses for Accountants of Panchayats and Municipal Bodies have been launched to make available trained accounting personnel in local bodies.ICAI is also providing support to GASAB for adaptation of cash based IPSAS in Government Accounts.ICAI is providing technical support to the Ministry of Housing and Urban Affairs (MoHUA) to transform the quality of financial reporting of ULBs in India. To begin with, draft framework is being laid out for quality assessment of Audited and Unaudited Annual Accounts of ULBs being uploaded on Cityfinance.2. Capacity Building InitiativesICAI is sensitising officials of all tiers of Government in India through workshops/trainings/seminars, e-training modules, short videos, webinars, etc.ICAI has entered into MoU and Agreements with various Government Departments for knowledge transfer and skill development of their officials (such as MoUs with Treasuries & Accounts Department, Government of Tamil Nadu & NIRD&PR and Agreement with Uttarakhand Public Financial Management Strengthening Project).Trainings are being imparted in regional languages such as Tamil, Gujarati, Marathi apart from Hindi & English.3. Submission of Inputs / Suggestions to GovernmentPresident, ICAI is a Member of GASAB. ICAI actively participates in their meetings and submits technical inputs on draft Standards and various other documents of GASAB from time to time.ICAI submits representations to various Government Authorities from time to time highlighting the need of:Separate accounts and finance cadre;Amending relevant Municipal Acts (for smooth implementation of accrual accounting reforms, municipal bonds issuance, etc);Constitution of Audit Committee in Municipalities, and so on.4. Certificate Course on Public Finance and Government AccountingICAI through CPGFM is conducting online certificate course / online self-paced course on public finance and government accounting to equip the participants with understanding of the accounting system of all tiers of Government (Central, State and Local-Self Government).This course can be attended by the officials of Government and Autonomous Bodies working under administrative control of Ministries & Government Department as well apart from Members of ICAI.This course has got recognition in tenders issued by Local Bodies/Government departments/Authorities in Maharashtra, Madhya Pradesh and Jammu & Kashmir. The O/o C&AG has also included this course as one of the criteria for empanelment of CA Firms (additional 1 point is awarded).Thousand members have been trained through this course.5. Certificate Courses for Accountants of Panchayats and Municipal BodiesICAI jointly with O/o CAG of India launched online Certificate Courses for Accountants of Panchayats and Municipal Bodies during 2023 to make available skilled & trained accountants at grassroots level.These courses are being organised through Board for Local Bodies Accountants Certification (BLoAC) established under the aegis of ICAI Accounting Research Foundation (ICAI ARF).Any candidate who is 18+ years of age and 12th pass in any stream can register for this course.E-Study Material of this course is being made available in 10 languages (English, Hindi, Marathi, Telugu, Tamil, Odiya, Gujarati, Kannada, Bengali & Punjabi).6. Conversion / Financial Management Reforms ProjectsICAI through its research arm, ICAI Accounting Research Foundation (ICAI ARF), also conducts pilot studies and facilitates the Government in conversion of their accounts from cash to accrual basis of accounting. In the past, ICAI ARF had also assisted various Government departments (Department of Posts, Indian Railways, etc.) and Municipal Corporations in their conversion projects.Technical Publications Brought Out by ICAICommonly Used Terms in Public Finance & Government AccountingChanging Times in Government Accounting (A Status Paper)Research Study on “Accounting Reforms in Urban Local Bodies in India”Transition to Accrual Accounting: Models & Learnings for Urban Local BodiesResearch Study on “How Municipal Financial Data can be used for Decision Making”Opportunities for Chartered Accountants (CAs) in Government Accounting ReformsCAs serve as the backbone of the economy, playing a significant role in nation-building by providing essential guidance on various financial and economic measures of the country. Their expertise extends across a wide spectrum of areas, contributing significantly to the efficient functioning of government operations.CAs play a crucial role in smooth implementation of accounting reforms including adoption of Accounting Standards. CAs support the Government in strategic planning, tax planning, capital budgeting, budget preparation, book-keeping and auditing. Their financial acumen assists in formulating sound economic strategies, optimising resource allocation, and ensuring compliance with financial regulations. After the implementation of Goods and Service Tax (GST), the role of the CA has changed significantly. Starting with the creation of laws and regulations, they are instrumental in interpreting GST laws, facilitating compliance, and supporting businesses in transitioning to the new tax regime.Furthermore, CAs may engage with the government in various capacities, such as employees, consultants, advisors or auditors also as committee members for formulation of any policy or law. Their expertise and role are leveraged to the fullest extent possible from formulating laws and regulations to ensuring the efficient functioning of day-to-day government operations.ConclusionThe pace of accounting reforms has direct impact on the accounting profession. CAs can support Government in improving their financial reporting and management, establishment of a culture of accountability and enhancing transparency in their financial operations, etc.ICAI through its Certificate Course on Public Finance and Government Accounting is making aware the members about the challenges of this field well in advance before they enter the market and making efforts to make them competent to take full benefit of the opportunities available in this field.Apart from this, Certificate Courses for Accountants of Panchayats and Municipal Bodies, i.e., a joint initiative of ICAI & O/o C&AG, will also help in creation of employment opportunities for the qualified candidate near to their home locations in panchayats and municipal bodies as well as in MSME sector.Authors may be reached at eboard@icai.in
THEME
Ep. 458 — Auditing in Local Bodies
CA Journal
· September 2026
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Auditing in Local BodiesLocal bodies are entrusted with specific responsibilities related to local governance, including infrastructure development, public services, social welfare, and economic development, among others. The importance of local bodies is multifaceted, and they play a major role in decentralized administration and effective service delivery. These bodies act as a crucial intermediary between the government and the citizens. The significance of these institutions of self-governance stems from the fact that their establishment was mandated by the enactment of two crucial pieces of legislation i.e., the 73rd and 74th Constitutional Amendment Acts of 1992.Background of Local BodiesThe 73rd and 74th Constitutional Amendment Act (CAA), 1992 constitutionalized the system of Panchayati Raj Institutions and Municipalities in our country. They added two new parts IX and IX-A to the Constitution of India. It also added two new schedules i.e. Eleventh and Twelfth Schedule which contain the provisions which specify the powers, authority, responsibilities and contains a list of 29 and 18 functional matters of Panchayats and Municipalities, respectively.This amendment to the Constitution mandated to establish a three-tier Panchayati Raj System and establishment of three kinds of municipalities.Structure of Government in India Post-73rd & 74th Constitutional AmendmentsUnion / Central Government → State Government → Local-Self GovernmentUrban Local Bodies (ULBs) or MunicipalitiesMunicipal Corporation: For a larger urban areaMunicipal Council: For a smaller urban areaNagar Panchayat: For a transitional area (rural to urban)Rural Local Bodies (Panchayati Raj System)Zila Parishad: For District levelPanchayat Samiti / Block Panchayat: For Block levelGram Panchayat: For Village levelAudit of Accounts of Local BodiesWith the huge devolution of public funds towards the local bodies of India, there comes a need to assure the public that the grants or public funds are being properly utilised. This requires an examination and assessment of financial transactions, records, operations and compliance with applicable laws and regulations. The need to audit the accounts of local funds hence becomes a crucial aspect to ensure transparency and accountability in operations of local bodies.The addition of Part IX and IX-A to the Indian Constitution, among other articles, added Article 243 J which deals with Audit of Accounts of Panchayat and Article 243 Z which deals with Audit of Accounts of Municipalities.The above provisions merely said, ‘The Legislature of a State may, by law, make provisions with respect to the maintenance of accounts by the Panchayats/Municipalities and the auditing of such accounts.’Legal Framework of Audit in Local BodiesThe amendment of the Constitution through the aforementioned acts granted Union Government, the powers to enact laws on local bodies (Panchayats and Municipalities) and provided a framework for states to bring their existing laws in conformity with the provisions of the 73rd and 74th Constitutional Amendment Acts.As per the prevailing rules, for the audit of local bodies –The Local Fund Auditor, who is generally an officer of the State Government, holds such responsibility, orIn certain states, the Examiner of Local Fund Accounts, who is an officer of the Comptroller and Auditor General, is responsible for the audit of local body accounts.The Director Local Fund Audit (DLFA), by whatever name it is known in state, works under the administrative control of State Government while receiving Technical Guidance and Support / Supervision in audit matters from Principal Accountant General who acts as the representative of C&AG.Table: Local Fund Audit Acts and Departments of 8 Sample States in IndiaS. No.StateDepartmentGoverning Act / Code1RajasthanLocal Fund Audit Department, RajasthanRajasthan Local Fund Audit Act, 1954 and Rules 19552Himachal PradeshLocal Audit Department under Himachal Pradesh State Audit DepartmentAudit Code of the State of Himachal Pradesh3Uttar PradeshLocal Fund Audit Department, Uttar PradeshUttar Pradesh Local Fund Audit Act, 19844Jammu & KashmirDirectorate of Local Fund Audit & Pensions under the Finance Department, Jammu & KashmirCreated in the year 2012 vide Govt. Order No. 70-F of 2012 Dated 20-03-20125Madhya PradeshDirectorate of Local Fund AuditMadhya Pradesh Local Fund Audit Act, 19736KarnatakaKarnataka State Audit and Accounts DepartmentKarnataka Local Fund Authorities Fiscal Responsibility Act, 20037MaharashtraDirectorate, Local Funds Accounts Audit, MaharashtraMaharashtra Local Fund Audit Act, 19308KeralaLocal Self Government Department, KeralaKerala Local Fund Audit Act, 1994Analysing the data obtained from the Local Fund Audit Regulations of the sample states in India, it is evident that majority of states have enacted their own Local Fund Audit Acts and established local fund audit departments.But not all the states have enacted their own acts that govern local body audit. As an example, the state of West Bengal does not have its own Local Fund Audit Department and is instead governed directly by the state-level functionary of the Comptroller and Auditor General (C&AG). In the state of West Bengal, as per the readjustment in May 2023, the Office of Principal Accountant General (Audit), West Bengal under the Indian Audit and Accounts Department, i.e., the state level functionary of the C&AG is mandated to audit local bodies.“The auditors are required to obtain a comprehensive understanding of the relevant acts, rules and regulations that govern their operations in the state where audit of local body is to be conducted.”Key Challenges in Audit of Local BodiesIn the current scenario, auditors face some challenges during conduct of audit of local bodies. Identifying such challenges is crucial for seeking solutions. These challenges are as follows—Diverse Regulations: Local Bodies of different states often have uneven regulations relating to state specific acts that govern them. The auditors are required to obtain a comprehensive understanding of the relevant acts, rules and regulations that govern their operations in the state where audit of local body is to be conducted.Limited Resources: Many local bodies have limited financial and human resources, which may result in inadequate accounting systems, recordkeeping, and internal controls. Auditors must navigate these limitations while ensuring the accuracy and reliability of financial information.Diverse Revenue Streams: Local bodies receive revenue from multiple sources, including taxes, grants, and fees. Auditors must ensure accurate recording and reporting of these revenues, which can be complicated due to the diversity of sources.Complexity of Operations: Local bodies often have complex operations involving various departments, projects, and funding sources, making it challenging for auditors to understand the entirety of their activities.Data Availability and Quality: Auditors rely on accurate and reliable data to perform their audit process effectively. However, local bodies may struggle to maintain up-to-date and accurate financial records, which can hinder the audit process and impact the reliability of audit findings.Capacity Building: Local bodies may lack the necessary capacity and expertise to implement audit recommendations and improve their financial management practices. Auditors may need to provide additional support and guidance to help local bodies address identified weaknesses and improve their operations.Unresolved Discrepancies Between Audit Paragraph and Observations: The discrepancies identified in audit paragraphs are not adequately addressed or resolved in the corresponding observations. As a result, the audit process may lack effectiveness and fail to achieve its objectives of ensuring transparency, accountability, and compliance with regulatory requirements.Backlog in Local Body Audits: The issue of accumulation of pending audit tasks and examinations within the local bodies entities are a challenge in various states. This backlog often arises due to various factors such as resource constraints, staffing shortages, complexity of audit processes, and inefficiencies in workflow management. As a result, audits may be delayed, leading to prolonged periods without oversight, potential financial mismanagement, and increased risk of errors or irregularities going undetected.The challenges highlighted above underscored the necessity for enhancing audit regulations governing local bodies in India.Strengthening Audit of Local Bodies in IndiaStrengthening the audit of local bodies is imperative to address various challenges and enhance effectiveness in governance at the grassroots level. One key aspect is to ensure the utilization of funds effectively, as local bodies manage significant financial resources allocated for public welfare. Through robust audit mechanisms, it becomes possible to assess the situation of local bodies comprehensively, identifying areas of improvement and potential risks.Various stakeholders have lent their support to bolstering the audit processes within local governance entities:i. Role of Comptroller and Auditor General of India (C&AG)In 1971, Parliament enacted a crucial legislation known as the Comptroller and Auditor General’s [Duties, Powers, and Conditions of Service (DPC)] Act. The Comptroller and Auditor General (C&AG) while fulfilling its responsibilities has taken an active stance in tackling accountability and standardization concerns related to local bodies. This involved—Submitting a Memorandum to the Eleventh Finance Commission (2000-2005), expressing views on the audit and accountability of local bodies following the enactment of the 73rd and 74th CAAs. As a result, the Finance Commission made recommendations in alignment with these concerns.C&AG provides Technical Guidance and Support (TGS) to Local Fund Audit. It encompasses providing guidance on audit methodologies, procedures, and standards.C&AG offers training and capacity building initiatives for local fund audit staff to enhance their skills and expertise in conducting audits effectively.ii. Role of Finance CommissionsThe Finance Commission has played a significant role in the audit of local bodies in India through several recommendations provided from time to time. These include –The Eleventh Finance Commission’s recommendations:The responsibility for controlling and supervising the maintenance and audit of accounts for all tiers of Panchayats and Urban Local Bodies should be assigned to the C&AG.The Department of Local Fund Audit or any other auditing agency should operate under the technical guidance and supervision of the C&AG.The C&AG should specify the format for preparing budgets and maintaining accounts for local bodies.The audit of local bodies’ accounts should be conducted by the C&AG.The audit report of the C&AG regarding Panchayats and Municipalities should be presented before a Committee of the State Legislature.The Thirteenth Finance Commission recommendations:The State Government must put in place an audit system for all the local bodies.Technical Guidance and Supervision (TGS) over the audit of all the local bodies shall be entrusted to the Comptroller & Auditor General of India.C&AG’s Annual Technical Inspection Report as well as the Annual Report of the Examiner of Local Fund Accounts must be placed before the State Legislative Assembly.The Fifteenth Finance Commission: Made Audited Financial Statements mandatory for Urban Local Bodies to access its Grants. The State Governments, hence, mandate to get the Financial Statements of Urban Local Bodies audited to comply with the grant conditions.“The Central Government is on the path to modernize the country by taking measures to improve online infrastructure through the Digital India Programme.”iii. Role of Central Government – The AuditOnline Mission Mode ProjectThe Central Government is on the path to modernize the country by taking measures to improve online infrastructure through the Digital India Programme. In a recent development, under Digital India Programme, the Ministry of Panchayati Raj (MoPR) has launched AuditOnline under e-Panchayat Mission Mode Project (e-Panchayat MMP).AuditOnline is a platform that facilitates simplified audit of accounts at all the three levels of Panchayats. The purpose of launching the platform is to streamline the audit process, promote transparency and accountability in audit of panchayats. It is a centralized platform for conducting audits, managing audit schedules, document findings, and track audit reports. The platform can also be utilized to facilitate Urban Local Bodies and Line Department audits.The recent data available on the AuditOnline Dashboard indicates the accomplishment for the year 2022-23 (status as on 18/03/2024) as –2,59,152Books Closed2,61,642Enlisted Auditees2,29,469Audit Plans Prepared10,597Auditors Enlisted16,16,928Observations Recorded1,45,096Audit Reports GeneratedBenefits of AuditOnline:It enables the government entities to comply with the C&AG’s defined standards and guidelines for audit.It ensures tracking and monitoring end to end auditing process including follow-up of audit observations, audit paras and action taken on audit paras.The platform maintains past audit records and hence improvises transparency and accountability.Recommendations for Strengthening Audit Functionsi. Guidance from International Audit Standards (INTOSAI / ISSAI)Auditing Standards prescribe the norms of principles and practices, which the Auditors are expected to follow in the conduct of Audit. They provide minimum guidance to the Auditor that helps determine the extent of auditing steps and procedures that should be applied in the audit and constitute the criteria or yardstick against which the quality of audit results is evaluated.As per the Auditing Standards (2nd Edition) released by the Indian Audit and Accounts Department, the auditing standards of the International Organization of Supreme Audit Institutions (INTOSAI) have been suitably adapted with due consideration of the Constitution of India, relevant statutes, and rules for the auditing standards for the Supreme Audit Institution of India (SAI).INTOSAI has published auditing principles and standards for various types of audits in public sector:Financial Audit Principles (ISSAIs 200-299) and Financial Audit Standards (ISSAIs 2000-2899)Performance Audit Principles (ISSAIs 300-399) and Performance Audit Standards (ISSAIs 3000-3899)Compliance Audit Principles (ISSAIs 400-499) and Compliance Audit Standards (ISSAIs 4000-4899)The audit shall take guidance from these standards to ensure systematic, thorough, and consistent audit process of local bodies. Some State Governments have already taken steps towards integrating their auditing processes with INTOSAI Standards; for example, the States of Rajasthan and Uttarakhand have revised their auditing manuals/frameworks for conducting audits in local bodies by integrating guidance from INTOSAI standards.ii. Transition from Traditional Approach to Risk-Based ApproachWhile the traditional audit approach focuses on thorough examination to ensure adherence to standards and legal requirements, there’s a growing trend of shift towards risk-based auditing that offers a more targeted and efficient approach by focusing resources on areas of greatest concern. Transitioning to a risk-based auditing approach is necessary as it empowers auditors to tailor their audit plans and procedures according to the primary areas of concern, identified through risk assessment practices conducted prior to the audit process of local bodies.Figure 1: Comparison of Traditional and Risk-Based Audit ApproachParameterTraditional ApproachRisk-Based ApproachFocusConducts comprehensive auditing covering all aspectsIdentifies and prioritizes audit activities based on the associated level of riskApproachUniform approach by applying standardized audit proceduresTailored approach by applying customized audit proceduresAssessmentRely on past audit findings and regulatory requirementsSystematic risk-assessment processPlanningPredefined audit plansAudit plans are developed based on risk-assessmentReportingReports provide general overview of findingsReports focus on high-risk areas, providing detailed insightsBenefits of Risk-Based Auditing:Focusing on the most significant and risky auditable areasConducting efficient audit activitiesIdentifying the risk appropriatelyAffirmative cost-benefit impactsFulfilling the stakeholders’ expectationsiii. Integration of IT Tools and Computer Assisted Audit Techniques (CAATs)Auditors should resort to utilizing Computer Assisted Audit Techniques (CAATs) and Analytical Auditing Methods to enhance audit procedures in local bodies:CAATs leverage advanced technology to automate various aspects of the audit process and enable auditors to perform tasks more efficiently and effectively.By employing CAATs and analytical methods, auditors can streamline data analysis, identify anomalies or irregularities in financial records, and conduct more comprehensive risk assessments.Additionally, CAATs facilitate the extraction and processing of large volumes of data, allowing auditors to focus their efforts on critical areas while minimizing manual effort and errors.Several states are already on the path of incorporating IT Tools, such as the establishment of the Audit Management System (AMS) in Rajasthan and Online Audit Management System (OAMS) in Uttarakhand.iv. Capacity BuildingDespite the critical role played by auditors, there exists a gap in their capacity due to inadequate knowledge of recent legislative amendments, lack of technological expertise, and challenges in understanding complex transactions. There is an urgent need for regular training for auditors covering key areas:Auditing Procedure and Guidelines adopted by the GovernmentUse of newer and advanced IT technologiesInternational Auditing StandardsRecent changes in ecosystem of local bodiesInternational best practiceThe C&AG has prioritized enhancing audit capabilities of staff within DLFA units across various states by offering consistent training sessions focused on auditing PRIs and ULBs through Technical Guidance and Support.“Capacity building programmes must provide auditors with the necessary training, resources, and tools to enhance their technical expertise and understanding of local body operations.”ConclusionEnhancing audit practices in local bodies is crucial, considering their significant impact on various aspects of rural and urban life, including employment, public health, sanitation, infrastructure, and education. By strengthening auditing in local bodies, we can better achieve the goals set forth by the 73rd and 74th Constitutional Amendment Acts, which aim to decentralize planning and decision-making authority, empowering citizens at the grassroots level. This will not only promote transparency and accountability but also bolster the foundation of the nation, leading to overall benefits for the country.Author may be reached at cabadaltyagi@ymail.com and eboard@icai.in
Panchayats, Panchayati Raj Institutions, PRIs, Public Finance, 73rd Constitutional Amendment, Article 243, State Finance Commission, Union Finance Commission, Local Self Government, Centrally Sponsored Schemes, MGNREGA, C&AG, BLoAC, ICAI
Ep. 459 — Finances and Accountability of Panchayats in India
CA Journal
· September 2026
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Finances and Accountability of Panchayats in IndiaLike many countries including those with federal constitutions, local governments in India render public services locally to the residents of their jurisdictions. These public services include drinking water, sanitation, primary health & education, roads etc. Local Government in rural and urban India are called Panchayats and Municipalities that provide basic services in rural and urban areas respectively.Panchayat became a constitutional entity in 1993, through the 73rd Constitutional Amendment Act. Panchayats are constituted in every fifth year through an election process and are operational in all States and Union Territories at three rungs, i.e. district, block, and gram/village. In small states, middle level is not mandatory.Through 73rd Constitutional Amendment Act, Part IX-The Panchayat has been inserted into the Constitution. The section contains many provisions starting from Article 243, 243A to 243O. Article 243G mandates Panchayats to function as institutions of local self-government for economic development and social justice. It is expected from Panchayats to provide services on local subjects including twenty-nine matters listed in the Eleventh Schedule of the Constitution. The other constitutional provision envisages State Governments to devolve concomitant finances through assignment of taxes and non-taxes. In addition, Article 243-I provides for the constitution of state finance commission (SFC) after every five years to transfer resources from the state kitty to Panchayats in the form of devolution, grants – both conditional and unconditional, assignment of tax and non-tax handles. It was envisaged that the recommendations of SFC could generate stress on the state finances, hence, through the 73rd Constitutional Amendment Act, a sub-clause was inserted in Article 280 mandating Union Finance Commission (UFC) to suggest measures to augment the consolidated fund of states for Panchayats. So far, the 10th, the 11th, the 12th, the 13th, the 14th, and the 15th UFC have made recommendations and allocated grants to Panchayats.Panchayat FinancesPanchayat finances consist of the following: a) own revenues, b) borrowings, c) vertical schemes of the union and state governments, d) grants from the SFC, and e) grants from the UFC.Own RevenueThe former Union Minister of State for Rural Development, Shri G Venkat Swamy, while introducing the Constitution (73rd Amendment) Bill in the Parliament said, inter alia, the following:“Constitution (Seventy-third) Amendment cast a duty on the centre as well as the states to establish and nourish the village Panchayats so as to make them effective self-governing institutions…. We feel that unless the Panchayats are provided with adequate financial strength, it will be impossible for them to grow in stature”. — Shri G Venkat Swamy, Former Union Minister of State for Rural DevelopmentIdeally, the assignment of taxes to Panchayats can be broadly associated with the tasks devolved to them. It may be noted that certain basic local functions do exist in the jurisdiction of Panchayats and demand significant funds. Own revenue covers hardly five to ten percent of total Panchayats’ expenditure. Since, Panchayat is a State subject, de-jure assignment of taxes to Panchayats varies across states. The way taxes and non-taxes are levied also differs considerably in States. However, property tax remains the mainstay of the own source revenue. However, this tax remains inelastic because of inefficient administration in its collection. Its assessment is based on the annual rental value of taxation and its associated evil: under declaration of rentals.After own-source revenues, assigned revenues are the most efficient in the dispensation to Panchayats. Such revenues are levied and collected by the State government and are passed on to Panchayats for their use. Some States deduct collection charges. The practices in assigning revenue are marked by large interstate variation. However, typical examples of assigned revenue are the surcharge on stamp duty, professional tax, and entertainment tax. In many states, these taxes form part of the own-source revenue of Panchayats.Water Tax, Lighting Tax, Animal and Vehicle Tax, Taxes on Professions, Trade, Callings and Employments, Boat Tax, Toll Tax are the other taxes which have been assigned to the Panchayats in most States.The relative importance of these taxes varies from state to state. The block and district Panchayats are endowed with powers to collect very few taxes, whereas village Panchayats are given substantial taxing powers. In several cases, under the tax rental arrangement, the village Panchayats collect taxes and pass them on to the higher level of Panchayats (Alok 2006).BorrowingsPart IX of the Constitution is silent on borrowings. Hence, it’s a common perception that Panchayats lack the authority to procure loans. It is noteworthy that the Local Authorities Loans Act of 1914, a Central Act, does exist enabling the grants of loans to local authorities including Panchayats (Alok 2009).Vertical SchemesIn most states, a significant portion of Panchayat finances is provided by the Union Government through state governments. These financial transfers, primarily in the form of Centrally Sponsored Schemes (CSSs)1 are administered by various ministries and departments of the Union Government, covering a wide range of subjects among the twenty-nine matters listed in the Eleventh Schedule of the Constitution. However, the efficacy of many of these schemes has been subject to scrutiny. It has been argued that CSSs should be converted to block transfers.In the third decade of the twenty first century, the Panchayats are being increasingly recognised as implementing institutions for the schemes of line ministries. The most important of these is the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), where the Panchayats at the district, intermediate and village levels have been given specific responsibilities as principal authorities for planning and implementation. Similarly, other schemes, e.g., Jal Jeevan Mission, Swachh Bharat Mission, Samagra Shiksha Abhiyan, National Health Mission, Pradhan Mantri Awas Yojna, Pradhan Mantri Gram Sadak Yojna, Integrated Child Development Services etc., are also implemented by the Panchayats.Panchayats generally rely more on fiscal transfers from the State government in the form of shared taxes and grants.State Finance Commission (SFC)Generally, proceeds from own sources contribute abysmal share to the local pool. Panchayats generally rely more on fiscal transfers from the State government in the form of shared taxes and grants. State taxes are shared as per the recommendations of SFC in many States. The SFC created, under Article 243-I, is viewed as the sub-national equivalent of the UFC. The legal provisions for the SFC are, therefore, similar to that of the UFC except the wordings of the first paragraph of Article 243-I that provides for the constitution of the SFC ‘at the expiry of every fifth year,’ This is not akin to the provision exits under Article 280 constituting UFC ‘at the expiry of every fifth year or earlier’. The missing part ‘or earlier’ disallows the constitution of a new SFC before the completion of the five-year-period. The article mandates SFC to review the financial position of the Panchayats and make recommendations to the Governor on the principles that should govern:The distribution between the State and the Panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the State, and their inter se distribution between the Panchayats at all levels for such proceeds;The determination of the taxes, duties, tolls and fees which may be assigned to, or appropriated by, the Panchayats;The grants-in-aid to Panchayats from the consolidated fund of the State;The measures needed to improve the financial position of the Panchayats;Any other matter in the interest of sound finance of the Panchayats.The first SFC of Andhra Pradesh, included the share of Union taxes in the state taxes and non-tax revenue to form the divisible pool. However, the first SFCs of Madhya Pradesh, and the second SFCs of Orissa have not included the share of union taxes and included only the state tax and non-tax revenues. The first SFCs of Tamil Nadu, Uttar Pradesh and West Bengal have gone a step further and recommended that only the tax revenues of the State form the divisible pool. As an exception, the Karnataka SFCs have adopted a different mechanism by using the phrase “Non-loan gross own revenue receipts” in defining the divisible pool.Union Finance Commission (UFC)With the insertion of the sub-clause, the successive UFCs have been recommending grants to Panchayats.Firstly, the UFC-X, recommended a grant of Rs. 100 per capita of rural population to Panchayats, which was estimated to a total of Rs. 4,381 crore for five years, i.e., 1995-2000. The UFC recommended Rs 1000 crore for municipalities and the aggregated amount of Rs. 5,381 crore was 1.38 per cent of the union divisible tax pool.Secondly, the UFC-XI, recommended a grant of Rs. 8,000 crore to Panchayats and Rs. 2,000 crore to municipalities for five years, i.e., 2000-05. The total amount of Rs. 10,000 crore represented 0.78 percent of the divisible pool.Thirdly, the UFC-XII, proposed a sum of Rs. 20,000 crores to Panchayats and Rs. 5,000 crore to municipalities for five years, i.e., 2005-10. The aggregated amount of Rs. 25,000 crore was equivalent to 1.24 per cent of the central divisible pool.Fourthly, the UFC-XIII, made a departure from the previous practice of ad-hoc lump-sum grants and calculated the grants in terms of a share of Panchayats and municipalities in the union divisible tax pool. The share was 1.5 per cent to Panchayats and 0.78 per cent to municipalities. That worked out to be Rs. 87,519 crore for five years, i.e., 2010-15.Fifthly, the UFC-XIV, did not proceed on the path created by the UFC-XIII and reverted to old path by recommending an ad-hoc grant of Rs. 2,00,292 crore to Panchayats and Rs. 87,149 crore to municipalities.Sixthly, the UFC-XV, recommended a marginal increase over previous number. The commission recommended Rs. 2,36,805 crore for Panchayats and Rs. 1,21,055 crore to municipalities for five years, i.e., 2021-26.Finance CommissionOperational PeriodPanchayats Allocation (₹ Cr)Municipalities Allocation (₹ Cr)Total Local Bodies Grant (₹ Cr)Divisible Pool Share / Allocation MethodologyTenth FC (UFC-X)1995–20004,3811,0005,3811.38% of Union Divisible Pool (₹100/capita rural)Eleventh FC (UFC-XI)2000–20058,0002,00010,0000.78% of Divisible Pool (Ad-hoc allocation)Twelfth FC (UFC-XII)2005–201020,0005,00025,0001.24% of Central Divisible Pool (Ad-hoc lump-sum)Thirteenth FC (UFC-XIII)2010–2015——87,519Buoyant Pool Share: 1.50% (PRIs) + 0.78% (ULBs)Fourteenth FC (UFC-XIV)2015–20202,00,29287,1492,87,441Reverted to Ad-hoc Lump-Sum GrantsFifteenth FC (UFC-XV)2021–20262,36,8051,21,0553,57,860Ad-hoc Lump-Sum Grants with Marginal IncreaseIn 2023, the UFC-XVI was fully constituted. The commission is mandated to make its own assessment in recommending the path and quantum of fiscal transfer to Panchayats keeping various facts in view. Ideally, the share in the Union divisible is a better option for the Commission instead of recommending the ad-hoc lump-sum grants which is insensitive to inflation and keeps Panchayats devoid of national economic growth.Enhancing Accountability and Transparency in Panchayat FinancesSince Panchayats have become an integral part of India’s governance system and fiscal architecture, their accountability to various stakeholders also needs to be ensured.The concern has been raised, many times, by the Comptroller and Auditor General of India (C&AG), Shri Girish Chandra Murmu. He advocated transparency and accountability in the effective management of Panchayat finances.One approach to enhance accountability and transparency in Panchayat finances is through proactive engagement with stakeholders. The stakeholders, including local residents, civil society organisations, government officials, and elected representatives, have a vested interest in the effective management of public funds and the delivery of essential services at the grassroots level. Therefore, auditors can gather valuable input, feedback, and insights by involving stakeholders in the auditing process.Furthermore, the stakeholder engagement fosters transparency and accountability by promoting open communication, dialogue, and information sharing between auditors, Panchayat officials, and the community. Through transparent communication channels, stakeholders can be kept informed about audit findings, financial performance, and corrective actions taken to address deficiencies or irregularities. This transparency builds trust and confidence in the integrity of Panchayat governance and financial management processes.Hence, the auditors play a key role in overseeing practices in financial management and ensuring compliance with legal and regulatory requirements. It is practically difficult for the C&AG auditors and Local Fund auditors to undertake audit requirements of about 2.72 lakhs Panchayats.Timely preparation of accounts of panchayats is essential for timely audit. In this direction, Office of C&AG collaborated with the Institute of Chartered Accountants of India (ICAI), in 2023, to create a pool of accountants for strengthening accounting system at Panchayats2.ConclusionIn conclusion, enhancing accountability and transparency in Panchayat finances requires collaborative efforts and active engagement with stakeholders. Therefore, auditors play a crucial role in facilitating stakeholder engagement and gathering input to improve financial management practices and governance processes. They can effectively engage with stakeholders to gather inputs, promote transparency, and enhance accountability in Panchayat finances, ultimately contributing to improved governance and the service delivery at grassroot level.ReferencesAlok, V. N. 2006. “Local Government Organization and Finance: Rural India”, in Anwar Shah (ed.), Local Governance in Developing Countries, Washington, The World BankAlok, V.N. 2009. “Share of Local Governments in the Union Divisible Pool: An Option before the 13th Finance Commission”, Indian Journal of Public Administration, Vol. LV, No.1. Jan-MarGovernment of India. 2004. Report of the Tenth Finance Commission for 1995-2000, New DelhiGovernment of India. 2004. Report of the Eleventh Finance Commission for 2000-05, New DelhiGovernment of India. 2004. Report of the Twelfth Finance Commission for 2005-10, New DelhiGovernment of India 2009. Report of the Thirteenth Finance Commission for 2010-15, New DelhiGovernment of India 2014. Report of the Fourteenth Finance Commission for 2015-20, New DelhiGovernment of India 2021. Report of the Fifteenth Finance Commission for 2021-26, New Delhi1 The states’ contribution to the CSSs was generally 50 per cent in the eight decades, which was reduced to one-fourth in the 1990s because of the tight fiscal situations of the states. In 2023, three types of CSS exists, i.e., a) Core of the Core Schemes where funding pattern is usually 60:40 between Union and State respectively; b) Core Schemes for eight north-eastern and Himalayan states sharing pattern is 90:10 and for others it is 60:40; c) Optional Schemes for eight north-eastern and Himalayan states sharing pattern is 80:20 and for the rest of the States, the sharing ratio between Centre and State is 50:50.2 https://lba.icaiarf.org.in/ (Board for Local Bodies Accountants Certification - BLoAC created in collaboration with ICAI ARF).Author may be reached at vnalok@gmail.com and eboard@icai.in
THEME
Ep. 460 — Innovative Approaches to Financial Accounting Reforms in Government
CA Journal
· September 2026
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Action Taken Report (ATR) Module of Audit(Online Audits of Panchayats)“Independence must begin at the bottom. Thus, every village will be a Republic or Panchayat having full powers”. — Mahatma GandhiIn 1882, the British Government introduced a resolution that aimed to establish ‘Local Boards’ with elected non-official members as the majority. This resolution also proposed the creation of Rural Local Boards, with two-thirds of their members elected by the population. In spite of these early efforts, progress in the formation of Rural Local Self-governments continued stationary until 1947. The 73rd Amendment to the Indian Constitution in 1992 institutionalized the Panchayati Raj Institutions (PRIs) at three levels in rural India which are Gram Panchayats at the village level, Mandal Panchayats at the intermediate / block level, and Zila Parishad at the district level.The grants to PRIs have steadily increased as recommended by the Central Finance Commissions (CFCs), from ₹4,381 crore by the tenth CFC to ₹2.37 lakh crore by the fifteenth CFC. Moreover, the Central Finance Commissions have suggested that audited accounts and budgets of PRIs should be made publicly available. The ATR Module of Audit Online that was launched by the Ministry of Panchayati Raj serves the purpose of providing clarity on the actions taken in response to audit findings. With this system in place, the online audit process will be streamlined, ensuring greater transparency and accountability at the grassroots level.Historical Background and Constitutional EvolutionSince ancient times in India, villages have functioned as vital administrative units. Ancient writings like Manusmriti, Arthashastra, and Mahabharata contain references to panchayats. The influence of panchayats diminished due to factors such as the failure of Kingdoms to follow decentralization principles. Under British rule, the Panchayati Raj System was dismantled and replaced by the District Collectorate, primarily engrossed on revenue collection. The Bengal Chowkidar Act of 1870 granted District Magistrates the authority to establish panchayats in villages, consisting of appointed members for tax collection.With 68.8 percent of India’s Population residing in rural areas according to the 2011 Census, the local governments at the Panchayat level play a vital role in implementing the vision and developmental policies of both the Central and State governments.They act as intermediaries between the masses and higher levels of government, promoting grassroots development by encouraging community participation, fostering local stewardship, and advancing sustainability initiatives. However, the efficacy of the PRIs depends on factors such as the availability of adequate resources, the development of capabilities, political support, and active engagement of the local community. The ability of PRIs to fulfil these functions effectively relies on access to sufficient financial resources.National PRI Statistics: Currently, there are 2.62 Lakhs PRIs in India, including 2.55 Lakhs Gram Panchayats, 6,711 Block / Mandal Panchayats, and 665 Zila Parishads as of End of October 2023.Note: The States of Meghalaya, Mizoram and Nagaland have been specifically excluded from the operation of the 73rd Amendment Act.PRIs are expected to contribute significantly to achieving the Sustainable Development Goals (SDGs) set for the nation by 2030. They also serve as an important defence against climate change-induced risks in rural areas.Revenue Streams of Rural Local BodiesBefore 1992, PRIs had limited sources of revenue. Their primary income streams included:Small number of mandatory taxes, such as property taxes,Land revenue or rent cess,Taxes on animals and vehicles, andProfessional taxes, etc.They also relied on various optional taxes and fees, such as:Octroi, taxes on shops and markets,Pilgrim taxes,Fees on goods displayed for sale,Drainage fees,Lighting charges, andWater fees, etc.These revenue streams were insufficient to sustain the Panchayats without financial support from the State governments, as highlighted in the Balwant Rai Committee Report of 1957.The Decentralization of funds from the Upper Tiers of Government to the PRIs is provided for by the 73rd Constitutional Amendment in 1992, in addition to their own revenue sources such as taxes, duties, fees, and user charges. Revenue streams encompass:Central Government: Central Finance Commission Grants (Tax devolution), Central Finance Commission Other Grants, and Scheme-related Grants.State Government: Tolls, taxes, duties and fees collected by State, Grants-in-aid from State Govt., and State Government Transfers (Schemes).Internal / Own Sources: Tax revenue and User charges.Other External Sources: Grants from International bodies like the World Bank, etc.Conventional Audit Process and Systemic BottlenecksThe Conventional Audit Process consists of:An entry meeting with stakeholders.Conducting an Audit Enquiry (AE).Generating a Local Audit Report (LAR).Holding an exit meeting.Generating Draft Notes (DN) and Draft Paras (DP).Preparing Final Audit Paras.Generating the Audit Report.Presenting the Audit Report before the Legislative Assembly.After the Audit Report is presented, it is reviewed by the Public Accounts Committee (PAC) in collaboration with the concerned department and the government. This periodic review ensures compliance with audit findings, rectification of any omissions or commissions, and follow-up actions to address and prevent mistakes and shortcomings. The Performance Audit also provides Special Audit Reports on important areas to benefit the relevant departments and improve governance. Hence, audit plays a vital role in achieving good governance by adhering to the prescribed rules and regulations.However, the departments are unable to fully utilize the benefits of the audit process and the suggestions / recommendations of the Accountant General (AG) due to numerous reasons like:The audit system does not support easy monitoring or institutionalization of good governance practices.The movement of paper / files within a department / government is time-consuming and causes unnecessary delays in initiating corrective measures.Accountability is weak, and follow-up actions are slow.It is difficult to identify common mistakes and promptly take remedial action across the field units of the department.The system lacks the ability to easily cross-check across different offices, resulting in the repetition of the same mistakes year after year.Therefore, the existing manual system is: i. Slow, ii. Cumbersome, and iii. Lengthy. By the time audit observations are reviewed by the Public Accounts Committee, a significant amount of time has passed, rendering corrective action ineffective. The delay between the audit enquiry and the final review by the Public Accounts Committee often leads to frustration and renders the process unproductive. As a result, no meaningful systematic improvements can be made.Migration to Audit Online and the ATR ModuleRecognizing the need to improve the audit system, stakeholders have decided to migrate from the existing “Manual Paper-based System” to an “Online ICT Based System” using “Audit Online”, which is a part of the existing Panchayat Enterprise Suite under e-Panchayat Mission Mode Project (MMP) of the Ministry of Panchayati Raj, GoI. Audit Online was launched on 15th April 2020 to carry out online audits of Panchayat accounts further strengthening the financial management and transparency of the Panchayats.“The Action Taken Report (ATR) Module of Audit Online was virtually launched by Shri Kapil Moreshwar Patil, the Union Minister of State for Panchayati Raj on 12th July 2023. ATR developed by the Ministry of Panchayati Raj, this module aims to streamline the audit process and ensure transparency in addressing audit findings.”(Source: Ministry of Panchayati Raj)Audit Online aims to facilitate the ‘Financial Audit’ of accounts by auditors (State AG / LFA) at all three levels of Panchayats namely:District / Zila PanchayatsBlock / Intermediate PanchayatsVillage / Gram PanchayatsTraditional Local Bodies (Sixth Schedule Areas)The software serves the purpose of both internal and external audit, allowing for online and offline auditing of accounts. It also maintains past audit records of the Panchayats with a list of auditors and audit team members. Additionally, the software ensures proper maintenance of accounts and acts as a reliable financial audit tool, promoting transparency and accountability.Key Features of Audit Online Application SoftwareAudit Online is a generic and open-source software application developed as a part of the Panchayat Enterprise Suite (PES), which is a part of the e-panchayat Mission Mode Project (MMP) initiated by the Ministry of Panchayati Raj (MoPR). The main purpose of Audit Online is to record detailed information about audits conducted for Panchayati Raj Institutions (PRIs) by auditors (State AG/LFA/Audit Dept.). It allows the recording of both internal and external audits according to the defined process.One of the unique aspects of this application is that it is configurable as per every states’ Audit Act / Rules. Also, it is not merely a data-entry application but an audit-processing application whereby the auditors can carry out the audits of Panchayat accounts. Moreover, Audit Online is also linked to the accounting module of e-Gram Swaraj whereby auditors can access various information pertaining to Panchayat accounts viz. annual receipts & payment statements, consolidated abstract register, monthly reconciliation statements, voucher details, cash book report, etc.The users of Audit Online are expected to have a basic understanding of computer usage and should be familiar with the keyboard and mouse in the local language. The user interface of Audit Online is designed intuitively, making it simple, easy to use, and self-explanatory. The software also allows switching to the local language, ensuring that all textual elements are displayed in the local language for better understanding and effective use.The software possesses the following key features:It is a robust and scalable enterprise version that operates on a single platform, catering to the needs of all departments within the state.Furthermore, it ensures transparency, promotes accountability, and enhances efficiency in the audit process.The software is also configurable for both internal and external audits of government departments, PRIs, ULBs, etc.It captures the entire audit process by seamlessly mapping the processes of the auditor and auditee, allowing for instant replies and follow-ups.Additionally, it enables access and usage by various units of the respective departments while maintaining control, privacy, and confidentiality.The software enables the seamless flow of audit handling at all stages, with linkage to transactional and back-end data through a uniform web service interface.It also facilitates the implementation of corrective measures and triggers the assessments for the need for training and capacity building.The software aids in the constitution and management of audit teams, as well as defines the audit schedule.It enables the categorization of audit observations into qualitative tags and allows for the dynamic creation of forms to record file/case details and facts.The software functions as an e-office in the respective office, facilitating analysis and providing auditors with the ability to view auditee accounts, record observations, and generate various reports applicable to the audit cycle (Audit Enquiry / Local Audit Report / Draft Note / Draft Para / Draft Audit Para etc.).It also allows auditees to respond to the queries raised by the auditors.The software is adaptable to variations across states and allows for the generation of audit reports and other related documents based on configurable report templates.It provides customizable dashboards and MIS reports available in PDF/Excel Format, which are sent to users through email.The software ensures complete confidentiality and high levels of security.Its technical architecture supports data exchange with other PES family products.It is designed to be simple and user-friendly, facilitating transparency in the audit process.The software also supports SMS / Email-based alerts and notifications for regular updates.It supports multi-tenancy and employs a strong authentication mechanism.Additionally, it is workflow-enabled, offers multilingual support, and is based on open-source technologies.Lastly, it is web-based and available 24x7.Audit Progress Report and Strengths of the ATR ModuleSince its launch, the Audit Online application has made significant progress, generating over 2,00,000 Audit Reports for the periods 2020-21 and 2021-22. Currently, there are 2,56,795 registered Panchayats on the platform, with 2,11,278 PRI audit reports generated for the audit period 2021-22 (~93%). This commendable achievement showcases the commitment of the states and panchayats towards financial management and transparency. Furthermore, the scope of audits and accountability has significantly expanded. These efforts are in line with the mandate of the XV Finance Commission, which requires audited accounts for all tiers of Panchayats for the Fiscal Year 2023-24.Enhancing Accountability: The ATR module is a valuable addition to the existing Audit Online Application, which was introduced on April 15, 2020, to enable online audits of panchayat accounts and promote financial management and transparency. One of the primary objectives of the ATR Module is to provide a well-organized approach to conduct audits and ensure clear documentation of the steps taken to address audit findings.Digital Governance: During the launch event, the Union Minister of State for Panchayati Raj underscored the significance of digital governance at the grassroots level and urged all States and Union Territories to prioritize panchayat account audits to fulfil the criteria set by the Fifteenth Finance Commission. The ATR module of Audit Online plays a crucial role in promoting: Accountability, Efficiency, Empowerment, and Corruption-free practices at the Gram Panchayat level nationwide.Documentation of Observations: The ATR module aims to address the numerous observations made during audits. To date, an astounding 21,03,058 observations have been documented, reflecting the comprehensive nature of the audit process. This documentation ensures that the necessary actions are taken to rectify any discrepancies and improve financial management practices.XV Finance Commission Compliance: Approximately 93% of PRI Audit Reports have been generated for the audit period 2021-22, highlighting their commitment towards accountability. According to the operational guidelines of the Fifteenth Finance Commission, starting from the Fiscal Year 2023-24, all 3 Tiers ZPs, BPs and GPs must undergo audited accounts. For the audit period 2022-23, 52% of PRI Audit Reports have been generated (as on 11th March 2024). The ATR Module will play a crucial role in ensuring comprehensive audits of all panchayat accounts, meeting the criteria set by the commission for subsequent grants.State-Wise Performance Report of Online AuditsSl. No.State NameNo. of Reports GeneratedSl. No.State NameNo. of Reports Generated1Andhra Pradesh12,47316Maharashtra19,9232Arunachal Pradesh017Manipur03Assam2,40418Meghalaya04Bihar3,69919Mizoram05Chhattisgarh88020Nagaland06Goa021Odisha6,6977Gujarat14,16022Punjab1,0638Haryana6,37523Rajasthan5,2129Himachal Pradesh2,35024Sikkim18910Jammu and Kashmir025Tamil Nadu12,32011Jharkhand026Telangana13,30112Karnataka5,89127Tripura90313Kerala1,10728Uttar Pradesh13,20614Ladakh029Uttarakhand3,19015Madhya Pradesh8,60330West Bengal2,955Source: Audit Online (as on 11th March 2024 for FY 2022-2023). Total Generated: 1,30,901 Reports.Future OutlookLooking forward, the ATR Module of Audit Online has great potential to enhance the transparency and accountability of panchayat accounts. By prioritizing the audit of all panchayat accounts, states can fulfil the criteria of the Fifteenth Finance Commission, enabling higher allocation of funds for Panchayati Raj Institutions (PRIs) and Rural Local Bodies (RLBs). Strengthening the District Level Financial Advisors (DLFAs) and audit departments will be crucial in achieving timely completion of audit activities.To conclude, Panchayati Raj Institutions bridge the gap between the rural population and the higher levels of government. They are the most suitable institutions for grassroots development. The recommendations of the Central Finance Commissions and the recent digital initiatives have collectively improved transparency and accountability at the Panchayat Level, thereby significantly contributing to the empowerment of Panchayats. These Institutions continue to heavily rely on grants from higher levels of government. It is necessary for them to develop innovative approaches for generating sufficient revenues for themselves.AbbreviationsAE : Audit EnquiryAG : Accountant GeneralATR : Action Taken ReportCFC : Central Finance CommissionDN : Draft NotesDP : Draft ParasLAR : Local Audit ReportPAC : Public Accounts CommitteePRIs : Panchayati Raj InstitutionsSDGs : Sustainable Development GoalsReferenceseGramSwaraj (egramswaraj.gov.in)Ministry of Panchayati Raj, Government of India (panchayat.gov.in)Press Information Bureau (PIB), Government of Indiae-Gov App Store, Government of IndiaAuthor may be reached at cma.psrprasad@gmail.com and eboard@icai.in
Climate Budgeting, Green Budgeting, Public Financial Management, PFM, Climate Budget Tagging, State Action Plan for Climate Change, SAPCC, Odisha, Bihar, Meghalaya, Assam, Puducherry, Rio Markers, CCIA, Sustainable Development Goals, Net Zero 2070, IPCC AR6, ICAI
Ep. 461 — A Comparison of Climate Budgets Presented by State Governments in India
CA Journal
· September 2026
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A Comparison of Climate Budgets Presented by State Governments in IndiaArticle Overview: Climate Budgeting is emerging as an effective Public Financial Management (PFM) tool that can help governments quantify the fiscal impact of their climate actions and leverage the budget for maximum climate impact. This article, second in a series on climate budgeting, is based on a review of climate budgets presented by early mover state governments in India. It looks at various aspects including coverage, tagging methodology, and presentation and summarizes the key insights presented in the climate budgets. Towards the end, the article builds a case for establishing a common national framework for climate budgeting and argues that climate budgeting, when combined with climate expenditure reviews, can provide valuable policy insights to governments on the effectiveness of their climate spending.BackgroundThe enormity of the challenge posed to humanity by climate change, and the large investments required to combat it, are highlighted in multiple national and international forums. India is ranked 7th on the Global Climate Risk Index 2021.1 Speaking at a public event in January 2024, Finance Minister Smt. Nirmala Sitharaman stated that India will need at least US$ 10 trillion to achieve its net zero targets by 2070.2 A sizeable portion of this investment would be in the form of government spending. The balance must come as private investment, for which the government must act as an enabler through a combination of regulation, conducive policies, and financial support in the form of subsidies, catalytic capital and viability gap funding.Climate budgeting is one among emerging public financial management (PFM) tools available to governments in their efforts to reorient public spending towards climate action. Climate budgeting, also called green budgeting, helps in mainstreaming climate concerns in budget preparation and execution processes, thus enabling a government to quantify and monitor the fiscal impact of its climate actions. For a detailed discussion on the concept of climate budgeting, its benefits, methodology for preparing climate budgets, and the pre-requisites, see the May 2023 article in The Chartered Accountant journal titled ‘Climate Budgeting powered by Climate Budget Tagging: An Effective PFM Tool in the Fight Against Climate Change’.3This article is the second in a series of articles on Climate Budgeting. While the May 2023 article introduces the concept of climate budgeting and climate budget tagging, this article does a deep dive into the climate budgets presented by certain early-mover state governments in India and presents the key findings.Climate Budgeting in India1.1 Preparation of Climate BudgetsIn India, action on climate budgeting is being seen at the state-level. Odisha and Bihar were the first Indian states to publish a climate budget for fiscal year 2020-21. While the two states have continued the trend in subsequent years also, Assam, Meghalaya and Puducherry have followed suit by presenting a climate budget along with the regular annual state budget. At the local level, although the number of cities and villages preparing local climate action plans is on the rise, climate budgeting is yet to start. Coimbatore, Panaji, and Shimla are reported to have been selected for producing climate budgets under a German-funded climate program, but the present status is not readily available.4“In India, action on climate budgeting is being seen at the state-level. Odisha and Bihar were the first Indian states to publish a climate budget for fiscal year 2020-21.”It is heartening to note that state governments have been leading the way in adopting climate budgeting. Although the Union Government has been aggressively driving the climate agenda in successive budgets, it does not present a separate climate budget as yet. In its annual budget for 2021-22, it clarified that climate action at the national level would be executed through the normal budgeting process.5 Nonetheless, since it has been continuously enhancing the mobilisation of resources towards climate action, climate budgeting at the national level is bound to become a reality soon.1.2 Legal Requirements and Policy DirectionAs pointed out in the May 2023 article, a prerequisite for the successful implementation of climate budgeting is the establishment of a climate budgeting mandate, preferably in the annual budget circular. From information available on the budget webpages, it is difficult to state conclusively that all the early movers have followed this practice. Assam and Puducherry climate budgets mention the issuance of the circular as a step in the climate budgeting process. Odisha’s annual budget circular for 2023-24 makes a cursory mention of the climate budget.6 Further, the State Action Plan for Climate Change (SAPCC) provides the general policy direction for green budgeting in the roadmap for climate change adaptation and mitigation strategies. All four states have relied on their respective SAPCCs for identifying the key priority areas, mapping of relevant departments, and for setting targets. Additional policy documents referred to in climate budgets include the National Biodiversity Strategy and Action Plan (NBSAP) in Bihar and the Disaster Risk Reduction Roadmap in Assam. While SAPCC will define the climate action priorities and the methodology for preparing climate budgets, it may be judicious to include the mandate for presenting a climate budget in the budget circular, or even better, in the governing budget law.A Comparison of Climate Budgets1.1 OverviewThe four States and Union Territory (UT) have variously referred to climate budget as ‘green budget’, ‘climate action budget’, or simply ‘climate budget’. Though Odisha and Bihar published their first climate budgets in 2020-21, Bihar has since published more number of climate budgets. At the time of publishing this article, Bihar and Meghalaya have come out with the climate budget for fiscal year 2024-25 also. Odisha has announced preparation of a carbon budget in June 2024 which is aimed at monitoring the state’s progress in meeting emission reduction targets.7Assam and Puducherry have both published their first green budgets for 2023-24. Puducherry has stated its intentions clearly that although only department-level mapping has been attempted in the first budget, future climate budgets will be more granular. Table 1 provides a quick snapshot of the climate budget documents reviewed for this article.Table 1: A Snapshot of Climate BudgetsState / UTAssamBiharMeghalayaOdishaPuducherryBudget TitleGreen BudgetGreen BudgetClimate Action BudgetClimate BudgetGreen BudgetNumber of years for which climate budgets available15241Latest budget (FY)2023–2482024–2592024–25102023–24112023–2412Number of departments covered1420131115Common sectors coveredNine: Agriculture and allied sectors; forestry and biodiversity; water resources; energy; science, technology and climate change; disaster management; health; transport; urban and rural development.Additional sectorsNoneFive: Animal and fisheries; education; industries; information and public relations; tourism.Three: Animal and fisheries; police; planning and investment promotion (industries).One: Animal and fisheries.Five: Fisheries; police; ports (transport); animal husbandry and welfare; industries.1.2 Sectoral CoverageOne of the first steps in the climate budgeting process is the determination of vulnerable sectors and the identification of departments that execute schemes/programs that impact the climate and the environment—positively or adversely. SAPCCs, on which climate budgets are based, are largely modelled on the National Action Plan for Climate Change. Therefore, nine sectors are covered commonly across all the climate budgets studied as indicated in Table 1. Additionally, there are sectors that have been specifically covered by certain states suited to the local context (see Table 1).Although Assam’s SAPCC lists the strategies for Mining and Industries, the departments’ program expenditures have not been included in the climate budget due to their minor representation in the overall state budget. The same is the case with Odisha as well. On the other hand, Bihar has mapped schemes/programs to the sugar industry department specifically.1.3 Process and MethodologyThe climate budgeting process is similar across the five budgets reviewed – it starts with a capacity-building exercise with officials of stakeholder departments through orientation workshops on climate change, its relevance, green budgeting, and realigning of departmental schemes to achieve greater climate relevance. To ensure consistency, a standardised template is circulated to collect budget inputs from the departments on the schemes and programs identified as having environmental and climate change relevance. For efficient tracking, department-level and programme-level codes are developed. The schemes are then mapped to themes/domains, activities and the Sustainable Development Goals (SDG). Once the tagging of allocations and expenditures is completed by the departments, they are analysed and compiled into the green budget.Variations in the process explained above are observed in the tagging methodology adopted by different states. While the basic principle of budget tagging is at the heart of all methodologies, they differ in terms of complexity. At one end, while Odisha has adopted a more complex tagging methodology, beginners like Meghalaya and Puducherry have followed simplistic tagging models. A summary of the methodology adopted by each state along with the key insights that can be drawn from the climate budget document are given in Table 2.Only Bihar and Meghalaya have published the rationale for including specific departments, schemes or programs for climate budgeting. Their climate budgets explain how the activity/scheme/program of a department contributes to positive environmental impact. For instance, while it may not be immediately clear as to why the Home Department (Police) has been included, Meghalaya’s climate action budget explains that it has been considered for its role in disaster risk reduction.Bihar’s budget simply goes by the ‘objective of the scheme’ to justify its inclusion. For example, the Pradhan Mantri Gram Sadak Yojana has been considered because road construction is to be done using green technologies.Table 2: Summary of Methodology and Key InsightsState / UTMethodologyInsightsAssam1. Classifying expenditure into 4 categories ranging from ‘highly favourable’ to ‘less favourable’ as per the degree of their impact on the environment.2. Two levels of tagging: a. Tagging schemes to 9 vulnerable sectors identified. b. Tagging schemes to the 3 broad domains identified (climate change adaptation, mitigation and environmental sustainability).1. Share of public expenditure on schemes across the 4 categories.2. Departments with the highest share of highly favourable schemes.3. Percentage share of highly favourable schemes in the total expenditure of the department.4. Department-wise distribution of activities across the 3 domains.Bihar1. Expenditure items are tagged using the SDG Mapping tool and the modified ‘Rio Marker Methodology’.132. The ‘green tagging’ system categorises expenditure items into 5 categories from ‘fully dedicated’ to ‘marginal’.1. Share of green expenditure in the total budget estimates.2. Number of green budget schemes in each department and their contributions.3. Extent of state’s focus on environmental sustainability from SDG tagging.4. Extent of state’s focus on different activities – e.g. more on program implementation and capacity building and less on research and development.Odisha1. Tagging is done through Phased Climate Change Impact Appraisal (CCIA) that analyses programme-related expenditure from two angles: a. Climate Change Relevance Share (CCRS) b. Climate Change Sensitivity Share (CCSS)2. A matrix marks activities/programs as: a. High Relevance (HR) + High Sensitivity (HS) b. LR + HS c. HR + LS - the low hanging-fruits d. LR + LS1. Percentage of Climate Change Relevant Expenditure and Climate Change Sensitive Expenditure.2. Sector-wise snapshot of the CCIA shows which sector has a high (≥45%) or a Low (<45%) CCR expenditure and high (≥40%) or a Low (<40%) CCS expenditure.MeghalayaDepartment-wise expenditure items are tracked by separately tagging the budget allocations made to climate change mitigation and climate change adaptation measures.1. Proportion of climate budget in the total state budget.2. Percentage share of allocation made to climate change mitigation and adaptation in the total climate budget.3. Department-wise percentage share of allocation made to the total climate budget.PuducherryEach programme or scheme is mapped to a specific theme, activity and SDG.Department-wise percentage share of green budget in the total scheme budget of the department.1.4 Presentation AspectsArrangement of sections: The climate budget documents of all four states and Union Territory follow a similar presentation scheme. The ‘Introduction’/’Overview’ chapter covers the state profile which gives important insights into the state’s geographic, demographic and environmental vulnerabilities. Bihar’s document additionally compares the state’s performance on sustainability and climate indices with that of India. The introduction section is followed by the state’s response to climate change through sectoral interventions or key initiatives and its achievements. Then comes the main part comprising of sections on the principles, framework, process, and methodology for preparing the climate budget. This is followed by the ‘budget analysis’ or ‘findings’ section. All the documents contain annexures which provide the department-wise inputs received in the form of green budget statements.Executive Summary: Only Odisha, Meghalaya and Puducherry contain an Executive Summary. Budget documents of Meghalaya and Puducherry carry a paragraph summarising the key findings from the climate budgeting exercise. The Executive Summary in Odisha’s climate budget merely covers the general background of the state, the policy context and the climate budgeting methodology, but does not discuss the key highlights.Presentation of findings: In the ‘analysis’ or ‘key findings’ section of each climate budget, a budget summary is presented covering a summary analysis of increase/decrease in the proportion of green budget in the total budget of the State. This is followed by a department-wise breakdown of the budget figures. In its first green budget in 2023-24, as a part of the baseline-setting exercise, the UT of Puducherry has identified six indicators as the ‘baseline indicators’ for presenting the summary.14Table 3: Presentation of Department-Wise FindingsState / UTDepartment-wise data presentedSDG-wise distributionTheme-wise distribution*Activity-wise distribution**AssamNumber of schemes and budget estimates across the 4 categoriesNoYes(Referred to as ‘domains’ and not ‘themes’)NoBihar1. Percentage share of green budget in total budget allocation.2. Percentage share of green budget in total scheme budget.3. Number of schemes falling under the six environmental sustainability relevance classifications for two years.YesYesNoMeghalaya1. Total allocation for climate change adaptation (A) and climate change mitigation (B) separately.2. Total green budget allocation (A+B).NoNoNoOdisha1. Percentage share of climate change relevant expenditure in the total program expenditure coded.2. Percentage share of positive climate change sensitive expenditure in the total program expenditure coded.3. Percentage share of negative climate change sensitive expenditure in the total program expenditure coded.NoNoNoPuducherry1. The total scheme budget and green budget in Rupees.2. Percentage share of green budget in total scheme budget.YesYesYes* Theme refers to an area of green planning and practice, for instance, sanitation and waste management.** Activity refers to any activity that is undertaken by the department having relevance to green budgeting such as programme implementation or Information, Education and Communication (IEC).Climate Budgeting in Other CountriesSeveral developing countries have adopted climate budgeting, with Nepal introducing it as early as 2012. In Nepal’s climate budget, climate related programs are either tagged ‘highly relevant’ or ‘relevant’ according to the technical guidelines provided in the Climate Budget Code prepared by the National Planning Commission of Nepal.15 Much like the state climate budgets in India, Nepal’s green budget also presents the sector-wise flow of money for climate expenditure and the ministry-wise appropriation of the budget for climate related expenditure. It additionally presents the percentage share of capital and recurrent budget within the total climate budget.Bangladesh published its first climate budget six years later in 2018. It has developed a more complex methodology of computing the climate change relevance criteria. Bangladesh uses Rio Markers to define what expenditure is climate change relevant.16 Based on the priorities set out in the National Climate Change Policy, there are three options to tag the expenditures - ‘principal objective’, ‘significant objective’ and ‘not targeted to the policy objective’. After tagging, various interventions within a programme are assessed and ‘weighted’ for their climate change relevance and sensitivity. Nepal’s tagging methodology resembles the one adopted by Odisha in several aspects. Negative allocations such as investments causing additional emissions are not yet being tracked in Nepal’s climate budget although the same is tracked in Odisha’s budget.Amongst developed nations, France has led the way in climate budgeting. Climate budgeting in France is done at the level of budgetary actions which are tagged to six environmental objectives like pollution abatement, water resources management, etc.17 To assess an action’s degree of climate relevance, a counter-factual scenario is considered. For example, a vehicle scrapping bonus is considered ‘positive’ when judged against the ‘pollution’ objective because the counter-factual scenario would be that without such a bonus, there is a greater likelihood of having more old, greater Green House Gas (GHG) producing vehicles on the road. France has adopted a 5-point rating scale and tracks expenditures with a negative impact as well by assigning them a ‘-1’ rating. The visual representation system in the climate budget presents expenditures as a grey dot for ‘neutral’ (those rated 0), green dot for ‘positive’ (those rated 1, 2 or 3) and brown dot for ‘negative’ (those rated –1).ConclusionThe Sixth Assessment Report of the Intergovernmental Panel on Climate Change (AR6) published in March 2023 estimates that the required investment levels to meet climate goals are 3-6 times the current investment.18 The Report, however, offers a ray of hope by stating that enough global financing is available to meet the needs and talks of a need for innovative financing mechanisms to redirect capital towards climate action in developing countries. Climate Budgeting is one such mechanism.Several Indian states have announced their intentions to publish a climate budget along with the main budget. Until now, climate budgets are being presented by state governments more as a demonstration of their intent to imbibe climate considerations into policy making and budgeting, and less as a tool to decide on budget allocations. As methodologies such as climate vulnerability/impact assessments and climate budget tagging mature, climate budget is expected to emerge as a strategic tool to inform budget allocations to sectors and schemes/programs with maximum impact on the government’s climate goals. While climate budgets must be increasingly used for better climate-informed budget decisions, their utility must not stop with that. Climate budgeting must be backed up by climate public expenditure reviews which can indicate the extent to which a government has achieved its climate policy and budget priorities, and the findings must inform the subsequent climate budget cycles.This article indicates that there are wide variations in climate budgets of states in terms of: the sectoral coverage, tagging methodologies, presentation aspects, and analysis of findings, making a direct comparison difficult. Furthermore, the quality of source data on which climate budgeting relies also becomes crucial. It is therefore important to institutionalize climate budgeting processes through budget laws, green budgeting standards, green taxonomies, and standard operating procedures. Attempts at climate budgeting by the early mover states have generated valuable experiential learning from which cues can be drawn to develop a comprehensive climate budgeting framework for the country. Such an initiative can come from the Union Government, roping in climate change and public finance professionals for this purpose.ReferencesHow Green budgeting is embedded in national budget processes — Simona Pojar — European Economy Discussion Paper 196, November 2023: https://economy-finance.ec.europa.eu/ecfin-publications_enGreen Budgeting: A toolkit for public sector finance professionals — ACCA, December 2022: https://tinyurl.com/293wudpoExploring Opportunities offered by Green Budgeting Statement — Jyotsna Goel and Subrata Sekhar Rath — OP Blogs, January 2024: https://tinyurl.com/2b79k2qt1 Global Climate Risk Index 2021: https://www.germanwatch.org/en/197772 ‘India faces $10 trillion funding gap in bid to meet net zero pledge: FM Nirmala Sitharaman’, The Economic Times, January 2024: https://tinyurl.com/2a5tlqev3 The article can be accessed at: https://tinyurl.com/2b92ougc4 Urban-Act: Integrated Urban Climate Action for low-carbon & resilient cities: https://tinyurl.com/2zkh9hyg5 Unstarred Question No. 1835, Lok Sabha, July 2023: https://sansad.in/getFile/loksabhaquestions/annex/1712/AU1835.pdf?source=pqals6 Odisha’s annual budget circular 2023-24: https://finance.odisha.gov.in/sites/default/files/2022-11/Annual%20Budget%20Circular%202023-24%20(1).pdf7 Odisha going in for carbon budget for 2024-25 fiscal year, The Hindu, January 2024: https://www.thehindu.com/news/national/other-states/odisha-going-in-for-carbon-budget-for-2024-25-fiscal-year/article67723168.ece8 Green Budget 2023-24, Assam: https://finance.assam.gov.in/sites/default/files/swf_utility_folder/departments/agriculture_com_oid_2/portlet/level_1/files/goa_green_budget_2023-24.pdf9 Green Budget 2024-25, Bihar: https://state.bihar.gov.in/cache/12/Budget/Budget/Green%20Budget%20Final%202024-25%20English%2022.02.pdf10 Climate Action Budget 2024-25, Meghalaya: https://megfinance.gov.in/budget_documents/2024-2025/others/climate_action.pdf11 Climate Budget 2023-24, Odisha: https://finance.odisha.gov.in/sites/default/files/2023-02/Climate%20Budget%20final_0.pdf12 Green Budget 2023-24, Puducherry: https://www.teriin.org/sites/default/files/2023-08/Puducherry_Green_Budget_Report_2023.pdf13 OECD DAC Rio Markers for Climate Handbook: https://www.oecd.org/dac/environmentdevelopment/Revised%20climate%20marker%20handbook_FINAL.pdf14 The six baseline indicators in Puducherry are: (i) Green Budget in Rupees; (ii) % Green Budget of Identified Scheme Budget; (iii) % Green Budget of Revised Estimate/Budget Estimate; (iv) Number of departments that identified schemes and green components; (v) Number of budget line items with green components; and (vi) Department-wise distribution.15 Nepal Citizen’s Climate Budget Booklet: https://www.undp.org/sites/g/files/zskgke326/files/migration/np/Citizen-Climate-Budget-English-Booklet.pdf16 Climate Financing for Sustainable Development, Budget Report 2023-24, Bangladesh: https://mof.portal.gov.bd/sites/default/files/files/mof.portal.gov.bd/page/6e496a5b_f5c1_447b_bbb4_257a2d8a97a1/Climate%20English.pdf17 The Green Budget in France: From an Informative Report to a Decision-Making Tool: https://tinyurl.com/25rdefak18 Sixth Assessment Report | Synthesis Report of the Intergovernmental Panel on Climate Change (AR6), March 2023: https://www.ipcc.ch/report/sixth-assessment-report-cycle/Authors may be reached at eboard@icai.in
Panchayati Raj Institutions, PRIs, Gram Panchayats, Audit Online, Action Taken Report, ATR Module, e-Gram Swaraj, Ministry of Panchayati Raj, Fifteenth Finance Commission, Public Accounts Committee, Local Fund Audit, Digital Governance, Local Self Government, ICAI
Ep. 462 — Action Taken Report (ATR) Module of Audit (Online Audits of Panchayats)
CA Journal
· September 2026
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From ancient village republics to the 73rd Constitutional Amendment Act in 1992, rural local self-governments have served as India's vital grassroots institutions representing 68.8% of the population across 2.62 lakh Panchayati Raj Institutions (PRIs). However, conventional manual auditing—comprising an 8-step paper trail from Audit Enquiry to Public Accounts Committee (PAC) reviews—has suffered from systemic delays, file movement inertia, and repetitive unrectified mistakes. This article analyzes the digital revolution spearheaded by the Ministry of Panchayati Raj through "Audit Online" (launched April 2020) and the "Action Taken Report (ATR) Module" (launched July 2023). Integrated seamlessly with e-Gram Swaraj, Audit Online captures end-to-end audits across Gram, Block, and Zila Panchayats. The ATR Module provides structured, closed-loop documentation of corrective actions, addressing over 21.03 lakh audit observations. The article examines the operational guidelines of the Fifteenth Finance Commission (which mandates 100% audited accounts for all three tiers to release ₹2.37 lakh crore grants) and presents a state-wise performance report of 1,30,901 audit reports generated for FY 2022–23 across 30 States and UTs led by Maharashtra, Gujarat, Telangana, and Uttar Pradesh.
MSME, MSMED Act 2006, Ministry of MSME, PMEGP, CGTMSE, ISEC, Section 43B(h), Income Tax Act, Udyam Registration, Delayed Payments, Micro and Small Enterprises, Priority Sector Lending, Presumptive Taxation, Section 44AD, MSME Yatra, ICAI
Ep. 463 — MSME Schemes under the Ministry of MSME, Govt. of India
CA Journal
· September 2026
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MSME Schemes under the Ministry of MSME, Govt. of IndiaIndia has been a nurturing ground for entrepreneurs since ancient times, with active involvement from all segments of society forming the cornerstone of its golden era before external forces disrupted its cultural fabric. Individuals were primarily inclined towards self-employment, establishing and managing their own small businesses. This approach not only fostered financial independence but also facilitated job creation, thereby bolstering the economy.Post-independence, India has persistently endeavored to revive entrepreneurial culture, encouraging self-employment on a national scale. The government has placed small and medium enterprises (SMEs) at the forefront, implementing various schemes and incentives to support and promote their growth.Building upon this trajectory, the government has shifted its focus towards Micro, Small, and Medium Enterprises (MSMEs), unveiling a myriad of schemes and incentives aimed at fostering their development. The Micro, Small, and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. MSMEs not only play a crucial role in providing large employment opportunities at comparatively lower capital costs than large industries but also help in the industrialization of rural & backward areas. These opportunities in rural and backward areas play a crucial role in mitigating regional imbalances, ensuring a more equitable distribution of national income and wealth. MSMEs serve as complementary entities to large industries, functioning as ancillary units, and this sector significantly contributes to the socio-economic advancement of the nation.Legislative Framework: The MSMED Act, 2006To offer contemporary solutions and incorporate provisions pertinent to the current landscape, the “Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993” has been superseded by The Micro, Small, and Medium Enterprises Act, 2006 (MSMED Act), enacted on 2nd October 2006. The MSME Act aims to facilitate the promotion, development, and bolstering of competitiveness within these industries, along with addressing related matters or incidental concerns.The MSME Act encompasses a comprehensive set of provisions aimed at fostering the growth and sustenance of micro, small, and medium enterprises (MSMEs). Among its key objectives are the clear definition and classification of these enterprises, establishing a high-level board and advisory committee to oversee their development, and ensuring prompt payments to MSMEs. Moreover, the Act facilitates the smooth flow of funds to prevent financial distress and provides for the procurement of goods and services. It also focuses on formulating policies such as reservation policies and guidelines to enhance the competitiveness of MSMEs, while also incorporating an Alternate Dispute Resolution System. Additionally, it introduces a simplified exit scheme for entities other than companies and facilitates the creation of funds through grants from the central government. These measures collectively aim to bolster the MSME sector and promote its sustained growth and competitiveness in the broader economic landscape.Revised MSME Classification CriteriaThe MSME sector has undergone further subdivision into three distinct categories, each tailored to address specific challenges and requirements unique to its members covering manufacturing unit, Service Sector and Traders *(w.e.f. 02-07-2021 for Limited Benefits). These categories are determined by the composite criteria of Investment in Plant and Machinery and Annual Turnover:CategoryInvestment in Plant and Machinery / EquipmentAnnual TurnoverMicroInvestment in P&M < ₹ 1 CroreTurnover < ₹ 5 CroreSmallInvestment in P&M < ₹ 10 CroreTurnover < ₹ 50 CroreMediumInvestment in P&M < ₹ 50 CroreTurnover < ₹ 250 Crore“The government has introduced several schemes aimed at providing financial support and assistance to different categories within the MSME sector.”Key Benefits Available to Registered MSMEs1Hassle-Free Business Registration as Enterprises without GST and other Business Registration.2Collateral-Free Loans from banks and financial institutions.3Subsidy on Patent Registration to foster technological innovation.4Protection against Delayed Payments through statutory interest and MSEFC.5Lesser Electricity Bills via state-level power tariff concessions.6Special Rebate on International Trade Fairs for global market exposure.7Reimbursement of ISO Certification Charges for quality standardization.8Rebate in Stamp Duty & Registration Fees on property and agreements.9Relaxation under Tax Laws and compliance procedures.10Subsidy on Credit Ratings for creditworthiness evaluation.11Incentive from MCA on company incorporation and compliance fees.12Export Incentive on export of certain items manufactured by government.Position of Traders in the MSME SectorTraders within the MSME sector may find themselves excluded from certain benefits that are available to other categories like manufacturing units and service sector enterprises. These benefits include subsidies on patent registration, tax exemptions, safeguards against delayed payments, concessions on electricity bills, reimbursement for ISO certification costs, as well as government assistance in marketing and promotion, and support for technology upgrades, among others. This discrepancy underscores the need for a nuanced approach to policymaking, recognizing the distinct challenges and contributions of traders within the MSME landscape. Efforts to address these disparities could involve tailored initiatives and support mechanisms that cater specifically to the needs and circumstances of traders, ensuring a more equitable and inclusive environment for all segments of the MSME sector.Major Financial Support SchemesThe government has introduced several schemes aimed at providing financial support and assistance to different categories within the MSME sector:1. Prime Minister Employment Generation Programme (PMEGP): One such initiative is the PMEGP, which endeavors to generate employment opportunities for MSMEs across the nation. Implemented by the Khadi and Village Industries Commission (KVIC) at the national level, the PMEGP extends its reach through state KVIC directorates, State Khadi and Village Industries Boards (KVIBs), District Industries Centers (DICs), and banks at the state and district levels.2. Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE): Another significant scheme is the CGTMSE, established jointly by the Ministry of MSME and the Small Industries Development Bank of India (SIDBI). This initiative provides collateral-free loans, with amounts of up to INR 1 crore, to individual Micro and Small Enterprises (MSEs), thereby easing financial constraints and facilitating business growth.3. Interest Subsidy Eligibility Certificate (ISEC) Scheme: Additionally, the ISEC scheme plays a crucial role in supporting the Khadi program undertaken by Khadi institutions across the country. By mobilizing funds from banking institutions, the ISEC scheme bridges the gap between the funds available from budgetary sources and the actual financial requirements, ensuring the sustained development and promotion of Khadi enterprises.These schemes collectively reflect the government’s commitment to fostering the growth and development of the MSME sector by providing accessible financial resources and support services tailored to the diverse needs of MSMEs, thereby facilitating entrepreneurship, employment generation, and economic empowerment.Recent Development: Section 43B(h) of the Income-tax Act, 1961“Section 43B(h) presents several key provisions relevant to transactions involving procurement of goods or services from entities registered under the MSMED Act, 2006.”Statutory Mandate of Section 43B(h)The recent amendment aimed at bolstering the MSME sector is set to exert a substantial influence, especially on businesses operating within this ecosystem. This amendment, emphasizing the enhancement of regulatory frameworks and provision of supplementary support mechanisms, is expected to usher in widespread positive transformations in the MSME domain. Introduced under the Finance Act 2023, Section 43B(h) mandates that any dues owed to Micro, Small, and Medium Enterprises (MSMEs) for supplied goods or rendered services may be deducted in the same fiscal year if settled within the stipulated deadline as per the Micro, Small, and Medium Enterprises Act.Section 43B(h) presents several key provisions relevant to transactions involving procurement of goods or services from entities registered under the MSMED Act, 2006:Effective Timeline: Firstly, it is set to be effective for the assessment year 2024–2025, commencing from the Financial Year 2023-24. Specifically, Clause (h) of Section 43B is slated to become operational from April 1, 2024.Applicability to Buyers: This clause applies when an enterprise engages in procurement activities without necessitating the buyer’s registration under the MSMED Act, 2006, with exemptions for transactions occurring before March 31, 2023.Exclusion of Medium Enterprises & Traders: Notably, this provision does not apply to medium enterprises, unregistered MSMEs, or traders, as their portal registration primarily serves priority sector lending purposes.Scope of Payments: Regarding its scope, Section 43B(h) is concerned with payable amounts linked to the purchase of goods and services. However, it explicitly excludes actionable claims of money, interest on loans, salary payments, and capital goods from its purview.Prescribed Payment Due Dates: Moreover, the provision outlines specific due dates for payment, stipulating that:With a written agreement: Payment must occur within 45 days from the date of acceptance or deemed acceptance.In the absence of a written agreement: Payment is required to be made within 15 days from the date of acceptance or deemed acceptance.Presumptive Taxation Exception: Furthermore, exceptions exist for buyers filing income tax returns under Sections 44AD, 44ADA, or 44AE (presumptive income), as these sections supersede Sections 28 to 43C of the Income-tax Act. This exception serves to clarify the applicability of Section 43B(h) within the context of income tax regulations.Role of ICAI in Fostering the MSME EcosystemThe Institute of Chartered Accountants of India is actively contributing to fostering a conducive environment for the growth of MSMEs. The Institute, in its pursuit of enhancing the capacity of MSMEs & Start-ups, acknowledges the evolving challenges they face and has established the Committee on MSME & Start-ups. This committee is tasked with addressing issues and obstacles encountered by MSMEs & Start-ups, proposing necessary measures to fortify and cultivate their capabilities, thereby bolstering their standing within the business community. Moreover, it aims to facilitate collaboration among professionals and experts in relevant domains, bridging the gap between regulatory authorities and MSMEs/Start-ups through various capacity-building initiatives.Nationwide 75-Day MSME Yatra — Recognized by Asia Book of RecordsThe Institute of Chartered Accountants of India (ICAI) conducted a comprehensive 75-day MSME Yatra program across India, aimed at supporting MSMEs in scaling up and enhancing their capacities. This initiative, supported by key stakeholders including the MSME Ministry, SIDBI, NSIC, and SBI, sought to promote innovation and entrepreneurship, marked significant milestone in India’s journey towards economic independence. Spanning over four months and covering 75 cities across the country, the Yatra showcased the vibrant MSME ecosystem, providing a platform for knowledge dissemination, access to credit, and improving marketing competitiveness for MSMEs. The dedication of ICAI has been acknowledged by the Asia Book of Records.ConclusionIn conclusion, the MSME sector in India stands as a vital contributor to the nation’s economic growth, fostering entrepreneurship, generating employment, and promoting socio-economic development. With the government’s steadfast commitment and a robust framework of schemes and incentives, the MSME sector has flourished, serving as a cornerstone of India’s industrial landscape. The recent amendments, including Section 43B(h) of the Finance Act 2023, underscore the government’s proactive approach in addressing challenges faced by MSMEs, facilitating prompt payments, and enhancing regulatory frameworks. Moreover, collaborative efforts by institutions like the Institute of Chartered Accountants of India further strengthen the ecosystem, providing crucial support and resources for MSMEs and startups to thrive. Moving forward, continued focus on tailored policies, capacity-building initiatives, and inclusive growth strategies will be essential to sustain the momentum and unleash the full potential of India’s vibrant MSME sector, thereby driving equitable economic prosperity across the nation.In addition to the government’s initiatives and institutional support, the MSME sector’s resilience and adaptability have been key drivers of its success. Despite facing challenges such as access to finance, technological adoption, and global competition, MSMEs have demonstrated remarkable innovation and perseverance. Furthermore, their role in fostering inclusive growth by promoting entrepreneurship in rural and backward areas cannot be overstated. As India continues on its path of economic development, nurturing the MSME sector will remain paramount, ensuring that it continues to thrive as a vibrant engine of growth, job creation, and socio-economic empowerment for millions across the country.Author may be reached at eboard@icai.in
Direct Taxes Committee
Ep. 464 — From Likes to Taxes: Do online influencers qualify as entertainers under Article 17 of the OECD Model Convention?
CA Journal
· September 2026
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From Likes to Taxes: Do online influencers qualify as entertainers under Article 17 of the OECD Model Convention?Executive Abstract: The classification of social media influencers as “entertainers” for tax purposes under Article 17 of the OECD Model Convention is an emerging field of debate in international taxation. With influencers earning income from various jurisdictions through sponsorships, endorsements, and other revenue streams, it has sparked discussions on how to determine their tax liabilities, especially in the context of tax treaties. This article analyses arguments in favour of considering influencers as entertainers by examining the criteria outlined in Article 17 and evaluating the nature of their activities. Considering the OECD commentary and a comprehensive analysis of these arguments, there is a good basis to classify influencers as entertainers for taxation purposes.“In a world where content is king1, social media influencers reign as the new monarchs of entertainment, where their influence is measured not by crowns but by likes and shares.”IntroductionSocial media platforms have transformed the way individuals consume and engage with content, giving rise to a new brand of celebrity: “The social media influencers”, with their ability to captivate and amass massive followers, have become powerful figures in the digital realm by creating content on social media platforms. According to recent studies, as of 2021, the number of social media users worldwide has surpassed 4.4 billion, with the average person spending over 2 hours and 25 minutes per day on social media platforms.2 Consequently, the influence and reach of social media influencers have skyrocketed, leading to lucrative opportunities for monetizing their online presence.In the digital landscape, social media influencers have become key players in the marketing and advertising industry. Brands and companies increasingly recognize the value of partnering with influencers to promote their products or services. In fact, a survey revealed that 89% of the marketers consider influencer marketing to be effective.3 From a mere $1.7 billion at the time of this site’s beginning in 2016, influencer marketing grew to have an estimated market size of $16.4 billion in 2022. Furthermore, this is expected to jump further by 29% to an estimated $21.1 billion in 2023.4As a result, many of these influencers earn significant amounts of money through sponsorships, endorsements, and advertising deals.However, the question remains whether social media influencers should be considered as “entertainers” for taxation purposes, as outlined in Article 17 of the OECD Model Convention5 (‘OECD MC’). If an affirmative view is taken, the source state shall also be granted taxing rights under Article 17. However, if a view is taken that social media influencers do not qualify as entertainers then the case falls outside the gambit of Article 17, and hence provisions of other Articles such as Article 7: Business Income, Article 21: Other income, etc. need to be considered.This is an evolving area of the entertainment industry and there are multiple perspectives for the classification of social media influencers under various Articles of the OECD MC. The Author’s opinion favours the view that social media influencers should be classified as entertainers and this article aims to present positive arguments in support of this stance.Influencers – Who are they?“The term influencer refers to an individual or a group of individuals who built their own audience through social media platforms.”6 Many influencers have built their following through their unique personalities, perspectives, and creative talents. They often collaborate with brands and businesses to promote products or services to their audience. Influencers have become a valuable marketing tool for brands and businesses looking to reach new audiences and drive sales. As a result, many influencers have turned their social media presence into a full-time career, earning income through brand partnerships, sponsorships, advertising, and other revenue streams.Basis the nature of content and audience, influencers can be categorized into four broad typologies:1. Snoopers7Discoverers of social media platforms motivated by pure amusement and fun. Content creation is their hobby or passion shared with a like-minded audience.2. Informers8Aim to share expert knowledge with their audience. Followers seek structured advice and professional help when handling domain-specific issues.3. Entertainers9Provide amusement, enjoyment, and relaxation to their audience by creating engaging and creative entertaining content.4. Infotainers10A hybrid version combining both Informers and Entertainers, creating content that blends instructional knowledge with captivating entertainment elements.What is the controversy?The controversy surrounding the classification of social media influencers as “entertainers” for taxation purposes arises due to the complex nature of their international activities. To illustrate this issue, let us consider an example:Illustrative Cross-Border Scenario:Imagine that an influencer, let’s call him Nikhil, is a tax resident of Country X. Nikhil travels to Country Y to shoot influential content, for example, travel vlogs, reels, fashion and fitness videos, etc., and receives payment for this work from a company located in Country Z. In this scenario, multiple jurisdictions are involved, each with their own tax laws and regulations.The challenge arises when determining the appropriate jurisdiction to tax the income earned by Nikhil:Country X, as Nikhil’s tax residence, may seek to tax the income based on their domestic laws on worldwide income.Country Y may argue that since the performance/content creation took place within their territorial jurisdiction, they have the primary right to tax the income earned.Country Z, where the paying company is located, may also claim a share of the tax revenue as the economic source of the payment.This example highlights the complex web of international taxation issues that can arise when taxing social media influencers. It brings into question which country has the rightful claim to tax the income earned by influencers, considering factors such as residency, source of income, and where the performance or content creation occurs. To solve one part of the complexity, in the next para, Article 17 of the OECD MC and its implications on the taxation of social media influencers have been discussed.Article 17 of the OECD Model ConventionArticle 17 of the OECD MC which deals with the taxation of Entertainers and Sportspersons, is reproduced below:11“ARTICLE 17: ENTERTAINERS AND SPORTSPERSONS1. Notwithstanding the provisions of Article 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from that resident’s personal activities as such exercised in the other Contracting State, may be taxed in that other State.2. Where income in respect of personal activities exercised by an entertainer or a sportsperson acting as such accrues not to the entertainer or sportsperson but to another person, that income may, notwithstanding the provisions of Article 15, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised.”Thus, Article 17 of the OECD MC deals with the allocation of taxing rights for non-resident entertainers and sportspersons. It specifies that the source state has taxing rights over the income from a performance in the source state.12 The primary objective of Article 17 is to prevent non or under-taxation of international entertainers’ income due to inefficiencies in the exchange of information between states.13 India, in its tax treaties with other nations, has generally adopted a similar Article to tax income earned by such entertainers.The term “entertainer” is not exhaustively defined in the OECD MC. However, Article 17(1) provides some illustrative examples of which professions should be covered by the term, namely “theatre, motion picture, radio or television artiste”.14 Further, the Commentary on Article 17 of the OECD MC contains some useful pointers regarding the interpretation of the terms “entertainer” and “sportsperson”.15 In particular, it indicates that both the terms presuppose the existence of the following two conditions:Public performance: the performance of the entertainer or sportsperson must be public.Entertaining: the performance must have an entertaining character.16Further, it is important to note that, “it is the character of the performance (on a stand-alone basis!) that makes a person an entertainer or a sportsperson”.17 Having said that, it is critical to understand the role of influencers and whether they satisfy the conditions prescribed under Article 17 of the OECD MC.Arguments in favour of Article 17In the below paragraphs, the author has analysed the criteria as per the OECD MC:1. Public PerformanceThe term “public” in the context of Article 17 of the OECD MC includes both direct and indirect publicity, such as through radio, television, and online media. Therefore, a performance is considered “public” under this article even if the relevant audience is not physically present but can access the performance virtually, either live or with a time delay.18 Therefore, basis the same, even if the influencers create and share their content, the same could be classified as a public performance.2. Entertaining NatureThe Commentary attempts to define the scope of the term “entertainer” and provides three potential distinctions as follows:Between entertainment and educational/informational activities: visiting conference speakers are excluded from the definition.Between entertainment and presentational/promotional activities: models are excluded when presenting clothes at a photo shoot or fashion show.Between entertainment and production/technical activities: administrative or support staff such as cameramen, producers, film directors, choreographers, technical staff, and road crew for a pop group are excluded.19Based on the three possible distinctions for the scope of an “entertainer” described in the above paragraph, in the paragraphs below it is analysed whether an influencer could be considered as an entertainer.Influencers, who create content such as videos, photos, and stories to entertain their followers, share several characteristics with traditional entertainers. They create content that is similar to traditional media, using storytelling, humour, and visual elements to capture the audience’s attention and provide entertainment value. Influencers have a significant fans following who actively seek out their content, indicating that their content is considered valuable and entertaining. They spend time developing ideas for their content, scripting and planning their videos, and editing their posts, similar to traditional entertainers who create live performances or recorded media.Moreover, influencers often partner with brands to promote products or services to their audience, indicating that they have the potential to influence consumer behaviour and drive sales, similar to traditional entertainers who endorse products. In addition, influencers create content that is designed to evoke emotions such as happiness, excitement, inspiration, and humour, similar to traditional entertainers who aim to elicit emotions through their performances or media. They provide a unique perspective or experience that is valuable to their audience, such as travel influencers who provide insights into different cultures and lifestyles or beauty influencers who offer tutorials on makeup application. Therefore, the basic nature of such content is to engage or entertain the audience.Some influencers engage in public speaking and participate in live events, such as meet-and-greets or speaking engagements, providing an opportunity to connect with their audience in a live setting, similar to traditional entertainers who perform live for their fans. Influencers have a loyal fans following who support their work and often express their support through comments, likes, shares, and other forms of engagement. Finally, influencers often collaborate with other content creators, such as other influencers, photographers, or videographers, to produce their content, similar to traditional entertainers who collaborate with other artists to create new works of art.3. User Point of ViewInfluencer content is often created with the primary goal of promotion or advertising, but it is important to acknowledge that entertainment is a key reason why audiences watch influencer content. Determining the entertaining character of an activity should take into account the perspective of the audience, and the audience is integral to the application of Article 17.20 This is also supported by the decision of the Tax Court of Canada.21However, we should consider that influencer content is a new form of entertainment for people. The attention span of the audience has fallen short and provoking content has become more engaging. Viewers watch influencer content for entertainment purposes, similar to traditional entertainment like movies or live performances. Additionally, many influencers offer an escape or distraction from reality, just like traditional entertainment. Travel influencers, for example, showcase exotic destinations and experiences, providing viewers with a break from their everyday life. Moreover, influencers offer a form of personal connection and interaction with their audience, using live streams and Q&A sessions which provide them with the opportunity to engage with their viewers in real-time, while relatable content, authenticity, creativity, lifestyle, interactivity, and niche appeal all contribute to the entertaining nature of influencer content.Thus, although influencers may be promoting or advertising products, entertainment remains the primary reason why audiences view their content. Even if a company pays an influencer for exposure or reviews of its products, the content must remain entertaining to attract a wider audience. In contrast to traditional ads on social media platforms, which are often skipped after just a few seconds, influencer content receives significant engagement and views. This suggests that the content being produced by influencers is not solely for promotional purposes but rather provides entertainment value to their audience. The ability of influencers to capture and retain the attention of their audience is a testament to the entertaining nature of their content.Judicial Pronouncements and Views of Academic ScholarsReliance can also be placed on the Austrian Verwaltungsgerichtshof (Supreme Administrative Court) which decided in 2015 that the performance of the “party-girl” at a public relations event at an Austrian ski resort in Ischgl had an entertaining character, and therefore the party girl earned the income in the capacity of an entertainer.22 The court rejected the argument that the performance served an advertising purpose. The court also noted that the public did not come to Ischgl because of the product advertising but rather to see their favourite party-girl live, and therefore the event had an entertaining character.Academic scholars are divided on this account. Some scholars conclude that influencers should fall within the personal scope of Article 17 of the OECD MC if their activities have entertaining content.23 “Activities such as writing a travel blog, posting a photo or a tweet to promote a brand are not activities with a performance nature and have no entertainment character behind them. However, creating a video (where the background music is crucial) or broadcasting a live video to interact with followers may qualify as an activity of entertainment nature.”24 The classification of social media influencers as performers under Article 17 of the OECD MC Convention is complex and requires a case-by-case assessment based on factors such as the content they create and how it is published, but influencers who livestream or publish videos online with promotional content that includes entertaining elements are likely to be covered under the definition of an entertainer.25“There is now an entertainment character in activities that were not as heavily present or did not exist years ago. One cannot simply disqualify a person as an “entertainer” based on the old concept of entertainment” and countries should consider this as a new form of entertainment and be willing to classify such influencers as “entertainers.”26Concluding Thoughts“Social media is not just a spoke on the wheel of marketing. It’s becoming the way entire bicycles are built.”27 It is evident that the area of social media influencers and their taxation under Article 17 of the OECD MC is still evolving. However, there are good arguments to cover the influencers as “entertainers”. While the examples discussed in this analysis primarily focus on influencers who blend promotional and entertaining activities, there may be certain influencers in the “snoopers” or “informers” category whose content is clearly not entertaining. Therefore, to obtain legal certainty and prevent double taxation or non-taxation, it is recommended that the OECD provides additional guidance and considers potential modifications to Article 17 to cover the new-age influencers as entertainers. This will ensure clarity and consistency in the taxation of social media influencers across jurisdictions.Furthermore, this article has primarily focused on presenting positive arguments in favour of covering social media influencers as entertainers under Article 17 of the OECD MC. However, this is a dynamic field and thus it would be interesting to also weigh the counterarguments to gain a more comprehensive understanding of the potential challenges and implications associated with the taxation of social media influencers in the international context. Indeed, administrative and procedural compliance complexities should also be considered when addressing this emerging tax issue.1 “Content is king” is a popular marketing phrase originated in an essay by Microsoft founder Bill Gates in 1996 and it’s usually used to describe the necessity for a brand to create content to dominate the online landscape.2 ‘Number of social media users worldwide from 2017 to 2025’, Statista (2021); https://www.statista.com/statistics/278414/number-of-worldwide-social-network-users/3 “Influencer Marketing Statistics: Key Insights and Trends Revealed”; https://www.charle.co.uk/articles/influencer-marketing-statistics/4 ‘The State of Influencer Marketing 2023: Benchmark Report’ (2023); https://influencermarketinghub.com/influencer-marketing-benchmark-report/5 Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing (2017).6 Jana Gross / Florian von Wangenheim, ‘The Big Four of Influencer Marketing: A Typology of Influencers’, Marketing Review St. Gallen (2018) p. 31.7 Snoopers are discoverers of social media platforms. They are motivated by pure amusement and fun from making and sharing content. Creating content is their hobby or passion, which they like to share with a like-minded audience.8 Informers aim to share their expert knowledge with their audience. Their audience seeks advice and help when handling domain-specific issues.9 Entertainers provide amusement, enjoyment, and relaxation to their audience by creating entertaining content.10 Infotainers are a hybrid version of both Informers and Entertainers. They create purely informational content, entertaining content, and content including both elements.11 It is interesting to note that except a few language variations, in substance Article 17 of the United Nations Model Double Taxation Convention between Developed and Developing Countries 2021 (‘UN Model’) is on similar lines as Article 17 of the OECD MC.12 Savvas Kostikidis, ‘Influencer Income and Tax Treaties’, Bulletin for International Taxation (2020) p. 362.13 Rita Julien / Karoline Spies, ‘Article 17 OECD MC in the Age of Influencers’, SWI (2023) p. 84.14 Rita Julien / Karoline Spies, SWI (2023) p. 84.15 Ibid.16 Ibid.17 Savvas Kostikidis, Bulletin for International Taxation (2020) p. 364.18 Savvas Kostikidis, Bulletin for International Taxation (2020) p. 364.19 Rita Julien / Karoline Spies, SWI (2023) pp. 92-93.20 Rita Julien / Karoline Spies, SWI (2023) p. 96.21 Tax Court of Canada, Thomas F. Cheek v. Her Majesty the Queen, 1999-1113(IT)G (2002); The Tax Court of Canada considered the perspective of the audience in the case of a U.S. resident who spent time in Canada as a radio broadcaster for the Toronto Blue Jays, reasoning that the audience is listening for the skills of the professional players, and the broadcaster offers a play-by-play, more akin to a reporter rather than an entertainer.22 Rita Julien / Karoline Spies, SWI (2023) pp. 87-89.23 Savvas Kostikidis, Bulletin for International Taxation (2020) p. 367.24 Andrea Valbuena, ‘Taxation of influencers: A double taxation or a non-double taxation issue?’, School of Economics and Management Department of Business Law (2022) pp. 42-43.25 Rita Julien / Karoline Spies, SWI (2023) p. 102.26 Carli Marcello, ‘I’m Entertained, but Who’s Doing the Entertaining? A Look at the International Tax Consequences for International “Entertainers”’, Tulane Journal of International and Comparative Law (2019) p. 146.27 Ryan Lilly, Write like no one is reading.Author may be reached at canikhilshimpi@gmail.com and eboard@icai.in
REITs, InvITs, Business Trust, Direct Tax, Finance Act 2023, Section 115UA, Section 56(2)(xii), Section 48, Cost of Acquisition, Capital Repayment, Debt Repayment, Section 10(23FC), Section 10(23FCA), Section 10(23FD), Section 10(23FE), Sovereign Wealth Funds, Secondary Market Investors, ICAI
Ep. 465 — New Tax on the Income Distributed by REITs and InvITs: A Comprehensive Overview
CA Journal
· September 2026
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New Tax on the Income Distributed by REITs and InvITsA Comprehensive OverviewExecutive Synopsis: The government acceded to the plea of industries for modification of proposal in the Finance Bill, 2023 for levy of tax against debt repayment portion of income distributed by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs) under the head Income from Other Source and made suitable changes in the Finance Act 2023. This article attempt to provide an insight on various provision contained in the Income-tax Act, 1961 (the Act) and changes made in the Finance act 2023.Brief Overview about REITs & InvITsReal Estate Investment Trusts (REITs) are investment trusts that own and operate real estate properties generating regular income and capital appreciation on their investments. REITs pool money from investors and invest those money in the real estate sector to generate regular income and capital appreciation. Normally, such investments are made through Special Purpose Vehicles (SPVs) or directly in the real estate properties. REITs invests in these SPVs through Equity, interest-bearing loans or debt instruments.Similarly, Infrastructure Investment Trusts (InvITs) are trusts that pool money from investors to invest in income-generating assets. The focus of InvITs is to invest in infrastructure projects which will have consistent cash flow over a period of time like roadways, power transmissions projects, power generation plants etc. InvITs also invest through SPVs in infrastructure assets.Parties Involved in the TransactionThere are broadly 3 (Three) kinds of parties involved in the transaction i.e. Investor, Business Trust (REITs/InvIT) and Special Purpose Vehicles (SPVs).Business Trust: REITs, together with “InvITs” are referred to as “Business Trust”.Special Purpose Vehicle (SPV): SPV is an Indian Company/LLP in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration.Investors: Unit holders holding units issued by the Business Trust.Source of Income and Taxation AspectThe sources of income of 3 parties i.e. SPV, Business Trust and Investors along with their taxation on such income are as follows:A. Special Purpose Vehicle (SPVs)i. Source of Income: The SPVs are primarily working in Real estate business and infrastructure projects like Highway Road project, Power Transmission Line, Real estate business etc. The main source of income of these SPVs are in the form of Toll Charges, Power Transmission charges, Rental Income etc.ii. Taxation: The SPVs are liable to pay taxes on these income as per the prevailing income tax provisions. Since SPVs are incorporated as companies/LLP, the tax rate will be applicable which may vary from 15% to 30% depending upon the tax regime chosen by the concerned SPVs.Note: The choice of Tax regime by SPV will impact the taxability of dividend received by Unit Holders from REITs/InvITs. The same will be elaborated in ensuing paragraphs.B. Business Trust (REITs/InvITs)i. Source of Income: The various sources of receipts for business trusts includes interest income, dividend income, debt/capital repayment from SPV, Rental income (In case of REITs), Income from Capital Gains, Other Income, etc.ii. Taxation: Section 115UA1 of the Act provides a pass-through status to the business trusts in respect of interest income, dividend income, Debt Repayment received from SPV and rental income (in case of REITs). The taxation implication on each component is summarised as below:SLHeadingDescriptionTaxation in the hands of Business Trust1.Income from SPVs (Primary Source of Income of REITs/InvIT)—a) InterestInterest received from SPVs based upon the loan given by REITS/InvITExempted from tax u/s 10(23FC)2(Pls Refer note for Amendment in TDS Provision)(Note-1) b) DividendDividend received from the SPVs based upon the equity investment made by REITS/InvIT.Exempted from tax u/s 10(23FC)22.Rental Income from the assets owned directly by the trust (applicable generally for REITs)In case of REITS, rental Income from real estate.Exempted from tax u/s 10(23FCA)33.Debt Repayment from SPVsApart from above income, REITS/InvIT get cash flow from the SPVs which are in the nature of repayment of principal amount of debt.Non-Taxable: Debt repayment by SPVs to Business trust is not subject to tax in the hand of business trust. Since the same is on account of repayment of principal portion of Loan issued by Trust to SPVs.4.Income from Capital GainE.g. Capital gains from the sale of assets owned by the trust.Taxable: Capital gain on sale of capital asset owned by the trust will attract tax on capital gain determined as per Section 111A (Short Term Capital Gain) or section 112 (Long Term Capital Gain). Applicable tax rate is 10% or 15% as the case may be.5.Other IncomeE.g. interest from term deposits from temporarily parking excess funds etc.Taxable:4 Any other income shall be charged to tax at the Maximum Marginal Rate (MMR) i.e. 42.7%.Note-1: As per amendment to Section 1935 of the Act, No TDS is required to be deducted in case of Interest payment by SPV to Business Trust.C. Investors / Unit Holdersi. Source of Income: As mentioned above, trust mainly receives fund in the form of dividend, interest on loan given to SPV along with repayment of principal amount of loan and rental income (in case of REITs). In fact, these trusts are mandatorily required to distribute 90% of its distributable cash flow to the unit holders.Further, as per Section 115UA of the Act, income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by the business trust. Meaning thereby, if the SPV pays interest amount to the trust for the Loan/debt taken, that amount has to be given by the trust (REITs/InvIT) to the unitholders in the form of interest income only.In view of above, investors of these REITs/InvITs, normally, receive:Interest;Dividend;Rental Income (In case of REITs);Portion of debt repayment which was made by SPV to REITs/InvIT; andOther Income (Mainly the Interest from surplus fund and Capital Gain on sale of asset).Note: Every Business Trust at the time of distribution of income to unit holders provides the detailed breakup of per unit distribution. The breakup includes the component of Interest, Dividend, Capital Repayment & other income per distribution.ii. Taxation: As has been stated above, since interest, dividend, rental income has been accorded as pass-through status at the level of business trust, these are made taxable in the hands of the unit holder(s). With respect to distributions made by the business trust to its unit holders which are shown as repayment of debt, it was also pass through at Trust level and was also not taxable in the hand of unit holders. No such provision existed before the Finance Act 2023 for treatment of amount received by unit holder as debt repayment portion in the distributed income. Now Finance Act, 2023 has made certain changes in various sections to provide for treatment of above in the hands of unit holders.SlType of IncomeTaxable / ExemptedRemark / Condition1.Interest Received from TrustTaxableTaxable as per Prevailing Income Tax Provision2.Dividend Received from Trust(Taxability of Dividend determined based upon Tax regime chosen by SPV)TaxableExemptedIf the dividend received and distributed by the trust is from the SPV who has opted to pay tax as per new tax regime i.e. concessional tax regime as per section 115BAA/ 115BAB.If the dividend received and distributed by the trust is from the SPV who has opted to pay tax as per old regime.3.Rental IncomeTaxableTaxable as per Prevailing Income Tax Provision.4.Repayment of Debt from SPVNot-TaxableUp to FY 2022-23 (i.e. Prior to Finance 2023); Not Taxable.Taxable(As capital gain due to reduction in cost of acquisition)Reduce the cost of acquisition of Units and in turn will be taxable under the head Capital gain when the unit(s) are sold [Amendment in Section 48 (cost of Acquisition)].Taxable(As income from other Source)Will be taxable under the head Income from other source when the sum received exceeds the issue price (Please refer detail explanation) (Note-2).5.Other IncomeExempted6Exempted under Section 10(23FD), (Since Trust has paid tax on it at MMR).Changes in Finance Act 2023: Section 48 & Section 56(2)(xii)Section 48 Explanation 1: Reduction in Cost of Acquisition“Explanation 1.—For the removal of doubt, it is hereby clarified that the cost of acquisition of a unit of a business trust shall be reduced and shall be deemed to have always been reduced by any sum received by a unit holder from the business trust with respect to such unit, which is not in the nature of income as referred to in clause (23FC) or clause (23FCA) of section 10 and which is not chargeable to tax under clause (xii) of sub-section (2) of section 56 and under sub-section (2) of section 115UA.”Section 56(2) Clause (xii): Specified Sum Taxable under Other Sources“New Clause ‘(xii) any specified sum received by a unit holder from a business trust during the previous year, with respect to a unit held by him at any time during the previous year.”Specified sum = A – B – C(which shall be deemed to be zero if sum of B and C is greater than A)Where: A = aggregate of sum distributed by the business trust with respect to such unit, during the previous year or during any earlier previous year or years, to such unit holder, who holds such unit on the date of distribution of sum or to any other unit holder who held such unit at any time prior to the date of such distribution, which is— (a) not in the nature of income referred to in clause (23FC) or clause (23FCA) of section 10; and (b) not chargeable to tax under sub-section (2) of section 115UA; B = amount at which such unit was issued by the business trust; and C = amount charged to tax under this clause in any earlier previous year;As per explanation to Section 48 of income tax act, any amount received except following will be considered as reduction in cost of acquisition of units of REITs and InvITs:Interest – As per Section 10(23FC); orDividend – As per Section 10(23FC); orRental income (in case of REITs) – As per section 10(23FCA); orDebt repayment portion upto the amount at which such units was issued by the trust [Amount not chargeable to tax u/s 56(2)(xii)]; orIncome Chargeable to tax in the hands of the business trust under section 115UA(2) (i.e. Interest income and capital gains).Thus, debt repayment must be reduced from cost of acquisition at the time of sale of units. As a consequence the amount received as debt repayment will in turn taxed as Capital gain at the time of transfer/sale of unit.Example 1: Mr. X bought one unit of InvIT at ₹200 and selling it after 3 year at ₹300 in the open market. During this period InvIT distributed ₹20 as debt repayment. To calculate Capital Gain Mr. X needs to reduce ₹20 from the cost of acquisition thus the net cost of acquisition is ₹180 (₹200 – ₹20) and the capital gain is ₹120 (₹300 – ₹180) instead of ₹100 (₹300 – ₹200). Thus, the debt repayment portion is taxed under the head Capital Gain at the time of sale of Unit in the hands of unit holder.“The amount of Debt repayment portion in the income distribution history of REITS/InvIT from the date of issue of Units is relevant for Investor.”Key Takeaway: The Debt repayment is to be taxed under capital gain until the amount distributed by REITs/InvITs doesn’t exceed its issue price.Comprehensive Numerical Illustration: 12-Year TrajectoryExample: Mr X bought one unit of InvIT from primary market for ₹200/- on Year-1. Mr. X received debt repayment as a component of distribution from InvIT as per following:Year(s)Amount Debt RepaymentTax Treatment as Per Finance Act, 20231–10₹180/-(From Year-1 to Year-10 Mr. X received ₹180/- as Debt repayment)• ₹180 will be reduced from cost of acquisition as per Explanation-1 to Section 48 of the act and will be taxed under the head Capital gain at the time of sale of unit.• Income From Other Source = ZERO (based on Formula provided in Section 56(2)(xii)).Calculation of Specified Sum [Section 56(2)(xii)]:A. Aggregate amount received: ₹180.B. Amount at which such units was issued by Trust = ₹200.C. Amount charged to tax in earlier year = NIL.Specified Sum: A – B – C = ₹180 – ₹200 – NIL = ZERO.11₹30/-• ₹20 will be reduced from cost of acquisition as per Explanation-1 to Section 48, and will be taxed under the head Capital gain at the time of sale of unit.• ₹10/- will be treated under the head Income from Other Source (based on Formula provided in Section 56(2)(xii)).Calculation of Specified Sum [Section 56(2)(xii)]:A. Aggregate amount received: ₹210 (₹180 + ₹30)B. Amount at which such units was issued by Trust = ₹200C. Amount charged to tax in earlier year = NILSpecified Sum: A – B – C = ₹210 – ₹200 – NIL = ₹10.12₹20/-• ₹20/- will be treated under Income from Other Source (based on Formula).Calculation of Specified Sum [Section 56(2)(xii)]:A. Aggregate amount received: ₹230 (₹180 + ₹30 + ₹20)B. Amount at which such units was issued by Trust = ₹200C. Amount charged to tax in earlier year = ₹10Specified Sum: A – B – C = ₹230 – ₹200 – ₹10 = ₹20/-.Secondary Market Acquisition DilemmaFor an example, M/s XYZ InvIT issues units at primary market on year-0 at ₹100/- per unit. Mr. X has purchased Units of InvITs in the Year-10 for ₹200/- from secondary market when debt repayment component in the distribution by InvITs exceeds its issue price ₹100/-.In the instant case, any amount received as debt repayment will be treated as Income from other source in the hands of Mr. X. Meaning thereby holding period is not relevant for taxing the debt repayment under the head Income from other source. The amount of Debt repayment portion in the income distribution history of REITs/InvIT from the date of issue of Units is relevant for Investor.Now Investors buying units of REITs/InvITs from secondary market need to calculate the amount of Debt repayment already made by respective REITs/InvITs so that correct tax treatment can be exercised at the time of receipt of debt repayment from InvIT/REITs. Govt. should provide any mechanism for detail disclosure by InvIT/REITs for tracking such debt repayment from the beginning of the Issue date in a standardised manner.Present Market Scenario (Distribution Details) of REITs/InvITIn India, few REITs and InvITs are traded in the stock exchanges. From the distribution history of such REITs and InvIT, it has been observed that the debt/capital repayment component forms a significant share of distributions made by certain REITs like Embassy and Brookfield.Embassy REITs has distributed near about 47% of its distribution as capital repayment whereas Brookfield distributes near about 53% of its distribution as capital repayment. The Capital Repayment portion of few REITs and InvIT for the Latest Quarter i.e. Q-4 of FY 2022-23 and cumulative distribution (from inception to 31st March 2023) as on 31st March, 2023 are as follows:PeriodName of REIT / InvITInterest (₹)Dividend (₹)Debt / Capital Repayment (₹)Others (₹)Total Distribution (₹)% Of debt/Capital Repayment Against Total DistributionQ4 (FY 2022–23)Brookfield-REIT2.30—2.660.045.0053.20%Embassy-REIT0.862.811.94—5.6134.58%Indigrid-InvIT2.530.280.590.053.4517.10%Powergrid-InvIT1.900.600.490.013.0016.33%Cumulative Since Inception to 31.03.2023Brookfield-REIT24.030.9617.110.2042.3040.45%Embassy-REIT24.2123.3041.83—89.3446.82%Indigrid-InvIT65.061.005.640.1771.877.84%Powergrid-InvIT14.776.461.220.0522.505.42%From above table, it is understood that the portion of debt/capital repayment in the distribution is increasing year by year. In the initial years of distribution of income, debt repayment portions were not significant, gradually over the period the debt repayment portion of the Income distributed increased manyfold.Tax Impact on Foreign InvestorsMany foreign investors like sovereign wealth fund (SWF), pension fund, subsidiary of the Abu Dhabi Investment Authority etc. are getting income tax exemption vide section 10(23FE) in respect of income earned by way of dividend, interest or long-term capital gains arising from an investment made by it in business trusts in India.Such investors are also getting the amount in the form of debt repayment as part of their return from the REITs/InvIT. No such exemption was available to them in Section 10(23FE) in the original Finance Bill, 2023, but now as per Finance Act 2023, Exemption is also extended to the income taxable U/s 56(2)(xii).ConclusionThe changes in the Finance Act 2023, compared to the original proposed provision in the Finance Bill, 2023 is a welcome change. Now the income received in the form of Debt repayment will be charged at concessional capital gain tax and not taxed at the investor’s income tax slab rate. But the worrying area for investor is, while dealing with the selling and buying of units of REITs/InvIT Investor should collect the history of debt repayment component of Income distributed by REITs/InvIT from the date of issue of Unit(s) which is a cumbersome work for investor.ReferencesPresent Market Scenario (Distribution Details) Of REITs/InvIT: Data Source from Distribution details available under Investor corner at respective REITs/InvIT websites.Finance Act, 2023.SEBI (Real Estate Investment Trusts) Regulations, 2014 & SEBI (Infrastructure Investment Trusts) Regulations, 2014.1 Section 115UA. (1) Notwithstanding anything contained in any other provisions of this Act, any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.2 Section 10(23FC) any income of a business trust by way of— (a) interest received or receivable from a special purpose vehicle; or (b) dividend received or receivable from a special purpose vehicle. Explanation.—For the purposes of this clause, the expression “special purpose vehicle” means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration.3 Section 10(23FCA) any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust. Explanation.—For the purposes of this clause, the expression “real estate asset” shall have the same meaning as assigned to it in clause (zj) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).4 Section 115UA (2): Subject to the provisions of section 111A and section 112, the total income of a business trust shall be charged to tax at the maximum marginal rate.5 Section 193 (ix) any interest payable to a “business trust”, as defined in clause (13A) of section 2, in respect of any securities, by a special purpose vehicle referred to in the Explanation to clause (23FC) of section 10.6 Section 10(23FD) any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not being that proportion of the income which is of the same nature as the income referred to in sub-clause (a) of clause (23FC) or sub-clause (b) of said clause (in a case where the special purpose vehicle has exercised the option under section 115BAA) or clause (23FCA).Author may be reached at eboard@icai.in
Design Thinking, Innovation, Human-Centred Design, Indian Organizations, Strategic Management, Tata Nano, Flipkart, NEP 2020, Sustainable Development Goals, Constitution of India, Competition Amendment Act 2023, DPDP Act 2023, Data Privacy, CCI, Leadership, ICAI
Ep. 466 — Exploring Design Thinking as A Strategic Tool for Innovation in Indian Organizations: Key Trends
CA Journal
· September 2026
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Exploring Design Thinking as A Strategic Tool for Innovation in Indian Organizations: Key TrendsExecutive Synopsis: Design thinking has emerged as a game-changer for Indian businesses seeking to innovate in today’s dynamic and competitive market. With its user-centric approach and emphasis on problem-solving, design thinking offers a fresh perspective on how businesses can create value and drive growth. This study explores the constitutional dimensions relating to design thinking and innovation in India. It highlights the key principles and methodologies of design thinking and examines how it enables businesses to identify unmet customer needs, generate innovative ideas, and develop breakthrough solutions. It also highlights the upcoming challenges faced by the Government Institutions, with special reference to data protection and anti-competitive practices. The study reveals that design thinking has proved a significant role for businesses and innovations, but it also requires some special attention and modifications by lawmakers on the Competition (Amendment) Act 2023 and the Digital Personal Data Protection (DPDP) Act, 2023. In the end, the author suggests some recommendations for policymaking and future implementation.Introduction and Theoretical Foundations of Design ThinkingDesign Thinking (hereinafter ‘DT’) is a powerful approach that has revolutionized the way businesses innovate and solve complex problems. In the context of Indian businesses, DT offers immense potential to drive innovation and stay ahead of the competition in a rapidly changing market landscape. It empathises with the end-users and gaining deep insights into their needs, desires, and pain points. By adopting a user-centric perspective, businesses can uncover hidden opportunities and design solutions that truly resonate with their target audience. This goes beyond aesthetics and focuses on creating products and services that are not only visually appealing but also functional and meaningful (Kimbell, L., 2011). This process typically involves five stages i.e., empathize, define, ideate, prototype, and test. These stages encourage businesses to step into the shoes of their users, define the problem they are trying to solve, generate a wide range of ideas, build prototypes to test those ideas and gather feedback to refine the solutions (Gottlieb, M. et al., 2017).1EmpathizeUnderstand user needs & pain points deeply.2DefineState user needs & problems clearly.3IdeateChallenge assumptions & create innovative ideas.4PrototypeBuild tangible, testable solutions.5TestTry solutions out & gather user feedback.i. Meaning and Significance of Design ThinkingThe DT is a problem-solving approach that focuses on understanding user needs, challenging assumptions, and creating innovative solutions through a human-centred design process. It enables organizations to tackle complex problems, foster innovation, enhance user experiences, and encourage a collaborative and constant mindset, promoting creativity and out-of-the-box thinking. It is a problem-solving practice and inspires organizations to test assumptions, explore alternatives, and continually improve their offerings. It inspires interdisciplinary teamwork, bringing together individuals with diverse backgrounds and expertise to generate fresh insights and perspectives (Oxman, R. 2004).ii. Importance of Innovation and Design Thinking in Today’s Rapidly Changing WorldThe DT and innovation allow businesses to anticipate future trends and stay ahead of their competition. By continuously developing new products, services, and ideas, businesses can meet the evolving needs of customers and maintain their relevance in the market. In a fast-paced and dynamic environment, businesses need to adapt quickly to new challenges and opportunities. It empowers organizations to respond effectively to changing market conditions, technological advancements, and customer preferences (Murphy, J., & Irwin, F., 2018). In addition, businesses can differentiate themselves from their competitors, gain a competitive advantage, and bring together diverse perspectives, experiences, and ideas.“By adopting a user-centric perspective, businesses can uncover hidden opportunities and design solutions that truly resonate with their target audience.”iii. Constitutional Dimension on Design Thinking in IndiaIn India, the constitutional dimensions relating to DT and innovation are not explicitly defined, but the implication of these concepts has a great impact on ensuring the essence of the preamble of the Indian Constitution including justice; social, economic and political, democracy, etc., and also confirms coordination among the three organs of the government i.e., legislature, executive and judiciary (De Visser, M., 2022). Which can contribute to enhancing the effectiveness of public policies, and promoting efficiency, effectiveness, and governance systems by incorporating user-centric approaches. Further, it can help address the evolving needs and challenges of society, thereby promoting access to justice and ensuring the protection of fundamental rights. Hence, today’s effective DT plays a vital role in harmonizing the essence of FR and DPSP of the Indian Constitution for sustaining social justice and governance in all rural and urban areas.Literature ReviewThe study focuses on how social entrepreneurs might use design thinking to develop economic approaches for solving issues during the COVID-19 pandemic (Mishra, O., 2021). It gives an in-depth overview of the various methods, by which industry experts provide fresh perspectives on this subject, and outlines a research agenda for DT’s and human-centred innovation (Brenner, W., & Uebernickel, F., 2016). In this part, the author identified that there are very few or no appropriate studies that focus upon the interface of the DT with other subject matters including the Indian Constitution, key principles, innovation, and the Competition (Amendment) Act 2023 and the Digital Personal Data Protection (DPDP) Act, 2023. Therefore, it attempts to reveal the most expected challenges relating to DT and Innovation in India.Why Design Thinking is a Game-Changer for Indian BusinessesIt can differentiate itself from competitors by creating products and services that truly address the needs of Indian customers (Lafley, A. G., & Charan, R. 2010). This can improve a deep understanding of their cultural, social, and economic context, and design solutions that are tailored to their specific requirements. This level of customization and localization can give Indian businesses a significant edge in the market, allowing them to capture the hearts and minds of Indian consumers. The same idea and approach are also promoted at the international level including the BRICS summit (2023), and G20 (2023) where the nations focused on global economic changes, BRICS expansion, promoting strategic partnerships among new entrants, sustainability, cooperation, and coordination at the universal level and to safeguard sustainable future, as discussed during the G20 Summit (2023) under the theme of “One Earth, One Family, One Future” (ORF et al., 2023).“Implementing a systematic approach and a commitment to change with DT can lead to business advantages as well as a sustainable future.”Steps Involved in Implementing Design Thinking in Your BusinessImplementing a systematic approach and a commitment to change with DT can lead to business advantages as well as a sustainable future. These methods may involve educating and training teams to provide training and resources to familiarize them with the principles and methodologies help them understand the worth of a user-centric method and advance the required skills to apply it in their work. Cultivating a culture of empathy and collaboration also encourages empathy, collaboration, and experimentation, and creates opportunities for multidisciplinary teams to work together and share diverse perspectives. It encourages open and non-judgmental discussions to generate innovative ideas which will guide the ideation process, Indian businesses can effectively implement this methodology and harness its potential to drive innovation and achieve business success (Chou, D. C., 2018).Resources and Training for Learning Design ThinkingTo learn and implement this skill effectively, it is important to have access to the right resources and training (Wrigley, C., & Straker, K., 2017) like:Stanford D. School: Renowned for its DT programs, offering online courses and workshops that provide a deep understanding of its principles and methodologies.IDEO U: An online platform that offers courses designed to help individuals and teams develop the mindset and skills required for effective innovation.Books and Publications: Several authoritative publications that provide valuable insights into DT.By investing in learning resources and training, Indian businesses can equip themselves with the knowledge and skills necessary to implement it successfully.The Role of Leadership in Promoting Design Thinking in Indian BusinessesLeadership plays a crucial role in promoting it as a strategic tool in Indian businesses. They need to champion the benefits of it and create a culture that supports innovation and experimentation. By embracing empathy, collaboration, and experimentation, leaders can inspire their teams to adopt Design Thinking in their own practices. They can also help in allocating resources, both financial and human, to promote it. Further, they encourage cross-functional collaboration and break down silos within the organization. They need to create a safe environment where failure is seen as a learning opportunity rather than a stumbling block. By celebrating failures and encouraging experimentation, leaders can create a different and dynamic culture that supports creating an environment that nurtures Design Thinking and empowers teams to innovate and drive business success (Sinha, S., & Sengupta, K., 2020).Significance of Design Thinking and InnovationIt plays a significant role in technology by introducing a new way of problem-solving and driving progress in various industries. It helps in developing innovative products and quick services and also takes into account ethical considerations, such as privacy, inclusivity, and sustainability. It helps create responsible and user-friendly technology that respects individuals’ rights and values (Owen, C. L., 2006).Further, it transforms the education system and ensures the possible shift from standardized knowledge delivery to learner-centred education for a sustainable future and social justice, as focused by the New National Education Policy (NEP) 2020. This approach promotes innovation in curriculum design, instruction methods, assessment strategies, and support systems, and encourages the use of technology platforms that allow students to choose their own learning pathways, access adaptive content, receive instant feedback, and track their progress (Sontakke, S. G. et al., 2022).In addition, by applying this approach to social issues, organizations can identify and address complex and upcoming challenges, and truly meet the needs of individuals and communities, leading to more effective and sustainable social change initiatives. It contributes to sustainable development by promoting the principles of circular economy and environmental sustainability. Through this, the organizations can design a new system that minimizes waste, conserves resources, and reduces environmental impact to foster a more sustainable and resilient future.Real-Life Examples of Successful Innovation in Indian OrganizationsSeveral Indian organizations have successfully incorporated it to drive innovation and achieve business success:1. Tata Group – The Tata NanoTata Group utilized Design Thinking to create the Tata Nano, a small and affordable car targeted at the Indian middle-class population (Moon, H. C. 2015). By empathizing with the needs of the Indian middle class—who were commuting under precarious conditions on two-wheelers—Tata Group was able to develop a car that fulfilled their aspirations while being cost-effective. This innovative approach disrupted the automotive industry in India and positioned Tata Nano as a game-changer in the market.2. Flipkart – Redefining the Indian E-Commerce ExperienceThe e-commerce giant Flipkart applied this approach to improve the online shopping experience of Indian customers. By understanding the challenges faced by Indian consumers, such as limited internet connectivity and trust issues with online payments, Flipkart redesigned its platform to provide a seamless and trustworthy shopping experience (such as introducing Cash on Delivery). This user-centric approach helped Flipkart become the leading e-commerce player in India, capturing a significant market share.Overcoming Challenges in Adopting Design ThinkingWhile this offers immense potential for Indian organizations, there are certain challenges that need to be addressed for successful adoption:Cultural Mindset: Indian organizations often have a hierarchical and risk-averse culture, which can hinder adoption. Leaders need to create a safe environment where experimentation and failure are viewed as learning opportunities.Lack of Awareness and Training: Many Indian businesses are not aware of the principles and methodologies of DT. Providing structured training and engaging external consultants can bridge this gap.Resistance to Change: Resistance is common in well-established organizations. Communicating benefits transparently and building cross-functional teams fosters ownership.Limited Resources: Startups and small businesses often face capital constraints. However, DT can be implemented with minimal resources by leveraging existing talent and fostering collaborative creativity.Emerging Legal & Regulatory Challenges1. Challenges under the Competition (Amendment) Act, 2023This can present certain challenges before the Competition Commission of India (CCI), because DT often involves cross-industry partnerships, knowledge-sharing, and co-creation, which can lead to concerns about potential collusion or abuse of market power, and market conditions. This leads to market disruptions and uncertainties, making it challenging for the CCI to assess the long-term effects of innovative practices. In addition, upcoming challenges like BRICS expansion and G20 lead to the expansion of international participation among business players and big consumer markets, raising jurisdictional complexities when cross-border disputes arise. To overcome these challenges, the CCI can consider engaging with DT experts and incorporating DT principles into its own decision-making processes.2. Challenges under the Digital Personal Data Protection (DPDP) Act, 2023One of the key concerns is privacy and consent. DT often involves user research and testing, which may require the use of personal data. This raises questions about how personal data is collected, used, and protected during the design thinking process. Furthermore, if big tech companies are using and processing such data outside India, regulatory enforcement becomes complex. Another challenge is the potential use of personal data for testing and experimentation without explicit consent, which may conflict with the principles of the DPDP Act. Regulatory frameworks may struggle to keep pace with rapid, agile design experimentation, leading to compliance uncertainties. It is imperative that DT is implemented in strict compliance with data protection laws to safeguard individuals’ privacy and rights.Conclusion and SuggestionsThis study reveals that design thinking for innovation has proved a significant game changer for Indian organizations, and there is a need to embrace it for economic development as well as sustainability. It highlights how DT can enhance the critical approach and knowledge emphasized by NEP 2020 and the Sustainable Development Goals (SDGs) for developing novel solutions among stakeholders. It also underscores how DT contributes to maintaining balance among the three organs of the government of India to achieve good governance and social justice.Further, this methodology has proved its significant role in economic growth through innovative ideas, as focused by BRICS (2023) and G20 nations. But at the same time, it highlights critical areas including anti-competitive practices at the international level (such as international cartels), data privacy, digital literacy, awareness, artificial intelligence, and cryptocurrency, on which policymakers are required to rethink and introduce effective, balanced regulatory solutions.ReferencesBrenner, W., & Uebernickel, F. (2016). Design thinking for innovation: Research and practice. Springer.Brown, T., & Wyatt, J. (2010). Design thinking for social innovation. Development Outreach, 12(1), 29-43.Chou, D. C. (2018). Applying design thinking method to social entrepreneurship project. Computer Standards & Interfaces, 55, 73-79.Clark, K., & Smith, R. (2008). Unleashing the power of design thinking. Design Management Review, 19(3), 8-15.De Visser, M. (2022). Promoting Constitutional Literacy: What Role for Courts? German Law Journal, 23(8), 1121-1138.G20 (2023). Welcome to India’s G20 Presidency. Available at: https://www.g20.org/en/Gottlieb, M., Wagner, E., Wagner, A., & Chan, T. (2017). Applying design thinking principles to curricular development in medical education. AEM Education and Training, 1(1), 21-26.Kimbell, L. (2011). Rethinking design thinking: Part I. Design and Culture, 3(3), 285-306.Lafley, A. G., & Charan, R. (2010). The Game-Changer: How Every Leader Can Drive Everyday Innovation. Profile Books.Mishra, O. (2021). Design Thinking and Bricolage for Frugal Innovations during Crisis. Journal of Innovation Management, 9(3), 1-26.Moon, H. C., Lee, Y. W., & Yin, W. (2015). A new approach to analysing the growth strategy of business groups in developing countries: The case study of India’s Tata Group. International Journal of Global Business and Competitiveness, 10(1), 1-15.Murphy, J., & Irwin, F. (2018). Design thinking: Can it prepare students for industry 4.0? Independence, 43(1).ORF et al. (2023). The BRICS Summit 2023: Seeking an Alternate World Order? Available at: https://www.cfr.org/councilofcouncils/global-memos/brics-summit-2023-seeking-alternate-world-orderOwen, C. L. (2006). Design thinking: Driving innovation. The Business Process Management Institute, 1-5.Oxman, R. (2004). Think-maps: teaching design thinking in design education. Design Studies, 25(1), 63-91.Sinha, S., & Sengupta, K. (2020). Role of leadership in enhancing the effectiveness of training practices: Case of Indian information technology sector organizations. Paradigm, 24(2), 208-225.Sontakke, S. G., Kadam, D. B., & Vartale, S. P. (2022). National education policy (NEP) 2020: India’s new and strong higher education program. Sumedha Journal of Management, 11(3), 18-22.Verma, P., Kumar, V., Daim, T., & Sharma, N. K. (2023). Design Thinking Framework Toward Management Control System in Environmental Dynamism: An Innovation Perspective. IEEE Transactions on Engineering Management.Wrigley, C., & Straker, K. (2017). Design thinking pedagogy: The educational design ladder. Innovations in Education and Teaching International, 54(4), 374-385.Authors may be reached at anuradhajain3@gmail.com, narenderarya86@gmail.com and eboard@icai.in
Bank Audit, PMLA 2002, Anti-Money Laundering, AML, Know Your Customer, KYC, Client Due Diligence, CDD, FIU-IND, CTR, STR, CCR, CBWTR, NTR, RBI Master Direction, Professional Misconduct, Chartered Accountants as Reporting Entities, S.O. 2036(E), ICAI
Ep. 467 — Auditor’s Responsibility during Bank Audit under the Prevention on Money-Laundering Act (PMLA), 2002
CA Journal
· September 2026
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Auditor’s Responsibility during Bank Audit under the Prevention on Money-Laundering Act (PMLA), 2002Executive Synopsis: This paper presents that while auditing the bank or financial institution, an auditor should take care of the provisions of the Prevention of Money-Laundering Act, 2002 (PMLA) and PML rules about responsibilities as reporting entities, and the RBI circular about anti-money laundering (AML) policies. The Auditor should ensure that the AML policies are in place and followed by the banks and financial institutions, check whether proper documents are being taken by the banks while dealing with customers at the time of Know Your Customer (KYC) and customer due diligence, and that banks are sending the required reports in due time. This paper discusses some cases wherein auditors failed to discharge their duties to report and were found guilty of professional misconduct.IntroductionWhen one opens a digital or print media, they may find news on Money Laundering and actions taken by the Enforcement Directorate against economic offenders which may include white-collar persons. Money laundering has a significant impact on the economy of our nation as well as other countries. The proceeds of crime earned are layered and reintroduced into the regular economy in different ways, showing that the money has been earned or received through legitimate sources. The process is called money laundering.To control money laundering activities, it was identified that banks and financial institutions are essential sources of information about money laundering and other financial crimes, and banking frauds investigated by law enforcement agencies. From this perspective, it increases an auditor’s responsibility to be aware of the provisions of PMLA, observe the same, and report with due diligence during bank audits.[1] Definitions under The Prevention of Money Laundering Act, 2002Every Auditor must be familiar with some of the following terms and definitions of PMLA which will help to start an audit of banks or financial institutions, mitigate the risk and find out the account and suspicious transactions if some money laundering is being done:Section 2(ha) – “Client”: Means a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting.Section 2(u) – “Proceeds of crime”: Means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property [or where such property is taken or held outside the country, then the property equivalent in value held within the country or Abroad].Section 2(y) – “Scheduled offence”: Means—the offences specified under Part A of the Schedule; orthe offences specified under Part B of the Schedule if the total value involved in such offences is one crore rupees or more; orthe offences specified under Part C of the Schedule.Section 3 – “Offence of money-laundering”: Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering. Explanation (added w.e.f. 01.08.2019):A person shall be guilty of the offence of money laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is involved in one or more of any of the processes or activities connected with proceeds of crime such as concealment, possession, acquisition, use, projecting as untainted property; or claiming as untainted property, in any manner whatsoever;The process or activity connected with proceeds of crime is a continuing activity. It continues still such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.Process and Methods of Money LaunderingThe Auditor should know the process of money laundering which generally comprises three stages:(a) Placement ➔ (b) Layering ➔ (c) IntegrationSome of the methods in money laundering are popular through which one may carry out their activities through the banking channel such as:a. Smurfing Cash is deposited into small amounts below reporting thresholds to avoid detection.b. Bank Complicity Bank employees collude by opening multiple unverified accounts or allowing cash operations without reporting.c. Currency Exchanges Physical money is transported out of a country through cross-border currency conversion.d. Purchase of Demand Drafts Financial instruments are purchased to send funds abroad into foreign or offshore bank accounts.e. Credit Cards High-value luxury purchases or converting credit balances into bank cheques.f. Casinos Purchasing gambling chips that are subsequently redeemed for clean casino cheques.g. Refining Exchanging smaller denomination bills for large bills across different banks to minimize bulk cash handling.h. Legitimate Business / Co-mingling Taking over cash-intensive businesses to mix illicit proceeds with genuine operational turnover.i. Loan Back Converting illegitimate wealth into clean capital by fabricating fake loan/mortgage documentation back to the criminal.j. Money Mules Hiring low-profile individuals to open accounts, transfer funds, or carry cash across borders.k. Shell Companies Creating complex corporate layers of transactions without genuine commercial substance.l. Trade-Based Laundering (TBML) Over- or under-invoicing goods/services, falsifying customs manifests, or misrepresenting quantities.m. Cryptocurrencies Using mixing services/tumblers and P2P decentralized exchanges without KYC to erase paper trails.n. Dark Web Marketplaces Purchasing illicit goods/services on encrypted hidden networks using virtual digital assets.Development of KYC and CDD ProcessesThe Auditor should know the background of global initiatives. The Basel Committee on Banking Supervision (BCBS), established in 1974 following the collapse of Herstatt Bank in West Germany, recognized the banking system as a primary channel exploited for money laundering. The Basel Committee issued its landmark “Statement on the prevention of criminal use of banking system for the purpose of money laundering”, recommending strict customer identification and ethical banking procedures.In 1989, the G-7 Summit in Paris established the Financial Action Task Force (FATF), which formulated the 40 Recommendations on Money Laundering and combating terrorist financing. One key recommendation was to bring professional accountants under the ambit of AML reporting entities. In 1995, the Egmont Group was formed, now comprising 164 Financial Intelligence Units (FIUs) globally to exchange financial intelligence securely.In India, FIU-IND was established in 2004 by the Government of India as the central national agency responsible for receiving, processing, analyzing, and disseminating information relating to suspect financial transactions.Regulatory Guidelines: RBI Master Direction on KYCThe Reserve Bank of India has issued several circulars on ‘Know Your Customer’ (KYC) and transaction monitoring, consolidated in its Master Direction (updated 4th May 2023 via Circular No. RBI/DBR/2015-16/18).Definition of Customer: “Customer means a person who is engaged in a financial transaction or activity with a Regulated Entity (RE) and includes a person on whose behalf the person who is engaged in the transaction or activity, is acting.”Mandatory KYC Documents (PML Rules 9(4 to 10)): Proof of Identity (Passport, Voter’s ID card, PAN card, Driving License) and Proof of Residence (utility bills, ration card, employer letter). For legal entities: Certificate of Incorporation, MOA/AOA, Partnership Deed, or Trust Deed. Additionally, the Video-based Customer Identification Process (V-CIP) has been introduced for digital customer onboarding.Client Due Diligence (CDD): Defined under Rule 2(1)(b) and Rule 14(ii)/(iii) of the amended PML (Maintenance of Records) Rules, 2013, requiring every reporting entity to formulate and execute a comprehensive CDD Programme to manage and mitigate risks.Mandatory Transaction Reports Furnished to FIU-IND (Section 12, PMLA)Under Section 12(1)(b) of the PMLA and PML Rules, banks, financial institutions, and intermediaries must submit periodic regulatory reports to FIU-IND:Report TypeReporting Threshold & DescriptionStatutory TimelineCash Transaction Reports (CTRs)• Total cash credit or debit transactions in an account exceeding ₹10 Lakhs in a calendar month.• Individual transactions of ₹50,000 and above are reported.• Transactions below ₹50,000 are also reported if the monthly account aggregate exceeds ₹10 Lakhs.• Cash deposits/withdrawals across all accounts of a single customer must be aggregated.• Compulsory monthly filing; NIL report required if no reportable transactions occur.By the 15th day of the succeeding monthNon-Profit Organization Transaction Reports (NTRs)• Any account of a Non-Profit Organization (NPO) receiving credit of ₹10 Lakhs or more in a month.• Compulsory monthly filing; NIL report required if no reportable credits occur.By the 15th day of the succeeding monthCounterfeit Currency Reports (CCRs)• Any forged or counterfeit banknotes detected at the cash counter.• Police FIR Requirement: If counterfeit notes detected exceed 4 pieces in a single transaction, an FIR must be lodged and a copy enclosed with the CCR.By the 15th day of the succeeding monthCross Border Wire Transfer Reports (CBWTR)• All cross-border wire transfers exceeding ₹5 Lakhs (or equivalent foreign currency) where origin or destination is in India.• Purchase/sale of immovable property valued at ₹50 Lakhs or more registered by the reporting entity.By the 15th day of the succeeding monthSuspicious Transaction Reports (STRs)• Any transaction or business dealing raising suspicion of being linked to proceeds of crime, money laundering, terrorist financing, or lacking economic rationale.• Includes attempted transactions, whether or not made in cash.• ANTI-TIPPING OFF MANDATE: Banks/FIs must not put any operational restrictions on accounts where an STR has been filed.Within 7 days of arriving at suspicionRed Flags and Identification of Suspicious TransactionsAuditors should review the following indicators of suspicious transactions during statutory and concurrent bank audits:False identification documents or documents that could not be verified within a reasonable time.Non-face-to-face clients and doubt over the Ultimate Beneficial Owner (UBO).Accounts opened with names deceptively close to established corporate entities.Multiple Accounts: Large number of accounts sharing a common account holder, introducer, or authorized signatory with no commercial rationale.Unexplained transfers between multiple accounts without clear rationale.Sudden, massive activity in long-dormant accounts.Transactions completely inconsistent with the client’s declared business turnover or financial standing.Accounts utilized for circular trading, insider trading, or off-market block deals executed at non-market prices.Chartered Accountants as Reporting Entities and Professional MisconductNotifications S.O. 2036(E) and S.O. 2135(E) (May 2023)Recently, two notifications Nos. S.O. 2036(E) and 2135(E) were issued by the Ministry of Finance, Department of Revenue on 3rd May 2023 and 9th May 2023, respectively, to include professionals (practicing Chartered Accountants, Company Secretaries, Cost Accountants) and company formation agents as Reporting Entities under the Prevention of Money Laundering Act. FIU-IND has issued guidelines detailing customer KYC and due diligence obligations for CAs.Keeping the provisions of PMLA in mind, the Auditor should verify all potential areas where suspicious transactions come to notice and verify whether banks have submitted all required statutory reports. In case of failure by banks, the Auditor is supposed to report.Now the question arises: if the bank has already reported the matter, is the Auditor required to report the same matter again as a reporting entity to FIU-IND or the Self-Regulatory Body (SRB)? This remains a critical area requiring regulatory clarification. If the Auditor fails to discharge their duties during an audit, they shall be guilty of professional misconduct and liable to disciplinary action by the competent authority. Substantial accountability and penal provisions now exist for both auditors and bank officials who fail to discharge their statutory PMLA obligations strictly.ConclusionWhile auditing banks, the Auditor should ensure that the bank has an effective AML/CFT program in place by establishing appropriate procedures and ensuring their effective implementation. It should cover proper management oversight, internal control systems, segregation of duties, staff training, and quarterly compliance submissions to the Audit Committee. Incorporating a risk-based audit approach and conducting rigorous verification of KYC/AML mechanisms is vital to safeguarding the integrity of India’s banking ecosystem.Authors may be reached at fcanarula@yahoo.com and eboard@icai.in
Interim Budget 2024, Indian Economy, Fiscal Deficit, FRBM Act, Capital Expenditure, Infrastructure, PM GatiShakti, Vande Bharat, MGNREGS, Subsidies, Viksit Bharat 2047, Net Zero 2070, Direct Tax, GST, Direct Benefit Transfer, ICAI
Ep. 468 — Fiscal Resilience, Social Growth: India’s Bold Vision in the Interim Budget 2024
CA Journal
· September 2026
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Fiscal Resilience, Social Growth: India’s Bold Vision in the Interim Budget 2024Executive Synopsis: Interim Union budget for the fiscal year 2024-25 envisages a development that leads to social and geographical inclusivity on the one hand and fiscal and environmental sustainability on the other. With a renewed emphasis on inclusive growth through capital expenditure, development of infrastructure, tourism and social sector including children, women, youth, farmers, poor and marginalised people, the budget not only reiterates inclusive and sustainable development agenda of the government but also reaffirms a continued commitment to fiscal prudence and net zero targets of carbon emissions.Development strategy of the government for the period of ‘Amrit Kaal’, as reflected in the budget, prioritises sustainable economic growth, inclusive development, and productivity enhancement. Efforts of the government under the ‘Panchamrit’ goals focus on sustaining high economic growth, ensuring energy security, and promoting financial sector preparedness. Initiatives like PM Awas Yojana (Grameen), rooftop solarization, and healthcare expansions target social welfare, while agricultural advancements and self-help group programs boost farmer incomes. Through the principles of ‘Reform, Perform, and Transform’, next-generation reforms will empower Micro, Small, and Medium Enterprises (MSMEs) and accelerate development in underdeveloped areas. The strategy also emphasizes technology and innovation for economic growth, along with infrastructure development and green energy initiatives for urban transformation and climate resilience. Overall, this budget of the ‘Amrit Kaal’ aims to drive comprehensive development through inclusive and transformative policies towards an ultimate objective of a Viksit Bharat (developed India) by the year 2047.A Budget for A Booming EconomyThe global economy faced unprecedented shocks in the current decade, with the pandemic and geopolitical conflicts triggering waves of disruption. From the pandemic-induced growth contraction to the Russia-Ukraine conflict-induced cost-push inflation, global economy faced relentless challenges. However, despite global uncertainties and challenges, Indian economy demonstrated resilience. Visionary economic policies in the post pandemic budgets drove the Indian economy fast to achieve a sharp V-shaped recovery and robust economic growth. This was aided by a resurgence in private consumption, accelerated by extensive vaccination drives, a strong multiplier effect of surge in the government capital expenditure, and government’s bold initiatives, interventions and reforms.International Monetary Fund (IMF) has upwardly revised its growth projection for India for FY 2023-24, which is an indicator of increasing global confidence. Buoyant economic activity has translated into robust revenue collections and an optimistic outlook for GDP growth in FY 2023-24. Industrial and service sector grew fast due to robust domestic demand and massive hike in capital expenditure. Agriculture sector has also shown growth despite challenges, supported by smooth procurement operations and increased food grain production. Although its export growth moderated, domestic consumption, especially in contact-intensive services, drove economic expansion. Private consumption reached 58.4% of GDP in the second quarter of FY 2023-24, the highest in years.According to IMF projections, India, with its promising growth prospects, is poised to become the third-largest economy by 2027. Figure 1 shows growth projections by different agencies for India for FY 2023-24: NSO (7.30%), ADB (7.00%), World Bank (6.90%), RBI (6.80%), IMF (6.80%), and OECD (6.60%). Indian economy is forecasted to grow by about 6.8% to 7.0% for FY23-24, exceeding most major economies. This resilience reflects India’s ability to adapt and revive growth drivers amid uncertainties.Receipts and Expenditure in the BudgetReceipts in the budget comprise revenue receipts1 and capital receipts2. Revenue receipts in the budget 2024 are projected to come mainly from tax and non-tax sources wherein corporation income tax, personal income tax and GST are likely to contribute about 17, 19 and 18 percent, respectively. Borrowings and other liabilities are going to be the highest contributor as in previous budgets (Figure 2). Revenue projections for FY 2024-25 reflect a forward-looking approach, with gross tax revenue estimated to grow at 11.5%. Direct and indirect taxes are expected to contribute significantly, underscoring the government’s emphasis on broadening the tax base and rationalizing tariffs. The focus on GST reforms, coupled with measures to enhance tax compliance and administration, aims to sustain revenue growth and fiscal stability.Figure 2: Sources of Revenue (Receipts %)Borrowings & Other Liabilities29%Income Tax19%Goods & Services Tax (GST)18%Corporation Tax17%Non-Tax Receipts7%Union Excise Duty5%Customs Duty4%Non-Debt Capital Receipts1%Figure 3: Items of Expenditure (%)Central Schemes (excl. Capex/Subsidies)25%States' Share of Taxes & Duties20%Interest Payments20%Other Expenditure9%Defence Services8%Finance Commission & Transfers8%Subsidies6%Pensions4%One fifth (20%) of the whole budget is estimated to be spent on interest payment alone. This interest is paid over the accumulated burden of public debt. A part of such debt is long term in nature wherein a substantial part has been raised and accumulated by previous governments in previous decades. A level of public debt to GDP ratio of about 60 percent is considered sustainable and commensurate with the current growth pace of the Indian economy.The expenditure is also classified as revenue expenditure and capital expenditure3. A significant allocation towards capital expenditure signals the government’s intent to prioritize investments in infrastructure and developmental sectors. Provisions for subsidies, pensions, and grants show a commitment to social welfare and inclusive growth. Furthermore, initiatives like the PM GatiShakti National Master Plan highlight efforts towards integrated planning and infrastructure development, leveraging technology for efficient resource allocation.Targeting Poverty, Empowerment and Inclusive DevelopmentGovernment of India has been persistently pushing for poverty eradication, welfare improvement and human empowerment due to which this year budget has been more nuanced toward these objectives. Finance Minister, in her budget speech, highlighted India’s significant strides in reducing Multi-Dimensional Poverty (MDP), marking a positive shift. There has been a shift towards empowering the poor rather than solely relying on entitlements, resulting in significant progress. In recent years, concerted government initiatives have economically empowered 25 crore people, leading to their greater participation in the development process. The mission of the government has been to reach out to each household for their needs like housing, water, electricity, cooking gas, bank account and financial services. Food for all has been ensured through free rationing of food for 80 crore people.Poverty is being addressed through multiple policies like employment generation, food rationing, direct transfer of benefits through financial inclusion, water supply, sanitation, health and educational facilities, etc. Jan Dhan Yojna has turned out to be highly significant which is visible from the fact that ₹2.7 lakh crore have been saved in the Direct Benefit Transfer of ₹34 lakh crore, allowing for increased funding in poverty alleviation programs like ‘Garib Kalyan’. Initiatives such as PM-SVANidhi and PM-JANMAN Yojana target specific groups like street vendors and tribal communities, ensuring inclusive development.Budgetary allocations under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) peaked during the pandemic year, 2020-21, and thereafter witnessed a cut in recent years. However, compared to the budgeted allocations for the year 2023-24, this year budget for MGNREGS has been hiked by ₹26,000 crore (holding at 2.4% of Revenue Expenditure).In agriculture, schemes like PM-KISAN SAMMAN Yojana provide direct financial aid to 11.8 crore farmers annually, while PM Fasal Bima Yojana offers crop insurance to 4 crore farmers. The Electronic National Agriculture Market integrates mandis, benefiting 1.8 crore farmers. Allocations for the Department of Agriculture and Farmers Welfare have been increased by about ₹2,000 crore over the previous year’s budget allocations.Youth empowerment initiatives include the National Education Policy (NEP) 2020, PM SHRI schools, and Skill India Mission, which have trained and upskilled millions. PM Mudra Yojana has sanctioned loans worth ₹22.5 lakh crore for entrepreneurial ventures, while various schemes support startups and employment generation.Women’s empowerment has seen significant progress, with initiatives like the Mudra Yojana empowering 30 crore women entrepreneurs. Female enrollment in higher education has increased by 28%, with a significant presence in Science, Technology, Engineering and Mathematics (STEM) courses. Over 70% of houses under PM Awas Yojana in rural areas are owned by women that further promotes gender equality.The budget also promotes the Aspirational Districts Programme (ADP) that aims to assist and transform 112 under-developed districts swiftly and effectively through faster development and employment generation. It emphasizes convergence, collaboration, and competition among districts, driven by a mass movement.Central Government Subsidies TrendsFood, Fertiliser and petroleum are the three major subsidies of the Central government. Additionally, subsidies are also provided on interest payments on variety of loans. Figure 6 shows a declining trend in these subsidies as a percentage of revenue expenditure:Subsidy Component2019–20 (Actual)2020–21 (Actual)2021–22 (Actual)2022–23 (Actual)2023–24 (BE)2023–24 (RE)2024–25 (BE)Food Subsidy4.6%17.6%9.0%7.9%5.6%6.0%5.6%Fertiliser Subsidy3.5%4.1%4.8%7.3%5.0%5.3%4.5%Petroleum Subsidy1.6%1.2%0.1%0.2%0.1%0.3%0.3%Interest Subsidy1.0%1.0%1.3%1.2%0.8%0.7%0.7%Source: Union Budget Documents of Different Years (% of Revenue Expenditure).Sustainable Development & Net Zero 2070The government’s commitment to achieve ‘Net Zero’ by 2070 is marked by various initiatives in the Interim Budget. These include providing viability gap funding for wind energy, establishing coal gasification and liquefaction capacity, and promoting the use of renewable energy sources like compressed biogas. Phased mandatory blending of CNG, PNG, and biogas is prioritized, along with financial assistance for biomass aggregation machinery. Additionally, schemes like rooftop solarization and e-buses for public transport aim to reduce carbon footprints. Supporting the e-vehicle ecosystem and launching bio-manufacturing initiatives further demonstrate a commitment to environmentally friendly alternatives, alongside significant distribution of LED bulbs and LPG connections.Overview of Fiscal Aspects & Deficit TrendsThe Interim Budget 2024 focuses on macroeconomic stabilization along with fiscal correction. Fiscal Responsibility and Budget Management (FRBM) Act, 2003 mandated the Central and State governments a reduction in their fiscal deficits, revenue deficits and primary deficits4. Government has been very conscious in its management of finances to meet the revised target of 4.5 percent of GDP of fiscal deficit of the FRBM Act by the year 2025-26. Fiscal deficit and revenue deficit have been targeted at 5.1% and 2% of GDP respectively for FY 2024-25.However, completely eliminating the revenue deficit is not considered feasible in the post-pandemic fiscal strategy. Despite cautious projections, disinvestment proceeds are estimated at ₹50,000 crore for FY 2024-25. Gross borrowings for FY 2024-25 are estimated at ₹14.3 lakh crore, that is slightly lower than previous years, indicating a restrained borrowing approach. In Figure 7, Central government finances show a trajectory of fiscal consolidation:Deficit Metric (% of GDP)2019–202020–212021–222022–232023–24 (BE)2023–24 (RE)2024–25 (BE)Fiscal Deficit4.6%9.2%6.8%6.4%5.9%5.8%5.1%Revenue Deficit3.3%7.3%4.4%3.9%2.9%2.8%2.0%Effective Revenue Deficit2.4%5.8%3.3%2.8%1.7%1.8%0.8%Primary Deficit1.6%5.8%3.3%2.8%2.3%2.3%1.5%Capital Expenditure and Infrastructure DevelopmentIndia’s aspiration to achieve developed nation status by 2047 heavily depends on its ability to transform infrastructure. In this direction, government’s commitment is visible from a substantial allocation of 3.4% of GDP to capital expenditure in FY 2024-25. Roads & Highways have received the largest share of investment, followed by Railways and Urban Public Transport. Ambitious targets include expanding the national highway network by 2025, developing airports, operationalizing waterways, and establishing Multi-Modal Logistics Parks under PM GatiShakti and the National Logistics Policy.YearCapital Expenditure (₹ Lakh Cr)Grant-in-Aid for Capital Assets (₹ Lakh Cr)Effective Capital Expenditure (₹ Lakh Cr)2016–172.81.74.52017–182.61.94.52018–193.11.95.02019–203.41.95.22020–214.12.36.42021–225.92.48.42022–237.43.110.52023–24 (RE)9.53.212.72024–25 (BE)11.13.915.0Focus on Tourism & Transformative Rail InfrastructureThe Budget 2024 proposes a transformative agenda for the tourism sector, particularly emphasizing rail travel enhancements. A significant announcement entails converting 40,000 regular train bogies into Vande Bharat coaches, promising passengers a high level of comfort and efficiency, thereby reducing travel time substantially. Moreover, the introduction of NAMO trains and expanded metro rail services underlines government’s commitment to enhance public transport accessibility, particularly to tourist destinations. Additionally, interest-free loans to states aim to elevate tourism infrastructure to international standards, with a special focus on island destinations like Lakshadweep.ConclusionContrary to expectations of a pre-election populist budget, the interim budget harmoniously aligns with the government’s ‘Viksit Bharat’ vision, embodying the ethos of inclusive development and collective trust. Prudent fiscal policy, revenue forecasts, and strategic expenditure allocations in the budget shows that India is poised for both stability and advancement. By prioritizing poverty alleviation, job creation, MSME recovery, tourism, agricultural development, rural welfare measures, empowerment of youth and women and environment concerns, the budget fosters inclusive growth and societal transformation. The budget will drive the nation further towards the envisioned ‘Viksit Bharat’ that is a prosperous Bharat in harmony with nature, modern infrastructure and opportunity for all. It extends the development mantra further from sabka saath and sabka vikas to sabka saath, sabka vikas, and sabka vishwas.ReferencesMinistry of Finance, Economic Survey, 2022-23.Ministry of Finance, Union Budget Documents (2021, 2022, 2023, 2024).Musgrave & Musgrave (1989). Public Finance in Theory and Practice, 5th Edn, McGraw Hill.Sury, M.M. (1997). Government Budgeting in India, Indian Tax Institute.National Institute of Public Finance and Policy (NIPFP) Bulletin (Feb 2024).Invest India: India’s Push for Infrastructure Development.1 Revenue receipts are those receipts which neither affect asset nor liability side of the government account.2 Capital receipts are those receipts which either affect asset or liability side of the government account.3 Revenue Expenditure does not affect asset or liability side of the government account but capital expenditure does.4 In India, Fiscal deficit is equal to the net borrowings of the government. Primary deficit = Fiscal deficit - Interest payments. Revenue deficit is the difference between revenue expenditure and revenue receipt.Author may be reached at rajeevsrcc@gmail.com and eboard@icai.in
InsurTech, Insurance, FinTech, Indian Startups, B2B, B2C, B2B2X, P2P, IRDAI, Bima Sugam, Bima Vahak, Regression Analysis, DPDP Act 2023, Risk Management, Digital India, ICAI
Ep. 469 — InsurTech: An Insight into the Future of Insurance in India
CA Journal
· September 2026
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InsurTech: An Insight into the Future of Insurance in IndiaAbout the AuthorDr. Nazreen Parveen Ali is an academician and researcher specializing in financial technology, insurance analytics, digital transformation, and risk management. She can be reached at nazreenparveen8@gmail.com.$339 Billion Projected Market Size by 202557% CAGR Fastest Growing FinTech Vertical4.2% of GDP Current Insurance Penetration300+ Startups Active InsurTech Ecosystem"InsurTech in India is not merely an incremental technological layer superimposed upon legacy underwriters; it represents a paradigm shift from transactional compensation to proactive risk mitigation, automated servicing, and financial inclusion."1. Introduction & Conceptual FoundationThe global insurance landscape has historically been characterized by underwriting conservatism, high distribution costs, information asymmetry, and cumbersome manual claims processing. In India, despite substantial economic expansion, insurance penetration remains modest at approximately 4.2% of GDP (FY 2022-23)—comprising 3.2% in life insurance and 1.0% in non-life insurance—against a global benchmark exceeding 7.0%. This stark protection gap, combined with widespread smartphone diffusion, rapid telecommunications digitisation (4G/5G), and the ubiquitous adoption of India Stack architecture, has catalyzed the emergence of InsurTech.InsurTech—a portmanteau of 'Insurance' and 'Technology'—denotes the strategic deployment of disruptive innovations such as Artificial Intelligence (AI), Machine Learning (ML), the Internet of Things (IoT), Big Data predictive analytics, distributed ledgers, and telematics to re-engineer every touchpoint of the insurance lifecycle. From real-time risk assessment and automated underwriting to parametric loss settlement and digital policy administration, InsurTech startups are redefining customer engagement models.2. Explosive Market Growth & Projections in IndiaThe Indian FinTech ecosystem has witnessed disproportionate value creation across payments and lending, but InsurTech has emerged as the fastest-growing sub-segment. Bolstered by shifting post-pandemic risk perceptions and regulatory liberalization by the Insurance Regulatory and Development Authority of India (IRDAI), the Indian InsurTech market is traversing an extraordinary upward trajectory:Year / PeriodMarket Valuation (USD Billions)Year-on-Year Dynamics & Growth Triggers2021 (Baseline)$56 BillionAccelerated digital onboarding during the COVID-19 pandemic; widespread adoption of digital term life and comprehensive health policies.2022$87 BillionExpansion of embedded insurance partnerships (B2B2X) across travel platforms, gig platforms, and e-commerce portals.2023$137 BillionInstitutional capital deployment into AI-native underwriting platforms and IoT-enabled telematics motor policies.2024 (Estimated)$216 BillionIntegration of the Ayushman Bharat Digital Mission (ABDM) and operational readiness testing for the universal Bima Sugam platform.2025 (Projected)$339 BillionMaturity of open insurance APIs, micro-insurance scaling across rural panchayats, and automated parametric payouts.With an estimated Compound Annual Growth Rate (CAGR) of 57% between 2021 and 2025, the growth velocity of InsurTech outstrips other leading technology verticals, including Digital Payments (16% CAGR) and Investment Tech / WealthTech (44% CAGR). Furthermore, over 73% of Indian consumers now prefer online channels to research, evaluate, and purchase general and health coverage, providing enormous operating leverage to digital-first underwriters and aggregators.3. Structural Taxonomy of InsurTech Business ModelsThe Indian InsurTech ecosystem comprises diverse business models designed to address distinct friction points across retail, commercial, and rural markets:Operating ModelStructural ArchitectureCore Characteristics & Delivery MechanismsProminent Indian ExamplesB2C (Business-to-Consumer)Direct Digital Insurers & AggregatorsDisintermediates traditional broker networks; delivers instant multi-quote comparisons, digital KYC, frictionless checkout, and paperless claims triage via mobile applications.Policybazaar, Digit Insurance, Acko General InsuranceB2B (Business-to-Business)Enterprise SaaS & Infrastructure EnablersFurnishes core legacy carriers, brokers, and Third-Party Administrators (TPAs) with AI computer vision for damage estimation, fraud analytics, OCR ingestion, and automated underwriting APIs.Cropin, Mantle Labs, CogniTensor, ClaimBuddyB2B2X (Embedded Insurance)Contextual API PartnershipsIntegrates micro-coverage into primary non-insurance transactions (e.g., flight cancellation covers on booking engines, transit insurance on e-commerce carts, loan-linked personal accident covers).Zopper, Riskcovry, Toffee InsuranceP2P (Peer-to-Peer)Mutual Affinity Risk PoolingUnites consumers with shared risk profiles into transparent capital pools; claims are settled mutually, and unspent surplus premiums are returned to members or disbursed to social causes.Emerging sandbox mutual pools; inspired by Lemonade and Friendsurance models4. Advanced Technological Service PillarsInsurTech firms have bifurcated their service offerings into specialized technological capabilities that address granular operational bottlenecks:A. Appetite & Dynamic Pricing SolutionsTraditional underwriting depends on static actuarial tables that fail to reflect evolving human risk. Modern InsurTech leverages the Internet of Things (IoT), telematics onboard diagnostics (OBD-II), and wearable biometric devices to pioneer dynamic pricing. Motor insurers execute Pay-As-You-Drive (PAYD) and Pay-How-You-Drive (PHYD) policies where premiums correlate with vehicle speed, harsh braking patterns, and total mileage. In health lines, policyholders receive wellness rewards and discounted renewal premiums linked to daily physical activity logs recorded via wearable fitness trackers.B. Data Science, Imagery & Catastrophic Loss SolutionsLoss assessment has traditionally suffered from protracted field surveyor turnaround times and fraudulent documentation. InsurTechs employ drones, satellite geospatial imaging (GIS), and smartphone computer vision to evaluate catastrophic damage in real time. Agricultural losses are quantified algorithmically via vegetative index maps, while vehicle collision dent/paint assessments are executed instantaneously via neural image classification algorithms, slashing claim settlement timelines from weeks to minutes.C. Frictionless Payment, Quoting & Issuance EnginesBy harnessing Open APIs and the Unified Payments Interface (UPI AutoPay), InsurTech platforms eliminate transaction latency. Customers execute sachet micro-insurance purchases (e.g., single-journey baggage covers costing less than ₹20) through conversational WhatsApp bots without manual documentation or physical signature hurdles.5. Empirical Analysis: InsurTech Funding vs. NSE Insurance PerformanceTo rigorously investigate whether capital flows into InsurTech exert a statistically significant influence on the broader Indian insurance capital market, empirical linear regression modeling was deployed across quarterly time-series datasets. The dependent variable is the quarterly return of the NSE Insurance Index ($R_i$), analyzed against two independent variables:InsurTech Funding Value ($IFV_i$): Total venture capital and private equity capital deployed into domestic InsurTechs (in USD Millions).InsurTech Funding Frequency ($IFF_i$): Total deal volume (number of concluded equity funding rounds).Model 1: Ri = α + β1(IFVi) + εiModel 2: Ri = α + β2(IFFi) + εiEmpirical ModelIntercept (α)Regression Slope (β)t-Statisticp-ValueCorrelation (r)Empirical InferencesModel 1: Funding Value ($IFV_i$)128.62570.01355.34220.00000.68Statistically significant at the 1% level (p < 0.01). Institutional capital infusion directly catalyzes positive market valuation rerating across listed carriers.Model 2: Funding Deal Count ($IFF_i$)78.48910.11180.08300.00000.69Statistically significant at the 1% level (p < 0.01). Deal vibrancy serves as a proxy for technological diffusion and industry operational efficiency.The statistical outcomes validate that both InsurTech funding quantum and transaction velocity maintain a robust, positive correlation ($r \approx 0.68 - 0.69$) with industry equity performance. Capital injection into digital platforms acts as a primary catalyst for modernizing legacy operations, optimizing expense-of-management (EoM) ratios, and enhancing corporate valuations across the insurance sector.6. Collaborative Frameworks: Incumbents vs. InsurTechsThe dynamic between legacy insurance conglomerates and InsurTech challengers has shifted from hostile disruption to collaborative coexistence. Incumbents possess extensive balance sheet reserves, established actuarial trust, underwriting capacity, and regulatory licenses, but suffer from monolithic legacy IT infrastructure and high distribution costs. Conversely, InsurTech startups offer customer-centric agility, advanced data engineering, and lean operating structures. Five distinct collaborative paradigms have crystallized:ParadigmOperational FrameworkStrategic Objectives & Synergies1. IncubationCorporate accelerator programs and R&D sandboxes.Incumbents sponsor startup cohorts to experiment with emerging capabilities (e.g., blockchain claims settlement, dynamic telematics algorithms) in an isolated, risk-governed environment.2. Financing & Strategic CVCCorporate Venture Capital (CVC) equity funding.Carriers deploy equity or convertible capital into promising InsurTechs, obtaining minority governance rights and priority commercial licensing of breakthrough tech.3. Co-CreationJoint product engineering teams.Combines the underwriter's balance sheet capacity with the startup's front-end UI/UX to roll out bespoke contextual policies (e.g., cyber risk micro-covers for retail digital banking users).4. Strategic PartnershipsCommercial distribution and digital brokerage alliances.Legacy carriers distribute products across InsurTech digital comparison platforms, achieving customer acquisition at a fraction of traditional physical agency costs.5. Enterprise Integration (M&A)Direct buyout or white-label SaaS infrastructure embedding.Incumbents acquire InsurTechs outright or license their core systems to dismantle legacy architectural debt and deploy automated claims-triage modules.7. Critical Structural Challenges & Regulatory ShiftsDespite stellar momentum, the Indian InsurTech sector encounters formidable strategic headwinds that require nimble architectural pivots:A. The "UPI Moment" of Insurance: IRDAI's Bima SugamThe Insurance Regulatory and Development Authority of India (IRDAI) is engineering a public, non-profit digital public infrastructure (DPI) known as Bima Sugam. Positioned as an open-access electronic marketplace connecting buyers, insurers, agents, and intermediaries, Bima Sugam will provide universal access to policy purchasing, servicing, and claims resolution. While dramatically lowering distribution costs and advancing the national mission of "Insurance for All by 2047", it poses an existential disintermediation threat to private digital brokers and price aggregators whose revenue models rely heavily on lead generation and distribution commissions.B. Grassroots Physical Penetration: Bima VahakTo permeate rural and semi-urban pockets where internet connectivity and digital literacy remain constrained, IRDAI has rolled out the Bima Vahak initiative—a dedicated, women-centric physical distribution force operating at the Gram Panchayat level. InsurTechs must pivot from purely urban, English-language mobile applications toward multilingual, offline-capable digital tools that empower Bima Vahaks with tablet-based electronic KYC and instant claim logging.C. Data Privacy Compliance under the DPDP Act, 2023The enactment of the Digital Personal Data Protection (DPDP) Act, 2023 imposes stringent governance mandates upon InsurTech entities acting as Data Fiduciaries. Given their reliance on invasive telematics, biometric vitals, geolocation tracking, and consumer financial history, InsurTechs face severe statutory penalties (up to ₹250 Crores) for non-compliance. Companies must institutionalize explicit, multilingual consent mechanisms, ensure purpose limitation, enforce data minimization, and overhaul cross-border data transfer protocols.8. Strategic Imperatives for the Future & ConclusionThe evolution of Indian InsurTech has crossed the initial phase of simplistic online product distribution. As basic comparison features become commoditized and public infrastructure like Bima Sugam gains regulatory ascendancy, InsurTech startups must evolve into comprehensive full-stack technological partners.Strategic priorities must focus on:Transitioning from pure distribution brokerage toward specialized B2B underwriting automation and fraud mitigation engines.Designing hyper-localized, sachet-sized parametric products catering to climate vulnerability in agriculture and the informal gig economy.Integrating seamlessly with the National Health Claims Exchange (NHCX) under the Ayushman Bharat Digital Mission to establish interoperable, cashless healthcare settlements.Maintaining stringent data ethics, algorithmic transparency, and institutional compliance with the DPDP Act, 2023.By harmonizing digital agility with regulatory discipline, InsurTech will serve as the indispensable linchpin in closing India's vast protection gap and realizing universal insurance security across the country.References & Recommended LiteratureInsurance Regulatory and Development Authority of India (IRDAI). (2023). Annual Report 2022-23: Fostering Sustainable Insurance Growth in India. Hyderabad: IRDAI.Boston Consulting Group (BCG) & FICCI. (2022). India InsurTech Landscape and Trends: Revolutionizing the Protection Agenda. Mumbai: BCG Publications.Swiss Re Institute. (2023). Sigma 03/2023: World Insurance - The Great Reset: Higher Interest Rates and Digital Acceleration. Zurich: Swiss Re.Government of India, Ministry of Law and Justice. (2023). The Digital Personal Data Protection Act, 2023. The Gazette of India, Extraordinary (Part II—Section 1).Ali, N. P. (2024). InsurTech: An Insight into the Future of Insurance in India. The Chartered Accountant, 72(10), 97–102.Editorial Correspondence: Comments and feedback on this research paper may be directed to the author at nazreenparveen8@gmail.com or the ICAI Editorial Board at eboard@icai.in.
ChatGPT, Artificial Intelligence, Generative AI, LLM, Natural Language Processing, OpenAI, Chartered Accountants, Digital Accounting, Audit Automation, Income Tax e-Filing, Prompt Engineering, Technology in Accounting, ICAI
Ep. 470 — ChatGPT – Your artificial intelligence based virtual assistant
CA Journal
· September 2026
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ChatGPT – Your artificial intelligence based virtual assistantAbout the AuthorCA. Rupinder Kaur is a Member of the Institute of Chartered Accountants of India (ICAI). She specializes in artificial intelligence applications, financial automation, audit technologies, and digital transformation in professional accounting practice.5 Days Time to 1 Million Users100 Million+ Users by January 2023200+ Books Authored on Amazon KindleRLHF Core Transfer Learning ModelChatGPT is an artificial intelligence chatbot developed by OpenAI. As of December 2022, ChatGPT has become the fastest growing computer application till date. ChatGPT never fails to surprise the users with its data, knowledge, and its speed to generate response. The interface for using ChatGPT is designed to be user-friendly, allowing users to ask questions and receive responses within a few seconds. ChatGPT is a revolutionary technology and can provide human-like responses and may eventually have the power to disrupt how humans interact with computers.What is ChatGPT?ChatGPT (GPT here stands for Generative Pre-trained Transformer), launched in November 2022, is an artificial intelligence chatbot developed by OpenAI. By December 4, 2022, ChatGPT already had over one million users. In January 2023, ChatGPT reached over 100 million users, making it the fastest growing computer application to date. This AI-based language model has been pre-trained on massive amounts of text data to learn the patterns and structures of human language.One of the unique features of ChatGPT is that it is a generative model, i.e., it can generate new text based on a given prompt. This makes it useful for a wide range of applications, from language translation to content creation. ChatGPT has been trained on a variety of sources, including books, articles, websites, and social media posts, which makes it capable of handling different types of language and even informal language, such as slang or colloquialisms.Usage of ChatGPTIt is an artificial intelligence-based virtual assistant designed to interact with users and provide helpful responses to a wide range of questions on various topics. It has been trained on a massive corpus of text data and uses advanced natural language processing algorithms to understand and generate human-like responses.The service was initially launched free to the public, with plans to monetize the service later. Looking at the popularity, the company has already launched a pilot subscription plan named ChatGPT Plus, which can chat with you, answer follow-up questions, and challenge incorrect assumptions.As per a Business Insider article, ChatGPT was credited as the author or co-author on more than 200 paperbacks and e-books in Amazon’s bookstore. A few other prominent uses of ChatGPT include:Create Content: ChatGPT can be used for content creation, as it can easily write content based on a prompt. For instance, the AI tool can write a song, articles, and even complete books.Write Codes and Debug: ChatGPT can even write codes, and help developers debug codes as well. It can also be used to generate complex SQL queries and script automated routines."ChatGPT was fine-tuned using an approach to transfer learning using supervised learning as well as reinforcement learning. Both the approaches used human trainers to improve the model's performance."How does ChatGPT work?ChatGPT was fine-tuned using an approach to transfer learning using supervised learning as well as reinforcement learning. Both approaches used human trainers to improve the model's performance:Supervised Learning: The model was provided with curated conversations in which human trainers played both sides—the user and the AI assistant.Reinforcement Learning from Human Feedback (RLHF): Human trainers first ranked responses which the model had created in a previous conversation. These rankings were used to create ‘reward models’ that the model was further fine-tuned on using several iterations.In addition, OpenAI continues to gather data from ChatGPT users that could be used to further train and fine-tune ChatGPT. Users are allowed to upvote or downvote the responses they receive from ChatGPT; upon upvoting or downvoting, they can also fill out a text field with additional qualitative feedback.What makes ChatGPT special?ChatGPT is special because it represents a significant breakthrough in the field of Natural Language Processing (NLP). Prior to the development of ChatGPT, language models were limited in their ability to understand the nuances of natural language and generate human-like responses. However, with the advent of transformers and attention mechanisms, ChatGPT is able to handle a wide range of language tasks and produce high-quality responses that are indistinguishable from those written by humans.Another unique feature of ChatGPT is that it is a “zero-shot” model, meaning that it can generate responses to prompts that it has not been explicitly trained on. This is possible because the model has learned the statistical patterns of language during the pre-training phase, which allows it to generate plausible responses to a wide range of prompts, even if it has not seen them before.Steps to Use ChatGPTThe interface for using ChatGPT is designed to be user-friendly, allowing users to ask questions and receive responses with ease. One needs to follow these simple basic steps:Visit the official portal at https://openai.com/blog/chatgpt.Type your question or query in the chat box.Press enter and submit the question.ChatGPT will process the query and generate the response within a few seconds.You can submit follow-up questions or iterative refinements if any.Practical Demonstration: Income Tax QueryThis is an example of a real response generated by ChatGPT in just a few seconds when queried regarding taxation compliance in India:User Query Prompt“Who has to pay income tax in India and how to pay?”ChatGPT Generated Response“In India, any individual, Hindu Undivided Family (HUF), association of persons (AOP), body of individuals (BOI), or any other artificial juridical person whose total income exceeds the basic exemption limit is liable to pay income tax. The basic exemption limit varies based on the age of the individual and the category of taxpayer.For the Financial Year 2022-23 (Assessment Year 2023-24), the basic exemption limit for individuals below 60 years of age is Rs. 2.50 lakhs, for individuals between 60-80 years of age is Rs. 3 lakhs and for individuals above 80 years of age is Rs. 5 lakhs.To pay income tax in India, one needs to follow these steps:First, you need to register yourself on the Income Tax Department’s e-filing website: https://www.incometaxindiaefiling.gov.in/.Once registered, you can file your income tax return either manually or through the website. For manual filing, you need to download the relevant forms from the website and submit them to your nearest Income Tax office. Alternatively, you can file your return online using the e-filing portal.To pay your income tax dues, you can choose any of the available modes of payment such as net banking, debit/credit card, NEFT, or RTGS. You can make the payment either online or offline by visiting the nearest bank branch.It is important to note that income tax returns need to be filed every year by the due date, which is usually July 31st of the assessment year. Failure to file income tax returns on time can lead to penalties and interest charges.”Limitations of ChatGPTWhile ChatGPT is a remarkable technological achievement, it has certain inherent limitations which users and professionals must carefully consider:LimitationUnderlying CausePractical Risk / Professional Impacti. Bias in DataTrained on massive, uncurated internet corpora containing historical stereotypes.Risk of reproducing or amplifying gender, racial, and socio-economic biases in analytical outputs.ii. Lack of Common SenseOperates purely on statistical token predictions without real-world causal understanding.Can produce nonsensical, absurd, or factually erroneous answers disguised in convincing prose.iii. Repetitive ResponsesHeavy dependence on frequent training data patterns.Outputs can become formulaic, lacking originality or tailored depth required for complex reporting.iv. Lack of Emotional UnderstandingAbsence of affective empathy or psychological theory of mind.Inability to accurately interpret grief or emotional distress, potentially producing insensitive remarks.v. Limited Context UnderstandingConstrained token window and lack of broader enterprise domain knowledge.Susceptible to misinterpreting nuanced professional premises and producing irrelevant conclusions.vi. Security & Privacy ConcernsCloud-based ingestion and potential retention of user prompt data.Severe confidentiality exposure if sensitive client financials, passwords, or proprietary data are entered.Jobs at Risk from ChatGPTThe widespread diffusion of ChatGPT and related generative models poses potential disruption across several employment sectors:Customer Service Representatives: Chatbots powered by AI can handle routine queries and resolve issues quickly and efficiently, reducing the need for entry-level customer service staff.Content Creation: While not fully replacing the nuance and creative skill of human writers, it can generate simple articles, product descriptions, marketing copy, and basic social media summaries.Translation: Capable of providing rapid and accurate translations for standard corporate documents and everyday conversations across multiple languages.Although AI technologies may lead to job losses in specific routine disciplines, as the technology continues to evolve, it is likely that new specialized roles will emerge requiring skills in AI architecture, prompt engineering, data analytics, and ethical AI auditing.About OpenAI: Founders, Leadership & BackersChatGPT is a proprietary creation of OpenAI, a San Francisco-based research organization co-founded in December 2015 with the stated mission of ensuring that artificial intelligence benefits all of humanity.Elon MuskInitial co-founder and major investor; served as co-chairman of the board until 2018 when he stepped down due to potential conflicts of interest with Tesla's autonomous AI development.Sam AltmanEntrepreneur, investor, and CEO of OpenAI; former president of the renowned startup accelerator Y Combinator.Greg BrockmanSoftware engineer and entrepreneur who previously co-founded payments pioneer Stripe; currently serves as Chairman and President of OpenAI.The tech giant Microsoft has invested billions of dollars into OpenAI to accelerate global AI breakthroughs. Other prominent institutional and angel investors include Reid Hoffman (co-founder of LinkedIn), Peter Thiel (co-founder of PayPal), and Amazon Web Services (AWS).Can ChatGPT Replace Google?With ChatGPT, users can ask natural language questions and receive prompt, consolidated responses. Conversely, Google search typically presents users with a curated list of web links deemed relevant by its PageRank algorithms. Often, ChatGPT responses surpass Google’s initial suggestions due to its state-of-the-art training. However, verifying the accuracy of ChatGPT answers requires deliberate effort because, unlike Google, it outputs unverified text without direct links or primary citations.Moreover, as ChatGPT advances, Google continues to build and deploy its own massive language models (including Gemini and LaMDA) and is deeply embedding generative AI directly into search algorithms. Therefore, it is premature to conclude that ChatGPT will replace Google's search engine.Competitors of ChatGPTThe public release of ChatGPT has sparked an aggressive global race among leading technology conglomerates:Google’s BERT: Bidirectional Encoder Representations from Transformers is a pioneering transformer model designed to evaluate contextual relationships between words in search queries and text synthesis.Microsoft’s Turing-NLG: A 17-billion parameter language model renowned for generating fluent, coherent text across diverse genres and complex conversational styles.Facebook’s RoBERTa: Developed by Meta AI, RoBERTa modifies key hyperparameters in BERT, removing next-sentence pre-training to optimize natural language understanding benchmarks."ChatGPT can provide insights and advice on various topics such as tax planning, financial analysis, audit procedures and more."Professional Opportunities for Chartered AccountantsChartered Accountants are uniquely positioned to leverage generative AI as a force multiplier across everyday professional practice:Client Services: CAs can integrate ChatGPT APIs into their firm websites or client portals, allowing clients to receive immediate 24/7 automated assistance on standard compliance checklists and filing requirements.Professional Development: Practitioners can use ChatGPT to accelerate technical research, exploring complex statutory provisions, comparative tax planning scenarios, financial ratio analysis, and standard audit checklist formulations.Improving Accuracy: ChatGPT can help improve computational accuracy by generating complex Excel formulas and error-checking routine financial models, mitigating human calculation errors.Automating Routine Tasks: Repetitive administrative burdens—such as invoice processing classification, payment reminder drafting, and initial data categorization—can be automated, enabling finance professionals to focus on higher-value strategic advisory.Conclusion & Future OutlookIn conclusion, ChatGPT represents a monumental breakthrough in artificial intelligence with the potential to fundamentally revolutionize how human beings interact with computers. However, professional adoption demands acute awareness of its limitations, particularly regarding hallucinated answers, bias, and data privacy. Ongoing research, governance frameworks, and ethical oversight will be imperative to ensure that generative AI is deployed responsibly, transparently, and securely across the financial and accounting fraternity.Author & Editorial Correspondence: Readers may communicate feedback or queries to the author at carupinderkaur@gmail.com or the ICAI Editorial Board at eboard@icai.in.
Theme
Ep. 471 — Digital Evolution: Charting the Future of Chartered Accountancy in the Age of Technology
CA Journal
· September 2026
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Digital Evolution: Charting the Future of Chartered Accountancy in the Age of TechnologyAbout the AuthorPranay Chauhan is a technology professional and industry researcher dedicated to enterprise digital transformation, cloud architecture, artificial intelligence in corporate finance, and the future strategic role of accounting professionals."The future of accounting is undergoing a profound transformation driven by rapid technological advancements. This transformation is reshaping traditional practices and redefining the roles and responsibilities of accounting professionals. Professionals must prioritize continuous learning and upskilling to stay abreast of technological advancements and maintain competitiveness in a swiftly evolving landscape."IntroductionIn the realm of finance and accounting, the winds of change are blowing stronger than ever, driven by the relentless march of technology. Professionals, once confined to spreadsheets and ledgers, now find themselves at the forefront of a digital revolution that promises to reshape their roles and redefine the profession. This paper researches into the transformative impact of technology on the future of accounting, exploring how advancements in automation, data analytics, and artificial intelligence (AI) will revolutionize traditional practices and redefine the roles and responsibilities of accountants in the years to come.[1]The Advent of AutomationThe rise of automation stands as one of the defining trends shaping the future of accounting. Tasks that were once manual and time-consuming, such as data entry, reconciliation, and compliance reporting, are now being streamlined and accelerated through the power of automation tools and software solutions. This shift not only enhances efficiency and accuracy but also frees up valuable time for professional accountants to focus on higher-value activities.As automation becomes more pervasive, the roles of accounting professionals will evolve from data processors to data analysts and strategic advisors.[2] Rather than spending hours poring over spreadsheets and reconciling figures, accountants will leverage automation tools to extract insights from vast amounts of data, identify trends, and make data-driven recommendations to clients. This shift towards data-driven decision-making will require accountants to develop proficiency in data analytics and interpretation, enabling them to provide greater value to their clients and stakeholders.Power of Data AnalyticsThe propagation of digital data presents both challenges and opportunities for accounting professionals. On one hand, the sheer volume and complexity of data generated by businesses require advanced tools and techniques for analysis and interpretation. On the other hand, harnessing the power of data analytics can provide valuable insights into financial performance, risk management, and strategic decision-making.With the advent of big data and analytics platforms, accounting professionals can access real-time information and perform complex analyses with ease. Predictive analytics, for example, enables firms to forecast future trends, identify potential risks, and optimize resource allocation. By leveraging data visualization tools, accountants can communicate their findings more effectively and empower stakeholders to make informed decisions.As the demand for data-driven insights grows, accounting professionals will increasingly be called upon to serve as strategic advisors, helping clients navigate complex business challenges and capitalize on emerging opportunities. By leveraging their expertise in financial analysis and risk management, accountants can provide valuable guidance on investment strategies, growth initiatives, and regulatory compliance.[3]The Rise of Artificial IntelligenceArtificial intelligence (AI) is poised to revolutionize the future of accounting professionals, automating routine tasks, and augmenting human decision-making capabilities. From machine learning algorithms that can detect anomalies in financial data to natural language processing (NLP) tools that can automate document review and analysis, AI holds the potential to transform every aspect of the accounting profession.[4]As AI technologies become more sophisticated, the roles of accounting professionals will evolve to encompass a blend of human judgment and machine intelligence. Rather than being replaced by AI, accountants will leverage these technologies to enhance their capabilities and deliver more value to their clients. For example, AI-powered chatbots can provide instant support to clients, answering common questions and guiding them through complex financial processes.Table 1: Commonly Used AI-Powered Accounting ToolsSoftware ToolCore Technological Capability & Application in AccountingBotkeeperIt is an AI-powered automated bookkeeping platform designed for accounting firms.Receipt Bank (Dext Prepare)It uses AI and OCR (Optical Character Recognition) technology to automate data extraction from receipts and invoices.MindBridge AIAn AI-powered auditing tool that detects anomalies, patterns, and errors in 100% of financial transaction data.IBM Watson Financial ServicesOffers AI-powered enterprise solutions for risk management, regulatory compliance, and strategic financial planning.PlootoUtilizes AI and intelligent automation to streamline business payment processing and cash flow management.Xero AdvisorOffers AI-powered features such as automated cash flow forecasting, invoice reminders, and smart expense categorization.Sage Intacct Intelligent GLAn AI-powered general ledger that automatically posts journal entries, identifies discrepancies, and performs reconciliations.Aero WorkflowUses AI and intelligent automation to streamline project management, standard procedures, and workflow processes for accounting practices.Moreover, AI can assist accounting professionals in identifying patterns and trends in financial data, flagging potential risks and opportunities that may have gone unnoticed. By harnessing the power of AI, chartered accountants can gain deeper insights into their clients’ businesses, enabling them to provide more proactive and strategic advice.Impact of Cloud ComputingCloud computing has emerged as a game-changer in the field of accounting professionals, offering scalable and cost-effective solutions for data storage, collaboration, and software deployment. With cloud-based accounting software, firms can access financial data from anywhere at any time, enabling greater flexibility and remote work opportunities. This not only enhances productivity but also improves client service delivery, as accountants can collaborate with clients in real-time and provide timely support and advice.Table 2: Cloud-Based Software for Accounting Purposes in IndiaPlatform NameEcosystem Focus & Practical Deployment in Indian AccountingZoho Books IndiaCloud-native accounting suite fully compliant with Indian GST, e-invoicing, and automated banking feeds.TallyPrime CloudVirtual cloud-hosted deployment of India's benchmark accounting software, enabling remote multi-user access.Marg ERP 9 CloudCloud-enabled inventory and accounting software customized for pharmaceutical, retail, and FMCG distributors.Reach Accountant CloudBrowser-based software integrating accounting, CRM, and branch management for small business enterprises.HostBooksAutomated cloud platform covering GST, TDS, e-way bills, payroll, and standard financial accounts.ProfitBooksStreamlined cloud accounting software providing fast invoicing, inventory control, and expenditure tracking.QuickBooks OnlineGlobal cloud platform supporting multi-currency transactions, receipt capture, and third-party app integrations.ClearTax GST (Clear)Enterprise cloud compliance solution for high-volume GST filing, 2B reconciliations, and tax data analytics.Furthermore, cloud computing enables firms to leverage advanced analytics and AI capabilities, such as machine learning and predictive modeling, without the need for significant upfront investment in hardware or infrastructure. By harnessing the power of the cloud, chartered accountants can unlock new insights and opportunities for their clients, driving greater efficiency and innovation in the accounting process.Cybersecurity and Data PrivacyAs technology becomes more integrated into accounting processes, cybersecurity and data privacy emerge as top concerns for accounting professionals. With the increasing frequency and sophistication of cyberattacks, firms must implement robust security measures to protect sensitive financial information and client data. This includes encryption protocols, multi-factor authentication (MFA), and regular security audits to detect and mitigate vulnerabilities.Warning & Regulatory Alert: "With the increasing frequency and sophistication of cyberattacks, firms must implement robust security measures to protect sensitive financial information and client data."Moreover, compliance with data privacy regulations, such as the General Data Protection Regulation (GDPR) in Europe and the California Consumer Privacy Act (CCPA) in the United States, poses additional challenges for firms operating in a globalized economy. Chartered accountants must ensure that they have adequate controls and procedures in place to safeguard client data and comply with regulatory requirements, or risk facing severe penalties and reputational damage.Evolution of Client RelationshipsTechnology is also reshaping the way chartered accountants interact with their clients, fostering deeper and more collaborative relationships. With the advent of client accounting platforms and collaborative tools, firms can engage with clients in new and innovative ways, offering personalized advice and support tailored to their specific needs and preferences.For example, client portals allow accounting professionals to share documents securely, communicate with clients in real-time, and provide access to financial reports and analysis. This not only enhances transparency and communication but also strengthens trust and loyalty between clients and their accountants. By leveraging technology to deliver a more personalized and proactive service experience, accounting professionals can differentiate themselves in a crowded marketplace and attract and retain high-value clients.Challenges and OpportunitiesWhile technology holds immense promise for the future of chartered accounting, it also presents challenges that must be addressed. One such challenge is the need for continuous learning and upskilling to keep pace with technological advancements. Accounting professionals must embrace lifelong learning and stay abreast of emerging trends and best practices to remain competitive in a rapidly changing landscape.Furthermore, the adoption of new technologies may require firms to rethink their business models and organizational structures. Firms that fail to adapt to the digital age risk being left behind by more agile and tech-savvy competitors. Therefore, it is essential for firms to invest in training and development programs to equip their staff with the skills and knowledge needed to thrive in a technology-driven environment.Despite these challenges, the future of chartered accounting is filled with opportunities for innovation and growth. By embracing technology and leveraging data-driven insights, firms can enhance their value proposition, expand their service offerings, and drive greater efficiencies across the organization. Accounting professionals who embrace the digital evolution and position themselves as trusted advisors will not only survive but thrive in the dynamic landscape of modern finance.ConclusionThe future of chartered accounting is being shaped by rapid technological advancements that are transforming traditional practices and redefining the roles and responsibilities of accountants. From automation and data analytics to artificial intelligence and cloud computing, technology offers unprecedented opportunities for firms to innovate, drive efficiency, and deliver added value to their clients. However, realizing the full potential of technology requires a willingness to embrace change and adapt to new ways of working.ReferencesImportance of technology in accounting profession available at https://accounting.uworld.com/blog/cpa-review/the-future-of-technology-in-accounting accessed on 14 Feb 2024.Role of technology in accounting profession available at https://www.lsbf.org.uk/blog/online-learning/how-will-technology-change-accounting-in-the-future.How technology has impacted accounting—from compliance to strategy available at https://tax.thomsonreuters.com/blog/how-technology-has-impacted-accounting-from-compliance-to-strategy/.Online role of technology in modern accounting available at mason.wm.edu/blog/the-role-of-technology-in-modern-accounting.Changing the Accounting profession available at https://fullyaccountable.com/how-is-technology-shaping-the-future-of-accounting/.AI Powered tools used in the accounting professions available at International Journal of Engineering Science Research (IJESR).Data science and machine learning in accounting professions at International Journal of Engineering Science Invention (IJESI).Author & Editorial Correspondence: Comments and queries regarding this article may be addressed to the author at Pranay.iet@gmail.com or the ICAI Editorial Board at eboard@icai.in.
Taxation
Ep. 472 — Subject to Tax Rule - An Analysis
CA Journal
· September 2026
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Subject to Tax Rule - An Analysis"The growth of Digitalization and Globalization has multifarious impact on the economies. These changes have created ample challenges to the international tax rules which prevailed over the century. This also created opportunities for Base Erosion and Profit Shifting (‘BEPS’) to the jurisdictions with the lower or nil rate."1. Introduction & The Pillar Two ArchitectureLarge Multinational Enterprises (‘MNEs’) take advantage of various aggressive tax planning strategies in a way that developing countries lose out on their fair share of taxes. To address the concern of developing countries and to ensure that MNEs pay a minimum level of tax on the income arising in each jurisdiction in which they operate, the OECD proposed the introduction of Global Anti–Base Erosion Rules (‘GloBE Rules’).The Pillar Two framework comprises two interlocking domestic rules and a treaty-based rule:Income Inclusion Rule (‘IIR’): Under IIR, the country of the ultimate parent entity collects top-up tax if overseas group entities are not adequately taxed (below 15%).Under-Taxed Profits Rule / Under Tax Payment Rule (‘UTPR’): IIR further works with UTPR, wherein deductions for related-party payments are denied if the country of the ultimate parent entity does not collect top-up tax under IIR.Subject to Tax Rule (‘STTR’): A treaty-based rule where the payer jurisdiction collects top-up withholding tax if the recipient country does not tax the income adequately.Thereby, the rules are interlocking and interrelated. The Pillar 2 mechanism is designed to ensure that an MNE pays a minimum level of tax on the income arising in each of the jurisdictions in which they operate. This article focuses on STTR, which specifically targets risk exposure to source jurisdictions posed by BEPS structures that take advantage of low nominal rates of taxation in the other contracting jurisdiction (that is, the jurisdiction of the payee).2. Subject to Tax Rules – An UnderstandingSTTR is one of the key components of the GloBE Rules. It is a model treaty provision that allows jurisdictions to impose additional tax on certain defined cross-border payments between connected persons, where the recipient is subject to a nominal corporate income tax rate below 9% in its jurisdiction.STTR covers specific intra-group service payments whereby the payor jurisdiction can impose additional tax on the gross amount of Covered Income up to 9% of the income. Hence, STTR would not apply if the source country can already sufficiently tax this payment (over and above 9%) under the normal allocation rules of the Tax Treaty or domestic law.3. Coverage: Connected Persons & Covered IncomeConnected PersonsSTTR covers payments between Connected Persons. Two persons are considered connected if one is directly or indirectly controlled by another, or both are under the control of the same person through legal or beneficial ownership of more than 50%, or based on facts and circumstances. Further, an additional measure—the Targeted Anti-Avoidance Rule (TAAR)—has also been introduced to prevent abuse on account of routing covered payments through the interposition of an unconnected intermediary.Covered IncomeSTTR is applicable only on specified items of covered income. Seven categories of income that constitute “covered income” are mentioned in the rules:Interest;Royalties;Payments for distribution rights for a product or service;Insurance or reinsurance premiums;Payments of guarantee or financing fees;Rental payments for industrial, commercial, or scientific equipment; andPayments for services.Having said that, STTR only applies when the taxing right of the source state is limited under Article 7 (Business Profits), Article 11 (Interest), Article 12 (Royalties), and Article 21 (Other Income). Article 8 (International shipping and air transport income) is not within the scope of the STTR.Provisions of Article 7, instead of STTR, would apply where the covered income is effectively connected with or attributable to a Permanent Establishment (PE) in the source state via which the payee carries on business in that state.4. Statutory Exclusions & Materiality ThresholdsPertinent to note that there are several exclusions based on recipient, amount, and materiality thresholds:Recipient Exclusions: STTR will not apply where the recipient is an individual, a non-profit organization, a State, or part of a State, an international organization, an investment fund that meets certain conditions (including pension funds), or an entity wholly, or almost wholly, owned by an excluded recipient.Mark-Up Threshold: STTR only applies to Covered Income (other than interest and royalties) where the amount of Covered Income exceeds the costs incurred in earning that income plus a mark-up of 8.5%. The mark-up threshold does not apply where the targeted anti-avoidance rule under the STTR applies to the covered income.Materiality Threshold: STTR only applies if the aggregate sum of Covered Income paid in a fiscal year exceeds EUR 1 million (or EUR 250,000 for jurisdictions with GDP below EUR 40 billion)."It is worth noting that in the executive summary of the OECD, India has expressed its reservation on the mark-up percentage and considers the same to be too high and finds the guardrails ineffective. India, however, has not objected to the approval and subsequent publication of the Inclusive Framework (‘IF’) on Base Erosion and Profit Shifting (‘BEPS’) to enable jurisdictions to join the Multilateral Instrument (‘MLI’)."The MLI adopted by the IF on BEPS in September 2023 will facilitate the implementation of Pillar-2 STTR in existing bilateral tax treaties. As a result, the STTR MLI will introduce the STTR into all “Covered payments” without the need for bilateral amendments.5. How to Compute STTR Tax Liability?STTR is designed in a way to expand the taxing rights of the source state where the residence state exercises its taxing rights at a rate below 9%, and will apply with or without Treaty application. As such, the STTR is calculated as the gross amount of covered income multiplied by the ‘specified rate’.Specified Rate = 9% − Applicable Tax Rate in Residence State − Withholding Tax Rate in Source State Allowed under TreatyApplicable tax rate in the residence state is either the statutory corporate tax rate or the reduced statutory rate (if the covered income or the recipient is subject to a special reduced rate) subject to any preferential adjustment. In cases where the Treaty Withholding rate is higher than the domestic Withholding rate, STTR does not call for a comparison between the two rates and accordingly, the specified rate shall be reduced by the WHT rate provided in the relevant Treaty, even though higher than the domestic withholding rate.Computation ExamplesExample 1: If the tax rate on income of EUR 1,000,000 was 5% in the residence state, the source state could levy tax up to 4% (9% − 5%) of EUR 1m, i.e., EUR 40,000. Note that the source state isn’t required to tax this full amount, but it cannot exceed it.Example 2: Taking it further, if the payor jurisdiction can impose a 5% withholding tax on a payment of Covered income and the recipient is subject to a 2% nominal tax rate, the payor jurisdiction retains a 5% withholding right but can impose an additional tax under STTR equal to 2% of the Covered income amount (9% − 5% − 2%).6. Key Takeaways on STTR ProvisionsProvision AreaSubstantive Legal Interpretation & Practical ImplicationsDividends ExcludedCovered income does not include dividend payments; however, interest is covered. Thereby, it implies that STTR promotes intra-group financing by equity rather than debt and focuses on a broad spectrum of payments that erode the tax base.Royalty & InterestPayments treated as Royalty/Interest under the Income-tax Act but not under the relevant tax treaty may not be impacted. Generally, tax treaty rates for Royalty/Interest payments by Indian residents exceed 10%, except in a few treaties like UAE and Mauritius. Hence, STTR applicability must be evaluated in such low-tax jurisdictions based on relevant treaty definitions.Inclusion of ServicesCovered payments include “Payment of services”. The word “services” is a very broad term that could encompass Software as a Service (SaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS), automated digital services, and telecom connectivity. Considering the word “Services” is not defined, this could open significant litigation. The OECD should categorically define “Services”.Bundled PaymentsApplicability of STTR rules on bundled payments or single composite fees charged for combinations of services and intangibles (e.g., royalty + payment for a service) requires granular analysis. Payments must be broken down to determine STTR applicability on each constituent component.Equipment RoyaltyCertain treaties (e.g., Israel, Netherlands, Belgium) do not cover equipment royalty under Article 12. Detailed analysis is required in such cases to evaluate whether STTR applies to such payments under Article 7 or 21.No Relief for Double TaxationAs the purpose of STTR is to restore to the source State a limited taxing right (or supplement an existing limited right) and not to achieve allocation of taxing rights, no additional credit shall be granted by the residence state for STTR paid in the Source state. No double tax relief will be available. Model treaty provisions will amend the Article on Elimination of Double Taxation.Administrative ChallengesPayers face practical hurdles in ascertaining whether the payee is subject to a nominal tax rate below 9%, especially where special tax regimes, preferential rulings, or differing characterizations apply. Robust information exchange mechanisms are urgently needed.Levy MechanismSTTR taxes are levied after the end of the fiscal year in which they arise. It operates by way of self-assessment, and the payee is only required to submit a tax return in the source state if it has a liability to tax under the STTR.7. Way ForwardSTTR is an important part of the BEPS Pillar Two Project providing taxing rights to source countries, mostly developing countries. However, such benefits to developing countries come with the cost of complexity of tax treaties for taxpayers and tax authorities. Now, there is a need for MNEs to analyze all direct and indirect intra-group cross-border payments, as some that were earlier subject to exclusive residence taxation (e.g., services) will now be covered under both residence and source taxation.Also, Pillar Two is going ahead with ambitious timelines. Companies should immediately start evaluating their international operating structures, especially in low-tax jurisdictions wherein the tax rate on income received is expected to be less than 9%.Footnotes & ReferencesExecutive Summary | Tax Challenges Arising from the Digitalisation of the Economy – Subject to Tax Rule (Pillar Two): Inclusive Framework on BEPS | OECD iLibrary (oecd-ilibrary.org).Tax Challenges arising from the digitalization of the Economy - Subject to Tax Rule @ OECD 2023 – July 2023.Tax Challenges arising from the digitalization of the Economy - Subject to Tax Rule @ OECD 2023 – October 2023.Applicable tax rate in the residence state is either the statutory corporate tax rate or the reduced statutory rate (if the covered income or the recipient is subject to a special reduced rate) subject to any preferential adjustment.In case where the Treaty Withholding rate is higher than the domestic Withholding rate, STTR does not call for a comparison between the two rates and accordingly, the specified rate shall be reduced by the WHT rate provided in the relevant Treaty, even though higher than the domestic withholding rate.Author & Editorial Correspondence: Readers may send comments and feedback to the authors at rajpalsimpy@gmail.com, gagan.121@gmail.com or the ICAI Editorial Board at eboard@icai.in.
Taxation
Ep. 473 — A Statistical Study of Impact of e-initiatives on Direct Tax Collection
CA Journal
· September 2026
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A Statistical Study of Impact of e-initiatives on Direct Tax CollectionCA. Deepti TanejaChartered Accountant & Research Scholar specializing in direct taxation, tax administration digitization, econometric modeling, and public finance.Dr. Monika GoelProfessor and Dean, Manav Rachna International Institute of Research and Studies (MRIIRS). Expert in fiscal policy, public economics, and empirical financial research.18x Growth Tax Base Growth (1980–2022)52.20% Direct Tax Share (FY 2021-22)₹14.10 Lakh Cr Direct Tax Collections (2021-22)H₀ Rejected Significance at 1% Level"The Direct Tax System in India underwent several reforms in the last four decades. Numerous e-initiatives have been taken to enhance voluntary compliance, improve tax administrative efficiency, and simplify the tax filing processes. The tax administration has become highly sophisticated with state-of-the-art technology. To ensure wider publicity of the initiatives, the administration issues advertisements and carries out awareness campaigns."1. Introduction & Historical ContextIn the last few years, the pace of increase in the tax base has started becoming visible. It has almost doubled from 3.68 crore in 2014-15 to 7.3 crore in 2021-22. The contribution of direct taxes to total tax collection rose from 24.29% in FY 1992-93 to 52.20% in FY 2021-22. However, the ratio of direct taxes to indirect taxes is still lower than international benchmarks; the OECD suggests that a ratio of 67:33 should be in favor of direct tax for enhancing economic growth.Reforms under direct tax in India have been introduced almost every year since the inception of the Income-tax regulations. The thought process of structural tax reforms started in the 1980s when the then Finance Minister V. P. Singh launched tax reforms to enhance tax collection and the taxpayer base by gradually reducing tax rates. He addressed reforms in direct and indirect taxes in an integrated manner during 1985-86. However, the impact of those early reforms on tax collection was minimal.The Direct Tax-to-GDP ratio slowly started crawling up from an average of 5.5% in FY 2011-12 to 5.97% in FY 2021-22 and reached 6.08% in FY 2022-23. As the tax base continued to be abysmally small compared to the rise in population, even with high economic growth, the tax-to-GDP ratio has struggled around 6%.2. Description of the Problem & Demographic RealityThe predominant reasons for this low tax-to-GDP ratio include the existence of a large informal sector, disproportionately wide-scale tax evasion, and statutory tax exemption for the agriculture sector:Out of the total population of India of 140 crores, approximately 75% consists of children, household women, the elderly, and the destitute; factoring these out, the effective tax base should realistically be 36 crores.A dominant portion of the workforce is employed in agriculture. Since agricultural income is exempt under Section 10(1), agriculturists generally do not file tax returns. The estimated population of agriculturists varies between 9 crore and 15 crore.If agriculturists are excluded from the count, approximately 25 crores of the population should be under the ambit of taxability, whereas the actual tax filing base is around 7 crores.It is a myth that only 5% of the overall population files ITR; approximately 37% of the formal labor force (around 8.5 crore) will be under the tax net by 2023-24, meaning one in every three workers in the formal sector is paying tax.The number of income tax returns filed for AY 2023-24 till July 31, 2023, stood at 6.77 crore for salaried taxpayers and non-tax audit cases (116.1% of the 5.83 crore filed till July 31, 2022). Furthermore, there were 53.67 lakh first-time ITR filers. However, an alarming 70% of the total filers filed nil tax returns, highlighting that base expansion has not immediately translated into commensurate tax yields.3. International Experience in Tax DigitizationIn most developing countries, tax revenue collection remains below 15% of GDP, compared to approximately 40% for developed economies. Advanced technological solutions have emerged as the primary mechanism to leapfrog structural bottlenecks:Georgia: Automated most of its tax processes between 2004 and 2011, establishing interconnected information-sharing among tax authorities and commercial banks via a unified internet portal. This led to a sharp reduction in tax rates while the tax-to-GDP ratio doubled to 25%.Liberia & Tajikistan: Recent empirical research demonstrates that introducing digital tax filing directly widened the active taxpayer base and curbed compliance costs.Guyana: Implemented a unified Taxpayer Identification Number (TIN) system that streamlined verification, eliminated ghost accounts, and augmented revenue mobilization.4. Longitudinal Taxpayer Growth Analysis (1980–81 to 2021–22)A 40-year empirical evaluation reveals an 18-fold expansion in the taxpayer base against a doubling of the population:Fiscal YearIndividual Tax Base (In Crore)Population of India (In Crore)Tax Base % to Population1980–810.4569.680.65%1985–860.5478.020.70%1990–910.7487.050.85%1995–961.0596.431.09%2000–012.27105.962.14%2005–062.94115.462.55%2010–113.32124.062.68%2014–153.61130.722.76%2015–163.98132.293.01%2016–174.37133.863.26%2017–185.38135.423.97%2018–196.20136.904.53%2019–206.39138.314.62%2020–216.63139.644.75%2021–227.30140.765.19%Until FY 2014-15, growth was sluggish—taking 15 years to double the tax base percentage from 1980-81. In contrast, from FY 2014-15 onwards, the percentage of the tax base doubled in just seven years. This proves that structural e-reforms display a gestation lag, compounding over time. If this growth trajectory is sustained, India’s tax base is projected to reach approximately 26% by 2037.5. The Four Phases of e-Reforms and MethodologySr. No.PeriodPhase of E-Reforms% Contribution of Direct Tax to Total Tax% of Taxpayers to Total PopulationStage of Impact0.Up to 1997–98Pre-e-initiatives (Manual processes)34.67%1.29%Base1.1998–99 to 2003–04PAN Systematization Process41.42%2.58%Short term2.2004–05 to 2011–12e-filing of ITR & TDS, CPC Bangalore, AIR55.82%2.84%Medium term3.2012–13 to 2021–22TRACES, GST-MCA Integration, AIS, NMS52.20%5.19%Long termEconometric Methodology & HypothesisThe study utilizes bivariate linear regression modeling ($y = \beta_1 x + \beta_0$) to examine whether e-initiatives significantly impacted personal and corporate tax revenues:Independent Variable ($x$): Time passage representing progressive cumulative e-initiatives.Dependent Variables ($y$): Annual collections of Personal Income Tax and Corporation Tax (in ₹ Crores).Null Hypothesis ($H_0$): Digitalization of the tax system does not significantly impact personal and corporate tax collections.6. Econometric Regression Results Across PhasesPhase 0: Pre-e-Initiatives Era (1992–93 to 1997–98)Personal Income Tax: y = 3,694.9x + 3,446.7 (R² = 0.9317)Corporation Tax: y = 2,393.5x + 6,264.7 (R² = 0.9796)During Phase 0, both taxes exhibited slow but steady growth, with personal tax growing at an average annual slope of ₹3,694.9 Crores and corporation tax at ₹2,393.5 Crores.Phase 1: PAN Systematization (1998–99 to 2003–04)Personal Income Tax: y = 3,607.1x + 19,536.0 (R² = 0.9622)Corporation Tax: y = 6,929.1x + 15,292.0 (R² = 0.8863)The introduction of PAN had an immediate, powerful effect on corporation tax, nearly tripling its annual growth slope from ₹2,393.5 Crores to ₹6,929.1 Crores. However, personal income tax growth remained flat at ₹3,607.1 Crores per year.Phase 2: e-Filing, TDS & CPC Bangalore (2004–05 to 2011–12)Personal Income Tax: y = 16,744.0x + 36,266.0 (R² = 0.9671)Corporation Tax: y = 35,584.0x + 40,054.0 (R² = 0.9912)Phase 2 witnessed an explosive surge. Automated electronic return filing, mandatory digital TDS returns, and CPC Bangalore accelerated personal tax growth four-fold (slope of ₹16,744 Crores) and corporation tax five-fold (slope of ₹35,584 Crores), with near-perfect fit ($R^2 > 0.96$).Phase 3: Deep Integration, AIS & Big Data (2012–13 to 2021–22)In the long-term phase, the annual average growth of Personal Income Tax jumped to ₹47,390 Crores per year, overtaking Corporation Tax growth, which moderated to ₹30,871 Crores per year. This deceleration in corporate tax growth was driven by the Finance Act 2019 corporate tax rate reduction (slashed to 22% for domestic companies) and COVID-19 pandemic relief measures.Phase No. & PeriodKey E-Reforms DeployedAverage Growth of Personal Tax / YearAverage Growth of Corporation Tax / YearEmpirical Analysis & InferencesPhase 0 (Up to 1997-98)Pre-e-initiatives₹3,694.90 Cr₹2,393.50 CrBase rate of manual growth.Phase 1 (1998–04)PAN Systematization₹3,607.10 Cr₹6,929.10 CrCorporation tax jumped from ₹2,393.5 Cr to ₹6,929.1 Cr; minimal short-term effect on personal tax.Phase 2 (2004–12)e-filing, e-TDS, CPC Bangalore₹16,744.00 Cr₹35,584.00 CrCollective digital reforms drove explosive growth in both heads, especially corporate revenue.Phase 3 (2012–22)TRACES, GST Integration, AIS, NMS₹47,390.00 Cr₹30,871.00 CrCumulative digitization produced higher growth in personal income tax than corporate tax. Corporate tax moderated due to rate cuts.7. Macro Tax Mix: Direct vs. Indirect Tax DynamicsPeriod / EraAvg Personal Tax (₹ Cr)Avg Corporate Tax (₹ Cr)Avg Direct Tax (₹ Cr)Avg Indirect Tax (₹ Cr)Avg Total Taxes (₹ Cr)Direct Tax Share (%)Indirect Tax Share (%)1992–93 to 1997–9816,37914,64231,02172,6261,03,64729%71%1998–99 to 2003–0427,56733,89461,4611,04,1911,65,65237%63%2004–05 to 2011–121,11,6132,00,1833,11,7952,67,3625,79,15752%48%2012–13 to 2021–223,93,9965,08,9789,02,9748,25,88217,28,85553%47%8. Strategic Policy RecommendationsWhile e-initiatives have demonstrated decisive empirical success, India's individual tax base of 5.19% remains low compared to developed economies such as the United States (59.9%). The authors propose three structural interventions:A. 360-Degree Family Income & Expenditure Profiling in AISTo eliminate information asymmetry and prevent income-splitting among family members, the Income Tax Department should build an automated module within the Annual Information Statement (AIS) that aggregates household incomes and cross-matches them against total family consumption expenditures (credit card spending, luxury retail, overseas travel, and property acquisitions).B. Rationalization of Personal Income Tax SlabsTo enhance voluntary compliance and tax buoyancy, personal tax rates must be affordable. Since AY 2013-14, the peak 30% slab rate has stagnated at ₹10 Lakhs. The authors recommend raising the 30% slab threshold from ₹10 Lakhs to ₹12 Lakhs, compensating any marginal revenue dip through expanded base coverage and higher income elasticity.C. Accelerating Formalization & Targeted EnforcementExpanding the formal economy is imperative to capture untaxed micro-enterprises and informal wages. Simultaneously, audit, search, and seizure protocols must be technologically refined to eliminate harassment while ensuring that chronic non-filers identified by the Non-Filers Monitoring System (NMS) are systematically brought into the tax net.9. ConclusionThe statistical models reject the Null Hypothesis ($H_0$), establishing that e-initiatives have had a statistically significant, profound impact on direct tax collections in India. Over the 30-year study horizon, average personal tax collections expanded from ₹16,379 Crores to ₹3,93,996 Crores, while corporate tax collections surged from ₹14,642 Crores to ₹5,08,978 Crores. Furthermore, research demonstrates upward mobility: 13.6% of tax filers originally in the sub-₹5,000,000 income bracket have migrated into higher tax brackets over the last decade. Sustained digitization, coupled with equitable rate rationalization and family-level expenditure tracking, will be critical to achieving an expanded, resilient tax base by 2037.References & Data SourcesAnnual Reports of the Comptroller and Auditor General of India (CAG).Department of Revenue (DoE) Annual Reports, Ministry of Finance, Government of India.Central Board of Direct Taxes (CBDT) Time Series Data and Statistics.Reserve Bank of India (RBI) Handbook of Statistics on the Indian Economy.Akitoby, B. (2018). Taxing Times: Improving Tax Collection in Developing Economies. IMF Finance & Development, 55(1).Okunogbe, O. (2022). Filling the Gap by Filing Taxes: How Technology Can Aid Governments in Tax Collection. World Bank Development Research Group.Ghosh, S. K. (2023). Decadal Taxpayer Migration Analysis: Incremental Reforms Bear Fruit. SBI Research Note.Taneja, D., & Goel, M. (2024). A Statistical Study of Impact of e-initiatives on Direct Tax Collection. The Chartered Accountant, 72(9), 35–43.Editorial Correspondence: Comments and feedback on this paper may be directed to the ICAI Editorial Board at eboard@icai.in.
Taxation
Ep. 474 — Cost Contribution Arrangements – Transfer Pricing implications
CA Journal
· September 2026
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Cost Contribution Arrangements – Transfer Pricing implicationsAbout the AuthorCA. Suresh Nagabathula is a Member of the Institute of Chartered Accountants of India (ICAI). He is an international tax and transfer pricing practitioner specializing in cross-border IP planning, BEPS documentation, DEMPE analytics, and dispute resolution."The presence of multinational group companies across the globe has created the need for Cost Contribution Arrangements (“CCAs”), wherein the cost associated with the development of intangibles or tangible assets or services is shared among the group members based on the contributions and the risks borne by each of the participants."1. Understanding Cost Contribution Arrangements (CCAs)At the outset, let us first understand the meaning of CCAs. A CCA is a contractual arrangement among Multi-National Enterprises (“MNE”) to share the contributions and risks involved, which arise as a result of joint development, production, or obtaining of intangibles or tangible assets or services, with the mutual understanding that such assets or services are expected to create benefits for the individual business operations of each of the participants.In simple terms, CCAs are contractual agreements between the associated enterprises within the MNE group through which the participants share certain costs and risks in return for having a proportionate interest in the expected benefits arising from the CCAs.One of the key components of the CCA is that there shall be some sort of contribution from each of the participants. Further, it is important to note that CCAs are not only restricted to the creation of intangible assets, but contributions can also be for the development of tangible assets and rendering of services.2. Types of CCAsThere can be two types of CCAs, classified based on the nature of transactions:[1]Classification of Cost Contribution Arrangements1. Development CCAsEntered for the joint development, production, or obtaining of (a) Intangible Assets or (b) Tangible Assets. They are expected to create recurring and future benefits for the participants over long horizons.2. Services CCAsEstablished basically for obtaining, centralizing, or sharing intra-group business services. They create present, immediate benefits only during the fiscal period in which services are rendered.3. Transfer Pricing Implications on CCAs under Indian LawIn the background of the definition of international transactions, as defined under Section 92B of the Income-tax Act, 1961 (“the Act”), CCAs are considered an international transaction, wherein it is stated that international transactions shall include:“...a mutual agreement or arrangements between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.”In light of the above definition, CCAs must adhere strictly to the arm’s length principle as required under Section 92 of the Act, and the same must be reported separately under Clause 17 of Form No. 3CEB.Further, reference is made to the Master File compliance requirement under Rule 10DA(1)(g) of the Income-tax Rules, 1962 read with Section 92D of the Act, wherein there is a specific statutory requirement to provide a list and brief description of important agreements among members of the international group related to intangible property, including cost contribution arrangements, principal research service agreements, and license agreements.Furthermore, considering the recent developments in inter-governmental arrangements in the background of the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) initiatives, there is heightened transparency concerning functions performed and risks borne by each participant. CCAs must be appropriately documented and reported in the Master File.4. The Arm's Length Principle & Mutual Benefit TestOne of the key features of a CCA is the sharing of contributions. In accordance with the requirement of the arm’s length principle, at the time of entering a CCA, each participant’s share of the overall contributions to the CCA must be consistent with its proportionate share of overall expected benefits to be received under the CCA.[2]Since the existence of mutual benefit is the foundational requirement under a CCA, it is pertinent to note that an entity may not be considered a participant if it does not have a reasonable expectation that it will benefit from the CCA. Participants must be assigned an interest or rights in the intangibles, tangible assets, or services that are part of the CCA.Accordingly, a CCA will satisfy the arm’s length principle if a participant’s share of contributions to the CCA is in proportion to its share of expected benefits derived under the CCA. Under the arm’s length principle, a participant in a CCA must have a specific interest in the underlying activity and should be capable of commercially exploiting those tangible and intangible assets or services.In cases where CCAs exist among group companies and a certain portion of the cost is re-charged to an associated enterprise who is a participant, the said transaction cannot be considered as a mere reimbursement or recovery of expenses. Such cross-charges require thorough functional and economic analysis to qualify legitimately as cost-sharing arrangements.5. When Can CCAs Fail the Arm’s Length Principle?A CCA may not satisfy the arm’s length principle if participants’ contributions are inconsistent with their share of expected benefits:EntityTime & Cost Contribution to R&DShare of Realized BenefitsArm's Length Evaluation & FindingCompany A10%80%Inconsistent / Inadequate Contribution: Company A captures excessive benefits far disproportionate to its minimal initial investment.Company B90%20%Excessive Contribution: Company B bears the majority of the risk and cost but receives an inadequate share of commercial proceeds.In this scenario, there is clear inconsistency. Company A is receiving an excessive share of benefits relative to its contributions. Accordingly, the tax authorities may make adjustments to either modify the cost allocation or disregard the terms of the CCA entirely and conclude that no effective contribution was made by Company A.CCAs satisfy the arm's length principle only if the value of each participant's proportionate share of total contributions is accurately reflected in its share of expected benefits. If inconsistent, the contributions of at least one participant are excessive, while those of another are correspondingly inadequate.6. Substance Over Form & Accurate DelineationAnother vital factor is the actual nature of transactions and the real-world conduct of participants. If an analysis discloses that the written terms of the CCA differ from the actual economic functions performed, the tax authorities may disregard the terms of the contract.Accordingly, there is an imperative need for accurate delineation of the transaction, identifying economically significant functions performed and risks assumed by each participant. In the event of a lack of clarity on functions performed, or if the taxpayer fails to demonstrate the commercial benefit derived, the tax authority may conclude that independent enterprises in third-party circumstances would never enter into such an arrangement, leading to a complete transfer pricing adjustment.7. Critical Transfer Pricing Adjustment MechanismsA. Balancing PaymentsWhere contributions are determined to be inadequate relative to expected benefits, a balancing payment is required under the arm's length principle. The balancing payment increases the value of contributions of the paying participant and compensates the participant bearing an excessive cost burden.In the earlier example, Company A must make a balancing payment to compensate Company B for the development of the intangible asset. Adjustments may also be needed based on periodic reviews of participants' actual contributions and evolving relative benefit shares.B. Buy-In Payments (Admitting New Participants)When an MNE incorporates a new entity (e.g., Company Z) that subsequently joins an existing operational CCA, that entity obtains an interest in pre-existing value created by other participants (work-in-progress, pre-existing IP, or developed rights). Under the arm’s length principle, the incoming participant must make an arm’s length payment for this transfer of pre-existing rights. This sum is known as the buy-in payment, calculated based on the fair value of rights acquired and anticipated future benefits.C. Buy-Out Payments (Exiting Participants)In the reverse scenario, where an existing participant (e.g., Company A) intends to exit a CCA, a buy-out occurs. The departing participant sells its interest in the tangible or intangible assets to the remaining participants (Company B and Company Z). The buy-out consideration must reflect the arm’s length value of the departing entity's contributions. If the CCA has produced no realized commercial benefits, payment of exit consideration may not be necessary.8. Valuing CCA ContributionsTo establish arm’s length compliance, all participant contributions—whether in the form of funds, tangible or intangible assets, or services (including employee compensation and direct overheads)—must be identified and valued at the time they are contributed. Key valuation rules include:Contributions must be used exclusively for the CCA activity.Routine operational services must not be bundled into the CCA contribution pool.If an entity renders specific services to associated enterprises and earns an arm's length profit mark-up, the costs associated with those services cannot be included in the CCA cost pool.9. CCAs vs. United States Cost Sharing Arrangements (CSAs)Concepts regarding CCAs are rooted in the OECD Transfer Pricing Guidelines. In the United States, the corresponding concept under Treasury Regulations is known as Cost Sharing Arrangements (“CSAs”):Scope Discrepancy: Under U.S. regulations, CSAs are strictly limited to the joint development of Intangibles. In contrast, OECD CCAs cover intangibles, tangible assets, and intra-group services.Jurisdictional Interaction: While India does not have standalone detailed CCA statutory regulations, Indian transfer pricing jurisprudence relies extensively on OECD Guidelines. However, where an Indian entity contracts with a U.S.-based affiliate, the arrangement must be examined under both Indian law and strict U.S. CSA regulations.10. Interlink of Royalty with CCAs & DEMPE FunctionsIn a traditional group structure, legal ownership of Intangible Property (IP) is concentrated in one entity, and group affiliates exploiting the IP pay an ongoing royalty. However, under a CCA:Where IP is jointly developed under a valid CCA, participating entities need not pay royalties to one another because benefits are shared in return for their development contributions.Conversely, non-participating group entities that exploit the developed IP must pay an arm's length royalty to the participating owners.Furthermore, under modern international transfer pricing, entities performing DEMPE functions (Development, Enhancement, Maintenance, Protection, and Exploitation) must be remunerated with an arm’s length return matching the economic substance of their operational involvement.11. Conclusion & Best PracticesIn the post-BEPS era of inter-governmental tax transparency, MNEs must rigorously examine their intra-group cost allocations. Cross-charges disguised as mere reimbursements without demonstrable benefit or economic substance run a high risk of being disallowed during transfer pricing audits. Indian enterprises must ensure that CCAs are accurately delineated, backed by contemporaneous legal contracts, supported by robust benefit computations, and explicitly reported under Clause 17 of Form No. 3CEB.Footnotes & ReferencesSection 8.10 on Page 340 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (January 2022 edition).Section 8.5 on Page 338 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (January 2022 edition).Section 92B and Section 92D of the Income-tax Act, 1961 read with Rule 10DA of the Income-tax Rules, 1962.OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, Actions 8–10: Aligning Transfer Pricing Outcomes with Value Creation.United States Department of the Treasury, Internal Revenue Service (IRS), 26 CFR § 1.482-7 - Methods to determine taxable income in connection with a cost sharing arrangement.Author & Editorial Correspondence: Comments and queries regarding this article may be addressed to the author at suresh.n6186@gmail.com or the ICAI Editorial Board at eboard@icai.in.
RBI Guidelines, Commercial Banks, Investment Portfolio, HTM, AFS, FVTPL, HFT, SPPI Test, Amortization, MTM Depreciation, Treasury Management, Basel III, Ind AS, Bank of Maharashtra, ICAI
Ep. 475 — Impact of RBI’s New Guidelines on Investment Portfolios of the Commercial Banks
CA Journal
· September 2026
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Impact of RBI’s New Guidelines on Investment Portfolios of the Commercial BanksAbout the AuthorVijay Prakash Srivastava is General Manager in the Financial Management & Accounts Department at Bank of Maharashtra. He possesses deep institutional expertise in bank treasury operations, asset-liability management (ALM), regulatory compliance, and the transition of the Indian banking sector toward Ind AS/IFRS.April 1, 2024 Effective Implementation DateNo Cap on HTM Removal of Regulatory Ceiling5% Sales Limit Annual HTM Liquidation CapInd AS / IFRS 9 Global Accounting Alignment"Treasury functions (Investment portfolio) is one of the key functions of commercial Banks. Not only does the investment portfolio provide Asset and Liability Management (ALM) support, but it is also a crucial source of income for Banks. Treasury functions are largely governed by RBI directions. In view of significant developments in global standards on classification, measurement, and valuation of investments, the RBI issued revised regulatory guidelines on 12 September 2023."1. Introduction & Global Standard HarmonizationThe guidelines of the Reserve Bank of India (RBI)—promulgated via the Master Directions – Classification, Valuation and Operations of Investment Portfolio of Commercial Banks (Directions), 2023 on 12 September 2023—are more or less in line with IND AS / IFRS 9 in respect of classification, valuation, and accounting. These changes exert a profound impact on the operation of the investment portfolio of commercial banks considering the structural shifts in classification, valuation methodologies, and internal treasury operations.2. Revised Classification FrameworkUnder the extant framework, commercial banks have classified investments into three categories: 1. Held to Maturity (HTM), 2. Available for Sale (AFS), and 3. Held for Trading (HFT). Under the new guidelines, a new category, Fair Value Through Profit and Loss (FVTPL), is introduced. The HFT portfolio becomes a sub-category of FVTPL. In addition, investments in subsidiaries, joint ventures, and associates are classified separately.The revised classification framework is structured as follows:Held to Maturity (HTM)Available for Sale (AFS)Fair Value Through Profit and Loss Accounts (FVTPL)Held for Trading (HFT) (Being a sub-category of FVTPL)Investment in Subsidiaries, Associates, and Joint Ventures3. Portfolio-Wise Eligibility & Operational ImpactA. Held to Maturity (HTM)Under HTM, securities acquired with the intention and objective to hold until maturity in order to collect contractual cash flows will be included. Furthermore, such securities must satisfy the SPPI criteria (i.e., the contractual cash flows are Solely Payments of Principal and Interest on specified dates). Securities that fail the SPPI criteria cannot be classified under HTM.Major Operational Shifts in HTM:Under the extant regime, a one-time annual shifting between HTM and AFS was permitted. Under the new guidelines, this option is no longer available under normal circumstances.Banks are permitted to sell securities from the HTM portfolio not exceeding 5% of the opening carrying value in any financial year. Any sales beyond 5% require prior approval from the RBI.Strategic Impacts on HTM:Trading profits historically harvested by banks through annual shifting from HTM will no longer be available, eliminating a significant source of treasury non-interest income.Banks must exercise greater caution regarding liquidity and risk management when classifying securities under HTM due to the stringent restrictions on subsequent sales.Currently, a large chunk of commercial bank investments resides in HTM. Given the strict sale limitations, banks may avoid maintaining excessively large HTM portfolios in the future.There is no regulatory cap on eligible securities (including Non-SLR securities meeting SPPI criteria) that can be classified under HTM, which could result in increased Interest Rate Risk in the Banking Book (IRRBB).B. Available for Sale (AFS)Under AFS, securities meeting the SPPI criteria are eligible where they are acquired with the twin objective of holding to collect contractual cash flows and selling before maturity. In addition, equity instruments not held with the objective of trading may be classified under AFS via an irrevocable option exercised at initial recognition."Under AFS, securities shall be fair valued periodically at least on a quarterly basis. Any discount or premium on acquisition of debt security shall be amortized."Strategic Impacts on AFS:Certain securities currently categorized under AFS will no longer qualify—such as equity shares held for trading, Basel III Tier 1 and Tier 2 bonds, and mutual funds—and must be reclassified under FVTPL.The historical basket-wise approach for recognizing Mark-to-Market (MTM) depreciation is abolished. Securities must now be fair-valued on an individual security basis.Cumulative unrealized gains or losses on performing investments will be credited or debited directly to an AFS-Reserve without impacting the Profit & Loss account. Upon actual sale, the realized gain or loss will be transferred from the reserve to P&L.The P&L account will no longer suffer from adverse yield spikes; however, bank equity capital (Net Worth) will directly absorb mark-to-market fluctuations.Unrealized gains in the AFS-Reserve are ineligible for dividend distribution or payment of coupons on Additional Tier 1 (AT1) bonds. Unrealized gains on Level 3 (L3) securities must be deducted from Common Equity Tier 1 (CET1).For equity instruments designated under AFS, realized gains or losses upon disposal are transferred from the AFS-Reserve directly into Capital Reserve rather than the P&L account.C. Fair Value Through Profit and Loss (FVTPL)FVTPL represents a new classification category for commercial banks. Securities that do not qualify for inclusion under HTM or AFS are classified here:Equity shares other than strategic holdings in subsidiaries, associates, and joint ventures.Investments in mutual funds, Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs).Tier 1 and Tier 2 bonds issued under Basel III capital regulations.Debt securities that fail the SPPI test.Securities held under FVTPL must be fair-valued at least quarterly, and both gains and losses on revaluation must be credited or debited directly to the Profit & Loss account. This marks a fundamental departure from the extant asymmetric regime where revaluation losses were recognized but gains were ignored. Unrealized gains will augment accounting profits, creating tax implications prior to asset monetization.D. Held for Trading (HFT)HFT operates as a sub-category of FVTPL for securities acquired strictly for short-term trading, profiting from short-term price movements, capturing arbitrage gains, hedging trading risks, listed equities, and net short positions. HFT securities must be fair-valued on a daily basis with revaluation differences flowing to P&L. Discounts and premiums on debt instruments in HFT will now be amortized over the residual life, streamlining redemption results.E. Subsidiaries, Associates, and Joint VenturesAll investments (equity and debt) in subsidiaries, associates, and joint ventures must be held at acquisition cost. Any acquisition discount or premium on debt instruments must be amortized over the life of the security.4. Prohibition on Re-Classification"Under new guidelines, Banks will not be able to reclassify their investments between categories without the approval of their Board of Directors and the prior approval of the Reserve Bank of India."Because annual one-time shifting and inter-category transfers (such as HFT to AFS) are eliminated, banks must exercise rigorous discipline at inception. Classification decisions must align strictly with Asset-Liability Management (ALM) positioning, capital adequacy implications, and fair value risk assessments.5. Transition and Repeal Provisions (April 1, 2024)At the time of transition to the new framework, commercial banks must reclassify their entire investment portfolio as of 31st March 2024 into the revised categories. The opening accounting adjustments effective April 1, 2024 are set out below:Previous FrameworkRevised FrameworkOpening Accounting Adjustments on April 1, 2024HTMHTMCarrying value becomes acquisition cost adjusted for cumulative amortized premium/discount from acquisition date to March 31, 2024. Difference adjusted in Revenue / General Reserve.HTMAFS*Carrying value becomes Fair Value as of March 31, 2024. Difference adjusted in AFS-Reserve (or Revenue/General Reserve per FIMMDA FAQs, except for designated equity).HTMFVTPLCarrying value becomes Fair Value as of March 31, 2024. Difference adjusted in Revenue / General Reserve.AFSHTMCarrying value becomes acquisition cost adjusted for cumulative amortized premium/discount from acquisition date to March 31, 2024. Difference adjusted in Revenue / General Reserve.AFSAFSCarrying value becomes Fair Value as of March 31, 2024. Difference adjusted in AFS-Reserve.AFSFVTPLCarrying value becomes Fair Value as of March 31, 2024. Difference adjusted in Revenue / General Reserve.HFTHTMCarrying value becomes acquisition cost adjusted for cumulative amortized premium/discount from acquisition date to March 31, 2024. Difference adjusted in Revenue / General Reserve.HFTAFSCarrying value becomes Fair Value as of March 31, 2024. Difference adjusted in AFS-Reserve.HFTFVTPLCarrying value becomes Fair Value as of March 31, 2024. Difference adjusted in Revenue / General Reserve.*Note on FIMMDA Transition FAQs: As per clarification issued by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), the opening difference between the revised and previous carrying value on reclassification to AFS should be adjusted in Revenue/General Reserve rather than AFS-Reserve, except in the case of equity instruments designated under AFS where the difference remains adjusted in AFS-Reserve.Importantly, any appreciation or depreciation on the valuation of securities on the date of transition will not be routed to the Profit & Loss account upon subsequent sale.6. Strategic Conclusions & Structural RealignmentThe revised Master Directions represent a monumental evolution in the financial management of Indian commercial banks:Interest Rate Risk in Banking Book: The elimination of the ceiling on HTM allows banks to hold larger portfolios without MTM markdowns, but heightens structural interest rate risk that must be actively monitored.P&L Insulation: Isolating AFS revaluation movements into the AFS-Reserve shields bank P&L from cyclical yield volatility, though capital adequacy ratios will fluctuate directly with market yields.Universal Amortization: Requiring debt securities across all categories to amortize discounts and premiums smooths out yields and eliminates sudden redemption spikes or cliffs.Systems & Governance Overhaul: Commercial banks must invest substantially in automated treasury systems, daily valuation feeds, SPPI auditing capabilities, and staff training to ensure compliance with the comprehensive disclosure mandates applicable from the financial year ending 31 March 2025 onwards.Overall, aligning Indian bank accounting with international standards enhances transparency, mitigates regulatory arbitrage, and deepens counterparty and investor confidence across the global financial architecture.Author & Editorial Correspondence: Comments and queries regarding this article may be addressed to the ICAI Editorial Board at eboard@icai.in.
Technology, Digital Transformation, Chartered Accountancy, Artificial Intelligence, Machine Learning, Data Analytics, Cloud Computing, ERP Systems, SAP HANA, Oracle NetSuite, Blockchain, Cybersecurity, Digital Assets, Audit Automation, ICAI
Ep. 476 — Embracing Technological Transformation in Accounting: Navigating Opportunities and Challenges
CA Journal
· September 2026
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Embracing Technological Transformation in Accounting: Navigating Opportunities and ChallengesAbout the AuthorCA. Ramesh Chandra Jha is a Member of the Institute of Chartered Accountants of India (ICAI). He is an established professional focusing on digital accounting transformation, enterprise ERP implementations, artificial intelligence in auditing, blockchain systems, and cybersecurity governance.Cloud ERP Next-Gen Accounting Backbone11 AI Cases End-to-End Workflow AutomationBlockchain Immutable Ledger SecuritySynergy Human Acumen + Machine Scale"In the digital age, technology's influence on accounting is profound. Automation, Artificial Intelligence (AI), Data Analytics, and Cloud Computing are redefining the profession. The digital shift radically changes accounting by replacing manual tasks with digital systems. This boosts efficiency, reduces errors, and empowers accountants to focus on making strategy. AI and data analytics are indispensable, unlocking insights from vast datasets. Accountants progress from data input operators to translators who provide direction for decisions."1. IntroductionIn the rapidly evolving digital era, the significance of technology’s role in reshaping the accounting profession has reached unprecedented levels. The intersection of automation, artificial intelligence (AI), data analytics, and cloud computing has initiated a profound revolution, altering the very essence of the manner of engagement of Accountants and allied professionals with their tasks. This article delves comprehensively into the immense impact of technology on the landscape of accounting, unravelling its multifaceted implications and unveiling crucial insights.2. The Digital Transformation: A Paradigm Shift in AccountingThe digital transformation is reshaping the accounting landscape by replacing manual record-keeping methods with sophisticated digital systems. This shift represents a significant paradigm change in the field, propelled by technology-driven tools and software. Several cutting-edge accounting software tools have emerged, spearheading the digital transformation by replacing traditional manual record-keeping with sophisticated digital systems. Some notable examples include:QuickBooks: A widely used accounting software, QuickBooks streamlines various accounting tasks such as invoicing, expense tracking, and financial reporting. It automates processes, reduces manual data entry, and provides real-time insights into financial performance.Xero: Like QuickBooks, Xero offers cloud-based accounting software that allows businesses to manage finances from anywhere. It automates reconciliations, offers real-time collaboration with advisors, and integrates with various third-party applications.Sage Intacct: Geared towards medium to large businesses, Sage Intacct provides advanced financial management and accounting solutions. It automates complex financial processes, enhances visibility into financial data, and offers scalability for growing organizations.Zoho Books: Designed for small businesses, Zoho Books automates various accounting tasks such as invoicing, expense tracking, and bank reconciliation. It offers integration with other Zoho applications for a seamless workflow.SAP HANA Cloud and Business One: SAP HANA Cloud is a comprehensive cloud-based platform that empowers large businesses to leverage the full potential of their data. With its real-time analytics, advanced data processing, and application development capabilities, it equips organizations with the tools needed to make agile and informed decisions in today’s fast-paced business landscape. Similarly, designed for small to medium-sized businesses, SAP Business One integrates financial management with sales, customer relationship management, and inventory management, providing a comprehensive solution for business operations.Odoo: An open-source ERP system, Odoo covers various business functions such as accounting, inventory, CRM, and e-commerce. It automates processes, enhances collaboration, and supports customization based on business needs.Oracle NetSuite: A cloud-based ERP platform, Oracle NetSuite offers financial management, CRM, and e-commerce functionalities. It automates processes, offers real-time insights, and supports businesses across different industries.These software tools exemplify the digital transformation initiated in accounting, replacing manual record-keeping with efficient, automated, and integrated digital systems that enhance accuracy, reduce errors, and provide real-time insights into financial operations. The digital transformation is thus empowering Accountants to evolve from transaction processors to strategic consultants, bolstering their role in driving business growth and financial stability.3. Harnessing the Power of AI and Data AnalyticsAI has emerged as a transformative force in the realm of accounting, reshaping traditional practices and offering a paradigm shift in how accountants approach their tasks. Through advanced algorithms and data analysis capabilities, AI empowers accountants to automate routine processes, uncover hidden insights within complex financial data, and enhance decision-making. Key use cases where AI transforms accounting workflows include:AI Use CaseTechnological MechanismAccounting & Operational BenefitAutomated Data EntryAI-powered Optical Character Recognition (OCR) technology.Quickly scans and extracts data from invoices, receipts, and financial documents, minimizing errors and manual data entry.Expense ManagementPattern recognition & historical categorization algorithms.Automatically categorizes and reconciles expenses, flagging duplicate or erroneous entries to improve reporting accuracy.Invoice ProcessingAutomated workflow rules & discrepancy checking.Compares invoice details against predefined purchase orders and rules, speeding up approval workflows.Financial Statement AnalysisReal-time anomaly and trend detection models.Scrutinizes financial statements to identify trends, variances, and risks in real time, assisting in strategic assessments.Auditing AutomationDeep data scanning & irregularity detection engines.Analyzes vast volumes of financial data to detect irregularities, patterns, and errors indicating potential fraud.Tax ComplianceDynamic regulatory trackers & classification engines.Tracks changes in tax regulations, updates tax codes, and automatically classifies transactions according to current tax rules.Financial ReportingAutomated extraction & format compilation.Generates customized, automated financial reports from disparate sources, ensuring presentation consistency.Cash Flow ManagementPredictive time-series analytics.Forecasts cash flow trends by modeling historical data, market conditions, and macroeconomic variables.Fraud DetectionContinuous transaction monitoring & behavioral profiling.Swiftly identifies unusual spending patterns, geographical disparities, and abnormal frequencies, minimizing false positives.Customer InteractionAI-powered conversational chatbots.Handles repetitive Accounts Payable (AP) and vendor inquiries regarding invoice status and payment schedules.Personalized Financial AdviceData-driven wealth & tax recommendation engines.Analyzes client financial records to deliver personalized financial advice, investment strategies, and tax optimization."AI-powered tools can analyze financial statements and identify trends, anomalies, and potential risks in real time. This assists accountants in making more accurate financial assessments and strategic decisions."4. Embracing Cloud Computing for Collaboration and AccessibilityCloud computing has brought a revolutionary change in collaboration and accessibility within the accounting sphere. Real-time sharing of financial data across teams has become seamless, enabling efficient remote work and fostering improved client collaboration. With cloud-based accounting systems, data can be accessed effortlessly from any location, ensuring professionals remain nimble and capable of swiftly addressing changing client requirements. This shift towards cloud-based solutions amplifies productivity, enhances communication, and bolsters adaptability, ultimately empowering Accountants to deliver higher levels of service in an increasingly dynamic and interconnected business landscape.5. Rethinking the Role of Accountants: From Data Entry to Data InterpretationThe rapid infusion of technology necessitates a profound re-evaluation of Accountants’ roles. As routine tasks are automated, the profession is undergoing a transformative shift towards strategic data interpretation. In this new landscape, Accountants play a pivotal role in translating intricate financial data into actionable insights that drive business expansion.The professional accountants have evolved into advisors, having a comprehensive grasp of the numbers to navigate clients through complex financial choices. Beyond number crunching, they contribute a strategic perspective that fosters well-informed decision-making. This transition signifies a departure from the traditional role of data entry to a dynamic position as interpreters and strategic consultants, cementing Accountants’ position as indispensable partners in driving sustainable growth and financial success.Noteworthy examples of this transition include Accountants utilizing advanced data analytics tools to unravel intricate financial patterns, AI-assisted analysis to anticipate market trends, and strategic planning software to develop data-driven growth strategies.6. Cybersecurity and Data Privacy: Critical ConcernsWith the increasing integration of technology, the significance of cybersecurity and data privacy intensifies within the accounting domain. Accountants deal with sensitive financial data, rendering them alluring targets for cyberattacks. Thus, implementing stringent security measures becomes imperative to shield client information and preserve trust.Security Imperative: Professionals must establish robust protocols, including end-to-end encryption, multi-factor authentication (MFA), and secure network architectures, to fortify against potential breaches. Staying updated through continuous training and remaining vigilant about evolving cybersecurity threats is pivotal to safeguarding client trust.7. The Emergence of Blockchain Technology & Digital AssetsBlockchain LedgersThe rise of blockchain technology brings transformative possibilities for the accounting domain. By its inherent transparency and tamper-proof nature, blockchain has the potential to reshape how transactions are recorded and reported. This technology ensures a secure and immutable ledger, mitigating the risk of fraudulent activities and augmenting transparency in financial reporting. Accountants must comprehend its capacity to revolutionize critical areas such as auditing, transaction verification, and supply chain finance, contributing to a more trustworthy financial ecosystem.Exploring New Frontiers: Digital AssetsThe emergence of digital assets has undeniably ushered in a new era in accounting. This paradigm shift necessitates that professionals delve into uncharted territory. Complexities arise from the unique nature of these assets, demanding Accountants grapple with intricate matters of classification, recording, and reporting under evolving accounting standards. This entails a thorough understanding of blockchain technology, digital wallets, and the nuanced transactional landscape that digital assets bring.8. Enhanced Reporting, Visualization & Audit AutomationReporting and Visualization ToolsIn the digital age, sophisticated reporting and visualization tools provide Accountants with powerful means to convey intricate financial data with enhanced effectiveness. Employing infographics, interactive dashboards, and visual representations of financial performance enables Accountants to offer clients a clear grasp of their financial well-being. This bridge between accounting complexities and client comprehension cultivates improved collaboration, elevated advisory conversations, and smarter financial planning.The Changing Face of Audit and ComplianceThe realm of audit and compliance has undergone a profound transformation through the integration of technology, ushering in an era characterized by unprecedented efficiency and accuracy. AI-driven audit tools meticulously scrutinize vast datasets, identifying irregularities, anomalies, and discernible patterns with remarkable precision."Automated compliance tools have taken center stage, streamlining complex procedures and dramatically reducing the potential for oversight errors."However, in the pursuit of automated audit and compliance solutions, it is vital to tread cautiously. While technology enhances efficiency, it must operate in tandem with human judgment rather than supplanting it entirely. The nuanced nature and contextual intricacies of financial data often require nuanced insights that only human expertise can provide. The collaborative synergy of human acumen and technological innovation is crucial in ensuring that audit outcomes remain comprehensive, precise, and reliable.9. Continuous Learning and Adaptation: A Stride Towards a Brighter FutureNavigating this paradigm shift requires a firm commitment to continuous learning and adaptation. Key imperatives for the modern practitioner include:Continuous Learning in a Changing Landscape: Ongoing education equips professionals with the skills to address intricacies, ensuring accurate, reliable, and insightful financial practices. Committing to lifelong education is no longer a luxury but a necessity to stay relevant.Beyond Technical Mastery: While technical accounting proficiency remains important, professionals must develop the ability to integrate technology into complex executive decision-making processes.Seizing Opportunities Amidst Challenges: Embracing constant technological change as an opportunity creates operational efficiencies and enables novel advisory solutions.Elevating the Role of Accountants: Automating routine tasks allows accountants to evolve from mere number crunchers to strategic advisors who leverage data-driven insights.Catalyzing Innovation: Staying ahead of technological trends positions accountants to innovate within their firms, delivering superior value to clients.Adaptability as a Cornerstone: Adaptability is a core cornerstone of professional success in modern finance.10. ConclusionThe ongoing technological revolution within the accounting profession presents a dualistic landscape of both opportunity and challenge. The integration of automation, AI, data analytics, and other emerging technologies holds a remarkable chance to elevate the profession’s value proposition. Yet, embarking on this transformational journey requires more than just a passive adoption of technology. It demands a proactive approach characterized by ongoing learning, dedication to innovation, and relentless cybersecurity monitoring.As the accounting industry adapts to this digital age, it stands ready to redefine its position within the wider business ecosystem—transcending traditional limitations to provide strategic guidance that drives organizational growth. By fostering open collaboration and embracing technological capabilities, accountants are positioned not just as service providers, but as trusted advisors equipped with unparalleled expertise to serve businesses in an increasingly complex and interconnected world.Author & Editorial Correspondence: Comments and queries regarding this article may be addressed to the author at Ca.r.c.jha@gmail.com or the ICAI Editorial Board at eboard@icai.in.
Mandatory Audit Trail – Step towards greater transparencyAbout the AuthorCA. Shraddha Khivasara is a Member of the Institute of Chartered Accountants of India (ICAI). She specializes in statutory audits, corporate governance, internal financial controls over financial reporting (IFCoFR), and regulatory reporting compliance under the Companies Act, 2013.April 1, 2023 Mandatory Effective DateRule 11(g) Auditor's Statutory Assertion8 Years Statutory Record RetentionThe 3W’s Who, When & What Logged"In a move designed to increase accountability and enhance transparency, the Ministry of Corporate Affairs (MCA) has made it mandatory for all companies, irrespective of their size and complexity, to have an audit trail feature in all accounting software. Though no such comparable requirements exist in other parts of the world, MCA is ahead of its time in mandating the maintenance of a detailed edited record of all transactions."1. Introduction & Regulatory EvolutionIn a move designed to increase accountability and enhance transparency, the Ministry of Corporate Affairs (MCA) has made it mandatory for all companies, irrespective of their size and complexity, to have an audit trail feature in all accounting software. The new audit trail requirement was initially made applicable for the financial year commencing on or after the first day of April 2021. However, the applicability was deferred twice and is now made mandatory for all companies w.e.f. April 01, 2023.This is another major reform by the MCA post Revised Schedule III disclosures and CARO 2020 towards greater corporate transparency. Though no such comparable requirements exist in other major jurisdictions around the globe, the MCA is ahead of its time in mandating the maintenance of a detailed edit log of all transactions. This will empower all stakeholders, including statutory auditors, to unearth sources of financial irregularities and help companies bolster their financial reporting and internal control framework.2. Defining an Audit TrailAn audit trail is defined as a step-by-step sequential record that provides evidence of the documented history of financial transactions to their source. Audit trails are a chronological record of changes that have been made to the data. Any change to data—including creating new data, updating existing data, or deleting records—must be systematically recorded.1. WHEN (Timestamp)Records the exact system date and time when changes were executed down to the second.2. WHO (User ID)Identifies the specific user credentials, login ID, or system process that executed the transaction.3. WHAT (Transaction Alteration)Details the transaction reference, before-and-after values, fields altered, and success or failure status.3. The Corporate Mandate: Rule 3(1) of Companies (Accounts) Rules, 2014The MCA amended the Companies (Accounts) Rules, 2014 by inserting the following proviso to Rule 3(1):Proviso to Rule 3(1):“Provided that for the financial year commencing on or after the 1st day of April 2023, every company which uses accounting software for maintaining its books of account shall use only such accounting software which has a feature of recording audit trail of every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.”Key dimensions of management responsibility under Rule 3(1) include:Universal Corporate Applicability: The requirement applies to all companies registered under the Companies Act, 2013 (public, private, Section 8, one-person companies). Limited Liability Partnerships (LLPs) and partnership firms fall outside its purview.Electronic Accounting Scope: It applies to the extent a company maintains its records in electronic form using accounting software, covering every transaction impacting the books of account.Multi-Software Environments: Where multiple software solutions are used (e.g., separate billing software, point of sale, inventory sub-ledgers, and core financial ERP), management must identify a complete inventory of all such software and ensure each maintains an active audit trail.Outsourced Accounting Functions: In cases where accounting is outsourced to a third party (e.g., payroll processing or shared services), management must ensure that the service provider deploys software with an audit trail feature, supported by independent SOC 1 / Type 2 system auditor reports.Anti-Disabling Controls: Management is strictly responsible for ensuring that the audit trail feature is never disabled or tampered with at any point in time, instituting robust access controls around database administrators (DBAs)."The auditor needs to verify whether management’s assessment of the list of software used in maintaining books of account is appropriate and complete."4. The Auditor’s Reporting Mandate: Rule 11(g)The MCA inserted clause (g) under Rule 11 of the Companies (Audit and Auditors) Rules, 2014, casting an onerous statutory duty upon the auditor to state in the audit report:Rule 11(g) Reporting Text:“Whether the company, in respect of financial years commencing on or after the 1st April 2022, has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention.”Although the text of Rule 11(g) originally cited 1st April 2022, because the substantive amendment to Rule 3(1) was deferred to 1st April 2023, auditors for FY 2022–23 reported that the requirement was not applicable for that year. The full operational reporting obligation commences with the financial year ended 31st March 2024.The Four Pillars of Auditor VerificationConfigurability: Whether the audit trail feature is configurable (i.e., whether it can be disabled or tampered with by administrative users)?Continuous Operation: Whether the audit trail feature remained enabled and operated throughout the entire 365 days of the financial year?Completeness: Whether all transactions recorded across all software modules impacting books of account are captured by the edit log?Statutory Preservation: Whether the audit trail has been preserved as per the 8-year statutory record retention requirements under Section 128(5) of the Act?5. Complex Audit Scenarios: Spreadsheets, Outsourcing & SA 600Spreadsheets (MS Excel Workings): In small companies where key accounting schedules—such as fixed asset registers, deferred tax workings, and consolidation adjustments—are maintained in Excel, the auditor must assess whether the spreadsheet forms part of the accounting software and whether an adequate audit trail can be established.Outsourced Operations: For outsourced activities like payroll or cloud billing, the auditor must review the independent auditor's assurance report of the service organization (e.g., SAE 3402 / SOC 1 Type 2), specifically covering edit log operating effectiveness.Involvement of IT Experts: Where complex multi-tier enterprise ERPs (e.g., SAP S/4HANA, Oracle) are deployed, statutory auditors should engage IT audit specialists to verify database-level change logs and evaluate whether direct backend SQL overrides bypassed application-level audit trails.Tampering & Disabling: In case the audit trail was disabled or tampered with during the year, the auditor must evaluate the impact on fraud risk assessment under SA 240, assess internal financial controls over financial reporting (IFCoFR), and make a factual, modified qualification in the independent auditor’s report.Consolidated Financial Statements (SA 600): The reporting responsibility applies to both standalone and consolidated financial statements. However, for components that are unincorporated entities or foreign subsidiaries, the Companies Act does not apply, and component auditors are not required to report on Rule 11(g). For Indian corporate subsidiaries, the group auditor relies on standalone component auditor reports in accordance with SA 600.Auditors must perform their verification procedures in strict alignment with the Implementation Guide on Reporting under Rule 11(g) issued by the Auditing and Assurance Standards Board (AASB) of ICAI.6. Benefits vs. Enterprise Implementation ChallengesDimensionCore Strategic BenefitsFormidable Implementation ChallengesAccounting DisciplineBrings systematic rigor; deters the common malpractice of backdating vouchers and manipulating books after period close.High data volume explosion requiring substantial ongoing investment in cloud storage and database maintenance.Internal Risk ManagementActs as an internal surveillance tool for management to monitor unauthorized entries and mitigate control failures proactively.Information overload: filtering millions of system change logs to isolate genuine high-risk anomalies is complex and tedious.Audit Comfort & GovernanceProvides auditors with deep transaction-level insights, bolstering corporate governance and investor confidence.Multi-software environments complicate audit analysis when sub-ledgers and main ledgers lack synchronized logging.Global MNC OperationsAligns corporate reporting with the highest global benchmarks of forensic accountability.Foreign parent companies often resist altering global template ERPs solely to satisfy Indian domestic regulations.Small Companies (SMEs)Fosters an institutional culture of financial integrity and transparent compliance from early growth stages.Disproportionate financial cost burden for small enterprises requiring software upgrades and specialized IT support.7. Way Forward: Action Points for Management and AuditorsAction Points for Corporate ManagementIdentify and document a comprehensive inventory of all software applications used directly or indirectly in maintaining books of account.Ensure the audit trail feature is active and enabled across all accounting software throughout the year without interruption.Where existing software lacks edit log capability, engage immediately with software vendors or obtain Board approval to migrate to compliant ERP solutions.Execute formal agreements with third-party service providers (payroll, SaaS billing) mandating audit trail compliance and regular SOC reports.Implement strict internal IT security controls, limiting database administrator privileges and preventing unauthorized tampering with log files.Establish archival and disaster-recovery procedures to retain all edit logs securely for a minimum statutory period of eight years.Action Points for Statutory AuditorsSensitize company management and the Audit Committee regarding Rule 11(g) reporting criteria during early audit planning meetings.Evaluate management's process for identifying all in-scope software and test the operating effectiveness of audit trail controls across the entire year.Coordinate with component auditors of Indian subsidiaries regarding specific testing procedures for consolidated reporting.Scrutinize high-risk entries in the edit log—specifically looking for unusual transaction timings, backdated entries, and manual journal overrides.Assess the reporting implications where the audit trail was disabled, incomplete, or unsupported by adequate retention, issuing modified reports where warranted.8. ConclusionAlthough the MCA introduced the audit trail framework two years ago, its full enforcement for the financial year 2023–24 represents a watershed moment for Indian corporate reporting. In the initial reporting cycle, statutory auditors may be required to issue modified reports for companies struggling with technical compliance. However, over the medium to long term, the audit trail will serve as a potent regulatory instrument to deter corporate fraud and ensure financial statement fidelity. The mandatory audit trail is a decisive, forward-looking step toward a disciplined, transparent era of corporate accounting in India.Author & Editorial Correspondence: Comments and queries regarding this article may be addressed to the author at cashraddha@yahoo.co.in or the ICAI Editorial Board at eboard@icai.in.
Accounting Standards
Ep. 478 — BEPS Pillar Two Rules: Background, Accounting, Tax and Other Key Considerations
CA Journal
· September 2026
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BEPS Pillar Two Rules: Background, Accounting, Tax and Other Key ConsiderationsAbout the AuthorCA. Anjani Khetan is a Member of the Institute of Chartered Accountants of India (ICAI). He is an expert in IFRS and Ind AS financial reporting, international corporate tax architecture, OECD BEPS Pillar Two compliance, and IAS 12 deferred tax accounting.€750 Million Consolidated Revenue Scope15% Minimum Global Minimum Tax (GMT)IAS 12 Para 4A Mandatory Deferred Tax Exception200+ Data Points Compliance Systems Load"The OECD / G20 Inclusive Framework on BEPS released Model Global Anti-Base Erosion (GloBE) rules under Pillar Two. These Model Rules stipulate a 'common approach' for a Global Minimum Tax (GMT) @ 15% on a country-by-country basis for multinational enterprises (MNEs) with a turnover of more than Euro 750 million in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) in at least two of the four Fiscal Years immediately preceding the tested Fiscal Year."1. Prelude and OverviewAt the outset, it may be recalled that the Organisation for Economic Co-operation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has been continuously evolving, with a view to developing an agreement on a two-pillar approach to help address key international tax issues like (a) tax avoidance and (b) ensuring coherence of international tax rules—eventually leading to a more transparent tax environment.[1]Accordingly, in December 2021, the OECD / G20 Inclusive Framework (IF) on BEPS released Model Global Anti-Base Erosion (GloBE) rules (hereinafter called Model Rules or GloBE Rules) under Pillar Two. These Model Rules stipulate a “common approach” for a Global Minimum Tax (GMT) @ 15% on a country-by-country basis for multinational enterprises (MNEs) with a turnover of more than Euro 750 million in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) in at least two of the four Fiscal Years immediately preceding the tested Fiscal Year.The underlying objective is to have coordinated global rules that ensure that large MNEs pay an effective tax rate of at least 15% in every jurisdiction in which they operate. This was followed by additional guidance on the Model Rules (including Commentary, an Implementation Framework, and Administrative Guidance). The GloBE Rules are designed to ensure that large multinational companies pay a minimum level of tax on the income arising in each jurisdiction where they operate, irrespective of where they are headquartered. The rules are relatively very complex and will require substantial new forms of financial data that tax departments may not currently have access to (and one school of thought indicates that it may require up to 200+ new data points for each legal entity to comply with the Rules).2. Key Features of the Model GloBE RulesTurnover Scope: The GloBE rules apply to multinational groups (MNE Groups) that have revenue of Euro 750 million or more in at least two out of the last four years. "Revenue" means the revenue reported in the Consolidated Financial Statements of the Group prepared in accordance with an Acceptable Financial Accounting Standard and after adjustments required by GloBE Rules (not limited to revenue recognized in accordance with IFRS 15).Jurisdictional Blending: In-scope MNE groups must calculate their GloBE effective tax rate (ETR) for each jurisdiction where they operate.Top-Up Tax Liability: If the blended GloBE effective tax rate for all companies in a specific jurisdiction is below the 15% minimum, they will be liable to pay a top-up tax for the difference between the 15% minimum rate and their jurisdictional GloBE ETR. However, if the domestic GloBE ETR is 15% or more, no GloBE top-up tax will be payable.Primary Liability on Ultimate Parent: It is the Ultimate Parent Entity (UPE) that is primarily liable for the GloBE top-up tax in its jurisdiction. Accordingly, the group company liable for the top-up tax (e.g., the UPE) will often differ from the group company that triggered it (e.g., a low-tax subsidiary).Subject to Tax Rule (STTR): Apart from the above, GloBE Rules also introduce the Subject to Tax Rule (STTR). The STTR is a tax treaty-based rule that allows source jurisdictions to impose limited source taxation on certain cross-border intercompany transactions not subject to a minimum 9% rate of tax. STTR is a creditable tax under the GloBE Rules.3. Key Components & Operational HierarchyThe Model GloBE Rules contain two main interlocking components—the Income Inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR)—and collection operates across three sequential mechanisms:The Three-Tier GloBE Collection Hierarchy1st Preference: QDMTT'Local' Country Measure: Qualified Domestic Minimum Top-Up Tax incorporated into domestic law. Allows the host jurisdiction to collect top-up tax locally on profits earned within its borders, preventing tax leakage to foreign parent jurisdictions.2nd Preference: IIR'Parent' Country Measure: Income Inclusion Rule imposes top-up tax at the parent entity level on an ownership interest in a low-taxed foreign subsidiary where the local jurisdiction has not enacted a QDMTT.[2]3rd Preference: UTPR'Backstop' Measure: Undertaxed Payment Rule operates if low-taxed income is not brought into charge under QDMTT or IIR. Operates by denying domestic tax deductions or requiring equivalent adjustments allocated via a substance key.[3],[4]4. Step-by-Step Methodology for Computing Top-Up TaxStepComputational StageSubstantive Explanation & Methodological RulesStep 1Calculate GloBE Income (or Loss)Determined from the financial accounting net profit or loss as per the Consolidated Financial Statements of the UPE, adjusted for required GloBE additions/exclusions (excluded dividends, equity gains, stock-based compensation, and PE allocations). Intra-group items must be added back (not eliminated).Step 2Calculate Adjusted Covered TaxesSum of current income tax expenses of all constituent entities in the jurisdiction. Non-income taxes (property tax, payroll tax, VAT) are excluded. Adjusted for deferred tax movements and qualified refundable tax credits.Step 3Calculate Jurisdictional ETRDividing Adjusted Covered Taxes (Step 2) by Net GloBE Income (Step 1). All constituent entities in the jurisdiction are blended together.Step 4Calculate Top-Up Tax %Top-Up Tax % = 15% (Minimum Rate) − Jurisdictional ETR % (if ETR < 15%).Step 5Calculate Excess Profit via SBIETop-Up Tax % is applied to Excess Profit. Excess Profit = GloBE Income less Substance-Based Income Exclusion (SBIE). SBIE = 10% of eligible payroll expenses + 8% of carrying amount of eligible tangible assets (phased down to 5% each over 10 years).Step 6Calculate Top-Up Tax LiabilityExcess Profit × Top-Up Tax %, reduced by any applicable domestic QDMTT paid. Allocate to liable entities under IIR or UTPR.5. Detailed Numerical Case Study: S1 Limited & S2 LimitedConsider an MNE group operating two constituent entities (S1 Limited and S2 Limited) in a single tested jurisdiction. The following inputs and sequential calculations demonstrate how jurisdictional blending and substance carve-outs determine the net Pillar Two top-up tax liability:[5]Input Details & Financial ItemsS1 LimitedS2 LimitedJurisdictional Total1. Profit for the Year (GloBE Income)₹20,000₹20,00,000₹20,20,0002. Current Income Tax Expense₹4,000₹76,800₹80,8003. Carrying Amount of Eligible Tangible Assets₹16,00,000₹3,00,000₹19,00,0004. Eligible Payroll Expenses₹10,00,000₹10,000₹10,10,000Calculation StepDerivation FormulaQuantified Outcome5. Covered TaxesTotal of Item #2 above₹80,8006. Total GloBE IncomeTotal of Item #1 above₹20,20,0007. Blended Jurisdictional ETR(Covered Taxes / GloBE Income) = (80,800 / 20,20,000)4.00%8. Top-Up Tax Percentage15.00% (Minimum Rate) − 4.00% (Blended ETR)11.00%9. Substance-Based Income Exclusion (SBIE): • Payroll Carve-out (Article 5.3.3)10% of Eligible Payroll Expenses (10% of ₹10,10,000)₹1,01,000• Tangible Assets Carve-out (Article 5.3.4)8% of Carrying Amount of Tangible Assets (8% of ₹19,00,000)₹1,52,00010. Total Excess Profit BaseGloBE Income (₹20,20,000) − Total SBIE (₹2,53,000)₹17,67,00011. Final Top-Up Tax LiabilityExcess Profit × Top-Up Tax % = (₹17,67,000 × 11.00%)₹1,94,3706. Accounting Dilemmas & The IAS 12 AmendmentAs jurisdictions began enacting GloBE legislation, profound accounting challenges arose under IFRS / Ind AS. Stakeholders questioned whether top-up taxes fell within the scope of IAS 12 Income Taxes, whether deferred taxes had to be recognized on future top-up liabilities, and whether existing deferred tax balances required remeasurement.Narrow-Scope Amendment to IAS 12 (May 2023)To address these acute complexities, the International Accounting Standards Board (IASB) issued an urgent, narrow-scope amendment introducing a mandatory temporary exception:Paragraph 4A (Mandatory Exception): Entities are mandatorily exempted from providing for and disclosing deferred tax assets or liabilities related to Pillar Two income taxes. Entities will neither recognize nor disclose deferred tax balances arising from GloBE rules.Paragraph 88A (Application Disclosure): Entities must explicitly disclose in their notes to accounts that they have applied this mandatory exception.Retrospective & No Sunset Date: The amendment applies immediately and retrospectively under IAS 8. The IASB did not include a sunset date; the relief will remain active until standard-setters decide whether to modify or make it permanent.7. Staged Financial Statement Disclosure MandatesStatutory StageMandatory Notes to Accounts Disclosure under Amended IAS 12Stage 1: Domestic Law Enacted or Substantively Enacted, but Not Yet EffectiveDisclose known or reasonably estimable information helping users understand Pillar Two exposure at the reporting date (Paras 88C & 88D):• Qualitative Information: How the company is affected and the specific jurisdictions where exposure arises.• Quantitative Information: Indicative percentage of profits potentially subject to top-up tax and the average applicable ETR, or how the average ETR would have changed.If information is not known or reasonably estimable, disclose a statement to that effect along with progress made in assessing exposure.Stage 2: After Top-Up Tax Legislation is Fully EffectiveUnder Paragraph 88B, disclose separately in the income tax note:• Current tax expense (or income) related to Pillar Two top-up taxes.• Continue disclosure regarding application of the mandatory deferred tax accounting exception.8. Key Takeaways & Enterprise Action PlanWith major economies implementing Pillar Two starting in 2024, corporate finance and tax departments must mobilize immediately:Current Tax Expense Impact: While deferred tax accounting is temporarily frozen, current tax expenses in 2024 will be directly impacted by GloBE top-up taxes and QDMTT payments.Jurisdiction-by-Jurisdiction Tracking: MNEs must closely monitor legislative enactment timelines across all operating countries to determine when disclosure and payment liabilities trigger.IT & ERP Architecture Upgrades: Collecting over 200 required data points—including non-IFRS 15 revenue adjustments, local tax credits, and granular payroll/tangible asset allocations—demands substantial upgrades to enterprise reporting systems.Resource Allocation: Companies must allocate expanded budgets, advisory bandwidth, and internal audit controls to manage year-end reporting complexities under the amended IAS 12.Footnotes & Regulatory ReferencesThe Inclusive Framework on Base Erosion and Profit Shifting (BEPS) was established in 2016 by the OECD and G20, and currently has over 140 participating countries and jurisdictions.Under the IIR, the effective tax rate of each jurisdiction is calculated based on all consolidated companies/branches in that jurisdiction and compared against the 15% minimum rate. Top-up tax is charged to the head office.If the UPE is in a jurisdiction that has not implemented a Qualified IIR, GloBE rules provide that top-up tax is levied on the next highest entity in the ownership chain located in a jurisdiction with a Qualified IIR.Where IIR cannot be applied, top-up tax is collected by all jurisdictions implementing UTPR via a substance-based allocation key, applied as a denial of deduction or equivalent mechanism.In the numerical illustration, although S1 Limited has a standalone ETR of 20%, jurisdictional blending blends its profits and taxes with S2 Limited (3.84%), producing a blended ETR of 4.00% and triggering top-up tax across the jurisdiction.Author & Editorial Correspondence: Comments and feedback on this article may be addressed to the author at anjanikhetan@gmail.com or the ICAI Editorial Board at eboard@icai.in.
Accounting Standards
Ep. 479 — Ind AS 116 - Leases
CA Journal
· September 2026
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Ind AS 116 - LeasesAbout the AuthorCA. Paras Chadha is a Member of the Institute of Chartered Accountants of India (ICAI). He is an accounting standards specialist focusing on Ind AS and IFRS implementations, lease accounting, corporate financial reporting, and complex financial instruments.April 1, 2019 Effective Implementation DateSingle Model Universal Lessee ModelROU & Liability On-Balance-Sheet RecognitionIFRS 16 Aligned Global Accounting Parity"Indian Accounting Standard (Ind AS) 116 is a financial reporting standard that deals with accounting for leases. It is a part of the Ind AS framework, which aligns with International Financial Reporting Standards (IFRS) 16. Ind AS 116 replaces the previous standard, Ind AS 17, and became effective for annual periods beginning on or after April 1, 2019. Ind AS 116 eliminates the off-balance-sheet treatment for operating leases, requiring lessees to recognize both lease liabilities and right-of-use assets on their balance sheet."1. Introduction & Core ObjectiveInd AS 116 brings about significant changes in the accounting treatment of leases, particularly for lessees, as it eliminates the traditional operating lease off-balance-sheet treatment. The standard aims to provide more transparency in financial reporting by recognizing leases on the balance sheet and providing users of financial statements with a more accurate representation of an entity’s financial position and performance.The adoption of Ind AS 116 has a significant impact on key financial metrics such as leverage ratios (Debt-to-Equity), return on assets (ROA), and interest coverage ratios. Operating lease rental expenses are replaced by depreciation on the right-of-use asset and finance costs on the lease liability, significantly increasing EBITDA. Investors and analysts need to be aware of these changes to make accurate assessments of a company’s financial performance and risk profile.2. Key Concepts & The Lease Identification ModelA lease is defined as a contract, or part of a contract, that conveys the right to use an underlying asset for a period of time in exchange for consideration. The arrangement can be written, oral, or implied by the parties’ actions. The agreement must grant the lessee the right to control the use of an identified asset (tangible, such as property or equipment, or intangible).To comply with the definition of a lease under Ind AS 116, the following four conditions must be simultaneously satisfied:1. Explicit / Implicit SpecificationThe asset is explicitly specified in the contract or implicitly identified when made available to the customer.2. No Substantive Substitution RightsThe supplier does not have the practical ability to substitute alternative assets throughout the period of use.3. Substantially All Economic BenefitsThe customer has the right to obtain substantially all economic benefits from use of the asset throughout the period.4. Right to Direct the UseThe customer has the right to direct how and for what purpose the asset is used throughout the period of use.Ind AS 116 eliminates the distinction between finance leases and operating leases for lessees and introduces a single accounting model. However, the classification criteria for lessors remain largely consistent with the previous standard, Ind AS 17 (bifurcated into finance and operating leases).3. Lessee Recognition and MeasurementAt the commencement date, a lessee recognizes a Right-of-Use (ROU) Asset and a Lease Liability:ComponentInitial Measurement (At Commencement Date)Subsequent Measurement (Carrying Value)Lease LiabilityMeasured at the Present Value (PV) of unpaid lease payments discounted using the interest rate implicit in the lease or the lessee's Incremental Borrowing Rate (IBR):• Fixed payments (including in-substance fixed)• Variable lease payments linked to an index or rate• Exercise price of a purchase option (if reasonably certain)• Penalties for terminating the lease• Amounts expected to be payable under residual value guaranteesNote: Upfront refundable security deposits are excluded from lease payments.Amortized Cost Model:Initial Carrying LiabilityAdd: Interest accrued at Effective Interest Rate (EIR)Less: Repayment of lease liabilities (principal and interest)Lessees cannot choose to measure lease liabilities subsequently at fair value.Right-of-Use (ROU) AssetMeasured at Cost, which comprises:• Initial measurement amount of the Lease Liability• Add: Any initial direct costs incurred by the lessee• Add: Present value of dismantling and site restoration costs• Add: Prepaid lease payments made at or before commencement• Less: Any lease incentives received from the lessorCost Model (Default):Initial CostLess: Accumulated Depreciation (straight-line basis)Less: Accumulated Impairment Losses (Ind AS 36)The ROU asset may be revalued only if it belongs to a class of property, plant, and equipment revalued under Ind AS 16.4. Recognition and Measurement for LessorsParticularsFinance LeaseOperating LeaseBalance SheetDerecognize the underlying asset. Recognize a finance lease receivable equal to the net investment in the lease (PV of lease payments + unguaranteed residual value).Continue to present the underlying asset on the balance sheet. Add initial direct costs incurred to the carrying amount of the leased asset.Statement of Profit & LossApportion lease receipts between finance income and reduction of lease receivable, reflecting a constant periodic rate of return.Recognize lease income over the lease term on a straight-line basis (or another systematic basis). Recognize depreciation expense on the underlying asset.5. Determining the Lease Term & Recognition ExemptionsDetermining the Lease TermThe lease term is the non-cancellable period for which a lessee has the right to use an underlying asset, together with:Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; andPeriods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.The lease term begins at commencement date and includes any rent-free periods. Termination options held exclusively by the lessor are not considered when determining the lease term. The lessee must reassess the lease term upon the occurrence of a significant event or change in circumstances within its control.Recognition ExemptionsA lessee may elect not to apply the ROU asset and lease liability recognition requirements to:Short-Term Leases: Leases with a term of 12 months or less that do not contain a purchase option. The election is made by class of underlying asset.Low-Value Assets: Leases where the underlying asset is of low value when new (e.g., personal computers, small office furniture). The election can be made on a lease-by-lease basis. Intermediate lessors cannot claim this exemption.For exempt leases, lease payments are recognized as an expense on a straight-line basis over the lease term.6. Presentation & Disclosure Mandates"If a lessee does not present lease liabilities separately in the balance sheet, the lessee shall disclose which line items in the balance sheet include those liabilities."Balance Sheet Presentation: Lessees must present ROU assets separately from other assets, or include them within the same line item as corresponding owned assets with note disclosures. Lease liabilities must be presented separately from other liabilities.Statement of Profit and Loss: A lessee presents interest expense on lease liabilities under finance costs (Ind AS 1, paragraph 82(b)) separately from depreciation on ROU assets.Required Notes Disclosures: Additions to ROU assets; carrying amounts by class; maturity analysis of lease liabilities; depreciation by class; interest expense; short-term and low-value lease expenses; variable lease payments; and total cash outflows for leases.7. Transition Options: Full Retrospective vs. Modified RetrospectiveWhen transitioning from Ind AS 17 to Ind AS 116, entities could select one of three transition paths:Transition CriteriaFull Retrospective ApproachModified Retrospective: Option AModified Retrospective: Option BCore Accounting ApproachStandard applied retrospectively to each prior reporting period presented in accordance with Ind AS 8.Lease liability measured at PV of remaining payments using IBR at initial application. ROU asset measured as if standard applied since inception, using IBR at initial application.Lease liability measured at PV of remaining payments using IBR at transition date. ROU asset equals lease liability adjusted for prepaid/accrued rentals.Data RequirementExtensive historical contract data, original discount rates, initial direct costs, and modifications since commencement.Comprehensive lease contract history required, but discount rate determined only at initial application date. Practical expedients permitted.Requires contract details from transition date onwards only. Significant reduction in administrative effort.Complexity of QuantificationHigh complexity; every historical modification requires remeasurement of lease liability.Moderate complexity; historical modification adjustments required, but without multi-period liability remeasurement.Low complexity; prospective approach eliminates need for historical modification analysis.Impact on Opening Net WorthDifference between ROU asset and liability adjusted against opening retained earnings (impacts net worth).Difference between ROU asset and liability adjusted against opening retained earnings (impacts net worth).Neutral for Net Worth: ROU asset equals adjusted lease liability, resulting in zero opening net worth impact.Impact on Future PBTFuture P&L charge is lower as ROU asset is already heavily depreciated.Future P&L charge is generally lower compared to Option B.Future P&L charge is higher (higher depreciation and interest charges).Prior Year RestatementMandatory restatement of prior comparative periods.No restatement of comparative prior years.No restatement of comparative prior years.8. Contentious Practical Application IssuesA. Interest-Free Refundable Security DepositsInd AS 116 does not provide specific guidance on security deposits. However, under Ind AS 109, a refundable deposit qualifies as a financial asset. If the time value of money is material, the deposit must be discounted to present value at initial recognition. The difference between the nominal transaction amount and its present value is recognized as prepaid lease rent and added to the ROU Asset, which is depreciated over the lease term. If payable in installments, future tranches are recognized as financial liabilities.B. Goods and Services Tax (GST) TreatmentGST is a destination-based consumption tax. Even though the lessee pays GST to the lessor, it does not form part of the lease consideration because the lessor acts merely as a collection agent for the government. Consequently, GST should not be included in measuring lease liabilities or ROU assets. If eligible for input tax credit (ITC), it is recorded as a balance with tax authorities; if ineligible, it is expensed in P&L.C. Reimbursed Property TaxesThe legal obligation to pay municipal property taxes rests on the lessor as legal owner. When a lessee reimburses property taxes, it compensates the lessor for asset utilization. Therefore, reimbursing property tax aligns with the definition of a lease payment. Since property tax levies vary based on municipal assessments and are not tied to an index or interest rate, they constitute variable lease payments recognized in P&L as and when incurred.D. Operating Lease Escalations Linked to InflationIn the books of a lessor, regardless of whether contractual lease escalations are structured to match general inflation indices, the lessor must recognize lease income on a straight-line basis over the lease term.9. Comparison Between Ind AS 116 and AS 19HeadInd AS 116AS 19Lease ModelSingle lease accounting model for lessees.Dual lease accounting model for lessees (finance vs. operating lease).Lease DefinitionControl model introduced into lease definition.No control model exists (risks and rewards model).Lease ExpenseFront-loaded: interest expense higher in initial years, lower in later years.Straight-line recognition of lease rentals over lease term.Lessor Initial Direct CostsAdded to carrying amount of leased asset; expensed over lease term.Recognized immediately as an expense in P&L when incurred.Right-of-Use (ROU)Concept of "Right to control the use" introduced for lessees.The concept of "Right to use" does not exist.10. ConclusionInd AS 116 is a comprehensive standard that brings about a fundamental change in lease accounting, aligning it more closely with economic reality. It aims to enhance comparability and transparency in financial reporting by requiring entities to recognize and measure leases on the balance sheet. With a clearer picture of lease-related obligations and assets, stakeholders—including investors, creditors, and analysts—can make more informed decisions regarding an entity’s financial health, true leverage, risk exposure, and overall operational performance.Author & Editorial Correspondence: Comments and queries regarding this article may be addressed to the author at paraschadha.ca@gmail.com or the ICAI Editorial Board at eboard@icai.in.
Financial Market
Ep. 480 — Indian Stock Market Efficiency: Evidence from Banking Sector
CA Journal
· September 2026
00:00
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Indian Stock Market Efficiency: Evidence from Banking SectorMallesha LResearch Scholar specializing in financial econometrics, empirical asset pricing, time-series analysis, and market efficiency.Archana H.N.Academician focusing on banking sector dynamics, capital market behavior, statistical modeling, and corporate finance.2,799 Obs Daily Observations (2012–2023)H = 0.5044 R/S Hurst Exponentp = 0.0587 Runs Test IndependenceWeak-Form Market Efficiency Confirmed"The Indian banking sector plays a vital role by fostering economic growth. Evaluating the efficiency of this sector is of paramount importance. This study investigated the efficiency of the Indian stock market using the S&P BSE BANKEX index as a sample. In conclusion, most of the tests confirm that the S&P BSE BANKEX returns follow random walk behaviour indicating that the Indian stock market is efficient. In this efficient market, gaining abnormal profit is challenging."1. IntroductionIn recent years, the Indian stock market has gained recognition as a rapidly growing and influential financial market on a global scale (Mallesha & Archana, 2023). Consequently, researchers have turned their attention towards examining the efficiency of the Indian stock market. This study aims to contribute to the existing body of literature by analysing whether the banking sector precisely follows a random walk pattern.According to the Random Walk Hypothesis, stock prices reflect all available information and exhibit a random pattern, rendering it impossible to predict future price movements based on historical data (Fama, 1965, 1970). If the banking sector aligns with this hypothesis, it suggests that the market is efficient, and any attempts to outperform it through stock selection or market timing would be futile. On the other hand, if the hypothesis is refuted, it indicates the presence of predictable patterns or inefficiencies in the market, which presents opportunities for investors to achieve superior returns (Dsouza & Mallikarjunappa, 2015).The S&P BSE BANKEX index, a sectoral index of the Bombay Stock Exchange (BSE) of India, represents the performance of the banking sector within the country. The banking sector plays a critical role in the Indian economy as a key financial intermediary facilitating economic growth (Lodha & Kumawat, 2022). Understanding the behaviour of the S&P BSE BANKEX index holds paramount importance for investors, policymakers, and market participants, as it provides insights into the overall health and stability of the Indian banking sector (Hossain & Maitra, 2020).2. Literature ReviewThe study builds upon prior research conducted by Kalsie (2012) on weak-form market efficiency for the National Stock Exchange (NSE), which utilised run tests with 30-day average prices from 2001 to 2007. Kushwah et al. (2013) also examined the weak form of market efficiency in the NSE using run tests and concluded that the Indian stock market is efficient in its weak form.On the other hand, Kumar & Kumar (2017) found that the real estate sector in India was not functioning optimally in terms of weak-form efficiency. Chavarkar and Nayak (2022) investigated the efficiency of Indian pharmaceutical stocks in both pre-pandemic and pandemic periods. By building on these prior studies and focusing on whether the Indian banking index follows a random walk hypothesis, this research seeks to shed more light on the efficiency of the Indian capital market.3. Research Methodology & Econometric TestsThe study utilised secondary data as the basis of investigation. The sample comprised daily closing prices of the S&P BSE BANKEX index. The study was conducted over a substantial period from April 2012 to July 2023, encompassing 2,799 data points obtained from BSE India. The closing prices were transformed into natural logarithmic returns ($R_t = \ln(P_t / P_{t-1})$) to facilitate time series analysis.Several robustified statistical tests were applied using RStudio (version 2023.06.1-524):Wald–Wolfowitz Runs Test: Developed in 1940, this non-parametric test determines whether consecutive price changes are mutually independent. The null hypothesis ($H_0$) states that price changes are independent and move at random.Automatic Portmanteau Test: Formulated by Escanciano & Lobato (2009), this robustified test evaluates whether the time series is devoid of serial correlation across data-dependent lags, remaining resilient against outliers and heavy tails.Automatic Variance Ratio Test (AVR): Formulated by Choi (1999) to improve upon the classical Lo & MacKinlay (1989) test. It employs a data-dependent procedure to determine optimal $q$ and $p$, testing the null hypothesis of zero autocorrelation by comparing multi-period variance to single-period variance (expecting a ratio of 1 for a random walk).Rescaled Range (R/S) Hurst Exponent: Introduced by Hurst in 1951 to analyze long-range dependence:$0 \le H < 0.5$: Inefficient market; anti-persistent, mean-reverting behaviour with negatively correlated returns.$H = 0.5$: Efficient market; random Brownian motion, uncorrelated returns, memoryless process.$0.5 < H \le 1$: Low market efficiency; persistent, trend-reinforcing behaviour with positively correlated returns.4. Empirical Results & DiscussionsA. Descriptive Statistics & Normality TestingDescriptive StatisticS&P BSE BANKEX Daily Return SeriesMean ($\mu$)0.0005Standard Deviation ($\sigma$)0.0150Skewness-0.6947Excess Kurtosis12.9016Minimum Return-0.1840 (-18.40%)Maximum Return0.1017 (+10.17%)Jarque-Bera Test Statistic19,672Jarque-Bera $p$-Value0.0000Total Observations ($N$)2,799As depicted in Table 1, the return distribution is negatively skewed (-0.6947), indicating a longer left tail and higher probability of extreme negative returns. The high excess kurtosis (12.9016) reflects a leptokurtic distribution with fat tails and severe outliers. The Jarque-Bera test ($p = 0.0000$) decisively rejects the null hypothesis of normality at the 1% significance level.B. Wald-Wolfowitz Runs Test for IndependenceRuns Test ParameterS&P BSE BANKEX ResultTotal Observed Runs1,350Positive Returns ($n_1$)1,399Negative Returns ($n_2$)1,399Total Sample Sequence ($n$)2,798Test Statistic ($Z$)-1.8908Asymptotic $p$-Value0.0587Table 2 displays a $p$-value of 0.0587, which exceeds the conventional significance threshold of 0.05. This indicates a 5.87% probability that the observed sequence occurred by pure chance under the random walk null hypothesis. Consequently, the null hypothesis of independence cannot be rejected, confirming that successive daily price movements in BSE BANKEX are independent and move at random.C. Autocorrelation Analysis: Portmanteau & Variance Ratio TestsAutocorrelation MethodologyTest Statistic$p$-ValueInference at $\alpha = 0.05$Automatic Portmanteau Test3.06560.0800No serial correlation; $p > 0.05$.Automatic Variance Ratio Test (AVR)1.15670.2560Random walk validated; $p > 0.05$.The probability values for both the automatic portmanteau test ($p = 0.0800$) and automatic variance ratio test ($p = 0.2560$) comfortably exceed 0.05. This demonstrates that S&P BSE BANKEX returns are free from linear autocorrelation across time lags, rejecting predictable serial dependence.D. Long-Range Memory: R/S Hurst Exponent AnalysisFractal DimensionS&P BSE BANKEX EstimateR/S Hurst Exponent ($H$)0.5044The estimated Hurst exponent of $H = 0.5044$ is remarkably close to the theoretical benchmark of 0.50. This establishes that the banking return series exhibits no long-term persistence or memory, confirming that price evolution conforms precisely to a geometric Brownian motion random walk.5. Conclusion & Policy ImplicationsThe comprehensive empirical findings across all four robustified tests confirm that the S&P BSE BANKEX index adheres strictly to the Random Walk Hypothesis, establishing that the Indian banking stock market is weak-form efficient. Because past price changes and historical volume patterns provide zero predictive power regarding future return trajectories, active market timing strategies, chartist heuristics, and technical analysis cannot systematically generate abnormal alpha.These findings provide vital insights for investors, institutional asset managers, and regulators. Investors are best advised to utilize low-cost passive index funds or fundamental credit-risk valuation models rather than technical momentum trading. Nevertheless, the authors acknowledge that the study is limited by its exclusive focus on the banking sector index. Further research across diverse sectoral indices and broader equity market capitalizations is recommended to enrich the empirical understanding of Indian stock market efficiency.ReferencesChavarkar, S. S., & Nayak, K. K. M. (2022). Analysis of Randomness in the Pharmaceutical Sector of Indian Stock Market: Pre- and During Covid-19 Period. Orissa Journal of Commerce, 43(3), 160–175.Dsouza, J. J., & Mallikarjunappa, T. (2015). Does the Indian Stock Market Exhibit Random Walk? Paradigm, 19(1), 1–20.Escanciano, J. C., & Lobato, I. N. (2009). An automatic portmanteau test for serial correlation. Journal of Econometrics, 151(2), 140–149.Fama, E. F. (1965). The Behavior of Stock-Market Prices. The Journal of Business, 38(1), 34–105.Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25(2), 383–417.Hossain, T., & Maitra, B. (2020). Monetary Policy, Trade Openness and Economic Growth in India Under Monetary-targeting and Multiple-indicator Approach Regimes. Arthaniti: Journal of Economic Theory and Practice, 19(1), 108–124.Kalsie, A. (2012). Study of the Weak Form of Market Efficiency: An Empirical Study of Indian Stock Market. FIIB Business Review, 1(2), 37–45.Kumar, S., & Kumar, L. (2017). Market Efficiency in India: An Empirical Study of Random Walk Hypothesis of Indian Stock Market NSE Midcap. SSRN Electronic Journal.Kushwah, S. V., Negi, P., & Sharma, A. (2013). The Random Character of Stock Market Prices. Journal of Business and Management, 6(1), 10–14.Lo, A. W., & MacKinlay, A. C. (1989). The size and power of the variance ratio test in finite samples: A Monte Carlo investigation. Journal of Econometrics, 40(2), 203–238.Lodha, S., & Kumawat, E. (2022). Impact of Lockdown Announcement on Indian Banking Sector: An Event Study Approach. Orissa Journal of Commerce, 43(3), 29–40.Mallesha, L., & Archana, H. N. (2023). Impact of Hindenburg Research Report on the Stock Prices of Adani Group Companies: An Event Study. Asia-Pacific Journal of Management Research and Innovation, 19(1), 40–46.Roy, S. (2018). Testing Random Walk and Market Efficiency: A Cross-Stock Market Analysis. Foreign Trade Review, 53(4), 225–238.Wald, A., & Wolfowitz, J. (1940). On a Test Whether Two Samples are from the Same Population. The Annals of Mathematical Statistics, 11(2), 147–162.Author & Editorial Correspondence: Comments and queries regarding this research paper may be addressed to the authors at malleshnaikmalla@gmail.com or the ICAI Editorial Board at eboard@icai.in.
Sustainability
Ep. 481 — Green Finance – The Emerging Future
CA Journal
· September 2026
00:00
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Comparative Analysis of MSME among QUAD NationsAn In-Depth Empirical Examination of MSME / SME Ecosystems Across India, Australia, Japan, and the USA: Definitional Standards, GDP Contributions, Employment Shares, Export Dynamics, and Strategic Trade Imperatives63.4 MIndian MSMEs (Largest Absolute)110 MIndian MSME Workforce45.03%Share of MSMEs in Indian Exports30.5%Indian MSME Contribution to GDPIn this era of globalization, Micro, Small, and Medium Enterprises (MSMEs/SMEs) are the backbone and the most flexible sector of every economy, especially for developing nations like India. This paper presents an inter-comparative analysis of the MSME sector among the Indo-Pacific-based QUAD group—comprising India, Australia, Japan, and the United States of America. Utilizing comprehensive secondary data across four core parameters—employment generation, GDP share, export contribution, and enterprise density—the findings reveal that India, characterized by a massive population and a prominent informal economy, must dramatically elevate the systemic role of its MSMEs to drive sustainable economic expansion and achieve its $5-trillion economic ambition.Introduction: The Strategic Emergence of the Indo-Pacific QUADThe Indo-Pacific region has developed into a pre-eminent hub for global geopolitics and geo-economics. In recent years, India's strategic and commercial significance in global affairs has expanded exponentially. To deepen multilateral cooperation, four major Indo-Pacific powers coalesced into the regional diplomatic and strategic coalition known as the QUAD (comprising India, Japan, Australia, and the USA).Across all four economies, MSMEs serve as indispensable economic pillars that complement large multinational corporations. They act as the largest aggregate employment generators, promote decentralized industrialization, and play a vital role in reducing regional economic disparities and wealth inequities. Within the QUAD framework, India stands out as the sole developing and rapidly industrializing economy, while Australia, Japan, and the USA represent highly mature, industrialized nations. Consequently, understanding how each member state defines, structures, and fosters its small business sector offers profound lessons for Indian economic policy.Definitional Architectures Across QUAD NationsBecause economic scales and industrial structures differ substantially across the QUAD members, each nation adheres to distinct quantitative criteria—ranging from employee headcounts to balance-sheet capital ceilings and turnover thresholds—to classify enterprises.1. India: The Composite Investment & Turnover FrameworkIn India, MSMEs are governed by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, as substantially amended via Government of India Gazette Notification S.O. 2119(E) dated June 26, 2020. The revised framework eliminated the historic distinction between manufacturing and services, establishing unified composite criteria based on capital investment in plant and machinery/equipment and annual turnover:Type of EnterpriseMicro EnterpriseSmall EnterpriseMedium EnterpriseManufacturing & Services Sector (Composite Criteria)Investment < ₹1 Crore ANDTurnover < ₹5 CroreInvestment < ₹10 Crore ANDTurnover up to ₹50 CroreInvestment < ₹50 Crore ANDTurnover up to ₹250 Crore2. Australia: Headcount & Revenue ClassificationsIn Australia, small and medium enterprises are commonly designated as SMEs. The Australian Bureau of Statistics (ABS) categorizes enterprises strictly by headcount:Micro Enterprise: 0 to 4 employees (including sole proprietorships and non-employing entities).Small Enterprise: 5 to 19 employees.Medium Enterprise: 20 to 199 employees.Large Enterprise: 200 or more employees.Concurrently, the Australian Taxation Office (ATO) defines an SME based on annual turnover, considering any entity generating less than $2 million annually as a micro-business, while small enterprises generate between $2 million and $10 million.3. Japan: Sector-Specific Capital & Staff HeadcountsIn Japan, the legal definition of an SME is codified under the SME Basic Law of 1999. Japanese regulations implement a dual-parameter threshold comprising either paid-in capital size or full-time personnel count, differentiated across four broad industry sectors:Industry SectorMaximum Capital Size (in Millions of Yen)Maximum Full-Time Staff HeadcountManufacturing & Other IndustriesCapital ≤ ¥300 MillionStaff ≤ 300 EmployeesWholesale TradeCapital ≤ ¥100 MillionStaff ≤ 100 EmployeesRetail TradeCapital ≤ ¥50 MillionStaff ≤ 50 EmployeesServices SectorCapital ≤ ¥50 MillionStaff ≤ 100 EmployeesUnder broad Japanese statistical surveys (Berisha & Pula, 2015), micro enterprises employ 4–9 persons, small enterprises employ 10–49, medium enterprises employ 50–249, and large entities employ 250 or more workers.4. United States of America: SBA Industry StandardsIn the United States, the Small Business Administration (SBA) and the US International Trade Commission establish small business eligibility based on North American Industry Classification System (NAICS) codes. For general statistical grouping, enterprises with 1–9 workers are micro, 10–99 are small, 100–499 are medium, and 500+ employees constitute large businesses. For federal contracting and financing, small businesses encompass enterprises with 250 to 1,500 employees or average annual receipts spanning $750,000 to $38.5 million depending on the sub-industry.Literature Review: Geopolitics & Trade OpportunitiesScholarly inquiries into the QUAD coalition and MSME internationalization emphasize the untapped potential of economic integration:Srivastava, Kumar, & De (2022)Observed that the QUAD alliance has focused disproportionately on defense and maritime security. However, computable general equilibrium (CGE) trade modeling demonstrates that deeper trade partnerships within the Indo-Pacific bloc yield higher relative welfare gains for member states compared to legacy frameworks like ASEAN-10, RCEP, or the GCC.Prakash, Pradhan, & Das (2012)Investigated Indian manufacturing SMEs, revealing an over-reliance on imported technology rather than indigenous R&D. They argued that governmental trade promotion bodies must connect MSMEs with research centers and global market intelligence to offset small-firm size disadvantages.Vemsani (2020)Emphasized that the QUAD represents a formidable demographic and economic bloc of modern democracies. To sustain long-term regional stability, the alliance must institutionalize commercial agreements that accelerate merchandise trade and supply chain exchanges among small business allies.Detailed Country Profiles: Structure & ContributionsIndia: Employment Engine of the EconomyAccording to the 73rd round of the National Sample Survey (NSS) and the Ministry of MSME Annual Report 2021–22, India hosts over 63.38 million (633.88 lakh) MSME units, providing livelihoods to over 110.98 million individuals. Small businesses account for 95% of total industrial enterprises in India and contribute ~36% of total manufacturing output.Sectoral ClassificationNumber of Enterprises (in Lakhs)Sectoral Share (%)Workforce Distribution (in Lakhs)Trading Enterprises230.3536%• Micro: 1,076.19 Lakhs (96.9%)• Small: 31.95 Lakhs (2.9%)• Medium: 1.75 Lakhs (0.2%)• Total: 1,109.89 Lakhs (~111 Million)Other Services206.8833%Manufacturing Units196.6531%Total633.88100%1,109.89 LakhsFiscal YearShare of MSMEs in Total GDP (%)Share of MSMEs in Total National Exports (%)2018–1930.50%—2019–2030.50%—2020–2126.83%49.35%2021–22—45.03%2022–23 (Up to August 2022)—42.67%Australia: High Value-Added & Export DominanceIn Australia, SMEs represented 2,418,037 business units in 2019–20, accounting for 99.8% of all private enterprises. According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), small enterprises (0–19 workers) employ over 5 million Australians (42% of the workforce) and generate $438 billion in value-added (33% of Australian GDP). Non-employing sole traders make up 58.7% of all firms. In aggregate, MSMEs generate 54% of Australia's industry Gross Value Added (GVA) and account for 59% of small business goods and services exporters.United States: Entrepreneurial DynamismAccording to the US Small Business Administration (2022), the United States is home to 33.2 million small businesses (0–499 employees), constituting 99.9% of all American firms. These entities employ 61.7 million individuals (46.4% of the US private workforce). Approximately 27 million firms (80%) are non-employer solopreneurs. In 2020, American SMEs exported $413.3 billion worth of merchandise (32.6% of identifiable exports), with 264,366 small businesses representing 97.3% of all US exporting companies. The US Office of Advocacy calculates that small businesses generate 44% of total US economic GDP.Japan: High Employment & Industrial CraftsmanshipData from the Japan Finance Corporation and the 2020 White Paper on SMEs (METI) indicate that SMEs comprise 99.7% of all Japanese business establishments (3.58 million units) and employ 32.0 million individuals—accounting for 68.8% of the private workforce. SMEs generate 53% of Japan's manufacturing and commercial value-added GDP. However, direct export participation among Japanese SMEs stands at 21.4% (6.2 trillion Yen), reflecting heavy domestic orientation and indirect export through large multinational Keiretsu trading houses.Inter-Comparative Analysis Among QUAD MembersSynthesizing secondary data across the four nations highlights major structural variances across the QUAD alliance:Share of MSME in National Exports (%)Australia59.0% India45.03% United States32.6% Japan21.4% Share of MSME in Total GDP (%)Australia54.0% Japan53.0% United States44.0% India30.5% Share of MSME in Total Employment (%)Japan68.8% Australia66.0% United States46.4% India40.0% Total Absolute MSMEs (in Millions)India63.4 M United States33.2 M Japan3.58 M Australia2.4 M Critical Challenges & Strategic Opportunities for IndiaThe inter-comparative empirical data yields vital insights into India's structural development challenges:The Employment Paradox: While Indian MSMEs employ an astounding 110 million people (the largest absolute workforce in the QUAD), this accounts for only 40% of India's total labor force. In contrast, Japanese and Australian SMEs absorb 68.8% and 66% of their national workforces respectively. This highlights the substantial informal agricultural labor surplus in India that has yet to transition into organized industrial and service MSMEs.The GDP Value-Addition Gap: Indian MSMEs contribute ~30.5% to national GDP, compared to 54% in Australia and 53% in Japan. This reflects lower capital intensity, micro-enterprise fragmentation, and technological deficits across Indian manufacturing units.Enterprise Density: While India has 63.4 million units in absolute numbers, MSMEs represent only 95% of registered business entities, whereas in Australia, Japan, and the USA, SMEs account for 99.7% to 99.9% of all enterprises. This indicates a high proportion of informal, unregistered enterprises that must be integrated into the formal economy.India's Initiatives & Policy Alignment with the QUAD VisionTo achieve the economic potential envisioned by the QUAD alliance, India has introduced foundational policy reforms:Promoting Women EntrepreneurshipIndia is actively expanding institutional credit, incubator support, and digital market access for women entrepreneurs, ensuring equitable socio-economic representation and harnessing untapped human potential.Sustainable Cluster InfrastructureStrengthening industrial parks, dedicated freight corridors, plug-and-play manufacturing facilities, and simplifying digital regulatory compliance to bolster the ease of doing business.Comprehensive Skill DevelopmentUpgrading Industrial Training Institutes (ITIs), introducing National Skill Qualification Framework (NSQF) vocational modules, and improving technical competencies to enhance product finishing, branding, and export acceptance.Actionable Policy Suggestions for Indian MSMEsBenchmarking Quality with Low-Cost Innovation: The other QUAD members represent advanced industrialized nations with established global brand equity. Indian MSMEs face stiff competition and non-tariff quality barriers. Promoting frugal innovation combined with zero-defect quality assurance is critical to prevent product rejection in Western markets.Adopting Sustainable & Eco-Friendly Production: Indian MSME clusters must transition to energy-efficient manufacturing, integrate information and communications technology (ICT), adopt renewable mini-grids, and minimize industrial waste. Green manufacturing is essential to satisfy international carbon border regulations (e.g., EU CBAM) and capture green global procurement orders.Expansion of Technical Training Institutes: Multiply the number of specialized ITIs and technological incubation centers, providing workers with certified training in robotics, digital design, and precision tooling.Strengthening QUAD B2B Trade Agreements: Formalize dedicated SME trade chapters within QUAD trade agreements, establishing direct B2B digital corridors, harmonized customs clearances, and mutual standard recognitions between Indian producers and buyers in Australia, Japan, and the US.ConclusionAmong all QUAD members, India boasts the third-largest nominal GDP but records the lowest per capita income. This empirical reality highlights the long developmental path ahead for the nation. As this inter-comparative analysis illustrates, India cannot achieve its $5-trillion economic milestone without dramatically boosting MSME productivity, increasing small business GDP contribution from 30.5% toward the 50%+ benchmarks set by Japan and Australia, and raising MSME employment absorption beyond 40%.By fostering active multilateral collaboration within the Indo-Pacific QUAD—sharing technological innovations, facilitating cross-border investment, harmonizing quality certifications, and expanding market access—all member nations can generate positive economic externalities, build resilient supply chains, and foster inclusive, sustainable prosperity across the Indo-Pacific region.About the AuthorSKSunil KumarAcademician & Economic ResearcherSunil Kumar is an academician specializing in applied economic research, international trade agreements, and MSME industrial policy. His research investigates the macroeconomic performance of small businesses, comparative trade policies within the Indo-Pacific QUAD alliance, and strategies for accelerating export competitiveness among Indian micro and small enterprises.References & Bibliography[1] Berisha, G., & Pula, J. S. (2015). Defining Small and Medium Enterprises: a critical review. Academic Journal of Business, Administration, Law and Social Sciences, 1(1).[2] Biswas, M. A. (2015). Opportunities and Constraints for Indian MSMEs. International Journal of Research (IJR), 2(1).[3] Connolly, E., Norman, D., & West, T. (2012). Small Business: An Economic Overview. Reserve Bank of Australia Small Business Conference.[4] Ghosh, N. (2021). Brass Tacks: Unpacking the Indo-Pacific Template. Observer Research Foundation (ORF) Occasional Paper.[5] Gilfillan, G. (n.d.). Definitions and data sources for small business in Australia: a quick guide. Parliament of Australia Research Paper.[6] Kelly Main & Cassie Bottorff. (2022). Small Business Statistics of 2023. Forbes Advisor.[7] Prakash, J., Prakash Pradhan, J., & Das, K. (2012). Exports by Indian Manufacturing SMEs: Regional Patterns and Determinants. Munich Personal RePEc Archive (MPRA), Paper No. 43491.[8] Srivastava, A., Kumar, S., & De, M. P. (2022). Ex-ante evaluation of India’s trade alliance with Indo-Pacific region: A general equilibrium analysis (Working Paper No. 211). Centre for Regional Trade (CRT).[9] Vemsani, L. (2020). Connectivity and the Quad Powers: Revisiting History and Thought. Journal of Indo-Pacific Affairs.[10] Yoshimura, T., & Kato, R. (n.d.). The Policy Environment for Promoting SMEs in Japan: Introduction and Context of SME Development. Japan International Cooperation Agency (JICA).Sources: MSME Annual Report 2021-22 (GOI); ABS; ASBFEO; METI SME Agency; US SBA.Author Contact: sunilsahu.sahu6@gmail.com | eboard@icai.in
Sustainability
Ep. 482 — The Role of Finance and ESG Leaders in Indian Context
CA Journal
· September 2026
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The Role of Finance and ESG Leaders in Indian ContextExploring the Strategic Collaboration, Skill Complementarity, Capital Allocation Dynamics, and Regulatory Mandates Uniting CFOs and Sustainability Executives Under the SEBI BRSR FrameworkTop 1,000Listed Entities Mandated for BRSRTop 150Entities Subject to BRSR Core AssuranceApril 1, 2024BRSR Reasonable Assurance Effective Date75%Value Chain Coverage ThresholdImplementing Environmental, Social, and Governance (ESG) practices is no longer an ancillary public relations endeavor; it has evolved into a strategic necessity for safeguarding corporate survival, competitive positioning, and sustainable capital access in India. This article explores the vital collaboration between Finance Leaders and ESG Leaders—who possess specialized knowledge of sustainability and climate change—demonstrating how combining financial acumen with environmental and social stewardship enables corporate India to bridge strategy with real-world impact.The Emerging ESG Landscape in the Indian EconomyESG factors are increasingly gaining traction in India as organizations recognize the importance of sustainable and responsible business practices. With a diverse and rapidly developing economy, India faces unique environmental and social challenges—ranging from acute atmospheric pollution, industrial water stress, and vulnerable monsoon agriculture, to wide demographic disparities and income inequality. These localized dynamics make the integration of ESG principles crucial for long-term corporate success.In India, regulatory bodies such as the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) have introduced comprehensive guidelines and regulations to enhance corporate governance practices. By adhering to these guidelines and establishing strong governance structures, Indian companies can inspire investor confidence, tap into global sustainable debt pools, and attract patient, long-term capital.The Business Responsibility and Sustainability Reporting (BRSR) FrameworkThe Business Responsibility and Sustainability Reporting (BRSR) framework is a landmark regulatory initiative by SEBI aimed at promoting transparent sustainability reporting and disclosure among Indian corporations. Introduced by SEBI in 2021, the BRSR framework mandates the top 1,000 listed companies in India (by market capitalization) to disclose their sustainability performance as part of their statutory annual reports.The framework aligns seamlessly with globally recognized sustainability reporting standards, including the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), and the United Nations Sustainable Development Goals (SDGs). This harmonization enables Indian enterprises to communicate their ESG credentials effectively to both domestic regulators and international institutional allocators.Enhanced TransparencyBRSR encourages granular disclosure of sustainability practices, operational metrics, and targets. This enables institutional investors, rating agencies, and credit institutions to make informed capital allocation decisions and evaluate the company's real ESG risk exposure.Improved Stakeholder EngagementBy reporting transparently on ESG parameters, organizations foster trust and long-term relationships across their entire stakeholder ecosystem—including shareholders, institutional customers, supply-chain vendors, employees, local communities, and regulatory bodies.Investor ConfidenceComprehensive BRSR disclosures provide global fund managers and green bond underwriters with verifiable data on climate mitigation and workplace safety, allowing capital allocators to align their portfolios with ESG mandates and lower overall corporate borrowing costs.Competitive AdvantageCompanies proactively embracing BRSR gain a decisive edge over laggards. Sustainable credentials attract socially responsible investment (SRI) funds, bolster customer brand loyalty, enhance brand equity, and contribute directly to higher enterprise valuations."Governance plays a critical role in building trust and maintaining the integrity of organizations. Strong corporate governance practices ensure accountability, transparency, and ethical conduct."The Tripartite Pillar Dynamics: E, S, and G in Indian ContextUnderstanding the multi-dimensional scope of ESG requires examining each individual pillar through the lens of India's unique developmental realities:Environmental Factors: The modern world faces unprecedented environmental threats, including air and water pollution, soil degradation, industrial deforestation, and global climate disruption. India's commitments under the Paris Climate Agreement—including reaching Net Zero by 2070 and generating 50% of electric power from non-fossil sources by 2030—and its alignment with the UN SDGs emphasize the urgency of adopting sustainable operational practices. Indian companies can lead by reducing their carbon footprint through renewable energy adoption, investing in energy-efficient industrial equipment, implementing circular waste management, conserving water through Zero Liquid Discharge (ZLD) technologies, and protecting biodiversity.Social Factors: India's socio-economic landscape is characterized by diverse demographics, broad income disparities, and social inequalities. ESG practices offer organizations an opportunity to address these challenges constructively. Companies can prioritize internal employee welfare by guaranteeing living wages, safe working environments, equal career advancement opportunities, gender diversity, and ongoing skill development. Beyond direct corporate walls, organizations must engage constructively with local communities, respect indigenous land rights, deploy meaningful CSR interventions, and assess the broader social ramifications of business decisions.Governance and Ethics: Corporate governance serves as the foundation of institutional integrity. Strong governance ensures accountability, operational transparency, and ethical business conduct. Core pillars include safeguarding board independence, eliminating conflicts of interest, aligning executive remuneration with long-term sustainable milestones, maintaining internal accounting controls, and enforcing robust enterprise risk management (ERM) frameworks.Complementary Leadership: The Finance Leader & The ESG LeaderThe integration of ESG factors into corporate strategy requires the close union of two historically disparate executive disciplines: Finance and Sustainability. Neither function can execute a successful ESG transition in isolation:"ESG leaders specialize in understanding the environmental, social, and governance landscape, as well as the evolving expectations of the stakeholders."The Role of Finance Leaders (CFOs): Finance leaders manage capital resources, assess liquidity, optimize balance sheets, and evaluate investment opportunities. Today, their mandate extends far beyond traditional financial ratios. By embedding ESG metrics into financial models, CFOs can quantify the tangible impact of environmental and social risks on corporate performance. They allocate capital to green capex, assess the commercial feasibility of sustainability initiatives, structure green credit lines, and evaluate the financial returns of energy-transition projects. Importantly, the CFO's role has expanded to ensure that non-financial data collected across operations and supply chains satisfies statutory audit standards.The Role of ESG Leaders (CSOs): ESG leaders possess specialized expertise in climate science, regulatory frameworks (BRSR, GRI, ISSB, TCFD), and stakeholder expectations. They formulate overarching sustainability roadmaps, establish carbon-abatement targets, and monitor corporate performance against ESG metrics. By collaborating cross-functionally, ESG leaders ensure that environmental and social responsibilities are embedded into daily operations rather than treated as a superficial marketing overlay.Core Synergies in Operational ExecutionFocus AreaRole of Finance LeadersRole of ESG LeadersIntegrated Business ImpactCapital AllocationEvaluates cash flows, WACC, financial ROI, and debt financing structures for sustainability capex.Identifies viable decarbonization tech, renewable energy alternatives, and emission-reduction assets.Optimal capital allocation balancing short-term liquidity with long-term ESG value creation.Risk ManagementQuantifies financial downside, potential asset write-offs, credit rating impacts, and debt covenants.Assesses acute physical climate hazards, emerging regulatory penalties, and supply chain vulnerabilities.Comprehensive risk modeling that protects balance sheets from stranded assets and climate litigation.Reporting & AssuranceProvides ledger reconciliation, internal control structures, and statutory financial data.Gathers Scope 1, 2, and 3 emission data, human rights metrics, and environmental KPIs.Transparent, auditable BRSR reports capable of securing reasonable assurance from external auditors.Corporate CultureLinks executive performance incentives and departmental budgets to sustainability milestones.Drives organizational awareness, ethical alignment, and stakeholder engagement.Instills sustainability directly into the corporate DNA, moving beyond tick-box compliance.Overcoming Key Implementation ChallengesIntegrating ESG into financial and operational systems involves significant challenges: internal skepticism, data fragmentation, resource constraints, and methodological hurdles in valuing environmental impacts. Finance and ESG leaders can resolve these challenges through targeted collaborative strategies:Education and Awareness: Finance leaders can validate the strategic business case for ESG by demonstrating how sustainable practices reduce energy expenses, eliminate regulatory fines, and lower borrowing spreads, dispelling the myth that ESG is purely a cost center.Enhancing Data Collection and Analytics: Finance and ESG teams must partner with IT and operations to deploy automated data capture mechanisms. Applying rigorous accounting controls to non-financial data eliminates inaccuracies and ensures readiness for statutory verification.Navigating Evolving Regulatory Mandates: Cross-functional collaboration ensures that organizations maintain agility in adapting to fast-moving SEBI mandates, carbon border taxes (e.g., EU CBAM), and international sustainability reporting baselines (IFRS S1 & S2).Recent Regulatory Developments: SEBI's BRSR Core & Assurance Glide PathIn a landmark regulatory advancement, the Securities and Exchange Board of India (SEBI) expanded the Business Responsibility & Sustainability Reporting (BRSR) framework to introduce BRSR Core—a focused subset of key performance indicators comprising quantifiable metrics across environmental, social, and governance domains.SEBI introduced mandatory assurance requirements utilizing a structured glide path model:Starting in 2024 (effective April 1, 2024), the top 150 listed entities are mandated to obtain reasonable assurance on their BRSR Core disclosures.The requirement progressively expands to encompass the top 250 entities, and subsequently the top 1,000 listed entities.Crucially, the directive requires disclosures and subsequent assurance covering the value chain of listed entities (focusing on the top 75% of purchases and sales by value), bringing MSMEs and supply-chain vendors into the sustainability compliance architecture.This regulatory milestone firmly elevates sustainability assurance to the same level of legal and operational rigor as statutory financial auditing, requiring finance and ESG leaders to work in complete lockstep.Opportunities for Career Growth & Professional LeadershipThe convergence of finance and ESG presents extraordinary career opportunities for Chartered Accountants and sustainability specialists. Finance professionals who master non-financial reporting, carbon accounting, and green financing instruments are uniquely equipped to assume strategic CFO and board-level roles. Concurrently, ESG leaders who develop financial literacy can articulate the economic return of sustainability initiatives with authority.Together, these leaders possess the collective influence to transform corporate boardrooms, shape industry-wide sustainability standards, influence national capital markets, and accelerate India's transition toward an equitable, low-carbon economic future.ConclusionThe partnership between Finance and ESG leaders is indispensable for successful corporate sustainability in India. By leveraging their complementary skill sets, these leaders effectively integrate ESG considerations into capital allocation, enterprise risk management, and regulatory disclosures, harmonizing commercial profit with environmental stewardship. As the regulatory spotlight intensifies under SEBI's BRSR Core assurance mandates, this collaboration will serve as the cornerstone of enterprise resilience, ensuring that Indian businesses thrive in a rapidly changing global economy while contributing positively to society and the planet.About the AuthorSJCA. Suresh JainMember of the Institute of Chartered Accountants of IndiaCA. Suresh Jain is a distinguished Chartered Accountant with extensive experience in corporate financial reporting, sustainability governance, and ESG framework integration. He actively works on bridging financial risk management with BRSR compliance, capital structuring for green initiatives, and guiding organizations through SEBI's reasonable assurance mandates for corporate disclosures.Sources: SEBI Circulars on BRSR & BRSR Core; ICAI Sustainability Reporting Standards Board.Contact: sjcabom@gmail.com | eboard@icai.in
MSME, SMEs, QUAD Nations, India, Australia, Japan, USA, GDP Contribution, Employment, Exports, Trade Policy, Indo-Pacific, ICAI
Ep. 483 — Comparative Analysis of MSME among QUAD Nations
CA Journal
· September 2026
00:00
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March 2024 Issue MSME & Global Trade Policy The Chartered Accountant (Vol. 72, No. 9)Comparative Analysis of MSME among QUAD NationsAn In-Depth Empirical Examination of MSME / SME Ecosystems Across India, Australia, Japan, and the USA: Definitional Standards, GDP Contributions, Employment Shares, Export Dynamics, and Strategic Trade Imperatives63.4 MIndian MSMEs (Largest Absolute)110 MIndian MSME Workforce45.03%Share of MSMEs in Indian Exports30.5%Indian MSME Contribution to GDPIn this era of globalization, Micro, Small, and Medium Enterprises (MSMEs/SMEs) are the backbone and the most flexible sector of every economy, especially for developing nations like India. This paper presents an inter-comparative analysis of the MSME sector among the Indo-Pacific-based QUAD group—comprising India, Australia, Japan, and the United States of America. Utilizing comprehensive secondary data across four core parameters—employment generation, GDP share, export contribution, and enterprise density—the findings reveal that India, characterized by a massive population and a prominent informal economy, must dramatically elevate the systemic role of its MSMEs to drive sustainable economic expansion and achieve its $5-trillion economic ambition.Introduction: The Strategic Emergence of the Indo-Pacific QUADThe Indo-Pacific region has developed into a pre-eminent hub for global geopolitics and geo-economics. In recent years, India's strategic and commercial significance in global affairs has expanded exponentially. To deepen multilateral cooperation, four major Indo-Pacific powers coalesced into the regional diplomatic and strategic coalition known as the QUAD (comprising India, Japan, Australia, and the USA).Across all four economies, MSMEs serve as indispensable economic pillars that complement large multinational corporations. They act as the largest aggregate employment generators, promote decentralized industrialization, and play a vital role in reducing regional economic disparities and wealth inequities. Within the QUAD framework, India stands out as the sole developing and rapidly industrializing economy, while Australia, Japan, and the USA represent highly mature, industrialized nations. Consequently, understanding how each member state defines, structures, and fosters its small business sector offers profound lessons for Indian economic policy.Definitional Architectures Across QUAD NationsBecause economic scales and industrial structures differ substantially across the QUAD members, each nation adheres to distinct quantitative criteria—ranging from employee headcounts to balance-sheet capital ceilings and turnover thresholds—to classify enterprises.1. India: The Composite Investment & Turnover FrameworkIn India, MSMEs are governed by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, as substantially amended via Government of India Gazette Notification S.O. 2119(E) dated June 26, 2020. The revised framework eliminated the historic distinction between manufacturing and services, establishing unified composite criteria based on capital investment in plant and machinery/equipment and annual turnover:Type of EnterpriseMicro EnterpriseSmall EnterpriseMedium EnterpriseManufacturing & Services Sector (Composite Criteria)Investment < ₹1 Crore ANDTurnover < ₹5 CroreInvestment < ₹10 Crore ANDTurnover up to ₹50 CroreInvestment < ₹50 Crore ANDTurnover up to ₹250 Crore2. Australia: Headcount & Revenue ClassificationsIn Australia, small and medium enterprises are commonly designated as SMEs. The Australian Bureau of Statistics (ABS) categorizes enterprises strictly by headcount:Micro Enterprise: 0 to 4 employees (including sole proprietorships and non-employing entities).Small Enterprise: 5 to 19 employees.Medium Enterprise: 20 to 199 employees.Large Enterprise: 200 or more employees.Concurrently, the Australian Taxation Office (ATO) defines an SME based on annual turnover, considering any entity generating less than $2 million annually as a micro-business, while small enterprises generate between $2 million and $10 million.3. Japan: Sector-Specific Capital & Staff HeadcountsIn Japan, the legal definition of an SME is codified under the SME Basic Law of 1999. Japanese regulations implement a dual-parameter threshold comprising either paid-in capital size or full-time personnel count, differentiated across four broad industry sectors:Industry SectorMaximum Capital Size (in Millions of Yen)Maximum Full-Time Staff HeadcountManufacturing & Other IndustriesCapital ≤ ¥300 MillionStaff ≤ 300 EmployeesWholesale TradeCapital ≤ ¥100 MillionStaff ≤ 100 EmployeesRetail TradeCapital ≤ ¥50 MillionStaff ≤ 50 EmployeesServices SectorCapital ≤ ¥50 MillionStaff ≤ 100 EmployeesUnder broad Japanese statistical surveys (Berisha & Pula, 2015), micro enterprises employ 4–9 persons, small enterprises employ 10–49, medium enterprises employ 50–249, and large entities employ 250 or more workers.4. United States of America: SBA Industry StandardsIn the United States, the Small Business Administration (SBA) and the US International Trade Commission establish small business eligibility based on North American Industry Classification System (NAICS) codes. For general statistical grouping, enterprises with 1–9 workers are micro, 10–99 are small, 100–499 are medium, and 500+ employees constitute large businesses. For federal contracting and financing, small businesses encompass enterprises with 250 to 1,500 employees or average annual receipts spanning $750,000 to $38.5 million depending on the sub-industry.Literature Review: Geopolitics & Trade OpportunitiesScholarly inquiries into the QUAD coalition and MSME internationalization emphasize the untapped potential of economic integration:Srivastava, Kumar, & De (2022)Observed that the QUAD alliance has focused disproportionately on defense and maritime security. However, computable general equilibrium (CGE) trade modeling demonstrates that deeper trade partnerships within the Indo-Pacific bloc yield higher relative welfare gains for member states compared to legacy frameworks like ASEAN-10, RCEP, or the GCC.Prakash, Pradhan, & Das (2012)Investigated Indian manufacturing SMEs, revealing an over-reliance on imported technology rather than indigenous R&D. They argued that governmental trade promotion bodies must connect MSMEs with research centers and global market intelligence to offset small-firm size disadvantages.Vemsani (2020)Emphasized that the QUAD represents a formidable demographic and economic bloc of modern democracies. To sustain long-term regional stability, the alliance must institutionalize commercial agreements that accelerate merchandise trade and supply chain exchanges among small business allies.Detailed Country Profiles: Structure & ContributionsIndia: Employment Engine of the EconomyAccording to the 73rd round of the National Sample Survey (NSS) and the Ministry of MSME Annual Report 2021–22, India hosts over 63.38 million (633.88 lakh) MSME units, providing livelihoods to over 110.98 million individuals. Small businesses account for 95% of total industrial enterprises in India and contribute ~36% of total manufacturing output.Sectoral ClassificationNumber of Enterprises (in Lakhs)Sectoral Share (%)Workforce Distribution (in Lakhs)Trading Enterprises230.3536%• Micro: 1,076.19 Lakhs (96.9%)• Small: 31.95 Lakhs (2.9%)• Medium: 1.75 Lakhs (0.2%)• Total: 1,109.89 Lakhs (~111 Million)Other Services206.8833%Manufacturing Units196.6531%Total633.88100%1,109.89 LakhsFiscal YearShare of MSMEs in Total GDP (%)Share of MSMEs in Total National Exports (%)2018–1930.50%—2019–2030.50%—2020–2126.83%49.35%2021–22—45.03%2022–23 (Up to August 2022)—42.67%Australia: High Value-Added & Export DominanceIn Australia, SMEs represented 2,418,037 business units in 2019–20, accounting for 99.8% of all private enterprises. According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), small enterprises (0–19 workers) employ over 5 million Australians (42% of the workforce) and generate $438 billion in value-added (33% of Australian GDP). Non-employing sole traders make up 58.7% of all firms. In aggregate, MSMEs generate 54% of Australia's industry Gross Value Added (GVA) and account for 59% of small business goods and services exporters.United States: Entrepreneurial DynamismAccording to the US Small Business Administration (2022), the United States is home to 33.2 million small businesses (0–499 employees), constituting 99.9% of all American firms. These entities employ 61.7 million individuals (46.4% of the US private workforce). Approximately 27 million firms (80%) are non-employer solopreneurs. In 2020, American SMEs exported $413.3 billion worth of merchandise (32.6% of identifiable exports), with 264,366 small businesses representing 97.3% of all US exporting companies. The US Office of Advocacy calculates that small businesses generate 44% of total US economic GDP.Japan: High Employment & Industrial CraftsmanshipData from the Japan Finance Corporation and the 2020 White Paper on SMEs (METI) indicate that SMEs comprise 99.7% of all Japanese business establishments (3.58 million units) and employ 32.0 million individuals—accounting for 68.8% of the private workforce. SMEs generate 53% of Japan's manufacturing and commercial value-added GDP. However, direct export participation among Japanese SMEs stands at 21.4% (6.2 trillion Yen), reflecting heavy domestic orientation and indirect export through large multinational Keiretsu trading houses.Inter-Comparative Analysis Among QUAD MembersSynthesizing secondary data across the four nations highlights major structural variances across the QUAD alliance:Share of MSME in National Exports (%)Australia59.0% India45.03% United States32.6% Japan21.4% Share of MSME in Total GDP (%)Australia54.0% Japan53.0% United States44.0% India30.5% Share of MSME in Total Employment (%)Japan68.8% Australia66.0% United States46.4% India40.0% Total Absolute MSMEs (in Millions)India63.4 M United States33.2 M Japan3.58 M Australia2.4 M Critical Challenges & Strategic Opportunities for IndiaThe inter-comparative empirical data yields vital insights into India's structural development challenges:The Employment Paradox: While Indian MSMEs employ an astounding 110 million people (the largest absolute workforce in the QUAD), this accounts for only 40% of India's total labor force. In contrast, Japanese and Australian SMEs absorb 68.8% and 66% of their national workforces respectively. This highlights the substantial informal agricultural labor surplus in India that has yet to transition into organized industrial and service MSMEs.The GDP Value-Addition Gap: Indian MSMEs contribute ~30.5% to national GDP, compared to 54% in Australia and 53% in Japan. This reflects lower capital intensity, micro-enterprise fragmentation, and technological deficits across Indian manufacturing units.Enterprise Density: While India has 63.4 million units in absolute numbers, MSMEs represent only 95% of registered business entities, whereas in Australia, Japan, and the USA, SMEs account for 99.7% to 99.9% of all enterprises. This indicates a high proportion of informal, unregistered enterprises that must be integrated into the formal economy.India's Initiatives & Policy Alignment with the QUAD VisionTo achieve the economic potential envisioned by the QUAD alliance, India has introduced foundational policy reforms:Promoting Women EntrepreneurshipIndia is actively expanding institutional credit, incubator support, and digital market access for women entrepreneurs, ensuring equitable socio-economic representation and harnessing untapped human potential.Sustainable Cluster InfrastructureStrengthening industrial parks, dedicated freight corridors, plug-and-play manufacturing facilities, and simplifying digital regulatory compliance to bolster the ease of doing business.Comprehensive Skill DevelopmentUpgrading Industrial Training Institutes (ITIs), introducing National Skill Qualification Framework (NSQF) vocational modules, and improving technical competencies to enhance product finishing, branding, and export acceptance.Actionable Policy Suggestions for Indian MSMEsBenchmarking Quality with Low-Cost Innovation: The other QUAD members represent advanced industrialized nations with established global brand equity. Indian MSMEs face stiff competition and non-tariff quality barriers. Promoting frugal innovation combined with zero-defect quality assurance is critical to prevent product rejection in Western markets.Adopting Sustainable & Eco-Friendly Production: Indian MSME clusters must transition to energy-efficient manufacturing, integrate information and communications technology (ICT), adopt renewable mini-grids, and minimize industrial waste. Green manufacturing is essential to satisfy international carbon border regulations (e.g., EU CBAM) and capture green global procurement orders.Expansion of Technical Training Institutes: Multiply the number of specialized ITIs and technological incubation centers, providing workers with certified training in robotics, digital design, and precision tooling.Strengthening QUAD B2B Trade Agreements: Formalize dedicated SME trade chapters within QUAD trade agreements, establishing direct B2B digital corridors, harmonized customs clearances, and mutual standard recognitions between Indian producers and buyers in Australia, Japan, and the US.ConclusionAmong all QUAD members, India boasts the third-largest nominal GDP but records the lowest per capita income. This empirical reality highlights the long developmental path ahead for the nation. As this inter-comparative analysis illustrates, India cannot achieve its $5-trillion economic milestone without dramatically boosting MSME productivity, increasing small business GDP contribution from 30.5% toward the 50%+ benchmarks set by Japan and Australia, and raising MSME employment absorption beyond 40%.By fostering active multilateral collaboration within the Indo-Pacific QUAD—sharing technological innovations, facilitating cross-border investment, harmonizing quality certifications, and expanding market access—all member nations can generate positive economic externalities, build resilient supply chains, and foster inclusive, sustainable prosperity across the Indo-Pacific region.About the AuthorSKSunil KumarAcademician & Economic ResearcherSunil Kumar is an academician specializing in applied economic research, international trade agreements, and MSME industrial policy. His research investigates the macroeconomic performance of small businesses, comparative trade policies within the Indo-Pacific QUAD alliance, and strategies for accelerating export competitiveness among Indian micro and small enterprises.References & Bibliography[1] Berisha, G., & Pula, J. S. (2015). Defining Small and Medium Enterprises: a critical review. Academic Journal of Business, Administration, Law and Social Sciences, 1(1).[2] Biswas, M. A. (2015). Opportunities and Constraints for Indian MSMEs. International Journal of Research (IJR), 2(1).[3] Connolly, E., Norman, D., & West, T. (2012). Small Business: An Economic Overview. Reserve Bank of Australia Small Business Conference.[4] Ghosh, N. (2021). Brass Tacks: Unpacking the Indo-Pacific Template. Observer Research Foundation (ORF) Occasional Paper.[5] Gilfillan, G. (n.d.). Definitions and data sources for small business in Australia: a quick guide. Parliament of Australia Research Paper.[6] Kelly Main & Cassie Bottorff. (2022). Small Business Statistics of 2023. Forbes Advisor.[7] Prakash, J., Prakash Pradhan, J., & Das, K. (2012). Exports by Indian Manufacturing SMEs: Regional Patterns and Determinants. Munich Personal RePEc Archive (MPRA), Paper No. 43491.[8] Srivastava, A., Kumar, S., & De, M. P. (2022). Ex-ante evaluation of India’s trade alliance with Indo-Pacific region: A general equilibrium analysis (Working Paper No. 211). Centre for Regional Trade (CRT).[9] Vemsani, L. (2020). Connectivity and the Quad Powers: Revisiting History and Thought. Journal of Indo-Pacific Affairs.[10] Yoshimura, T., & Kato, R. (n.d.). The Policy Environment for Promoting SMEs in Japan: Introduction and Context of SME Development. Japan International Cooperation Agency (JICA).Sources: MSME Annual Report 2021-22 (GOI); ABS; ASBFEO; METI SME Agency; US SBA.Author Contact: sunilsahu.sahu6@gmail.com | eboard@icai.in
Indian Economy, Developed Economy, Viksit Bharat, Human Development Index, HDI, GDP Per Capita, Skill Development, Infrastructure, Innovation, Social Inclusion, Environmental Sustainability, ICAI
Ep. 484 — Transforming India into a Developed Economy
CA Journal
· September 2026
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Transforming India into a Developed EconomyA Strategic Exploration of India's Growth Path, Macroeconomic Benchmarks, Human Development Index (HDI) Deficits, and the Three Flanks of Skilling, Infrastructure, and Social-Environmental Sustainability$3.38 TNominal GDP (5th Largest Global)~ $13 TPPP GDP (3rd Largest Global)1.42 BDemographic Base (World's Largest)Rank 132UN Human Development Index (HDI: 0.633)India, currently standing as the fifth-largest economy in the world in nominal exchange terms and the third-largest in Purchasing Power Parity (PPP) terms, finds itself on the cusp of a historic leap toward becoming a fully developed nation in the coming decades. Achieving this vision requires addressing complex structural headwinds. This article explores India's journey toward developed nation status, focusing particularly on human development, labor productivity, and societal transformation—the decisive keys to sustainable long-term prosperity.The Indian Economy: Past, Present, and Growth PotentialIndia is home to the world's largest population, with approximately 1.42 billion citizens. Measured at international market exchange rates in 2022–23, India stands as the fifth-largest economy globally with a nominal GDP of approximately $3.38 trillion (surpassed only by the USA, China, Germany, and Japan). In Purchasing Power Parity (PPP) terms, India's economy is valued at approximately $13 trillion, ranking third globally.The Indian economy has demonstrated consistent, resilient expansion over recent years despite severe global macroeconomic turmoil. The fiscal year 2020–21 remained the sole exception, when the national economy contracted by -5.8% due to the unprecedented health and economic disruptions of the COVID-19 pandemic.Selected Economic & Financial Indicator2018–192019–202020–212021–222022–23Nominal GDP (USD Trillion)2.702.842.673.153.38Real GDP Growth Rate (%)6.5%3.9%-5.8%9.1%7.0%Population (Billion)1.371.381.401.411.42GDP Per Capita (Nominal USD)$1,974$2,050$1,913$2,238$2,389Unemployment Rate (%)7.7%6.5%10.2%7.7%7.3%World Economic Growth Rate (%)3.6%3.2%-3.1%6.1%2.3%Source: Compiled from World Bank and International Monetary Fund (IMF) databases.The primary growth engines propelling India's forward momentum include robust private domestic consumption, aggressive capital spending by the government and private sector on infrastructure (expressways, multi-modal logistics, airports, modern seaports, and railway corridors), and a profound digital transformation. Barring external headwinds—such as global supply chain disruptions emanating from geopolitical flashpoints (e.g., the Russia-Ukraine war, Middle Eastern conflicts) and elevated energy commodity prices—the Indian economy is well-positioned to maintain steady growth and emerge as a dominant global economic superpower over the next few decades.Characteristics of a Developed Economy & The Human Development GapTo understand the scale of transformation required, one must examine the defining characteristics of a truly developed economy:High Per Capita Income: High Gross Domestic Product per head, lifting broad citizen living standards into high-income brackets ($13,000+ per year).Diverse Industrial Mix: Advanced manufacturing base supported by a dominant, knowledge-intensive services sector.Deep & Sophisticated Financial System: Liquid capital markets, accessible banking channels, and mature risk-transfer mechanisms.Superior Life Expectancy at Birth: Advanced healthcare systems ensuring low infant mortality and long, healthy life expectancies (80+ years).Well-Developed Educational System: High literacy rates, universal access to tertiary schooling, and advanced technical research institutions.While agencies such as the IMF and World Bank classify economies using income thresholds, the United Nations Human Development Index (HDI) offers a more holistic composite benchmark. The HDI integrates life expectancy, education (mean and expected years of schooling), and per capita income. As the United Nations points out, the HDI captures more than mere monetary output: it reflects how efficiently a country translates economic income into educational, nutritional, and healthcare opportunities for its citizens.Country / TerritoryHDI Score (Max 1.0)Global Rank (out of 191 Nations)Comparative Developmental AssessmentSwitzerland0.9621World leader in life expectancy, educational attainment, and per capita productivity.Norway0.9612Equitable wealth distribution supported by sovereign wealth funds and advanced welfare systems.Iceland0.9593High social cohesion, universal tertiary education, and green energy infrastructure.Hong Kong (SAR)0.9524Dense financial services hub with the world's longest average life expectancy (85.5 years).Australia0.9515Resource-rich, high-income economy with exceptional educational attainment (21+ expected years).India0.633132Medium Human Development; highlights the stark gap between nominal GDP scale and individual human capabilities.Source: United Nations Human Development Report (UNDP).The Three Flanks of TransformationClosing this developmental gap requires a targeted structural strategy. The transformation of India from an emerging market into a developed economy rests upon three foundational flanks:Flank (a): Skill Development and EmploymentFlank (b): Infrastructure and InnovationFlank (c): Social Inclusion and Environmental SustainabilityFlank (a): Skill Development and EmploymentSkill development contributes directly to structural transformation and economic growth by enhancing employability, expanding labor productivity, and boosting national competitiveness. High-quality human capital generates a powerful virtuous cycle: relevant vocational skills enhance industrial productivity, which attracts foreign direct investment (FDI), creates higher-paying formal employment, and stimulates further public and private investment in education."Skill development contributes to structural transformation and economic growth by enhancing employability and labour productivity and helping the country to become more competitive."Significance in the Indian Context:Addressing Unemployment: With a population exceeding 1.4 billion and a national unemployment rate of 7.3%, skilling provides job seekers with practical competencies demanded by modern industries.Enhancing Economic Growth: Skilled personnel drive corporate innovation, attract international R&D centers, and support the establishment of high-tech manufacturing ecosystems.Alleviating Poverty: Vocational skills empower marginalized workers to move out of subsistence farming into well-compensated industrial and service roles.Fostering Entrepreneurship: Nurtures technical and managerial confidence, enabling youth to build startups rather than merely seeking wage employment.Critical Challenges & Government Interventions:India's skilling ecosystem continues to face significant hurdles: outdated vocational curricula, inadequate physical infrastructure in rural training institutes, a deficit of certified master instructors, a persistent mismatch between classroom curricula and industry requirements, low rural awareness, and systemic gender disparities in female workforce participation.To bridge these deficits, the Government of India has introduced several flagship initiatives:Pradhan Mantri Kaushal Vikas Yojana (PMKVY): Launched in 2015 to offer industry-relevant skill training and certification.National Skill Development Mission (NSDM): Designed to train over 400 million individuals across diverse sectors.Skill India Mission: Coordinating pan-India vocational programs.Startup India: Providing seed financing, regulatory sandboxes, and incubation to early-stage entrepreneurs.Flank (b): Infrastructure and InnovationInfrastructure and innovation are the twin engines that drive national productivity and technological sovereignty."Infrastructure and innovation are two areas which play a vital role in a nations development."Transportation CorridorsRapid construction of access-controlled expressways, the expansion of regional aviation networks connecting tier-2 and tier-3 towns, semi-high-speed Vande Bharat rail modernization, and the Bharatmala (highways) and Sagarmala (ports) initiatives.Energy TransitionAccelerated deployment of solar parks and wind farms, grid battery storage, and green hydrogen infrastructure to secure domestic energy security while advancing decarbonization commitments.Urban ModernizationDeveloping Smart Cities equipped with digitized municipal management, efficient waste and wastewater recycling, and multi-tier metro transit networks across major urban centers.Digital InfrastructureA digital public infrastructure revolution (Aadhaar, UPI, DigiLocker, Account Aggregator) transforming financial inclusion, telehealth, and online education across all socio-economic strata.Innovation Frontrunners:IT & Software Services: Global outsourcing hub providing enterprise digital transformation worldwide.Startup Ecosystem: The world's third-largest startup ecosystem, generating tech unicorns across fintech, edtech, and SaaS.Healthcare & Pharmaceuticals: Renowned as the "Pharmacy of the World," producing high-quality, affordable generic medicines and vaccines.Space Technology: ISRO's milestone achievements (Chandrayaan-3 lunar landing, Aditya-L1 solar observatory) establishing commercial space launch leadership.Key Infrastructure Challenges:Persisting urban-rural infrastructure divides, concerns over long-term environmental sustainability and climate resilience of public works, low private sector R&D expenditure, and the pressing need to upskill the workforce to meet the demands of Artificial Intelligence and automation.Flank (c): Social Inclusion and Environmental SustainabilitySocial inclusion and environmental sustainability are complementary principles that underpin an equitable, resilient society. Social inclusion ensures equal representation and opportunity across gender, caste, and economic strata. Environmental sustainability guarantees that natural capital is stewarded responsibly to meet contemporary needs without compromising future generations.Equity and JusticeEnsures marginalized communities enjoy equal access to resources, education, and credit, while guaranteeing that the costs of environmental transitions do not fall disproportionately on vulnerable groups.Livelihoods & Green EconomyPromotes green jobs in solar energy, organic farming, and circular waste recycling, providing stable, dignified employment for lower-income rural households.Protecting Climate-Vulnerable PopulationsBuilds climate resilience for low-income farmers and coastal communities who bear the direct brunt of heatwaves, floods, and droughts.Public Health ProtectionReduces air pollution, water contamination, and toxic waste, directly cutting healthcare expenditures and improving quality of life for urban and rural citizens.Overcoming Implementation Gaps:Integrated Policy Formulation: Breaking the administrative silos between social welfare programs and environmental regulations.Institutional Capacity Building: Equipping local municipal bodies, Panchayati Raj institutions, and communities to manage climate and social programs.Societal Behavioral Transformation: Fostering civic responsibility through national initiatives such as Mission LiFE (Lifestyle for Environment).Conclusion: The Vision of Viksit BharatTransforming India into a developed economy is a complex, multifaceted undertaking. While India's macroeconomic trajectory and nominal GDP scale are undeniably impressive, bridging the human development divide (HDI rank 132) remains the essential benchmark of true national development.This transformation requires visionary political leadership, coordinated public-private partnerships, and proactive stakeholder participation. By focusing on economic diversification, aggressive human capital development, cutting-edge innovation, and inclusive green practices, India can construct a thriving, equitable economy that benefits all citizens and achieves the vision of a developed nation.About the AuthorJCCA. Joydeb ChatterjeeMember of the Institute of Chartered Accountants of IndiaCA. Joydeb Chatterjee is a Chartered Accountant and economic policy analyst with extensive experience in macroeconomic analysis, public financial management, infrastructure capital allocation, and human development policy. He writes regularly on national economic trends, the demographic dividend, and India's long-term developmental roadmap.Data Sources: World Bank, IMF World Economic Outlook, UNDP Human Development Reports.Author Contact: chatterjoydeb5@gmail.com | eboard@icai.in
Ep. 485 — The Crucial Role of Intellectual Property in Modern Business Practices
CA Journal
· September 2026
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March 2024 Issue Commercial Laws & IPR Strategy The Chartered Accountant (Vol. 72, No. 9)The Crucial Role of Intellectual Property in Modern Business PracticesExploring the Legal Architectures, International Multilateral Treaties, Indian Statutory Frameworks, and Strategic Enterprise Monetization Models Governing Intangible Assets in the Digital Age20 YearsStatutory Patent Monopoly TermLife + 60 YrsCopyright Protection Duration (India)IndefiniteTrademark Renewal (10-Yr Blocks)1995TRIPS Agreement Established under WTOIn the rapidly evolving landscape of the global economy, intellectual property (IP) has emerged as a cornerstone of modern business practices. With the advent of technology and the digital age, the value of intangible assets has skyrocketed, leading to the recognition of IP as a critical driver of innovation, competitiveness, and economic growth. This article delves into the multifaceted significance of intellectual property in contemporary business environments, exploring its various forms, legal frameworks, and strategic implications.Understanding Intellectual PropertyIntellectual property refers to creations of the mind, such as inventions, literary and artistic works, designs, symbols, names, and images used in commerce. It encompasses a wide array of intangible assets that can be protected and monetized. In an era where corporate enterprise value is overwhelmingly composed of knowledge capital and brand goodwill rather than physical plant and machinery, intellectual property rights (IPR) provide the legal architecture that converts creative concepts into legally enforceable, balance-sheet assets.The primary forms of intellectual property recognized across modern commercial jurisdictions include:PatentsPatents provide inventors with exclusive rights to their inventions for a specific period, typically 20 years. This statutory monopoly encourages inventors to disclose their innovations to the public, fostering a culture of knowledge-sharing and technological advancement. Patents play an indispensable role in research-intensive sectors such as pharmaceuticals, biotechnology, semiconductor design, and advanced manufacturing by ensuring that inventors can recoup substantial R&D investments.CopyrightsCopyright protection applies to original works of authorship, including literary, dramatic, musical, artistic, and cinematographic creations, as well as software code. This protection confers exclusive rights to reproduce, publish, perform, adapt, and distribute works. In the digital age, copyrights have acquired critical commercial importance due to the ease of digital content replication and cross-border distribution.TrademarksTrademarks are distinctive symbols, names, logos, words, and slogans used to distinguish goods and services in the marketplace. They establish brand identity and consumer trust. Trademark protection prevents unauthorized use of confusingly similar marks, safeguarding a company's commercial reputation and consumer goodwill. Global brand giants like Apple, Nike, and Coca-Cola owe much of their enterprise valuation to strong trademark protection.Trade SecretsTrade secrets encompass confidential business information, formulas, customer databases, industrial techniques, and algorithms that confer a decisive competitive advantage. Unlike patents or copyrights, trade secrets require no formal statutory registration and enjoy indefinite protection as long as the information remains confidential. Iconic examples include the Coca-Cola syrup formula and Google's proprietary search algorithm."Copyright protection applies to original works of authorship, such as literary, artistic, and musical creations."Industrial Designs: Designs under intellectual property law refer to the protection of the visual appearance, ornamentation, shape, or aesthetic elements of a product or article. Design protection safeguards the unique, eye-catching exterior elements that make a product commercially distinctive from functional equivalents. Legal systems generally recognize design patents and registered industrial designs.Geographical Indications (GIs): Geographical Indications identify goods as originating from a specific geographical territory, region, or locality where a given quality, reputation, or characteristic of the product is essentially attributable to its geographical origin. GIs serve as potent economic instruments for rural communities and traditional artisans, protecting products such as Darjeeling tea, Basmati rice, and Kanchipuram silk from unauthorized commercial dilution.The Multilateral Legal Framework of Intellectual PropertyIntellectual property rights are governed by a sophisticated matrix of international treaties, multilateral conventions, and domestic statutory regimes. The international framework ensures cross-border harmonization and prevents jurisdictional regulatory arbitrage:International Treaty / ConventionAdministering Body & YearCore Legal Doctrine & Operational MechanismThe Berne ConventionWIPO (1886)Foundational treaty for the protection of literary and artistic works. Guarantees automatic protection across all member states without the requirement of formal registration.The Paris ConventionWIPO (1883)Governs industrial property (patents, trademarks, industrial designs). Codifies the principles of national treatment and the crucial right of priority (allowing applicants to claim initial domestic filing dates internationally).TRIPS AgreementWTO (1995)Most comprehensive multilateral agreement on intellectual property. Sets enforceable minimum standards of protection across all member states, backed by the WTO's dispute settlement mechanism.Patent Cooperation Treaty (PCT)WIPO (1970)Streamlines international patent filings, enabling an inventor to file a single international application to preserve filing rights across more than 150 member nations.Madrid Agreement & ProtocolWIPO (1891 / 1989)Provides a centralized, cost-effective system for the international registration and management of trademarks across multiple foreign jurisdictions through a single application.Doha Declaration on TRIPS & Public HealthWTO (2001)Affirmed developing nations' sovereign rights to implement compulsory licensing flexibilities for life-saving pharmaceuticals to address public health crises.The Hague SystemWIPO (1925)Facilitates the international registration of industrial designs across participating member countries through a single standardized application."Balancing IPR protection with access to essential medicines in developing countries has been a prominent issue."The Statutory IPR Regime in IndiaIn India, the legal framework governing intellectual property is robust, modern, and fully compliant with TRIPS obligations while carefully safeguarding domestic public interest:The Patents Act, 1970: Serves as the cornerstone of Indian patent jurisprudence. Grants 20-year exclusive rights for novel and non-obvious inventions. The Act strikes a careful balance between private patent exclusivity and public welfare—incorporating Section 3(d) to prevent the abusive "evergreening" of pharmaceutical patents and Section 84 providing for compulsory licensing in cases of public health emergencies or anti-competitive non-working.The Copyright Act, 1957: Confers automatic protection on literary, dramatic, musical, and artistic works for the author's lifetime plus 60 years (in case of joint authors, 60 years after the death of the last surviving author). For cinematograph films, sound recordings, and posthumous works, protection runs for 60 years from the year of publication. It includes robust "fair dealing" exceptions for research, education, and news reporting.The Trade Marks Act, 1999: Governs brand registration under the "first-to-file" principle. Registered trademarks are valid for 10 years and can be renewed indefinitely for successive 10-year blocks, ensuring permanent protection for established commercial goodwill.The Designs Act, 2000: Protects novel and original industrial shapes and visual configurations applied to articles for an initial period of 10 years, extendable to a maximum of 15 years.The Geographical Indications of Goods Act, 1999: Grants legal protection to location-specific traditional products, ensuring that regional artisan communities retain exclusive marketing rights over names like Darjeeling and Kanchipuram.Protection of Plant Varieties and Farmers' Rights Act, 2001: A unique Indian statutory model that balances plant breeders' proprietary rights with small farmers' traditional rights to save, use, sow, and exchange protected seeds.Trade Secrets Protection: While India lacks standalone trade secret legislation, confidential business information is rigorously protected under common law and the Indian Contract Act, 1872. Courts enforce Non-Disclosure Agreements (NDAs), non-compete covenants, and grant interim injunctions and damages against breach of confidentiality."Patents provide inventors with a limited monopoly on their innovations, allowing them to recoup their investments and gain a competitive edge."The Strategic Significance of Intellectual Property in Modern EnterpriseIn contemporary corporate strategy, intellectual property is no longer merely a legal defensive tool; it is a vital commercial asset that drives enterprise valuation, revenue expansion, and competitive moats:Incentivizing R&D and InnovationPatents provide innovators with a limited statutory monopoly that allows companies to recoup substantial R&D investments and earn premium profit margins, driving technological progress across the economy.Market Differentiation & BrandingTrademarks and distinct commercial dress cultivate deep brand recognition and customer loyalty. Iconic companies like McDonald's, Disney, and Apple rely heavily on trademark moats to protect market share.Monetization & RoyaltiesEnterprises generate high-margin recurring income by licensing patent portfolios, franchising brand systems, and collecting software copyright royalties without incurring direct manufacturing overheads.Attracting Investment & M&A ValuationVenture capital and private equity investors scrutinize an enterprise's IPR portfolio during due diligence. Proprietary patents and registered trademarks significantly elevate acquisition multiples in corporate mergers.Defensive Positioning & Freedom-to-OperateEnterprises strategically amass defensive patent portfolios to deter competitor lawsuits, prevent market foreclosure, and negotiate reciprocal, royalty-free cross-licensing pacts.Seamless Global ExpansionSecuring multi-jurisdictional IPR protection ensures that as businesses enter overseas export markets, their innovations and brands remain shielded from local trademark squatting and counterfeit duplication.Critical Challenges & Controversies in the Digital EraDespite its profound benefits, the modern IPR landscape faces significant commercial, technological, and ethical challenges:"Striking the right balance between protecting IP rights and ensuring public access to essential goods and services is a constant challenge."Balancing Exclusive Monopoly with Public Health Access: The tension between strong pharmaceutical patent monopolies and universal access to life-saving drugs in low-income nations remains a persistent ethical flashpoint, as highlighted in debates surrounding COVID-19 vaccine waivers and cancer therapies.Patent Trolls and Overlapping Patent Thickets: Non-Practicing Entities (NPEs)—colloquially termed "patent trolls"—acquire vague, broad patents solely to extract aggressive settlement royalties from practicing innovators, burdening legitimate businesses and stifling open R&D.Digital Piracy and Generative AI Infringement: The proliferation of digital networks, streaming platforms, and generative artificial intelligence has severely disrupted copyright protection. Unauthorized internet distribution, software cracking, and the unconsented scraping of copyrighted works for training large language models (LLMs) challenge existing legal frameworks.Cost and Prosecution Complexity for MSMEs: Navigating patent filings, trademark oppositions, and multi-jurisdictional infringement litigation entails exorbitant legal expenses, placing small and medium enterprises (MSMEs) at a severe disadvantage against well-capitalized multinational conglomerates.Conclusion & The Road AheadIntellectual property has fundamentally transformed from a specialized legal concept into the strategic cornerstone of modern commerce. It stimulates innovation, attracts venture investment, and fosters vigorous market competition while constantly challenging legal institutions to balance private reward with public welfare. As the digital knowledge economy deepens, the strategic value of intellectual assets will only expand.India's statutory IPR ecosystem admirably reconciles the protection of technological and creative innovation with essential public interests. As technological revolutions—from artificial intelligence and biotechnology to renewable energy—continue to reshape commerce, India's judiciary and regulatory bodies must continually adapt the legal framework, ensuring that innovation flourishes while the rights of society and consumers remain safeguarded.About the AuthorPKCS Prashant KumarCompany Secretary & Corporate Legal ConsultantCS Prashant Kumar is a practicing Company Secretary specializing in corporate commercial laws, intellectual property rights (IPR) management, cross-border technology licensing, and corporate compliance governance. He advises technology startups, industrial corporations, and creative enterprises on structuring robust IPR portfolios, contract enforcement, and navigating regulatory frameworks under Indian and international commercial laws.Statutory Sources: Patents Act 1970, Copyright Act 1957, Trade Marks Act 1999, Designs Act 2000, TRIPS & WIPO Conventions.Author Contact: eboard@icai.in
Taxation
Ep. 486 — Navigating the Honourable Supreme Court Judgments: Will the substantial question of Law travel the distance?
CA Journal
· September 2026
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Navigating the Honourable Supreme Court Judgments: Will the substantial question of Law travel the distance?Harmonizing the Landmark April 2023 Rulings in SAP Labs and Travelport Inc.: Deciphering Whether Arm’s Length Price Determination and PE Profit Attribution Under FAR Analysis Constitute Substantial Questions of Law Under Section 260AApril 2023Landmark Supreme Court VerdictsSection 260ASubstantial Question of Law GatewayTwin TestStatutory Violation + Perversity15% ThresholdTravelport PE Profit AttributionIn the month of April 2023, the Hon’ble Supreme Court of India delivered landmark judgments in the cases of SAP Labs India Pvt. Ltd. and Travelport Inc.—addressing Arm’s Length Price (ALP) determination in SAP Labs and Profit Attribution to a Permanent Establishment (PE) in Travelport. In SAP Labs, the Court held that ALP determination is a question of law, whereas in Travelport, it was held that the attribution of profits was a question of fact. Due to the ruling in Travelport, a majority of taxpayers and tax advisors concluded that if the attribution of profits is a question of fact, ALP determination too ought to be considered a question of fact, since Functions, Assets, and Risks (FAR) Analysis forms a vital part of both. However, in the author's view, the status quo has been maintained pre- and post-judgment—nothing has fundamentally changed, and even profit attribution can travel to the High Courts as a substantial question of law in certain circumstances.Introduction: The Apparent Contradiction in April 2023The month of April 2023 was quite a landmark and a period of ambiguity for tax practitioners in general, and Transfer Pricing and International Taxation practitioners in particular. This ambiguity arose because the Hon’ble Supreme Court of India delivered two judgments which, when viewed from the perspective of the existence of a "question of law," resulted in an inter-linkage that generated confusion across the profession.In SAP Labs India Private Limited vs Income Tax Officer [TS-225-SC-2023-TP], the Supreme Court overruled the Karnataka High Court’s decisions in M/s SAP Labs India Pvt. Ltd. (ITA No. 340/2012) and PCIT vs Softbrands India (P.) Ltd. [2018] 406 ITR 513 (Kar). The Supreme Court held that it cannot be accepted as an absolute proposition that the Income Tax Appellate Tribunal (ITAT) is the final fact-finding authority when it comes to the determination of the Arm’s Length Price (ALP). The Court affirmed that it is always open to the High Courts to examine whether the statutory guidelines laid down under Chapter X of the Income-tax Act, 1961 ('the Act') and the Income-tax Rules, 1962 ('the Rules') were followed, and whether the findings recorded by the ITAT in determining the ALP are perverse.Conversely, in Director of Income-tax vs Travelport Inc. [2023] 149 taxmann.com 470 (SC), the Supreme Court upheld the concurrent views of the Delhi ITAT and the Delhi High Court, dismissing the Revenue's appeal by holding that what proportion of profits arose or accrued in India (the question of attribution of profits to a Permanent Establishment) was purely a question of fact."Although FAR Analysis can be considered an important part of the process of the determination of the ALP, it is not the only part, and therefore, the question of determination of the ALP is one of law, and that of attribution of profits is one of fact."Question of Law: When Can it be Considered 'Substantial'?For an appeal to be maintainable before a High Court under Section 260A of the Act, the appeal must raise a substantial question of law, rather than a mere question of law. Section 260A is held to be in pari materia and in identical terms to Sections 100 and 103 of the Code of Civil Procedure, 1908 ('CPC'), as affirmed in PCIT vs Softbrands India (P.) Ltd. and Vijay Kumar Talwar vs CIT [2011] 330 ITR 1 (SC).Significantly, the term "substantial question of law" has neither been defined in the Income-tax Act nor in the CPC. Its precise contours have been established through a rich lineage of Supreme Court precedents, notably Sir Chunilal V. Mehta & Sons Ltd. vs Century Spinning & Mfg. Co. Ltd. (AIR 1962 SC 1314), Santosh Hazari vs Purushottam Tiwari [2001] 3 SCC 179, and Hero Vinoth (Minor) vs Seshammal [2006] 5 SCC 545. The governing principles may be summarized as follows:Debatable Issue Affecting Rights: A question of law having a material bearing on the decision of the case (i.e., directly affecting the rights of the parties) is substantial if it is not settled by express statutory provisions or binding precedents, thereby involving a debatable legal controversy.Substance vs. Technicality: The word "substantial" qualifies the question as having substance, essential value, and real worth—in contradistinction to something technical, of no consequence, or merely academic.No Requirement of Public Importance: The legislature deliberately refrained from qualifying the term with the phrase "of general importance" (which appears in Section 109 CPC and Article 133(1)(a) of the Constitution). Thus, a substantial question of law need only be substantial between the litigating parties.Disregard of Settled Precedent: A substantial question arises where the legal position is clear, but the lower courts or tribunals have decided the matter by ignoring or acting contrary to settled principles.Application of Settled Law is Excluded: A mere question of law requiring the routine application of settled legal principles does not give rise to a substantial question of law.When Does a Finding of Fact Become a Substantial Question of Law?While the ITAT is universally recognized as the final fact-finding authority, a finding of fact can be challenged as a substantial question of law if it suffers from the vice of perversity. As established in Madan Lal vs Mst. Gopi (AIR 1980 SC 1754) and Narendra Gopal Vidyarthi vs Rajat Vidyarthi (Civil Appeal No. 7011 of 2008), perversity arises in five distinct evidentiary circumstances:1. Findings Not Based on EvidenceWhere the conclusions recorded by the ITAT are completely unsupported by any cogent evidence on record.2. Ignoring Admissible EvidenceWhere relevant, admissible, and material evidence submitted by the assessee or Revenue was arbitrarily ignored.3. Relying on Inadmissible MaterialWhere the Tribunal based its decision on inadmissible evidence or unverified secret third-party information.4. Misapplication of Legal PrinciplesWhere established legal standards and statutory interpretation rules were not applied in appreciating the evidence.5. Misreading of EvidenceWhere documentary evidence, contracts, or audited financials were patently misread, distorted, or misconstrued.In Vijay Kumar Talwar, the Supreme Court explicitly reaffirmed that: "the Tribunal being a final fact-finding authority, in the absence of demonstrated perversity in its finding, interference therewith by this Court is not warranted."The Legal Battle: Softbrands vs. SAP LabsThe Karnataka High Court’s Stance in Softbrands (2018)In PCIT vs Softbrands India (P.) Ltd., the Karnataka High Court ruled that:The High Court cannot undertake the exercise of comparing comparables, which is essentially an exhaustive fact-finding exercise.Under Section 260A, findings of fact cannot be disturbed unless they are ex-facie perverse, unsustainable, and exhibit a total non-application of mind.Perversity is the sole "key to the lock" for entering High Court jurisdiction under Section 260A. Inconsistent Tribunal views alone do not create a substantial question of law.Questions regarding whether comparables were rightly selected or whether comparability filters were properly applied do not give rise to a substantial question of law, making the ITAT’s ALP determination final.The Supreme Court’s Overruling in SAP Labs (April 2023)Setting aside the Softbrands doctrine, the Supreme Court held:Any determination of the ALP under Chapter X of the Act de hors (outside of) the relevant statutory provisions and Rules can be considered perverse, and perversity itself is a substantial question of law.There is no absolute proposition of law that the ITAT's determination of ALP is final and immune from scrutiny by High Courts under Section 260A.High Courts are fully empowered to examine whether the statutory transfer pricing guidelines laid down in the Act and Rules were complied with, and whether the ITAT's findings are perverse.Has Anything Changed Post-SAP Labs? The Author’s AnalysisAlthough critics argue that SAP Labs will overwhelm High Courts with protracted Transfer Pricing litigation over comparables, the author submits that the fundamental legal position remains unchanged. The Supreme Court did not adjudicate the individual factual merits of the case; it merely reiterated settled appellate principles through a mandatory Twin Test:"For the determination of the ALP to be a substantial question of law, the twin test required to be fulfilled is: (1) ALP not being determined by following the guidelines mentioned in the Act and Rules; and (2) findings of the ITAT were perverse and have been established and demonstrated."Determining the ALP is an intricate composite exercise involving FAR analysis, tested party selection, choice of the Most Appropriate Method (MAM—such as TNMM), selection of the Profit Level Indicator (PLI), and the application of quantitative and qualitative filters. The ITAT must evaluate all these factors in totality under statutory guidelines. If the Tribunal properly investigates and applies the statutory provisions, its factual findings on comparability cannot be disturbed unless perversity is established and demonstrated.The Travelport Inc. Judgment & Profit Attribution to PEShortly after SAP Labs, the Supreme Court in Director of Income-tax vs Travelport Inc. dismissed the Revenue’s appeal, ruling that the quantum of income attributable to operations carried out in India is fundamentally a question of fact.Facts of the Travelport Case: The assessee provided electronic global distribution services to airlines via Computerized Reservation Systems (CRS). Its mainframe servers were situated outside India (USA and Europe). To market and distribute services in India, the assessee contracted Indian distribution agents, paying them between USD/EUR 1 to 1.8 out of its total booking fee of USD/EUR 3.The ITAT held that the distributors constituted a Fixed Place PE and a Dependent Agent PE (DAPE) in India. However, based on an exhaustive FAR analysis, the ITAT determined that because the lion's share of complex technical activities occurred on overseas servers, only 15% of Travelport's global profits (approx. 0.45 cents per booking) could be attributed to Indian operations. Crucially, because the commission paid to Indian distributors (USD/EUR 1 to 1.8) far exceeded the 15% threshold, the ITAT concluded that no further profit attribution to the PE was warranted. The High Court and Supreme Court upheld this factual finding.Harmonizing SAP Labs and Travelport: The Ultimate ConclusionMany tax advisors perceived an irreconcilable contradiction: if profit attribution to a PE based on FAR analysis is a question of fact, shouldn't ALP determination (which also hinges on FAR analysis) also be a question of fact?The author demonstrates that there is no contradiction. While FAR analysis forms a critical common foundation, ALP determination incorporates extensive statutory methodologies, rules, and mathematical formulas under Chapter X that are absent in general PE profit attribution.More importantly, the ratio in SAP Labs is completely intact: even in profit attribution cases, if the ITAT conducts an arbitrary, irrational, or perverse FAR analysis, that finding of fact can be challenged as a substantial question of law before the High Court."Therefore, to conclude, the question of determination of the ALP as well as the attribution of profits to PE may travel the distance to the High Courts if the findings of the ITAT are perverse."About the AuthorRMCA. Raj ManiyarMember of the Institute of Chartered Accountants of IndiaCA. Raj Maniyar is a Chartered Accountant with extensive specialization in International Taxation, Transfer Pricing dispute resolution, and appellate litigation. His professional research examines Chapter X benchmarking, Permanent Establishment profit attribution under Article 7 of DTAAs, and the jurisprudential boundaries of Section 260A before the High Courts and the Supreme Court of India.Table of Cited Authorities & Precedents[1] SAP Labs India Private Limited vs Income Tax Officer, [TS-225-SC-2023-TP] (Supreme Court of India).[2] Commissioner of Income Tax-III vs M/s SAP Labs India Pvt. Ltd., (2018) I.T.A. No. 340/2012 (Karnataka High Court).[3] PCIT vs Softbrands India (P.) Ltd., [2018] 406 ITR 513 (Karnataka High Court).[4] Director of Income-tax vs Travelport Inc., [2023] 149 taxmann.com 470 (Supreme Court of India).[5] Vijay Kumar Talwar vs Commissioner of Income-tax, New Delhi, [2011] 330 ITR 1 (Supreme Court of India).[6] Sir Chunilal V. Mehta & Sons Ltd. vs Century Spinning & Mfg. Co. Ltd., AIR 1962 SC 1314 (Supreme Court of India).[7] Santosh Hazari vs Purushottam Tiwari, [2001] 3 SCC 179 (Supreme Court of India).[8] Hero Vinoth (Minor) vs Seshammal, [2006] 5 SCC 545 (Supreme Court of India).[9] Madan Lal vs Mst. Gopi & Anr., [AIR 1980 SC 1754] (Supreme Court of India).[10] Narendra Gopal Vidyarthi vs Rajat Vidyarthi, [Civil Appeal No. 7011 of 2008] (Supreme Court of India).Statutory Provisions: Sections 92C, 92CA, 260A of Income-tax Act, 1961; Sections 100, 103 of Code of Civil Procedure, 1908.Author Contact: maniyarraj28@gmail.com | eboard@icai.in
GST
Ep. 487 — Events imposing liability on directors of private companies under the GST law
CA Journal
· September 2026
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February 2024 Issue Goods & Services Tax (GST) The Chartered Accountant (Vol. 72, No. 8)Events imposing liability on directors of private companies under the GST lawA Critical Examination of Section 89(1) of the CGST Act: Piercing the Corporate Veil, Non-Applicability to Input Tax Credit (ITC), Pre-requisites of Non-Recovery, and Exoneration Defenses Borrowed from Income Tax JurisprudenceSection 89(1)CGST Statutory Piercing RuleSection 179(1)IT Act Pari Materia Benchmark3 ConditionsCumulative Triggers for LiabilityExcludedWrongly Availed/Utilized ITCSection 89(1) of the Central Goods and Services Tax Act, 2017 ("CGST Act") imposes joint and several personal liability on the directors of a private limited company to make good GST dues that cannot be recovered from the company. As the GST regime completes more than six years since its rollout, departmental audits, scrutiny, and anti-evasion investigations are on a steep rise. It is therefore vital for corporate management, tax advisors, and independent professionals to understand the strict statutory prerequisites built into Section 89(1) before directors are saddled with the company's tax burden.Introduction: The Corporate Veil vs. Statutory Vicarious LiabilityUnder the general principles of corporate jurisprudence and Section 2(84) of the CGST Act, a company incorporated under the Companies Act is recognized as an independent legal person distinct from its shareholders and directors. Consequently, debts incurred by a company—including statutory tax liabilities—are enforceable solely against the assets and balance sheet of the corporate entity.However, Section 89(1) of the CGST Act operates as an express statutory exception that pierces this corporate veil under designated contingencies, fastening personal liability directly onto the individuals who served as directors.Understanding the Statutory Text of Section 89(1)“(1) Notwithstanding anything contained in the Companies Act, 2013, where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both for any period cannot be recovered, then, every person who was a director of the private company during such period shall, jointly and severally, be liable for the payment of such tax, interest or penalty unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.”A bare perusal reveals that directors of a private company are made jointly and severally liable not merely for the primary GST liability, but also for accrued interest and statutory penalties. However, this vicarious liability is strictly conditional. Directors can be made personally liable only if the following three conditions are cumulatively satisfied:Condition (a): Inability to Recover from CompanyThe GST liability, interest, or penalty due in respect of supply of goods and/or services cannot, as a matter of fact and law, be recovered from the private company despite departmental efforts.Condition (b): Directorship During the Supply PeriodThe targeted individual held the office of director in the private company during the specific tax period when the taxable supplies of goods and/or services were executed.Condition (c): Inability to Prove Non-AttributabilityThe directors fail to establish that the non-recovery of the outstanding dues cannot be attributed to any gross neglect, misfeasance, or breach of duty on their part in managing company affairs.Critical Ambiguity 1: Applicability of Section 89(1) to Input Tax Credit (ITC)The foremost legal issue that arises is whether Section 89(1) of the CGST Act applies to the recovery of Input Tax Credit (ITC) wrongly availed and utilized by a private company. A rigorous textual examination of the statutory provisions reveals that it does not:Narrow Scope of "Tax": Section 89(1) specifically refers to recovery of "tax, interest or penalty due from a private company in respect of any supply of goods or services or both". Sub-sections (21) and (104) of Section 2 define "Central tax" and "State tax" as levies charged under Section 9 on outward taxable supplies. Thus, the term "tax" in Section 89(1) refers strictly to output tax liability payable on supplies made by the company.Bifurcated Legislative Scheme: Throughout the CGST Act, the Parliament has maintained a sharp distinction between "tax" and "input tax credit". For instance, Section 50(1) levies interest on delayed payment of tax, whereas Section 50(3) was specifically enacted to provide for interest on input tax credit wrongly availed and utilized.Separate Show Cause Notices: Sections 73 and 74 separately and distinctly cover: (i) tax not paid or short paid; and (ii) input tax credit wrongly availed or utilized.Statutory Analogy under Section 132: Where the legislature intended to include input tax credit within the definition of "tax", it did so expressly—such as in the Explanation to Section 132 (penal offenses), which explicitly states that "tax" includes "input tax credit"."Thus, in the absence of specific inclusion of the term 'input tax credit' in Section 89(1) of the CGST Act, it can be contended that Section 89(1) does not deal with cases involving recovery of input tax credit wrongly utilized by a private company."Critical Ambiguity 2: The Mandatory Two-Step Cover Protecting DirectorsDirectors cannot be automatically or mechanically saddled with company tax demands. To validly invoke Section 89(1), the Department must satisfy a mandatory two-step evidentiary hurdle:The GST dues are genuinely non-recoverable from the company; andThe directors, by virtue of their culpable action or omission, are directly responsible for the non-recovery of the dues.Because Section 89(1) of the CGST Act is in pari materia with Section 179(1) of the Income Tax Act, 1961, the established direct tax jurisprudence applies with full force to GST proceedings.Prong I: Establishing that Dues "Cannot be Recovered" from the CompanyThe phrase "cannot be recovered" is a mandatory jurisdictional condition precedent. It imposes an affirmative obligation on tax authorities to demonstrate that they made exhaustive, reasonable, and diligent efforts to recover the tax arrears from the company's own assets, bank accounts, and receivables, and that such efforts proved futile:Bhagwandas J. Patel v. DCIT [1998 (12) TMI 61] (Gujarat High Court)The assessee-director handed over management to a new director. The Revenue initiated recovery under Section 179 against the outgoing director, stating that recovering demands from the company was found "difficult".Held: The High Court quashed the order, holding that the Revenue must affirmatively establish that recovery cannot be made against the company before it can touch the directors. Mere administrative difficulty or inconvenience does not satisfy the statutory threshold.Indubhai T. Vasa (HUF) v. ITO [2005 (3) TMI 41] (Gujarat High Court)The Gujarat High Court reaffirmed that where the Assessing Officer failed to demonstrate that adequate steps were taken to attach and liquidate company assets, proceedings against directors under Section 179 are unsustainable in law.Smt. Pratibha Garg v. CIT and Others [2013 (12) TMI 726] (Allahabad High Court)The Revenue attempted to justify proceeding against directors by arguing that the company’s debtors were located outside the assessing officer's territorial jurisdiction, making recovery impossible.Held: The Allahabad High Court rejected this contention, holding that the Act imposes no territorial restriction on recovering book debts. The Department must pursue all debtors and assets of the company, and proceedings against directors can be initiated solely for the residual balance that proved genuinely unrecoverable.Prong II: Establishing That Non-Recovery is Attributable to the DirectorsEven if tax dues cannot be recovered from the company, Section 89(1) provides a safe harbor: directors are exempt if they prove that the non-recovery cannot be attributed to any gross neglect, misfeasance, or breach of duty on their part."Here, it is important to note the usage of the term 'non-recovery' in Section 89(1) as against the term 'non-payment'. The directors are not required to prove that 'non-payment' of the tax is not on account of gross neglect... They are simply required to substantiate that they did not act in a mala fide manner which led to the non-recovery of GST dues."This distinction between non-payment (which may be caused by genuine business losses, market downturns, or customer defaults) and non-recovery (which relates to deliberate asset stripping or fraudulent transfer) has been settled through several landmark rulings:Maganbhai Hansrajbhai Patel v. ACIT [2012 (11) TMI 189] (Gujarat High Court)The Revenue focused entirely on the petitioner’s managerial negligence during the operational life of the company. However, the Department failed to allege that the director fraudulently diverted assets or paid off other personal creditors in preference to tax dues.Held: The High Court quashed the vicarious liability order, ruling that the lack of gross neglect or misfeasance must be evaluated strictly in the context of the non-recovery of tax dues, rather than general operational management.Jashvantlal Natverlal Kansara v. ITO [2014 (4) TMI 210] (Gujarat High Court)The company suffered severe commercial losses and defaulted on bank loans. The Debts Recovery Tribunal (DRT) ordered the auction of company assets to satisfy bank claims. The tax officer invoked Section 179(1), arguing that the directors should have offered the properties to the tax department first.Held: The High Court quashed the order, holding that the transfer occurred pursuant to a judicial order of the DRT without voluntary director consent, and could never constitute gross neglect or breach of duty.CIT v. Sahu Investment Mutual Benefit Co. Ltd. [2017 (9) TMI 1230] (Allahabad High Court)The Allahabad High Court held that the doctrine of lifting the corporate veil is intended to prevent deliberate fraud and tax evasion, not to penalize directors where a company has suffered bona fide business failure. Directors cannot be made personal guarantors for normal capital depreciation or commercial business collapse.Gul Gopaldas Daryani v. ITO [2014 (5) TMI 706] (Gujarat High Court)The Revenue argued that the company paid ordinary trade creditors without creating a reserve for tax liabilities, and failed to maintain insurance over company property.Held: The High Court held that commercial business decisions—whether wise or unwise—do not constitute gross neglect or misfeasance. The provision cannot be invoked unless directors actively defrauded the revenue or diverted corporate funds.Conclusion: The Three Grounds of RestrictionAlthough Section 89(1) of the CGST Act creates a formidable mechanism for departmental recovery, personal liability cannot be fastened upon directors arbitrarily. In light of statutory construction and established pari materia jurisprudence, director liability under Section 89(1) can be successfully restricted or defeated in the following three circumstances:1. ITC Recovery ExclusionWhere the underlying tax liability pertains to input tax credit wrongly availed or utilized, rather than output tax due on supplies of goods or services.2. Failure of Departmental ExhaustionWhere the Departmental authorities fail to affirmatively prove that they took all reasonable, diligent, and adequate steps to recover the dues from the company's assets and bank accounts first.3. Bona Fide ManagementWhere the directors demonstrate that they acted in a bona fide commercial manner and did not fraudulently divert, siphon, or conceal company assets to render tax recovery impossible.About the AuthorAJCA. Arushi JainMember of the Institute of Chartered Accountants of IndiaCA. Arushi Jain is a practicing Chartered Accountant specializing in Goods and Services Tax (GST) litigation, indirect tax advisory, and appellate proceedings. Her core areas of research include corporate recovery mechanisms, directors' statutory liabilities under Section 89, departmental audit defense, and the harmonization of indirect tax procedures with direct tax jurisprudence.Statutory Reference: Section 89(1) of the CGST Act, 2017; Section 179(1) of the Income Tax Act, 1961.Author Contact: caarushi.18@gmail.com | eboard@icai.in
Technology
Ep. 488 — Navigating the World of Forensic Accounting: A Practical Guide to Detecting and Preventing Fraud
CA Journal
· September 2026
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February 2024 Issue Technology & Forensic Accounting The Chartered Accountant (Vol. 72, No. 8)Navigating the World of Forensic Accounting: A Practical Guide to Detecting and Preventing FraudA Comprehensive Guide to Fraud Investigation Methodologies, Historical Milestones, Advanced Analytical Tools (Benford’s Law, RSF, CAATs), and the Mandatory ICAI Forensic Accounting and Investigation Standards (FAIS)July 1, 2023FAIS Made Mandatory by ICAI20 StandardsCodified Across 6 Core Series$117,000Median Occupational Fraud Loss (ACFE)1817Earliest Recorded Expert Witness CaseIn recent years, the accounting landscape has undergone a significant transformation to strengthen financial reporting in the changing business paradigm. This transformation has led to the emergence of a new branch of accounting known as forensic accounting. This specialized field is focused on uncovering significant misrepresentations, errors, and fraudulent activities. In response to the rising incidence of financial crimes, forensic accounting has emerged as a powerful weapon in combating fraud. To detect and prevent fraud effectively, professionals—especially Chartered Accountants—require a deep understanding of the rapidly evolving field of forensic accounting along with its techniques and standards. In India, the Forensic Accounting and Investigation Standards (FAIS) issued by the ICAI play a pivotal role in guiding practitioners through the complexities of financial investigations.Introduction: The Architecture of Forensic AccountingForensic accounting constitutes a distinctive field that leverages accounting expertise to examine financial data for potential use in legal proceedings. This domain seamlessly integrates the specialized skills of accounting, auditing, and investigative inquiry to identify fraud and support legal adjudications. According to Oyedokun (2016), forensic accounting is not only pivotal in supporting accounting-related investigations, but also serves as a vital tool in safeguarding corporate institutions and sovereign nations against financial improprieties.The term "Forensic" denotes the systematic application of scientific methodologies to investigate criminal and civil misconduct. This structured process involves the collection, preservation, analysis of financial data, and final reporting. The forensic evidence gathered during fraud detection assumes supreme importance in legal prosecution (Ocansey, 2017). In contemporary corporate environments, forensic accountants act as a critical line of defense, conducting tests to detect fraud, intentional misstatements, errors, and internal control vulnerabilities (Bhasin, 2016).Forensic accountants play an indispensable role in providing expert witness testimony during judicial trials. This specialized realm extends beyond conventional accounting and statutory auditing skills; it necessitates an investigative mindset to uncover hidden transactions within an organization's financial landscape. Sub-specializations thriving within this field include fraud investigation, anti-money laundering (AML) compliance, royalty assessments, insurance claims evaluation, construction audits, and securities fraud litigation (Lakshmi and Menon, 2016)."Technological advancements and the digitalization of financial environment have had a deep impact on forensic accounting."History and Evolution of Forensic AccountingAlthough relatively obscure until the 19th century, forensic accounting possesses a fascinating history marked by influential milestones and historic criminal prosecutions:Phase 1: Early Beginnings and Recognition (1817 to 1930s)The genesis of forensic accounting traces back to the Meyer v. Sefton case in 1817, marking the inaugural recorded instance of an accountant serving as an expert witness in a Canadian bankruptcy court. The discipline gained widespread public recognition in the 1930s when Frank Wilson, a forensic accountant working for the US Internal Revenue Service (IRS), meticulously analyzed financial records to secure the landmark 1931 tax evasion conviction against Al Capone.Phase 2: Rise of Forensic Accounting (Late 20th Century)Landmark corporate collapses at the turn of the millennium—most notably the Enron scandal (2001) and WorldCom (2002)—exposed massive systemic accounting frauds. In response, the US enacted the Sarbanes-Oxley Act (SOX) in 2002, introducing stringent internal financial controls and criminal penalties, which dramatically elevated the global demand for forensic accountants.Phase 3: Technological Advancements & GlobalizationThe digital transformation of financial transactions required forensic practitioners to adopt advanced analytics, CAATs, data mining, artificial intelligence, and machine learning to sift through massive data lakes, identify patterns, and uncover complex fraudulent schemes.Phase 4: Expansion of Services & Digital Integration (Present)Today, forensic accounting has broadened its scope far beyond post-mortem fraud investigations. It encompasses proactive Anti-Money Laundering (AML) monitoring, corporate risk profiling, asset tracing, damage quantification, and dispute advisory, reinforced by formal regulatory standards.Core Competencies & Imperative Skills of the Forensic AccountantConducting court-admissible financial investigations requires an interdisciplinary synthesis of technical accounting, legal acumen, digital proficiency, and behavioral psychology:Basic Knowledge & Imperative SkillsScholarly Literature ReferenceInvestigative UtilityAuditing, Accounting & Statistics KnowledgeTiwari and Debnath (2017)Detecting irregular journal entries, analyzing statistical anomalies, and evaluating ledger reconciliations.Civil and Criminal Law, CPA / CFAP CredentialsSumartono et al. (2020)Navigating statutory requirements, preserving chain of custody, and preparing trial-ready evidence.Internal Controls, Interpersonal Dynamics & Critical ThinkingOthman and Laswad (2019)Identifying control circumvention, conducting witness interviews, and overcoming perceptual blindness.Criminology, IT Systems & Investigative CommunicationAkkeren et al. (2013); Bassey (2018)Understanding fraudster psychology, extracting digital evidence, and delivering clear expert testimony.Benefits to Chartered Accountants & Financial ReportingFor Chartered Accountants and audit professionals, developing forensic expertise enhances professional skepticism and equips them to identify red flags during statutory audits (Dhami, 2015; Sumartono et al., 2020). Forensic accounting augments corporate financial reporting through several vital functions:Detecting Market Manipulation: Scrutinizing circular trading, insider dealing, and artificial market capitalization inflation.Tracking Fund Flows & Siphoning: Unraveling multi-layered fund diversions through related-party shell entities and unauthorized loans.Scrutinizing Financial Records: Validating transaction authenticity, uncovering unrecorded liabilities, and detecting fictitious revenue.Monitoring International Transactions: Tracking trade-based money laundering, over-invoicing of imports, and offshore fund flight.Assessing Warehouse Receipts: Detecting phantom inventory schemes, duplicate collateral pledges, and commodity misstatements.The urgency of robust forensic practices is highlighted by the Association of Certified Fraud Examiners (ACFE) 2022 Report to the Nations, which examined 2,110 cases of occupational fraud across 133 countries, revealing a staggering median financial loss of $117,000 per case. High-profile scandals—including Enron, WorldCom, Bernie Madoff’s $65B Ponzi scheme, and India's Satyam Computer Services collapse—reaffirm that forensic accounting is essential to preserving investor trust.Advanced Techniques for Fraud Detection & PreventionForensic accountants deploy advanced mathematical, statistical, and software tools to detect anomalies and investigate fraud:TechniqueCore Analytical MethodologyPractical Application in Fraud DetectionBenford’s LawEvaluates the statistical frequency of the first (left-most) digits in numerical datasets against a logarithmic curve.Detects manipulated financial records, fabricated procurement invoices, and fraudulent vendor disbursements.Relative Size Factor (RSF)Calculates the ratio between the largest and second-largest transaction values for a given entity (vendor, customer, employee).Flags abnormal payment spikes that deviate significantly from established vendor baselines, signaling kickbacks or bogus billing.Computer-Assisted Auditing Tools (CAATs)Specialized software (e.g., IDEA, ACL) that processes and recalculates entire transactional populations from enterprise systems.Tests 100% of journal vouchers, extracts duplicate payments, and identifies transactions executed on weekends or holidays.Data Mining TechniquesAutomated extraction of patterns across three domains: Discovery, Predictive Modeling, and Deviation/Link Analysis.Uncovers hidden relationships between procurement executives and suppliers, such as shared telephone numbers, addresses, or bank accounts.Specialized Ratio AnalysisCalculates data analysis ratios across numerical fields, specifically tracking $\text{Max}/\text{Min}$ and $\text{Max}/\text{Max2}$ parameters.Pinpoints unusual cost concentrations, sudden inventory write-downs, and operational expense anomalies.Forensic Accounting and Investigation Standards (FAIS) in IndiaIn a historic regulatory advancement, the Institute of Chartered Accountants of India (ICAI), through its Digital Accounting and Assurance Board (DAAB), formulated and issued the Forensic Accounting and Investigation Standards (FAIS). Effective from July 1, 2023, these standards are mandatory for all members of the ICAI conducting Forensic Accounting and Investigation (FAI) engagements.Developed in consultation with major regulatory and enforcement bodies—including the Reserve Bank of India (RBI), the Ministry of Corporate Affairs (MCA), the Comptroller and Auditor General (CAG) of India, the Securities and Exchange Board of India (SEBI), the Central Bureau of Investigation (CBI), the Enforcement Directorate (ED), and the Serious Fraud Investigation Office (SFIO)—the FAIS framework sets benchmark performance expectations and ensures evidence produced by forensic auditors withstands rigorous judicial scrutiny."On July 1, 2023, the Institute of Chartered Accountants of India (ICAI) introduced and implemented the revised Forensic Accounting and Investigation Standards (FAIS). These standards are now mandatory for all ICAI members."The Six Core Series of FAIS100 SERIESStandards on Key ConceptsEstablishes fundamental concepts: nature of engagement, fraud risk evaluation, statutory compliance, and applying investigative hypotheses.200 SERIESEngagement ManagementGoverns engagement objectives, appointment terms, utilization of external experts, agency interactions, and stakeholder communication.300 SERIESExecuting AssignmentsOutlines planning, evidence gathering, chain of custody, execution procedures, interview protocols, supervision, and court testimony.400 SERIESSpecialised AreasAddresses advanced data analytics, digital domain evidence discovery (e-discovery), and investigations into bank loans and borrowings.500 SERIESReporting ResultsSets rigorous standards for drafting objective, evidence-backed forensic investigation reports suitable for legal proceedings.600 SERIESQuality ControlMandates engagement-level and firm-wide quality controls, peer review protocols, and confidentiality safeguards.Complete List of 20 Codified FAIS StandardsFAIS Standard CodeStandard Title & NomenclaturePrimary Investigation FunctionFAIS 110Understanding the Nature of EngagementDistinguishing between forensic accounting and statutory auditing engagements.FAIS 120Understanding the Fraud RiskAssessing vulnerabilities, fraud mechanisms, and potential perpetrator profiles.FAIS 130Laws and RegulationsAligning investigation procedures with the Evidence Act, CrPC, PMLA, and IPC.FAIS 140Applying HypothesesFormulating, testing, and refining inductive and deductive investigation theories.FAIS 210Engagement ObjectivesDefining precise terms of reference and agreed-upon scope of inquiry.FAIS 220Engagement Acceptance and AppointmentConducting conflict of interest evaluations and formalizing appointment letters.FAIS 230Using the Work of an ExpertEvaluating qualifications and findings of external technical specialists.FAIS 240Engaging with AgenciesProtocols for coordinating with law enforcement bodies (CBI, ED, SFIO, Police).FAIS 250Communication with StakeholdersGoverning formal progress updates to audit committees, boards, and lenders.FAIS 310Planning the AssignmentDeveloping customized, risk-calibrated investigative work plans.FAIS 320Evidence and DocumentationSecuring, logging, and preserving authentic, legally admissible documentary proof.FAIS 330Conducting Work ProceduresExecuting fieldwork, substantive verification, and asset verification procedures.FAIS 340Conducting InterviewsStandard operating procedures for questioning witnesses and suspected wrongdoers.FAIS 350Review and SupervisionSupervising multidisciplinary field teams and reviewing working papers.FAIS 360Testifying Before a Competent AuthorityGuidelines for acting as an expert witness in tribunals and courts of law.FAIS 410Applying Data AnalysisDeploying advanced analytics, statistical tools, Benford's Law, and RSF.FAIS 420Evidence Discovery in Digital DomainForensic disk imaging, volatile RAM capture, and electronic metadata analysis.FAIS 430Loans and BorrowingsInvestigating fund diversions, siphoning, willful defaults, and NPA accounts.FAIS 510Reporting ResultsStructuring factual, unbiased, court-admissible forensic audit reports.FAIS 610Quality ControlEnforcing engagement-level quality assurance, ethical standards, and peer review.ConclusionIn today’s complex business environment, financial crimes and corporate scandals continue to grow in scale and sophistication, exposing vulnerabilities within corporate governance structures and eroding public trust. In response to these challenges, forensic accounting has emerged as an indispensable discipline for uncovering financial misconduct, safeguarding banking assets, and supporting judicial prosecutions.The mandatory implementation of the FAIS framework on July 1, 2023, positions the Institute of Chartered Accountants of India at the forefront of global anti-fraud governance. By mastering forensic technologies—including digital discovery, Benford’s Law, and transactional data mining—and adhering strictly to codified FAIS standards, Chartered Accountants are uniquely equipped to protect corporate integrity, restore market confidence, and uphold the highest standards of financial probity across the Indian economy.About the AuthorsMJCA. Mohit JindalMember of the Institute of Chartered Accountants of IndiaCA. Mohit Jindal is a practicing Chartered Accountant specializing in forensic audits, corporate fraud investigation, anti-money laundering (AML) compliance, and digital accounting systems. He actively advises banking institutions, corporate boards, and legal counsel on fraud risk management and implementation of the mandatory ICAI FAIS standards.GBDr. Garima BansalAcademician & Economic ResearcherDr. Garima Bansal is an academician and researcher specializing in forensic accounting methodologies, corporate governance architectures, and financial fraud deterrence. Her research explores interdisciplinary curricula development in accounting, empirical fraud risk modeling, and the integration of digital analytical tools in corporate investigations.References & Academic Bibliography[1] Akkeren, J. V., Buckby, S., & Kim, M. (2013). A metamorphosis of the traditional accountant: An insight into forensic accounting services in Australia. Pacific Accounting Review, 25(2), 188–216.[2] Alshurafat, H., Beattie, C., Jones, G., & Sands, J. (2019). Forensic accounting core and interdisciplinary curricula components in Australian universities. Journal of Forensic and Investigative Accounting, 11(2), 353–365.[3] Association of Certified Fraud Examiners (ACFE). (2022). Occupational Fraud 2022: A Report to the Nations. Austin, TX: ACFE.[4] Bassey, E. B. (2018). Effect of forensic accounting on the management of fraud in microfinance institutions in Cross River State. Journal of Economics and Finance, 9(4), 79–89.[5] Bhasin, M. L. (2016). Satyam’s manipulative accounting methodology unveiled: An experience of an Asian economy. International Journal of Business and Social Research, 6(12), 35–54.[6] Institute of Chartered Accountants of India (ICAI). (2023). Compendium of Forensic Accounting and Investigation Standards (FAIS). Digital Accounting and Assurance Board (DAAB), New Delhi.[7] Lakshmi, P., & Menon, G. (2016). Forensic accounting: A checkmate for corporate fraud. Journal of Modern Accounting and Auditing, 12(9), 453–460.[8] Ocansey, E. (2017). Forensic accounting and the combating of economic and financial crimes in Ghana. European Scientific Journal, 13(31), 379–393.[9] Onodi, B. E., Okafor, T. G., & Onyali, C. I. (2015). The impact of forensic investigative methods on corporate fraud deterrence in banks in Nigeria. European Journal of Accounting, Auditing and Finance, 3(4), 69–85.[10] Othman, R., & Laswad, F. (2019). Future forensic accountants: Developing awareness of perceptual blindness. Journal of Forensic and Investigative Accounting, 11(2), 299–308.[11] Oyedokun, G. (2016). Forensic accounting investigation techniques: Any rationalization? SSRN Electronic Journal, Paper No. 2910318.[12] Seda, M., & Kramer, B. K. P. (2014). An examination of the availability and composition of forensic accounting education in the United States and other countries. Journal of Forensic and Investigative Accounting, 6(1), 1–46.[13] Sumartono, S., Urumsah, D., & Hamdani, R. (2020). Skills of the forensic accountants in revealing fraud in public sector: The case of Indonesia. Journal of Accounting and Investment, 1(1), 180–194.[14] Tiwari, R. K., & Debnath, J. (2017). Forensic accounting: A blend of knowledge. Journal of Financial Regulation and Compliance, 25(1), 73–85.Statutory Authority: Digital Accounting and Assurance Board (DAAB), ICAI; FAIS Mandatory from July 1, 2023.Authors Contact: camj777@gmail.com | garimahgc13@gmail.com | eboard@icai.in
Technology
Ep. 489 — Deciphering the Course of Cybersecurity in Digital Banking
CA Journal
· September 2026
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February 2024 Issue Technology & Digital Banking The Chartered Accountant (Vol. 72, No. 8)Deciphering the Course of Cybersecurity in Digital BankingA Comprehensive Bibliometric and Empirical Analysis of Online Banking and Cybersecurity Research Since the 2014 Digital India Initiative: Publication Trends, Core Thematic Mapping, and Emerging Fraud Defense Vectors72 StudiesScopus Publications Analyzed14.57%Average Annual Growth Rate (CAGR)75%Financial Share of Cybercrimes (FCRF)47%Prevalence of UPI FraudsThis research paper focuses on the accelerating growth of the online banking sector and its critical intersection with cybersecurity. A comprehensive bibliometric and empirical analysis is undertaken for practitioners—including Chartered Accountants, management accountants, academicians, and banking professionals—to decipher the trajectory of studies, key findings, and emerging research directions in the field. The paper encapsulates the journey of online banking and cyber defense since 2014, when the landmark Digital India Initiative was rolled out alongside the Pradhan Mantri Jan Dhan Yojana (PMJDY), democratizing digital access and establishing universal financial inclusion across the Indian economy.Introduction: The Evolution of Digital Banking in IndiaIndia has been leading the world in the development and large-scale adoption of financial technologies. Online banking in India originated in the late 1990s, with ICICI Bank taking the pioneering initiative. However, following the collapse of the dot-com bubble, the Indian public grew exceptionally wary of transacting over the internet due to acute security vulnerabilities. During that period, online banking was low on consumer priorities, as transitioning from physical branch banking to digital interfaces lacked robust security guarantees. Even a decade after its introduction, a substantial majority remained non-users, a small segment utilized online portals purely for account balance inquiries, and only a minuscule fraction conducted actual monetary transactions (Iyengar & Belvalkar, 2010).The watershed turning point arrived in 2014 with the launch of the Digital India Initiative, backed by an initial governmental commitment of ₹1,000 Crore. Simultaneously, the Pradhan Mantri Jan Dhan Yojana (PMJDY) provided universal banking access, issuing basic savings accounts and RuPay debit cards to millions across all socioeconomic strata. Deposits in Jan Dhan accounts subsequently surpassed ₹1.5 Trillion (PTI, 2022). These dual structural reforms created a ubiquitous digital foundation, transforming online banking into an "anywhere, anytime" reality for account holders nationwide.The Shadow of Cybercrime in Digital BankingThis unprecedented digital expansion has been severely marred by the exponential rise in cybercrimes. A cybercrime encompasses any unlawful criminal activity executed over computer networks and the internet. According to the Future Crime Research Foundation (FCRF), an alarming 75% of all reported cybercrimes are financial frauds (spanning January 2000 to June 2023).These financial offenses include unauthorized online banking intrusions, credit/debit card theft, ransomware locks, and most prominently, UPI fraud, which accounts for 47% of all digital financial frauds (PTI, 2022). Common threat vectors involve customer data theft, phishing, vishing, malware injection, and credential harvesting. Consequently, both digital banking adoption and cybercrime rates are expanding simultaneously, demonstrating an urgent need for institutional investment in cybersecurity infrastructure."Online banking is not a choice but a necessity, but there have been threats to online transactions especially financial transactions including online banking transactions."Research Objectives & Core QuestionsThis paper captures the research trajectory since 2014, evaluating the post-Digital India landscape through three core research questions (RQs):RQ1: What is the publication trend and author productivity profile in online banking and cybersecurity?RQ2: What are the most relevant and highly cited benchmark studies in digital banking cybersecurity indicating?RQ3: What are the core themes, latent trends, and future frontiers that must be addressed by the banking industry?Findings I: Publication Trends & Prolific Researchers (RQ1)The bibliometric analysis reveals that academic and practical research in online banking cybersecurity has grown rapidly. A total of 72 Scopus-indexed research publications were identified between 2014 and 2023, published across 65 distinct journals and sources.Publication output expanded from just 2 papers in 2014 to 17 papers in 2023, reflecting an average annual growth rate of 14.57%. This sustained growth confirms that academic and industry interest is surging in response to escalating real-world financial losses. The analysis highlights leading global researchers with multiple Scopus-indexed publications in the field, including S. Dasgupta, P. Kumar, A. Phipps, Shava, Vassilev, and Wodo. Chartered Accountants and banking institutions can actively seek professional collaborations with these subject-matter experts to develop robust cyber risk frameworks.Findings II: Deep Dive into the Top Four Benchmark Studies (RQ2)To understand the primary frontiers of digital banking defense, the four most highly cited studies in the field were analyzed:S.No.Study Title & AuthorsPublication Venue & DOIKey Findings & Practical Insights1Cyber hygiene: The concept, its measure, and its initial tests(Vishwanath et al., 2020)Decision Support SystemsVol. 128, Jan 2020, 11316010.1016/j.dss.2019.113160Pioneering benchmark study that conceptualizes, operationalizes, and identifies the sub-dimensions of cyber hygiene. It demonstrates that individual security habits and behavioral discipline are decisive in preventing digital intrusion. (Citations: 38)2Deep Learning Modalities for Biometric Alteration Detection in 5G Networks-Based Secure Smart Cities(Sedik et al., 2021)IEEE AccessVol. 9, July 2021, pp. 94780–9478810.1109/ACCESS.2021.3088341Highlights the vulnerability of biometric authentication within high-speed 5G mobile banking environments. Proposes advanced deep learning convolutional models to compute the probability of biometric signatures having been altered, forged, or spoofed. (Citations: 29)3Cyber Security Threats on Digital Banking(K, 2022)IEEE AccessOnline ISSN: 2169-353610.1109/ACCESS.2021.3088341Identifies cybersecurity as the single greatest systemic operational risk to digital banking. Proves the necessity of constructing multi-layered defense architectures incorporating multi-factor verification, hardware tokens, and dynamic cryptographic encryptions. (Citations: 26)4Gamification Techniques for Raising Cyber Security Awareness(Scholefield & Shepherd, 2019)Lecture Notes in Computer Science (LNCS)Vol. 11594, Springer, pp. 191–20310.1007/978-3-030-22351-9_13Demonstrates that didactic, preachy awareness warnings are largely ignored by bank customers. Proposes gamified simulations inside digital banking interfaces to train users interactively in identifying phishing lures and social engineering scams. (Citations: 23)These benchmark studies reveal that the progression from simple, amateurish malware ("soft cybercrimes") to highly automated, AI-driven syndicates has occurred so rapidly that traditional banking defenses frequently lag behind. Modern protection demands algorithmic anomaly detection, multi-layered biometric defense, continuous customer cyber hygiene, and interactive gamified education.Findings III: Thematic Mapping of Keywords via Biblioshiny (RQ3)To map the conceptual structure and future directions of the field, a strategic thematic mapping analysis was executed using the biblioshiny package. This framework evaluates keyword clusters based on two statistical dimensions: Centrality (relevance degree across the domain) and Density (internal development degree of the theme).Figure 1: Strategic Thematic Mapping of Keywords (Biblioshiny Analysis)Niche Themes (Q-2) High Density, Low CentralityHighly developed and internally structured, but currently isolated from everyday digital banking workflows.cyber-security blockchain privacy cyber crimeMotor / Driving Themes (Q-1) High Density, High CentralityWell-developed and central to digital banking defense. These represent the primary engines of current research.e-banking phishing awareness cyber security authentication online bankingEmerging / Declining Themes (Q-3) Low Density, Low CentralityNascent themes that require substantial future research to mature into core operational standards.internet banking electronic banking artificial intelligenceBasic / Transversal Themes (Q-4) Low Density, High CentralityFundamental, ever-present topics that form the bedrock of the discipline across all banking environments.cybersecurity security cybercrimeNote: The transitional cluster bridging Q-1 and Q-4 includes deep learning and phishing website detection.Discussion & Practical Implications for Chartered AccountantsThe complete transition of commercial banking to digital channels has permanently altered the nature of operational and financial audit risks. For Chartered Accountants, Management Accountants, and internal system auditors, cybersecurity is no longer merely an IT infrastructure concern; it is a critical component of Internal Financial Controls (IFC), statutory compliance, and enterprise risk management.Implementing cutting-edge security architecture is capital-intensive, but essential to prevent systemic banking failures and protect corporate solvency. Auditors must expand their scope beyond balance sheet reconciliations to evaluate:IT General Controls (ITGC): Verifying the robustness of bank API gateways, multi-factor authentication protocols, and hardware security modules (HSMs).Biometric Integrity: Assessing compliance with deep learning anti-spoofing standards and encryption protocols for customer biometric credentials.Regulatory Compliance: Auditing adherence to the Reserve Bank of India’s (RBI) Cyber Security Framework for Banks, CERT-In directions, and the Digital Personal Data Protection (DPDP) Act, 2023.Future Research AgendaThe findings point to three critical frontiers that demand urgent empirical investigation, particularly in the Indian context:1. Mitigating UPI Payment FraudsWith Unified Payments Interface (UPI) frauds accounting for 47% of all digital financial crimes, researchers must design predictive machine learning models that identify fraudulent transaction patterns and unauthorized screen-sharing apps in real time.2. Weaponization of Artificial IntelligenceInvestigating the malicious use of generative AI by cybercrime syndicates—including deepfake voice cloning for authorized fund transfers and automated spear-phishing campaigns targeting bank personnel.3. Governance, Risk & Compliance (GRC)Developing standardized GRC frameworks that integrate technical cyber defense metrics into executive board oversight and statutory reporting across Indian public and private sector banks.ConclusionThe advent of digital banking has revolutionized the financial services landscape, delivering unparalleled convenience and universal financial inclusion across India. However, the accompanying surge in cybercrimes poses a severe threat to public trust and banking stability. By examining 72 core Scopus publications, evaluating top-cited benchmark studies, and analyzing keyword thematic distributions, this paper underscores that technical solutions—such as deep learning biometric verification, advanced cyber hygiene, and gamified awareness—must be integrated with robust audit oversight.Chartered Accountants and banking leaders must collaborate closely with cybersecurity researchers to establish an adaptive, resilient security posture, ensuring that India’s digital banking ecosystem remains secure, trustworthy, and globally competitive.About the AuthorsMMDr. Meera MehtaAcademician & Information Systems ResearcherDr. Meera Mehta is an academician and researcher specializing in digital banking architectures, financial technology adoption, cyber risk management, and cybersecurity governance in banking ecosystems. Her research investigates consumer trust in digital payments, IT internal controls, and empirical threat modeling in mobile banking.SADr. Shivani AroraAcademician & Finance SpecialistDr. Shivani Arora is an academician and researcher focusing on information security, consumer behavior in digital finance, bibliometric mapping, and cybersecurity risk frameworks. She has authored multiple scholarly papers evaluating the intersection of financial inclusion, UPI payment systems, and operational risk mitigation.References & Bibliography[1] Iyengar, J., & Belvalkar, M. (2010). Case study of online banking in India: User behaviors and design guidelines. IFIP Advances in Information and Communication Technology, 316, 180–188. doi:10.1007/978-3-642-11762-6_15[2] K. H. M. A. T. M. G. M. K. H. A. A. R. (2022). Cyber Security Threats on Digital Banking. IEEE Access. doi:10.1109/ICAIC53980.2022.9896966[3] Press Trust of India (PTI). (2022). Deposits in bank accounts opened under Jan Dhan scheme cross Rs 1.5 trn. Business Standard News.[4] Scholefield, S., & Shepherd, L. A. (2019). Gamification Techniques for Raising Cyber Security Awareness. In Lecture Notes in Computer Science (LNCS) (Vol. 11594, pp. 191–203). Springer. doi:10.1007/978-3-030-22351-9_13[5] Sedik, A., Tawalbeh, L., Hammad, M., El-Latif, A. A. A., El-Banby, G. M., Khalaf, A. A. M., El-Samie, F. E. A., & Iliyasu, A. M. (2021). Deep learning modalities for biometric alteration detection in 5G networks-based secure smart cities. IEEE Access, 9(July), 94780–94788. doi:10.1109/ACCESS.2021.3088341[6] Vishwanath, A., Neo, L. S., Goh, P., Lee, S., Khader, M., Ong, G., & Chin, J. (2020). Cyber hygiene: The concept, its measure, and its initial tests. Decision Support Systems, 128, 113160. doi:10.1016/j.dss.2019.113160Institutional Mapping: Digital Accounting and Assurance Board (DAAB), ICAI.Authors Contact: eboard@icai.in
Financial Market • Capital Markets & IPO DisclosuresUnlocking IPO Financial Mastery: Decoding Financial Statements & Audit Reports to ensure ICDR ComplianceA comprehensive statutory roadmap demystifying the 5 distinct financial statement architectures, audit certification requirements, peer review mandates, and case-wise reporting matrices under the SEBI (ICDR) Regulations, 2018.5Financial Statement Types3 FYsHistorical Period + Stub180 DaysMaximum Staleness RuleTop 10Risk Factor MandateAn Initial Public Offering (IPO) represents the ultimate evolutionary transition for a private enterprise entering the regulated capital markets. However, navigating the labyrinth of financial disclosures under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (SEBI ICDR Regulations) requires rigorous technical precision. Issuers, merchant bankers, and audit practitioners must decode the intricate taxonomy of financial statements and audit opinions to safeguard compliance, eliminate regulatory rejection, and maintain public investor confidence.1. The Regulatory Ecosystem & Legislative FoundationsThe architecture of financial disclosures in offer documents is governed by a tripartite framework consisting of:SEBI (ICDR) Regulations, 2018: Specifically Schedule VI, Part A, Paragraph 11, which prescribes the minimum financial information, audit reports, and restatement adjustments required in the Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP).The Companies Act, 2013: Sections 26, 129, 134, 139, and 143, establishing statutory audit standards, accounting principles, and director responsibilities.ICAI Guidance Notes & Standards: Particularly the Guidance Note on Reports in Company Prospectuses (Revised 2019), SA 800 / SA 805 for special purpose audits, and SAE 3420 for compilation of proforma financial statements.ⓘ The Core Objective of Restatement under SEBI ICDRThe fundamental objective of financial restatement under SEBI ICDR Regulations is not merely historical aggregation. Rather, it aligns historical operating results across the preceding three financial years and any interim stub period to reflect uniform accounting policies, rectify past audit qualifications, correct prior-period errors, and present a true, fair, and comparable snapshot to the investing public.2. Decoding the 5 Types of IPO Financial StatementsDepending on the company's operational lifecycle, corporate reorganizations, timing of the filing, and audit firm status, up to five distinct categories of financial statements may feature in an IPO offer document:1 AAFSAnnual Audited Financial Statements: General-purpose statutory financials prepared under the Companies Act for past years. Audited by the qualified statutory auditor; may or may not be peer-reviewed at the time of original signing.2 SPIFSSpecial Purpose Interim Financial Statements: Interim financials prepared when the latest audited financial year is older than 6 months from the filing date. Audited under Ind AS 34 / AS 25 with no comparative stub requirements.3 RAFSRe-Audited Financial Statements: Mandatory re-audits performed when a new peer-reviewed auditor is appointed for the stub period, curing the deficiency of a predecessor auditor who lacked a valid peer review certificate.4 PFSProforma Financial Statements: Required when material acquisitions or divestments occur post-balance sheet date, presenting the issuer's financials as if the transaction had taken place at the start of the reporting period.5 RFSRestated Financial Statements: The primary investor-facing financial statements prepared for the preceding 3 full financial years plus the stub period, embodying restatement adjustments and peer review certification.3. Comparative Taxonomy & Audit Reporting RequirementsThe application of statutory reporting standards—including the Companies (Auditor's Report) Order (CARO 2020) and Internal Financial Controls over Financial Reporting (IFCoFR)—varies significantly across these five financial statement categories:Statement TypeGoverning StandardCARO 2020 Applicable?IFCoFR Reporting?Peer Review Certificate?Primary Audit ReportAAFS (Annual Audited)Companies Act, 2013 / Ind AS / ASMandatoryMandatoryOptional (Historical)Independent Auditors' ReportSPIFS (Interim Stub)SEBI ICDR / Ind AS 34 / AS 25ExemptedMandatoryMandatoryIndependent Auditors' Report on SPIFSRAFS (Re-Audited)SA 800 / SA 805 / SA 700ExemptedExemptedMandatoryIndependent Auditors' Report on RAFSPFS (Proforma)SAE 3420 / SEBI ICDRNot ApplicableNot ApplicableMandatoryAssurance Report on Proforma FinancialsRFS (Restated)ICAI Guidance Note / SEBI ICDRNot ApplicableNot ApplicableMandatoryIndependent Auditors' / Examiners' Report⚠ The Peer Review Board (PRB) Certification MandateUnder Regulation 25(6) and Schedule VI of the SEBI ICDR Regulations, no financial statements can be incorporated in an offer document unless audited or examined by a Chartered Accountant holding a valid Peer Review Certificate issued by ICAI. If the statutory auditor who signed past historical financials lacked a valid certificate at the signing date, the issuer must either re-audit the latest year through a peer-reviewed auditor or appoint an outside peer-reviewed CA firm to issue an Examiners' Report.4. Case-Wise Applicability Matrix: Part A (Standalone Issuers)For companies without subsidiaries, joint ventures, or associates, the procedural pathway is determined by whether the statutory auditor possesses a valid peer review certificate and the timing of any new auditor appointment:ScenarioPredecessor Auditor StatusAppointment of New AuditorApplicable Financial StatementsResulting Audit ReportsCase IHeld valid Peer Review Certificate when signing latest AAFS.No change in auditor; existing auditor continues.• AAFS (3 FYs)• SPIFS (if stub required)• RFS (3 FYs + Stub)• Statutory Audit Reports on AAFS• Auditors' Report on SPIFS• Independent Auditors' Report on RFSCase IILacked Peer Review Certificate when signing latest AAFS.New peer-reviewed auditor appointed for stub period or before filing.• AAFS (as originally signed)• SPIFS (Stub period)• RAFS (Latest FY re-audited)• RFS (3 FYs + Stub)• Original Audit Reports on AAFS• Auditors' Report on SPIFS• Auditors' Report on RAFS• Independent Auditors' Report on RFSCase IIILacked Peer Review Certificate when signing latest AAFS.New peer-reviewed auditor appointed after stub period but before filing.• AAFS (as originally signed)• SPIFS (signed by predecessor)• RAFS (Latest FY + Stub Period)• RFS (3 FYs + Stub)• Original Audit Reports on AAFS & SPIFS• Auditors' Report on RAFS (FY + Stub)• Independent Auditors' Report on RFSCase IVLacked Peer Review Certificate when signing latest AAFS.No new statutory auditor appointed prior to filing offer document.• AAFS (as originally signed)• SPIFS (if prepared)• RAFS (Optional re-audit)• RFS (3 FYs + Stub)• Original Audit Reports on AAFS• Examiners' Report issued by independent Peer-Reviewed CA firm⚠ Case IV Disclosure Penalty: Mandatory Top 10 Risk FactorIf an issuer adopts Case IV—wherein the statutory auditor lacks a peer review certificate and the Restated Financial Statements are examined and certified by an external Chartered Accountant firm (issuing an Examiners' Report rather than an Auditors' Report)—SEBI ICDR Regulations mandate that this fact must be highlighted prominently as one of the Top 10 Risk Factors on the front pages of the Draft Red Herring Prospectus. This triggers severe reputational scrutiny and investor discount pricing.5. Case-Wise Applicability Matrix: Part B (Holding Companies with Subsidiaries)When the issuer operates as a parent holding company with subsidiaries, joint ventures, or associates, the consolidation requirements under Ind AS 110 / AS 21 intersect with SEBI ICDR disclosure mandates:Consolidated Restated Financial Statements (CRFS): CRFS is the primary basis of investor presentation. All restatements, uniform accounting policy alignments, and intercompany eliminations must occur at the consolidated level for all 3 preceding financial years and the interim stub period.Standalone Restated Financial Statements (SRFS): Must also be disclosed in an abridged format or as an annexure, allowing investors to evaluate parent standalone cash flows and standalone debt-servicing capability.Component Auditor Reliance (SA 600): The principal auditor certifying the consolidated RFS must evaluate whether component auditors hold valid peer review certificates. Where material subsidiaries are audited by non-peer-reviewed firms, additional audit testing or re-audits of those components may be necessitated.Proforma Consolidated Financials: If a subsidiary was acquired after the stub period or during the preceding financial year without 100% full-period historical consolidation, Proforma Consolidated Financial Information prepared under SAE 3420 becomes mandatory.6. Strategic Guidelines for Issuers, Merchant Bankers & AuditorsVerify Peer Review Validity Upfront: Never rely on assurances. Obtain the physical ICAI Peer Review Certificate and verify its validity on the ICAI portal covering the exact date of signing the financial statements and examination reports.Manage the 180-Day Staleness Clock: If the DRHP or RHP filing crosses 180 days from the fiscal year-end (e.g., beyond September 30 for a March 31 year-end), immediately commission Special Purpose Interim Financial Statements (SPIFS) for a 3-month or 6-month stub period to prevent filing invalidation.Embed IFCoFR into Interim Audits: Auditors must note that while interim reviews (SRE 2410) do not require IFCoFR, full interim audits of SPIFS under SEBI ICDR do mandate IFCoFR reporting. Plan testing cycles accordingly.Avoid Case IV Where Feasible: Appoint a peer-reviewed statutory auditor prior to filing rather than relying on an external CA firm's Examiners' Report, thereby avoiding the punitive Top 10 Risk Factor disclosure.Regulatory References & Authoritative LiteratureSecurities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 [SEBI ICDR Regulations], Gazette Notification No. SEBI/LAD-NRO/GN/2018/31, as amended.Institute of Chartered Accountants of India (ICAI), Guidance Note on Reports in Company Prospectuses (Revised 2019), New Delhi.ICAI Standard on Assurance Engagements (SAE) 3420, Assurance Engagements to Report on the Compilation of Proforma Financial Information Included in a Prospectus.Ministry of Corporate Affairs, Companies (Auditor's Report) Order, 2020 [CARO 2020], notified under Section 143(11) of the Companies Act, 2013.ICAI Peer Review Board Guidelines and Statement on Peer Review, ICAI, New Delhi.
Forensic Accounting
Ep. 492 — Chartered Accountants: The New Vanguard of Dispute Resolution
CA Journal
· September 2026
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Forensic Accounting • Dispute Resolution & Litigation SupportChartered Accountants: The New Vanguard of Dispute ResolutionExploring the transformative evolution of Chartered Accountants from number crunchers to strategic dispute resolution practitioners across arbitration, mediation, conciliation, courtroom expert testimony, and financial damage quantification.ADR & CourtDual Practice ArenasSec 26Arbitral Tribunal ExpertSec 45Evidence Act AdmissibilityFAISForensic Standards Framework🔧The Swiss Army Knife MetaphorOriginating in the 19th century, the Swiss Army knife is considered a marvel of design and efficiency. The Swiss military sought a pocket-sized tool that would allow soldiers to perform a variety of tasks, from opening canned foods to disassembling rifles. The result was a compact multipurpose tool combining a knife blade with screwdrivers, scissors, and other implements. Chartered Accountants embody this exact essence of adaptability and multifunctionality in the business and legal world.Just like a Swiss Army knife equipped to handle a spectrum of tasks, Chartered Accountants are trained across diverse domains such as accounting, taxation, law, management, and advisory. When complex business challenges and commercial disputes arise, business owners frequently seek the counsel of their CA before consulting legal professionals. Today, with the exponential rise of forensic accounting, CAs are establishing themselves as the indispensable vanguard of dispute resolution, offering investigative accounting, damage quantification, and formal litigation support.1. Forensic Accounting & Dispute Resolution ArchitectureCommercial disagreements in modern enterprise are inevitable—spanning contractual conflicts with vendors, shareholder disputes, post-acquisition claims, intellectual property infringements, and regulatory actions. Left unmanaged, commercial conflicts drain executive bandwidth and corporate liquidity. From a professional perspective, dispute resolution is bifurcated into two primary pathways:Dispute Resolution ArchitectureOut of Court Settlements (ADR)Taking Dispute to Court (Litigation)ArbitrationConciliationMediation & NegotiationJudicial Trial & AppealsArbitration: A formal Alternative Dispute Resolution (ADR) mechanism where a neutral third party (the arbitrator or panel) evaluates evidence and renders a binding award, enforceable under the Arbitration and Conciliation Act, 1996 (subject to limited challenge under Section 34). Arbitration promises confidentiality, party autonomy, technical expertise, and speed.Conciliation: A structured statutory ADR process under Part III of the 1996 Act. The conciliator actively assists parties in drafting settlement terms, and upon mutual execution, the settlement agreement carries the status and effect of a binding arbitral award under Section 74.Mediation & Negotiation: Negotiations involve direct party-to-party dialogue without formal rules or third-party interference. Mediation engages an impartial mediator who facilitates dialogue and assists parties in reaching an amicable resolution, without the statutory authority to impose a binding verdict.Litigation: Taking the conflict to traditional civil courts or specialized tribunals. While formal, procedural, and potentially protracted, litigation offers complete discovery rules, public accountability, and multiple tiers of appellate review.2. Real-World Case Studies: Pre-Litigation & Litigation ConsultingForensic accounting interventions routinely crystallize positions, quantify exposure, and secure favorable settlements or judicial convictions:Pre-Litigation / ADRFactory Fire Business InterruptionScenario: Following a devastating blaze at a major textile facility, the enterprise claimed massive business interruption losses against its insurer. Deep disagreements arose over revenue projections and gross profit margins.Forensic Role: Appointed independently by mutual consent, forensic accountants evaluated pre-fire production runs, seasonal sales trends, fixed-cost run rates, and supply-chain alternatives. Their unbiased report provided a definitive loss quantification, resulting in an agreed multi-crore settlement without court intervention.Pre-Arbitration RebuttalMulti-Billion Dollar Pharma AcquisitionScenario: A cross-border pharmaceutical buyout precipitated an intense post-closing purchase price dispute regarding accounts payable liabilities, damaged inventory valuations, and unrecorded regulatory compliance accruals.Forensic Role: Forensic accounting experts were retained for pre-arbitration consulting. Over three rigorous rounds of rebuttal, they analyzed general ledger logs and vendor master files, narrowing disputed items and enabling a binding commercial settlement days before the arbitral tribunal hearings commenced.Litigation SupportPolitician Embezzlement & Money LaunderingScenario: In a high-profile prosecution involving alleged public fund embezzlement, law enforcement engaged a forensic accounting firm for litigation support to trace money trails and prove asset diversion.Forensic Role: Forensic professionals uncovered layered shell entities in offshore tax havens, matched illicit kickbacks with private asset purchases, and prepared comprehensive trial exhibits. Their expert witness testimony successfully withstood defense cross-examination, securing a criminal conviction.3. The Dynamics of Dual Expertise: Synergy of Legal & Accounting MindsAccording to the joint perspectives of the American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA), collaboration between attorneys and forensic accounting professionals is not merely advantageous—it is vital across several high-stakes practice areas:Financial statement misrepresentation and disclosure fraudEconomic damages and lost profit calculationsBusiness valuations in shareholder squeeze-outs and marital dissolutionsBankruptcy, corporate insolvency, and debt restructuring proceedingsFraud detection, internal investigations, and anti-bribery complianceComputer forensics and digital evidentiary acquisitionAttorneys & Legal CounselSubstantive Law & Procedure: Specialize in trial strategy, rules of evidence, legal precedents, and procedural motions.Direct Representation: Hold exclusive rights of audience before High Courts and Supreme Court (via Advocates-on-Record).Litigation Tactics: Recommend cause of action, frame issues, depose witnesses, and lead courtroom arguments.Credentials: Professional law degrees (LL.B / LL.M) and mandatory Bar Council certification.Forensic Accounting ProfessionalsFinancial Data Dissection: Analyze intricate transactions, hidden journal vouchers, and multi-tier bank reconciliations.Tribunal Representation: Non-lawyer CAs possess statutory rights of audience before tribunals such as the NCLT and ITAT.Damage Quantification: Compute discount rates, discounted cash flows (DCF), lost opportunity costs, and prejudgment interest.Credentials: Chartered Accountants (ICAI), CPAs, and certified specialists (FAFD, CFE, ABV).4. Statutory Standing of CAs in the Indian Dispute EcosystemIn India, the statutory framework increasingly accommodates and empowers Chartered Accountants across several formal dispute resolution capacities:✓ Statutory Representation Rights Before TribunalsWhile pleadings before the Hon'ble Supreme Court of India are reserved exclusively for Advocates-on-Record, Section 432 of the Companies Act, 2013 permits Chartered Accountants in practice to plead, argue, and represent parties directly before the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). This establishes CAs as primary counsel in corporate oppression, insolvency (IBC), and scheme matters.Beyond tribunal advocacy, CAs function under specific statutory provisions within the Arbitration and Conciliation Act, 1996:Sole Arbitrator or Panel Member: Appointed by commercial parties or arbitral institutions to adjudicate disputes revolving around joint venture accounts, supply agreements, and royalty audits.Amiable Compositeur: Authorized under Section 28(2) of the Act to decide ex aequo et bono (according to equity and good conscience) where parties prioritize commercial fairness over strict legalities.Tribunal-Appointed Expert (Section 26): The Arbitral Tribunal holds explicit statutory jurisdiction to appoint an independent CA expert to investigate and report on complex accounting records, cost overruns, and asset valuations.5. The ICAI FAIS Framework & Global Professional StandardsTo elevate the credibility, objectivity, and evidentiary rigour of forensic practitioners, the Institute of Chartered Accountants of India formulated the Forensic Accounting and Investigation Standards (FAIS). The FAIS establishes mandatory benchmarks across engagement planning, evidence collection, digital analysis, fraud reporting, and litigation support services.⚠ Joint Retainers: Eliminating Bias in Commercial ADRIn modern commercial mediation and arbitration, forensic professionals are increasingly retained jointly by both disputing parties. Joint engagement creates seamless document discovery, open data-sharing, eliminates asymmetric financial assumptions, reduces litigation expenditure by more than 50%, and yields an unbiased damage baseline acceptable to both camps.6. Evidentiary Admissibility: The Global Daubert Standard vs Indian LawThe admissibility of a forensic accountant's report and testimony as evidence is governed by strict legal benchmarks across global and domestic jurisdictions:The International Benchmark: The Daubert-Joiner-Kumho TrilogyIn international arbitrations and US federal courts, the admissibility of forensic accounting testimony is governed by the landmark Daubert trilogy (Daubert v. Merrell Dow Pharmaceuticals, General Electric Co. v. Joiner, and Kumho Tire Co. v. Carmichael). Under the Daubert Standard, the court functions as a gatekeeper evaluating:Whether the expert's theory or technique has been tested in practice;Whether it has been subjected to peer review and academic publication;The known or potential error rate of the scientific/financial model;The existence and maintenance of professional operating standards; andWhether the methodology has garnered general acceptance within the relevant financial community.The Indian Position: Section 45 & The 185th Law Commission ReportIn India, expert evidence is governed by Sections 45 to 51 of the Indian Evidence Act, 1872 (now mirrored in the Bharatiya Sakshya Adhiniyam, 2023). While Section 45 permits courts to seek opinions upon points of science or art, it does not explicitly define forensic accounting. As emphasized in the 185th Report of the Law Commission of India:Forensic accounting reports are generally treated as secondary, opinion evidence, demanding corroboration by books of original entry, vouchers, and direct witness testimonies.A forensic report placed on corporate records carries direct corporate governance ramifications for company management, audit committees, and statutory auditors.Judicial integration requires clearer statutory codification, standardizing methodologies to ensure reports withstand hostile cross-examination in criminal and civil trials.7. Comprehensive Litigation Support: Stage-Wise Value AdditionThe following matrix summarizes the practical applications, real-world case contexts, and tangible client value delivered by forensic accounting professionals across the dispute lifecycle:Litigation StageCore Forensic ApplicationPractical Case ScenarioTangible Value AdditionConsulting Service Before Court Proceedings (Pre-Litigation)• Preliminary calculation of financial loss & damages• Impartial evaluation of commercial outcomesThe professional collaborates with client management to construct realistic damage assessments prior to serving legal notice.• Substantial cost-saving• Establishes pragmatic expectations• Prevents non-meritorious lawsuitsEvidence Gathering (Discovery Process)• Identifying relevant accounting records• Framing financial deposition interrogatoriesThe practitioner assists counsel in drafting targeted document production requests and formulating financial deposition questions.• Comprehensive evidentiary trail• Strategic trial roadmap• Unearths hidden off-balance-sheet itemsServing as an Expert Witness (Court Proceedings)• Formal quantification of economic damages• Investigating breaches of contract & fraudThe expert provides an independent report and testifies in court on lost profit calculations, insolvency triggers, or partnership accounts.• Substantive admissible evidence• Enhanced tribunal credibility• Independent professional objectivityCritiquing (Court Proceedings)• Evaluating opposing experts' valuation models• Critiquing findings, reports, and testimoniesThe professional reviews the opposing expert's report, identifies flawed assumptions or erroneous discounting rates, and prepares cross-examination outlines.• Robust counter-arguments & rebuttals• Discredits opposing testimony• Neutralizes exaggerated claims8. Strategic Imperatives for the CA ProfessionAs commercial disputes grow increasingly data-intensive, the intersection of finance and law creates an unprecedented expansion in professional scope for Chartered Accountants:Pursue Advanced Credentials: Supplement statutory audit foundations with specialized credentials such as ICAI's Forensic Accounting and Fraud Detection (FAFD), Certified Fraud Examiner (CFE), and arbitration empanelment courses.Adopt Rigorous Methodologies: Ground all expert damage calculations in established, testable financial theories that satisfy Daubert-level scrutiny and FAIS standards.Maintain Uncompromising Objectivity: When acting as a testifying expert or arbitrator, maintain absolute professional independence from instructing counsel to ensure courtroom credibility is never compromised.Foster Inter-Professional Alliances: Build collaborative working relationships with litigation attorneys, commercial arbitrators, and law enforcement agencies to champion proactive pre-litigation resolution.Authoritative References & Doctrinal SourcesResearchGate: An Assessment of the Role of Forensic Accountants in Litigation Support Services: An Explanatory Approach (https://www.researchgate.net/publication/315010446).Deloitte Ireland: Forensic Accountant in Mediation (https://www2.deloitte.com/ie/en/pages/finance/articles/forensic-accountant-in-mediation.html).Bar & Bench: Mediation Finds Its Place: The Evolution of Commercial Dispute Resolution.WIRC of ICAI: Opportunities in Arbitration for Chartered Accountants and Finance Professionals.HKA Global: Forensic Accounting and Commercial Damages Quantification in the Americas.Latin Lawyer: It Takes Two to Tango: How Forensic Accountants Complement Corporate Attorneys in Investigations.NACVA: Journal of Forensic and Investigative Accounting, Vol. 3, Issue 2.Willamette Management Associates: Insights Journal on Economic Damages and Expert Witness Testimony.Jus Corpus Law Journal: Role of Forensic Accounting in Commercial Disputes, 2023.ICAI: Forensic Accounting and Investigation Standards (FAIS), Digital Accounting and Assurance Board, ICAI, New Delhi.
Corporate Law
Ep. 493 — Sustaining Corporate Integrity: Safeguarding Against Fraud
CA Journal
· September 2026
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Corporate Law • Corporate Governance & Fraud Risk ManagementSustaining Corporate Integrity: Safeguarding Against FraudA comprehensive exploration of corporate integrity as an indispensable institutional shield against fraud, evaluating empirical benchmarks from the OECD, the ACFE occupational fraud taxonomy, eight core anti-fraud pillars, and systemic challenges in India's corporate ecosystem.52.2%Voluntary Integrity Adoption3 ClassesACFE Occupational Fraud8 PillarsAnti-Fraud StrategySec 447Companies Act Fraud SanctionFinancialization has played a pivotal role in fostering global economic expansion, yet it has concurrently given rise to an alarming range of fraudulent practices—including financial misstatements, mis-selling of complex instruments, illicit market trading, and asset diversion. Corporate integrity serves as the fundamental bedrock of a resilient, healthy, and sustainable business environment. In today's interconnected corporate landscape, the threat of corporate fraud remains pervasive, posing grave risks to solvency, investor confidence, and societal trust.“Corporate integrity refers to an organization's commitment to ethical behavior, transparency, and compliance with laws and regulations. It involves upholding high standards of honesty, fairness, and accountability in all aspects of business operations.”1. The Interconnection: Corporate Integrity vs Corporate FraudCorporate integrity and corporate fraud operate in direct opposition. While corporate fraud involves deceptive, covert, and dishonest schemes carried out by individuals within or connected to an organization for personal or institutional gain at stakeholders' expense, corporate integrity establishes institutional immunity against such transgressions. This relationship manifests across two critical operational vectors:Prevention (The Deterrence Vector): A strong culture of corporate integrity, championed by ethical leadership, robust corporate policies, and strict statutory compliance, acts as an active deterrent. When enterprises embed integrity into their operational DNA, they create transparent reporting channels, dismantle rationalizations for misconduct, and substantially diminish fraud opportunities.Detection and Response (The Resilience Vector): Even within ethical organizations, rogue elements may attempt fraudulent schemes. However, organizations with high integrity maintain effective internal accounting controls, data monitoring systems, and whistleblower safeguards. They detect anomalies early, conduct swift, unbiased investigations, enforce decisive disciplinary action, and implement remediation to permanently seal control gaps.2. Empirical Benchmark: Why Companies Build Business Integrity FunctionsAccording to the landmark Trust and Business Survey conducted by the Organisation for Economic Co-operation and Development (OECD), the creation of a formal corporate integrity function is overwhelmingly driven by voluntary cultural commitment rather than mere statutory coercion:Why Business Integrity Functions are Created by CompaniesSource: OECD (2015) Trust and Business Survey • Multiple responses permittedOn a Voluntary Basis 52.20% Following a Decision by the Board 42.00% Following Legislative or Regulatory Changes 23.20% Following a Change in Corporate Management 11.60% Following an Enforcement Action for Serious Corporate Misconduct 8.70% To Comply with Requirements Imposed by Business Partners / Customers 7.20% Following Public / Media Campaigns or Allegations 4.30% Following Divestment from Investors Over Misconduct Allegations 2.90% 3. The Taxonomy of Corporate Fraud: The ACFE ClassificationCorporate fraud causes severe financial depletion, irreparable reputational injury, and severe legal liability. The Association of Certified Fraud Examiners (ACFE) categorizes occupational fraud into three distinct branches:1 Financial Statement FraudThe deliberate misstatement or omission of material financial facts, fictitious revenue recognition, understating liabilities, or improper asset valuations designed to deceive capital markets, lenders, and analysts.2 Asset MisappropriationThe theft or misuse of enterprise resources by internal personnel, including cash skimming, bogus vendor billing, payroll padding, fraudulent expense claims, and physical/digital asset theft.3 CorruptionThe wrongful use of institutional influence to procure personal or unauthorized organizational benefits, comprising commercial bribery, vendor kickbacks, undisclosed conflicts of interest, and bid-rigging.4. Corporate Integrity in the Indian Regulatory LandscapeIn India, corporate integrity has emerged as a cornerstone of regulatory policy. The legislative architecture is anchored by the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR):⚖ Statutory Pillars of Corporate Integrity in India1. Section 134(5)(e): Mandates that directors of listed companies explicitly confirm the adequacy and operating effectiveness of Internal Financial Controls (IFC).2. Section 177(9): Requires listed entities and large public companies to establish a formal Vigil Mechanism (Whistleblower Policy) with direct audit committee access.3. Section 143(12): Imposes a mandatory statutory duty on auditors to report suspected fraud exceeding ₹1 Crore directly to the Central Government.4. Section 447: Enacts stringent criminal penalties for fraud, including non-bailable imprisonment up to 10 years and treble monetary fines.5. SEBI LODR Regulation 23: Mandates strict Audit Committee review, valuation thresholds, and minority shareholder approvals for Related Party Transactions (RPTs).5. Eight Key Strategies to Safeguard Corporate IntegrityEnterprises must implement an integrated, multi-layered defensive strategy to deter fraud and preserve corporate integrity across their operational footprint:1 Ethical Tone at the TopBoard directors and executive leadership must embody uncompromising ethical standards, demonstrating through actions that business integrity takes precedence over short-term quarterly gains.2 Robust Whistleblower SystemsEstablishing secure, confidential, and fully anonymous reporting mechanisms backed by strict statutory non-retaliation guarantees to empower employees to voice concerns without fear.3 Transparent Reporting HotlinesProviding multi-channel access—such as 24/7 dedicated telephone hotlines, encrypted digital portals, and independent ombudsperson access for external stakeholders, suppliers, and vendors.4 Segregation of Duties & IFCEnforcing dual-authorization thresholds, maker-checker financial controls, strict access permissions, and continuous internal audit scrutiny to eradicate single-point control overrides.5 Pre-Employment Due DiligenceConducting comprehensive candidate screening—verifying educational degrees, examining past employment records, checking regulatory disqualifications, and screening financial backgrounds.6 Continuous Training ProgramsConducting recurring ethics and anti-fraud workshops covering red-flag identification, code of conduct requirements, reporting protocols, and real-world ethical dilemmas.7 AI & Analytics Fraud DetectionHarnessing artificial intelligence, machine learning algorithms, and advanced big data analytics to detect transactional outliers, duplicate billings, and unauthorized journal entries in real time.8 Independent External AssuranceEngaging independent external auditors, forensic specialists, and governance consultants to conduct objective vulnerability reviews, controls testing, and comprehensive risk assessments.6. Systemic Challenges Facing Indian OrganizationsDespite growing legislative and regulatory rigor, organizations in India confront significant structural and cultural headwinds in sustaining business integrity:Integrity ChallengeUnderlying Operational DynamicsInstitutional Impact & ExposureRequired Corporate RemediationEthical Decision-MakingCultural pressures, hierarchical reluctance to question superiors, intense drive for short-term financial targets.Subtle rationalization of compliance compromises that eventually expand into catastrophic failures.Formalizing ethical risk assessment frameworks; institutionalizing safe dissent mechanisms.Managing Conflicts of InterestClose-knit business communities, overlapping directorships, extensive promoter family networks.Undisclosed related-party dealings, corporate asset diversion, minority shareholder oppression.Mandatory proactive declaration registers; recusal of interested directors from all deliberations.Complex Multi-Jurisdictional ComplianceProliferation of Central, State, and municipal regulations spanning labor, GST, pollution, and corporate laws.High compliance overhead, inadvertent non-filing, legal vulnerability to regulatory sanctions.Adopting enterprise RegTech platforms and executing regular secretarial compliance audits.Social & Environmental Responsibility (ESG)Balancing statutory 2% CSR obligations and decarbonization mandates with commercial profitability.Accusations of greenwashing, misdirection of social development funds, reputational backlash.Independent social audit of CSR initiatives; comprehensive Business Responsibility & Sustainability Reporting (BRSR).Cultivating a Sustainable Culture of IntegrityCynicism among employees that whistleblowers face career marginalization while high-earning wrongdoers are protected.Erosion of organizational morale; fraud concealment until exposed by external investigative agencies.Enforcing strict, visible zero-tolerance disciplinary actions irrespective of executive seniority.7. Conclusion: Building the Ethical FortressCorporate integrity cannot be treated as a passive check-the-box compliance exercise. It demands active, continuous vigilance, frequent systemic evaluations, and unwavering commitment across every tier of the enterprise. By synthesizing ethical leadership, advanced predictive data technologies, rigorous internal financial controls, and empowering whistleblower frameworks, organizations build an enduring defense against fraud. In an era of uncompromising stakeholder scrutiny, corporate integrity is the definitive competitive moat that safeguards balance sheets, attracts global capital, and secures long-term corporate longevity.Authoritative References & Doctrinal SourcesChang, V., Valverde, R., Ramachandran, M., & Li, C. S. (2020). Toward Business Integrity Modeling and Analysis Framework for Risk Measurement and Analysis. Applied Sciences, 10(9), 3145.Shu, W., Chen, Y., Lin, B., & Chen, Y. (2018). Does corporate integrity improve the quality of internal control? China Journal of Accounting Research, 11(4), 407–427.Rifai, M. H., & Mardijuwono, A. W. (2020). Relationship between auditor integrity and organizational commitment to fraud prevention. Asian Journal of Accounting Research, 5(2), 315–325.Armstrong, A., & Francis, R. D. (2008). Loss of Integrity: the True Failure of the Corporate Sector. Journal of Business Systems, Governance and Ethics, 3(3).Rajora, V. M. (2010). Corporate Frauds in the World of Corporate Sector: A Critical Analysis. SSRN Electronic Journal.Kaptein, M., & Wempe, J. (2002). The Balanced Company: A Theory of Corporate Integrity. Oxford University Press.EY Global. (2023). Why Corporate Integrity Is More Crucial Now Than Ever. EY Forensic & Integrity Services.Corporate Compliance Insights. (2020). Placing Integrity at the Heart of Business Strategy.Regents Risk Advisory. (2021). Fraud & Integrity Frameworks.Paine, L. S. (1994). Managing for Organizational Integrity. Harvard Business Review, 72(2), 106–117.OECD. (2015). Trust and Business Survey: Report on Corporate Governance and Business Integrity. OECD Publishing, Paris.
MSME
Ep. 494 — Industry 4.0 adoption in Indian SMEs: Future Roadmap using TOWS Matrix Framework
CA Journal
· September 2026
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MSME • Digital Transformation & Industrial AutomationIndustry 4.0 adoption in Indian SMEs: Future Roadmap using TOWS Matrix FrameworkA data-driven empirical investigation examining the barriers, critical success factors, and Networked Readiness of Indian small and medium enterprises, synthesizing actionable strategic pathways via the TOWS Matrix.1.31 Cr+Udyam Portal EmploymentRank 9Global Tech AffordabilityRank 114Digital InfrastructureTOWSStrategic Decision Model“It is a revolution – a movement that is happening. Either we are a part of it, who makes it happen, or we let it happen to us.”Smart manufacturing technologies under the umbrella of Industry 4.0 are fundamentally changing global industrial operations, delivering exponential gains in shopfloor productivity, operational efficiency, and manufacturing agility. First conceptualized in 2011 at the Hannover Fair in Germany, Industry 4.0 has empowered German manufacturing SMEs to achieve international market dominance. However, while industrialized nations advance rapidly, the pace of adoption among Indian Small and Medium Enterprises (SMEs) remains sluggish. This study decodes the underlying bottlenecks and constructs an actionable strategic roadmap using the TOWS Matrix framework.1. The Technological Ecosystem: The 10 Pillars of Industry 4.0At the heart of the fourth industrial revolution lies the Cyber-Physical System (CPS), an architecture where physical machinery, embedded sensors, and digital computing networks interact seamlessly. As established by Ghobakhloo (2018), Industry 4.0 is driven by ten interconnected technological pillars:📶Internet of Things (IoT)☁Cloud Computing📊Big Data Analytics🤖Advanced Robotics🖨3D Printing (Additive)🔒Cybersecurity💻Cognitive Computing📡RFID Technologies📱Mobile Technologies🔄Machine-to-Machine (M2M)2. Significance and Revised Definition of Indian MSMEsThe Micro, Small, and Medium Enterprises (MSME) sector is the undisputed backbone of India's economic growth, employing over 1.31 Crore individuals registered on the Udyam Portal (FY 2021-2022) and accounting for 12% of the nation's total labor force (Sarma et al., 2020). Effective June 1st, 2020, under the *Aatmanirbhar Bharat* economic package, the Ministry of MSME notified revised, composite criteria unifying manufacturing and service enterprises:ClassificationInvestment in Plant & Machinery or EquipmentAnnual Turnover CeilingCore Role in the Industrial Supply ChainMicro EnterpriseNot more than ₹1 CroreNot more than ₹5 CroresGrassroots component fabrication, job-work, and localized cottage manufacturing.Small EnterpriseNot more than ₹10 CroresNot more than ₹50 CroresAncillary parts manufacturing, precision tooling, and industrial sub-assemblies.Medium EnterpriseNot more than ₹50 CroresNot more than ₹250 CroresDirect OEM supply, discrete equipment assembly, and international export production.3. Performance Overview: India's Networked Readiness ParadoxAccording to the Networked Readiness Index (NRI) published by the World Economic Forum, India presents a stark structural paradox across its digital readiness pillars:Overall Global Ranking: India ranks 91st out of 139 nations with an index score of 3.8 out of 7.The Affordability Advantage: India ranks an impressive 9th globally in affordability (Score: 6.6 / 7), proving that basic access cost is not the primary impediment to technological adoption.The Infrastructure & Innovation Deficit: In contrast, India ranks 114th in Digital Infrastructure and 110th in Business and Innovation Environment. Factory floors suffer from low bandwidth, intermittent industrial connectivity, and an absence of automated shopfloor data-sharing.⚠ The Research Disconnect: Theory vs SME RealityExtensive literature (Masood & Sonntag, 2020; Wankhede & Vinodh, 2022) highlights a severe disconnect between academic Industry 4.0 models and the ground reality of Indian SMEs. Unlike large multi-plant corporations with surplus capital and specialized IT divisions, small firms operate under intense cash-flow constraints, lack formal digital architectures, and struggle to upskill manual laborers into tech-literate machine operators.4. Empirical Identification of Barriers (Weaknesses & Threats)Through a systematic review of contemporary empirical research across Scopus, Web of Science, and ProQuest, the core barriers impeding Industry 4.0 adoption in Indian SMEs have been identified and classified into internal Weaknesses and external Threats:Factor CodeTOWS CategorizationIdentified Adoption BarrierSupporting Empirical LiteratureW1Internal WeaknessLack of manufacturing workforce upskilling strategiesAulbur et al. (2016); Dutta et al. (2020); Müller et al. (2018)W2Internal WeaknessPoor digital infrastructure to support man-machine relationshipsAntony et al. (2008); Kumar et al. (2022); Prasanna & Vinodh (2013)W3Internal WeaknessLack of top management support for implementing Operator 4.0 practicesChauhan et al. (2021); Jain et al. (2017); Kamble et al. (2020)W4Internal WeaknessHigh initial investment cost for implementing I4.0 technologiesAntony et al. (2008); S. Kumar et al. (2022); Shashi et al. (2019)T1External ThreatFear of cybersecurity breaches regarding Operator 4.0Antony et al. (2008); Kumar et al. (2022); Prasanna & Vinodh (2013)T2External ThreatFear of human safety hazards with modern automated machinesFeng et al. (2018); Shashi et al. (2019)T3External ThreatJob insecurity in digital deployment of manufacturingAntony et al. (2008); Kumar et al. (2022); Prasanna & Vinodh (2013)T4External ThreatFear of rapid technology obsolescenceAntony et al. (2008); Kumar et al. (2022); Prasanna & Vinodh (2013)5. Critical Success Factors (Strengths & Opportunities)Conversely, manufacturing enterprises possess distinctive internal capabilities and external market tailwinds that serve as Critical Success Factors (CSFs) to drive digital adoption:Factor CodeTOWS CategorizationCritical Success Factor (CSF)Supporting Empirical LiteratureS1Internal StrengthIT and innovation agilityChau & Tam (1997)S2Internal StrengthPrudent financial capabilities & targeted budgetingGross (2008)S3Internal StrengthTop management vision and digital commitmentMoeuf et al. (2020)S4Internal StrengthStructured user training and workforce educationKayikci et al. (2022)S5Internal StrengthAdaptive and flexible organizational cultureO’Donnell & Jackson (2007)O1External OpportunityAvailability of low-cost modular transformation kitsMoeuf et al. (2020)O2External OpportunityFlat organizational structures enabling agile process redesignKayikci et al. (2022)O3External OpportunityGovernment intervention through SAMARTH BHARAT Udyog initiativesO’Donnell & Jackson (2007)O4External OpportunityAbundant supply of skilled young technical and engineering laborMoeuf et al. (2020)6. Strategic Synthesis: The TOWS Matrix FrameworkBy cross-referencing internal strengths and weaknesses against external opportunities and threats, the TOWS Matrix synthesizes four distinct operational strategies to guide SME leadership:SO Strategies (Maxi-Max)Strengths × Opportunities(S2, O1) - Phased Capital Deployment: Invest in modular, low-cost smart sensors and SaaS analytics adopted by successful foreign and domestic SMEs.(S3, O2) - Agile Executive Sponsorship: Top management leverages the flat organizational structure to design and implement a rapid, phased adoption roadmap.ST Strategies (Maxi-Min)Strengths × Threats(S1, T1) - In-House Cyber Hardening: Deploy agile internal IT capabilities to install localized firewalls, eliminating cybersecurity fears around Operator 4.0 interfaces.(S4, T2) - Human-Centric Safety Drills: Institutionalize rigorous operator training programs to guarantee physical safety when working alongside cobots and automated machinery.WO Strategies (Mini-Max)Weaknesses × Opportunities(W2, O3) - Institutional Capacity Building: Overcome poor local infrastructure by utilizing government-subsidized testbeds under the SAMARTH BHARAT Udyog 4.0 initiative.(W3, O4 / O2) - Management Modernization: Reconfigure rigid reporting lines and onboard young technical talent to overcome managerial inertia.WT Strategies (Mini-Mini)Weaknesses × Threats(W1, T3) - Inclusive Workforce Retraining: Proactively upskill legacy operators to eradicate anxieties regarding job losses and displacement from automation.(W4, T4) - Brownfield Retrofitting: Utilize low-cost retrofit IoT modules on existing machinery rather than purchasing expensive new assets, mitigating obsolescence risks.7. Managerial Implications & Future Action RoadmapFor SME founders, CEOs, and professional finance advisors, digital transformation must be approached not as an all-or-nothing leap, but as an incremental, value-accretive journey:Pilot with Brownfield IoT: Avoid retiring functional machinery. Attach external vibration, temperature, and power-consumption IoT sensors to extract real-time telemetry from legacy tools.Leverage Government Subsidies: Tap into the Ministry of Heavy Industries' SAMARTH Udyog Bharat 4.0 centers across academic institutes (e.g., IITs) for subsidized prototyping, workforce training, and demonstration facilities.Foster Operator 4.0 Psychological Safety: Actively communicate that automated robotics and algorithms are deployed to handle repetitive, ergonomically hazardous tasks, augmenting human operators rather than replacing them.Adopt Cloud SaaS Platforms: Replace on-premise servers with subscription-based industrial software, converting prohibitive capital expenditure (CapEx) into manageable operational expenditure (OpEx).Academic References & Empirical LiteratureAntony, J., Kumar, M., & Labib, A. (2008). Gearing Six Sigma into UK manufacturing SMEs: Results from a pilot study. Journal of the Operational Research Society, 59(4), 482–493. https://doi.org/10.1057/palgrave.jors.2602437Chauhan, C., Singh, A., & Luthra, S. (2021). Barriers to industry 4.0 adoption and its performance implications: An empirical investigation of emerging economy. Journal of Cleaner Production, 285, 124809. https://doi.org/10.1016/j.jclepro.2020.124809Dutta, G., Kumar, R., Sindhwani, R., & Singh, R. K. (2020). Digital transformation priorities of India’s discrete manufacturing SMEs – a conceptual study in perspective of Industry 4.0. Competitiveness Review, 289–314. https://doi.org/10.1108/CR-03-2019-0031Ghobakhloo, M. (2018). The future of manufacturing industry: a strategic roadmap toward Industry 4.0. Journal of Manufacturing Technology Management, 29(6), 910–936. https://doi.org/10.1108/JMTM-02-2018-0057Jain, S., Shao, G., & Shin, S. J. (2017). Manufacturing data analytics using a virtual factory representation. International Journal of Production Research, 55(18), 5450–5464. https://doi.org/10.1080/00207543.2017.1321799Kumar, S., Raut, R. D., Narwane, V. S., Narkhede, B. E., & Muduli, K. (2022). Implementation barriers of smart technology in Indian sustainable warehouse by using a Delphi-ISM-ANP approach. International Journal of Productivity and Performance Management, 71(3), 696–721. https://doi.org/10.1108/IJPPM-10-2020-0511Moeuf, A., Lamouri, S., Pellerin, R., Tamayo-Giraldo, S., Tobon-Valencia, E., & Eburdy, R. (2020). Identification of critical success factors, risks and opportunities of Industry 4.0 in SMEs. International Journal of Production Research, 58(5), 1384–1400. https://doi.org/10.1080/00207543.2019.1636323O’Donnell, J., & Jackson, M. (2007). Solutions drawn from Australian case studies in mobile commerce. Conference Proceedings - 6th International Conference on the Management of Mobile Business, ICMB 2007, 2(2), 20. https://doi.org/10.1109/ICMB.2007.59Prasanna, M., & Vinodh, S. (2013). Lean Six Sigma in SMEs: An exploration through literature review. Journal of Engineering, Design and Technology, 11(3), 224–250. https://doi.org/10.1108/JEDT-01-2011-0001Wankhede, V. A., & Vinodh, S. (2022). Analysis of barriers of cyber-physical system adoption in small and medium enterprises using interpretive ranking process. International Journal of Quality & Reliability Management, 39(10), 2323–2353. https://doi.org/10.1108/IJQRM-06-2021-0174
Leadership
Ep. 495 — The Role of New Age CFO, Complexities & Challenges
CA Journal
· September 2026
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Leadership • CFO Leadership & Strategic Financial ManagementThe Role of New Age CFO, Complexities & ChallengesA veteran corporate perspective reflecting on the fifty-year metamorphosis of the Indian corporate finance function—from manual bookkeeping and the dawn of Accounting Standards to Ind AS adoption, massive global capital inflows, and the modern CFO's strategic co-pilot mandate.UP50 YearsCorporate Metamorphosis39 Ind ASFair Value Regime$1 Trillion+Foreign Inflows ManagedCo-PilotStrategic Business RoleOver the last fifty years, the Indian economy and corporate sector have undergone an unprecedented transformation. The primary catalyst has been the liberalization and globalization of the Indian economy, driving massive corporate diversification, global reach, and substantial inflows of technology and capital. Consequently, one of the central pillars of corporate management—the Chief Financial Officer (CFO)—has experienced extraordinary complexity. From essentially functioning as an unglamorous bookkeeper, the CFO has emerged as a key member of the senior leadership team and a strategic business partner who never loses sight of the controllership function.“The accounting function has remained an integral and important part of the role of the Head of Accounts, but in most cases financial management has also become a part of his role—certainly at the apex level.”1. Half a Century Ago: The Era of Manual BookkeepingFifty years ago, accounting in Indian corporate houses was predominantly manual. Balance sheets were compiled laboriously by hand and were susceptible to mathematical and clerical errors. Many a time, the balance sheet failed to tally on the first attempt; when it finally balanced after intense scrutiny of ledgers and trial balances, it was a moment of immense professional joy and pride for the Chartered Accountants involved!In that era, accounting was relatively straightforward, designed simply to satisfy the fundamental “true and fair” test. In the early 1970s, there were no formal Accounting Standards—the first Indian standard was issued by the Institute of Chartered Accountants of India (ICAI) only in 1979. The role of the finance head was primarily record-keeping, reflected in modest titles such as Accountant, Chief Accountant, or Controller of Accounts, tasked with periodical accounts, tax filings, and basic Management Information Systems (MIS).2. The First Wave: Accounting Standards Before 1991To reduce subjective judgment and render corporate financial statements comparable across enterprises, ICAI developed the foundation of Indian GAAP. By 1991, eleven foundational standards had been notified:StandardTitle of Accounting Standard (Issued Prior to 1991)Regulatory Impact on Corporate ReportingAS 1Disclosure of Accounting PoliciesStandardized disclosure of fundamental assumptions (going concern, accrual, consistency).AS 2Valuation of InventoriesEnforced measurement at lower of cost and net realizable value (NRV).AS 3Changes in Financial PositionIntroduced structured reporting of funds flow and working capital movements.AS 4Contingencies and Events Occurring after the Balance Sheet DateMandated treatment of subsequent adjusting and non-adjusting events.AS 5Prior Period and Extraordinary Items and Changes in Accounting PoliciesSegregated exceptional operational volatility from baseline recurring profits.AS 6Depreciation AccountingEstablished systematic depreciation methods based on useful economic life.AS 7Accounting for Construction ContractsIntroduced percentage-of-completion revenue accounting for project developers.AS 8Accounting for Research and DevelopmentRegulated conditions for expensing research versus capitalizing development costs.AS 9Revenue RecognitionDefined revenue milestones for sale of goods, service contracts, interest, and dividends.AS 10Accounting for Fixed AssetsCodified historical cost gross block, installation additions, and revaluations.AS 11The Effects of Changes in Foreign Exchange RatesFormulated foreign currency transaction translation and forward contract accounting.3. 1991 Liberalization & The Foreign Capital DelugeIn the early 1990s, the Government of India dismantled the industrial licensing raj, eliminated expansion restrictions, and opened capital markets. Indian enterprises forged international collaborations, acquired global technologies, and tapped foreign equity and debt through Global Depository Receipts (GDRs), External Commercial Borrowings (ECBs), and Foreign Currency Convertible Bonds (FCCBs).This structural pivot drew unprecedented overseas capital into Indian enterprise, demanding world-class disclosures, investor protection, and corporate governance:Category of Overseas CapitalCumulative Value (USD Billion)Benchmark Timeframe / Data SourceStrategic Role of Company CFOForeign Portfolio Investors (FPI) - Equity$551 BillionAs at 31st March 2023 • Source: Kotak Institutional Equities (KIE)Quarterly investor presentations, earnings calls, capital allocation clarity.Foreign Portfolio Investors (FPI) - Debt$31 BillionAs at 31st March 2023 • Source: NSDLCovenant compliance, credit rating maintenance, global yield benchmarking.Net Foreign Direct Investment (FDI) Inflows$466 BillionCumulative over 20 years (2004–2023) • Source: KIEJoint venture structuring, cross-border M&A valuation, FDI/FEMA filings.4. The Post-1991 Accounting Expansion & Ind AS HarmonizationTo match overseas regulatory expectations, ICAI introduced 18 additional accounting standards post-1991, establishing comprehensive guidelines for group consolidations, financial instruments, and segment reporting:StandardTitle of Accounting Standard (Issued 1991 and Thereafter)AS 12Accounting for Government GrantsAS 13Accounting for InvestmentsAS 14Accounting for AmalgamationsAS 15Accounting for Retirement Benefits in the Financial Statements of EmployersAS 16Borrowing CostsAS 17Segment ReportingAS 18Related Party DisclosuresAS 19LeasesAS 20Earnings Per ShareAS 21Consolidated Financial StatementsAS 22Accounting for Taxes on IncomeAS 23Accounting for Investments in Associates in Consolidated Financial StatementsAS 24Discontinuing OperationsAS 25Interim Financial ReportingAS 26Intangible AssetsAS 27Financial Reporting of Interests in Joint VenturesAS 28Impairment of AssetsAS 29Provisions, Contingent Liabilities and Contingent AssetsSubsequently, India took the monumental leap to converge Indian GAAP with International Financial Reporting Standards (IFRS), notifying 39 Indian Accounting Standards (Ind AS). This fair value-based regime transformed corporate disclosures, demanding future-looking projections, complex impairment testing, and deep collaboration between finance teams, business operators, and external valuation professionals.5. The Modern CFO's Strategic Mandate: The Business Support RoleBeyond ensuring flawless controllership and statutory compliance, the modern CFO serves as an essential strategic co-pilot to the Chief Executive Officer (CEO) and Board of Directors across six critical operational dimensions:1. Strategy Evolution & ExecutionActive participation in formulating enterprise strategy, evaluating new business activities, sizing acquisition targets, and structuring cross-border joint ventures.2. Stress-Testing Business PlansRigorous questioning and testing of operational projections, evaluating revenue assumptions, margin sensitivity, and cash burn horizons rather than passively accepting models.3. Real-Time Performance MonitoringTracking performance against budgets, delivering variance analysis, and formulating proactive mid-course operational corrections before deviations impact annual results.4. Peer Group BenchmarkingExecuting ratio analysis against domestic and global peer leaders, identifying cost inefficiencies, and steering operational units toward best-in-class performance metrics.5. Early Warning & Red-Alert SystemsServing as the corporate canary in the coal mine—issuing early alarms when project execution milestones fall out of sync with capital expenditure outflows.6. Counter-Cyclical Cash GovernanceConserving cash buffers during economic upswings to weather down-cycles; rationalizing costs strategically rather than enforcing arbitrary across-the-board cuts.6. Mastering Financial Balance: The CFO's Triple ScaleThe ultimate value of a CFO lies in maintaining fine-tuned equilibrium across competing corporate pressures to ensure the corporate ship sails smoothly toward its objectives without catastrophic shocks:The Strategic Equilibrium Framework of the Modern CFOThe Growth & Vision PlateBig Business (Aggressive Growth)Entrepreneurial PassionLong-Gestation Projects⚖The Prudence & Governance PlateAffordable Business (Profitable Growth)Institutional Process & LimitsShort-Gestation Cash Generators⚠ The Courage to Speak Out: The CFO's True TestA CFO must possess the professional courage to speak out candidly when business colleagues or executive leadership champion ill-conceived ventures that jeopardize financial viability. As CA. Uday Phadke emphasizes: “He must do this because if he doesn’t, who will? This may be a little unpleasant, but it will be well understood and respected if the CFO has earned deep trust and credibility.”7. Soft Skills, Lifelong Learning & The Future of LeadershipTo achieve enduring professional excellence, the contemporary finance chief must transcend technical balance sheet mechanics:Sharpen the Saw Continuously: Maintain career-spanning continuing education, tracking macroeconomic policy, attending executive leadership programs, and exploring technological frontiers such as Artificial Intelligence (AI).Institutionalize Knowledge Sharing: Disseminate learnings across cross-functional teams. Teaching finance to marketing, manufacturing, and operational peers clarifies strategic thinking across the enterprise.Active Professional Citizenship: Engage with industry chambers, regulatory bodies, and ICAI, sharing ground-level corporate insights to assist policymakers in drafting practical regulations.Strive to be the ‘Complete CFO’: While prestigious honors like the ICAI Best CFO Awards celebrate exceptional achievements, the highest satisfaction lies in earning the enduring trust, credibility, and respect of colleagues, the CEO, and the Board of Directors.About the Author:CA. Uday Phadke is a veteran Chartered Accountant and former President of Finance & Legal at the Mahindra Group. Across a distinguished corporate career spanning several decades, he has spearheaded capital market issuances, cross-border acquisitions, Ind AS transition, and corporate governance architectures.Correspondence: uyphadke@gmail.com • eboard@icai.in
Theme
Ep. 496 — India’s Startup Surge: Due Diligence Decoded
CA Journal
· September 2026
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Theme • Startups & Venture Capital Due DiligenceIndia’s Startup Surge: Due Diligence DecodedA comprehensive practitioner roadmap navigating startup due diligence in India—decoding statutory finance and tax compliances, DPIIT Startup India exemptions, critical contractual safeguards, financial projection metrics, dual valuation mandates, and the 10 core dimensions of institutional investor scrutiny.VDRVirtual Data RoomsSec 56Angel Tax ExemptionRule 11UAMerchant Banker DCF10 PillarsDue Diligence StreamsOver the past few years, the Indian funding landscape has witnessed exponential growth, characterized by a massive influx of venture capital (VC) and private equity (PE) investments. This surge has been accelerated by rapid nationwide digital transformation and increasing investor confidence in the scalability of Indian startups. However, the due diligence processes accompanying these funding rounds have become significantly more rigorous, data-driven, and institutionalized. Investors now demand exhaustive background reviews, forensic financial assessments, unit economic validation, and Environmental, Social, and Governance (ESG) disclosures managed through Virtual Data Rooms (VDRs).“In India’s dynamic funding landscape, marked by increased venture capital and private equity investments, companies are intensifying their due diligence efforts, focusing on in-depth financial, legal, and ESG factors. To attract investors, businesses are meticulously preparing legal and tax compliances, engaging in strategic contracts, and acquiring necessary licenses.”1. Finance and Tax Compliances: The Operational BaselineEarly-stage startups must maintain strict vigilance across their statutory finance and tax architecture to ensure lawful operation, avoid compounding penalties, and survive institutional investor diligence:Comprehensive Startup Compliance HierarchyGSTType of Registrations (Regular / SEZ)Monthly / Quarterly Filings (GSTR-1, GSTR-3B)Input Tax Credit (ITC) ReconciliationsIncome TaxTax Exemption Approvals (80-IAC)TDS Withholding Compliance (Monthly)Advance Tax & Annual ITR FilingsROC FilingsCharter Documents (MoA & AoA)Annual Returns (AOC-4 & MGT-7)Event-Based Filings (PAS-3, DIR-12)Labor & Social SecurityPF Registration (≥20 staff; Due: 15th)ESI Registration (≥10 staff; Due: 15th)Professional Tax (PTRC/PTEC; Due: Month-end)Incorporation & Business Structure: Choosing the optimal corporate form (Private Limited Company, LLP, or Partnership) to accommodate equity capitalization, ESOPs, and venture funding.FEMA & Inbound Investments: Startups raising foreign capital from non-resident angels, overseas VCs, or through convertible notes must file Form FC-GPR with the Reserve Bank of India (RBI) within 30 days of share allotment.Accounting & Digital Audit Trail: Maintaining double-entry books of account as mandated by Section 128 of the Companies Act, 2013, incorporating statutory software edit logs (audit trails).Statutory & Tax Audits: Timely completion of statutory audits and tax audits under Section 44AB to ensure complete financial transparency before signing Term Sheets.2. Startup India Incentives: Unlocking Regulatory ExemptionThe Department for Promotion of Industry and Internal Trade (DPIIT) offers a three-tiered incentive architecture designed to accelerate startup innovation and capital formation:1 Self-Certification & IPREnables startups to self-certify compliance under 9 labor and environmental laws. Provides fast-tracked patent applications, government-sponsored facilitation costs, and an 80% rebate on patent filings.2 Angel Tax ExemptionSecuring approval under Section 56(2)(viib) of the Income Tax Act via the Startup India portal (`startupindia.gov.in`), completely exempting premium funding from taxation as income from other sources.3 Section 80-IAC Tax HolidayGrants an Inter-Ministerial Board (IMB) certified startup a 100% tax holiday on operating profits for three consecutive financial years out of its first ten years of commercial incorporation.3. Contractual Governance: The Tripartite Agreement FrameworkVenture capital investors scrutinize three foundational categories of commercial and operational agreements to verify asset ownership, enforceability, and operational stability:A. Vendor AgreementsContracts stipulating commercial terms, payment milestones, service level agreements (SLAs), and warranty provisions between the startup and its key suppliers. Investors review these to confirm that intellectual property rights for customized vendor code or assets are unconditionally assigned to the startup.B. Employee AgreementsParticularly crucial amidst heightened market volatility and talent turnover, comprehensive employment contracts must incorporate:Work-for-Hire & IP Assignment: Establishing that all code, algorithms, designs, and inventions created by employees belong exclusively to the company.Non-Disclosure Agreements (NDAs): Strict confidentiality obligations protecting proprietary technology and trade secrets during and after employment tenure.Non-Compete & Non-Solicitation: Restricting departing employees from joining direct competitors or poaching existing clients and co-workers.Termination, Severance & POSH: Clear terms governing notice periods, severance packages, grounds for cause, and compliance with statutory prevention of sexual harassment (POSH) mandates.C. Agreement with Promoters (Shareholders' / Founders' Agreement)The Promoters' Agreement safeguards daily business continuity and aligns founder incentives with institutional investors through fifteen critical covenants:Clause HeadContractual Definition & ScopeInvestor Protection BenchmarkEquity Holdings & VestingDelineates shareholding percentages, vesting schedules, and reverse-vesting milestones.Ensures founders earn their equity over 4 years with a 1-year cliff.Roles & Decision-MakingOutlines executive duties and defines affirmative voting matters reserved for investor consent.Prevents unilateral decisions on major capex, debt, or key executive hiring.Lock-in PeriodPrevents promoters from transferring or pledging shares during early developmental stages.Secures founder stability until commercial product-market fit is achieved.Non-Compete & NDAsProhibits promoters from engaging in competing ventures during and after their active tenure.Safeguards company IP and trade secrets from founder leakage.Right of First Refusal (ROFR)Grants the company and existing investors the first right to buy shares offered for transfer.Maintains cap table integrity against hostile third-party entrants.Tag-Along & Drag-Along RightsEnables minority shareholders to join in a sale (Tag) or forces all holders to accept a buyout (Drag).Ensures liquidity parity and guarantees 100% saleability in strategic M&A.Succession & Exit StrategyPre-determined mechanisms for founder departure, disability, or planned private equity exit.Pre-empts deadlocks and institutionalizes leadership continuity.4. Sector-Specific Licenses & Regulatory PermissionsDepending on operational domain and location, startups must obtain industry-specific operating approvals before seeking capital:Food & Beverage: Food Safety and Standards Authority of India (FSSAI) license, local municipal health trade licenses, and fire NOCs.Cross-Border Trade: Import Export Code (IEC) issued by the Directorate General of Foreign Trade (DGFT) and authorized dealer bank AD-code registrations.Manufacturing & Cleantech: Consent to Establish (CTE) and Consent to Operate (CTO) from State Pollution Control Boards (SPCB) under environmental statutes.Fintech & Data Platforms: Adherence to RBI Master Directions (for payment aggregators/NBFCs) and compliance with the Digital Personal Data Protection (DPDP) Act.Pharmaceuticals & Healthtech: Manufacturing and marketing licenses from the Central Drugs Standard Control Organization (CDSCO).5. Pitch Deck Architecture & Financial Projection ModelingA successful fundraising process synthesizes high-impact strategic storytelling with rigorous unit-economic financial modeling:1. Problem & Unique SolutionArticulating a painful market friction and demonstrating why the startup's proprietary product or service solves it 10x better than existing alternatives.2. Total Addressable Market (TAM)Quantifying the overall market size, serviceable addressable market (SAM), and serviceable obtainable market (SOM) supported by industry data.3. Unit Economics & Margin EngineDemonstrating healthy Gross Margins, viable Contribution Margins, and an LTV : CAC ratio trending sustainably above 3:1.4. Cash Burn & Financial RunwayForecasting month-by-month cash outflows, burn rates, capital expenditure (CapEx), and runway to demonstrate capital efficiency.6. Dual Valuation Architecture: Section 62 vs Rule 11UAIssuing shares at a premium to institutional investors triggers dual, non-negotiable statutory valuation requirements under Indian corporate and direct tax laws:⚖ Navigating India's Dual Valuation Requirements1. Section 62(1)(c) of the Companies Act, 2013: Mandates that private placement of equity or convertible securities must be justified by a formal valuation report issued by an IBBI Registered Valuer. Although the Act is silent on validity, Indian corporate practice accepts reports for a maximum of 6 months.2. Rule 11UA of the Income Tax Rules, 1962: Requires that the Fair Market Value (FMV) of unquoted equity shares under the Discounted Cash Flow (DCF) method must be appraised exclusively by a SEBI-Registered Category-I Merchant Banker. However, startups holding a valid DPIIT Section 56 Exemption Certificate are relieved from angel tax scrutiny.7. The 10 Core Dimensions of Investor Due DiligenceBefore deploying capital, venture capital and private equity investors commission comprehensive due diligence exercises across ten interconnected operational streams:Due Diligence StreamPrimary Investigation ScopeKey Deliverables & Verifications1. Financial Due Diligence (FDD)Quality of earnings, recurring revenue run-rate, unrecorded liabilities, cash reconciliations.Normalized EBITDA, working capital cycle, debtor recoverability.2. Legal Due Diligence (LDD)Corporate standing, charter documents, historical share allotments, pending litigations.Clean title of share capital, board minutes, regulatory filings.3. Operational Due Diligence (ODD)Supply chain bottlenecks, vendor reliance, manufacturing throughput, logistics efficiency.Vendor dependency analysis, operational capacity limits.4. Market & Industry DDTAM sizing, customer churn, cohort retention curves, competitive moat validation.Customer reference calls, market share projections.5. Management & Governance DDFounder background checks, director competence, board independence, ethical track record.Criminal background verification, reference checks, KYC reviews.6. Strategic Fit & SynergiesSynergies with VC portfolio companies, cross-selling avenues, geographic expansion.Synergy valuation models, joint commercial roadmaps.7. Environmental, Social & GovernanceSustainability initiatives, carbon footprint, diversity metrics, POSH compliance.ESG governance framework, workplace safety records.8. Tax Due Diligence (TDD)Direct and indirect tax exposures, open assessment notices, un-reconciled GST input credit.Tax contingency matrix, transfer pricing audit reports.9. Tech & Intellectual Property (IPDD)Source code ownership, proprietary patents, open-source software license contamination.IP assignment agreements, software security penetration tests.10. Exit Strategy EvaluationFeasibility of private equity secondary sales, strategic trade acquisitions, or IPO roadmaps.Exit multiple benchmarking, IPO listing eligibility analysis.8. Conclusion: Turning Diligence Readiness into Funded RealityNavigating a venture capital or private equity funding round is no longer just about charismatic pitch deck storytelling; it is fundamentally an exercise in operational and governance maturity. By establishing airtight tax compliances, securing Startup India tax exemptions, crafting robust promoter and employee contracts, executing methodologically sound valuations, and organizing documentation in a structured Virtual Data Room, Indian startups demonstrate that they are built for sustainable, long-term scale. Thorough due diligence preparation transforms speculative investor interest into tangible capital commitments, securing the foundational backing needed to fuel national and international expansion.About the Author:CA. Tejas Savla is a practicing Chartered Accountant and venture transaction advisor specializing in startup legal due diligence, Section 56 / Rule 11UA valuation advisory, and venture capital contract negotiations.Correspondence: catejassavla@gmail.com • eboard@icai.in
Theme
Ep. 497 — Unseen Battles & Hidden Dilemmas of Entrepreneurship
CA Journal
· September 2026
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Theme • Entrepreneurship & Venture Capital StrategyUnseen Battles & Hidden Dilemmas of EntrepreneurshipA candid examination of the psychological, financial, and strategic paradoxes confronting modern founders—decoding the perils of the fundraising trap, the discipline of the ongoing funding winter, the superiority of patient strategic investment, and the timeless necessity of cash-flow-positive business modeling.-38.6%Indian VC Deals Decline920 DealsJan–Oct 2023 Volume12–14 HrsDaily Operational GrindCash is KingTrue Success MetricWhen embarking on the exciting journey of entrepreneurship, individuals are frequently enticed by the captivating prospect of fundraising—a promising beacon that suggests rapid growth and public acclaim. However, as the pursuit of securing capital takes center stage, founders often find themselves entangled in a dangerous paradox. The relentless spotlight on funding leads to an overemphasis on financial valuation and investor pleasing, causing founders to overlook the essential operational functions that define a sustainable commercial enterprise.“While securing capital is undeniably crucial for business growth, the prevailing tendency among entrepreneurs is to become excessively fixated on fundraising, inadvertently neglecting their core business operations. Raising funds is merely a stepping stone—not the ultimate benchmark of success.”1. Rethinking Success: The Fundraising ParadoxIn contemporary startup culture, raising a multi-million-dollar funding round is celebrated as the ultimate finish line. Media headlines glorify valuation markups, treating capital infusion as definitive proof of commercial triumph. In reality, capital is merely fuel; without a functioning engine, fuel only accelerates destruction.Entrepreneurs frequently tailor their product roadmap and operational metrics to resonate with venture capital preferences—chasing vanity metrics like gross user signups, application downloads, and unmonetized traffic. This strategic misalignment steers the company away from organic evolution. By accepting early outside investment, founders inadvertently commit to an operational treadmill of continuous cash burn, trapped in a cycle where survival depends entirely on scoring the next funding round.⚖ The Unanswered Question in Startup BoardroomsThe burning question every founder and investor must confront is: How many startups are generating positive operating cash flows two years after scoring their initial round of venture capital? And if they are generating profits, what is their actual Profit After Tax (PAT), and can they sustain those earnings without perpetual equity dilution?2. The True Cost of Unsustainable Growth & The Funding WinterIn the competitive frenzy to secure capital, a disconcerting phenomenon has surfaced across the startup ecosystem: the embrace of unsustainable growth strategies. Behind closed doors, struggling companies resort to manipulating vanity metrics, round-tripping transactions, and exaggerating recurring revenues to fabricate an illusion of traction.When these artificial bubbles burst, the repercussions are catastrophic: total erosion of investor trust, massive employee layoffs, and industry-wide skepticism that punishes genuinely innovative, ethical startups.⚠ The Deflationary Reality: India's 38.6% Funding ContractionThe calendar years 2022 and 2023 delivered a severe reality check to the Indian startup ecosystem, marking a definitive departure from the euphoric peaks of 2021. According to venture capital transaction data, India witnessed a 38.6% decline in VC funding deals, falling from 1,499 deals reported in January–October 2022 to just 920 deals during the same period in 2023. Average ticket sizes, company valuations, and aggregate deal values receded sharply, inaugurating the era of the "Funding Winter."3. Strategic Investors vs Venture Capital: A Superior BlueprintIn navigating growth, founders face a pivotal choice between traditional Venture Capital (VC) funds and Patient Strategic Investors. While venture capital brings financial prestige, its inherent fund structure imposes rigid constraints that can derail young enterprises:Operational DimensionVenture Capital (VC) Funding RoutePatient Strategic Investor RouteExit HorizonsInflexible 5-to-7 year fund lifecycle; relentless pressure for secondary sales or premature IPOs.Patient, evergreen capital horizon; focused on decades of compounding and market leadership.Industry ExpertiseHigh financial and spreadsheet acumen, but often lacks hands-on technical or operational domain depth.Direct industry peers or conglomerates bringing intimate knowledge of supply chains, regulations, and manufacturing.Market Access & NetworksIntroductions to downstream financial funds and investment banking intermediaries.Immediate commercial integration into established global vendor, dealer, and customer distribution channels.Growth TrajectoryDemands hyper-growth and aggressive customer acquisition subsidies, often forcing operational cash burn.Encourages disciplined, organic scaling aligned with positive unit economics and operational cash flow.4. The Grass Looks Greener on the Other Side: The Personal TollModern media romanticizes entrepreneurship as an exhilarating escape from corporate drudgery, promising unbounded personal freedom, exponential wealth creation, and executive autonomy. The lived reality of the founder is starkly different:1. Financial DeprivationLeaving a predictable, lucrative monthly corporate salary forces founders to endure prolonged periods—often extending to years—with zero personal income while struggling to achieve company cash breakeven.2. The 14-Hour WorkdayWork-life balance becomes a distant fiction. Founders endure grueling 12- to 14-hour daily schedules, seven days a week, with no genuine holidays, vacations, or mental respite from operational emergencies.3. Chronic Self-DoubtSleepless nights become routine. Faced with vendor payment delays, product glitches, or missed sales quotas, entrepreneurs constantly battle imposter syndrome and re-evaluate their life decisions during moments of adversity.4. Strained Personal RelationshipsThe relentless demands of business take an undeniable toll on personal and family life. Personal living standards drop, carefree indulgences are eliminated, and loved ones must bear the indirect burden of financial austerity.Consequently, the leap into entrepreneurship must never be taken lightly or solely for prestige. Aspiring founders should consider building industry experience, accumulating emergency financial runways, and achieving personal milestones before abandoning stable careers.5. The Key is to Build a Robust & Sustainable Business ModelBefore knocking on the doors of angel syndicates or venture capital funds, founders must step back and treat a robust business model as their primary compass:Investors Invest in Realities, Not Just Dreams: Having a disruptive concept is merely the starting point. Modern institutional investors demand tangible proof that customers genuinely value the product enough to pay profitable prices for it.Get the Numbers on Your Side: Prioritize real sales traction, healthy gross margins, low customer churn, and positive unit economics over pitch deck aesthetic perfection.Don't Rush the Funding Race: Timing is paramount. Scrambling for venture capital prematurely dilutes founder equity at cheap valuations. Focusing first on building an irresistible, cash-generative product allows founders to negotiate capital infusions from a position of absolute strength.6. Conclusion: Redefining Entrepreneurial TriumphThe true measure of entrepreneurial greatness is not the size of the cheque received from a venture capital fund, nor is it the headline valuation broadcast across social media. True entrepreneurial triumph lies in building a resilient, ethical, and cash-flow-positive enterprise that delivers enduring value to its customers, fair compensation to its workforce, and sustainable returns to its stakeholders. By resisting the seductive illusion of the fundraising trap and embracing patient operational excellence, the new generation of Indian entrepreneurs can build enterprises designed to endure across generations.About the Author:CA. Tarun Chaurasia is a practicing Chartered Accountant and strategic startup advisor specializing in venture feasibility, corporate finance architecture, cash-flow governance, and business model design for emerging enterprises.Correspondence: eboard@icai.in
Theme
Ep. 498 — Startup India: Funding the Future & Fueling the Growth of Startups through Financial Support
CA Journal
· September 2026
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Theme • Government Initiatives & Startup FinancingStartup India: Funding the Future & Fueling the Growth of Startups through Financial SupportAn authoritative blueprint from the leadership of Startup India (DPIIT) detailing the 19-point Action Plan and its three pillars—evaluating the Startup India Seed Fund Scheme (SISFS), AI Investor Connect, MAARG Mentorship, the INR 10,000 Crore Fund of Funds (FFS) under SIDBI, and the Credit Guarantee Scheme for Startups (CGSS).₹945 CrSeed Fund Scheme (SISFS)₹10,000 CrFund of Funds (FFS)₹17,010 CrCapital Catalyzed into Startups5,965+ HrsMAARG Mentorship SessionsThe Startup India initiative, launched in 2016, represents a visionary national undertaking by the Government of India to propel the country to the forefront of global entrepreneurship and technology. Unveiled by the Honourable Prime Minister through a transformative 19-point Action Plan, the initiative creates an empowering ecosystem managed by a dedicated team within the Department for Promotion of Industry and Internal Trade (DPIIT). Built upon three strategic pillars—Simplification and Handholding, Funding and Incentives, and Incubation and Industry-Academia Partnerships—Startup India provides tailored, lifecycle-stage interventions that transform raw entrepreneurial ambition into scalable, globally competitive enterprises.“From startups in the ideation stage, to late-stage startups in a span of few years, Startup India has launched various schemes to cater to different demands that oscillate between the changing times.”1. The Tripartite Architecture of Startup IndiaThe Startup India action plan addresses the distinct requirements of emerging businesses through three mutually reinforcing operational pillars:Pillar 1: Simplification & Handholding: Recognizes the complex regulatory burdens confronting young founders. By introducing self-certification compliance under 9 labor and environmental laws, establishing the National Single Window System (NSWS), and providing an 80% rebate on patent filings, the initiative eliminates red tape so founders can focus on product innovation.Pillar 2: Incubation & Industry-Academia Partnerships: Fosters collaborative ties between academia, research laboratories, established corporate industries, and budding startups to accelerate knowledge exchange and joint research.Pillar 3: Funding & Incentives: Delivers non-dilutive grants, seed equity, catalytic venture fund-of-funds capital, and loan guarantee mechanisms to eliminate the persistent capital gaps that threaten viable ventures.2. Stage 1: The Early Stage (Ideation, Pre-Seed & Seed Stage)During the ideation phase, founders conceptualize solutions, assess product feasibility, and develop minimum viable prototypes. Because ideas at this stage carry high technical risk and lack operating cash flows, traditional bank loans are unviable. Seed capital provides the essential bridge for product testing, initial market entry, and early customer acquisition.The Startup India Seed Fund Scheme (SISFS)To democratize access to early-stage capital across all states and sectors, DPIIT launched the Startup India Seed Fund Scheme (SISFS) with an outlay of INR 945 Crore. Operating via certified incubators, SISFS provides two specialized funding tracks:Grants up to ₹20 Lakhs: For proof of concept validation, prototype fabrication, product trials, and laboratory testing.Debt / Convertible Debentures up to ₹50 Lakhs: For commercial market launch, initial distribution setup, and business scaling.✓ SISFS Realized Impact (as of October 31, 2023)• 192 Incubators selected across 26 States and Union Territories.• ₹747.34 Crores approved to selected incubators (including 5% management fees).• 1,579 Startups approved for direct seed funding, totaling ₹291.57 Crores.• 57.8% of funded startups hail from Tier II and Tier III cities, driving grassroots innovation.• 50.4% of funded enterprises feature at least one woman director, advancing gender diversity.3. Stage 2: Validation & Early Traction PlatformsAs startups transition from prototype testing to market validation, securing the "right match" between founders and capital providers becomes paramount. Startup India has institutionalized two AI-powered digital public platforms:Startup India Investor ConnectAn AI-powered matchmaking marketplace bridging founders in emerging cities with institutional angel and VC investors. By November 30, 2023, the platform onboarded 5,300+ startups and 120 investors, hosting 31 investment calls with 3,700+ applications, and facilitating nearly ₹50 Crores in equity capital (including women-led pioneers like Brainsight Technology and Kris Originals).MAARG Mentorship PortalThe Mentorship, Advisory, Assistance, Resilience, and Growth (MAARG) portal delivers 360-degree, pro-bono guidance across business strategy, finance, and human resources. As of October 31, 2023, MAARG has onboarded 1,338 expert mentors, 2,057 startups, and logged over 5,965+ hours of high-impact mentorship sessions.4. Stage 3: The Growth Stage & Institutional Capital MobilizationWhen startups prove product-market fit and enter the high-growth scaling phase, their capital requirements expand exponentially. To support growth without distorting market dynamics, the Government deployed two macroeconomic mechanisms:A. Fund of Funds for Startups (FFS) – The SIDBI MultiplierEstablished in 2016 with a corpus of INR 10,000 Crore, the FFS scheme operates through an indirect investment model. Rather than picking individual startups, the Small Industries Development Bank of India (SIDBI) allocates capital to SEBI-registered Alternative Investment Funds (AIFs), known as “daughter funds,” which then invest equity into high-growth Indian startups:FFS Performance Metric (SIDBI Implementation)Cumulative Progress (as of Sept 30, 2023)Strategic Venture Capital ImpactTotal Capital Committed to AIFs₹10,019.00 Crores across 126 AIFsAchieved 100% commitment of the total cabinet-approved corpus.Capital Disbursed to AIFs₹4,327.00 Crores distributed to 90 AIFsMaintains steady drawdown liquidity for domestic venture capital funds.Total Capital Injected into Startups₹17,010.00 Crores invested in 910 StartupsDemonstrates a powerful ~4x private capital multiplier in venture equity.B. Credit Guarantee Scheme for Startups (CGSS) – Unlocking Venture DebtSecuring debt financing is historically one of the most formidable hurdles for asset-light startups. Traditional commercial banks require fixed assets as collateral, which tech ventures lack. DPIIT notified the Credit Guarantee Scheme for Startups (CGSS) to provide sovereign credit guarantees for collateral-free loans extended by commercial banks, NBFCs, and SEBI-registered Venture Debt Funds (VDFs):Transaction-Based Cover: Issued to Member Institutions (MIs) on a single-borrower basis, providing sovereign risk guarantees covering 80%, 75%, or 65% of the loan facility depending on the sanctioned amount.Umbrella-Based Cover: Tailored for SEBI-registered Venture Debt Funds (VDFs), providing pooled default guarantees across debt funds that back high-growth startups with debt and equity warrants.5. Conclusion: Empowering India's Innovation CenturyFunding the future, one startup at a time, Startup India has erected an institutional financial scaffolding that protects innovators across every milestone of the enterprise lifecycle. From initial ₹20 Lakh PoC grants under SISFS to catalytic ₹10,000 Crore equity commitments via FFS and collateral-free debt under CGSS, the initiative aligns public capital with private innovation. Indian entrepreneurs are urged to obtain formal DPIIT recognition via www.startupindia.gov.in, access these institutional benefits, and power the nation's journey toward becoming the world's preeminent innovation economy.Authoritative References & Official PortalsStartup India Funding Guide: https://www.startupindia.gov.in/content/sih/en/funding.htmlDPIIT Startup Recognition Portal: https://www.startupindia.gov.in/content/sih/en/startup-scheme.htmlStartup India Seed Fund Scheme (SISFS) Official Portal: https://seedfund.startupindia.gov.in/Central Government Schemes for Startups: https://www.startupindia.gov.in/content/sih/en/government-schemes.htmlStartup India Investor Connect: https://investorconnect.startupindia.gov.in/National Mentorship Portal (MAARG): https://maarg.startupindia.gov.in/SIDBI Fund of Funds for Startups (FFS) Commitments: https://www.sidbivcf.in/en/commitments#ffsCredit Guarantee Scheme for Startups (CGSS): https://www.startupindia.gov.in/content/sih/en/credit-guarantee-scheme-for-startups.htmlOfficial Correspondence: eboard@icai.in
Economy
Ep. 499 — Evolving face of the India Offshore Business (GCC): Way forward
CA Journal
· September 2026
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Economy • Global Capability Centers & Offshore OperationsEvolving face of the India Offshore Business (GCC): Way forwardA comprehensive macroeconomic analysis tracking the paradigm shift of India's Global Capability Centers—from transactional back-office BPOs to strategic Global Value Organisations (GVOs) delivering $38B+ gross output, driving Tier II/III city expansion, and creating immense opportunities for Chartered Accountants.DGUS$ 38B+Direct Gross OutputUS$ 6.5B+Direct Tax Contribution1.3 MillionDirect GCC WorkforceUS$ 110B+2030 Output ProjectionGlobal Capability Centers (GCCs)—formerly known as captive centers—have emerged as one of the most vibrant focal points in corporate boardrooms and economic roundtables globally. The macroeconomic statistics speak for themselves: India's GCC ecosystem contributes close to US$ 38 Billion+ to direct gross output (representing sales to parent and associate enterprises), constituting roughly 1.1% of India’s GDP. The sector tops up national tax revenues by over US$ 6.5 Billion+ and directly employs close to 1.3 million high-skilled professionals, accounting for nearly 25% of India's entire IT workforce. Over the past two decades, India has reinforced its standing as the world's most favored destination for global capability centers.“There is an inherent requirement to make the Indian GCCs more productive in terms of efficiency and delivery. The GCC operating model is continuously evolving from being back office to an inseparable front office, wherein the GCC moves head-to-head with the parent organization.”1. The Metamorphosis: From BPO to Global Value Organisation (GVO)The functional trajectory of Indian offshore centers has undergone a fundamental structural re-engineering:Wave 1: GenesisFunctional Shared Services (BPO)Began as tactical back-offices executing rule-based, repetitive sub-processes. Value was derived purely from wage arbitrage and labor cost reduction under strict parent SOPs.Wave 2: ConsolidationGlobal Shared Service CentersCentralized disparate processes across global operating entities into regional shared hubs, standardizing financial reporting, enterprise IT, and global payroll management.Wave 3: Modern EraGlobal Value Organisation (GVO)Inseparable front-office partner driving core product innovation, Generative AI integration, robotic process automation (RPA), data analytics, cybersecurity, and global tax compliance.By 2030, industry forecasts project that Indian GCCs will generate over US$ 110 Billion+ in direct economic output (exceeding 2% of India’s GDP), with more than 2,500 global corporations anchoring their strategic core in the Indian subcontinent.2. Five Strong Undercurrents Defining the Future GCC LandscapeFive powerful structural shifts are reshaping the operational footprint and value delivery of GCCs across India:a) What Can Be Delivered? – The Rise of Centres of Excellence (CoEs)Gone are the days when Indian offshore centers merely hosted telephone call centers and body-shopping units executing routine maintenance. Today, capability centers for multinational corporations across the US, EMEA, and Australia operate as full-fledged Centres of Excellence (CoEs). They spearhead cutting-edge technological development—such as Generative AI, cloud-native software architecture, cybersecurity monitoring, and complex data science—alongside high-end financial controllership, transfer pricing, and cross-border regulatory compliance.b) Who Will Deliver the Work? – The Talent Snowball EffectOver the past decade, Indian GCCs have built an elite leadership pipeline comprising over 50,000+ senior leaders. Furthermore, ex-GCC professionals have emerged as prominent tech entrepreneurs, with over 80,000+ people hired by startups founded by former GCC executives. The post-pandemic shift toward flexible and hybrid working models has unlocked an additional talent pool of over 2 Lakh+ (200,000+) qualified female professionals returning from career breaks. Indian GCCs now attract top-tier engineering, finance, and management graduates, creating a self-sustaining talent magnet.c) How Will Service Delivery Happen? – The Domestic Support EcosystemA massive organic B2B support ecosystem has matured around Indian GCCs. Captives no longer operate in isolation; they are supported by specialized enterprise SaaS vendors, cybersecurity firms, employee transport and logistics providers, facilities managers, and professional corporate enabling services across finance, HR, payroll, direct/indirect taxation, and legal compliance.d) Where Will Service Delivery Happen From? – The Tier-II & III SurgeWhile primary metros—Bengaluru, Chennai, Hyderabad, Pune, Mumbai, and Delhi-NCR—remain the historical bastions of GCC development, escalating commercial real estate costs, urban traffic congestion, poor air quality, and higher living costs are driving significant decentralization:✓ The Rise of Nodal Offices in Tier-II & III CitiesGlobal capability centers are actively opening nodal satellite offices and partnering with co-working operators in Tier-II and Tier-III cities, including Indore, Bhopal, Jaipur, Kanpur, Nashik, and Coimbatore. This distributed hub-and-spoke model enables employees to work closer to their hometowns, drastically curbs voluntary attrition, lowers operational overheads by 30%–40%, and significantly boosts female workforce retention through hybrid work options.e) Where Will the Services Be Delivered? – Beyond Fortune 500Historically, only giant Fortune 500 conglomerates possessed the scale to justify dedicated offshore captive centers. Today, severe talent shortages and margin pressures in Western economies have turned offshore capability development into a strategic compulsion for mid-market enterprises ($500M–$5B in revenue). While over 80% of GCC headquarters are rooted in the US and Europe, a surging influx of new centers is originating from Australia, New Zealand, Japan, South Korea, and Southeast Asia.3. GCCs as an Emerging Asset Class: The "GCC as a Service" ParadigmPrivate equity funds and institutional investors are increasingly viewing GCCs as an attractive, monetizable asset class. Forward-thinking banking, financial services, and insurance (BFSI) multinationals are exploring models to commercialize their Indian captives:Spin-Offs into Independent Business Units: Segregating proprietary back-office centers into standalone corporate entities that provide specialized third-party services to external global clients.GCC as a Service (GaaS): Providing plug-and-play incubator infrastructure, regulatory handholding, and hyper-local talent acquisition for foreign mid-sized enterprises seeking an offshore presence without establishing a direct subsidiary.4. Professional Opportunities for Chartered AccountantsThe rapid evolution of the GCC sector opens vast, lucrative practice arenas for finance, legal, and audit professionals:Service DomainSpecific GCC Operational RequirementChartered Accountant Advisory Role1. Regional Expansion & Nodal SetupEstablishing satellite offices in Tier-II and Tier-III cities across India.Local infrastructure planning, vendor contract vetting, state-specific labor, and professional tax compliance.2. GCC as a Service (GaaS)Mid-sized foreign companies seeking customized offshore delivery models.Turnkey entity structuring, registered office services, and regulatory incorporation under the Companies Act.3. Transaction & Carve-Out SupportPrivate equity carve-outs, M&A, spin-offs, and captive business unit sales.Due diligence, vendor diligence, transaction tax structuring, business valuation, and closing reconciliations.4. Business Enabling ServicesComprehensive financial management of Indian captive entities.Bookkeeping, Ind AS / IFRS alignment, payroll management, corporate secretarial, and transfer pricing filings (Form 3CEB).5. Technology, Data & Cyber AssuranceAdherence to the Digital Personal Data Protection (DPDP) Act, GDPR, and SOC standards.Information security audits, data governance reviews, internal financial controls (IFC) testing, and IT risk mitigation.5. Critical Challenges & The Policy Roadmap AheadTo sustain momentum and achieve the ambitious US$ 110 Billion horizon by 2030, the public and private sectors must collaborate to resolve key structural headwinds:Tax & Regulatory Certainty: Streamlining transfer pricing safe harbor rules, resolving permanent establishment (PE) ambiguities, and providing clear tax incentives for Tier-II/III setups.Bridging the High-End Talent Gap: Aligning academic curricula with high-end global requirements in AI engineering, quantitative finance, and international tax law.Overcoming the "Low-Cost" Perception: Aggressively marketing Brand India as a premier global hub of true intellectual value creation rather than a pure discount labor destination.Infrastructure Investment: Accelerating modern transportation networks, high-speed fiber internet, and smart city infrastructure in emerging regional urban centers.Authoritative References & Industry LiteratureErnst & Young (EY): EY GCC Pulse Survey 2023 – Decoding the Next Wave of Value Creation.NASSCOM & Deloitte: GCC Industry Report: India at the Epicenter of Global Capability Advancements.Official Correspondence: eboard@icai.in
Technology
Ep. 500 — Integration of Artificial Intelligence and Human Knowledge in improving Financial Decision-Making
CA Journal
· September 2026
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Technology • Artificial Intelligence & FinanceIntegration of Artificial Intelligence and Human Knowledge in improving Financial Decision-MakingAn empirical inquiry into how machine learning models enhance financing, investment, and dividend decisions—and why human cognitive discretion remains an indispensable counterweight to algorithmic fragility. $15.7 TrillionGlobal GDP AdditionProjected global economic growth driven by AI by 2030 (Huang & You, 2022).>60%CAPM Precision GainReduction in cost-of-equity error using LSTM neural networks (Eliasy & Przychodzen, 2020).80.0% / 90.6%Fraud Detection RatesSVM model precision in identifying corporate fraud vs honest filings (Cecchini et al., 2010).Man + MachineDecision ParadigmSynergistic framework combining algorithmic speed with human ethical discretion.Introduction & Theoretical ContextArtificial Intelligence (AI) has rapidly transformed the corporate and financial landscape, moving beyond theoretical computer science into the core of enterprise resource allocation, corporate governance, and capital planning. Historically, corporate financial decisions have been organized around three foundational pillars: financing decisions (determining capital structure, optimal leverage, and the cost of capital), investment decisions (capital budgeting, asset valuation, and resource allocation under risk), and dividend decisions (retained earnings policy, payout signaling, and shareholder liquidity distribution).For decades, finance practitioners relied upon classical econometrics, linear regression frameworks (such as Ordinary Least Squares), and static theoretical models like the Capital Asset Pricing Model (CAPM), the Miller-Modigliani theorems, and Lintner's dividend smoothing model. While mathematically elegant, these traditional models assume rational expectations, information efficiency, and normal distributions of financial returns—assumptions that regularly fail during periods of market stress, informational opacity, and non-linear shocks.According to economic projections by Huang & You (2022), widespread AI deployment across industries could contribute an astounding $15.7 Trillion (or a 14% expansion) to global GDP by the year 2030. In the domain of corporate finance, AI does not merely accelerate execution speed; it fundamentally restructures how quantitative and qualitative data are analyzed, bridging information asymmetry, predicting multi-dimensional cash flows, and revealing latent patterns across massive unstructured corporate disclosures.Figure 1: The AI-Driven Corporate Financial Decision ArchitectureUnstructured Big Data(Filings, Audios, Photos)→AI & Deep Learning Engines(LSTM, CNNs, SVM, NLP)→Tripartite Decisions(Financing, Investment, Dividends)→Man + Machine Synthesis(Human Judgment & Ethical Guardrails)1. Artificial Intelligence in Corporate Financing DecisionsFinancing decisions determine how a corporation funds its long-term assets and ongoing operations—balancing equity, debt, convertible instruments, and retained earnings to minimize the overall Weighted Average Cost of Capital (WACC) while maintaining operational solvency. Estimating the accurate cost of capital requires financial controllers and CFOs to quantify risk accurately.The standard Capital Asset Pricing Model (CAPM) estimates the expected cost of equity capital (\(r_e\)) as a function of the risk-free rate (\(r_f\)), the market risk premium (\(r_m - r_f\)), and systematic risk beta (\(\beta\)):Classical CAPM Formulation:\[E(R_i) = R_f + \beta_i [E(R_m) - R_f]\] Limitation: Classical linear regressions assume beta is constant over time, failing to capture regime shifts, dynamic operational leverage, and volatile macroeconomic feedback loops.Pioneering empirical work by Eliasy & Przychodzen (2020) investigated the role of advanced AI algorithms in overcoming these deficiencies. By deploying a Recurrent Neural Network (RNN) configured with Long Short-Term Memory (LSTM) architecture and dropout regularization layers, they tested whether deep neural networks could improve the predictive accuracy of the CAPM. The LSTM network was trained on high-dimensional sequential financial time series to track time-varying beta dynamics.The empirical findings demonstrated that the LSTM neural network model reduced the estimation error of the CAPM cost of equity by more than 60% compared to traditional linear regressions. Furthermore, when applied to multi-period forward-looking equity forecasts, the deep learning network enhanced return forecasting precision by over 18%. This breakthrough allows corporations to formulate capital structure policies based on dynamic, real-time risk costs rather than backward-looking quarterly accounting metrics.Additionally, in commercial credit and debt financing, machine learning models process unstructured data—including customer payment cycles, supplier invoices, executive conference call tones, and regulatory filings—to dynamically estimate probability of default (PD) and loss given default (LGD), lowering borrowing friction and preventing costly over-leverage.2. Artificial Intelligence in Corporate Investment DecisionsInvestment decisions encompass capital budgeting, mergers and acquisitions (M&A), research and development (R&D) commitments, and portfolio allocation. These decisions are inherently forward-looking, requiring executive decision-makers to evaluate project returns, terminal values, and risk profiles amid deep uncertainty.Multi-Dimensional Information IngestionHistorically, capital allocators relied heavily on structured financial statements (balance sheets, profit and loss statements, cash flow statements). In modern financial markets, however, valuable signals are buried inside unstructured communications. AI and Natural Language Processing (NLP) models extract actionable investment intelligence across three distinct disclosure vectors:Mandatory Corporate Disclosures: Parsing annual 10-K/MCA reports, auditor notes, and ESG disclosures to evaluate disclosure tone, litigation exposure, and linguistic obfuscation (Li, 2010; Frankel et al., 2022).Intermediary Disclosures: Synthesizing thousands of equity research analyst notes, credit rating commentaries, and central bank monetary policy communiqués (e.g., RBI Monetary Policy Committee statements) to assess macroeconomic cost headwinds and sector growth trajectories (Huang, Zang & Zheng, 2014).Market & Stakeholder Sentiment: Extracting real-time sentiment from institutional order flows, conference call Q&A acoustics, and trade forum dialogues.Visual Sentiment Analytics: Deep Learning on News ImageryA remarkable expansion in investment analytics is the transition from textual NLP to multi-modal visual sentiment modeling. In a breakthrough study, Obaid & Pukthuanthong (2022) utilized Google's Inception v3 convolutional neural network to process tens of thousands of news photographs published in the Wall Street Journal.The visual AI model extracted semantic features from photographs illustrating financial headlines (e.g., images of stressed traders, empty manufacturing facilities, volatile trading floors, or distressed corporate headquarters). The authors demonstrated that visual news sentiment predicted return reversals and market-wide volatility significantly faster than text-based algorithms alone, especially during episodes of extreme market fear and uncertainty. This empirical evidence proves that non-verbal, visual media captures latent psychological panic that textual reports often understate or delay reporting.Accounting Fraud & Financial Statement Manipulation DetectionFor investment analysts and statutory auditors, verifying the integrity of underlying financial statements is paramount. Traditional financial ratios and Beneish M-Score models often lag behind sophisticated earnings management techniques. Cecchini, Aytug, Koehler & Pathak (2010) developed a specialized Support Vector Machine (SVM) utilizing non-linear kernel transformations to detect management fraud in financial statement data.Their empirical model achieved extraordinary diagnostic capability: successfully identifying 80.0% of fraudulent accounting cases while correctly categorizing 90.6% of honest, non-fraudulent companies. By mapping complex multi-year relationships between revenue accruals, capital expenditures, inventory valuation, and liability reserves, kernel SVMs identify subtle balance sheet distortions long before regulatory enforcement actions or public bankruptcies occur.High-Frequency Cross-Sectional Return PredictabilityIn liquid asset management and treasury investment decisions, identifying fleeting predictive signals across thousands of securities represents a massive dimensionality challenge. Chinco, Clark-Joseph & Ye (2019) deployed the Least Absolute Shrinkage and Selection Operator (LASSO) regularized regression across the entire cross-section of US equities at high-frequency 1-minute intervals. LASSO effectively solved the "curse of dimensionality" by penalizing coefficients and setting uninformative variables to zero, proving that cross-stock trading dynamics generate statistically robust return predictability up to one minute in advance.3. Artificial Intelligence in Corporate Dividend DecisionsEver since Fischer Black coined the term "The Dividend Puzzle" in 1976, determining corporate payout policy has remained one of the most challenging problems in financial economics. Payout policies—encompassing cash dividends, share repurchases, and capital return programs—must balance corporate liquidity preservation with the need to signal earnings confidence to financial markets (Brav, Graham, Harvey & Michaely, 2005; Mensa et al., 2014).Traditional econometric payout models, rooted in John Lintner's 1956 partial adjustment framework, assume that management targets a stable long-term dividend payout ratio and adjusts distributions conservatively in response to earnings fluctuations:Lintner’s Classic Dividend Adjustment Model:\[\Delta D_{i,t} = \alpha_i + c_i (D^*_{i,t} - D_{i,t-1}) + \epsilon_{i,t}\] Where: \(D^*_{i,t} = r_i E_{i,t}\) represents the target dividend, \(r_i\) is the target payout ratio, and \(c_i\) is the speed of adjustment coefficient.While Lintner's framework captured twentieth-century corporate conservatism, it struggles to account for modern share buybacks, cyclical earnings volatility, and rapid shifts in shareholder demographic preferences. Modern researchers have leveraged machine learning to overcome these rigid linear constraints.Abdou, Pointon & El-Masry (2012) conducted comprehensive comparative research evaluating the efficacy of Multi-Layer Perceptron (MLP) neural networks against conventional econometrics (Multiple Discriminant Analysis and Binary Logistic Regression). Their findings established that neural networks demonstrated superior classification accuracy and lower predictive error in forecasting corporate dividend distributions and associated market price reactions. The neural network was capable of modeling complex, non-linear interactions between free cash flow to equity, debt maturity schedules, capital expenditure intensity, and macro interest rate regimes.Furthermore, Won, Kim & Bae (2012) pioneered hybrid architectures merging Genetic Algorithms (GA) with non-linear Marsh & Merton (1987) dynamic payout models. By allowing the genetic algorithm to optimize parameter selection dynamically, the model captured asymmetric dividend reactions—demonstrating why firms aggressively defend dividend floors during minor downturns but alter payouts decisively during systemic regime changes.4. The "Man + Machine" Paradigm: Why Human Knowledge is IndispensableThe remarkable empirical achievements of machine learning across financing, investment, and dividend decisions have led some industry observers to speculate whether fully autonomous financial systems could entirely replace human decision-makers. However, rigorous academic scholarship underscores that unsupervised algorithmic decision-making creates severe systemic risks, reinforcing the necessity of a synergistic "Man + Machine" operational paradigm.Operational DomainMachine Capabilities (AI)Algorithmic VulnerabilitiesHuman Professional ExpertiseIntegrated "Man + Machine" SynergyFinTech Consumer LendingProcesses millions of data points; evaluates alternative data in milliseconds; reduces transaction friction.Encodes historical bias; creates disparate impact; lacks empathy during borrower distress (Fuster et al., 2019; Dobbie et al., 2021).Contextual discretion; regulatory compliance oversight; subjective hardship evaluations.AI performs high-speed risk tiering; human underwriters adjudicate borderline, non-conforming, or distressed applications.Equity Research & ValuationRobo-analysts produce objective, unconflicted earnings models; update ratings instantly (Coleman et al., 2022).Cannot evaluate executive body language, boardroom chemistry, or qualitative strategic shifts.Relational intelligence; investigative channel checks; assessment of management integrity.Robo-analysts handle quantitative data parsing; human analysts deliver strategic foresight and qualitative thesis verification.Commercial Credit UnderwritingScans ledger entries, cash velocity, and GST data to predict working capital stress.Degrades severely when underwriting opaque borrowers or asset-light firms (Costello et al., 2020).Field audits; qualitative collateral appraisal; counterparty character evaluation.Human-in-the-loop credit committees use AI default probability scores as one input among qualitative covenants.Corporate Disclosure & GovernanceMonitors earnings call linguistics and sentiment cues across capital markets (Cao et al., 2022).Susceptible to strategic disclosure manipulation; gaming by executives who script remarks for algorithms.Substantive auditing; skepticism; probing investigative cross-examination.Chartered Accountants apply professional skepticism to ensure substance-over-form reporting.As demonstrated by Costello, Down & Mehta (2020) in their empirical examination of commercial lending, machine learning algorithms excel when evaluating borrowers with deep, standardized, and transparent histories. However, when evaluating opaque borrowers, emerging startups, firms with substantial intangible assets, or companies navigating unprecedented structural transitions, algorithmic models experience significant predictive degradation. In such environments, the tacit knowledge, subjective discretion, and investigative inquiry of experienced human professionals remain paramount.Strategic Takeaway for Finance Leaders:Artificial Intelligence is not an autonomous replacement for human financial governance; it is a cognitive amplifier. Algorithms provide computational speed, high-dimensional pattern recognition, and freedom from emotional exhaustion. Humans contribute contextual interpretation, ethical governance, professional skepticism, and strategic moral accountability. Financial decision-making achieves its highest fidelity when machine precision is anchored by human wisdom.5. Conclusion & Future Outlook for Chartered AccountantsThe integration of Artificial Intelligence into corporate financial decision-making represents a decisive structural shift in corporate governance, capital allocation, and professional accounting practice. As demonstrated across the empirical literature:In Financing: Recurrent neural networks (LSTM) refine beta estimations, cutting cost-of-equity estimation errors by over 60% and enabling real-time capital structure optimization.In Investment: Multi-modal algorithms—from FinBERT textual parsing of regulatory disclosures to Google Inception v3 visual sentiment analysis of news photography—uncover latent risks and forecast return trajectories with unprecedented speed.In Dividends: Non-linear neural networks and genetic algorithms capture dynamic payout adjustments, outperforming static legacy econometric models.For Chartered Accountants, Chief Financial Officers, and statutory auditors, this technological inflection does not diminish professional relevance—it elevates it. The financial leader of the modern era must transition from a retrospective record-keeper to a prospective algorithmic architect: validating machine learning data inputs, auditing predictive objective functions, mitigating algorithmic biases, and ensuring that strategic capital allocations adhere to statutory transparency and ethical fiduciary duties.Academic References & Empirical Literature CitedAbdou, H. A., Pointon, J., & El-Masry, A. (2012). Neural nets versus conventional techniques in credit scoring in Egyptian banking. Expert Systems with Applications, 35(3), 1275–1292.Blankespoor, E., deHaan, E., & Zhu, C. (2018). Capital market effects of media synthesis and dissemination: Evidence from robo-journalism. Review of Accounting Studies, 23(1), 1–36.Brav, A., Graham, J. R., Harvey, C. R., & Michaely, R. (2005). Payout policy in the 21st century. Journal of Financial Economics, 77(3), 483–527.Cao, S., Jiang, W., Yang, B., & Zhang, A. L. (2022). How to talk when a machine is listening: Corporate disclosure in the age of AI. The Review of Financial Studies, 36(9), 3617–3655.Cecchini, M., Aytug, H., Koehler, G. J., & Pathak, P. (2010). Detecting management fraud in financial statements using specialized support vector machines. Decision Support Systems, 50(1), 188–194.Chinco, A., Clark-Joseph, A. D., & Ye, M. (2019). Sparse signals in the cross-section of returns. The Journal of Finance, 74(1), 449–492.Coleman, K., Merkley, K. J., & Pacelli, J. (2022). Robo-analysts: A new era of financial research. Harvard Business School Accounting & Management Unit Working Paper.Costello, A. M., Down, R., & Mehta, M. N. (2020). Machine learning and loan contracting. Journal of Accounting Research, 58(5), 1147–1189.Ding, R. H., Perez-Truglia, R., & Zhang, P. (2020). The value of algorithmic ratings in insurance underwriting. National Bureau of Economic Research Working Paper.Dobbie, W., Liberman, A., Paravisini, D., & Pathania, V. (2021). Measuring bias in consumer lending. The Review of Economic Studies, 88(6), 2799–2832.Eliasy, R., & Przychodzen, J. (2020). The role of artificial intelligence in improving the accuracy of Capital Asset Pricing Model. Journal of Risk and Financial Management, 13(9), 217.Frankel, R., Jennings, J., & Lee, J. (2022). Disclosure tone and investor sentiment: An empirical investigation. Journal of Accounting and Economics, 73(2), 101480.Fuster, A., Goldsmith-Pinkham, P., Ramadorai, T., & Walther, A. (2019). Predictably unequal? The effects of machine learning on credit markets. The Journal of Finance, 77(1), 5–47.Huang, A. H., Zang, A. Y., & Zheng, R. (2014). Evidence on the information content of text in analyst reports. The Accounting Review, 89(6), 2151–2180.Huang, Y., & You, C. (2022). Artificial intelligence and economic growth: Global projections towards 2030. Technological Forecasting and Social Change, 178, 121588.Li, F. (2010). The information content of forward-looking statements in corporate filings—A Naïve Bayesian approach. Journal of Accounting Research, 48(5), 1049–1102.Mensa, S., et al. (2014). Information asymmetry and corporate payout policy: Global empirical evidence. Journal of Corporate Finance, 29, 179–201.Obaid, K., & Pukthuanthong, K. (2022). A picture is worth a thousand words: Measuring investor sentiment by combining machine learning and photos from news. Journal of Financial Economics, 144(1), 273–297.Won, C. H., Kim, J., & Bae, J. K. (2012). Using genetic algorithm to optimize Marsh-Merton dividend prediction models. Expert Systems with Applications, 39(10), 8750–8758.
Technology
Ep. 501 — The AI Revolution in Finance: Unleashing ChatGPT’s Potential
CA Journal
· September 2026
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Technology • Generative AI & Practice InnovationThe AI Revolution in Finance: Unleashing ChatGPT’s PotentialA comprehensive exploration of how Large Language Models empower Chartered Accountants—from automating complex Excel modeling and statutory tax planning to enhancing audit diagnostics and client advisory. 30%Faster Response TimesObserved reduction in operational latency using AI conversational interfaces.25%Higher Client SatisfactionMeasured boost in client engagement and feedback through instant advisory delivery.175 Billion+Model ParametersTransformer architecture neural weights powering generative language synthesis.Real-TimeData CapabilityRapid on-demand synthesis of financial ledgers, tax codes, and spreadsheets.Introduction: The Emerging AI Paradigm in Financial ServicesChatGPT, a state-of-the-art conversational language model based on deep Transformer architecture, is profoundly transforming the modern finance and accounting landscape by delivering unprecedented access to real-time financial data, research synthesis, and rapid analytical processing. In the context of financial advisory and practice management, "real-time" denotes the capability of the AI engine to ingest user queries and provide rigorous explanations, formulas, code, or structured reports promptly and without significant latency.In the financial domain, real-time response capability is vital because corporate transactions, regulatory compliance deadlines, capital market movements, and executive decisions operate at high velocity. Access to immediate, synthesized intelligence provides a formidable competitive advantage. Recent corporate research indicates that enterprises integrating AI-driven conversational assistants experience a 30% reduction in customer response times and a 25% increase in client satisfaction scores.Beyond transactional efficiency, ChatGPT drives qualitative innovation across accounting practice. By automating repetitive procedural tasks—such as journal entry lookups, formula drafting, routine tax queries, and initial report preparation—it liberates Chartered Accountants and finance leaders to concentrate on high-level strategic counsel, ethical governance, risk management, and holistic business valuation.Exploring the Evolution of ChatGPT: A Historical PerspectiveThe technological lineage of ChatGPT represents one of the most rapid and impactful evolutions in computational natural language processing (NLP):GPT-2 (2018–2019): The genesis of modern autoregressive language generation began with the demonstration of significant NLP capabilities in translation and coherent text synthesis. Due to early safety concerns regarding potential misuse in generating synthetic misinformation, OpenAI initially restricted the full model's public distribution.GPT-3 (June 2020): A major breakthrough occurred with the release of GPT-3, scaled to 175 billion parameters. Trained on a diverse corpus encompassing the internet, books, scientific articles, and open-source code repositories, GPT-3 demonstrated remarkable few-shot proficiency in drafting essays, writing Python/SQL scripts, and answering multi-faceted conceptual questions.GPT-3.5 & ChatGPT (Late 2020–2022): Leveraging Reinforcement Learning from Human Feedback (RLHF) and fine-tuning on domain-specific conversational tasks, OpenAI released ChatGPT. This methodology enabled the model to maintain conversational context, admit errors, decline inappropriate queries, and generate highly nuanced, context-aware responses to intricate text prompts.How ChatGPT Operates: Understanding the Workflow MechanicsFor practitioners integrating ChatGPT into daily accounting workflows, understanding the conversational interaction cycle is essential for maximizing output quality:Accessing the Chat Interface: Initiating interaction via the web browser interface or integrated API platforms supporting conversational AI.Setting Context & Persona: Establishing the operating identity (e.g., specifying your role as a statutory auditor, tax consultant, or financial controller) and defining the intended audience.Formulating the Core Question: Asking precise technical queries, ranging from foundational concepts (e.g., the structural differences between balance sheets and income statements) to complex statutory interpretations under Accounting Standards (AS/Ind AS).Evaluating the Generated Response: Critically analyzing the AI-generated output, which may include technical explanations, comparative tables, Excel formula syntax, or links to primary resources.Iterative Multi-Turn Refinement: Conducting follow-up dialogue to refine parameters, narrow assumptions, clarify edge cases, or adjust formatting.Concluding & Archiving the Session: Finalizing the inquiry and archiving the prompt-response transcript into practice workpapers for documentation and compliance purposes.The Core Rule of Prompt Engineering:Prompts serve as the foundational catalyst for generative language models. A vague, one-line query produces ambiguous, generic responses. Conversely, a carefully constructed prompt that establishes the practitioner's persona, specifies the regulatory framework, details the input variables, and defines the exact output structure will generate outputs that rival experienced human analysts.ChatGPT & Microsoft Office: Supercharging Spreadsheets and PresentationsOne of the most immediate productivity breakthroughs for accounting professionals lies in using ChatGPT to supercharge Microsoft Office tools, particularly Excel and PowerPoint. Financial professionals frequently encounter complex nested logic, dynamic lookups, or slide transition challenges that traditionally consumed hours of manual search through software documentation.For example, when constructing an audit schedule requiring conditional sums based on dynamic thresholds, a practitioner can simply prompt the model: "How do I use the SUMIF formula to aggregate values in Column A exceeding 10?" ChatGPT instantly provides the exact functional syntax:Generated Excel Syntax =SUMIF(A1:A10, ">10")Practical Demonstration: Excel Formulas for Client PresentationsWhen presenting financial statements and management accounts to boards or SME clients, Chartered Accountants require clean, automated, and error-free spreadsheets. Below is an illustrative tabular output generated by ChatGPT in response to a professional prompt:Input Prompt 1 "Can you give examples of Excel Formulas in Tabular Form useful for presenting data to clients?"FormulaTechnical DescriptionPractical Excel Syntax ExampleSUMCalculates the total of a designated range of cells.=SUM(A2:A10)AVERAGECalculates the arithmetic mean of a range of cells.=AVERAGE(B2:B10)MAXFinds the highest numerical value in a range of cells.=MAX(C2:C10)MINFinds the lowest numerical value in a range of cells.=MIN(D2:D10)COUNTCounts the number of cells in a range that contain numerical data.=COUNT(E2:E10)IFReturns one value if a condition evaluates to true, and another if false.=IF(F2>100, "High", "Low")VLOOKUPLooks up a value in a table and returns a corresponding value from another column.=VLOOKUP(G2, A2:B10, 2, FALSE)CONCATENATEJoins together two or more discrete text strings into a single string.=CONCATENATE(H2, " - ", I2)ROUNDRounds a number to a specified number of decimal places.=ROUND(J2, 2)TEXTFormats a number as text using a specified custom format code.=TEXT(K2, "$#,##0.00")Simulating Professional Interviews & Role-Play ScenariosChatGPT can also serve as an interactive training simulator for recruiting, team upskilling, and executive interview preparation. By instructing the model to adopt the persona of an employer or board panel, practitioners can pressure-test candidate competencies across internal controls, crisis budgeting, and statutory compliance.Input Prompt 2 "Can you simulate a job interview for a finance manager by asking and answering questions as if you are a potential employer?"Interviewer: "Can you tell me about your experience working as a Finance Manager?"Candidate: "Yes, certainly. I have been working as a Finance Manager for the past five years, where I have been responsible for overseeing financial operations, managing budgets, preparing financial statements, and providing financial analysis to senior management. During my time as a Finance Manager, I have successfully implemented cost-saving measures and streamlined financial processes to increase efficiency and accuracy."Interviewer: "How do you ensure that financial data is accurate and compliant with regulatory requirements?"Candidate: "As a Finance Manager, accuracy and compliance are critical components of my role. I ensure that financial data is accurate by implementing robust financial controls and conducting regular audits of financial processes. I also stay up-to-date with regulatory requirements and ensure that our financial reporting is compliant with all relevant regulations."Interviewer: "Can you tell me about a time when you had to make a tough financial decision? How did you handle it?"Candidate: "Yes, I can. In my previous role as Finance Manager, we were facing a significant budget shortfall due to unexpected expenses. I had to make the tough decision to reduce our workforce to cut costs. To handle this situation, I conducted a thorough analysis of our financial data to identify areas where we could make cost savings without compromising our operations. I then worked closely with HR to ensure that the layoffs were conducted fairly and respectfully, while also ensuring that our financial goals were met."Ten Strategic Ways ChatGPT Assists Chartered AccountantsThe scope of ChatGPT's utility extends across the complete lifecycle of accounting, auditing, and corporate finance. Below are ten high-impact deployment vectors for modern CA firms:Instant Knowledge Synthesis: Providing answers to standard accounting queries in real-time, drastically reducing the manual research hours spent flipping through physical manuals or disparate search engines.Big Data Financial Analysis: Ingesting large volumes of transactional data, general ledger extracts, and journal runs to highlight operational trends and executive insights.Automated Statement Generation: Assisting in drafting structured financial statements—including balance sheets, profit and loss accounts, and cash flow statements—based on underlying client trial balances.Tax Compliance & Regulatory Filing: Clarifying nuances in tax legislation, statutory deduction thresholds, and filing schedules to help ensure zero non-compliance penalties.Financial Forecasting & Budgeting: Developing multi-variable financial forecasts, budgeting schedules, and sensitivity models based on historical run-rates.Strategic Financial Management: Formulating actionable cost-rationalization strategies and operational optimization plans for corporate boards and SMEs.Financial Risk Management: Identifying latent credit, liquidity, and operational risk factors and proposing mitigation structures.Audit Assistance & Anomaly Detection: Pre-screening transactional data to isolate anomalies, unusual ledger postings, or duplicate entries warranting substantive audit procedures.Accounting Technology Adoption: Supporting accounting firms in evaluating, configuring, and scripting modern cloud accounting and ERP tools.Personalized Client Advisory: Generating tailored advisory memos and educational briefs to address unique, industry-specific client financial challenges.Practice Area Deployment MatrixThe functional integration of ChatGPT across specific accounting practice areas is summarized below:Area CoveredHow ChatGPT Can Help Accounting ProfessionalsTax PlanningProvides real-time tax calculations, regime comparisons, and advisory notes based on user inputs, empowering CAs to make informed tax planning decisions.Financial AnalysisGenerates variance reports, key financial ratios, and diagnostic observations on balance sheets and income statements to rapidly identify areas of concern.Regulatory ComplianceProvides immediate reference information on regulatory compliance mandates, statutory accounting standards, and statutory disclosure requirements.Financial ForecastingBuilds dynamic forecast models based on historical baseline data, helping CAs predict future performance and advise clients on capital preservation.Accounting SupportDelivers guidance on technical journal entries, accounts payable/receivable reconciliations, and accrual accounting treatments.Client CommunicationDrafts professional client communications, automated compliance reminders, engagement letters, and periodic financial update briefs.Critical Limitations of Natural Language Processing ModelsWhile ChatGPT is a powerful cognitive tool, it possesses fundamental architectural limitations that require strict professional safeguards. Practitioners must never treat AI as an autonomous substitute for certified professional judgment:Mandatory Ethical & Professional Governance:ChatGPT is a probabilistic language model, not a certified practitioner. It does not bear statutory liability, cannot hold professional indemnity insurance, and owes no legal fiduciary duty to clients. Chartered Accountants remain fully liable under the Chartered Accountants Act, 1949 for all opinions, certifications, and filings delivered to clients and regulators.Lack of Common Sense: The model operates on statistical token prediction and lacks grounded, real-world common sense. It may generate outputs that appear grammatically polished and technically sound, yet are commercially unfeasible or illegal in specific local contexts.Algorithmic Bias: Trained on vast internet corpora, the model can reproduce inherent historical biases, potentially skewing qualitative assessments or credit scoring recommendations.Limited Contextual Understanding: While proficient in tracking conversational threads, the model struggles with subtle sarcasm, corporate subtext, ambiguous regulatory intent, or non-verbal board dynamics.Inability to Learn from Direct Experience: The model does not acquire tacit knowledge or learn from dynamic operational experience in the manner of human professionals. It relies strictly on pre-existing training data and explicit prompt inputs.Absence of Emotional Intelligence: The model possesses zero empathy or genuine emotional intelligence. It cannot replace the human connection, moral judgment, and ethical reassurance required during sensitive client crises or complex restructurings.Conclusion: The Future of the Augmented AccountantThe integration of ChatGPT and Generative AI into the finance profession does not herald the obsolescence of the Chartered Accountant; rather, it marks the dawn of the Augmented Accountant. Professionals who master prompt engineering, understand algorithmic limitations, and integrate AI into their analytical workflows will achieve unprecedented efficiency and client value.By leveraging ChatGPT as a high-speed research assistant, formula builder, and initial drafting engine, while retaining rigorous human verification, professional skepticism, and ethical responsibility, Chartered Accountants can cement their role as indispensable strategic advisors in an increasingly digital world.
Technology
Ep. 502 — The Digital Personal Data Protection Act, 2023 – A step towards empowering Indian citizens
CA Journal
· September 2026
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The Digital Personal Data Protection Act, 2023 – A step towards empowering Indian citizensA legal, operational, and regulatory analysis of India’s landmark data privacy statute—exploring fiduciary duties, citizen empowerment, heavy penalties up to ₹250 Crores, and the compliance framework for enterprises. 11th Aug 2023Presidential AssentEnactment of the Digital Personal Data Protection Act, 2023.₹250 CroresMaximum PenaltyPer-instance statutory fine for failing to prevent data breaches.10th GloballyITU Cybersecurity RankIndia’s rank out of 194 nations in Global Cyber-Security Index."She / Her"Legislative DraftingFirst Indian parliamentary statute acknowledging female pronouns.Introduction: The Need for an Omnibus Data Protection LawThe herculean task of safeguarding the integrity, confidentiality, and privacy of digital personal data has been officially shouldered by India’s landmark enactment—The Digital Personal Data Protection Act, 2023 (DPDP Act, 2023). For over two decades, Indian digital regulation was anchored in the Information Technology Act, 2000 (IT Act). However, the IT Act was primarily designed to facilitate electronic commerce and penalize computer-related offenses. It was never comprehensive enough to address the sophisticated ways digital personal data is extracted, monetized, profiled, and traded in today's algorithmic economy.Digitization has become the indispensable edifice of the modern global economy. Over the past twenty years, technology-driven methods have superseded traditional practices of manual data processing. Instant electronic transfer and cross-border exchange of information have become standard business requirements. In modern commercial reality, the words "Commerce" and "Digitization" have become two inseparable sides of the same coin.Corporate organizations continuously accumulate vast repositories of personal information from subscribers, online consumers, vendors, and employees. These entities store, process, and transmit data for commercial operations, targeted analytics, and the training of Artificial Intelligence (AI) models. Crucially, this immense digital footprint often remains indefinitely stored with data processors long after the original purpose of collection has been served. To ensure that personal data is safe, secure, and processed solely for lawful purposes with affirmative consent, the Parliament passed the DPDP Act, receiving the assent of the Honourable President of India on 11th August 2023.Territorial Scope & Extraterritorial ApplicationThe DPDP Act, 2023 establishes an expansive jurisdictional framework designed to protect Indian citizens irrespective of where data processing infrastructure resides:Processing Within India: The Act applies to the processing of digital personal data within the territory of India where the personal data is collected:In digital form; orIn non-digital form and digitized subsequently.Extraterritorial Jurisdiction: The Act applies to the processing of digital personal data outside the territory of India, provided such processing is in connection with any activity related to the offering of goods or services to Data Principals within India.Key Statutory Terms & DefinitionsThe Act introduces precise statutory terminology that fundamentally alters corporate accountability:1. Personal DataDefined broadly as "any data about an individual who is identifiable by or in relation to such data." It encompasses all sensitive information, including but not limited to names, addresses, contact details, biometric facial scans, fingerprints, government-issued identity cards (Aadhaar, PAN, Passport), bank accounts, credit card records, vehicle registration numbers, medical and health reports, and ration cards.2. Data PrincipalThe individual to whom the personal data relates. The statute incorporates progressive legal safeguards for vulnerable individuals:In the case of a child (defined as an individual below 18 years of age), the Data Principal includes his or her parents or lawful guardian.In the case of a person with a disability, the term includes his or her lawful guardian acting on their behalf.3. Data FiduciaryAny person or organization who, alone or in conjunction with other persons, determines the purpose and means of processing personal data. The deliberate legislative choice of the term "Fiduciary" signifies that organizations hold citizens' personal data in "pure trust". They must safeguard privacy, ensure legitimate use, and effect data erasure with the same diligence as they would handle their own critical assets.4. Consent ManagerAn intermediary registered with the Data Protection Board of India who acts as a single point of contact to enable the Data Principal to give, manage, review, and withdraw her consent transparently through an accessible, interoperable digital platform.Key Obligations of Data FiduciariesUnder the DPDP Act, organizations can no longer treat customer data as proprietary corporate property. The Act imposes strict statutory obligations upon every Data Fiduciary:Processing Under Valid Contract: A Data Fiduciary may engage, appoint, or involve a Data Processor to process personal data only under a valid, legally binding contract. The Data Fiduciary remains primarily responsible and legally liable for data protection, irrespective of whether processing is conducted in-house or outsourced.Mandatory Data Erasure: The Data Fiduciary must erase personal data upon withdrawal of consent by the Data Principal, or immediately after the purpose for which the data was collected has ceased to exist, unless retention is explicitly mandated by another applicable law.Effective Grievance Redressal: Every Data Fiduciary must establish an efficient, easily accessible grievance redressal mechanism to address complaints from Data Principals.Strict Safeguards for Children & Disabled Persons:Verifiable consent of the parent or lawful guardian is mandatory before processing children's data.Fiduciaries are strictly prohibited from tracking or monitoring children's behavior or directing targeted advertisements at them.The Central Government may notify age relaxations only for specific fiduciaries that demonstrate verifiably safe processing standards.Data Quality & Completeness: Where personal data is used to make a decision affecting the Data Principal or is disclosed to another Data Fiduciary, the fiduciary must ensure absolute completeness, accuracy, and consistency.Reasonable Security Safeguards & Breach Notification: Fiduciaries must implement robust security controls to prevent personal data breaches. In the event of a breach, the fiduciary must notify both the Data Protection Board of India and each affected Data Principal in the prescribed format.Significant Data Fiduciaries (SDF) & Enhanced GovernanceUnder Section 10, the Central Government possesses the power to designate specific organizations or classes of organizations as Significant Data Fiduciaries (SDF) based on an evaluation of six statutory criteria:Statutory Criteria for SDF NotificationRegulatory Rationale & Strategic ObjectiveVolume and Sensitivity of DataMega-platforms, banking conglomerates, and health portals processing massive datasets require enhanced oversight.Risk to Data Principal RightsPreventing widespread financial fraud, identity theft, or automated profiling harms.Sovereignty & Integrity of IndiaShielding critical national data infrastructure against geopolitical exploitation.Risk to Electoral DemocracyPreventing synthetic voter profiling, psychographic micro-targeting, and democratic interference.Security of the StateSafeguarding defense, intelligence, telecom, and critical energy grids.Public OrderPreventing coordinated digital disinformation campaigns that incite social unrest.Entities classified as Significant Data Fiduciaries must comply with three mandatory institutional requirements:Resident Data Protection Officer (DPO): Appoint an individual who represents the board of directors and is based in India.Independent Data Auditor: Appoint an external auditor to evaluate statutory compliance and evaluate security posture periodically.Data Protection Impact Assessment (DPIA): Carry out periodic assessments to evaluate operational risks to Data Principals.Legitimate Uses: Lawful Grounds for Processing Without ConsentRecognizing operational necessities, Section 7 of the Act outlines specific "Legitimate Uses" where personal data can be processed without obtaining prior affirmative consent:Voluntary Provision: When a Data Principal voluntarily provides her data for a specific purpose without expressing objection.State Welfare & Subsidies: For delivering government welfare benefits, subsidies, licenses, or certificates.Sovereign State Functions: Performing functions mandated by law in the interest of India's sovereignty, integrity, or national security.Judicial Compliance: Complying with any decree or order issued by an Indian court, or civil orders issued abroad.Medical Emergencies & Epidemics: Responding to severe health threats, life-threatening accidents, epidemics, or natural disasters.Employment & Corporate Asset Protection: Safeguarding employers against corporate espionage, intellectual property theft, or maintaining confidentiality of trade secrets.Citizen Empowerment & Progressive Legislative InnovationsEmpowerment fundamentally means "to derive power from." Previously, Indian citizens had limited legal remedies against unauthorized commercial profiling and data scraping. The DPDP Act fundamentally shifts this power dynamic by turning commercial organizations into legal trustees accountable to citizens.Key Welcome Features Introduced by the Government:Deterrent Penalties (INR 150 Crores to 250 Crores): Non-compliance or data breaches attract unprecedented financial penalties. Failing to implement reasonable security safeguards carries a fine of up to ₹250 Crores, while failing to report breaches or violating children's data rules carries fines up to ₹200 Crores.Lucid Language with Real-Life Illustrations: Breaking away from archaic legislative conventions, the Act is drafted in plain, accessible language with practical illustrations, avoiding convoluted proviso clauses and multiple cross-references.Pioneering Use of "She / Her" Pronouns: Historic Milestone For the first time in Indian parliamentary legislative drafting, the words "She" and "Her" are used to refer to individuals, acknowledging and respecting the virtues of women in statutory drafting.Statutory Administrative Penalties (Schedule under Section 33):The Act completely eliminates trivial corporate fines, replacing them with massive financial liabilities that make data protection a mandatory boardroom agenda:Statutory Default / Breach CategoryRelevant SectionMaximum Statutory PenaltyFailure to implement reasonable security safeguards to prevent data breachSection 8(5)Up to ₹250 CroresFailure to notify the Board and affected Data Principals in the event of a breachSection 8(6)Up to ₹200 CroresNon-compliance with obligations in relation to children and persons with disabilitySection 9Up to ₹200 CroresFailure to comply with additional obligations of a Significant Data FiduciarySection 10Up to ₹150 CroresGeneral non-compliance with any other provisions of the Act or rulesResidual ClauseUp to ₹50 CroresBreach of statutory duties by a Data Principal (impersonation, false claims)Section 15Up to ₹10,000Institutional Architecture: The Data Protection Board of IndiaTo enforce the provisions of the Act, the Central Government will establish the Data Protection Board of India (DPBI). Operating as a modern "Digital Office", the Board will conduct inquiries, evaluate data breaches, direct interim remediation, and impose administrative penalties. Key aspects of the enforcement framework include:Expert Composition: The Chairperson and members will possess specialized knowledge in data governance, techno-regulation, information technology, and consumer protection.Appellate Hierarchy: Any party aggrieved by an order of the Board may file an appeal before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT), and subsequently before the Supreme Court of India.Platform Blocking Powers: Upon reference from the Board citing two or more penalty instances, the Central Government is empowered to block public access to a non-compliant fiduciary's platform in the public interest.Road Ahead: Strategic Imperatives for Chartered Accountants & BusinessesIndia currently ranks 10th out of 194 countries in the Global Cyber-Security Index published by the International Telecommunication Union (ITU). With the DPDP Act entering into force, Indian enterprises must fundamentally re-engineer their technological and administrative architecture:Board-Approved Data Protection Policy: Every corporate entity qualifying as a Data Fiduciary must formulate and adopt a comprehensive, board-approved data protection charter.Vendor Contract Overhauls: Existing vendor agreements, cloud hosting contracts, and software licenses must be amended to include strict data processing and audit covenants.Workforce Upskilling: Relationship managers, HR teams, customer support representatives, and IT administrators who handle personal data must undergo continuous data protection training.Technology Investments: Substantial capital expenditure will be directed toward consent management modules, automated data discovery engines, tokenization software, and breach response systems.For Chartered Accountants, the DPDP Act opens substantial advisory and assurance opportunities. As trusted financial and governance advisors, Chartered Accountants are uniquely positioned to assist corporate boards in designing data governance frameworks, conducting internal controls assessments, and performing independent data compliance audits in an economy increasingly driven by Artificial Intelligence.
Sustainability
Ep. 503 — Prioritizing Green Finance in India: A critique on Multi-Lateral Development Banks as a bulwark for Climate Financing
CA Journal
· September 2026
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Prioritizing Green Finance in India: A critique on Multi-Lateral Development Banks as a bulwark for Climate FinancingA critical empirical evaluation of Multi-Lateral Development Banks (MLDBs), examining the $10.1 Trillion capital chasm facing India's Net-Zero 2070 roadmap, regional funding disparities, and the imperative for blended finance. USD 10.1 TrillionNet-Zero 2070 NeedTotal climate investment required for India to achieve Net-Zero by 2070.USD 50.7 BillionMLDB Climate CommitmentsTotal adaptation & mitigation finance committed to low/middle-income nations (2021).17%Foreign Inflow ShareA meager 17% of India's green finance stems from foreign public/private sources.45%Emission Intensity CutTarget reduction in carbon emissions intensity of India's GDP by 2030.Introduction: The Climate Crisis & India’s Global PledgesThe global community is facing the severe brunt of climate inaction in the form of cascading environmental disturbances that threaten ecological equilibrium and macroeconomic stability. To restrict the ever-widening trench of looming ecological disasters in India, national planning must be anchored firmly in sustainable, environmentally balanced growth. While the UN Sustainable Development Goals (SDGs) and the Paris Agreement are at the forefront of international development agendas, India faces significant strategic challenges in channeling adequate climate finance toward realizing these ambitious commitments.At the 26th Conference of the Parties (COP26) held in Glasgow in 2021, India announced its landmark "Panchamrit" climate pledges:Expanding non-fossil fuel energy generation capacity to 500 Gigawatts (GW) by 2030.Fulfilling 50% of its national energy requirements from renewable sources by 2030.Reducing aggregate projected carbon emissions by 1 Billion tonnes between 2021 and 2030.Lowering the carbon emissions intensity of its economy by 45% by 2030 (relative to 2005 levels).Achieving a comprehensive "Net-Zero" carbon economy by 2070 (Goswami, 2022).Translating these historic pledges into tangible physical infrastructure requires unprecedented capital mobilization. As documented by official economic surveys, India requires nearly USD 2.5 Trillion to fulfill its Nationally Determined Contributions (NDCs) by 2030, and a staggering USD 10.1 Trillion to realize Net-Zero by 2070 (ET Government, 2022). Meeting these capital requirements demands an examination of the role played by Multi-Lateral Development Banks (MLDBs).Defining Green Finance: A "Climate Plus" ArchitectureGreen Finance refers to financial investments channeled into sustainable development projects, environmental technologies, and initiatives that encourage balanced, low-carbon growth (International Development Finance Club, 2013). Green finance is broader than conventional climate finance; it embodies a "Climate Plus" approach that encompasses not only greenhouse gas mitigation and climate adaptation, but also biodiversity conservation, soil health, circular economy practices, and water security.Figure 1: Conceptual Hierarchy of Sustainable Development (UNEP 2016 Schema)EnvironmentalSocialEconomicGovernanceClimate Change Mitigation("Low-Carbon" Capital)Climate Change Adaptation("Climate Resilience")Other Environmental Goals("Green & Circular")Need for Green Finance & The Role of Multilateral Development BanksAll real economic sectors face growing physical and transition risks associated with climate change. Extreme weather disasters disrupt global supply chains, destroy agricultural yields, and escalate project implementation costs. These climate shocks risk destabilizing international financial markets, threatening unprecedented impairment of bank loan portfolios and corporate collateral. While the global insurance industry has attempted to price these physical risks, commercial banks remain late movers. Furthermore, post-pandemic fiscal constraints have deepened liquidity shortfalls across emerging nations.To prevent climate disruptions from reversing decades of poverty alleviation, multilateral financial flows are indispensable (Kaya, 2022). Multi-Lateral Development Banks (MLDBs)—such as the World Bank Group, the Asian Development Bank (ADB), and the African Development Bank (AfDB)—are supranational institutions owned by sovereign shareholder nations. Because they operate beyond the political confines of any single nation, MLDBs are theoretically poised to serve as the global bulwark for climate finance, advancing economic stability and low-carbon growth across developing economies.Empirical Reality: 2021 MLDB Climate CommitmentsAccording to the 2021 Joint Report on Multilateral Development Banks (Mesquita Moreira et al., 2022), MLDBs committed a total of USD 50,667 Million (~$50.7 Billion) to climate finance in low- and middle-income economies. However, an analysis of the distribution reveals substantial geographic and programmatic imbalances:Global RegionAdaptation Finance ($ M)Mitigation Finance ($ M)Total Combined ($ M)Percentage Share (%)Sub-Saharan Africa$6,847$5,914$12,76125.19%Latin America & the Caribbean$2,984$6,837$9,82119.38%South Asia (incl. India)$3,034$5,125$8,15916.10%East Asia & the Pacific$2,308$3,652$5,96011.76%Europe: Non-EU$542$4,730$5,27210.41%Middle East & North Africa$1,100$2,970$4,0708.03%Central Asia$485$1,444$1,9293.81%Multi-Regional Projects$214$1,310$1,5243.01%Europe: EU Members$98$1,073$1,1712.31%Total Commitments$17,612 (34.8%)$33,055 (65.2%)$50,667100.0%Disproportionate Geographic & Sectoral Allocation:While the World Bank contributes more than half of all climate finance projects in low- and middle-income nations, total MLDB commitments remain heavily tilted toward Mitigation (USD 33.06 Billion / 65.2%) rather than Adaptation (USD 17.61 Billion / 34.8%). Furthermore, out of ~$51 Billion pledged, merely $8.2 Billion reached Asian economies—a region housing over half the world’s climate-vulnerable population.Critique of Multilateral Development Banks: Sluggish Flows & Lack of TransparencyDespite public pledges aligned with the Paris Agreement and SDGs, academic scholarship highlights that MLDB commitments remain inadequate, opaque, and sluggish:The $100 Billion Broken Promise: Developing nations expected nearly USD 100 Billion annually in climate finance disbursements from advanced economies. In reality, actual disbursements totaled only USD 19.5 to 22.0 Billion per year between 2017 and 2018 (Neunuebel et al., 2022).Lack of Project-Level Transparency: MLDB reporting is bogged down by vague tracking taxonomies and aggregated numbers. Detailed data on how much capital actually reaches ground-level projects versus administrative overhead remains largely inaccessible to host country stakeholders.Debt Traps over Concessional Capital: Emerging economies face severe fiscal headwinds. Extending climate funding in the form of commercial-rate debt loans rather than concessional capital or grants risks plunging debt-vulnerable nations into fiscal distress (Kaya, 2022).Commercial Unviability of Early-Stage Green Tech: Because renewable energy and climate adaptation projects in developing nations carry high upfront risks and lack immediate commercial revenue streams, private international investors remain hesitant without substantive public risk-cushioning.Climate Finance in India: Domestic Reliance vs. Foreign Inflow DeficitThe structural reality of India’s green finance ecosystem reveals an overwhelming reliance on internal domestic capital rather than external multilateral aid:India's Green Finance Reality:India has raised approximately USD 261 Billion in green financing. However, over 83% of this capital was raised domestically, with the private sector providing nearly 60% of the total. Foreign inflows accounted for a mere 17%, originating primarily from bilateral public sources rather than foreign commercial direct investment (Naran et al., 2022). Most MLDB participation has been restricted to investment loans of around USD 51 Million per deal.The GDP-Indexed Emissions DilemmaA critical structural challenge facing India’s NDC pledges lies in how emissions targets are formulated. India's commitment specifies reducing emissions intensity per unit of GDP by 45%, rather than imposing an absolute cap on gross emissions. Consequently, as the Indian economy expands at 6–8% annually, aggregate greenhouse gas emissions will continue to grow in absolute terms until industrial decoupling occurs. To reverse this trajectory, India must aggressively accelerate its ambition through massive capital mobilization.The Way Forward: Recommendations for Policy & Practice1. Catalyzing Blended Finance FrameworksConstrained sovereign budgets in emerging markets require a structured Blended Finance Framework. Public capital from MLDBs must be deployed strategically to de-risk green projects—providing first-loss credit guarantees, absorbing high-risk project development phases, offering subsidized local currency hedging, and accepting lower initial returns. This de-risking allows private institutional capital to fund downstream operational phases.2. Regulatory Cohesion Among Financial Regulators (RBI, SEBI, IRDAI)Achieving a resilient, low-carbon financial system requires coordinated action among India’s apex financial regulators:Reserve Bank of India (RBI): Implement frameworks from its Discussion Paper on Climate Risk and Sustainable Finance (2020), integrating climate stress-testing into banking supervisory reviews and establishing targeted Priority Sector Lending (PSL) carve-outs for green assets.Securities and Exchange Board of India (SEBI): Expand the Business Responsibility and Sustainability Reporting (BRSR Core) framework, institute green bond taxonomy standards, and enforce anti-greenwashing regulations on ESG funds.Insurance Regulatory and Development Authority (IRDAI): Incentivize climate-resilient property underwriting, develop agricultural weather-indexed insurance, and mobilize domestic insurance float into long-term green infrastructure debt.3. Establishing an MLDB Climate Finance Oversight CommitteeTo eliminate sluggishness and restore trust, MLDBs must institute an independent Climate Finance Oversight Committee. This body should be tasked with:Ensuring that environment-tagged funds are channeled strictly into high-impact climate adaptation and mitigation initiatives.Guaranteeing that developing nations are protected against sovereign debt traps resulting from hard-currency loan terms.Publishing an open, transparent database of granular project-level disbursements and verified emission reductions. Conclusion: The Imperative for Chartered AccountantsMulti-Lateral Development Banks possess the supranational mandate and balance-sheet capacity to act as the primary catalyst for global climate transition. However, as demonstrated by the authors, fulfilling this promise requires moving beyond announcements toward verified disbursements, concessional risk absorption, and project-level transparency.For Chartered Accountants and auditing professionals, the expansion of green finance represents an important practice horizon. The financial profession must lead in establishing rigorous carbon accounting methodologies, providing assurance over sustainability reports (BRSR/TCFD), auditing green loan covenants, and evaluating climate-related asset impairments—ensuring that India’s path to Net-Zero 2070 is built upon transparent, auditable, and resilient financial foundations.Academic References & Official PublicationsBanaji, F. (2021). Multilateral Development Bank Climate Finance for Developing Countries Rose to US$ 38 Billion. Joint Report on MDBs.Buchner, B., Naran, B., Fernandes, P. de, Padmanabhi, R., Rosane, P., Solomon, M., Stout, S., Zhu, Y., & Wakaba, G. (2021). Global Landscape of Climate Finance 2021. Climate Policy Initiative.CISL & UNEP FI (2014). Stability and Sustainability in Banking Reform: Are Environmental risks missing in Basel III? University of Cambridge Institute for Sustainability Leadership and UNEP Finance Initiative.Goswami, A. (2022). India’s updated climate pledge to Paris Agreement gets Union Cabinet nod. Down to Earth.International Development Finance Club (IDFC) (2013). IDFC Green Finance Mapping Report 2012. Frankfurt School of Finance & Management.Kaya, A. (2022). Multilateral Development Banks and Climate Finance: More Words Than Action. SDG Knowledge Hub / IISD.Mesquita Moreira, M., Dolabella, M., Kwanghee, K., Choi, H., Em, H., Choi, S., Kim, Y., Lee, D., & Chicola, E. (2022). 2021 MDB Joint Report on Climate Finance. Inter-American Development Bank.Naran, B., Connolly, J., Rosane, P., Wignarajah, D., Wakaba, G., & Buchner, B. (2022). Global Landscape of Climate Finance: A Decade of Data. Climate Policy Initiative.Neunuebel, C., Gebel, A., Laxton, V., & Kachi, A. (2022). The Good, the Bad and the Urgent: MDB Climate Finance in 2021. World Resources Institute.OECD (2015). Aligning Policies for a Low-carbon Economy. OECD Publishing, Paris.OECD (2017). Investing in Climate, Investing in Growth. OECD Publishing, Paris.Reserve Bank of India (RBI) (2020). Discussion Paper on Climate Risk and Sustainable Finance. Reserve Bank of India Publications.Stern, N. (2006). Stern Review: The Economics of Climate Change. HM Treasury, London.World Bank (2021). World Bank Group Climate Change Action Plan 2021–2025: Supporting Green, Resilient, and Inclusive Development. World Bank, Washington, DC.
Sustainability
Ep. 504 — Sustainable Finance – Gearing towards a Greener Economy
CA Journal
· September 2026
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Sustainable Finance – Gearing towards a Greener EconomyA comprehensive exploration of the theoretical, operational, and regulatory evolution of sustainable finance—analyzing ESG investment strategies, quad-stakeholder implementation barriers, and India’s emerging green architecture. 17 SDGs2030 Global AgendaTargeted Sustainable Development Goals uniting global economies.Rank 121 / 163India SDG StandingIndia’s global ranking with a 60.3% country score (Jeffrey Sachs, 2022).₹16,000 CrSovereign Green BondsOversubscribed maiden sovereign green bond issuance in January 2023.8 StrategiesESG Capital DeploymentDiverse investment methodologies bridging ethics and risk-adjusted return.Introduction: The Imperative for Sustainable DevelopmentSustainable Development, as famously articulated by the Brundtland Commission, is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It constitutes an integrated conceptual framework that harmonizes three interdependent pillars: economic growth, environmental protection, and social progress. Global economies have joined hands in their collective pursuit to realize the United Nations' 17 Sustainable Development Goals (SDGs) by the year 2030.For decades, traditional economic models operated under the assumption of unlimited resource exploitation to maximize immediate financial profits. In today's interconnected global landscape, this extraction-heavy model is no longer acceptable due to severe ecological degradation, climate disruptions, and widening social inequalities. Achieving the SDGs necessitates a fundamental reallocation of capital away from carbon-intensive activities into projects that are environmentally restorative, socially inclusive, and commercially resilient.This is where the discipline of Sustainable Finance plays a transformative role. Sustainable finance ensures that financial resources are strategically directed toward initiatives that align with sustainable development objectives. By embedding Environmental, Social, and Governance (ESG) factors into investment decisions, sustainable finance balances planetary and societal well-being with long-term financial viability.Sustainable Finance: A Futuristic OutlookThe academic and professional discipline of finance has undergone profound evolutionary transformations over the past century:Classical Finance: Rooted in the efficient market hypothesis, rational expectations, and the singular objective of short-term shareholder wealth maximization.Behavioral Finance: Integrated cognitive psychology to explain irrational market anomalies, herd instincts, and emotional decision-making.Cultural Finance: Examined how regional traditions, religious ethics, and societal norms shape institutional resource allocation.Sustainable Finance: Represents the modern zenith of financial theory, expanding investment horizons beyond narrow quarterly earnings to encompass long-term multi-stakeholder value creation and systemic planetary boundaries.Sustainable finance refers to the comprehensive investment decision-making process that factors in ESG criteria to create sustainable long-term value. It demands active collaboration between capital-providing financial institutions (commercial banks, multilateral agencies, sovereign wealth funds) and capital allocators. Governments, financial institutions, and corporate boards must fundamentally overhaul their capital expenditure decision-making frameworks to ensure rigorous alignment with ESG mandates (Belgaonkar et al., 2022; HLEG on Sustainable Finance, 2017).Challenges Confronting Sustainable FinanceDespite rapid global adoption, sustainable finance encounters significant systemic friction. These challenges can be categorized across four primary stakeholder groups:1. Challenges Faced by InvestorsLack of Cross-Company Comparability: Disparate reporting frameworks make it extraordinarily difficult for institutional and retail investors to compare the authentic sustainability performance of companies across sectors and geographies.Absence of Standardized Metrics: Conflicting criteria, divergent methodologies, and subjective scoring systems utilized by independent ESG rating agencies frequently yield contradictory ratings for the same corporate issuer.Quantification & Data Overload: Raw ESG data is often unstructured, complex, and overwhelming, making it challenging for portfolio managers to extract actionable valuation signals.High Cost of Information Gathering: Accessing verified, high-quality ESG datasets and analytics tools imposes heavy cost burdens, acting as an entry barrier for smaller investment funds and boutique wealth managers.Perceived Return Trade-offs: Investors frequently express concern regarding potential trade-offs between fiduciary returns and sustainability goals, necessitating deeper empirical understanding of long-term risk-adjusted outperformance.2. Challenges Faced by Financial InstitutionsAdapting Credit Risk Models: Financial institutions must recalibrate conventional credit underwriting models to incorporate physical climate hazards and transition risks into expected loss calculations.Absence of Standardized Lending Guidelines: A lack of uniform regulatory taxonomy creates uncertainty when evaluating loan eligibility under "green" or "sustainable" credit windows.Internal ESG Capacity & Talent Deficits: Commercial lending officers and credit committees require intensive upskilling to evaluate complex technical ESG indicators (e.g., carbon sequestration, circularity metrics, biodiversity impacts).3. Challenges Faced by Finance and Accounting ProfessionalsFor Chartered Accountants and corporate controllers, sustainable finance necessitates an unprecedented expansion of professional responsibility:Mandate for Non-Financial Reporting: Accounting professionals are now charged with identifying relevant sustainability metrics, instituting measurement methodologies, and enforcing internal financial controls over non-financial data streams.Data Silos Across Organizations: Measuring greenhouse gas emissions (Scope 1, 2, and 3), water recycling, and supply chain human rights requires accounting teams to reach across manufacturing, procurement, logistics, and human resources departments.Regulatory Readiness & Assurance: Navigating mandatory reporting frameworks—such as SEBI’s Business Responsibility and Sustainability Reporting (BRSR) in India—while preparing systems for independent third-party reasonable assurance.Eight Core ESG Investment Strategies Deployed by InvestorsModern capital allocators deploy eight discrete investment methodologies to operationalize sustainability across asset classes:1. Engagement & Active OwnershipUsing shareholder voting rights at AGMs and direct board dialogue to actively lobby management toward adopting sustainable practices and improving ESG disclosures.2. Negative / Exclusionary ScreeningSystematically excluding companies, sectors, or sovereign entities that violate basic sustainability standards or operate in controversial sectors (e.g., thermal coal, weapons, tobacco).3. Positive ScreeningDeliberately prioritizing and overweighting companies that lead their sectors in environmental stewardship, renewable energy adoption, or workforce diversity.4. Best-in-Class ScreeningSelecting the most sustainable companies within traditionally carbon-intensive sectors (e.g., mining, steel, chemicals), encouraging sector-wide operational decarbonization.5. Thematic InvestingDirecting capital into specialized funds dedicated to specific environmental or social themes, such as clean water infrastructure, grid storage, or sustainable agriculture.6. Portfolio TiltingAdjusting broad benchmark allocations to tilt weightings toward high-scoring ESG firms while maintaining general sector diversification and benchmark tracking fidelity.7. Impact InvestingTargeting ventures specifically designed to generate measurable, verified positive social or ecological impacts (e.g., rural healthcare, slum redevelopment) alongside financial returns.8. ESG IntegrationSystematically blending qualitative and quantitative ESG risk factors into fundamental equity valuation models, adjusting DCF terminal growth rates and cost of capital.Innovations in Sustainable Financial Instruments & InstitutionsSurging institutional and retail demand has catalyzed an explosion of innovative financial products and specialized institutions designed to mobilize capital for the 2030 agenda (Hawkins & Weber, 2015):Green Bonds: Fixed-income debt securities whose net proceeds are contractually earmarked to finance eligible green projects (e.g., renewable energy plants, energy-efficient building infrastructure, zero-emission mass transit).Social Impact Bonds (SIBs): Outcome-contingent debt contracts where private capital finances public social interventions, with returns paid by governments based on verified social impact milestones.Green Funds & Ethical Funds: Pooled mutual funds and exchange-traded funds (ETFs) that construct portfolios using rigorous ESG filtering criteria (Keerthi, 2013).Green Banks: Dedicated public or quasi-public financial institutions established to catalyze clean energy investment by providing concessionary loans, loan guarantees, and blended risk-capital.FinTech Platforms: Technology-driven platforms that automate carbon footprint tracking, streamline fractional green bond investing, and verify sustainability impact metrics using distributed ledgers.Sustainable Finance: The Indian Macro ScenarioAccording to the Sustainable Development Report 2022 authored by Jeffrey D. Sachs et al., India is ranked 121 out of 163 countries with an overall SDG performance score of 60.3%, which is currently below the South Asian regional average of 65.9%. However, India’s domestic trajectory reflects decisive structural progress, particularly in:SDG 12: Responsible Consumption and ProductionSDG 13: Climate ActionSovereign Green Bonds & Regulatory Leadership:India marked a historic milestone in January 2023 with the inaugural issuance of Sovereign Green Bonds (SGrBs) amounting to ₹16,000 Crores. The bond offering witnessed intense oversubscription from institutional domestic and international investors, securing a favorable "greenium." Furthermore, market regulator SEBI has taken the lead globally by mandating the comprehensive Business Responsibility and Sustainability Reporting (BRSR) framework for the top 1,000 listed companies, with ICAI providing standard assurance methodologies.In addition, specialized domestic financial institutions—notably NABARD (National Bank for Agriculture and Rural Development) and SIDBI (Small Industries Development Bank of India)—have emerged as frontline champions in channeling green refinance capital to rural irrigation, agro-forestry, solar pump installation, and energy-efficient MSME manufacturing.Conclusion: Rewiring the Financial ArchitectureThe transition toward a sustainable financial architecture represents a decisive paradigm shift in global economic governance. Aligning financial decisions with ecological boundaries and social equity presents undeniable implementation challenges—from data harmonization deficits to evolving regulatory standards—yet it is an indispensable prerequisite for long-term economic resilience.For Chartered Accountants, Chief Financial Officers, and statutory auditors, sustainable finance redefines professional practice. By establishing robust internal controls over non-financial ESG metrics, providing credible assurance over BRSR disclosures, and structuring innovative green financing vehicles, the accounting profession acts as the vital bridge translating sustainable aspirations into transparent, auditable, and resilient reality.Academic References & Official ReportsBak, C. (2019). Three-Year Plan for Climate-Related Financial Disclosure to Create Markets for Sustainable Finance. Centre for International Governance Innovation.Belgaonkar, A., Fernald, E., Heteren, W. v., Presler, G., & Shilpi Singh. (2022). Corporate ESG Survey Report 2022. The Morningstar Sustainalytics.Brundtland, G. H. (1987). Our Common Future: Report of the World Commission on Environment and Development. Oxford University Press.Hawkins, P., & Weber, O. (2015). Global Sustainability, Climate Change and Finance Policy: A South African Perspective. C. Hurst & Company.High-Level Expert Group (HLEG) on Sustainable Finance (2017). Financing a Sustainable European Economy: Interim Report. European Commission.Jeffrey D. Sachs, Kroll, C., Lafortune, G., Fuller, G., & Woelm, F. (2022). Sustainable Development Report 2022: From Crisis to Sustainable Development, the SDGs by 2030. Cambridge University Press.Jha, B., & Bakhshi, P. (2019). Green Finance: Fostering sustainable development in India. International Journal of Recent Technology and Engineering, 8(4), 384–389.Keerthi, B. S. (2013). Study on Emerging Green Finance in India: Its Challenges and Opportunities. International Journal of Management and Social Sciences Research, 2(2), 49–53.UNEP & World Bank (2022). The Rise of Sustainable Finance in India: Case Studies of 'Best Practice' in Front-Running Financial Institutions. United Nations Environment Programme.
Theme
Ep. 505 — India: An Emerging Global Accounting Hub
CA Journal
· September 2026
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India: An Emerging Global Accounting HubA strategic blueprint by Past President CA. Atul Kumar Gupta on transforming India into the world’s foremost Finance and Accounting (F&A) shared services nerve center—leveraging Ind AS convergence, talent scale, and GIFT City. US$ 68.8 BnMarket by 2030Projected global valuation of Finance & Accounting (F&A) outsourcing.37%Enterprises OutsourceProportion of global corporations outsourcing their core accounting functions.>55% GDPServices Sector BaseContribution of services to India’s fast-expanding 4th largest global economy.Largest in WorldICAI Standalone RankIndia’s premier institute is the world’s largest standalone professional accounting body.Introduction: The Strategic Evolution of Finance & AccountingIn the contemporary corporate arena, news headlines regularly proclaim: "Our organization is expanding at a 10% CAGR and our market capitalization has reached record milestones!" While such headlines are undeniably attractive, a fundamental question emerges: Where does this strategic analytical insight originate, and what system underpins such corporate performance? The answer lies indisputably in the Finance and Accounting (F&A) function.The accounting function no longer serves merely as a retrospective bookkeeping mechanism. Today, it constitutes the central nervous system of enterprise governance—maintaining verifiable financial records, supplying data for statutory legal compliance, formulating multi-year capital plans, and delivering real-time diagnostics on business health. Globally, both multinational conglomerates and agile SMEs share the common objective of establishing an Accounting Hub. This hub centralizes and standardizes accounting rules into a centrally controlled, fully auditable, and reconcilable repository.Simultaneously, Chief Financial Officers (CFOs) face escalating pressures to streamline operational expenditures, enhance workforce productivity, and reorient internal teams toward higher-value strategic advisory. In Western developed economies, unemployment rates in the accounting sector remain historically low, creating severe talent acquisition and retention bottlenecks. Consequently, over 37% of global organizations are opting to outsource their core finance and accounting functions. Following IT outsourcing, F&A has emerged as the second-largest outsourcing domain worldwide, with projections forecasting rapid expansion to US$ 68.8 Billion by 2030.IFAC Vision: The Mandate for the Future-Ready CFOThe International Federation of Accountants (IFAC)—representing Professional Accountancy Organizations (PAOs) across more than 135 countries—has outlined the essential strategic priorities that modern CFOs must adopt:Value Creation Alignment: Actively steering corporate strategies toward holistic commercial value creation rather than passive historical measurement.End-to-End Digitalization: Automating routine general ledger tasks, invoice lifecycles, and period-end close processes through digital tools.Leveraging Non-Financial Data: Blending operational data, ESG metrics, and customer sentiments to unlock latent enterprise value drivers.Enhanced Decision Support: Supplying real-time, predictive business intelligence across every operational business unit.Data Security & Internal Controls: Enforcing strict zero-trust cyber controls, segregation of duties, and audit trail verifiability.Multi-Capital Reporting: Communicating corporate performance beyond narrow financial metrics to encompass human, intellectual, and natural capitals.Figure 1: Core Operational & Strategic Benefits of F&A OutsourcingFocus on Core BusinessReduce Operating CostsIncrease Operational RedundancyAdopt Global Best PracticesReduce Transaction Cost & TATSimplify Business ProcessesEnsure Service StandardizationSupplement Internal TalentElevate SLA Service LevelsThe Comprehensive Modular Suite of Outsourced F&A ServicesComprehensive BPO Accounting Services combine top-tier professional talent with state-of-the-art automation tools, enabling internal finance teams to transition into strategic business partners. Below is the modular architecture of services delivered from India’s accounting hubs:Accounts Payable (AP)Vendor Master File MaintenancePurchase Order (PO) Processing & MatchingInvoice Verification & Exception HandlingVendor Helpdesk & Inquiry ResolutionTravel & Entertainment (T&E) AuditingPeriod-End Reconciliations & Sub-Ledger CloseAccounts Receivable (AR)Customer & Pricing Master GovernanceSales Order Validation & ProcessingAutomated Billing & Dunning CollectionsCash Application & Bank Remittance MatchingRevenue Recognition (Ind AS 115 / ASC 606)Dispute Resolution & AR Sub-Ledger CloseGeneral Accounting (R2R)Global Chart of Accounts (CoA) HarmonizationJournal Entry Posting, Accruals & PrepaymentsBank & Intercompany ReconciliationsFixed Asset Register & Depreciation SchedulesPayroll Processing & Tax WithholdingStatutory Management & Financial ReportingFinancial Planning & Analysis (FP&A)Multi-Tier Entity ConsolidationsExecutive Commission & Incentive ModelingCAPEX & Project Investment AppraisalRolling Forecasts & Variance AnalysisWorking Capital & Cash Flow Stress TestingScenario Modeling for Board PresentationsBusiness Intelligence (BI)Operational Performance TelemetryGranular Product & Segment Revenue AnalysisCustomer Churn & Lifetime Value AnalyticsMarketing Spend ROI OptimizationReal-Time Executive Cloud DashboardsAutomated Anomaly & Outlier DetectionProcess Automation (RPA)Intelligent OCR Document Data ExtractionRobotic Process Automation (RPA Bots)Straight-Through Workflow AutomationAutomated Account & Ledger ReconciliationsEnterprise Knowledge Management SystemsAutomated Compliance & Tax Filing BotsIndia’s Rise as the Preeminent Global Accounting ContenderMultinational corporations are increasingly selecting India as their primary destination for hosting mission-critical finance functions. India offers a compelling combination of competitive advantages that outperform regional competitors such as the Philippines, Malaysia, and China:Unmatched Talent Depth: The Institute of Chartered Accountants of India (ICAI) is the largest standalone professional accounting body in the world, producing tens of thousands of highly qualified, English-speaking, and technologically proficient finance professionals annually.Full Accounting Convergence (Ind AS): India has successfully transitioned to IFRS-converged Indian Accounting Standards (Ind AS), which are mandatory for all listed entities and companies/NBFCs with a net worth of ₹250 Crores or more. This alignment eliminates reporting gaps and places Indian financial workpapers on par with global benchmarks.Advanced IT Infrastructure & Automation Mindset: Seamless synergy between India's world-class IT software sector and the accounting profession enables rapid deployment of RPA, cloud ERPs, and artificial intelligence into everyday accounting workflows.Operating Cost & Time-Zone Advantages: Substantial cost arbitrage combined with round-the-clock operating cycles provides seamless follow-the-sun service delivery for North American and European enterprises.GIFT City: The Game-Changing Regulatory CatalystIn a historic strategic initiative designed to transform India’s financial landscape, Union Finance Minister Nirmala Sitharaman announced a comprehensive legal framework to position GIFT City (Gujarat International Finance Tec-City) as an international hub for accounting, auditing, and financial back-office functions.Strategic Significance of the GIFT City Framework:The dedicated International Financial Services Centre (IFSC) regulatory architecture enables Indian Chartered Accountants, audit firms, and tax consultants to export high-end professional services directly to foreign clients under a specialized, tax-advantaged SEZ ecosystem. This reform levels the playing field with international financial centers like Dubai, Singapore, and London.Conclusion: Strategic Recommendations for India's AscendancyWith India recognized as the world's 4th largest economy, and its services sector contributing more than 55% of GDP, the nation possesses the scale, technical capacity, and digital infrastructure to dominate the US$ 68.8 Billion global F&A market. To fully unlock this potential, the author recommends several vital policy initiatives:Promoting Domestic Firm Networking & Consolidation: Encouraging Indian CA firms to merge, form multidisciplinary partnerships, and build large indigenous firms capable of competing directly with global networks.Modernizing Professional Advertising Guidelines: Adopting a more liberal, export-oriented regulatory stance that allows Indian firms to showcase and market their services to international corporate clients.Targeted Export Incentives: Introducing specialized tax incentives, infrastructure subsidies, and export credits for firms generating foreign exchange through accounting and tax exports.Continuous Capacity Building: Expanding ICAI's specialized certification programs in forensic accounting, cybersecurity, IT audit, data science, and international taxation to maintain a future-ready workforce.By executing this multi-pronged roadmap, India will not only cement its role as the back-office engine of global enterprise finance, but will rise as the world's trusted, strategic accounting nerve center.
Theme
Ep. 506 — Leveraging G20 Summit Outcomes: Role of Chartered Accountants
CA Journal
· September 2026
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Leveraging G20 Summit Outcomes: Role of Chartered AccountantsA comprehensive analysis of the landmark 18th G20 Summit in New Delhi—examining geopolitical agreements, the IMEC economic corridor, the Startup20 $1 Trillion agenda, and the strategic implementation roadmap for Chartered Accountants. US$ 1 TrillionStartup20 TargetAmbitious global investment target for the startup ecosystem by 2030.IMEC CorridorHistoric Transit PactMultimodal rail-maritime trade network connecting India, West Asia, and Europe.30% RestorationEcosystem TargetBinding pledge to restore 30% of degraded terrestrial & marine ecosystems by 2030.Zero ToleranceAnti-CorruptionThree High-Level Principles criminalizing foreign bribery and aiding asset recovery.Introduction: India’s Historic G20 PresidencyThe 18th G20 Leaders' Summit, convened in New Delhi on 8th and 9th September 2023 under the decisive leadership of Prime Minister Shri Narendra Modi, marked an unprecedented watershed in modern multilateral diplomacy. Representing 19 sovereign nations and the European Union—with the historic induction of the African Union as a permanent member—the summit operated under the overarching philosophy of "Vasudhaiva Kutumbakam" (One Earth, One Family, One Future) and the thematic pillar: "People, Planet, Peace and Prosperity."The New Delhi Summit succeeded in forging an unexpected, unanimous consensus across highly polarized geopolitical divides. At its core, the declaration rejected the false dichotomy that forces developing nations to choose between poverty alleviation and environmental preservation. Instead, it articulated a shared commitment toward sustainable, human-centered development—ensuring that the voice of the Global South is permanently integrated into the core architecture of international economic governance.Comprehensive Outcomes of the New Delhi Declaration1. Advancing Sustainability, Clean Energy & Ecosystem RestorationThe summit delivered unprecedented, actionable environmental commitments that establish global benchmarks for the next three decades:Clean Energy Transition: Pledged to pursue the tripling of global renewable energy capacity by 2030 while facilitating access to low-cost international capital for emerging economies. The declaration emphasized cross-border grid interconnections and the rationalization of inefficient fossil fuel subsidies.Ecosystem Preservation: Endorsed the Kunming-Montreal Global Biodiversity Framework with a binding pledge to restore 30% of degraded ecosystems by 2030 and reduce land degradation by 50% by 2040.Binding Treaty on Plastic Pollution: Established momentum for the Intergovernmental Negotiating Committee (INC) to finalize a legally binding global instrument to eradicate plastic pollution.Paris Agreement & Global Net-Zero: Reaffirmed mid-century (2050) global net-zero greenhouse gas emission goals, grounded in common but differentiated responsibilities (CBDR).2. Global Health, Food Security & One Health ApproachRecognizing the deep economic scars left by global health shocks, the G20 reinforced the "One Health" approach with the World Health Organization (WHO) at its institutional center. Key deliverables include:Strengthening the Joint Finance and Health Task Force (JFHTF) and endorsing the Framework on Economic Vulnerabilities and Risks (FEVR) to assess pandemic-related fiscal threats.Mobilizing new sovereign donors for the international Pandemic Fund to assist low-income nations with infectious disease surveillance.Robust planned replenishment of the International Fund for Agricultural Development (IFAD) to insulate vulnerable populations against climate-induced food inflation.3. International Taxation, Crypto Regulation & Anti-CorruptionThe summit achieved significant alignment on modernizing global financial governance:OECD/G20 Two-Pillar International Tax Reform: Reaffirmed swift implementation of Pillar 1 (reallocation of taxing rights over tech multinationals) and Pillar 2 (a mandatory 15% Global Minimum Corporate Tax) to curb base erosion and profit shifting.Comprehensive Crypto Asset Framework: Welcomed the IMF-FSB Synthesis Paper and BIS research, establishing unified standards for Central Bank Digital Currencies (CBDCs) and adopting the Crypto-Asset Reporting Framework (CARF) for automated tax information exchange.Zero Tolerance on Corruption: Endorsed three High-Level Principles focusing on the criminalization of foreign bribery, international cooperation in tracing and confiscating criminal proceeds, and institutional asset recovery.Breakthrough Landmark Initiatives Championed by IndiaUnder India’s visionary stewardship, the G20 established four institutional mechanisms that will redefine global trade, innovation, and infrastructure resilience:1. India-Middle East-Europe Economic Corridor (IMEC)A transformative multimodal rail-and-port transit network connecting India to Europe via the UAE, Saudi Arabia, Jordan, and Israel. IMEC will reduce transit times by 40%, lower freight costs, and integrate clean hydrogen pipelines and digital connectivity cables.2. The Startup20 Engagement GroupThe first-ever official G20 engagement group dedicated to startups. With over 850,000 startups and 1,500 unicorns across G20 nations, Startup20 established a historic mandate to mobilize US$ 1 Trillion in global startup investment by 2030, inaugurated by a bilateral Saudi-India joint startup fund.3. Disaster Risk Reduction Working Group (DRRWG)Inaugurated in Chennai to institutionalize global preparedness under the Sendai Framework. The DRRWG champions localized disaggregated weather forecasting, early warning networks, and climate-resilient physical infrastructure.4. Digital Public Infrastructure (DPI) Global ConsensusShowcased the transformative success of the "India Stack" (Aadhaar, UPI, Account Aggregator), introducing international guiding principles for open, interoperable, and secure digital infrastructure to drive global financial inclusion.Synthesis of G20 Summits: Key Mandates & Global ImpactStrategic DomainNew Delhi G20 Summit OutcomeGlobal Target / BenchmarkImplementation MechanismSustainable EnergyAccelerating renewable adoption & grid interconnectionTripling global renewable capacity by 2030Blended multilateral capital & green infrastructure bondsEcosystem ConservationHalting land degradation & restoring ecosystemsRestore 30% by 2030; cut degradation 50% by 2040Kunming-Montreal Framework & Global Plastic TreatyStartup InnovationInstitutionalizing Startup20 for cross-border scaleUS$ 1 Trillion global startup investment by 2030Startup20 Communiqué & bilateral venture fundsGlobal TaxationPillar 1 & Pillar 2 BEPS implementation15% Global Minimum Corporate Tax rateOECD/G20 Inclusive Framework & CARF reportingTrade ConnectivityLaunch of IMEC multimodal transit corridor40% reduction in India-Europe transit timesJoint working groups (India, USA, UAE, Saudi, EU)Strategic Role and Professional Opportunities for Chartered AccountantsThe ambitious multilateral mandates formulated at the G20 Summit cannot materialize through political declarations alone; they require rigorous financial engineering, statutory governance, and auditable execution. Chartered Accountants serve as the indispensable bridge translating international policy outcomes into tangible corporate and economic reality.Chartered Accountants as the Execution Engine:Whether structuring cross-border joint ventures under IMEC, auditing carbon disclosures under BRSR/TCFD, ensuring GloBE tax compliance under Pillar 2, or performing financial due diligence for Startup20 venture allocations, Chartered Accountants provide the institutional trust and technical competence required to operationalize G20 commitments.Key Professional Practice Frontiers for CAs:ESG Advisory, Carbon Accounting & Assurance: CAs are at the forefront of measuring Scope 1, 2, and 3 emissions, designing corporate decarbonization strategies, and delivering statutory assurance over sustainability reports (BRSR Core), safeguarding companies against greenwashing liabilities.Global Tax Optimization (BEPS Pillar 2): With the rollout of the 15% Global Minimum Tax, CAs must assist multinational corporations in computing Effective Tax Rates (ETR), navigating Top-Up Tax mechanisms, and aligning transfer pricing models across jurisdictions.Startup20 Valuation & Capital Structuring: With a US$ 1 Trillion global capital mobilization target, CAs will steer cross-border M&A due diligence, angel tax structuring, valuation certifications, and internal financial controls (ICFR) for emerging startups and unicorns.Infrastructure & Supply Chain Financial Modeling: The IMEC corridor will require billions of dollars in public-private partnership (PPP) financing. CAs are uniquely equipped to draft project feasibility models, negotiate currency hedging covenants, and audit concession agreements.Forensic Auditing & Anti-Corruption Governance: In alignment with the G20’s zero-tolerance corruption mandate, forensic accountants will assist corporate boards and law enforcement agencies in fraud risk assessment, asset recovery, and compliance with anti-bribery management standards (ISO 37001).Conclusion: Leading the Global TransitionIndia’s G20 Presidency has established a visionary blueprint for a more resilient, equitable, and sustainable global order. By successfully championing the interests of developing nations while securing unanimous commitment to clean energy, financial transparency, and digital inclusion, India has demonstrated exemplary global leadership.For the accountancy profession, this moment represents an unprecedented call to action. Chartered Accountants must expand their vision beyond traditional statutory audits, stepping forward as global architects of sustainable finance, ethical governance, and economic resilience—ensuring that the historic commitments made in New Delhi drive lasting prosperity for the planet and society at large.
Theme
Ep. 507 — Commitment, not coins, forges the brilliance of a Chartered Accountant
CA Journal
· September 2026
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Theme • Professional Ethics, Leadership & InspirationCommitment, not coins, forges the brilliance of a Chartered AccountantAn introspective and inspirational exploration into the true essence of Chartered Accountancy—celebrating the emotional crusade of aspirants, the triumph of human spirit over physical adversity, and the unwavering dedication that defines fiscal custodianship. 5 ProfilesTriumphs of CourageExtraordinary stories of differently-abled members shattering societal glass ceilings.10 YearsTenacity MilestoneA decade of unyielding devotion culminating in the coveted CA designation.Dual CA & CSPresidential AwardCerebral palsy conqueror honored with the National Best Employee Award.Infinite GritTrue Price of the TitleMeasured in perseverance and sleepless sacrifice—never in mere monetary coins.Introduction: The Crucible of GreatnessEmbarking on the odyssey toward achieving greatness in life is invariably fueled by a visionary spark. It is the origin of inspiration—a riveting impression of extraordinary accomplishment etched upon the canvas of the mind—that propels individuals toward the zenith of their aspirations. Acting as a stalwart lighthouse, this vision provides a profound sense of direction and purpose, purposefully guiding travelers along the unfolding tapestry of their dreams.Yet, the apex of greatness is seldom scaled without backbreaking labor, perseverance, and unwavering devotion. It stands atop a toilsome ascent, requiring the resolute willingness to confront grueling challenges, overcome setbacks, and adapt gracefully through a painstaking journey. It demands a mindset that embraces setbacks not as stumbling blocks, but as stepping stones, and obstacles as opportunities for profound intellectual and moral growth. Within the crucible of this pilgrimage comes the realization that greatness is not merely a terminal achievement, but an eternal pursuit—the culmination of steady progress, unyielding resilience, and unshakeable faith in one's vision.Chartered Accountants: Custodians of Fiscal Wisdom and Public TrustChartered Accountants are recognized as the most respectable and trusted financial professionals in the global economic landscape. They stand as the custodians of fiscal wisdom and transparency, their diligence, grit, and determination serving as the bedrock of ethical financial integrity and public accountability. Their multifaceted responsibilities extend far beyond mechanical financial management, contributing significantly to societal welfare, economic stability, and governmental fiscal health.Within the fabric of society, economy, and governance, Chartered Accountants wield an indispensable influence. Their expertise pervades every industry sector, fostering a culture of compliance, transparency, and financial literacy. In public administration, CAs advise governments on regulatory compliance and tax policy, ensuring the credible utilization of public funds. In corporate boardrooms, they act as ethical guardians, ensuring that financial statements accurately reflect commercial reality rather than manufactured illusions.The Arduous Pilgrimage: An Emotional CrusadeThe allure of Chartered Accountancy beckons a diverse group of individuals. Many are drawn by the fascination of financial architecture and complex economic systems; others seek professional excellence, financial stability, and global prestige. Many are attracted by the privilege of advising corporate leaders at critical crossroads, while others are motivated by the profound ethical responsibility to safeguard integrity in financial reporting.The Reality of the Journey:The endeavor to become a Chartered Accountant is an arduous pilgrimage not suited for the faint-hearted. It is not merely a professional qualification; it is an emotional crusade that tests the very fabric of one’s resilience and determination. It is a journey where the weight of textbooks carries the dreams of financial mastery, echoing through the quiet corridors of sleepless study nights.Aspirants grapple with an endless maze of auditing standards, direct and indirect taxation, corporate jurisprudence, and advanced financial management. The personal toll is ostensible: family gatherings missed, festive celebrations forgone, and the warmth of social companionship replaced by the cold glow of study lamps. In examination halls, mental fortitude clashes with self-doubt. The practical training of articleship brings its own trials—balancing grueling work deadlines, client expectations, and evening study sessions. Yet, in the heart of this emotional storm, the tears shed in frustration become the ink that writes the story of eventual triumph.Commitment, Not Coins: The True Price of the CA DesignationWhile the financial resources required to pursue the Chartered Accountancy course—registration fees, coaching tuition, examination costs, and study materials—are modest compared to private business schools, they represent a mere fraction of the true investment required.The True Currency of Achievement:The rightful cost for attaining the designation of a Chartered Accountant cannot be denominated in coins, bank drafts, or fee structures. It is paid in the hard currency of unwavering perseverance, thousands of hours of rigorous study, and the personal sacrifices an aspirant makes. The monetary outlay, though necessary, is utterly outweighed by tenacity, grit, and character.For many families, the qualification is an inheritance of honor—a legacy passed down through generations, intricately woven with determination, integrity, and shared pride. It represents an ancestral repository of moral conduct and financial wisdom, reinforcing the nobility of serving the nation's economy.Profiles in Courage: Triumph of the Human SpiritWithin the revered corridors of the Institute of Chartered Accountants of India, there are members who epitomize the ultimate triumph of the human spirit. These individuals embraced severe physical disabilities and surmounted impossible obstacles to scale the pinnacle of the profession:CA. Rajani GopalakrishnanFirst Visually-Impaired Woman CAInflicted with partial blindness at age 9 due to Stevens-Johnson Syndrome from incorrect treatment, progressing to total blindness by 1994. Undeterred, she mastered screen-reading software in 2000, resumed CA Final preparation after a 7-year hiatus, and qualified triumphantly in 2003.CA. R. Rajashekhar ReddyOvercame Childhood BlindnessLost his vision completely at age 11 due to a damaged optic nerve caused by a brain tumor. Supported by volunteer audio recordings and screen-reading laptops, he cleared CPT and qualified the CA examinations on his second attempt in November 2012.CA. Omkar Jayant NirgudkarDual CA & CS • Presidential AwardeeBorn with Cerebral Palsy, he earned dual qualifications as a CA and CS, outshining 3,500 candidates in campus placements. In February 2013, he was honored with the National Award for Best Employee by Hon'ble President of India, Shri Pranab Mukherjee.CA. Pooja KaraveerashettarA Decade of Dedication (Qualified May 2023)Born with Retinitis Pigmentosa, she was denied a medical career due to vision loss. Aided by her mother reading textbooks aloud and balancing demanding articleship, her unwavering resilience prevailed after a 10-year journey, qualifying in May 2023.CA. Sarika JainCA (2011) • UPSC Civil Services (2013)Stricken with polio at age two resulting in 50% disability in her right leg. She qualified as a Chartered Accountant in 2011 and subsequently cracked the prestigious UPSC Civil Services Examination in 2013, exemplifying public governance leadership.The Future Horizon: Technology, Strategy & Global LeadershipThe evolution of Chartered Accountancy has dismantled traditional professional boundaries. Today, CAs have emerged as strategic business architects, board advisors, Chief Executive Officers (CEOs), Chief Financial Officers (CFOs), and Independent Directors of listed corporations.As Artificial Intelligence, Robotic Process Automation, and cloud ERPs automate routine transaction processing, the human value of the Chartered Accountant shifts toward higher-order strategic domains: sophisticated financial modeling, ESG sustainability assurance, forensic auditing, international tax treaty arbitration, and enterprise risk governance. In an increasingly interconnected and complex economic landscape, the Chartered Accountant remains the non-negotiable anchor of commercial truth.Conclusion: A Victory of the Human SpiritAt the end of this arduous pilgrimage, when the distinguished title of Chartered Accountant is earned, it represents far more than an academic degree or professional license. It is a victory over the emotional battlefield that forged the journey.The tears shed in solitude, the sacrifices willingly made, and the moments of despair overcome are woven into a tapestry of resilience, courage, and unshakeable faith. It is an emotional triumph that transcends ledger books and balance sheets, standing as an enduring testament to the unconquerable strength of the human spirit.
Theme
Ep. 508 — Nurturing MSMEs to empower India’s Economic Growth
CA Journal
· September 2026
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Theme • MSME Growth & Financial InclusionNurturing MSMEs to empower India’s Economic GrowthA strategic perspective by CA. Krishna Kanhaiya, CEO of Mirae Asset Financial Services, exploring the macroeconomic engine of MSMEs, the $1 Trillion export frontier by 2028, FinTech co-lending innovations, and the Atmanirbhar Bharat vision in Amrit Kaal. >20 MillionRegistered MSMEsFormalized micro, small, and medium enterprises registered on Udyam portal.>140 MillionEmployment BaseCitizens employed across manufacturing, trade, and service micro-units.>30% GDP / 48% ExpEconomic ContributionContribution of MSME sector to India's GDP and national merchandise exports.USD 1 Trillion2028 Export TargetProjected export contribution by the Indian MSME sector over the next 5 years.Introduction: The Unquestioned Backbone of the Indian EconomyThe Micro, Small and Medium Enterprises (MSMEs) in India are universally recognized as the backbone of the national economy. Across policy documents and economic discourse, phrases such as "engine of growth" and "powerhouse of enormous opportunities" are frequently employed to describe this vibrant sector. There is substantive empirical justification for these accolades.According to official Udyam registration data, there are over 20 Million registered MSMEs operating across India, providing direct livelihood and employment to over 140 Million people. The sector generates over 30% of India’s Gross Domestic Product (GDP) and accounts for approximately 48% of total national exports. More importantly, the future growth potential remains unprecedented: latest macroeconomic forecasts project that the Indian MSME sector will contribute nearly USD 1 Trillion in merchandise exports by the year 2028.The Structural Liquidity Dilemma:Despite their undeniable contribution to national output, MSMEs face acute vulnerabilities. Whenever an external macroeconomic crisis occurs—whether the liquidity disruption of demonetization or the demand shock of the COVID-19 pandemic—MSMEs are impacted disproportionately due to thin working capital cushions, absence of hard assets, and delayed buyer realizations.Emerging Opportunities: "China Plus One" & Atmanirbhar BharatThe contemporary geopolitical and geo-economic landscape has created unprecedented tailwinds for Indian manufacturing and allied services. Foremost among these is the emergence of the "China Plus One" strategy. Global manufacturing conglomerates, having experienced severe supply chain disruptions during recent global shocks, are aggressively seeking to diversify their production bases away from concentrated geographic centers. India has emerged as a premier destination of choice.This global diversification, coupled with the Union Government's sustained push for "Atmanirbhar Bharat" (Self-Reliant India) and the "Make in India" initiative, presents extraordinary market opportunities for domestic MSMEs. By integrating into global supply chains, Indian enterprises can absorb cutting-edge technology, adopt world-class quality frameworks, and benchmark production against international peers.Furthermore, India's ongoing digital revolution—characterized by ubiquitous broadband connectivity, cloud software platforms, and the Unified Payments Interface (UPI)—is empowering MSMEs to dramatically enhance operating efficiency, automate inventory controls, and access national markets through platforms like ONDC and B2B e-commerce networks.Strategic Levers to Catalyze All-Round MSME GrowthTo fully capitalize on these macro tailwinds, the author outlines five essential operational and regulatory pillars that must be strengthened across the ecosystem:1. Regulatory SimplificationTransitioning toward self-certification mechanisms, expanding digital compliance architectures, deepening single-window industrial clearances, and expanding institutional credit guarantee programs (CGTMSE) to streamline ease of doing business.2. Operating Infrastructure & ClustersInvesting in modern physical infrastructure—transportation corridors, logistics parks, and continuous power/water utilities. Fostering public-private industrial clusters enables smaller firms to pool resources, achieve scale economies, and share advanced tooling.3. Continuous Skill DevelopmentEncouraging MSMEs to adopt a self-funding, disciplined approach to human capital. Building sector-specific training hubs and partnering with academic institutions ensures that the workforce stays ahead of automation and changing market demands.4. Technology & R&D AllocationMSMEs must allocate dedicated budgets toward research, software adoption, and automation. Government subsidies for digital infrastructure and e-commerce onboarding will provide the catalyst needed to build a durable competitive edge.Bridging the Credit Chasm: FinTechs, NBFCs & Co-LendingDespite significant policy focus, a persistent dearth of credit continues to stifle last-mile enterprise potential. Traditional frontline commercial banks have historically struggled to service the MSME sector due to deep-seated structural barriers: remote geographic reach, high transaction servicing costs, and an inability to underwrite borrowers who lack conventional audited track records or immovable real estate collateral.The FinTech & Co-Lending Breakthrough:New-age Non-Banking Financial Companies (NBFCs) and FinTech platforms are revolutionizing credit delivery. By deploying machine-learning algorithms on alternative data—such as GST return velocities, UPI merchant cash flows, and e-way bill streams—FinTechs effectively evaluate creditworthiness in hours rather than months. Recognizing this technological edge, leading commercial banks are now aggressively entering into Co-Lending partnerships with NBFCs. This hybrid architecture combines the low-cost balance sheet of Tier-1 banks with the agile, last-mile underwriting expertise of NBFCs, delivering "right finance at the right price."Supply Chain Financing (SCF) as a Liquidity EngineTraditional balance-sheet lending is increasingly yielding to dynamic Supply Chain Financing (SCF). By discounting vendor invoices against the balance-sheet strength of anchor corporate buyers via platforms like TReDS, MSMEs obtain instantaneous liquidity, short-circuiting the vicious cycle of delayed receivables and freeing up cash flow for factory expansion.Conclusion: Leading India's Economic Charge in "Amrit Kaal"Indian MSMEs represent a formidable powerhouse of untapped economic potential. They are not merely ancillary suppliers; they are the primary engines of job creation, grassroots innovation, and equitable wealth distribution across the nation.By synchronizing regulatory simplification, modern cluster infrastructure, continuous labor reskilling, technological adoption, and FinTech-led credit access, India can unleash the full power of its entrepreneurial spirit. In doing so, MSMEs will lead India’s charge toward becoming an economic titan during "Amrit Kaal", turning the vision of an "Atmanirbhar Bharat" into a glorious living reality.
Special Segment
Ep. 509 — I am the I in ICAI – Fuelling India’s Growth Story
CA Journal
· September 2026
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Special Segment • Leadership & Economic TransformationI am the I in ICAI – Fuelling India’s Growth StoryA dual-perspective leadership feature by corporate captains on the transformative ethos of Chartered Accountancy, India’s march toward a $29 Trillion economic powerhouse by 2047, and the CA as an indispensable national enabler.USD 5.4 Trillion3rd Largest by 2027IMF projection: India surpassing Japan and Germany in 4 years.USD 29 TrillionEconomy by 2047India’s centenary milestone reaching high upper-middle income status.1.5x – 2.0xGrowth MultipleIndia’s relative economic expansion rate compared to the US and China.The 3 DsStructural PremiumDemography, Democracy, and Digitisation powering enduring resurgence.Part I: Fuelling India’s Growth Story – The Structural TriadBy CA. Nrupesh Shah, Managing Director, Symphony Ltd.India stands today at a critical, historic juncture of economic ascent, possessing the unparalleled advantage of the Three Ds: Demography, Democracy, and Digitisation. Globally, most nations have enjoyed only one, or at best two, of these defining attributes simultaneously. India alone commands all three in dynamic synergy.THE FOUR PILLARS OF DEMOCRACYLEGISLATUREEXECUTIVEJUDICIARYMEDIABecause of this institutional bedrock, India enjoys an authentic valuation premium among emerging economies. India’s economic growth is extraordinarily valuable because it occurs at a time when most other major global economies are wrestling with severe internal headwinds—demographic decline in the West and East Asia, debt saturation, and political polarization. On a relative basis, India’s growth is projected to be a multiple of 1.5x to 2.0x of the United States and China. True economic value is defined not merely by velocity, but by the quality of growth: predictability, consistency, and structural longevity.Over the past decade, sweeping institutional reforms have borne tangible fruit in formalizing the Indian economy:Goods and Services Tax (GST): Unified a fragmented indirect tax structure into a single national common market.Insolvency and Bankruptcy Code (IBC): Restructured credit culture, promoting orderly capital reallocation and creditor rights.Unified Payments Interface (UPI): Digitized consumer commerce, making transaction friction virtually zero.Aadhaar Digital Identity: Formalized social welfare distribution, plugging leakages across government schemes.Downside Risks & Internal Vigilance:Despite this stellar outlook, corporate and policy leaders must remain vigilant against three systemic risks: (i) the uneven, K-shaped post-COVID recovery that exacerbates inequality; (ii) historical domestic "self-goals" and political instability; and (iii) escalating geopolitical turbulence and global conflicts that destabilize trade corridors.In this landscape, Chartered Accountants have emerged as pivotal contributors to the national resurgence. Serving as business advisors, operational strategists, and frontline administrators, CAs act as the catalysts steering the nation through an era of unprecedented growth happening once in a millennia.Part II: India’s Growth Story – The CA as a National EnablerBy Mr. Anuj Mathur, MD and CEO, Canara HSBC Life InsuranceOver the past fifteen years, India has methodically surpassed several advanced nations. India rose from around USD 2 Trillion in 2014 to USD 3.73 Trillion in 2023, overtaking the United Kingdom to become the world’s fifth-largest economy. According to official 2023 International Monetary Fund (IMF) projections, India is firmly on course to become the world’s third-largest economy by 2027 at USD 5.4 Trillion, overtaking both Japan and Germany.Looking further ahead, market consensus projects India’s GDP to reach USD 29 Trillion by 2047 (the centenary of Indian Independence) and soar to USD 45 Trillion by 2052, transitioning the nation into an upper middle-income economic powerhouse. This expansion is underpinned by demographic strength, financial deepening, a stable currency backed by ample foreign exchange reserves, and robust domestic consumption.The Demographics of Capital Deepening:As dependency ratios fall and household disposable incomes rise, India’s national savings rate will accelerate. Supported by deeper financial penetration, this will create an unprecedented domestic pool of patient capital to fund infrastructure and manufacturing expansion organically, insulating India from external capital flight.The Ethos of "I am the I in ICAI"Becoming a Chartered Accountant is a transformative life journey. It teaches time management, relentless discipline, dedication, and priority setting under intense pressure. While every professional chases excellence, it is equally vital to embrace the journey: staying open to new ideas, leveraging artificial intelligence and automation, adapting to fluid work environments, and driving daily continuous improvement.In the financial services and life insurance sector, our corporate role transcends commercial enterprise. Insurance provides foundational financial security and fosters a culture of long-term savings, directly funding nation-building capital projects. As partners in the national vision of "Insurance for All by 2047", we channel household savings into long-term infrastructure debt and equity across industry sectors.India’s young demographic will be the protagonists of the next twenty-five years. Many of these leaders will be Chartered Accountants. Every CA must internalize the adage "I am the I in ICAI"—viewing themselves not merely as accountants balancing commercial ledgers, but as societal enablers who protect public trust, uphold ethical governance, and actively weave the socio-economic fabric of an emergent global superpower.Accountant’s Browser: Curated Professional Literature DigestSelected index of contemporary academic and professional research from leading periodicals for members and students:DomainArticle Title & AuthorJournal CitationAccountancySustainability reporting and opportunities for practitioners by Deep AgarwalBombay Chartered Accountant Journal (Oct 2023, pp. 35–39)EconomicsDampening sustainability: Critical review of alternative approaches by Sandipan BaksiEconomic & Political Weekly (Oct 28, 2023, pp. 55–63)EconomicsGold is old: Noble metal in the Indian Economy through ages by Satish DeodharVikalpa (July–Sept 2023, pp. 175–188)LawInterim finance in creditor-oriented bankruptcy codes (IBC) by Amol BaxiVikalpa (July–Sept 2023, pp. 189–205)InvestmentAlternative Investment Funds (AIFs) – Pari-passu & pro-rata concepts by Dushyant DalalBombay Chartered Accountant Journal (Oct 2023, pp. 15–23)ManagementESG board’s responsibility – India and globally by Rajiv JhaChartered Secretary (Oct 2023, pp. 111–116)TaxationDistinct & related persons under GST and related party transactions by Jatin ChristopherThe Chamber’s Journal (Sept 2023, pp. 47–53)TaxationPractical approach to GST notices on secondment of employees by Ruchesh Sinha & Prakash MehtaGoods & Services Tax Cases (Nov 07–13, 2023, pp. 49–56)
Sustainable Growth Model: Shaping India’s Economic LandscapeA comprehensive macroeconomic analysis by Prof. Dr. Neelam Tandon evaluating India’s resilient growth trajectory—examining coordinated fiscal-monetary policies, ₹5.15 Lakh Crore in PPP projects, digital payment velocity, and financial sector deepening. 6.5% GDPGlobal "Bright Spot"IMF declaration of India as the fastest-growing major world economy in 2023.₹5.15 Lakh CrPPP Projects ScaleTotal project cost across 345 public-private partnership assets implemented.803.6 CroreDigital PaymentsTotal volume of digital payment transactions recorded in 2023 via UPI and platforms.>39,000Compliances ReducedBusiness compliance norms eliminated to advance the Ease of Doing Business.Introduction: The Macroeconomic "Bright Spot" in a Turbulent WorldDespite severe global geopolitical instability, supply chain disruptions, and widespread stagflation across developed nations, the International Monetary Fund (IMF) has unequivocally declared India as the "bright spot in the world market", projecting a robust real GDP growth rate of 6.5% in 2023. Even amid the prolonged Russia-Ukraine crisis and turbulent global food and energy prices, India’s headline consumer inflation moderated from 5.07% to 4.87% in November 2023.This economic resilience is not accidental. It is the direct outcome of tightly synchronized, countercyclical monetary and fiscal policy interventions. While the Union Government aggressively expanded public capital expenditure (Capex) to crowd-in private investment, the Reserve Bank of India (RBI) calibrated its benchmark repo rate to fine-tune aggregate demand without choking growth. Supported by global acclaim during its 2023 G20 Presidency and winning the bid to host the 2029 Youth Olympics, India’s sustainable growth model has earned the enduring confidence of international capital allocators.Digital Health Ecosystem & Natural Resource MonetizationThe World's Largest Vaccination Drive: Health as an Economic EngineIndia’s economic resurgence was anchored in its public health response. By developing a world-class digital health infrastructure (CoWIN), India successfully executed the largest COVID-19 vaccination drive in human history, shielding the economy from catastrophic productivity loss. Beyond crisis response, India’s healthcare and life sciences sector has emerged as a premier employment engine—possessing the potential to generate 500,000 new jobs annually at a compounded annual growth rate (CAGR) of 22%.Commercialization & Self-Reliance in Coal ProductionTo end historic operational inefficiencies and state monopolies, the Government of India opened the coal mining sector to private commercial enterprise. By November 2023, 91 commercial coal mines had been auctioned. This landmark structural reform allows private enterprises to utilize extracted coal for captive industrial consumption, open-market commercial sale, or export—establishing an equitable playing field, boosting state royalty revenues, and creating grassroots industrial jobs in mineral-rich belts.Energy Infrastructure: Powering India's Industrial BaseThe operational competitiveness of modern manufacturing depends upon reliable, uninterrupted access to electricity. Today, India stands as the third-largest consumer and third-largest producer of electricity globally. A defining triumph of recent policy has been private sector integration:Private Capital Dominance in Power Generation:Private sector investment now accounts for almost 60% of the total installed power capacity in the country, commanding an installed base of 2,14,760 MW. In 2023 alone, private capital generated a record 60 GW of conventional capacity, providing the baseload stability needed to support factory automation and high-speed rail.Energy Generation SourceInstalled Capacity Share (%)Current Status & Grid RoleCoal (Thermal Power)48.6%Primary industrial baseload power; supercritical generation efficiency.Wind, Solar & Other Renewables30.9%Rapidly expanding clean capacity driving COP26 decarbonization pledges.Hydroelectric Power11.1%Peaking grid balancing power; run-of-the-river & pumped storage hydro.Other Clean Sources (Nuclear, etc.)9.4%Constant emission-free baseload energy supporting heavy industrial grids.The Public-Private Partnership (PPP) TransformationTo modernize physical infrastructure without expanding sovereign debt, the Government introduced a robust Public-Private Partnership policy framework under the National Monetization Pipeline (NMP). By transferring operating risk to private concessionaires, the state creates high-quality public assets while unlocking continuous non-tax revenue streams.Nationwide, India has successfully implemented 345 PPP projects with an aggregate project cost of ₹5,15,539.16 Crores (2023). The aviation sector exemplifies this success: modern PPP airports—including Delhi, Mumbai, Bengaluru, Hyderabad, and Cochin—have transformed passenger throughput, relieved stressed commercial banks, and are consistently ranked among the top 5 globally by Airports Council International (ACI) for Airport Service Quality (ASQ).The Digital Financial Landscape: Scaling Inclusion & VelocityFinancial transaction velocity is fundamental to sustainable growth. The rollout of the Unified Payments Interface (UPI) as an open, interoperable direct bank transfer gateway has democratized commerce across the nation:1. Cellular & Mobile ScaleMobile cellular connections surged to 1.10 Billion users in 2023, representing 77.0% of the entire population, turning mobile phones into primary commercial terminals.2. Internet PenetrationAccording to the Digital India Portal, active internet subscribers reached 692.0 Million in early 2023 (48.7% penetration), driving remote e-commerce into rural districts.3. Transaction Volume RecordIndia reported a staggering 803.6 Crore digital payment transactions in 2023, slashing cash transaction overheads and establishing digital audit trails.4. Regulatory DecriminalizationTo foster Ease of Doing Business, the Government has systematically eliminated more than 39,000 compliance norms, decriminalizing technical procedural lapses.Financial Sector Reforms: Institutional Balance Sheet HygieneA resilient economy requires a sound financial system. Over the past decade, India established dedicated institutional machinery to resolve debt distress and mobilize patient capital:Insolvency and Bankruptcy Board of India (IBBI): Established time-bound corporate insolvency resolution, dismantling promoter impunity and recycling stranded assets back into production.National Bank for Financing Infrastructure and Development (NaBFID): A specialized Development Finance Institution (DFI) established to fund high-gestation infrastructure projects and attract global Net-Zero funds.National Asset Reconstruction Company Ltd. (NARCL / "Bad Bank"): Created to aggregate large stressed corporate loans with sovereign backstops, liberating commercial banks to expand private credit.Tax Integration via GST & Aadhaar-PAN Linking: Eradicated fund diversion and fictitious billing, leading to record-breaking monthly GST revenues surpassing ₹1.6 Lakh Crores.The Green Horizon: Clean Energy & National Electric MobilityThe final pillar of India’s sustainable growth model addresses the decoupling of transportation from greenhouse gas emissions. Under the National Electric Mobility Mission Plan (NEMMP) and FAME schemes, India has initiated a structural transition toward electric vehicles (EVs), renewable micro-grids, and green hydrogen hubs. These capital-intensive green initiatives, supported by production-linked tax credits for battery storage and EV assembly, ensure that future industrial expansion will not compromise ecological equilibrium.The Demographic Compounding Effect:India’s young demographic profile—characterized by a high Marginal Propensity to Consume (MPC)—drives strong consumer demand. As financial literacy and deepening capital markets expand, this consumption naturally converts into a high Marginal Propensity to Invest (MPI), ensuring that domestic savings fund the capital expenditure needed for Amrit Kaal.Conclusion: A Durable Architecture for Amrit KaalIndia’s economic growth is not an ephemeral cyclical upturn; it is the structural consequence of synchronized fiscal and monetary policy, infrastructure asset monetization, digital payment democratization, and institutional financial reforms.For Chartered Accountants, corporate executives, and international investors, this sustainable model provides a highly predictable, profitable, and transparent operating environment. By combining modern physical logistics with world-leading digital infrastructure, India has successfully forged an economic growth engine that will power national prosperity through "Amrit Kaal" and beyond.
Taxation
Ep. 511 — Democratizing Wealth Creation: Decoding the Potential of REITs in Making Real Estate Investment an Accessible Reality
CA Journal
· September 2026
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Democratizing Wealth Creation: Decoding the Potential of REITs in Making Real Estate Investment an Accessible Reality“The best investment on Earth is Earth.” — Louis Glickman (Texas Monthly, November 1990)Within India’s real estate landscape, the Real Estate Investment Trusts (REITs) offer a tantalizing prospect by embracing the timeless wisdom of “buy land, they are not making more of it.” These sophisticated investment vehicles transform ‘realty’ dreams into ‘reality’, allowing individuals to partake in the property market. However, in the face of their alluring potential, the Indian REITs find themselves in an intriguing adolescent stage, braving significant challenges. Successfully manoeuvring through intricate regulations, navigating liquidity concerns, and unravelling tax complexities become pivotal in unlocking the full growth potential of the REITs. Savvy investors keen on embracing the abundant opportunities presented by the Indian REITs must skilfully navigate these dynamics.This maxim finds particular relevance in the grand Indian narrative where historically, the possession of land & real estate had symbolized much more than mere ownership. ‘Zamindars’ or landlords embodied the essence of a status symbol, signifying their elevated position within the social fabric. Land and real estate in India remains a treasured inheritance that embodies the essence of prosperity, continuity and stability. In the contemporary realm of modern India, the Real Estate Investment Trusts (REITs) have proved to act as a conduit for transforming the dream of real estate investment into a tangible and accessible reality. They provide a channel through which individuals can participate in the growth of the real estate sector, tapping into its potential for a long-term income generation and capital appreciation.96.0%US REIT Market Cap Penetration\$7.0 BnIndian Office REIT Mcap (~19% Nifty Realty)74.4 MSq. Ft. REIT Stock (Tripled since 2019)\$63 BnUntapped Commercial Listing PotentialEvolution of REITThe REIT is an investment vehicle that is a vertically integrated entity that owns and operates real estate and related assets and allows individual investors to own a part of the income producing portfolio without actually having to buy a capital intensive asset.The REIT was introduced to the world by the US, as early as the 1960s. Today, more than 41 countries offer REIT as an investment vehicle. In 2019, India saw its first publicly listed REIT — Embassy Office Parks, while the US REIT market capitalization was already at 96% of the real estate market; Singapore and Japan with 55% and 51% respectively. Investors around the world now have access to portfolios of income producing real estate trusts.The inception of Real Estate Investment Trusts (REITs) in India dates back to 2013 when the Securities and Exchange Board of India (SEBI) released draft guidelines for this investment vehicle. The SEBI introduced REITs in India with the aim of providing the much-needed capital to the real estate sector and channelizing funds from retail investors into the formal system. To achieve this, the SEBI implemented the SEBI (REITs) Regulations in 2014, which have been amended periodically.Jurisdiction / CountryM.Cap of REITs (USD Bn)M.Cap of Real Estate Sector (USD Bn)REIT Market Penetration (%)Maturity & Structural StageUSA1,232 US$ bn1,284 US$ bn96%Mature & Deep (Over 60 years of operating history)Singapore76 US$ bn137 US$ bn55%Developed Hub (Pan-Asian Cross-Border Assets)Japan148 US$ bn292 US$ bn51%Developed Market (Institutional J-REIT Architecture)India (2023)7 US$ bn36.8 US$ bn (Nifty Realty)19%High-Growth Adolescent Stage (Immense Scope)Table 1: Countries with high REIT market capitalization; Source: Author’s Presentation (Dec 2023)Figure 1: Evolution of REIT in India: A Timeline2008Initial ConceptualizationSEBI introduced initial concept paper and guidelines for REITs in India.2014Regulations FinalizedSEBI formalized and notified the landmark SEBI (REITs) Regulations, 2014.2014–2019Tax & Regulatory TuningUnion Budget 2015 rationalized capital gains tax on SPV transfers, enabling listing readiness.2019First REIT IPOEmbassy Office Parks lists as India's first REIT, capturing $4 Bn market cap.2020Second ListingMindspace Business Parks REIT completes successful public listing amid pandemic resilience.2021 (June)Retail Accessibility ReformSEBI reduces minimum application from ₹50,000 to ₹10,000–₹15,000; trading lot size cut from 100 to 1 unit.2021Third Office REITBrookfield India Real Estate Trust completes IPO, expanding institutionalGrade-A supply.2023 (June)First Retail Mall REITNexus Select Trust successfully lists as India's premier retail consumption-backed REIT.Source: Author’s PresentationREIT Structure & Governance MechanicsThe SEBI (REITs) Regulations outline the registration requirements, registration procedures, and eligibility criteria for the REITs. However, due to a lack of clarity regarding taxation and other legal aspects, the implementation of the REITs was delayed until the 2015 Union Budget. In that budget, the finance minister announced measures to facilitate the establishment of REITs, such as rationalizing the capital gains tax on the transfer of property from the developers’ main companies to the listed entities, specifically the special purpose vehicles (SPVs) formed for running the REITs.In the subsequent years, several amendments were introduced to clarify and streamline the implementation of the REITs. The amendments were made to encourage broader investor participation and improve the accessibility to REIT investments, aligning with the goal of attracting retail investors and facilitating the growth of the real estate sector in India. Notably, in June 2021, the SEBI made two significant amendments to the rules governing investments in the REITs in India:Abolition of High Entry Barrier: The previous minimum investment requirement of INR 50,000 for investors to participate in the REITs was abolished. Presently, the minimum investment amount required is only INR 10,000 to INR 15,000 for investment through initial public offerings (IPOs) and follow-on offers.Unit Lot Rationalization: The minimum trading lot size for secondary transactions on stock exchanges was drastically reduced from 100 units to 1 unit.To gain a comprehensive understanding of the taxation and legal aspects of the REITs, it is crucial to first familiarize ourselves with the structure of these entities, which encompasses the following key constituents:1. Sponsor: The Sponsor is the real estate company that contributes the real estate assets to the trust and appoints a Trustee to hold these assets. A REIT can be set up by the sponsor by:Transfer of shareholding, rights, or interest in the holding company (Holdco) or the SPV; orTransferring the real estate asset directly in favour of the trust, in exchange for units of the REIT.2. Trustee: The Trustee is an independent entity registered with SEBI, responsible for holding and safeguarding the real estate assets in trust on behalf of the unitholders. The Trustee enters into an investment management agreement with the Manager.3. Manager: The Manager is appointed by the Trustee to oversee the day-to-day operations and asset management of the real estate properties held by the REIT. The Manager is responsible for investment decisions, leasing negotiations, property maintenance, tenant enhancements, and ensuring that distributions are paid out. The Manager acts as a fiduciary on behalf of the REIT and its unitholders.4. HoldCo & SPVs: Special Purpose Vehicles are companies or LLPs through which underlying real estate properties are held. The REIT must hold at least a 50% controlling equity stake in the HoldCo/SPV, and at least 80% of the value of the REIT assets must be invested in completed, revenue-generating properties.Figure 2: Typical Operating Structure of an Indian REITSponsor (Developer)Contributes Assets / SPV SharesHolds $\ge 15\%$ for 3 YearsTrustee (Independent)Holds Assets for BeneficiariesOversees Regulatory ComplianceManager (Operating Co.)Asset Management & LeasingFiduciary Duty for a Fee▼ ▼ ▼REIT (Business Trust - SEBI Registered)Hybrid Pass-Through Conduit • Listed on BSE & NSEMandated Distribution $\ge 90\%$ of Net Distributable Cash Flows (NDCF)▲ ▼Unitholders (Domestic & Foreign)Retail, HNIs, FPIs, Mutual FundsReceives Dividends, Interest, Capital GainsHoldCo / SPVs ($\ge 80\%$ Completed)Commercial Tech Parks, Malls, SEZ AssetsGenerates Rental Income & Cash FlowsInstitutional Ecosystem Facilitators: Custodians • Registrar & Transfer Agents (RTAs) • Merchant Bankers • Statutory Auditors • Independent ValuersSource: Author’s PresentationTaxation Aspects under the Indian REIT FrameworkFollowing are the transactions which accrue income to the entities involved in an REIT. The respective transactions correspond directly to the operating structure outlined above.1. Sponsor Level TaxationThe transfer of real estate assets by a sponsor to a Real Estate Investment Trust (REIT) can be accomplished through two methods, as outlined below:Transfer of shareholding, rights, or interest in the holding company (Holdco) or Special Purpose Vehicle (SPV): If the sponsor swaps shares of the SPV for units of the REIT, this transaction is not considered a transfer according to Section 47(xvii) of the Income Tax Act. Instead, taxation is deferred until the actual sale of the units (i.e., the sponsor’s secondary exit from the REIT). Furthermore, if the sponsor is a corporate entity, it is not subject to Minimum Alternate Tax (MAT). In the case of selling such units (exit opportunity), the sponsor will be liable for Capital Gains tax. The Cost of Acquisition (CoA) for tax calculation purposes is determined as the cost of the shares in the SPV that were transferred. The Period of Holding (POH) is calculated by aggregating the POH of the units in the REIT and the POH of the original shares of the SPV.Transferring the real estate asset directly in favour of the trust: This method involves transferring the real estate asset directly to the REIT. However, such a transfer will attract Capital Gains Tax immediately, and there are no statutory exemptions available to the sponsor in this case.2. REIT (Trust) Level TaxationThe REIT is a pass-through entity under Section 115UA, but its tax character is technically hybrid. The dividend income received by the REIT is taxed only at the hands of the SPV or Holdco and is thus exempt at the hands of the REIT u/s 10(23FC). The Interest income received by the REIT from the SPV or Holdco is exempt in the hands of the REIT but taxable in the unitholder’s hands. However, capital gains at the time of disposal of assets of the trust are to be taxed in the hands of the trust itself.Nature of Income Accruing to TrustTaxability in Hands of the REITStatutory Governing SectionDividend Income from SPVExemptSection 10(23FC)Interest Income from SPV loansExemptSection 10(23FC)Rental Income from Real Estate Assets held directlyExemptSection 10(23FC)Capital Gains on sale of SPV shares or real estate assets directly ownedTaxableTaxable at specified rates (Shares: STCG slab, LTCG 10% u/s 112A > ₹1L; Real Estate: STCG slab, LTCG 20% u/s 112)Other Income (e.g., Bank interest, Treasury deposits)Taxable at MMRMaximum Marginal Rate (MMR)Table: Statutory Taxability of Income Streams at REIT Level; Source: Income-tax Act, 19613. SPV Level TaxationThe specific tax provisions would not apply to Holdco whose sole purpose is to hold shares of SPVs. Real estate assets are directly owned by SPVs or the REIT:Rent from real estate assets: The income generated from renting out real estate assets by the SPV falls under the category of “Income from House Property” for tax purposes (eligible for statutory 30% standard deduction).Profits from investments in Real Estate/Infrastructure Projects: Any profits earned by the SPV through its investments in real estate or infrastructure projects are classified as “Business Income” (PGBP).Capital appreciations: If the SPV experiences capital appreciation from its asset disposals, resulting gains will be subject to Capital Gains Tax under Chapter IV-E.Corporate Tax Rates: SPVs pay tax @ 25% + surcharge and cess, or the concessional rate of 22% + surcharge and cess if opted for the lower corporate tax regime under Section 115BAA.4. Investor / Unitholder Level TaxationUnder Section 115UA(1), any income distributed by a business trust to its unitholders is deemed to be of the same nature and in the same proportion in the hands of the unitholder as it was received by or accrued to the business trust:1. Rent: Taxable under “Income from House Property” at applicable slab rates based on the unitholder’s total income.2. Dividend:If SPVs opted for lower tax regime (Sec 115BAA @ 22%): Taxable under “Income from Other Sources” (IFOS) at slab rates.If SPVs have not opted for lower tax regime (Normal 25%): Exempt u/s 10(23FD).3. Interest:For Residents: Taxable under “Income from Other Sources” (IFOS) at normal slab rates.For Non-Residents (NRIs/FPIs): Taxable at a concessional rate of 5% (+ surcharge & cess).4. Amortisation of Debt / Repayment of Loan: Up to FY 2022-23, this distribution was not taxable as it represented a return of capital. w.e.f. FY 2023-24 (Finance Act 2023): Taxable u/s 56(2)(xii) as IFOS at applicable slab rates.5. Any Other Income: Exempt in the hands of unitholders under Section 10(23FD).6. Capital Gains on Sale of Units:Short-Term Capital Gains (STCG): Tax rate is 15% u/s 111A if held for 12 months or less.Long-Term Capital Gains (LTCG): If held for more than 1 year (12 months), LTCG tax is 10% on gains exceeding ₹1 Lakh (across equity investments) without indexation benefit u/s 112A.Comparative Analysis of REIT PerformanceCurrently, there are 4 REITs in India. The Mindspace REIT was one of the top performers with absolute returns of 8.11% in the YTD Oct’22 period. The Brookfield India REIT came in second with 7.30% absolute returns. These two were followed by the Embassy REIT with 1.40% absolute returns during the same period. The Nexus Select Trust is the 4th REIT which got listed in June 2023 and is excluded from the historical operational comparison due to want of trailing data.The Embassy Office Parks was the first REIT which made its IPO in 2019. At that time, with only one REIT in India, the market capitalization of REIT (USD 4 Bn) was already at 17% of the market capitalization of the real estate sector in India (USD 24 Bn). India’s 3 listed office REITs combined have a USD 7 Bn market capitalization, representing ~19% of the Nifty Realty index companies’ market cap. The Real Estate Industry in India is estimated at USD 265.18 billion in 2023, and is expected to reach USD 828.75 billion by 2028, growing at a CAGR of 25.60% during the forecast period (2023-2028).In April 2023, NSE Indices Ltd launched the country’s first-ever Real Estate Investment Trusts and Infrastructure Investment Trusts index — Nifty REITs & InvITs Index. Globally, the S&P Global REIT Index serves as a comprehensive benchmark of publicly traded equity REITs, yielding annualized returns of 6.08% over the past three years.Key Financial & Operational MetricEmbassy Office Parks REITMindspace Business Parks REITBrookfield India REITTotal Portfolio Area (mn sq. ft.)43.631.918.7Occupancy Rate (%)86%88%88%Incremental Leasing (sq. ft.)964,0001,320,000332,000In-Place Rents (INR / sq. ft. / month)₹80₹65₹64Revenue from Operations (INR mn)₹8,654₹5,440₹2,999Net Operating Income - NOI (INR mn)₹7,049₹4,551₹2,405EBITDA (INR mn)₹7,177₹4,165₹2,345Distribution per Unit (INR / unit)₹5.31₹4.80₹5.00Annualized Dividend Yield (%)6.3%5.7%6.9%Market Capitalisation (INR mn)₹319,023₹198,655₹96,723Balance Sheet Gearing (%)37%21%47%REIT Spotlight: Key Financial Metrics for REITs for quarter ending December 2022; Source: REIT Quarterly Filings, BSEValuation & Stock ParameterEmbassy Office ParksMindspaceBrookfield IndiaMarket Capitalisation276.82 bn INR184.99 bn INR87.58 bn INRPrice-to-Earnings (PE) Ratio54.7165.2466.77Secondary Price Performance-21.77%-11.04%-18.64%Anchor Institutional Investors (%)55%58.75%45%Table: Valuation Multiples & Trading Behavior; Source: Author’s AnalysisStructural Challenges Confronting Indian REITsThe underperformance of REITs in India relative to broader equity benchmarks can be attributed to several systemic hurdles:1. Tenant Concentration in Global Technology MNCsA substantial portion of rental revenue across the REIT office portfolio — approximately 43% — is derived from technology sector clients. These REITs primarily lease properties to large multinational corporations and foreign enterprises that prefer leasing over ownership. However, the shift towards remote and hybrid work models following the COVID-19 pandemic has led to a rationalization of physical office footprints, potentially dragging long-term leasing renewals.2. SEZ Dominance & Sunset Clause VulnerabilitiesListed REITs face the challenge of lower average lease rentals compared to prime core assets. Over 60% of the total portfolio is concentrated in Special Economic Zone (SEZ) office parks. The expiration of direct tax holiday sunset clauses under the Income Tax Act has reduced the incremental attractiveness of SEZs for prospective tenants. Furthermore, the limited presence of Central Business District (CBD) assets — which command top-tier rental premiums — limits portfolio rental escalation.3. High Anchor Allocation & Secondary Liquidity ConstraintsA large percentage of REIT initial issuances (45% to 58.75%) is allocated to anchor institutional investors who operate under regulatory holding locks. This results in a compressed free float for retail investors, contributing to trading illiquidity and dampening retail enthusiasm in the secondary market.4. Yield Penalty Relative to Physical Commercial RealtyREIT dividend payout ratios (DPR) yielding 5%–7% are notably lower than gross yields available in physical Indian real estate. Standalone office spaces in suburban IT corridors yield 6%–8%, prime CBD commercial offices command 7%–9%, and organized retail malls generate yields of up to 9%. While REIT unitholders avoid physical property management, poor secondary unit price performance has amplified this yield penalty.Private Equity Inflow Dynamics & Global HeadwindsIn the first quarter of 2023, the Indian real estate sector experienced a dramatic contraction in private equity investment inflows, dropping to just USD 45 million (INR 3.7 billion) — representing a sequential decline of 97%. This sharp pullback was propelled by four interconnected macroeconomic headwinds:Heightened Global Recession Odds: In late 2022, consensus surveys placed the probability of a U.S. recession at 70% (65% in May 2023). Benchmark indices like the S&P United States REIT Index and the S&P Global Property Index dropped by -9.51% and -9.67% respectively by July 2023.Escalating Cost of Capital: Aggressive policy rate tightening by central banks globally elevated borrowing and refinancing costs, inducing institutional investors to delay real estate capital deployment.Valuation Disparity: Diverging perception of asset values between developers (seeking historic cap rates) and institutional PE funds (demanding higher risk premiums) resulted in transaction impasses.U.S. Regional Banking Turmoil: According to the NAREIT 2023 Mid-Year Report, three of the four largest bank failures in U.S. history occurred in H1 2023. Heightened regulatory scrutiny over commercial real estate (CRE) loan exposures tightened global credit availability.The \$63 Billion Untapped Frontier of Indian REITsDespite immediate headwinds, Indian REITs possess structural growth runways. Currently, only ~10% of India’s total Grade-A office stock is securitized under REITs. Grade-A office parks across the top 7 metropolitan hubs (Bengaluru, Mumbai, NCR-Delhi, Hyderabad, Chennai, Pune, and Kolkata) command the lion’s share of institutional demand.The Indian commercial office market is estimated to unlock an untapped listing potential of USD 59 to 63 billion through follow-on issuances and the entry of new REIT vehicles. Operational office stock under listed REITs has tripled from 24.8 million sq. ft. in March 2019 to 74.4 million sq. ft. as of March 31, 2023.While investors face trade-offs such as interest rate sensitivity, the recent taxation of debt repayments under Section 56(2)(xii), and annual asset management fees, REITs offer retail and institutional investors a high-quality, transparent, and professionally managed gateway into institutional-grade assets. Long-term corporate leases provide predictable cash flow streams that were previously unattainable for non-institutional investors.Conclusion & Strategic OutlookIn conclusion, REITs present a compelling investment avenue that combines accessibility, diversification, and liquidity within the real estate realm. By offering wider access compared to private equity investments, the REITs democratize participation and open doors for a broader range of investors. The inherent diversification benefits of REITs, despite associated risks, grant investors autonomy to selectively navigate their portfolios, maximizing long-term returns. Furthermore, high liquidity ensures enhanced marketability and flexibility, enabling swift portfolio adjustments in response to changing macroeconomic dynamics.In a country where real estate ownership holds immense cultural and emotional significance, REITs emerge as a sophisticated, compliant vehicle enabling millions of Indian citizens to participate in wealth creation from Grade-A commercial landmarks.Statutory & Academic FootnotesTexas Monthly, November 1990 (quoting Louis Glickman).In case of shares of SPV: STCG: Slab rates; LTCG (held for more than a year): 10% (on gains exceeding Rs 1 lakh) without indexation benefit. In case of Real Estate Assets: STCG: relevant income tax slab rate; LTCG (held for > 24 months): 20% with indexation benefits.The specific tax provisions would not apply to HoldCo. Sole purpose of HoldCo is to own shares of SPVs. Real estate assets are directly owned by SPV or the REITs.As per Section 115UA(1), notwithstanding anything contained in any other provisions of this Act, any income distributed by a business trust to its unitholders shall be deemed to be of the same nature and in the same proportion in the hands of the unitholder as it had been received by, or accrued to, the business trust.SPVs pay tax @ 25% + surcharge and cess or the concessional rate of 22% + surcharge and cess if opted for lower tax regime (Sec 115BAA).Up to FY 2022-23: Not taxable as the amount was not in nature of income. w.e.f. FY 2023-24: Taxable u/s 56(2)(xii) as Income from Other Sources (IFOS).At the end of 2022, the Bloomberg consensus forecast survey placed the odds of a U.S. recession within the next 12 months at 70%. As of May 2023, the likelihood was 65%. S&P US REIT Index and S&P Global Property Index dropped -9.51% and -9.67% respectively as of July 28, 2023.National Association of Real Estate Investment Trusts (NAREIT).India Grade-A office space covers office stock of top 7 metros: Bengaluru, Mumbai, NCR-Delhi, Hyderabad, Chennai, Pune, and Kolkata based on Building Owners and Managers Association (BOMA) International guidelines.Select BibliographyKaur, B.A., 2021. Opportunities for institutional investors in Indian REITs (Doctoral dissertation, Massachusetts Institute of Technology).Gupta, S., Majumdar, S., Jain, K., & Kathawala, S. S. India’s REIT Opportunity, CRISIL Research.Mansukhlal Hiralal & Co., 2023. REIT Regime In India.Securities and Exchange Board of India. Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014.Mordor Intelligence, 2023. India Real Estate Market Size & Share Analysis - Industry Research Report.Jones Lang LaSalle (JLL), 2023. India Office REITs - Off to a Great Start.
Taxation
Ep. 512 — Comprehensive analysis of issues arising from the Extraterritorial taxation of dividend under Article 10(5) of the OECD Model Tax Convention
CA Journal
· September 2026
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Comprehensive Analysis of Issues Arising from the Extraterritorial Taxation of Dividend under Article 10(5) of the OECD Model Tax Convention“Article 10(5) of OECD MTC looks small, but it enjoys a special treatment in international tax law.”Organisation for Economic Cooperation and Development (OECD) commentary to the provision of Article 10(5) and its history is very illuminating. Article 10(5) of the OECD Model Tax Convention, 2017 (OECD MTC) has been defined “as a negative source rule.”1 The Source country should not tax the dividend distributed by a non-resident company to shareholders simply because such a non-resident company makes its corporate profit that is created in the source country. However, Article 10(5) contains two crucial exceptions.With this background, the structure of this article makes an attempt, in the first section, to provide the historical aspects of Article 10(5) of the OECD MTC. Thereafter, the article discusses the principle of Article 10(5) which consists of the main rule of Article 10(5), exceptions to Article 10(5), and practical application of the triangular case. Further, this analysis takes a closer look at the application of Article 10(5) under specific scenarios such as the cash scenario, dual-residence scenario, and controlled foreign corporation (CFC) scenario. Each scenario has been discussed with the help of a flow chart.The last section of this article seeks to discuss the treaty analysis in the context of interpreting Article 10(5), particularly:(a) The provisions allowing a second layer of taxation on the profits attributable to a permanent establishment (“PE”) in the country in which the said PE is located; and(b) The provisions allowing for the application of extraterritorial taxation.1946Origin: London Draft Art. VIII(3)RuleNegative Source Doctrine2Primary Treaty Exceptions5% – 15%Branch Profits Tax CapsEvolution of Article 10(5) of the OECD MTCArticle 10(5) of the OECD MTC has its origin in Article VIII(3) of the London Draft MTC of the League of Nations of 1946.On 1 August 1960, Working Party 2 of the Fiscal Committee submitted the final draft on Article 10 dealing with the taxation of dividends which was published on September 1, 1961, wherein the related commentary provided only limited guidance, in particular, that non-resident companies were not to be subjected to special taxes on undistributed profits.From the OECD Draft (1963) onwards, the provision has been retained and its wording has been slightly amended without any change of its substance.2The Principle of Article 10(5) of the OECD MTCi. Statutory Extract from the OECD MTC, 2017“Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a PE situated in that other State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.”The provisions of the OECD MTC are similar to the provisions of the UN MTC. However, the OECD MTC does not refer to a ‘Fixed base’ as it covers only the Permanent Establishment (PE) situation.ii. The Main Rule of Article 10(5)As per Article 10(5), the source country should not tax the dividend distributed by a non-resident company to shareholders merely because such a non-resident company derives its corporate profit that originated in the source country.Source of dividends is not the state in which the profits out of which dividends are paid were derived.For example, in Picture 1, X Co. is a resident, on the basis of Articles 3 and 4 of the OECD MTC, in a contracting state i.e., State X; and the profits are derived by that company from the other contracting state i.e., State Y.In such a case, State Y is not entitled to tax the dividends paid by X Co. and subject the undistributed profits of the company to tax, regardless of the fact that the profits relate to income arising in the other contracting state i.e., State Y.In this way, Article 10(5) prohibits ‘extraterritoriality’ with respect to the taxation of dividends, and this interpretation is confirmed by the Commentary on Article 10 paragraph 33 of the OECD MTC, 2017.Further, this article also prohibits the country of source from taxing undistributed profits of a company that is a resident of another country, even if the profits were wholly, mainly, or partly derived from sources within the country of source.Special taxes on undistributed profits are also prohibited; in other words, non-resident companies are not to be subjected to special taxes on undistributed profits.3Picture 1: General Case — Prohibition of Extraterritorial TaxationState XX Co. (Resident)⤹ Profit Sourced ⤸State Y(Source State)Result: State Y is NOT entitled to tax dividends paid by X Co., nor tax its undistributed profits.iii. Triangular CaseAs Article 10(5) does not clearly indicate where the recipient must be located, there may be situations involving three states:For example, in Picture 2, X Co. and Z Co. are residents in State X and State Z respectively. Dividends are paid by a resident of State X to a resident of State Z. X Co. carries on its business in State Y. It also generates income from State Y through a Permanent Establishment (PE) in State Y.Picture 2: Triangular Case Structural ConfigurationState XX Co. (Payor Co.)─── Dividend Paid ───►State ZZ Co. (Shareholder)│ Branch / PEState YPE of X Co. (Business Activity)Interaction of 3 Bilateral Treaties: State X–Z, State Y–Z, and State X–YIn such a case, the following three tax treaties may apply:Contracting StateTax Treaty: State X & State ZTax Treaty: State Y & State ZTax Treaty: State X & State Y1. State Z• Z Co. is a resident recipient of the income.• According to Article 7(4) of the OECD MTC, Article 10 takes priority over Article 7.• State Z can also tax its resident recipient i.e., Z Co., but must grant double tax relief.In this scenario Article 10 does not apply as the dividends are not paid by a resident of State Y.• Articles 7 or 21 apply, both attributing taxing rights to State Z.—2. State X• X Co. can tax the distribution of dividends at source, but subject to the withholding limitations of the tax treaty.——3. State Y——• State Y would be prohibited from taxing the distribution of dividends by X Co.• State Y is not entitled to: 1. Tax the dividends paid by X Co. 2. Subject the undistributed profits of the company to tax, regardless of the fact that profits relate to income arising in State Y.Table: Three-Way Treaty Interaction in a Triangular Case; Source: Author’s Analysisiv. The Exceptions to Article 10(5)Article 10(5) provides for two specific exceptions:Exception 1: Dividends Paid to a Resident of the Other Contracting StateWhere the dividends are paid to a resident of the other contracting state (e.g., dividends paid by X Co. in State X to Y Co. in State Y). Under this first exception, State Y should not be limited by Article 10(5), as it is taxing its own resident (Y Co.) under residence-based worldwide taxation, and is not claiming source jurisdiction over foreign company profits.Picture 3: Exception 1 — Dividends Paid to a Resident of the Other StateState XX Co. (Payor Co.)─── Dividend Paid ───►State YY Co. (Resident Recipient)State Y taxes its own resident Y Co.; Article 10(5) negative source rule does not restrict State Y.Exception 2: Holding Effectively Connected with a Permanent EstablishmentWhere the dividends are paid to a company that has a PE in the other contracting state, and the holding from which the entitlement to receive dividends arises is effectively connected to the PE. With regard to this second exception, the same result would have been realized through the application of Article 7. In such a case, it is clear that despite the fact that it is apparently a domestic situation, the dividends should be attributed to the PE of X1 Co. in State Y for the purpose of determining its tax base.4Picture 4: Exception 2 — Dividends Effectively Connected with a PEState XX1 Co. (Subsidiary)─── Dividend Paid ───►State XX Co. (Head Office)│ Holding Effectively ConnectedState YPE of X Co. (Tax Base includes Dividends)Dividends are attributed to State Y PE under Article 7 principles.Application of Article 10(5) under Specific Scenariosi. Cash ScenarioThere could be a situation when a contracting state wants to tax a distribution of dividends by a company resident in another contracting state only because the cash necessary for the payment accrued and the subsequent payment is affected in its territory, i.e., through an account maintained there. Three possible cases arise:Scenario CaseStructural Facts & Parties InvolvedCash Remittance ExecutionTreaty Resolution & Article 10(5) InterplayCase 1(Picture 5)X Co. is resident in State X. Dividends are paid by X Co. to a resident of State X (P Co.).The cash flow execution of the dividend is made from a bank account in State Y to P Co.Article 10(5) of the State X–State Y treaty is not necessarily relevant. Articles 7 or 21 apply, giving exclusive taxing rights to State X.Case 2(Picture 6)X Co. is resident in State X. Dividends are paid by X Co. to a resident of State Y (P Co.).The cash flow execution of the dividend is made from a bank account in State Y to P Co.The first exception in Article 10(5) of the State X–State Y treaty applies, arriving at the same result as Article 10 general rules.Case 3(Picture 7)X Co. is resident in State X. Dividends are paid by X Co. to a resident of third State Z (P Co.).The cash flow execution of the dividend is made from a bank account in State Y to P Co. in State Z.Article 10(5) of the State X–State Y treaty can be directly invoked to resolve the issue and bar State Y from taxing.Analysis of Cash Routing Scenarios; Source: Author’s FormulationConclusion in the Cash Scenario:In case of a cash scenario, there could be situations in which a taxpayer would be insufficiently protected by a treaty network.In Case 3 (Picture 7), according to State Z, Article 10(5) of the State X–State Y Tax Treaty would prevent State Y from levying extraterritorial tax, but according to State Y, the same provision does not affect its right to tax P Co., which could be disadvantaged from such an interpretation conflict.ii. Dual-Residence ScenarioA dual-resident company is a company that is considered to be a resident of two contracting states according to their respective domestic tax laws (e.g., incorporation in one State, place of effective management in another). Three possible cases may arise:Case 1 (Picture 8): Residence conflict is resolved in favour of State X (Winning State); State Y is the Losing State. Dividends are paid by a resident of State X to a resident of loser State Y (P Co.). Resolution: Article 10 applies. The “winning” State X may tax dividends up to treaty caps. The “losing” State Y may tax dividends in the hands of P Co. as its resident, but must provide relief according to Article 23A or 23B.Case 2 (Picture 9): Residence conflict resolved in favour of State X (Winning State). Dividends paid by a resident of State X to a resident of winner State X (P Co.). Resolution: Article 10 does not apply (purely domestic to State X). The solution is found in Articles 7 or 21 of the OECD MTC. State Y has no taxing rights.Case 3 (Picture 10): Residence conflict resolved in favour of State X (Winning State). Dividends paid by a resident of State X to a resident of third State Z (P Co.). Resolution: If no profits are derived from State Y, Article 10(5) should not apply.Key Principles Governing Dual-Residency Companies:Exception to Article 1: The provision of Article 10(5) is considered as an exception to Article 1 of the OECD MTC as there is no resident recipient of the income.Incorporation Principle Conflict: Article 10(5) is applicable in the dual-residence scenario where taxation is levied on dividends because of the incorporation principle under the domestic law of the country losing the tie-breaker. The fact that the winning country does not derive profits from the losing country, or that dividends were paid out of profits not arising in the losing country, is not relevant.iii. Controlled Foreign Corporation (CFC) ScenarioCFC rules are the rules by means of which countries try to prevent the tax deferral of profits that normally would have arisen and been taxed in the relevant country.Article 10(5) should only apply when the country applying the CFC rules derives profits from the CFC country. Paragraph 37 of Article 10(5) of the OECD Commentary provides that:It cannot be interpreted as preventing the state of residence of a taxpayer from taxing that taxpayer, pursuant to its CFC legislation, on profits which have not been distributed by a foreign company.The paragraph is confined to taxation at source and, thus, has no bearing on taxation at residence under such legislation or rules.The paragraph concerns only the taxation of the company and not that of the shareholder.Hence, Article 10(5) should be confined to taxation at source, but can, nevertheless, prevent the application of CFC rules “because the CFC legislation taxes all the profits of the CFC because of tainted income that has its source in the country imposing the CFC legislation.”Treaty Analysis in the Context of Interpreting Article 10(5)Most countries include a provision that is in line with Article 10(5), but also include another provision that allows for a second layer of taxation on the profits attributable to a PE in the country in which the said PE is located (often termed a Branch Profits Tax).i. Provisions Allowing for a Second Layer of Taxation on PE ProfitsSl.Tax Treaty BetweenIn Line with Art. 10(5)?Second Layer of Taxation?Allow Extraterritorial Taxation?Relevant Extract of Treaty1Canada – FranceYesYes (PE profits)No“Nothing in the Convention shall prevent a Contracting State from imposing on the earnings attributable to a PE, situated in that State, of a company which is a resident of the other Contracting State a tax in addition to the tax allowable under the other provisions of the Convention, provided that any additional tax so imposed shall not exceed 5 per cent of the amount of such earnings....”2Costa Rica – SpainYesYes (PE profits)No“Profits of a company of a Contracting State which carries on business in the other Contracting State through a PE situated therein may, after having been charged to tax by virtue of Article 7, be taxed on the remaining amount in the Contracting State in which the PE is situated and according to the laws of that State, but in that case the tax charged shall not exceed 5%.”Table: Bilateral Treaties Permitting Branch Profits Tax on PEsii. Provisions Allowing for the Application of Extraterritorial TaxationSl.Tax Treaty BetweenIn Line with Art. 10(5)?Second Layer of Taxation?Allow Extraterritorial Taxation?Relevant Extract of Treaty1France – African StatesNo—Yes (Apportioned Base)“Where a company resident in one of the Contracting States is subject in that State to a tax on dividend distributions and maintains one or more PE in the other Contracting State in respect of which it may also be liable in the latter State to a similar tax then the income which may be subject to that tax will be apportioned between the two States in order to avoid double taxation.”2Brazil – ItalyNo—Yes (PE WHT)“Where a resident of Italy has a PE in Brazil, this PE may be subject to tax withheld at source in accordance with a Brazilian law. However, such a tax cannot exceed 15 percent of the gross amount of the profits of that PE, determined after the payment of the corporate tax related to such profits.”3Austria – CanadaNo—Yes (Carve-Out)“Where a company is a resident of a Contracting State the other Contracting State may not impose any tax on the dividends paid by the company to persons who are not residents of that other State, or subject the company to a tax on undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State. The provisions of this paragraph shall not prevent that other State from taxing dividends relating to a holding which is effectively connected with a PE, or a fixed base operated in that other State.”Table: Bilateral Treaties Incorporating Express Extraterritorial Apportionment ClausesConcluding RemarksArticle 10(5) of the OECD MTC looks small, but it enjoys special treatment in international tax law. Many contracting states have tried to answer the questions connected to Article 10(5) by including specific provisions in their treaties aimed at clarifying whether or not the provision should be applied in certain situations.Some tax treaties do not include the phrase “derives profit from” in order to make it clear that the application of the provision is not confined to situations of taxation at source and that, therefore, all forms of extraterritorial taxation are, in principle, prohibited. Other treaties include deviations related to the effects of Article 10(5) in regard to a dual-resident company, and the application of Article 10(5) is explicitly excluded.In conclusion, it can be observed that those countries that provide for extraterritorial taxation of dividends have tried to include, in their tax treaties, a special provision in order not to be restricted by Article 10(5). However, evolution and increasing complexity of business models has led to recognition by the OECD that the wording of Article 10(5) of the OECD MTC could lead to absurd conclusions and therefore, it should be interpreted having in mind the purpose of the provision i.e., the prohibition of extraterritorial taxation and the fundamental purpose of a tax treaty, i.e., the avoidance of double taxation.Statutory & Academic FootnotesJ.F. Avery Jones et al., Tax Treaty Problems Related to Source, 38 Eur. Taxn. 3, sec. II.B. (1998), Journals IBFD.K. Vogel, Klaus Vogel on Double Taxation Conventions, p. 693 (Kluwer Law International, 1997).Commentary on Article 10(5), Paragraph 36 of the OECD Model Tax Convention, 2017.E. Arruda Madeira & T. Cassiano Nieves, Exploring the Boundaries of the Application of Article 10(5) of the OECD MTC, 35 Intertax 8/9, p. 474 (2007).
Taxation
Ep. 513 — Angel Taxation: An Investment Scenario in India
CA Journal
· September 2026
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Angel Taxation: An Investment Scenario in India“As investors resist with additional tax liabilities, it can also have negative impact on FDI inflow from foreign investment.”India’s tax landscape is dramatically shifting, which makes it challenging for emerging startups to adapt to new policies consequences. Rapid policy changes make it difficult for start-ups to adjust to the existing start-up ecosystem. Healthy growth of entrepreneurship is a pre-requirement for attaining economic super power, and simplifying stringent norms related to angel funding would be a stepping stone to achieve this. The primary purpose of this article is to dwell into the Indian Angel Investment system and examine the tax related policies which support or hinder the flow of angel funding in the Indian start-up ecosystem. Secondary data sources have been utilized in the current study and concerns regarding angel taxations have been highlighted along with recommendations of remedial measures.₹25 CrPaid-Up Capital Exemption Cap₹100 CrAnnual Turnover Threshold10%Rule 11UA Safe Harbor Tolerance21Notified Exempt Foreign NationsIntroductionSmall startups are financed through angel investors. When such firms are in the early stages of development, it can be challenging for them to find funding from conventional sources of funding like banks, financial institutions, etc. By providing monetary and non-monetary aids to startups in their early growth stages, angel investors promote entrepreneurship in the nation. Additionally, these investors give businesses access to their own professional networks along with mentoring. As a result, they provide both wealth and experience to new business endeavors.However, with the introduction of the Income Tax Act’s Section 56(2)(viib) in 2012, which is now commonly referred to as ‘Angel Tax’, it has created a lot of buzz in the investors’ community regarding its intention to support the startup ecosystem in India. The issue of India’s angel tax has long been divisive. It was first implemented with the intention of serving as an anti-abuse mechanism to stop money laundering and the transportation of illicit funds under the pretext of entrepreneurship. Since its introduction, businesses have found the tax regulations to be arbitrary and vague. A decade has passed since its introduction, yet a concise and supportive policy measure is still missing which is needed to ease the angel fund flow in the Indian Startups.Angel InvestorHigh-net-worth individuals who invest their own money in start-up businesses or small and medium-sized businesses are known as angel investors. Their experience enhances the value of new businesses. In other words, an angel is a wealthy individual who provides risk capital to small and private firms in the form of private equity capital or near equity capital, and angel investment methodology differs from other players as they apply very primitive search processes for potential idea identification and rely heavily on informal friends and family networks (Prowse S., 1998).Angel Tax & Legislative BackgroundThe Income Tax Act’s Section 56(2)(viib) levies taxes on startup funding raised if it exceeds over their fair market value (FMV). In order to curb the practice of conversion of black money into white through shell companies, the then Finance Minister of India, Mr. Pranab Mukherjee, in Budget 2012 introduced section 56(2)(viib), effective from Assessment Year (AY) 2013-14, which is now termed as ‘Angel Tax’. The UPA government adopted it in 2012 in an effort to uncover money-laundering schemes and shut down fraudulent start-ups.Why in News? The Rule 11UA Valuation OverhaulAngel tax valuation rules for investments in startups have been announced by the Finance Ministry. The government has tried to ease the angel tax provisions for non-resident investors by introducing five different valuation methods for shares and offered a 10% deviation tolerance limit. Also, the Central Board of Direct Taxes (CBDT) has stipulated that the valuation of compulsory convertible preference shares (CCPS) may be based on the fair market value of unquoted equity shares in accordance with the amendments to Rule 11UA of the Income Tax Rules, which took effect on September 25, 2023.RankTop Angel Investors & Networks in India (2022)Number of DealsCategory / Type1Kunal Shah67Individual Super Angel2LetsVenture67Angel Syndicate Platform3IP Ventures55Angel Investment Network4Venture Catalysts Angels45Integrated Incubator Fund5Kunal Bahl34Individual Super Angel6Rohit Bansal30Individual Super Angel7Mumbai Angels27Angel Syndicate Network8Indian Angel Network26Angel Syndicate Network9AngelList25Syndicated Investment Platform10ah! Ventures24Early-Stage Growth Platform11SucSEED Indovation21Angel Network / Seed Fund2022: Top Angel Investors and Networks in India (No. of deals as of Dec 23, 2022); Source: Venture IntelligencePossible Characteristics of Angel Tax ProvisionsTax TreatmentRefundable? OrNon-Refundable?Core Policy InstrumentTax Credit?% of Investment?Seed Fund Relief?Capital Gains Deferral?TransferabilityTransferable? OrNon-Transferable?Allocation RulesFirst dibs? Pro-rated? If unused?Carry-Forward LimitsCapped restrictions? Carried forward?Source: Hudson, M., & Williams, J. (2008)Literature ReviewAngel investment is an under-researched field of knowledge. Due to the presence of angel syndications, unclear demarcation of angel funds and venture capital funds, and co-occurrence of investments, it is complex to measure the precise volume of angel investment. Harrison, R.T. (2017) concluded that over the past ten years, angel investors have begun to consider global issues as more and more studies demonstrate the effectiveness of the model of angel-led entrepreneurial development as a viable long-term strategy.Earlier, Mason, C.M., & Harrison, R.T. (2008) stated that it is crucial to analyze the activity of angel investors and monitor changes over time in order to better comprehend the entrepreneurial environment. Business angel populations are neither fixed nor static; rather, they exist in a cyclical state. Also, the distinction between angel investing and other informal investing has been muddled by connections with other investors.Emphasizing the interrelatedness of investment and taxation, Poterba, J.M. (1989) examined how tax-related investment elasticities play a substantial role in determining the investment propensity of micro angel investors. Similar conclusions were drawn by San José, A., Roure, J., & Aernoudt, R. (2005), who stated that the ineffective performance of business angels’ investment activities is the result of insufficient attempts to strengthen frameworks including taxation, legal considerations, and advertising of business angel networks.Historical Benchmark: The Sunil Mishra Committee (2012)Under the leadership of Shri Sunil Mishra (Ex-Revenue Secretary, Government of India), a committee was established in 2012 to make policy recommendations for speeding angel investment. The committee defined an angel investor as “a person who directly invests his own money in a seed stage enterprise in which there is no familiarity.” The committee recommended an investment cap of less than ₹5 Crore for an individual and less than ₹10 Crore for a syndicate, with seed-stage companies defined as unlisted entities with turnover under ₹25 Crore, unaffiliated with groups exceeding ₹300 Crore turnover.Discussing the trends, prospects, and challenges in Indian Angel Investment, Sabarinathan, G. (2019) discovered that over the past fifteen years, there has been a sharp increase in the number of enterprises funded by angel investors. Globally, Pierrakis, Y., & Owen, R. (2022) suggested that government policy should encourage impact accelerators so that social and environmental companies can expand sustainably.Financial YearNumber of Angel Investment Deals in IndiaAnnual Market PhaseFY 2016297Initial Startup Ecosystem ExpansionFY 2017229Post-Demonetization & Early Tax ScrutinyFY 2018256Recovery & Syndication EmergenceFY 2019275DPIIT Exemption Framework NotificationFY 2020341Pre-Pandemic Growth SurgeNumber of Angel Investment Deals in India (2016 to 2020); Source: StatistaAngel Tax: The Picture So Far & Finance Act 2023 AmendmentsFollowing the proposals in Finance Act 2023, Section 56(2)(viib) was amended with effect from April 1st, 2024 (Assessment Year 2024-25). The tax’s coverage has now been extended to overseas / foreign investors. Any investment received by an unlisted company from a foreign investor at a premium exceeding the fair market value is deemed income and subjected to tax under “Income from Other Sources”.Prior to Budget 2023–24, only investments made by residents were subject to angel tax. The elimination of the foreign investor exemption was intended to level the playing field, but risks exacerbating an in-built funding shortage during an ongoing venture capital funding winter. In India, the value of venture startup funding decreased by 33% from 2021 to 2022, dropping to $24 billion.DPIIT Startup Exemption ThresholdsTo qualify for exemption from Section 56(2)(viib), a startup must be formally registered with the Department for Promotion of Industry and Internal Trade (DPIIT) and satisfy the following criteria:Paid-up Capital Cap: The aggregate paid-up share capital and share premium after the proposed share issuance must not exceed ₹25 Crore. (Excludes investments from non-residents, SEBI Category I/II AIFs, and listed companies with net worth $\ge$ ₹100 Cr or turnover $\ge$ ₹250 Cr).Corporate Form & Age: Registered as a private limited company, partnership, or LLP, operating within 10 years from its date of incorporation.Turnover Ceiling: Turnover has not exceeded ₹100 Crore in any preceding financial year (expanded from the former ₹25 Crore ceiling).Genuine Genesis: The entity must not be formed by splitting up or reconstruction of an existing business entity.Negative Asset List (Anti-Abuse Restrictions): The startup must not invest in:Jewelry or bullion;Land or buildings not used in the ordinary course of business;Motor vehicles costing more than ₹10 Lakh;Loans and advances (other than ordinary lending businesses);Shares, securities, or capital contributions in other enterprises.Problems Faced by Startups & Investors in Calculating Fair Market ValueDetermining the Fair Market Value (FMV) of early-stage startups is fraught with controversy. In September 2023, the CBDT notified five new valuation mechanisms for non-resident share issuances under Rule 11UA:Replacement Cost Approach;Probability Weighted Anticipated Return Method (PWARM);Comparable Company Multiple Method (CCMM);Option Pricing Method (OPM);Milestone Analysis Method.Furthermore, a 10% safe harbor / deviation tolerance limit was provided, and deals completed within 90 days of an equity infusion by an exempt investor (such as a Category-I AIF or notified foreign entity) can match that exact issuance price.The Valuation Disconnect: Commercial Hindsight vs. DCF ScrutinyCommercial venture investors value young startups based on intangibles, prospective addressable markets, gross merchandise value (GMV), run rate, and the founding team’s pedigree. However, Income Tax Assessing Officers (AOs) frequently substitute aggressive, hindsight-driven DCF projections to recalculate a drastically reduced “fair value”, taxing the excess capital as deemed income, accompanied by interest and penalty orders. Unlisted startup equity lacks public market price discovery, exposing founders to arbitrary and hostile tax demands.Recommendations for a Supportive Tax FrameworkThe following recommendations should be mindfully considered by the Government to ensure that angel tax provisions do not stifle the vibrant Indian startup ecosystem:1. Expand Concessional Carve-Outs for Foreign Entities: Extend explicit exemptions to foreign entities registered with home regulators, Category-I Foreign Portfolio Investors (FPIs), sovereign wealth funds, and global pension funds qualifying under Section 10(23FE).2. Stop Coercive Recovery Actions: Prohibit coercive attachment of startup bank accounts while valuation appeals and reassessments are pending.3. Increase Safe Harbor Tolerance to 25%: Where shares are issued at a price backed by a Category-I Merchant Banker’s valuation report, provide a tolerance limit of up to 25%. Any additions exceeding 25% must be reviewed by an independent Approval Panel (modeled after the GAAR Approval Panel).4. Expand the List of Notified Countries: The Central Government’s notification of May 24, 2023 excluded 21 countries (e.g., US, UK, France, Germany, Japan) from foreign angel tax. Crucial venture funding hubs such as Singapore, UAE, Mauritius, and the Netherlands must be evaluated for inclusion.5. Resolve the FEMA vs. Income Tax Pricing Gridlock: Under FEMA regulations, non-resident share issuances cannot occur below fair market value (price floor), while under Section 56(2)(viib), issuances cannot occur above fair market value (price ceiling). This creates an unworkable zero-tolerance corridor. Harmonizing these rules is vital to avoid encouraging startups to engage in "reverse flipping" to offshore jurisdictions.6. Automate Startup India Certification: Make DPIIT recognition completely objective and automated, removing bureaucratic officer discretion regarding whether a startup is sufficiently "innovative".ConclusionBy inhibiting the growth of emerging firms and hurting the entrepreneurial spirit, rigidity in angel taxation puts India at a disadvantageous position. Given prevailing global headwinds, the startup industry needs a favorable, transparent governmental framework. While foreign investments may seek entry via alternative investment fund (AIF) routes, excessive tax complexity incentivizes founders to incorporate abroad. By ensuring valuation flexibility, expanding safe harbors, and resolving regulatory contradictions, policymakers can empower Indian entrepreneurship toward the goal of becoming a global economic superpower.Select References & BibliographyHarrison, R. T. (2017). The internationalization of business angel investment activity: a review and research agenda. Venture Capital, 19(1-2), 119-127.Hudson, M., & Williams, J. (2008). Tax Credits and Government Incentives for Angel Investing in Various States. Available at SSRN 1291795.Mason, C. M., & Harrison, R. T. (2008). Measuring business angel investment activity in the United Kingdom: a review of potential data sources. Venture Capital, 10(4), 309-330.Pierrakis, Y., & Owen, R. (2022). Startup ventures and equity finance: How do Business Accelerators and Business Angels assess human capital? Innovation, 1-25.Prowse, S. (1998). Angel investors and the market for angel investments. Journal of Banking & Finance, 22(6-8), 785-792.Poterba, J. M. (1989). Venture Capital and Capital Gains Taxation. NBER Working Paper No. W2832, Cambridge, MA.Sabarinathan, G. (2019). Angel Investments in India–Trends, Prospects and Issues. IIMB Management Review, 31(2), 200-214.San José, A., Roure, J., & Aernoudt, R. (2005). Business angel academies: unleashing potential. Venture Capital, 7(2), 149-165.Venture Intelligence, Statista, Bar & Bench, EY India Tax Insights, and CBDT Notifications on Rule 11UA (2023).
Sustainability
Ep. 514 — The Finance Function and Sustainable Development
CA Journal
· September 2026
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The Finance Function and Sustainable Development“Cost cutting initiatives for sustainability inducing activities, such as energy efficiency, waste reduction, and responsible procurement, not only save money but also contribute to a healthier planet.”Controllership function under the aegis of the broader finance domain could increasingly play an indispensable role in achieving Sustainable Development Goals (SDG) of entities, and in the process could add substantial monetary as well as non-monetary value to the global economy.The Finance Control (FC) function plays a critical role in cost optimization within an organisation. It involves managing and monitoring the company’s financial activities, ensuring compliance with financial regulations, and providing valuable insights to help the business optimize its resources and reduce expenses. This function can collaborate with various departments (including the Chief Ethics Officer, if any) to implement effective cost-rationalization measures while maintaining financial stability and sustainability. Let us go through the role of the aforesaid function in organisational “minimalism”.8Core Controllership Pillars8Minimalism Principles12Operational DimensionsSDGsDual Monetary & Planet ValueCore Pillars of the Finance Control (FC) Function in Cost OptimizationCost optimization requires a multi-faceted controllership framework that balances tactical fiscal frugality with long-term operational resilience. The Finance Control function exercises this leadership through eight core disciplines:1. BudgetingThe FC function is responsible for creating and monitoring budgets and financial forecasts. By predicting revenue and expenses, this function can identify potential areas for cost saving and allocate resources more efficiently. Regularly comparing actual results to budgeted figures allows for adjustments and proactive cost management.2. Cost AnalysisThe FC function conducts detailed cost analysis to identify areas of inefficiency, duplication, and overspending. By analyzing expenses across different departments and projects, it pinpoints non-essential costs and areas where cost-cutting measures can be implemented without compromising productivity or quality.3. BenchmarkingEstablishing key performance indicators (KPIs) allows the FC function to monitor the financial health of the organisation continually. KPIs related to cost efficiency help track progress and identify areas for improvement. Comparing company performance to industry benchmarks reveals areas of overspending or competitive lag, providing insights into best practices.4. Process ImprovementThe FC function identifies and streamlines inefficient processes. By eliminating redundant or time-consuming tasks, the organisation can reduce operational costs while maintaining or enhancing overall productivity and output quality.5. Vendor ManagementManaging vendor relationships is another essential aspect of cost-cutting. The FC function negotiates better contracts, explores bulk purchasing opportunities, and rigorously assesses supplier performance to ensure the company gets the best value for its money.6. Capex ManagementThe FC function evaluates proposed capital expenditure to determine their potential return on investment (ROI) and align them with the company’s strategic goals. By prioritizing projects that offer significant value and growth potential, unnecessary spending on non-essential assets is prevented.7. Risk ManagementIncorporating risk management practices into frugality decisions is essential to avoid unintended consequences. The FC function assesses potential risks associated with cost minimization measures, ensuring that they do not compromise the organisational ability to operate efficiently or comply with regulatory mandates.8. Employee AwarenessThe FC function works with HR and departmental mentors to educate employees about the importance of cost consciousness. By raising awareness and encouraging active participation, the organisation fosters a culture of responsible spending and resource management.Organisational “Minimalism” and Sustainability: Rules of the RoadWhile expenses restructuring primarily focuses on financial efficiency and reducing costs, incorporating spiritualistic “minimalism” principles can foster a deeper understanding of the interconnectedness between business decisions and their impact on individuals, society, and the environment. Let’s explore how spirituality (aka “minimalism” and financial simplicity) can influence stakeholders in a positive and meaningful way:i. Mindful Decision-MakingSpirituality encourages individuals to cultivate mindfulness and awareness in their actions. In the context of the finance domain, this means taking a thoughtful and compassionate approach to financial decisions. Instead of merely slashing expenses without consideration, businesses evaluate broader consequences, seeking measures that align with their values and support stakeholder well-being.ii. Ethical Cost CuttingSpirituality emphasizes ethical conduct and moral values. Businesses embrace cost-cutting measures that uphold ethical standards, such as avoiding practices that exploit workers, harm the environment, or compromise product quality. Ethical cost-cutting ensures that financial efficiency does not come at the expense of integrity and social responsibility.iii. SustainabilitySpirituality emphasizes the interconnectedness of all living beings and the environment. By incorporating sustainability into cost-cutting strategies, businesses reduce their ecological footprint and promote responsible resource management. Activities like energy efficiency, waste reduction, and responsible procurement save money while contributing to a healthier planet.iv. Employee Well-BeingA spiritual approach recognizes the importance of caring for employee well-being. Instead of solely focusing on reducing labor costs, businesses consider innovative ways to support employees’ physical, emotional, and spiritual needs. Investing in wellness programs, work-life balance, and personal development leads to an engaged, motivated workforce.v. Long-Term PerspectiveSpirituality encourages looking beyond short-term gains to adopt a long-term perspective. In cost-cutting, this means making decisions that prioritize sustainable growth and viability. Investments in employee training, process improvement, and technological advancements lead to significant savings and increased efficiency over the long run.vi. Gratitude and AbundanceSpirituality fosters a sense of gratitude and recognition of abundance. Instead of focusing solely on cost-cutting out of fear or scarcity, businesses approach financial decisions with an attitude of abundance. This mindset leads to creative solutions that optimize resources and identify opportunities for growth and expansion.vii. Empathy and CompassionA spiritual perspective fosters empathy and compassion towards all stakeholders, including customers, employees, suppliers, and the community. In the context of cost-cutting, this means considering the potential impact of financial decisions on various groups and seeking ways to minimize negative consequences.viii. SimplicityA spiritual outlook is straightforward thought process, speech, and actions while abhorring unnecessary complexities. When applied to financial decisions, it implies focusing on the right business model to generate wealth instead of adopting roundabout ways to earn money out of a doomed business model.Table 1 of 1: Nuts & Bolts — User Manual to Facilitate the Larger PurposeThe following operational playbook outlines practical guidelines across twelve dimensions to implement organizational minimalism and sustainable cost optimization:#DimensionKey Insights & Practical Implementation Guidelines1ExpensesConduct a thorough analysis of all costs, categorize them into essential and non-essential expenditures, and identify areas with the potential for optimization. Focus on reducing unnecessary overheads, such as subscriptions to redundant services, unused office space, or outdated equipment.2TechnologyIncorporating technology can lead to significant cost savings and improve and speed up various aspects of an organization’s activities in various business functions. Automation can streamline repetitive tasks, increasing productivity. Cloud computing can eliminate the need for expensive hardware and software installations, reducing maintenance costs. Additionally, leveraging data analytics can provide valuable insights into customer behavior, enabling businesses to make more informed decisions and allocate resources more efficiently.3Lean ManagementAdopting lean management principles involves eliminating waste and inefficiency across all aspects of the business. Regularly assess workflow and identify bottlenecks that hinder productivity. By promoting a culture of continuous improvement, businesses can foster innovation and find more cost-effective ways to deliver their products or services.4Energy EfficiencyEnergy costs can constitute a substantial part of a company’s expenses. Implementing energy-saving practices can have a considerable impact on the bottom line. Simple steps, such as switching to energy-efficient lighting, investing in programmable thermostats, and powering down equipments during non-working hours, can lead to substantial savings over time.5StaffingHuman resources are a significant expense for any organisation. While it is essential to have a competent and motivated workforce, it’s equally vital to optimize staffing levels to match the current business demands. Explore flexible work arrangements to maintain a skilled workforce and to attract the right talent.6Outsourcing(For a Leaner Org)Outsourcing non-core activities can be a cost-effective strategy. Tasks like payroll, IT support, or customer service can be entrusted to specialized service providers, saving both time and money. Outsourcing allows the organisation to focus on its core competencies and strategic objectives while reducing the burden of fixed expenses.7Waste Reduction & RecyclingWaste reduction not only lowers waste disposal costs but also aligns with sustainable principles. Implementing recycling programs and encouraging responsible waste management practices can significantly reduce expenses while demonstrating a commitment to environmental stewardship.8Supply Chain OptimizationCollaborating with suppliers that adhere to sustainable practices and ethical standards can foster a more sustainable supply chain. Besides, optimising the supply chain is a strategy that can simultaneously enhance cost efficiency and sustainability. By sourcing materials locally, businesses can reduce transportation costs and support the local economy.9Sustainable ProcurementIntegrating sustainability into the procurement process can lead to long-term cost savings. Choosing products or services with eco-friendly credentials may have a higher upfront cost, but they often prove to be more durable and efficient, reducing maintenance and replacement expenses over time.10Green Building PracticesInvesting in energy-efficient buildings and utilizing natural lighting can lead to reduced utility bills while promoting a healthier and more productive work environment.11Employee EngagementEngaging employees in sustainability initiatives can foster a culture of responsible consumption and resource management. Employees can suggest innovative ideas for cost-cutting and sustainability, creating a sense of ownership and commitment to the company’s goals.12TaxesRespect the fine line between planning and evasion by building necessary safeguards and boundaries to remain on the right side of the law.Table 1 of 1: Nuts & bolts - User manual to facilitate the larger purpose; Source: Author’s FormulationStrategic Takeaways: The Fiduciary Calling of the Finance FunctionResponsible and enlightened businesses prioritize sustainable practices. By adopting sustainable practices, businesses can not only contribute to environmental and social well-being but also gain a competitive advantage in an increasingly eco-conscious market. By reducing environmental impacts, optimizing resources, removing unwarranted complexities, and embracing socially responsible practices, entities can create a positive impact on both their bottom line and the world they operate in. Simplicity drives businesses towards long-term success and a brighter, more sustainable future.An effective Finance function stewards organisations for long-term growth and meaningful success. The finance function ought to realize its destiny, its calling, and its fullest potential by being a revolutionary force kindling a fire healing the planet through:Conservation of resources & sustainable resource management;Facilitation of authentic social responsibility measures & support for non-profit initiatives;Boosting accessibility & affordability of products & services;Speeding innovation & efficiency across core operations;Creating inspiring role models for the corporate ecosystem.Most importantly, integrating spirituality into the levers of expenses maneuvering leads to a more conscious and values-driven approach to business practices along with a more holistic and responsible approach to financial management.
Financial Market
Ep. 515 — Asset Pricing Models to Predict Returns: A Comparative Study
CA Journal
· September 2026
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Asset Pricing Models to Predict Returns: A Comparative Study“The findings adequately evidence to draw the conclusion that the Fama-French Three-Factor Model (FFTFM) is more effective than CAPM in explaining stock return variations in the Indian market.”In this study, the applicability of the Capital Asset Pricing Model (CAPM) and the Fama and French Three-Factor Model (FFTFM) is examined and compared in the Indian context. The study is undertaken on the companies in the Nifty-100 index covering a period of twelve years (March 2011 to March 2023). The portfolios for explanatory variables are formed considering market capitalization and value. The findings adequately evidence to draw the conclusion that the FFTFM is more effective. The results of the GRS (Gibbons, Ross, and Shanken) test also supported the use of the FFTFM in explaining stock return variations.12 YrsHorizon (2011–2023)82Nifty-100 Universe Stocks94.2%Max FFTFM R² Explanatory Fit6.03GRS Statistic (vs 7.92 CAPM)IntroductionAsset pricing models specify how return and risk relate to one another. The first model to elucidate the risk-return association in the financial market was Modern Portfolio Theory (MPT). In 1952, Harry Markowitz proposed MPT in his seminal paper “Portfolio Selection”. According to MPT, investors who wish to minimize their risk create diversified portfolios to optimize their rewards.In the 1960s, a new model dubbed the Capital Asset Pricing Model (CAPM) was developed based on Markowitz’s MPT by William Sharpe (1964), John Lintner, and Jan Mossin autonomously. Although the CAPM is frequently used and well-known, it has received unsatisfactory results in earlier empirical studies like Basu (1977), Banz (1981), Rosenberg, Reid and Lanstein (1984), Bhandari (1988), and Fama and French (1993). This has driven many researchers to attempt and identify other factors ignored by the single-beta CAPM.Fama and French collaborated in 1992 and 1993 to test the single-factor model by adding market capitalization (size) and book-to-market equity (value) factors. Their findings led to the development of the Fama-French Three-Factor Model (FFTFM), a well-known alternative model to CAPM. Additionally, they argued that their three-factor model outperformed CAPM in accurately predicting stock and portfolio returns.Subsequent literature in India and globally has validated this multi-factor paradigm:Naughton and Veeraraghavan (2005) proved that the CAPM alone is inadequate to explain portfolio returns and concluded that the FFTFM is an appropriate model.Yash Pal Taneja (2010) found that the FFTFM is an effective predictor in the elucidation of asset returns in India.Sanjay Sehgal and A. Balakrishnan (2013) re-examined the efficacy of CAPM and FFTFM and found that FFTFM outperforms CAPM in explaining returns on most portfolios.Veysel Eraslan (2013) concluded that the FFTFM has limited ability on the Istanbul Stock Exchange.Nenavath Sreenu (2018) showed that FFTFM offers clearer elucidation for return disparities across NSE and BSE.Mobin Anwar and Sanjay Kumar (2018) revealed that while FFTFM did not adequately capture individual asset returns, it robustly explained portfolio returns sorted by size and value.Zankhana Atodaria (2020) and Debaditya Mohanti & Ravi Kumar Jain (2020) confirmed that market capitalization and value factors significantly influence returns, capturing systematic risk better than CAPM in the Indian market.Research MethodologyThe study relies on secondary data covering a period of twelve years, ranging from March 2011 to March 2023. Eighty-two companies listed in the S&P CNX Nifty-100 Index were selected. Required financial data was retrieved from annual reports, Yahoo Finance, Moneycontrol, and the Reserve Bank of India (RBI) Bulletin.Market Return ($R_m$): S&P CNX Nifty-100 Index returns are used as the proxy for market return.Risk-Free Rate ($R_f$): Return on 365-day Government of India Treasury Bills (from the RBI Bulletin) serves as the risk-free benchmark.Portfolio Formation: At the end of March each year ($t$), firms are univariate-sorted into five size-sorted portfolios ($P_1$ to $P_5$) and five book-to-market equity sorted portfolios ($P_1$ to $P_5$). For each portfolio, monthly average equally-weighted returns are computed.Joint Test of Intercepts: The GRS.test package in R is used to determine whether the models completely explain portfolio returns (testing the joint null hypothesis $H_0: \alpha_1 = \dots = \alpha_{10} = 0$).CAPM Model: $R_{it} - R_{ft} = \alpha_i + \beta_i (R_{mt} - R_{ft}) + \epsilon_{it}$Single-factor regression modeling excess portfolio return against market risk premium (EMR).FFTFM Model: $R_{it} - R_{ft} = \alpha_i + \beta_i (R_{mt} - R_{ft}) + s_i SMB_t + h_i HML_t + \epsilon_{it}$Three-factor regression modeling excess returns against market premium (EMR), size premium (SMB), and value premium (HML).Sl. No.FactorsMeasurement Formulation1Market Capitalization (MC)$MC = \text{Outstanding Equity Shares} \times \text{Market Value per Share}$2Book to Market Equity (BM)$BM = \frac{\text{Book Value of Equity}}{\text{Market Value of Equity}}$3Excess Return on Market (MF / EMR)$MF = \text{Return on Market} - \text{Risk-Free Rate}$Table 1: Measurement of Fama and French Three Factors; Source: Authors’ FormulationData Analysis: Descriptive StatisticsTable 2 presents descriptive statistics and correlations for the independent variables. The mean value is positive for the market premium at 0.587% per month, while the size ($SMB$) and value ($HML$) factors are negative (consistent with Taneja, 2010).A negative size premium ($-0.129\%$) indicates that large-cap stocks outperformed small-cap stocks within the Nifty-100 over this period.A negative value premium ($-1.184\%$) indicates that growth stocks yielded higher average returns than value stocks.The value factor ($HML$) exhibited the highest volatility with a standard deviation of 5.526%.The market factor ($EMR$) displays a leptokurtic distribution with kurtosis of 6.313 (> 3) and negative skewness ($-1.132$).Correlations between explanatory factors are low to moderate, ruling out multi-collinearity concerns.FactorMean (%)Std. Dev. (%)SkewnessKurtosisCorr (EMR)Corr (SMB)Corr (HML)EMR0.5874.761-1.1326.3131.000-0.1200.441SMB-0.1291.821-0.047-0.348-0.1201.0000.023HML-1.1845.5260.2100.2780.4410.0231.000Table 2: Descriptive Statistics and Correlation Matrix for Independent Variables; Source: Authors’ CalculationOLS Regression Estimates for CAPMTable 3 details the empirical estimation of the single-factor CAPM across size-sorted and book-to-market-sorted portfolios.PortfolioIntercept ($\alpha_i$)Market Factor (EMR Beta)$R^2$ (%)Adjusted $R^2$ (%)Part A: Size Sorted Portfolios$P_1$ (Small Size)0.007099 **0.836131 ***69.8%69.5%$P_2$0.006691 **0.998681 ***81.6%81.4%$P_3$0.004792 *1.089122 ***84.6%84.4%$P_4$0.004126 .1.081783 ***80.4%80.2%$P_5$ (Large Mega-Cap)0.006984 ***0.903765 ***91.2%91.1%Part B: Book-to-Market (BM) Sorted Portfolios$P_1$ (Growth)0.011440 ***0.668810 ***59.3%58.9%$P_2$0.012841 ***0.876988 ***72.7%72.5%$P_3$0.005909 ***0.912251 ***85.2%85.0%$P_4$0.0020001.153218 ***88.0%87.9%$P_5$ (Value)-0.0030001.311027 ***66.9%66.7%Table 3: OLS Regression Estimates for CAPM | GRS Statistic: 7.917444 | $p$-value: $1.816864 \times 10^{-9}$; Source: Authors’ CalculationOLS Regression Estimates for Fama-French Three-Factor ModelTable 4 summarizes the multi-factor regression estimates incorporating the $SMB$ and $HML$ factors.PortfolioIntercept ($\alpha_i$)EMR Beta ($\beta_i$)SMB Coeff ($s_i$)HML Coeff ($h_i$)$R^2$ (%)Adj. $R^2$ (%)Part A: Size Sorted Portfolios$P_1$ (Small Size)0.007700 ***0.870640 ***0.895730 ***0.01600080.8%80.3%$P_2$0.006636 ***1.048257 ***0.775555 ***-0.02200088.3%88.0%$P_3$0.006732 ***1.050597 ***0.454103 ***0.110491 **87.7%87.3%$P_4$0.008053 ***0.921540 ***-0.419197 ***0.256441 ***86.0%85.6%$P_5$ (Large Mega-Cap)0.004439 ***0.983196 ***-0.125547 *-0.156456 ***94.2%94.1%Part B: Book-to-Market (BM) Sorted Portfolios$P_1$ (Growth)0.005060 **0.913524 ***0.429531 ***-0.410163 ***83.1%82.6%$P_2$0.009202 ***1.013163 ***0.188000-0.232754 ***77.9%77.4%$P_3$0.004945 **0.966497 ***0.345384 ***-0.068903 *87.1%86.8%$P_4$0.005270 **1.069419 ***0.306742 **0.180401 ***91.2%91.0%$P_5$ (Value)0.009295 ***0.901057 ***0.328050 **0.779361 ***91.4%91.2%Table 4: OLS Regression Estimates for FFTFM | GRS Statistic: 6.025099 | $p$-value: $3.30128 \times 10^{-7}$; Source: Authors’ CalculationComparative Performance: Predicted Returns & Goodness of FitFrom the single-factor model to the three-factor model, the explanatory power ($R^2$) increased across all ten portfolios:In the size-sorted portfolios, $R^2$ rose to a peak of 94.2% for large-caps ($P_5$).In the value-sorted portfolios, growth portfolio ($P_1$) fit jumped dramatically from 59.3% under CAPM to 83.1% under FFTFM.The GRS test statistic decreased from 7.917 for CAPM to 6.025 for FFTFM, confirming that the three-factor model captures return variations with lower pricing errors.PortfolioSize Sorted PortfoliosValue (BM) Sorted PortfoliosActual Return ($R_i$)CAPM ($ER_i$)FFTFM ($ER_i$)Actual Return ($R_i$)CAPM ($ER_i$)FFTFM ($ER_i$)$P_1$1.0537851.2005251.1463591.3051171.5364441.471982$P_2$1.1060551.2551061.2049131.6484841.7986991.765930$P_3$1.0155281.1182751.1000791.0278091.1261911.098474$P_4$0.9205131.0473691.0967360.8501560.9038850.901242$P_5$1.1294851.2287111.2222870.3485870.4426840.493140Table 5: Predicted Monthly Excess Returns Using Asset Pricing Models; Source: Authors’ CalculationConclusionThis study examined and compared the applicability of the CAPM and FFTFM in the Indian stock market using 82 companies from the S&P CNX Nifty-100 index between March 2011 and March 2023. The estimated empirical results demonstrate that the Fama and French Three-Factor Model is superior in explaining variations in portfolio returns. FFTFM outperforms CAPM in terms of positivity and statistical significance of intercepts, reduction in pricing errors (lower GRS statistic), and overall goodness of fit ($R^2$).These findings match the empirical conclusions of Fama & French (1993), Naughton & Veeraraghavan (2005), Taneja (2010), Sehgal & Balakrishnan (2013), and Mohanti & Jain (2020), underscoring that institutional investors and Chartered Accountants must incorporate multi-factor modeling for portfolio management, hurdle rate estimation, and cost of capital determination.Select References & BibliographyAtodaria, Zankhana. (2020). Fama-French Three Factor Model in Indian Stock Market. Developing Strategies for Business of Tomorrow.Mohanti, Debaditya., & Jain, R.K. (2020). Effect of Size and Value in Three Factor Model: Evidence from Indian Equity Market. MDIM Business Review, 1(1), 46-53.Arora, Deeksha., & Gakhar, Divya Verma. (2019). Asset Pricing Models: A Study of CNX Nifty 500 Index Companies. Indian Journal of Finance, 13(4), 20–35.Sreenu, N. (2018). An Empirical Test of Capital Asset-pricing Model and Three-factor Model of Fama in Indian Stock Exchange. Management and Labour Studies, 43(4), 1–14.Anwar, M., & Kumar, S. (2018). Three-factor model of asset pricing: Empirical evidence from the Indian stock market. The IUP Journal of Applied Finance, 24(3), 16–34.Eraslan, V. (2013). Fama and French Three-Factor Model: Evidence from Istanbul Stock Exchange. Business and Economics Research Journal, 4(2), 11-22.Taneja, Y.P. (2010). Revisiting Fama French Three-Factor Model in Indian Stock Market. Vision: The Journal of Business Perspective, 14(4), 267-274.Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56.Sharpe, William F. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.Markowitz, Harry. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77-91.
Insolvency
Ep. 516 — Impact of Covid-19 on the Insolvency Law in India: Measures for Long-Term Development and a Way Forward
CA Journal
· September 2026
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Impact of Covid-19 on the Insolvency Law in India: Measures for Long-Term Development and a Way Forward “The measures undertaken to combat the Covid-19 pandemic have not only stabilized the insolvency landscape but also laid the groundwork for enduring, long-term improvements in India’s insolvency regime.”Covid-19 had significantly impacted the global economy, leading to immediate measures to protect companies and individuals from bankruptcy and insolvency. These include suspending debt repayment, sector-specific tolerance, imparting measures in the financial system, leniency in insolvency proceedings, and freedom from compliance with legal obligations. The Indian Government introduced changes in insolvency framework, and this paper discusses the immediate and long lasting reforms implemented in response to the pandemic and their impact on the overall performance of the Code.₹1 CroreCIRP Trigger Floor (Up from ₹1 Lakh)1 YearSection 10A Suspension Window64%> 270 Days Cases (Down from 79%)1,255FY23 Rebound CIRP AdmissionsIntroductionThe adoption of the new Insolvency bill, also known as the Insolvency and Bankruptcy Code 2016 (The Code) is seen, together with the Goods and Services Tax (GST) Act, as a significant economic reform. Prior to its introduction, the legal mechanism utilised to handle the repayment of loans was not that effective. Initiating recovery proceedings from debtors using existing frameworks didn’t achieve the intended outcomes. The largest credit market sector in India is the secured loan provided by banks.The Code attempts to encourage entrepreneurship and necessary access to finance, strives to achieve a time-bound process, balances the interests of all stakeholders, and raises the realizable value of the debtor’s assets. When a firm fails to meet its debt repayment commitments, the Code provides for strict timelines as the insolvency resolution process under the code is time-bound. If the insolvency resolution process fails, it leads to the liquidation process. It ensures that control transfers from the owners to the Credit Provider, or from a “debtor in control” model to a “creditor in possession / control” model.The Covid-19 pandemic caused economic downturns in India, causing widespread damage to businesses. Industrial activities halted, leading to significant losses and employee layoffs. The pandemic affected sectors like micro, small, and medium enterprises (MSMEs), healthcare, tourism, and automobiles. The virus disrupted contract performance, causing financial and operational problems for creditors. Stock values declined rapidly due to decreased global demand — with benchmark NIFTY indices plummeting by -25.94% (dropping from 10,451.45 to 8,083.80 between March 06, 2020 and April 03, 2020).Importance of Insolvency Law for Economy during the time of Covid-19A bankruptcy law’s crucial function is to lessen the harm brought on by financial problems, utilizing tools such as:Proclamation of a “Moratorium Period” under Section 14;A shift from the “debtor in possession” system to the “creditor in control” model;Valuing rescue financing and interim finance priority;Diminution of “ipso facto” contract termination clauses;Facilitating the orderly closure of unfeasible businesses while keeping economically feasible companies alive to preserve enterprise value.Overall, insolvency laws can be a very useful tool because, in addition to minimizing enterprise value demolition, they provide mechanisms to facilitate debt restructuring. Therefore, companies can get out of debt through a financial framework focused on cash flow generation.Immediate Measures Taken to Tackle the Covid-19 OutbreakIn the wake of the nationwide lockdown announced from March 25, 2020, the Indian Government and regulatory bodies implemented several decisive emergency measures:1. Suspension of Insolvency Proceedings (Section 10A)Section 10A was inserted into the IBC, suspending the filing of fresh applications under Sections 7, 9, and 10 (by financial creditors, operational creditors, and corporate debtors, respectively). Initially declared for six months from March 25, 2020, it was extended for another six months in two tranches of three months each (up to March 24, 2021). Furthermore, defaults occurring during this lockdown period were permanently excluded from the definition of default under the Code.2. Relaxation of Resolution Timelines by NCLATOn March 30, 2020, NCLAT issued a suo-moto order declaring that the lockdown period imposed by the Government would be excluded when calculating the statutory 180/270/330-day duration of the Corporate Insolvency Resolution Process (CIRP) under Section 12.3. Increase in Threshold for Triggering CIRPWith a notification dated March 24, 2020, the Central Government exercised powers under the proviso to Section 4 of the Code, raising the minimum default threshold for initiating CIRP from ₹1 Lakh to ₹1 Crore. This crucial step prevented viable MSMEs from being dragged into insolvency for small, temporary payment defaults.4. Supreme Court Extension of Limitation Period & RBI Debt MoratoriumThe Supreme Court excluded the entire period from March 15, 2020 to February 28, 2022 from the calculation of the limitation period for filing cases, suits, appeals, and applications. Concurrently, the RBI announced a 6-month debt repayment moratorium (March 1 to August 31, 2020), injected ₹3.7 Lakh Crore in liquidity, and released an out-of-court resolution framework on August 6, 2020 for COVID-impacted borrowers without requiring management change.Impact of Immediate Covid-19 Measures on the Insolvency LawWhile these interventions prevented mass corporate closures, they created an immediate statistical contraction in formal CIRP proceedings across the country:ParticularsFY 2018–19FY 2019–20FY 2020–21CIRP Admitted1,1181,883499CIRP Approved (Resolution Plan)74120108Appeal / Review / Settled6710454CIRP Withdrawn u/s 12A9170113Liquidation Orders287518339Table 1: CIRP Admitted, Approved, Withdrawn, and Liquidated (FY 2018-19 to FY 2020-21); Source: IBBI Newsletters Q4 DataSignificant Rise in Resolution Period of Ongoing CIRPsAlthough the average resolution period under the IBC framework was 394 days (compared to 4+ years under legacy regimes), tribunal closures and lockdowns caused severe aging in pending cases. The proportion of ongoing cases pending for more than 270 days leaped from 32% in March 2019 to 79% in March 2021.Days Ageing BasketAs on 31 Mar 2019As on 31 Mar 2020As on 31 Mar 2021No. of Cases% of OngoingNo. of Cases% of OngoingNo. of Cases% of Ongoing> 270 Days36232%73834%1,36179%> 180 Days < 270 Days18616%49423%694%> 90 Days < 180 Days24722%56126%865%< 90 Days34830%37717%20712%Total Ongoing CIRPs1,143100%2,170100%1,723100%Status and Ageing of Ongoing CIRPs (As on March 31, 2019, 2020, and 2021); Source: IBBI Quarterly NewslettersBringing a More Debtor-Friendly Framework: Introduction of Pre-PacksRecognizing the need for a non-adversarial, cost-effective mechanism, the Government established the Insolvency Law Committee (ILC) Sub-committee on June 24, 2020 to design a pre-packaging procedure within the Code. Enacted as Chapter III-A (Pre-Packaged Insolvency Resolution Process - PPIRP) for MSME corporate debtors, Pre-Packs introduce a balanced hybrid governance model:Standard CIRP"Creditor in Control" model.Management of the Corporate Debtor is transferred to the Insolvency Professional (RP).Statutory timeframe of 180 to 330 days.High public advertisement, litigation, and administrative costs.Potential loss of operational momentum, customer trust, and enterprise goodwill.Pre-Packaged Insolvency (PPIRP)"Debtor in Possession with Creditor Control" model.Existing promoters continue day-to-day operations under oversight of Resolution Professional.Strict 120-day timeframe (90 days for filing with NCLT + 30 days for approval).Promoter submits Base Resolution Plan upfront, subject to a Swiss Challenge if creditors are impaired.Significantly lower costs, less stigma, and zero operational disruption.Enduring Reforms: Long-Term Efficiency ReboundFollowing the expiration of Section 10A suspensions and the implementation of structural enhancements, the Code experienced a remarkable revival:CIRP Admissions Rebound: Annual admissions rose sharply from 499 in FY 2020–21 to 834 in FY 2021–22, reaching 1,255 in FY 2022–23.Resolution Plans Approved: Approved turnaround plans surged from 108 in FY 2020–21 to 180 in FY 2022–23.Resolution Ageing Reduction: Cases pending for over 270 days dropped from a peak of 79% in March 2021 down to 66% in March 2022 and 64% by March 2023.Swift Resolutions: Cases resolved within 90 days increased from 12% in March 2021 to 15% in March 2023.ParticularsFY 2020–21FY 2021–22FY 2022–23CIRP Admitted4998341,255CIRP Approved108125180CIRP Withdrawn113112195Liquidation339319400Post-Developments Status of CIRPs (FY 2020-21 to FY 2022-23); Source: IBBI Newsletters Q4 DataFuture Proposed Developments & ConclusionOn January 18, 2023, the Ministry of Corporate Affairs (MCA) released a comprehensive consultation paper proposing further structural upgrades to the Code:Broadening Pre-Packs: Expanding PPIRP beyond MSMEs to all corporate debtors with consensual creditor support;Real Estate Project-Wise Insolvency: Limiting CIRP strictly to defaulted real estate projects to protect solvent sites and home buyers;Digital e-Court Platform: Developing an integrated electronic workflow system with minimal human interface to fast-track tribunal proceedings.As highlighted by the Reserve Bank of India’s Trend and Progress of Banking in India Report, resolutions under the IBC accounted for more than half of the total stressed assets recovered across the banking system in 2018–19. The Economic Survey for 2022–23 similarly noted that “structural reforms like the Insolvency and Bankruptcy Code enhanced the efficiency and transparency of the economy and ensured financial discipline and better compliance.”In conclusion, the Indian insolvency framework demonstrated exceptional resilience and adaptability during the pandemic. The pragmatic blend of emergency suspensions, threshold rationalization, and innovative Pre-Pack mechanisms successfully insulated viable enterprises while cementing the IBC’s standing as the premier debt resolution engine in India.Select References & Statutory SourcesInsolvency and Bankruptcy Code, 2016 (Pub. L. No. 31 of 2016).Ministry of Corporate Affairs (MCA), Invitation of comments from the public on changes being considered to the Insolvency and Bankruptcy Code, 2016 (January 18, 2023).Bankruptcy Law Reforms Committee (BLRC), Report of the Bankruptcy Law Reforms Committee, Vol. 1: Rationale and Design (November 2015).Insolvency and Bankruptcy Board of India (IBBI), Quarterly Newsletters (Jan-Mar 2018 through Jan-Mar 2023).Sub-committee of the Insolvency Law Committee, Report on Pre-packaged Insolvency Resolution Process (October 2020).Reserve Bank of India, COVID-19 Regulatory Package (RBI/2019-20/186) & Resolution Framework for COVID-19-Related Stress (RBI/2020-21/16).NCLAT Principal Bench, Suo-Moto Order dated 30.03.2020 (Exclusion of Lockdown Period).Ministry of Finance, Economic Survey 2020-21 and 2022-23, Government of India.
Accounting Standards
Ep. 517 — Cluster Analysis Approach to Measure Awareness of Hedge Accounting and the Significance of IFRS-9
CA Journal
· September 2026
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Cluster Analysis Approach to Measure Awareness of Hedge Accounting and the Significance of IFRS-9“Hedge accounting rules of IFRS ensure that earnings and expenses regarding hedging relationships are accounted for simultaneously, offering a more accurate reflection of the hedging relationship’s true economic reality.”Managing an entity’s risk management is a challenge for corporates. The objective of hedge accounting is to represent the awareness of hedge accounting. The purpose of the paper is to identify the effectiveness of IFRS 9 to meet the objective of reducing entrepreneurs’ risk management with less complexity. The aim of this review is to highlight the importance of hedge accounting and the significance of IFRS 9 in financial reporting.A questionnaire based on Likert’s Five-Point scale was applied to analyse the results with 252 completed responses. Descriptive statistics have been used for demographical and physiographical report presentations. For testing the hypotheses, the Chi-Square test, Phi test, Fisher's Exact test, One-Way ANOVA, and K-Means cluster techniques have been applied. It is found that there is a strong relationship between the nature of work and the experience of all the respondents of all three clusters. Also, a significant association between awareness of hedge accounting and perception towards the need to change in IFRS 9 among all three clusters has been empirically verified.252Valid Analyzed Responses3Identified K-Means Clustersp = 0.000Chi-Square Significance0.620Peak Cluster Phi StatisticIntroductionAn accounting practice known as “hedge accounting” is used to lessen the volatility of financial statements brought on by changes in the fair value of financial instruments used to manage risks. In order to provide a more accurate portrayal of an entity’s financial condition, hedge accounting aims to match changes in the value of the hedging instrument with changes in the value of the hedged item.Hedge accounting rules of IFRS ensure that earnings and expenses regarding hedging relationships are accounted for simultaneously. It offers a more accurate reflection of the hedging relationship's economic reality. Even if the accounting approach of a hedging relationship does not correspond to the legal form of the relationship, the goal of hedge accounting is to recognize the economic implications of the relationship.Accounting for hedges is optional. Yet, once an entity uses hedge accounting for a relationship, it is impossible to deliberately stop using it unless the particular hedge’s risk management goal is no longer legitimate or relevant. Protecting profit from unintended volatility in the profit or loss account is the primary operational objective.Hedge Accounting and IFRS 9Understanding hedge accounting and IFRS 9 requires specialized expertise in financial engineering. By balancing gains and losses in the value of assets or liabilities with comparable gains and losses in hedging derivatives, hedge accounting enables businesses to manage interest rate, currency, and commodity price risks.In IFRS 9 Financial Instruments, the International Accounting Standards Board (IASB) replaced the legacy, rule-heavy provisions of IAS 39. IFRS 9 establishes more principles-based guidance for classifying, valuing, and disclosing financial instruments, aligning accounting treatment directly with corporate risk management strategies.Review of LiteratureAbdullah & Ismail (2017): Surveyed 100 Malaysian investors; found that only 33% understood hedge accounting and its financial statement impact, and only 36% were aware of IFRS 9 modifications.Sticca & Nakao (2019): Investigated 379 Brazilian listed firms (2010–2017); demonstrated that high currency risk exposure and options to defer taxes on exchange earnings drove hedge accounting adoption.Potin, Bortolon, & Neto (2016): Analyzed the Brazilian market, demonstrating that hedge accounting significantly improved the quality of accounting information and lowered information asymmetry.Dinh & Seitz (2020): Investigated European banks (2005–2014); proved that hedge accounting disclosures have greater value relevance to capital markets than "as-if" unhedged metrics.Ranasinghe, Sivaramakrishnan, & Yi (2022): Examined SFAS 133/ASC 815, showing that derivative accounting complexity continues to challenge even seasoned financial statement users.Bullen & Crocker (2019): Surveyed UK finance professionals; revealed that while 60% were aware of hedge accounting, only 35% had implemented it in their organizations, citing a training gap.Research Methodology & HypothesesQuestionnaires were administered to 510 respondents, yielding 252 fully completed, valid responses. Likert’s Five-Point scale was utilized. Descriptive statistics were employed for demographic and physiographical analysis, while One-Way ANOVA, Chi-Square, Fisher’s Exact test, Phi symmetric measures, and K-Means cluster analysis were conducted using SPSS 21.Formulated Null Hypotheses:$H_{01}$: There is no significant association between the nature of working and the experience of all the respondents.$H_{02}$: There is no significant association between awareness and hedge accounting, and the perception towards the need to change in IFRS 9 among all the three clusters.$H_{03}$: There is no significant association between the nature of working and experience among the respondents of all the three clusters.Demographic Structure & Testing of $H_{01}$Out of the 252 respondents, 78.2% (197) were academicians and 21.8% (55) were corporate/accounting professionals. In terms of professional tenure, 76.2% (192) possessed 5–10 years of experience, 16.3% (41) had 10–15 years, and 7.5% (19) possessed 15–20 years.Variable CategoryClassificationFrequency ($N$)Percent (%)Valid Percent (%)Cumulative %Nature of WorkingAcademicians19778.2%78.2%78.2%Professionals5521.8%21.8%100.0%Professional Experience5–10 Years19276.2%76.2%76.2%10–15 Years4116.3%16.3%92.5%15–20 Years197.5%7.5%100.0%TotalValid Sample252100.0%100.0%—Tables 1 & 2: Distribution of Nature of Working and Professional Experience ($N=252$)Statistical MetricValueDegrees of Freedom ($df$)Asymptotic Significance (2-sided)Pearson Chi-Square69.8632.000Likelihood Ratio61.5622.000Linear-by-Linear Association48.7671.000Number of Valid Cases252——Table 3: Chi-Square Test Results for $H_{01}$ | Decision: Null Hypothesis $H_{01}$ Rejected ($p < 0.05$)K-Means Cluster Analysis & Final Cluster CentersHierarchical cluster analysis using a dendrogram confirmed that the sample cleanly segments into three distinct clusters based on awareness and perceptions of IFRS 9:Cluster 1: Low AwarenessSample Size: $N = 31$ (12.3%)Characterized by low mean agreement scores (~2.00 to 2.39). Contains the highest relative proportion of corporate professionals (32.3%) who remain skeptical or unexposed to IFRS 9 hedge accounting mechanisms.Cluster 2: Moderate AwarenessSample Size: $N = 101$ (40.1%)Exhibits moderate agreement scores (~3.28 to 3.59). Comprises mid-career respondents with balanced academic and professional backgrounds seeking clearer standard guidance.Cluster 3: High AwarenessSample Size: $N = 120$ (47.6%)Displays strong agreement scores (~4.13 to 4.43). Heavily represented by academicians (81.7%) who champion IFRS 9's role in risk mitigation and financial statement transparency.Physiographical & Demographical VariablesFinal Cluster Centers (Mean Likert Score)Cluster 1 ($N=31$)Cluster 2 ($N=101$)Cluster 3 ($N=120$)Physiographical Survey Questions (1 to 5 Scale)The fund seeks to hedge investor’s capital against market volatility by employing alternative investment approaches2.063.514.42Hedge accounting assesses the amounts, timing, and uncertainty of future cash flows2.233.284.13Do you feel that the companies’ hedging activities are effective in risk management2.003.594.38There is a requirement for change in IFRS 9 in regard to hedging accounting2.393.394.33New adoption will change the way it accounts for financial assets and financial liabilities under IFRS 92.293.494.43Demographical Variables (%)Experience: 5–10 Years77.4%75.2%76.7%Experience: 10–15 Years19.4%13.9%17.5%Experience: 15–20 Years3.2%10.9%5.8%Nature: Academicians67.7%77.2%81.7%Nature: Professionals32.3%22.8%18.3%Table 4: Descriptive Statistics of Physiographical and Demographical Clustered Variables; Source: Authors’ CalculationTesting of Hypotheses $H_{02}$ and $H_{03}$Due to sparse cell counts in cross-tabulations violating standard asymptotic chi-square assumptions, Fisher’s Exact Test was applied for testing $H_{02}$, and the Phi ($\phi$) Symmetric Test was utilized for testing $H_{03}$.Cluster CaseStatistical MetricAwareness towards Hedge AccountingOpinion for Significance of IFRS 9Cluster 1 ($N=31$)Chi-Square11.67726.677$df$23Asymp. Sig..003.000Exact Sig..003.000Point Probability.001.000Cluster 2 ($N=101$)Chi-Square50.45598.010$df$23Asymp. Sig..000.000Exact Sig..000.000Point Probability.000.000Cluster 3 ($N=120$)Chi-Square19.20069.050$df$12Asymp. Sig..000.000Exact Sig..000.000Point Probability.000.000Table 5: Test Statistics of Fisher’s Exact Test for $H_{02}$ | Decision: Null Hypothesis $H_{02}$ Rejected ($p < 0.05$)Cluster SegmentNominal Association TestCoefficient ValueApproximate Significance ($p$-value)Valid Cases ($N$)Cluster 1Phi ($\phi$).620.00331Cramer’s V.620.00331Cluster 2Phi ($\phi$).468.000101Cramer’s V.468.000101Cluster 3Phi ($\phi$).563.000120Cramer’s V.563.000120Table 6: Symmetric Measures (Phi and Cramer's V Test) for $H_{03}$ | Decision: Null Hypothesis $H_{03}$ Rejected ($p < 0.05$)Conclusion & Strategic ImplicationsHedge accounting is a valuable tool for entities exposed to financial market risks, such as fluctuations in interest rates, foreign exchange rates, or commodity prices. By utilizing hedge accounting under IFRS 9 / Ind AS 109, entities can reduce unnecessary financial statement volatility, achieve accurate portrayal of their true financial position, and manage enterprise risks more effectively.This paper successfully categorized 252 respondents into three distinct clusters: Highly Aware, Moderately Aware, and Unaware. The statistical findings confirm:A strong relationship exists between the nature of working (academician vs. professional) and experience ($p = 0.000$);A highly significant association exists between hedge accounting awareness and positive opinion towards IFRS 9 across all three clusters ($p < 0.05$);The Phi test confirms a robust association between occupation and professional tenure within each cluster ($\phi = 0.468 \text{ to } 0.620$).To bridge the gap between academic understanding and corporate practice, standard setters and professional bodies like ICAI must prioritize targeted practitioner training workshops, enabling CFOs and Chartered Accountants to fully leverage the flexibility of IFRS 9.Select References & BibliographyAbdullah, Azrul, and Ku Nor Izah Ku Ismail. 2017. “Company-Specific Characteristics and the Choice of Hedge Accounting for Derivatives Reporting: Malaysian Case.” International Journal of Accounting, Auditing and Performance Evaluation 13(3).Bernhardt, Thomas, Daniel Erlinger, and Lukas Unterrainer. 2016. “IFRS 9: The New Rules for Hedge Accounting from the Risk Management’s Perspective.” ACRN Oxford Journal of Finance and Risk Perspectives 5(3).Bullen, P., and Crocker, R. 2019. “Hedge Accounting Awareness among UK Finance Professionals.” Accounting & Finance Review.Dinh, Tami, and Barbara Seitz. 2020. “The Information Content of Hedge Accounting—Evidence from the European Banking Industry.” Journal of International Accounting Research 19(2).Potin, Silas Adolfo, Patrícia Maria Bortolon, and Alfredo Sarlo Neto. 2016. “Hedge Accounting in the Brazilian Stock Market: Effects on the Quality of Accounting Information, Disclosure, and Information Asymmetry.” Revista Contabilidade & Finanças 27(71).Ranasinghe, Tharindra, Konduru Sivaramakrishnan, and Lin Yi. 2022. “Hedging, Hedge Accounting, and Earnings Predictability.” Review of Accounting Studies 27(1).Sticca, Ralph Melles, and Silvio Hiroshi Nakao. 2019. “Hedge Accounting Choice as Exchange Loss Avoidance under Financial Crisis: Evidence from Brazil.” Emerging Markets Review 41.
CBAM, Carbon Border Adjustment Mechanism, EU ETS, Carbon Tax, Fit for 55, Iron and Steel, Aluminium, Cement, Fertilizers, Scope 1 Emissions, Scope 2 and 3, FIEO, Carbon Leakage, Indian Exports, Green Deal
Ep. 528 — EU Carbon Tax and its Impact on the Indian Industry
Code of Ethics, Ethics 2026, Professional Integrity, Public Trust, ICAI Ethics, ESB, Independence Standards, NOCLAR, Chartered Accountants, ICAI Journal
Ep. 529 — Ethics and Integrity: The Foundation of Public Trust and Professional Excellence
CA Journal
· October 2026
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Ethics and Integrity: The Foundation of Public Trust and Professional ExcellenceA Chartered Accountant is entrusted with responsibilities that extend far beyond numbers. Businesses rely on audited financial statements to raise capital, governments depend on tax compliance to support public welfare, and investors make informed decisions based on reliable financial information. At the heart of this trust lies the ethical conduct of the professional that certifies, assures, and advises. By upholding the highest standards of ethics, Chartered Accountants reinforce confidence in the financial system and contribute meaningfully to its strength and stability.Ancient Wisdom—Enduring TrustThere is an ancient Sanskrit shloka that the Institute of Chartered Accountants of India has chosen to open its Code of Ethics, 2026 with:"धर्मो रक्षति रक्षितः"meaning, "Dharma protected, protects. Therefore, let us not violate Dharma."As our profession continues to embrace new opportunities and adapt to a rapidly changing world, ethics remain its enduring foundation. This timeless shloka reminds us that ethical values are not merely principles to be observed, they are the very strength that sustains our integrity, inspires public confidence, and upholds the honour of the Chartered Accountancy profession for generations to come.The Institute of Chartered Accountants of India (ICAI) has continuously strengthened its ethical framework since publishing its first Code of Ethics in 1963. Effective from April 1, 2026, the 13th Edition of the Code of Ethics marks a significant milestone, reflecting contemporary professional requirements while reinforcing the enduring values that define the Chartered Accountancy profession.Integrity as the Anchor: The Principles That Never Go Out of StyleFor a Chartered Accountant, the most valuable professional asset is not merely technical expertise, it is the trust earned through integrity and ethical conduct. Knowledge and skill build competence, but it is a reputation for trustworthiness that truly defines a professional over a lifetime.The Code of Ethics reinforces this through five fundamental principles that continue to anchor every Chartered Accountant's conduct:Integrity: being straightforward and honest in all professional and business relationships.Objectivity: exercising professional or business judgement free from bias, conflict of interest, or undue influence, whether from individuals, organisations or technology.Professional Competence and Due Care: attaining and maintaining the knowledge and skill needed to serve clients and employers competently and acting diligently.Confidentiality: respecting the confidentiality of information gained through professional and business relationships.Professional Behaviour: complying with relevant laws and regulations and upholding the standing of the profession.Integrity has always meant being straightforward and honest, but the revised Code goes a step further by giving honesty its own dedicated place within this principle. It is a small addition with a large implication: a Chartered Accountant shall comply with the principle of honesty, which requires being honest and upright not only in professional dealings but as a citizen, and in one's personal affairs as well. The revised Code also draws on the ideal of Satyameva Jayate (सत्यमेव जयते) i.e., "Truth alone triumphs," a phrase drawn from the Mundaka Upanishad and adopted as the national motto of India, asking every Chartered Accountant to imbibe it as a guiding principle.The Code of Ethics, 2026The Code of Ethics, 2026 marks a significant step forward in reinforcing ethical standards within the accountancy profession. Effective from 1 April 2026, the Code has been published in three volumes:Volume I comprises the relevant provisions of the Chartered Accountants Act, 1949, the Chartered Accountants Regulations, Council Guidelines, and Council Decisions.Volume II converges with the 2024 edition of the IESBA Code of Ethics.Volume III incorporates the Ethics Standards for Sustainability Assurance, including the Independence Standards, underscoring the profession's expanding responsibility in the sustainability assurance domain.Significant Changes in Code of Ethics, 2026Widening the Scope of ServiceThe revised Code expands the services Chartered Accountants are recognised to offer. Under Section 2(2)(iv) of the Chartered Accountants Act, 1949, the list of recognised Management Consultancy and Other Services has grown from 28 to 32, now including Forensic Accounting and Investigation, work as a Research Analyst recognised by a regulator, the assessment and evaluation of Social Impact, CSR Impact, and Business Responsibility and Sustainability Reporting, and notably, Artificial Intelligence Consultancy in areas that a Chartered Accountant in practice may render. 'Management and operational audits' have also been expanded to include Information System Audit.Advertisement, Website, Branding & Visibility RelaxationsBeyond its revised structure, a notable area of reform relates to the Advertisement and Website Guidelines, recognising the increasing role of digital communication in professional practice.Guidelines on Ethical Issues, 2026Even as it opens new doors, the revised Code strengthens the safeguards that protect public interest, ensuring that excellence and accountability grow together. The Council General Guidelines, 2008 have been comprehensively revised and renamed the Guidelines on Ethical Issues, 2026. Among the most practical of these is a new chapter addressing the timely payment of audit fees in continuing audit engagements, reinforcing fairness in the professional relationship. A member in practice shall not sign the audit report of a Public Interest Entity (PIE) if the undisputed audit fees for the previous year remain unpaid; for non-PIE, the same principle applies where undisputed fees for two consecutive previous years remains unpaid.The Code has also refreshed some of its numerical thresholds:Indebtedness Limit: From 1 Lakh → 5 Lakh for accepting an audit assignment with the added explanation that "auditor" for this purpose does not include an internal auditor, concurrent auditor, or reporting to management.Ceiling on Company Audits: From 30 → 40 for Company Audits excluding One Person Companies and Dormant Companies.Comparative Summary of Changes (12th Edition vs. 13th Edition)ParticularsEarlier Code (12th edition)Revised Code (13th edition)Definition of 'Write-up'Contemporary forms & directories not includedInclusion of contemporary forms & directoriesMembership No./ FRNMandatory mention of Membership number/FRNRemoval of mandatory mention of Membership No./ FRNParticulars of the firmProvide only those particulars of the firm that are expressly mentioned in the guidelinesMore flexibility of contents by allowing the inclusion of additional information by membersMention of client assignments in write-upNo mention of names of clients and nature of assignmentsFor Non-Exclusive Services: Names of clients and nature of assignments may be mentioned, subject to permission of Client.For Exclusive Services: Only client names may be mentioned subject to permission.Event photographsNot allowedEvent photographs allowed on social media with safeguardsEducation videosNo mention of firm nameIn addition to videos, audios and podcasts are also permitted. Further, mentioning the name of the firm, wherein the member is a partner/proprietor is allowedCredits of firm namesAllowed only in television or movie creditsFirm name allowed in credits beyond TV & MoviesWebsites for networksNo provision in the earlier Code for developing website of networksNetworks registered with ICAI permitted to develop and maintain their own websites, subject to the website guidelines of firms and networkWebsite Technology"Pull technology"— wherein information about services is made available on the website but can be accessed only when a person specifically searches for or requests such information through a "pull" action.Used for Information like Area of Experience and Number of Article AssistantPermitted "Push technology" for non-exclusive services while exclusive services must continue to follow the "pull" model.Permitted "Push Technology" for Information like Area of Experience and Number of Article AssistantMention of client assignments on websiteNot allowedFor Non-Exclusive Services: Names of clients and nature of assignments may be mentioned, subject to permission.For Exclusive Services: Only client names may be mentioned subject to permissionPhoto gallery on websitePassport style photographs onlyPhoto gallery of persons associated with the firm and photo gallery of professional event(s) organized by the firm or any professional event(s) where lectures are delivered by the partners/proprietor of the firm are permittedAggregators PlatformsProhibition for listing on online application-based service provider aggregatorsPermitted Listing with online service aggregators for non-exclusive services.Listing on Government/Regulator portals allowed (e.g., GeM) for both exclusive and non-exclusive servicesThe Guidelines for Practice in Corporate Form have also been widened to include forensic accounting, administrative services, research analysis, social impact and CSR impact assessment, Business Responsibility and Sustainability Reporting, and artificial intelligence services rendered through a company, keeping this route to practice aligned with the profession's expanding scope of work.In step with the Government of India's push toward a digital economy, the Council has recommended that members and firms accept audit fees only through digital modes or banking channels—a small procedural step with an outsized benefit: greater transparency in every professional transaction, recorded and traceable by design.Strengthening Independence ProvisionsThe independence framework, too, has been strengthened, further anchoring public trust.NOCLAR Applicability: The provisions on Responding to Non-Compliance with Laws and Regulations (NOCLAR) now extend to all listed entities and their material subsidiaries[cite: 16, 17].Expanded Definition of Public Interest Entities (PIEs): The definition of a Public Interest Entity has been broadened to include entities whose primary function is accepting public deposits.To further reinforce auditor independence, the revised provisions restrict auditors from providing certain non-audit services to Public Interest Entity audit clients where such services may create a self-review threat. The Code also provides additional guidance on advisory services, clarifying that firms may provide only those services that do not impair their independence.Taken together with the introduction of Ethics Standards for Sustainability Assurance, converged with the corresponding International Standards issued by the IESBA, these changes show a profession thinking ahead with clarity and purpose.Collectively, these changes demonstrate that the Revised Code of Ethics, 2026 is not merely an update of existing provisions but a comprehensive modernisation of the ethical framework governing the profession. By balancing technological advancements, professional practices and international developments with the profession's enduring ethical values, the Code of Ethics equips Chartered Accountants to discharge their responsibilities with greater confidence while continuing to uphold the public interest.The Ethical Standards BoardCode of Ethics is only the first step; its true effectiveness lies in ensuring that its principles are understood, applied and embedded in everyday professional practice. In this endeavour, the Ethical Standards Board (ESB) plays a pivotal role by promoting ethical awareness, providing timely guidance and supporting members in addressing ethical issues with confidence and clarity.This year carries special significance for the Board. Constituted in 1976, the Ethical Standards Board is celebrating its 50th year of excellence in 2026 - five decades of steadfastly upholding the ethical foundations of the Chartered Accountancy profession. It is a fitting coincidence that this golden jubilee year coincides with the release of the 13th Edition of the Code of Ethics, marking a moment where the Board's long legacy and its forward-looking vision meet.Since the Revised Code of Ethics came into effect on 1 April 2026, the Board has undertaken several initiatives to facilitate its effective implementation. Notably, the Board had responded to various ethical queries from members reflecting both the practical significance of the revised provisions and the profession's active engagement with ethical issues.Website of Ethical Standards Board: To strengthen awareness and provide members with easy access to ethical guidance, the Board has developed a dedicated ethics website (https://ethics.icai.org/) with enhanced features. The portal serves as a comprehensive repository of ethical resources, including guidance on the Code of Ethics, summaries of disciplinary cases and an 'Ethics Quiz' designed to promote awareness, encourage continuous learning and recognise members for their participation."Ethics Echo" An AI assistant Chatbot: To provide members with quick and convenient access to guidance on ethical matters, the Ethical Standards Board has developed and launched "Ethics Echo", an interactive AI chatbot on the Code of Ethics. The chatbot enables members to obtain prompt responses to their queries relating to the Code of Ethics and other ethical issues, offering a simple, accessible and user-friendly platform for ethical guidance.Case Laws Referencer: Another significant initiative is the publication of the "Case Laws Referencer (2019-2026) First and Second Schedule to the Chartered Accountants Act, 1949", which compiles decided and published cases of the Board of Discipline and the Disciplinary Committee for the period 2019-2026. The publication serves as a valuable reference for members by providing practical insights into disciplinary cases and their ethical implications.Compilation of FAQs on Code of Ethics, 2026: To provide practical guidance on the revised Code of Ethics, the booklet on Compilation of FAQs on Code of Ethics, 2026 has been issued[cite: 17, 18]. The objective of this publication is to provide practical guidance and enhance members' understanding of the revised Code through clear and concise responses to commonly raised ethical issues.Conversation series on Dharma of the Profession: Recognising the importance of making ethical principles more relatable and accessible, the Board has also initiated a unique series titled "Dharma of the Profession", presented as conversations between Lord Krishna and Arjuna. The series seeks to simplify ethical concepts and enhance members' understanding of the provisions of the Code of Ethics through practical discussions on ethical dilemmas encountered in professional practice. Ten parts of the series have already been published, which will continue to be published in the future.The Board has also been organising awareness programmes across the country to make the members aware of the provisions of the Revised Code of Ethics.Faculty Development Programme: The Board organised a Faculty Development Programme on the Code of Ethics, 2026 in June 2026. The programme featured a series of technical sessions including participant presentations and mock disciplinary proceedings, which provided valuable practical insights into professional and ethical standards.Collectively, these initiatives demonstrate that ethical standards are most effective when they are understood, discussed and consistently applied in professional practice. Through guidance, education and continuous engagement, the Ethical Standards Board seeks to foster a culture in which ethical conduct becomes an integral part of every professional decision.Building upon these initiatives, the Ethical Standards Board has articulated a forward-looking vision to further strengthen the Ethics of the profession. The Board proposes to periodically review and update the Code of Ethics in line with international developments and emerging professional requirements while continuing knowledge upgradation initiatives through seminars, webinars, webcasts and specialised programmes on professional ethics. The Board will also commemorate Global Ethics Day through a series of awareness initiatives aimed at reinforcing ethical values and fostering a culture of integrity among members and stakeholders.ConclusionThe Chartered Accountancy profession has been built on the quiet, consistent and often unrecognised efforts of professionals who chose, day after day, to place accuracy above convenience, truth above comfort and public interest above personal gain. The 13th Edition of the Code of Ethics reflects ICAI's commitment to ensuring that this tradition not only continues but becomes even stronger in the years ahead.Trust is not bestowed automatically; it is earned through transparent conduct, sound judgement and honest communication. Integrity is not something that is merely spoken about; it is reflected in everyday actions, in the choices made when faced with difficult situations, and in the commitment to do what is right even when it is not the easiest course.The values of ethics and integrity have always been at the heart of the profession. While the nature of professional work may change and new opportunities may emerge, these values remain constant. Technical knowledge and professional expertise are essential, but it is ethical conduct that sustains the respect and confidence that the profession has earned over generations.In this journey, the Ethical Standards Board continues to play a significant role by assisting members through its guidance, publications, educational initiatives and outreach programmes. The Board provides members with the clarity and support needed to address ethical matters with confidence.As the Board completes fifty years, its efforts continue to reinforce a simple but enduring message: when ethics remains central to professional conduct, trust follows naturally, strengthening both the profession and the confidence society places in it.❖ ❖ ❖Authors may be reached at eboard@icai.inwww.icai.org October 2026 | Page 32 (492)
Professional Ethics, Ethical Judgement, Artificial Intelligence, Code of Ethics, ICAI Journal, Core Values, Compliance
Ep. 530 — Values Codified: From Rules to Ethical Judgement in a Changing Profession
CA Journal
· September 2026
00:00
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Values Codified: From Rules to Ethical Judgement in a Changing ProfessionIntroductionThe strength of the Chartered Accountancy profession rests fundamentally on trust. That trust is not created merely by statutes, regulations, standards or a Code of Ethics, but is earned, sustained and strengthened through the conduct, judgement and professional responsibility of individual Chartered Accountants. The transition from values to rules should therefore not be misunderstood as a dilution of compliance or a departure from established professional requirements. On the contrary, it represents a higher and more mature understanding of compliance—one in which rules are respected not merely because they prescribe a particular course of action, but because they embody values intended to protect the integrity of the profession, the interests of stakeholders and the public interest.Rules establish the framework, professional standards establish the discipline, ethical principles establish the direction, and values determine the character of the professional.At the core of this framework are certain principles that cannot be negotiated, diluted or compromised: honesty, integrity, objectivity, independence, professional competence, due care, confidentiality and professional behaviour. These are not merely words appearing in a Code, but they constitute the moral and professional foundation upon which the credibility of the Chartered Accountancy profession is built.At the same time, the profession operates in a rapidly changing environment where technology, artificial intelligence, automation, data analytics, digital platforms, new business models and innovative methods of delivering professional services are transforming the way Chartered Accountants work. Ethics must therefore be sufficiently strong to preserve the fundamentals and sufficiently enlightened to accommodate legitimate change. Ethics should protect the core without clipping the wings of the profession.From Values to RulesRules are indispensable to a regulated profession. The Chartered Accountants Act, Regulations, Code of Ethics, Standards on Auditing, Accounting Standards, professional guidance and other applicable laws establish boundaries within which professional conduct must operate, and compliance with these requirements is not optional. However, professional life cannot always be reduced to a simple question: "Is there a rule prohibiting this?". The more meaningful professional question is: "Is this consistent with the values, responsibilities and public trust attached to my profession?".The distinction is important; a purely rule-based approach may identify what is expressly permitted or prohibited, whereas a values-based approach asks whether the proposed course of action is honest, transparent, responsible, objective, independent and consistent with the public interest. The objective is not to replace rules with personal morality, nor should every professional be permitted to interpret ethical requirements according to individual preferences. Rather, rules provide the boundaries and values guide professional judgement within those boundaries. The original framework rightly emphasises that ethical decision-making requires a combination of law, the Code of Ethics, fundamental principles, professional standards, facts, professional judgement and consideration of the public interest, which is the essence of professional maturity.Values Codified - Not Values CompromisedThe expression "Values Codified" captures an important distinction: when values are codified, they do not cease to be values merely because they find expression in rules, standards and professional guidance. Codification gives institutional recognition to those values and provides professionals with a common framework for applying them.However, codification should not result in an approach where every conceivable professional situation is attempted to be regulated through increasingly detailed prescriptions, as no regulatory framework can anticipate every circumstance. Business models evolve, technology changes, client expectations change, methods of professional delivery change, and information systems change. Artificial intelligence changes the manner in which knowledge is generated and applied. Therefore, an ethical framework must possess both certainty at its core and flexibility in its application. There should be no flexibility regarding dishonesty, lack of integrity, deliberate misrepresentation, compromise of independence or abuse of professional position, but there should be adequate space for innovation in the means by which legitimate professional services are delivered. That is the difference between protecting professional values and restricting professional evolution.The Non-Negotiable CoreThere are certain values that must remain non-negotiable irrespective of changing times:Honesty: A professional must be truthful and straightforward in professional relationships and communications. No technological advancement, commercial consideration, client pressure or competitive environment can justify dishonesty.Integrity: Integrity requires the professional to act with moral courage and consistency, including when doing so may not be commercially convenient. The real test of integrity often arises not when the correct course of action is obvious, but when the professional has an opportunity to benefit from choosing the easier course.Objectivity: Professional judgement must not be compromised by bias, conflict of interest, undue influence or commercial pressure.Independence: Particularly in assurance and certification engagements, independence is not a technical formality but is fundamental to credibility. An audit opinion, certification or professional assurance loses its value if the user of that opinion cannot trust the independence of the professional who provides it.Professional Competence and Due Care: Ethics also requires competence; a professional cannot discharge an ethical responsibility merely by being honest. The professional must possess the necessary knowledge, skills and professional competence and must exercise appropriate care and diligence.Confidentiality: Confidential information entrusted to a professional must be protected, and technological convenience cannot override professional responsibility.Professional Behaviour: A Chartered Accountant is expected to conduct himself or herself in a manner that preserves the dignity and reputation of the profession.These principles constitute the ethical foundation that cannot be compromised by changing circumstances.Ethics Is Not Anti InnovationOne of the challenges before modern professional regulation is to distinguish between ethical safeguards and outdated methods of professional delivery. The fact that a particular method was not contemplated when a rule was framed does not necessarily make the method unethical, and equally, the fact that technology makes something technically possible does not necessarily make it professionally appropriate. The appropriate test should therefore be: Does the innovation preserve the underlying professional value?.If it does, the profession should have the confidence to embrace it, subject to appropriate safeguards. A professional should not be prevented from adopting a more efficient, accurate, transparent or technologically advanced method merely because the traditional method is more familiar. Professional ethics should act as a compass, not a cage, as the purpose of ethical regulation is to prevent conduct that undermines trust—not to prevent legitimate progress.Ethics Must Walk With Changing TimesEthics are not static; the fundamental values of the profession may remain constant, but the circumstances in which those values must be applied continuously evolve. The ethical challenges faced by a Chartered Accountant today are different in form from those faced by the profession decades ago.Artificial intelligence, cloud computing, remote audits, automated accounting systems, data analytics, digital signatures, virtual professional teams and technology-enabled advisory services have created opportunities that were previously unimaginable. They have also created new ethical questions. The appropriate response should not be to reject innovation merely because it creates new questions, but instead, the profession should ask:Does the innovation preserve confidentiality?Does it protect independence and objectivity?Is the information accurate and reliable?Is professional judgement being exercised?Are appropriate safeguards in place?Can the professional explain and defend the conclusion?Does the approach protect the public interest?Where the answer is yes, innovation should ordinarily be encouraged rather than restrained merely because it departs from traditional methods.From "Can I?" to "Should I?"One of the most powerful disciplines of ethical decision-making is the transition from: "Can I do this?" to: "Should I do this?".The first question is essentially compliance orientated, whereas the second requires professional judgement. An action may not be expressly prohibited and yet may create a misleading impression, compromise professional credibility or adversely affect stakeholders. Conversely, an action may be innovative or unconventional and yet be entirely consistent with professional values and responsibilities. The distinction is therefore not between traditional and modern, but between ethical and unethical. The original framework appropriately identifies this distinction and emphasises that the absence of an express prohibition does not, by itself, establish that an action is ethically appropriate, a principle which should become an integral part of professional thinking.Rules Set the Boundary; Values Guide the JourneyA mature profession should not aspire to create a rule for every possible situation, as such an approach would inevitably produce excessive prescription and could unintentionally discourage professional judgement. Rules should establish the outer boundary of acceptable conduct, while values should guide the professional within that boundary. This requires Chartered Accountants to develop the ability to ask:What are the applicable legal and regulatory requirements?What does the Code of Ethics require?What fundamental ethical principles are relevant?What are the facts and circumstances?What threats to integrity, objectivity or independence arise?What safeguards are available?Who may be affected by the decision?What are the short-term and long-term consequences?Can I transparently explain and defend my decision?Would I be comfortable if the decision were examined by the client, regulator, profession and public?This approach converts ethics from a compliance exercise into a professional decision-making discipline.Ethical Decision-Making as a Professional ProcessEthical judgement can be approached through six stages:Recognise: Identify whether an ethical issue exists and whether professional principles may be affected.Gather: Understand the complete facts and circumstances, as ethical conclusions should not be based on assumptions or incomplete information.Analyse: Identify the applicable provisions of law, regulations, professional standards and the Code of Ethics.Evaluate: Assess threats, consequences, available safeguards and alternative courses of action.Decide: Select the course of action that is consistent with professional requirements, fundamental principles and the public interest.Act and Reflect: Implement the decision, document the reasoning where appropriate, and reflect on what can be learned for future situations.This framework is particularly relevant because difficult ethical questions frequently arise where several legitimate interests compete or where there is no single provision that provides an immediate answer.Technology and Artificial Intelligence: Ethics Must Lead InnovationArtificial Intelligence is perhaps the clearest example of why professional ethics must evolve without compromising its foundations. AI can assist in research, analysis, drafting, data processing, risk identification, documentation and numerous other professional activities, but technology can assist professional judgement; it cannot replace professional responsibility. A Chartered Accountant using AI must continue to exercise professional scepticism and judgement. The relevant questions include:Is the information supplied to the system appropriate?Is confidential information adequately protected?Is the output accurate and complete?Has the output been independently reviewed?Could the system introduce bias?Is the underlying source reliable?Can the professional explain the conclusion?Who assumes responsibility for the final professional opinion?The answer should not be to prohibit technology, but to ensure that technology operates within an ethical framework and under responsible professional oversight.Ethics and the Public InterestThe responsibility of a Chartered Accountant extends beyond the immediate client, as financial statements, audit reports, certificates, tax opinions, valuation reports and other professional communications may be relied upon by investors, lenders, regulators, employees, shareholders, creditors and the wider public. Therefore, the professional cannot view every decision exclusively through the lens of the immediate commercial interest of the client. The public interest is an essential dimension of professional ethics, and an action that provides a short-term advantage to a client may nevertheless create misleading information or expose other stakeholders to significant risk. Ethical professional judgement requires the Chartered Accountant to look beyond: "What does the client want?" and consider: "What is professionally responsible and appropriate in the circumstances?". This broader responsibility is intrinsic to a profession whose work is relied upon by stakeholders who may never directly meet or interact with the professional.Do Not Clip the Wings of ProfessionalsRegulation is necessary, but regulation must also recognise the nature of a profession, which is not merely an occupation governed by a checklist. A professional is entrusted with knowledge, judgement and responsibility. If every emerging practice is viewed with suspicion merely because it is new, regulation can unintentionally discourage innovation. If every professional judgement is replaced by prescriptive rules, the profession may gradually lose the very quality that distinguishes a professional from a functionary—the capacity to exercise informed judgement responsibly. The objective should therefore be strong principles, clear boundaries, responsible judgement and freedom to innovate within the ethical framework. The wings of professionals should not be clipped by rudimentary notions of professional conduct, but at the same time, freedom cannot become an excuse for compromising fundamental values. Innovation in means must never become dilution in values.Ethical Leadership and Institutional CultureEthics is ultimately shaped not only by rules but also by institutional culture. An ethical organisation should encourage:open communication;consultation on difficult matters;willingness to question inappropriate practices;respect for professional judgement;timely escalation of concerns;accountability for decisions;continuous professional education; andtransparency in decision-making.The original article appropriately recognises that ethical leadership is demonstrated through everyday conduct and not merely through policies and statements. For professional leaders, this responsibility is even greater, as the culture established by senior professionals influences how younger professionals understand the meaning of ethics. If leadership rewards only commercial outcomes, ethics becomes secondary; if leadership rewards integrity, professional competence, responsible judgement and long-term credibility, ethics becomes part of the institutional DNA.From Compliance to ConvictionThere are different levels of ethical maturity. At the first level, a professional asks: "What does the rule say?". At the next level: "Why does the rule exist?". At the highest level: "What professional value is the rule intended to protect, and how should I uphold that value in these circumstances?".This is the transition from compliance to conviction, which does not diminish the importance of rules but gives them meaning. A mature professional does not wait for a rule to prohibit every inappropriate action, but understands the values underlying the regulatory framework and applies those values when circumstances are uncertain. This is precisely why the movement from rules to values represents a progression in professional maturity rather than a retreat from regulation.The Future of Professional EthicsThe future will require a regulatory philosophy that achieves a delicate balance. On one side lies the need for certainty, discipline, accountability and protection of public interest; on the other hand, lies the need for innovation, professional autonomy, technology adoption and freedom to develop better methods of delivering professional services. Neither extreme is desirable, as absolute prescription can create rigidity, and absolute discretion can create inconsistency.The appropriate path is principle-based professional judgement supported by clear and enforceable ethical standards. The profession should preserve its non-negotiable ethical core while remaining open to new ways of working. Thus, the ethical framework of tomorrow should be:Firm in principles.Flexible in application.Open to innovation.Responsible in judgement.Uncompromising in integrity.Conclusion: Values Are the Future of RulesThe transition from rules to values is not a movement away from regulation, but it is a movement towards better regulation and better professional judgement. Rules will continue to define obligations and establish boundaries, but rules alone cannot anticipate every technological development, every business model or every professional dilemma. Values provide the continuity that rules cannot always provide.When circumstances change, honesty remains honesty, integrity remains integrity, independence remains independence, and objectivity remains objectivity. The methods may change, the technology may change, the professional environment may change, but the fundamental character of the profession must not change. That is why the profession needs values codified, not merely more rules.Ethics must walk with changing times, recognise innovation, encourage improvement in the means of delivering professional services and permit the profession to spread its wings, but those wings must always be anchored to an ethical foundation. We should not regulate innovation out of existence, nor should we permit innovation to erode integrity. The objective is to create a profession that is both principled and progressive.Ultimately: Rules set the boundaries. Values guide our choices. Judgement connects the two. Integrity gives us the courage to do what is right. And when the profession combines codified values with responsible professional judgement, ethics ceases to be merely a system of restrictions and becomes what it ought to be a force for professional excellence, public trust and a better tomorrow.Author may be reached at eboard@icai.in
Professional Ethics, ICAI Code of Ethics, Practice Management, Client Trust, Employee Mentorship, CA Profession, ICAI Journal
Ep. 531 — Ethics as a Compounding Asset: Perspectives from Four Decades in Practice
CA Journal
· September 2026
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Ethics as a Compounding Asset: Perspectives from Four Decades in PracticeOver a four-decade career, the author observes that professionals rarely reject ethics outright but rather drift through minor micro-compromises. While mandatory regulatory codes like ICAI's set a baseline for public trust, long-term professional character requires an internal philosophy. Practiced as an "inside-out" mindset, ethics acts as a compounding asset that yields massive reputational and financial returns over time.The article highlights three core pillars:• Client-First: Decoupling service quality from fees, refusing compromised engagements, and prioritizing integrity over short-term gains to build unshakable trust.• Employee-First: Fairly compensating, mentoring, and protecting teams to build institutional loyalty.• Peer/Partner Relations: Maintaining consistent standards, courtesy, and shared credit. Ultimately, aligned professional ethics create enduring peace of mind, respect, and long-term success.The Dual Architecture: Regulatory Code vs. Internal PhilosophyThe Institute of Chartered Accountants of India (ICAI) provides a formal Code of Ethics which forms the mandatory operating base for professionals. Compliance with technical regulations, independence norms, and standard operating procedures preserves public trust and maintains the regulatory standing of the profession in the public eye. The International Ethics Standards Board for Accountants (IESBA) also lays down a detailed framework on how ethics is practiced individually and organizationally.However, regulatory compliance is merely the baseline. While technical compliance keeps a practitioner licensed, an internal ethical standard determines long-term character and resilience.Genesis of Conduct: Early Roots vs. Market RealitiesAn internal ethical compass is rarely built in formal settings; it begins in childhood and is shaped by early role models. During articleship and early career days, students gain a first real-life view of how the profession operates, and exposure to high ethical standards during this formative phase leaves a lasting impact.Professionals do not operate in a siloed world; they are part of the social milieu. Fierce commercial competition often shapes personal responses, leading to complex, layered situational responses while navigating grey zones to protect personal interests.The drift away from ethics rarely begins with a major infraction. Instead, it starts with micro-compromises: overlooking a subtle disclosure issue to satisfy a valued client, rationalizing a questionable tax position to match competitors, or prioritizing short-term revenue over long-term independence. Over a career, these incremental, defensible-sounding concessions quietly erode professional credibility.Core Pillars of an Ethical FrameworkWhen ethics is viewed as a foundational capability, it becomes a significant differentiator that enables professionals to move up the value chain. Like compound interest, a few ethical choices yield modest returns in the short term, but immense financial and reputational returns over a multi-decade career. This framework is built upon three core pillars:1. Client-First is a Compass, Not a SloganDecouple Quality from Fees: Deliver services with unwavering integrity and intensity, and never scale down work quality to match a lower fee. Exceptional quality reinforces your internal framework and creates a solid foundation of client loyalty.Build Unshakable Trust: Advice must be structured so clients never second-guess your commercial motives. When clients see their interests genuinely prioritized—even when delivering uncomfortable truths or declining lucrative compromised assignments—trust becomes permanent.Turn Integrity into Competitive Advantage: Refusing a questionable filing carries an immediate cost, but a market reputation for absolute accuracy and independence becomes your strongest asset, attracting premium clients and minimizing regulatory risks.Filter Your Client Base: Be selective in choosing clients and release those who push you to compromise or do not fit your quality benchmarks.Focus on Long-Term Realities: Recommend positions that align with a client's real risk tolerance, rather than prioritizing short-term desires that could lead to decades of litigation.Identify the True Beneficiary: In assurance engagements for listed companies, the ultimate clients are the financial statement users, not the management appointing you and paying your bill.Own Mistakes Upfront: Address gaps in advice or delivery candidly rather than covering them up, as forthrightness builds lasting trust.Never Trade Integrity for Immediate Success: Never compromise integrity as a shortcut; what appears to be an immediate advantage can become a long-term liability through lost trust and diminished credibility.2. Employee-First: An Often-Overlooked ObligationDiscussions on professional ethics often neglect obligations to the people executing the work: articled students, professionals, admin teams, and partners. Treating people with dignity, compensating them fairly, offering a balanced work culture, and providing conscientious mentorship creates institutional loyalty that outlasts short-term financial incentives.Invest in the Future: Mentor people as if you intend for them to outlast you in the profession, placing measured trust in them over time.Invest in Culture: Building a common firm culture requires years of dedicated, sustained effort and proper alignment in cultural messaging.Maintain Sound Compensation Benchmarks: Establish fair compensation benchmarks that reward what people bring to the table, viewing staff costs as a healthy percentage of revenue rather than an expense line item to squeeze.Constructive Feedback and Appraisals: Evaluations must be transparent, healthy, and candidate-focused. Pass credit downward to the team, offer corrections privately, and never tolerate bad client behaviour toward your staff.“Every ethical choice made in a professional career eventually circles back. Financial success alone does not create a fulfilling career; the true rewards, i.e. peace of mind, enduring relationships, professional respect, and quiet confidence, come from aligning with universal principles.”Invest in Culture: Culture, like ethics, is selectively practiced. Building a common firm culture requires years of dedicated, sustained effort. Proper alignment in cultural messaging is vital, as people easily spot gaps. Address them upfront. Maintain Sound Compensation Benchmarks: Establish fair compensation benchmarks, rewarding what people bring to the table. True performers rarely negotiate. View staff costs as a healthy percentage of revenue rather than an expense line item to squeeze. Accept administrative claims with trust, while dealing with wrong claims strictly to shape genuine internal alignment. Constructive Feedback and Appraisals: Evaluations must be transparent, healthy, and candidate focused. Show genuine interest in well-being while remaining neutral regarding your own outcomes. Pass credit downward to the team and offer corrections privately. Never tolerate bad client behaviour toward your staff. Over time, people will seek your counsel in personal and professional choices.A firm’s external reputation directly mirrors its internal culture. Employees who thrive in an ethical internal environment carry those same standards into client engagements, protecting the firm’s legacy.3. Peer and Partner Relations: Courtesy Over RivalryWithin a partnership, ethical consistency ensures operational stability. Evaluating internal partner decisions with consistent standards prevents friction, ensures fair profit distribution, and maintains unified governance.Integrity and fairness ensure decisions are guided by consistent principles rather than convenience, favouritism, or short-term commercial pressure. When commitments are honoured, credit shared, mistakes acknowledged, and difficult decisions taken transparently, trust develops within the organization, creating an environment where people can challenge decisions constructively in the firm’s collective interest.Practicing these traits consistently shapes a personal work style that flows into collective endeavours and provides quiet, real-life mentorship.The Ultimate Compounder of Well-BeingIn a market that rewards immediate results, choosing principles over quick gains can feel like a disadvantage. Over a multi-decade career, however, the math changes. Shortcuts create hidden liabilities, while fairness and integrity compound quietly but surely.Relying on universal laws of cause and effect, nothing exists or happens in isolation. Every ethical choice made in a professional career eventually circles back. Financial success alone does not create a fulfilling career; the true rewards, i.e. peace of mind, enduring relationships, professional respect, and quiet confidence, come from aligning with universal principles. Try giving more than what you get; what you leave on the table returns to fill your life with what matters most. What we put out daily through inner alignment, i.e. how we treat clients, staff, and the truth, does not disappear. It returns as trust, reputation, and high-calibre relationships—intangibles far more valuable than numbers on a financial balance sheet.Ultimately, practicing ethically is a practical recognition of how the world works. What we give to our clients, colleagues, and profession determines the quality of the life and practice we build. Fees are spent, but trust, and the way we earned it, is what remains. To conclude, the most important audit we conduct is not only of accounts, but of our own choices. The real measure of a professional life is not merely what we achieved, but what we refused to compromise to achieve it.Author may be reached at eboard@icai.in
Section 44ADA, Presumptive Taxation, Ranu Gupta Decision, A. Anand Kumar, ITAT Delhi, Income Tax Act 2025, Direct Tax, ICAI Journal
Ep. 532 — Presumptive Taxation for Professional Partners: Analysing the Ranu Gupta Decision and the Unresolved Controversy Under Section 44ADA
CA Journal
· October 2026
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Presumptive Taxation for Professional Partners: Analysing the Ranu Gupta Decision and the Unresolved Controversy Under Section 44ADAThe ITAT Delhi's June 2, 2025 decision in Sh. Ranu Gupta (ITA No. 2224/Del/2025) reverses lower authorities and permits professional partners to claim presumptive taxation benefits under Section 44ADA on remuneration received from professional firms. This landmark ruling contradicts the Madras High Court's A. Anand Kumar decision (2023), which held that partner remuneration cannot constitute "gross receipts" of a profession. The Ranu Gupta Tribunal's reasoning contains a critical deficiency: it fails to substantively engage with or rebut the High Court's foundational reasoning that partners do not independently carry on the profession. The decision creates significant jurisdictional variation – favorable to assessees in Delhi but contrary to settled law in South India – and its weakness invites High Court challenge.IntroductionThe taxation of professional partners has long presented a challenge for India's income tax jurisprudence, particularly when presumptive taxation provisions are invoked. The ITAT Delhi's recent decision in Sh. Ranu Gupta (ITA No. 2224/Del/2025, Assessment Year 2018-19, pronounced on June 2, 2025) reopens a contentious question: Can a Chartered Accountant who receives remuneration as a working partner in a professional firm claim the presumptive income scheme under Section 44ADA, or is such remuneration fundamentally excluded from the ambit of this provision?The Statutory Framework: Understanding Section 44ADAIntroduction Of Section 44ADASection 44ADA was introduced by the Finance Act 2016, effective from Assessment Year 2016-17. It represents a shift from the general regime of detailed assessment by introducing a presumptive taxation scheme for small professionals. The language of Section 44ADA(1) provides that where the gross receipts of a resident assessee in a previous year on account of a profession do not exceed fifty lakh rupees (subsequently amended by the Finance Act 2023 to increase the threshold to ₹75 lakh), the assessee may declare income from the profession at a sum equal to 50% of the gross receipts, or at a higher amount claimed to have been earned by the assessee.The statutory language "claimed to have been earned by the assessee" is critical: it may be argued that the income figure is determined by the assessee's declaration, not by the Assessing Officer's estimation. The Assessing Officer cannot subsequently deny this deeming provision by demanding that the assessee produce invoices, vouchers, or detailed records of actual expenses incurred. This deeming provision alters the nature of the assessment – it shifts from a detailed, expense-analysis model to a flat, receipt-based model.The Eligibility Question: Who is an "Eligible Assessee"?Section 44ADA(1) specifies that the scheme applies to resident individuals engaged in specified professions, partnership firms (excluding Limited Liability Partnerships) engaged in specified professions, and Hindu Undivided Families (HUFs) engaged in specified professions. The statute, notably, does not explicitly require that an assessee must be engaged in an individual capacity or in independent practice. This silence is the source of the controversy. The act recognizes partnership firms as eligible assessees, but it remains silent whether a partner within a firm can claim the benefit for income received from that firm, or whether only the firm itself can claim the benefit for its overall professional receipts.The Concept of "Gross Receipts" in the Statutory SchemeThe term "gross receipts" is important but not defined in Section 44ADA itself. By implication, "gross receipts of a profession" refers to the total fees, remuneration, or income arising from the practice of the specified profession. The critical dispute revolves on whether remuneration received by a partner from a professional partnership firm constitutes "gross receipts of a profession" carried on by that partner individually, or whether it represents a derivative or secondary source of income that falls outside the ambit of the scheme. This difference is important since it goes to the heart of whether the scheme is designed for independent practitioners or is flexible to encompass secondary professional income earned.The critical dispute revolves on whether remuneration received by a partner from a professional partnership firm constitutes "gross receipts of a profession" carried on by that partner individually, or whether it represents a derivative or secondary source of income that falls outside the ambit of the scheme.The Core Controversy: Two Competing InterpretationsThe controversy depends on different interpretations of what constitutes eligible "gross receipts" for Section 44ADA purposes. Two schools of thought have emerged, each with coherent statutory and jurisprudential support.The Restrictive Interpretation: The Revenue's PositionThe tax authorities have adopted a restrictive stance grounded in several interconnected arguments. The first is regarding capacity and mode of engagement. Section 44ADA is meant for small practitioners engaged in solo or independent professional practice, as pointed out in CBDT Circular 3/2017, which describes Section 44ADA as a scheme for "small professional practices." The Revenue views the partnership as the true professional entity, with the partner being a member-service provider rather than an independent practitioner.The Revenue also argues what might be called the "derivative income theory." Partner remuneration is not truly "professional income" of the partner but rather a derivative or secondary form of income arising from the firm's professional practice. The primary income earner is the firm itself. By this logic, the partner is not independently carrying on the profession; rather, the partner is employed or engaged by the firm to contribute to its professional practice. The stance on whether the remuneration paid by the partnership firm to the partner tantamounts to professional income is ambiguous.Finally, this interpretation reflects a substance-over-form philosophy, i.e. regardless of formal structure, the substance is that the partner is receiving a salary-like payment from an organization, not generating independent professional income.The Expansive Interpretation: The Assessee's Position (and ITAT Delhi's Endorsement)Conversely, assessee advocates and, the ITAT Delhi in Ranu Gupta argues that the statutory text does not support the Revenue's restrictive interpretation. Section 44ADA does not, in its statutory text, mandate that a professional must practice in an individual capacity. If the Act intended such a restriction, it could and should have stated it explicitly.Under existing law, Section 28(v) of the Act explicitly characterizes remuneration received by a partner as "profits and gains from business or profession." If it is professional income for standard taxation purposes, it should not be disqualified merely because it arises through a partnership. To do so would create an internal inconsistency: treating the same income as professional for general assessment purposes but non-professional for presumptive purposes. This inconsistency cannot be justified without explicit instructions in the Act distinguishing between the two contexts.The Judicial Landscape: Conflicting Case LawThe "Presumptive Taxation Denies Partner" Line: A. Anand Kumar (Madras High Court)Perhaps the most cited authority against allowing Section 44ADA (and similarly Section 44AD) benefits to partners is the decision of the ITAT Chennai in A. Anand Kumar (ITA No. 573/CHNY/2018), which was subsequently upheld by the Madras High Court on December 21, 2023 (MA No. 388 of 2019). In this case, A. Anand Kumar, an individual assessee, received remuneration and interest on capital from partnership firms during Assessment Year 2012-13. He sought to apply the presumptive rate of 8% under Section 44AD (a similar presumptive scheme for business).The ITAT Chennai held that remuneration and interest received by a partner from a firm cannot be termed "turnover" or "gross receipts" of the partner himself. These amounts are not receipts from a business carried on by the assessee but rather receipts from a partnership in which the assessee is a partner. The presumptive scheme (Section 44AD) applies to persons carrying on an "eligible business," and receipt from a partnership firm does not constitute an "eligible business" of the partner.The presumptive scheme "Section 44AD" applies to persons carrying on an "eligible business," and receipt from a partnership firm does not constitute an "eligible business" of the partner.The Madras High Court upheld the Tribunal and went further and provided more detailed reasoning. The High Court held that the assessee should establish that he is an eligible assessee engaged in an eligible business and such business should have a total turnover or a gross receipt. The remuneration and interest received by the assessee from the partnership firm cannot be termed to be a turnover as assessee.This decision, being a High Court affirmation, carries significant precedential importance. It establishes that an individual partner is not "carrying on a business" or "engaged in a profession" independently; rather, the firm carries on the business, and the individual merely receives a share of its proceeds or remuneration.The "Partner Can Opt" Supporting Line: Sagar Dutta (ITAT Kolkata)In contrast, Sagar Dutta v. DCIT (ITAT Kolkata) ITA 692/Kol/2012, though not directly addressing Section 44ADA, is cited for the proposition that a partner can maintain books of account and be assessed on remuneration received from the firm as "gross receipts." The Kolkata Tribunal held that remuneration and other receipts by a partner from a professional firm can be considered "gross receipts" for purposes of the statutory book-keeping requirement under Section 44AB. If amounts constitute gross receipts for audit purposes, the reasoning goes, they should similarly qualify under the presumptive scheme.However, the Sagar Dutta decision involved a different statutory provision (Section 44AB audit requirements) and did not directly opine on Section 44ADA applicability. The decision is thus a supporting precedent by analogy but lacks the direct authority of A. Anand Kumar, as the distinction in "gross receipts" for audit compliance purpose and for presumptive taxation demands jurisdictional intervention.The Foundational Partner Income Case: Ramnik Lal Kothari (Supreme Court)The Supreme Court decision in Commissioner of Income Tax v. Ramnik Lal Kothari (1969) 74 ITR 57 (SC) is an ancient decision but remains significant in the context of taxation of partner's income. The Supreme Court established that a partner's share in the firm's profits is "profits and gains of business" within the meaning of the predecessor Income Tax Act, 1922. It held that a partner is entitled to claim deductions under Section 10(2) for expenditure incurred in earning the partner's share of profits, even if such expenditure is not incurred by the firm itself.This decision recognizes that partner's income is taxed as business income and that partners have deduction rights of allowable business expenditure. A partner is not merely a passive recipient but an active participant in earning that income. However, this case predates the introduction of Section 44ADA and does not address whether partner income specifically qualifies for presumptive schemes.The Auditing Framework Cases: Usha A. Narayanan and Amal GangulySeveral tribunal decisions (such as Usha A. Narayanan v. DCIT, ITAT Kolkata, ITA 703/Kol/2012 and Amal Ganguly ITA 2135/Kol/2008) have held that remuneration received by partners is subject to audit requirements under Section 44AB when it exceeds statutory thresholds. These decisions are often cited for the proposition that such amounts constitute "gross receipts" for audit purposes and therefore should be similarly treated under presumptive provisions.Analysis of the Ranu Gupta Decision: The Delhi Bench's Significant InterpretationFacts and Lower Authority RejectionSh. Ranu Gupta (the order spells the name both as "Ranu" and "Renu") was a Chartered Accountant. During Assessment Year 2018-19, the assessee received Rs. 27,00,000 as remuneration from the firm. He offered 50% of this amount to tax under the presumptive scheme of Section 44ADA.The assessee relied on Sagar Dutta (ITAT Kolkata) for the proposition that partner remuneration qualifies as gross receipts, Ramnik Lal Kothari (SC) for the principle that partner income is legitimate business income. The Assessing Officer rejected the claim on multiple grounds. First, the assessee was receiving remuneration as a working partner of the firm, not as an individual independently carrying on the profession. Second, the expenses incurred by the working partner for conducting the firm's affairs are the liability and responsibility of the firm and not of the individual partner, stating that the partner is not truly "carrying on" the profession. Third, under Section 28(v) and Section 40(b), remuneration from the firm cannot be considered gross receipts of a profession carried out by the assessee individually.The AO also relied on CBDT Circular 3/2017, arguing that the scheme is for "small taxpayers" and "small professional practices." Additionally, the AO noted that the assessee had previously declared the same remuneration as general business income in Assessment Years 2016-17 and 2017-18.The Commissioner of Income Tax (Appeals) upheld the AO's order. The appellate authority agreed that remuneration received by a partner is distinct and separate from the professional income of the partner as an independent practitioner. The decision in A. Anand Kumar case is taken to support the AO's position. The CIT(A) essentially adopted the version of the Revenue's argument that if a partner cannot claim presumptive benefits for business under Section 44AD (per A. Anand Kumar), then certainly not for profession under Section 44ADA.The Tribunal's InterpretationThe Delhi Bench of ITAT allowed the appeal. The Tribunal directed the Assessing Officer to reassess the assessee under Section 44ADA. This reversal contradicts both lower authorities and the precedent of A. Anand Kumar.The Tribunal held that Section 44ADA does not impose any precondition that an assessee must first claim or substantiate actual expenditure to be eligible for the presumptive benefit. This reasoning rebuts the Revenue argument that because the assessee did not claim any expenses against the remuneration, the presumptive scheme should not apply. The Tribunal correctly recognized that the absence of claimed expenditure is irrelevant to eligibility. The deeming provision operates automatically once the assessee opts for the scheme.The Tribunal emphasized that Section 44ADA does not mandate that professional activity must be carried on in an individual capacity or independently. Nowhere in the statutory text is it stipulated that a professional partner in a firm is not eligible for presumptive taxation merely because the activity is conducted through a partnership.The Tribunal invoked the principle of strict interpretation of taxing statutes as established by the Supreme Court in Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Co. (2018) 9 SCC 1. This landmark decision, decided by a Constitutional Bench, reiterated that in construing taxation statutes, the Court has to apply strict rule of interpretation. The Tribunal applied the strict interpretation principle to reject the Revenue's implicit reading of conditions not found in the statutory text.The Ranu Gupta Order's Critical Flaw: A. Anand Kumar Remains UnrebuttedA critical examination of the Hon'ble ITAT Delhi's order in Sh. Ranu Gupta (ITA No. 2224/Del/2025, June 2, 2025) reveals a fundamental defect. The Tribunal's actual reasoning occupies only paragraph 4 of the order and is very brief. The Tribunal talked about the main issues of the case in only one short paragraph in which the Tribunal summarily dismisses the Revenue's arguments without addressing the A. Anand Kumar precedent that formed the foundation of both the AO's and CIT(A)'s decisions.This implies that the Tribunal did not engage with the A. Anand Kumar's precedent or attempt to rebut the High Court's holding that a partner "is not carrying on any business" and therefore remuneration "cannot be termed to be a turnover of the assessee." The Tribunal does not address why identical reasoning would not apply to Section 44ADA or why a partner "is carrying on a profession" when the High Court concluded the partner is not carrying on a business.Instead, the Tribunal's entire decision rests on a single point: Section 44ADA contains no explicit statutory language prohibiting partners from claiming the benefit, and therefore, textual silence must be interpreted in the assessee's favor under the Dilip Kumar doctrine of strict interpretation. The Tribunal does not dispute the observations in A. Anand Kumar. The brevity of the Tribunal's reasoning and its failure to rebut the High Court's judgment create a conflicting arena that the Tribunal is not attempting to overturn A. Anand Kumar but rather is circumventing it through a procedural technicality, i.e. statutory silence.This is problematic for several reasons. The doctrine of strict construction of tax statutes (Dilip Kumar, mentioned supra) does not automatically override High Court precedent. The Tribunal's assertion that silence favors the assessee is a choice of interpretation. The Tribunal has not addressed whether the principle underlying A. Anand Kumar – that a partner does not independently carry on the business/profession but rather receives income from the entity that does – applies with equal force to Section 44ADA. If this principle has merit, then silence in Section 44ADA does not erase it.This decision is therefore significantly weakened by the Tribunal's failure to engage substantively with the precedent that opposed it. When the matter reaches a High Court on appeal, the court can point out that the Tribunal never addressed A. Anand Kumar's core reasoning, merely stated that statutory silence favors the assessee, and failed to explain the basis for distinguishing the High Court's holding. Consequently, the law on whether partners can claim Section 44ADA benefits remains unsettled, and the Revenue's position holds considerable strength pending High Court resolution of the inter-bench conflict.Relevance under the Income Tax Act 2025, applicable w.e.f. 01.04.2026This issue remains highly relevant under the new Income Tax Act, 2025, because the core controversy continues almost unchanged even though the presumptive regime is now structurally consolidated into a single provision, i.e. Section 58 instead of the erstwhile Sections 44AD/44ADA of the 1961 Act. The new Act preserves a presumptive scheme for small resident taxpayers and professional assessees, but it does not comprehensively resolve the specific question of partner-level eligibility, meaning that the interpretational conflict between decisions like A. Anand Kumar and the favourable ITAT rulings of Ranu Gupta will still determine how Section 58 is argued and applied in practice. In effect, while section numbering and some eligibility mechanics have changed, the analytical framework and jurisprudence of ITAT Delhi in Ranu Gupta remain immediately useful under the Income Tax Act, 2025.Conclusion: The Significance and Limitations of Ranu Gupta's decisionThe Ranu Gupta decision represents a significant victory for professional partners seeking to claim presumptive taxation benefits under Section 44ADA. By invoking strict interpretation principles and plain language reading, the Delhi Bench has held that Section 44ADA does not exclude partner remuneration from presumptive relief.The decision offers hope, but not certainty. The Ranu Gupta decision is a landmark case that likely marks a turning point in the treatment of professional partners under presumptive taxation provisions. However, it is not yet the final word. Until a High Court affirms or reverses it, or until legislative clarification occurs, practitioners should regard the law as evolving. The law on this fundamental question remains unsettled, and the coming years will likely see further judicial pronouncements that may bring clarity.Author may be reached at officeraghavm@gmail.com and eboard@icai.inThe Chartered Accountant · Direct Tax · October 2026 · www.icai.org
Section 202, Income Tax Act 2025, New Tax Regime, Deductions, Exemptions, NPS, Agniveer Corpus Fund, Direct Tax, ICAI Journal
Ep. 533 — Deductions Available under the New Tax Regime (Section 202 of the Income Tax Act 2025): A Practical and Professional Analysis
CA Journal
· October 2026
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Deductions Available under the New Tax Regime (Section 202 of the Income Tax Act 2025): A Practical and Professional AnalysisSection 202 of the Income-tax Act, 2025, introduced a concessional tax regime for individuals and Hindu Undivided Families (HUFs), offering lower tax slab rates in exchange for the withdrawal of most exemptions and deductions. With effect from Financial Year 2025–26, the new tax regime has been notified as the default tax regime, though taxpayers may still opt for the old regime while filing their return of income. This article examines the scope of deductions and exemptions that continue to remain available under the new tax regime, dispels common misconceptions, and provides practical clarity for taxpayers and professionals.IntroductionEvery year, a significant number of taxpayers in India grapple with a fundamental question: “Which tax deductions am I eligible to claim?” For several decades, tax planning in India largely revolved around the Old Tax Regime, under which taxpayers could reduce their taxable income through various deductions and exemptions. Popular instruments such as Provident Fund (PF), Life Insurance (LIC), Equity Linked Savings Schemes (ELSS), health insurance premiums, and interest on home loans formed the backbone of tax-saving strategies. While this regime offered substantial deduction-based relief, it was also characterised by higher tax rates, extensive documentation, and complex compliance requirements.With the objective of simplifying the income tax framework and reducing dependency on tax-driven investments, the Government of India introduced the New Tax Regime under Section 202 of the Income-tax Act, 2025. The new regime provides concessional tax slab rates in exchange for the withdrawal of most exemptions and deductions available under the old regime. A common misconception among taxpayers is that no deductions whatsoever are permitted under the new tax regime. This assumption is inaccurate.In reality, although the scope of deductions has been significantly narrowed, a limited yet meaningful set of deductions and exemptions continues to be available under the new tax regime. When understood and applied correctly, these provisions can still help taxpayers legally and efficiently reduce their tax liability, even without traditional tax-saving investments.This article examines each deduction permitted under the New Tax Regime and explains those in clear and simple terms, supported by practical illustrations, to enable taxpayers and professionals alike to clearly understand what can and cannot be claimed while opting for taxation under Section 202.Applicability of Section 202 of the Income-Tax Act, 2025Section 202 applies to the following categories of taxpayers:Individuals orHindu Undivided Families (HUFs) oran association of persons (other than a co-operative society); ora body of individuals, whether incorporated or not; oran artificial juridical person referred to in section 2(77)(g)The provisions apply uniformly to:Salaried employeesPensionersSelf-employed individualsProfessionalsThe availability of deductions, however, varies depending on the nature of income, particularly salary income.Income Tax Slab Rates under the New Tax RegimeThe Income-tax Act, 2025 introduces a significant simplification in India’s tax framework by replacing the traditional concepts of “Previous Year” and “Assessment Year” with a single, unified term known as the Tax Year. Effective from 1 April 2026, the tax year represents a straightforward 12-month period from April to March, aligning the period of earning income with its taxation reference and eliminating the long-standing confusion between financial and assessment timelines.The Income-tax Act, 2025 introduces a significant simplification in India’s tax framework by replacing the traditional concepts of “Previous Year” and “Assessment Year” with a single, unified term known as the Tax Year.TAX YEAR 2026-27: The slab rates applicable under Section 202 are as follows:Total IncomeRate of TaxUp to ₹4,00,000Nil₹4,00,001 – ₹8,00,0005%₹8,00,001 – ₹12,00,00010%₹12,00,001 – ₹16,00,00015%₹16,00,001 – ₹20,00,00020%₹20,00,001 – ₹24,00,00025%Above ₹24,00,00030%These slab rates apply irrespective of age and category of the taxpayer.Standard Deduction under the New Tax RegimeSection 19 continues to provide relief to salaried taxpayers under the new tax regime.Standard Deduction: ₹75,000Eligible taxpayers: Salaried individuals and pensionersThis deduction is allowed automatically and does not require any documentary evidence.Rebate under Section 156 of the Income-Tax Act, 2025Resident individual taxpayers opting for the new tax regime are eligible for a rebate of tax up to ₹60,000 under Section 156.Impact of RebateTaxable income up to ₹12,00,000 results in nil tax liability.Salaried individuals effectively enjoy tax-free income up to ₹12,75,000, considering the standard deduction.This rebate significantly enhances the attractiveness of the new tax regime for middle-income taxpayers.Deductions Allowed under Section 202 of the Income-Tax Act, 2025Although most deductions under Chapter XV are withdrawn, the following deductions continue to be available.Employer’s Contribution to National Pension System – Section 124(1) of the Income-tax Act, 2025Deduction is allowed for contributions made by the employer to the employee’s NPS account.Employees: Up to 14% of salary (Basic + DA)There is no monetary ceiling on this deduction.The table compares the tax treatment of National Pension System (NPS) contributions under the New Tax Regime (Section 202) and the Old Tax Regime, highlighting the structural difference in deduction availability. The distinction primarily revolves around who contributes (employer vs employee) and whether deductions fall under Chapter XV limits.ParticularsNew Tax Regime (Section 202)Old Tax RegimeGovernment EmployerOther EmployersGovernment EmployerOther EmployersEmployer’s Contribution 124Deductible up to 14% of Salary (Basic + DA)Deductible up to 14% of Salary (Basic + DA)Deductible up to 14% of Salary (Basic + DA)Deductible up to 10% of Salary (Basic + DA)Employee’s Contribution 124Not allowedNot allowedDeductible up to 10% of Salary (Basic + DA) within overall Section 123 limitDeductible up to 10% of Salary (Basic + DA) within overall Section 123 limitAdditional NPS Deduction (124(3))Not allowedNot allowedDeductible up to ₹50,000 extra over Section 123 limitDeductible up to ₹50,000 extra over Section 123 limitDeduction Under Section 123 (Total Limit ₹1.5 Lakh)Not availableNot availableAvailable (includes employee NPS contribution)Available (includes employee NPS contribution)Agniveer Corpus Fund: Deduction of Contributions under Section 125Section 125 was introduced in the Income-tax Act, 2025 to provide tax relief to individuals enrolled under the Agnipath Scheme, with the objective of encouraging disciplined savings for Agniveers during their tenure of service. The section specifically grants deductions in respect of contributions made to the Agniveer Corpus Fund.Unlike most deductions under Chapter XV, the benefit under Section 125 is expressly allowed even when the assessee opts for the New Tax Regime under Section 202.Eligible AssesseeThe deduction under Section 125 is available to:Individuals enrolled as Agniveers under the Agnipath Scheme.No other category of taxpayer is eligible for this deduction.Nature of Contributions CoveredSection 125 allows deduction in respect of the following contributions made to the Agniveer Corpus Fund:Employee’s (Agniveer’s) own contribution, andContribution made by the Central Government to the Agniveer Corpus Fund.Both contributions are treated independently and are fully deductible.Quantum of Deduction100% of the amount contributed by the Agniveer to the Agniveer Corpus Fund is allowed as a deduction.100% of the contribution made by the Central Government to the said fund is also allowed as a deduction.There is no monetary ceiling prescribed under this section.Availability under New and Old Tax RegimesA key distinguishing feature of Section 125 is its availability under both tax regimes.ParticularsOld Tax RegimeNew Tax Regime (Section 202)Deduction for Agniveer’s contributionAllowedAllowedDeduction for Government’s contributionAllowedAllowedCovered under Section 123 limitNoNoThus, the deduction under Section 123CH operates independently of Section 123 and is not affected by the choice of tax regime.Professional ObservationsSection 125 is a regime-neutral deduction, unlike most Chapter XV deductions.The deduction is over and above Section 123, with no upper monetary cap.It ensures tax neutrality of mandatory savings under the Agnipath Scheme.From a policy perspective, the provision aligns taxation with the unique employment structure of Agniveers.ConclusionSection 125 provides comprehensive tax relief in respect of contributions made to the Agniveer Corpus Fund by allowing full deduction of both employee and government contributions, irrespective of the tax regime chosen. This provision ensures that Agniveers are not disadvantaged from a tax perspective due to compulsory savings under the Agnipath Scheme and reinforces the Government’s intent to support long-term financial security for such personnel.Deduction in respect of Family Pension – Section 93(1)(d) of the Income-tax Act, 2025Meaning of Family PensionFamily pension refers to the pension received by the spouse or legal heir of a deceased employee, whether from the Government or from a private employer. For income-tax purposes, family pension is taxable under the head “Income from Other Sources” and not under the head “Salaries”.Deduction AllowedThe provisions relating to family pension under the Income-tax Act, 2025 continue to provide a standard deduction to reduce the tax burden on recipients of such income. Family pension, being a regular monthly payment made by the employer to the family of a deceased employee, is taxable under the head “Income from Other Sources,” but with a concessional deduction. As per the new framework, where income-tax is computed under section 202(1), the deduction allowed is the lower of one-third of such income or ₹25,000; in all other cases, the deduction is restricted to the lower of one-third of such income or ₹15,000. This ensures a degree of relief to dependent family members while maintaining a simplified and consistent approach under the revised tax regime.BasisNew Tax Regime (Section 202(1))Old Tax Regime (Other Cases)Nature of IncomeFamily PensionFamily PensionHead of IncomeIncome from Other SourcesIncome from Other SourcesDeduction RuleLower of 1/3 of pension or ₹25,000Lower of 1/3 of pension or ₹15,000Maximum Deduction Limit₹25,000₹15,000Percentage Condition1/3 of total pension1/3 of total pensionFinal Deduction AllowedWhichever is lower (1/3 or ₹25,000)Whichever is lower (1/3 or ₹15,000)This deduction is automatic and does not require any specific investment or expenditure.Illustrative ExampleParticularsAmount (₹)Annual Family Pension received90,000One-third of pension30,000Deduction allowable under Section 93(1)(d)15,000Taxable Family Pension Income75,000The deduction of ₹15,000 is allowed irrespective of whether the assessee opts for the old or new tax regime.Interest on Home Loan – Let-Out Property Only (Section 22 of the Income-tax Act, 2025)Self-Occupied PropertyUnder the New Tax Regime (Section 202), no deduction is allowed in respect of interest on borrowed capital for a self-occupied house property. Accordingly:The deduction of interest up to ₹2,00,000 available under the old tax regime stands withdrawn.No loss under the head “Income from House Property” can be claimed for a self-occupied property under the new tax regime.Let-Out PropertyIn the case of a let-out property, the treatment under the new tax regime is as follows:Deduction of interest on borrowed capital under Section 22 continues to be allowed.However, any loss arising under the head “Income from House Property” cannot be set off against income under other heads, such as salary or business income.Such loss may be carried forward and set off only against income from house property in subsequent assessment years, subject to statutory provisions.Illustrative ExampleParticularsAmount (₹)Gross Rental Income2,40,000Less: Interest on Home Loan(3,00,000)Loss under the head “Income from House Property”(60,000)Tax Treatment under New Tax Regime:The loss of ₹60,000 cannot be adjusted against salary or other income in the same assessment year.The loss may be carried forward and set off only against income from house property in future years.Professional Note: The restriction on set-off of house property loss under the new tax regime significantly impacts taxpayers with housing loans. Taxpayers with substantial home loan interest, particularly in respect of self-occupied properties, should carefully evaluate the comparative tax impact before opting for Section 202.Transport Allowance for Differently-Abled Employees: Rule 15(1), Income-tax Rules, 2026 (Effective from April 1, 2026)Under the provisions of the Income-tax Rules, 2026, the government has proposed a substantial enhancement in the transport allowance deduction for employees with disabilities, including those who are blind, deaf, dumb, or orthopedically handicapped. The monthly deduction limit, which was earlier ₹3,200, is proposed to be increased to ₹8,000 for employees residing in non-metro areas and ₹15,000 for those in notified metro cities. This deduction will continue to be available under both the new and old tax regimes and is specifically aimed at addressing the higher commuting costs and mobility challenges faced by differently-abled individuals.CategoryEarlier LimitRevised LimitNon-Metro Cities₹3,200/month₹8,000/monthMetro Cities₹3,200/month₹15,000/monthThe above exemption is allowed irrespective of the tax regime opted.Salary-Related Exemptions AllowedRetirement and Terminal BenefitsThe following exemptions continue to apply under the new tax regime as per existing limits:GratuityLeave EncashmentVoluntary Retirement CompensationThese exemptions are unaffected by the choice of tax regime.Allowances for Official PurposesCertain allowances remain exempt when incurred wholly, necessarily, and exclusively for official duties, including:Transport allowance for specially-abled employeesConveyance allowance for official dutiesTravel allowance for tour or transferDaily allowance for duty-related expenses away from the normal place of workPerquisites for Official UsePerquisites provided exclusively for official purposes continue to remain exempt, subject to prescribed conditions.Deductions and Exemptions Not Available (Illustrative)Under Section 202, the following commonly claimed benefits are not allowed:Section 123 investments (PF, LIC, ELSS, PPF, etc.)Medical insurance premiumEducation loan interestDonationsHouse Rent Allowance (HRA)Leave Travel Allowance (LTA)Home loan interest on self-occupied propertyEmployee’s own NPS contributionProfessional Evaluation of the New Tax RegimeThe new tax regime is particularly beneficial for:Taxpayers with minimal investments under Chapter XVSalaried individuals without housing loansEmployees receiving employer contribution to NPSIndividuals preferring higher liquidity and simplified complianceThe regime may not be advantageous for taxpayers who heavily rely on deductions and exemptions under the old regime.ConclusionThe introduction of Section 202 represents a structural transformation in India’s personal taxation framework, shifting the emphasis from exemption-oriented tax planning to a simplified, rate-based system. Although the new tax regime significantly restricts the availability of traditional deductions and exemptions, it does not eliminate tax relief in its entirety. Select provisions—such as the standard deduction, employer’s contribution to the National Pension System, deductions relating to the Agniveer Corpus Fund, interest on borrowed capital for let-out properties, and exemptions in respect of specified retirement benefits—continue to offer targeted relief under the new regime.The analysis demonstrates that the effectiveness of the new tax regime is largely contingent upon the taxpayer’s income composition, employment structure, and availability of employer-driven benefits. For certain categories of taxpayers, particularly salaried individuals with limited reliance on Chapter XV deductions, the new regime may result in improved tax efficiency alongside reduced compliance complexity. Conversely, taxpayers with substantial deduction-based claims may find the old regime more advantageous.Accordingly, the choice between the old and new tax regimes necessitates a reasoned, computation-based evaluation on an annual basis, rather than a presumption driven by the default applicability of Section 202. A nuanced understanding of the residual deductions and exemptions under the new tax regime is essential for ensuring legally compliant and optimal tax outcomes within the evolving income-tax framework.Author may be reached atdeepakrathore.8888@gmail.com and eboard@icai.inThe Chartered Accountant · Direct Tax · www.icai.org · October 2026
Corporate Governance, Family Business, ESG, Shareholder Risk, Succession Planning, Board Independence, SEBI LODR, ICAI Journal
Ep. 534 — LISTED VS UNLISTED: When "Family-Style" Control Becomes a Red Flag for Shareholders
CA Journal
· October 2026
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LISTED VS UNLISTED: When "Family-Style" Control Becomes a Red Flag for ShareholdersFamily-owned businesses have built many of the world's most admired brands. Their strengths are obvious, such as loyalty, long-term vision, and a sense of stewardship that often outlasts quarterly capitalism. But those same virtues can decay into vices when personal power eclipses professional governance.When a listed company behaves like a private fiefdom, or when an unlisted company seeks investor money without institutional discipline, shareholders face a structural problem: the rules of accountability become optional. A business may call itself "listed," but if it functions like a family living room, its governance risk is the same as a private empire, with public consequences.This article explores why "family-style" behaviour is a red flag for investors, how succession failures destroy value, how ESG governance lapses multiply the damage, and what red flags investors should read before committing their capital.What "Family-Style" Really MeansA company is not a family, and shareholders are not relatives. Yet many enterprises, especially in Asia, the Middle East, and Latin America, operate as if they are. Decision-making becomes personal rather than institutional. Loyalty trumps logic. Power clusters around a patriarch or matriarch, and dissent is equated with disloyalty.Even listed entities may show these habits:Centralized Power: The founder or a small inner circle controls strategy, appointments, and finances with minimal board challenge.Weak Boards: Independent directors are nominal; committees exist in form, not substance.Succession by Surname: Leadership is transferred through bloodline rather than competence.Opacity in Related-Party Transactions: Family entities do business with the company on privileged terms.Blurred Lines between Ownership and Management: Promoters treat the company's cash as an extension of personal wealth.These traits are not rare. According to Credit Suisse's "Family 1000" study (2022 edition), over 65% of publicly listed companies in emerging Asia are family controlled. The risk is not control itself; it is habitual informality, which thrives until a crisis exposes it.The Mathematics of FailureFamily enterprises are romanticized for longevity, but statistics tell a harsher story. Research compiled by the Cornell SC Johnson College of Business and a 2023 Survey shows:Only 30% to 40% of family-run businesses survive the transition from first to second generation.Barely 12% to 13% reach the third generation.Fewer than 3% remain under family control by the fourth.The core reason is not competition; it is succession and governance failure. Families postpone tough conversations, avoid documentation, and rely on "understood" arrangements that disintegrate under stress.A 2023 UBS report on Asian family businesses estimated that nearly USD 1 trillion in market capitalization across Asian listed firms would undergo generational transition in the next five years. Without formal planning, such transitions often trigger value erosion, board disputes, and market distrust.In short, the "family premium" can flip into a control discount overnight.Dictatorship Behind the VeilThe single-owner syndrome is not limited to families. Many founders morph into benevolent dictators whose word becomes the law. The logic is seductive— "I built this, I know best." But when founder omniscience meets market complexity, arrogance becomes a liability.Symptoms of such dictatorship include:Strategic rigidity; unwillingness to adapt.Suppression of dissent and information.Appointments based on loyalty, not skill.Delayed succession out of fear of irrelevance.Commingling of personal and corporate leverage.The result: brilliant first decades followed by decades of drift. A company becomes a personality cult; when the personality fades, so does the valuation.When Governance Fails, ESG FailsESG (Environmental, Social, and Governance) is not a fad. It is the architecture of responsibility. The "G" in ESG governs the "E" and the "S". Weak governance invariably leads to environmental shortcuts and social exploitation. Several global catastrophes prove that environmental tragedies are usually born in the boardroom, not in the factory.Volkswagen Diesel Gate (2015)A governance culture that prized engineering prestige over ethical compliance led to illegal emission software across millions of vehicles. The financial impact exceeded USD 30 billion in settlements and recalls. The root cause was a hierarchical, family-style governance structure that stifled internal whistleblowing.BP Deepwater Horizon (2010)Safety protocols were compromised under commercial pressure. The disaster cost more than USD 65 billion in fines and remediation. Investigations highlighted fragmented accountability and governance silos.Vale and Samarco (2015, 2019)Tailings-dam failures in Brazil caused over 250 deaths and massive ecological damage. In both cases, risk governance and board oversight were found grossly inadequate. The settlement amounts crossed USD 30 billion.Wells Fargo (2016–2022)A toxic sales culture and weak oversight produced millions of fake customer accounts. Regulatory fines and settlements totalled USD 3.7 billion. Governance tone at the top overrode compliance systems.Boeing 737 MAX (2018–2019)The rush to compete with Airbus led to design and disclosure lapses that cost lives, reputation, and over USD 2.5 billion in settlements. Once again, cultural governance, not engineering, was the root failure.Toshiba Accounting Scandal (2015)Profits were overstated by USD 1.2 billion due to pressure from top leadership to "meet targets at any cost." Independent directors were powerless.Rana Plaza (2013)Although not a single listed company, the collapse of a garment factory in Bangladesh that supplied global brands killed over 1,100 people. It exposed how ESG failure can travel through global supply chains and return as reputational damage to listed companies.These incidents, collectively, underline that governance is the spine of ESG. When governance collapses, the other two pillars crumble automatically.The Indian ParallelIndia has also witnessed several instances where governance weaknesses, concentrated promoter control, and inadequate oversight mechanisms have adversely affected stakeholder confidence. Across sectors such as infrastructure, financial services, healthcare, media, and technology, regulatory interventions and market events have repeatedly highlighted the importance of transparency, succession planning, board independence, and responsible capital allocation.Common patterns observed in such situations include:excessive concentration of decision-making authority,weak segregation between ownership and management,opaque related-party arrangements,over-leveraged expansion strategies,insufficient board oversight, anddelayed recognition of financial or operational stress.In several widely discussed cases over the past two decades, governance concerns eventually resulted in regulatory scrutiny, shareholder disputes, valuation erosion, leadership instability, or restructuring exercises. These developments reinforced an important lesson for Indian markets: strong financial performance alone cannot substitute institutional governance.The Indian regulatory ecosystem has progressively responded through stronger disclosure standards, tighter related-party transaction norms, enhanced responsibilities for independent directors, and increased emphasis on ESG and sustainability reporting. However, long-term governance effectiveness ultimately depends not only on regulatory compliance, but also on organizational culture and leadership philosophy.For investors, the broader takeaway remains consistent: concentration of control without corresponding accountability can significantly increase governance and succession risk, irrespective of sector or scale.Listed vs Unlisted: Two Sides of the Same CoinListed companies at least exist under the discipline of disclosure: SEBI's Listing Obligations and Disclosure Requirements (LODR), mandatory audit committees, and Business Responsibility and Sustainability Reporting (BRSR) for the top 1,000 entities. These instruments set a compliance floor.But compliance does not guarantee culture. Boards filled with family members can technically meet every SEBI norm while subverting its spirit. For instance, independent directors may meet the definition of independence while being socially dependent on the promoter family.Unlisted companies operate in near-darkness. Their minority shareholders depend on private agreements and good faith. Without formal governance, private equity or angel investors face the same "family-style" risk in a quieter form i.e., no public market, no liquidity, and limited recourse.The crucial distinction is this: Listing is a disclosure event, not a governance transformation. A listed family fiefdom is merely a private company that publishes its secrets quarterly.Succession: The Silent KillerSuccession planning is often avoided because it feels like talking about death. Founders believe in immortality through relevance; families fear conflict. Yet statistics show that the absence of succession planning is the single largest destroyer of family-controlled enterprise value.According to a 2023 Survey, it was found that only 34% of families have a documented, communicated, and tested succession plan. In Asia, the percentage is lower still. INSEAD professor Morten Bennedsen's work across Asian family enterprises demonstrates that business value typically halves during succession transitions without formal planning.Reasons are predictable:Ambiguity: Founders do not name successors to avoid offending relatives.Unprepared Heirs: Successors are parachuted into leadership without experience or appetite.Fragmentation: Second-generation members fight for control or dividends.Informal Vetoes: Elder founders retain invisible authority even after retirement.Loss of Credibility: Markets distrust transitional leadership, leading to valuation compression.Various renowned families in India as well as globally are classic illustrations of this pattern i.e., great empires divided by bloodlines rather than competition.Governance and ESG in the Indian Regulatory ContextIn India, ESG is finally becoming enforceable rather than aspirational. SEBI introduced the Business Responsibility and Sustainability Report (BRSR) framework in 2021, replacing the earlier voluntary format. From FY 2022–23, it became mandatory for the top 1,000 listed entities by market capitalization.The BRSR Core announced in 2023 adds limited assurance requirements and expands to value chains, meaning that a listed company is accountable for environmental and social practices across its suppliers and partners.Similarly, SEBI's LODR Regulation 23 tightened the definition of related-party transactions, demanding shareholder approval and independent audit committee scrutiny. These frameworks are specifically designed to curb promoter tunnelling and undisclosed financial engineering.However, even the best rules cannot override culture. Compliance tick-boxes are meaningless if the promoter sees governance as a performance, not a philosophy. That is why ESG ratings, BRSR disclosures, and independent board effectiveness must be assessed qualitatively, not mechanically.The Anatomy of DestructionFamily or founder dictatorship typically destroys value through the following mechanisms:Information Asymmetry: Management hides facts from the board or markets. Audits become procedural rather than substantive.Related-Party Transactions: Profitable deals are routed through promoter-owned entities. Shareholder value leaks through pricing, guarantees, or land deals.Pledged Shares: Promoters borrow against their holdings to fund private ventures. When share prices fall, margin calls trigger panic selling or desperate refinancing. In India, data from Prime Database frequently show that companies with sustained high pledge ratios underperform the market.Board Capture: Directors are loyalists. The audit committee becomes ceremonial. Internal auditors are affiliates rather than watchdogs.Complacent Culture: Employees learn that silence is safer than truth. Whistle-blower mechanisms exist on paper only.Over-leverage: Expansion is debt-fuelled, assuming implicit government or bank support. When credit tightens, the empire implodes.Externalization of Risk: Weak governance leads to environmental or social incidents, which then convert into legal liabilities and brand damage.The Shareholder's Risk SpectrumFor external investors, these behaviours translate into tangible financial risks:Control Risk: One shareholder (the family) can override everyone else.Governance Risk: Compliance may be formal, not functional.Liquidity Risk: Family stakes are large, so stock float is limited.Reputation Risk: Regulatory action or scandal affects valuation instantly.Succession Risk: Leadership transitions depress confidence.ESG Risk: Environmental or social violations trigger investor flight, especially from institutional funds bound by ESG mandates.Global investors increasingly apply a "family governance discount" in valuations. In effect, markets charge higher cost of capital to companies where transparency, independence, or succession is doubtful.What Good Looks LikeNot all family-controlled businesses are dysfunctional. Some convert family values into institutional strength. Common traits of successful transitions include:Documented succession plans with clear performance milestones.Independent boards that exercise real oversight.Transparent related-party policies and voluntary disclosures beyond statutory minimums.Professional CEOs hired from outside the family with authority and accountability.Progressive ESG practices with verified BRSR reporting and third-party assurance.Global examples include the Møller-Maersk Group, America Móvil (Slim family), and even Patagonia, whose founder transferred ownership to a trust aligned with environmental purpose instead of heirs. These cases demonstrate that family legacy and institutional integrity can coexist when governance is treated as stewardship, not possession.The Investor's 20-Point Red-Flag ChecklistNo named successor or formal succession document.Board dominated by family or friends of the promoter.Long director tenures without re-evaluation.Frequent related-party deals lacking transparency.Rising pledge of promoter shares.Multiple layers of subsidiaries and opaque financial structures.Auditor resignation mid-year or repeated rotation.SEBI or court investigations.Expansion into unrelated promoter-owned businesses.Weak ESG or BRSR disclosures.Inconsistent dividend policy.Declining promoter shareholding coupled with high control rights.Poor retention of non-family CXOs.Complex cross-guarantees and loans to affiliates.Repeated delays in results publication.Auditor or internal auditor connected to the promoter ecosystem.Resistance to shareholder resolutions on governance reforms.Use of social media or PR campaigns to attack regulators.Sudden management exits without explanation.Excessive reverence for the founder figure.If even five of these appear, governance is likely ceremonial.The Private Investor's DefenceIn unlisted companies, contractual safeguards must substitute regulation. Investors should:Demand veto rights over related-party transactions.Insist on board seats and independent audit access.Require anti-pledge and information covenants.Build step-in rights if family disputes paralyze management.Include ESG representations and warranties in shareholder agreements.Seek periodic third-party audits of environmental and social compliance.Governance clauses are cheaper than litigation, and priceless when disputes arise.The Path to Redemption for PromotersFor promoter families seeking long-term investor trust, the prescription is clear:Institutionalize Governance: Adopt independent audit committees, external risk reviews, and publish board evaluations.De-pledge Shares: Reducing pledge is the simplest signal of financial discipline.Separate Roles: Distinguish between Chairperson (oversight) and CEO (execution).Professionalize Management: Bring in non-family experts and give them autonomy.Strengthen ESG Reporting: Treat BRSR and assurance as business tools, not paperwork.Simplify Corporate Structure: Reduce cross-holdings and make cash flows traceable.Communicate Succession: Tell investors how leadership continuity will be handled.Doing this not only lowers the cost of capital but also earns reputational capital—an asset no balance sheet can quantify.Lessons from History: Why Power Must InstitutionalizeIn political history as in business, unchecked personal power breeds fragility. Monarchies without constitutions fall when heirs quarrel; businesses without governance collapse when markets turn. The continuity of an institution depends not on charisma but on constitution.For companies, that constitution is governance i.e., the rulebook that ensures that success outlives personality. The moment a listed entity starts acting like a private family trust, it breaks the social contract implicit in public shareholding.Governance is not bureaucracy; it is the oxygen of credibility. Investors can forgive a bad quarter, not a bad culture.The Investor's Rule of ThumbTreat every company, whether listed or unlisted, as a governance equation:Enterprise Value = Economic Performance × Governance QualityNo matter how good the first term, the second acts as a multiplier or a divisor. A single governance scandal can erase decades of brand building.Hence, for investors and analysts:Value companies with family control only if governance quality multiplies, not divides, enterprise value.Apply a control discount when opacity persists.Exit when red flags multiply faster than explanations.Closing ArgumentThe distinction between listed and unlisted entities is primarily regulatory; the distinction between well-governed and poorly governed enterprises is fundamentally institutional.Family ownership, founder-led vision, and long-term stewardship have contributed significantly to economic growth across many jurisdictions. In several cases, such structures have enabled resilience, continuity, and sustained value creation. However, governance concerns may arise when informal control mechanisms begin to override transparency, accountability, or independent oversight.For investors, governance quality should therefore be assessed not merely through compliance disclosures, but through the practical functioning of boards, succession frameworks, risk management systems, and shareholder protections.Ultimately, sustainable enterprise value depends on the ability of an organization to institutionalize decision-making beyond individuals or family influence. Transparency, accountability, and credible governance practices remain central to maintaining investor confidence over the long term.In that sense, governance is not simply a regulatory requirement; it is a foundational component of institutional credibility and durable value creation.Author may be reached at aroranakulca@gmail.com and eboard@icai.inOctober 2026 | www.icai.org
Women Entrepreneurs, Startup India, Venture Capital, Tier-II Cities, Tier-III Cities, Financial Reporting, E-commerce, Chartered Accountants, ICAI Journal
Ep. 535 — Women Entrepreneurship and Startup Growth in India
CA Journal
· October 2026
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Women Entrepreneurship and Startup Growth in IndiaThe increasing number of women entrepreneurs in India represents a transformative opportunity for the startup ecosystem, contributing to new business creation, employment generation and innovation. Improved access to digital infrastructure and supportive policy initiatives has strengthened the participation of women founders; however, structural barriers, particularly in access to growth capital, governance capacity and institutional networks, continue to constrain scalability. This study examines the economic contributions of women-led startups, analyses the key obstacles limiting their expansion, and highlights the critical role of Chartered Accountants and financial professionals in bridging these gaps. By strengthening financial reporting systems, ensuring regulatory compliance, supporting fundraising efforts and institutionalizing governance frameworks, CAs enhance investor readiness and long-term sustainability. The paper argues that professional financial mentorship combined with enabling public policy is essential for moving women-led enterprises from participation to scalable impact, thereby contributing to inclusive and sustainable economic development in India.IntroductionThe overall economy and GDP growth trajectory of a country depend on the contributions of small and medium-sized entrepreneurs and their ability to create jobs through innovation and productivity increases within industries that are considered ‘high-tech’, ‘high-skill’, and require the most capital. Over the last decade, we have seen a massive increase in the number of new entrepreneurs entering the marketplace and creating jobs through their innovative concepts. The Government of India is assisting this new breed of entrepreneurs and providing them the necessary tools and resources for success, such as through its Start-up India initiative.Another area of increasing importance for many businesses, particularly in developed economies, is e-commerce or the ability to do business electronically via the internet. E-commerce has provided new opportunities for businesses that may not have had the ability to do so in the past, enabling existing and potential start-ups to create and operate on the same playing field as traditional brick-and-mortar retailers. We have seen numerous advancements in this area; however, the current representation of women in the role of founder and CEO of women-led startups is still far below acceptable levels in sectors that are traditionally considered ‘high-capital’ sectors and where advanced technology is required (DPIIT, 2025). Even though research shows that boosting female participation in entrepreneurship can yield positive effects on the broader economy, their lack of representation remains a persistent challenge.Figure 1 highlights the urban concentration of women-led startups, with Bengaluru (2,093) emerging as the leading hub, followed by Mumbai (1,753) and Delhi (1,451). Tier-I cities have benefitted from greater access to advanced technology, venture capital and other financing, an ever-growing network of incubators and a greater prominence of strong professional networks than in most other less-developed markets; however, the stronger presence of venture-capital-backed incubators and the networks generated by those incubators are evident in those cities compared to cities such as Kolkata and Jaipur, which exhibit weaker presence and demonstrate a need to devise strategies to assist tier-two and tier-three cities to be more conducive for entrepreneurship while India has over 159,000 DPIIT-recognized startups, with over 45% located outside metro centres in Tier-II and Tier-III cities, a reflection of broader geographic diffusion of entrepreneurial activity beyond the big Tier-I hubs (Sarath C P, 2025).Figure 1: Geographical Concentration of Women-Led Startups across Major Indian CitiesTotal Number of Companies vs. CitiesBengaluru2093Mumbai1753Delhi1451Delhi NCR1354Pune544Hyderabad531Chennai451Ahmedabad228Kolkata225Jaipur197* Delhi NCR includes Gurgaon, Noida, Faridabad and Ghaziabad only * Equity rounds considered onlySource: Tracxn, 2025According to economic analyses, female-led businesses can act as vehicles of (1) social integration, (2) productivity, (3) the production of new goods and services, (4) increased sales and profit margins, and (5) creating more jobs and stabilizing the economy through entrepreneurship. Studies have shown that a higher participation of women in entrepreneurship increases labour force participation, which improves household income stability and strengthens economic resilience (World Bank, 2023). However, the growth of startups directed by women impacts not only individual enterprises but also the overall route of economic development.Women-Led Startups in the Indian ContextA significant number of women are employed in consumer-oriented service-driven sectors like education, retail, healthcare and financial inclusion. These sectors often merge to create social influence on enterprises’ sustainability and craft business models that address local demands and fill market gaps.Table 1 shows that women-led startups in India witnessed peak funding in 2021 (USD 6.3 billion), followed by a decline during the global funding slowdown. Despite this, a sizable portion of global funding for women-led startups consistently comes from Indian sources. Additionally, the data shows that in 2024, women-led startups contributed 8.76% of all Indian tech funding, demonstrating resilience in the face of macroeconomic challenges.Table 1: Funding Trends of Women-Led Startups in India and Global ComparisonYearWomen IndiaIndia Overall% share of India Tech-Women led in Overall-India TechWomen Global% share of India Tech-Women led in Global Tech-Women ledTotal FundingTotal Funding Total Funding 2015$1.2B$8.5B14.48%$10.6B11.67%2016$1.0$4.9B21.42%$9.2B11.41%2017$909.7M$11.8B7.72%$15.7B5.76%2018$2.1B$11.0B18.85%$19.8B10.46%2019$2.1B$15.1B14.02%$24.9B8.50%2020$3.5B$10.9B32.06%$23.4B14.92%2021$6.3B$35.0B18.08%$57.3B11.05%2022$5.0B$24.4B20.39%$32.8B15.18%2023$1.4B$11.2B12.32%$28.6B4.82%2024$1.0B$11.8B8.76%$26.0B3.96%2025-YTD$133.1M$980.0M13.58%$2.5B5.27%Source: Tracxn, 2025There is a noteworthy rise in the number of women entrepreneurs in Tier II and Tier III cities. Unlike the starting stages of startup expansion, which were mainly focused on metropolitan cities, female-led enterprises are now gradually emerging from smaller cities and semi-urban locations. This geographical spread supports decentralized economic development and aligns with the national objectives of balanced regional growth (NITI Aayog, 2022).Digital technologies such as digital payments, e-commerce and cloud accounting have simplified business operations by reducing intermediaries and geographic barriers. This expansion of market access has enabled more women to establish and grow enterprises despite mobility and safety constraints.Economic Contributions of Women-Led StartupsIndian women-led innovations and business development are creating numerous jobs for women. Increased employment for women leads to more households with women in the workforce and women having a higher level of educational achievement. This has an impact on the growth of human capital in a country. Economically, these revenues are a supporting factor for social stability and are also a contributing factor to an economy growing via consumption.The majority of women-operated small businesses are focused on utilizing creative business strategies that can benefit the social organization as well as creating fresh approaches to problem-solving and introducing new products and services. Small businesses in agriculture, education, health and finance (especially financial inclusion) provide new and more efficient methods for delivering services, increase access to services, and give business owners the ability to identify and help repair the underlying structural inclusivity gaps in the way in which they provide service.Women entrepreneurs contribute to the expansion of consumer markets, especially in many “untapped” or underserved sectors. Additionally, female-owned businesses create a bridge between consumers and products, providing a connection between local consumer preferences and established market segments, thereby creating a more personalized consumer journey for the new consumer and creating consumer awareness to increase the new consumer’s purchasing power. The result of this increased consumer awareness will lead to tax compliance, increasing revenues for businesses, increased transparency in business operations, and ultimately the overall growth of the economy (RBI, 2023).Companies listed in Table 2 demonstrate how structured financial governance supports scaling to advanced stages. For example, Zomato, founded in 2008, raised USD 1.7 billion and achieved public status, while Pine Labs secured USD 1 billion and reached the late-stage category. Similarly, firms such as Of Business (USD 758M, Series G) and Cult.fit (USD 687M, Series F) progressed through multiple funding rounds before approaching late-stage maturity.Such progression across Series D to G funding rounds typically requires strong financial reporting, regulatory compliance, valuation accuracy and due diligence preparedness, where Chartered Accountants play a critical role in enhancing investor confidence and enabling a successful transition toward late-stage expansion or public listing.Table 2: Top Funded Women-Led Startups in IndiaCompany NameFounded YearTotal Funding (USD)Company StageZomato20081.7BPublicPine Labs19981BLate StageLenskart20101BSeries IOf Buisness2015758MSeries GCult.fit2016687MSeries FACKO2016598MSeries ELivSpace2014527MSeries FTable Space2017402MSeries DAmagi2008359MSeries FThe Good Glamm Group2015346MSeries ESource: Tracxn, 2025Policy Environment and Institutional SupportThe Indian government has launched several policy initiatives to increase participation and access to resources because it recognizes the significance of women entrepreneurs. Initiatives such as Startup India and Stand-Up India aim to support women entrepreneurs by providing them with easier access to institutional credit, streamlined registration procedures, and incubation assistance. Dedicated credit plans and guarantees have been created to help women-owned businesses overcome financial challenges (Government of India, 2023).Figure 2 reveals a striking structural imbalance: while approximately 31% of women-owned enterprises are Urban Solopreneurs, less than 1% qualify as Scalers. This disparity indicates that most women entrepreneurs operate small, home-based or micro-enterprises generating less than INR 50 lakh annually, with limited employees and restricted growth orientation. The extremely small Scaler segment reflects barriers such as inadequate access to growth-stage capital, limited investor networks, governance gaps, collateral constraints and sociocultural time burdens that restrict expansion beyond subsistence-level entrepreneurship.Figure 2: Distribution and Characteristics of Women-Owned Enterprises in India by Business SegmentSegmentPercentage of women-owned enterprisesOverviewScaler< 1%Rural or urban women with non-farm businessesGenerate more than INR 50 lakh in revenue or employ more than 10 peopleOperate from a formal office settingValue growth, recognition and wealth creationUrban small business owner~6%Operators of small urban businessesGenerate less than INR 50 lakh in revenue, and typically employ less than 10 peopleServing a large, local customer base, they operate from an office or a co-working spaceValue the steady income potential from entrepreneurshipRural small business owner~8%Operators of small rural non-farm local businessesGenerate less than INR 50 lakh in revenue, and typically employ less than 10 peopleOperate from homes or a community centreOften driven by financial necessity, they value the steady income their business providesUrban solopreneur~31%Urban, self-employed womenTypically generate less than INR 50 lakhs in revenueUsually work from home, occasionally with part-time helpValue the flexibility entrepreneurship brings, and the ability to generate income and be productiveRural solopreneur~38%Rural non-farm, home-based business ownersGenerate supplemental household income by selling individually or through collectivesValue entrepreneurship for the petty supplemental income it provides; operate the business as a secondary priority to household workRural agripreneur~16%Farm-based business owners, focused on growing and selling agriculture products for profitMay employ people formallyMobility constraints mean they usually work full time but from home, selling primarily through offline channels such as markets or distributorsAre engaged as entrepreneurs due to necessity, given absence of other income opportunitiesSource: BCG & TiE, 2020The proposed policy interventions aim to shift women from the Solopreneur category to the Scaler segment by expanding access to growth-stage funding, strengthening mentorship and incubation ecosystems, integrating Chartered Accountant advisory support for financial structuring and simplifying compliance frameworks. By addressing capital continuity and institutional readiness, these reforms can enable more women-led enterprises to transition from income-supplementing ventures to scalable revenue-generating businesses contributing significantly to employment and GDP growth.The Women Entrepreneurs’ Platform (WEP) was launched by NITI Aayog with a view to creating an ecosystem for developing women entrepreneurs and has given an impetus to network with other women entrepreneurs in both a formal & informal fashion through networking and capacity building (NITI Aayog, 2022). Digital infrastructure has helped these efforts by enabling businesses to use a combination of ways to digitally establish their identity through Aadhaar, and to pay for their goods and services digitally with UPI.Growth Barriers Faced by Women-Led StartupsWomen-led businesses have made remarkable advancements, but they still face great roadblocks in terms of growth opportunities such as limited access to sources of funding being one of the major challenges that women entrepreneurs are confronted with as they try to raise capital. Venture funding received by women-only founding teams in India stands at 2.3%, while the figure for mixed-gender teams rounds off to nearly 23%. It is also important to note that women-led startups receive a mere Rs. 4 out of every Rs. 100 gained by startups in the country. The picture is not any different on the global stage; women-led startups have received lower than 2% of the total global venture capital funding, while at the same time providing favorable returns (Resham Suhail, 2026).Women entrepreneurs often shoulder a disproportionate share of household and caregiving responsibilities, limiting their time availability and flexibility to manage and expand their businesses effectively. These constraints restrict networking and investor engagement opportunities, while limited asset ownership further reduces their ability to access institutional credit for growth.Financial Management and Governance ChallengesPoor financial management leads to a variety of problems over time for startup businesses led by women and other under-represented groups. Many under-represented groups have other barriers, such as lack of access to capital; however, a major issue for many early-stage ventures that are being led by women is that they do not have formal accounting systems in place and implemented internal controls. Because these early-stage companies tend to be primarily focused on getting their products to the market, they will often take a “get it to market quickly” approach at the detriment of establishing proper financial reporting systems. As a result, while companies may experience quick growth with this approach, they may ultimately create long-term funding problems, including lack of investor confidence, cash flow issues, and difficulties with obtaining a bank loan. As startups continue to grow, if they do not comply with tax regulations, additional penalties may be assessed against them, thereby harming their reputation. Thus, as these startups continue to seek institutional funding and partnerships with other (large) companies, they should ensure that they have implemented requisite governance policies/procedures.By shifting the emphasis of female-led businesses from being sustainable businesses to growth-focused businesses, creating strong governance frameworks and improving financial control will be crucial to their success. The transition from being a small business to a large company is a significant step in the journey for all entrepreneurs, especially women entrepreneurs, who have a unique set of challenges that male entrepreneurs do not have to overcome during their journey.Role of Chartered Accountants and Finance ProfessionalsChartered Accountants (CAs) play a crucial role in addressing the financial, regulatory, and governance challenges faced by women-led startups. As trusted advisors, they provide both technical expertise and strategic direction that support sustainable growth and investor confidence.Early engagement with Chartered Accountants improves compliance, enhances financial transparency and strengthens investor readiness. For women entrepreneurs, professional mentorship provides clarity in navigating complex regulatory environments and supports the transition from early-stage operations to scalable enterprises. Through financial literacy initiatives and structured advisory, CAs contribute meaningfully to inclusive and sustainable economic development.Table 3: Key Areas of Professional ContributionTechnical ContributionsStrategic ContributionsDesigning accounting and financial reporting systemsBusiness valuation and financial modellingTax compliance and GST advisoryFundraising strategy and investor pitch supportStatutory audits and regulatory filingsDue diligence preparation and capital structuringEstablishing internal controlsScaling strategy and financial planningRisk assessment and compliance monitoringIPO readiness and governance advisorySource: Author’s CompilationPolicy Implications and the Way ForwardPolicy ReformTo fully realize the economic potential of women-led startups, policy interventions must move beyond participation metrics and focus on scale, sustainability and integration into mainstream economic activity. Expanding access to growth-stage capital through blended-finance mechanisms and gender-sensitive investment frameworks can significantly strengthen scaling opportunities. Simplifying regulatory compliance and introducing targeted incentives for high-growth women-led enterprises will further enhance institutional participation and investor confidence.Regional InclusionAddressing regional disparities is essential for balanced entrepreneurial development. Strengthening mentorship networks, incubation centres, and investor outreach programs in Tier-II and Tier-III cities can decentralize startup growth and reduce metro concentration. Developing localized funding networks and professional advisory access in emerging hubs will accelerate the transition of women entrepreneurs from micro-enterprises to scalable ventures.Professional Mentorship and Advisory SupportEnterprise sustainability can be reinforced through structured financial guidance and governance support. Expanding access to expert advisory services, particularly Chartered Accountants and financial professionals, will improve compliance, financial discipline, valuation readiness and long-term strategic planning. Professional mentorship programs integrated within startup ecosystems can bridge capability gaps and enhance investor preparedness.From a macroeconomic perspective, strengthening women-led startups contributes directly to India’s long-term development strategy by increasing productivity, generating employment, promoting financial inclusion, and advancing social equity.Figure 3: Various Outcomes of Women Entrepreneurship in IndiaEconomic outcomesCreation of jobs for themselves and othersSocial outcomesMultiplier effect on social outcomesPersonal outcomesAutonomy and control for oneselfFuelling innovationFulfilling new needs, opening up new marketsSource: BCG & TiE, 2020ConclusionDespite supportive factors, women-led startups often operate on a micro or small scale. To nurture the success of female entrepreneurs, they need not only to be mentored but also to receive financial support. In addition, female-led enterprises contribute considerably to both job creation and the economy in India and help to lead the shift to digital commerce. Chartered Accountants and finance professionals provide ethical and strategic assistance throughout the entire entrepreneurial cycle of female entrepreneurs. This assistance fosters a better business environment for future generations. Supporting female-led businesses is about more than creating equal access; it is about creating an environment for sustainable economic development in India and enabling a larger potential for long-term economic success.ReferencesACT For Women. (2023). WISER shows startups can catalyse women’s workforce participation. https://actgrants.in/wiser-2023-finds-that-startups-can-lead-the-way-on-accelerating-womens-workforce-participation-in-india/BCG & TiE. (2020). Women Entrepreneurship in India.Government of India. (2023). Stand Up India Scheme. https://www.narendramodi.in/pm-modi-at-the-launch-of-stand-up-india-initiative-in-noida-uttar-pradesh-440007Ministry of Finance. (2024). Economic Survey 2023-24.NITI Aayog. (2022). Women Entrepreneurship Platform (WEP) Annual Report.RBI. (2023). REPORT ON TREND AND PROGRESS OF BANKING IN INDIA.Resham Suhail. (2026). Women-led Startups Receive Less Than 2% Of Global VC Funding Despite Delivering 35% Higher ROI - BW Disrupt. https://www.bwdisrupt.com/article/women-led-startups-receive-less-than-2-of-global-vc-funding-despite-delivering-35-higher-roi-596898Tracxn. (2025). India Ranks 2nd Globally After the US in All-Time Funding for Women-Led Tech Startups.World Bank. (2023). The state of women’s legal rights.Authors may be reached at vanshika.180899@gmail.com and eboard@icai.in
GenAI, Forensic Investigation, Data Blindspot, Retrieval-Augmented Generation (RAG), Semantic Analysis, DPDP Act 2023, FAIS Compliance, Data Hygiene, Hallucination, Chartered Accountants
Ep. 536 — From Theory to Detection: A Practical Framework for Implementing GenAI in Forensic Investigations
CA Journal
· October 2026
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From Theory to Detection: A Practical Framework for Implementing GenAI in Forensic InvestigationsForensic investigators face limitations when assessing non-structured data, which makes up almost 80% of all business data, using traditional audits. The introduction of Generative AI (GenAI) has changed this by removing the need to use keywords to perform searches; instead, GenAI uses semantic pattern recognition (or semantic analysis) to identify the facts of the audit as if it were an intelligent junior investigator working with the Chartered Accountant (CA). This article outlines a simple, four-step framework that integrates GenAI into forensic investigation engagements: 1) Data Hygiene; 2) Contextual Prompt Engineering; 3) Pattern Recognition; and 4) Human Verification. It demonstrates how these solutions can all work together as part of the strict guardrails of the Digital Personal Data Protection (DPDP) Act 2023. It illustrates how to use technological innovations to improve the quality of forensic investigations while adhering to regulations and without compromising client confidentiality.Introduction: The Data BlindspotWhile structured ledgers are the traditional focus of forensic investigations, they constitute only 20% of enterprise information. The remaining 80%, such as unstructured documents like emails and contracts, creates a “Data Blind Spot” where fraudulent intent is hidden. Traditional sampling techniques are increasingly ineffective at parsing this volume. Generative AI (GenAI) provides a critical solution by “reading” the entire dataset’s context and sentiment at scale. This allows investigators to identify potential collusion and anomalies that standard tools cannot detect.The Technology: Demystifying GenAI for the Forensic InvestigatorTo effectively leverage GenAI in a professional setting, we must first strip away the hype and understand the mechanics. A common misconception among finance professionals is that tools like ChatGPT are simply advanced search engines. This is incorrect. A search engine retrieves information that already exists; a Large Language Model (LLM) generates new content based on patterns it has learned.LLMs: The Pattern Recognition EngineGenAI is not a search engine; Large Language Models (LLMs) generate content based on learned patterns. To understand an LLM, picture a highly articulate debate champion who understands report structures but lacks a fact-checking database. Because LLMs use probabilistic reasoning, they prioritize linguistic flow over factual accuracy, creating the risk of “Hallucination” (e.g., inventing a fraud clause in a contract where none exists). Relying on this without verification is a professional hazard.Because LLMs use probabilistic reasoning, they prioritize linguistic flow over factual accuracy, creating the risk of “Hallucination” (e.g., inventing a fraud clause in a contract where none exists).RAG: The “Open Book Exam” for AITo mitigate hallucination, investigators use Retrieval-Augmented Generation (RAG). Instead of relying on the AI’s general knowledge, the investigator uploads private datasets (e.g., 5,000 PDFs) into a secure environment to create a searchable index. When queried, the system retrieves only pertinent sections and instructs the LLM: “Using only the text provided, answer the investigator’s question.”The Core Framework: 4 Steps to ImplementationKnowing how technology works is important; however, applying it to your business requires that you use a structured process. A four-step guide will help Chartered Accountants use GenAI in their investigation process. The four-step approach has been developed through successful implementation of forensic case investigations.1Data Hygiene and Ingestion – The “Garbage In, Garbage Out” PrincipleThe main reason that AI-based forensic engagements frequently fail is because of the type of data that is used in the model. In direct alignment with FAIS 410 (Applying Data Analysis), which explicitly recognizes the inherent challenges of receiving data in multiple formats, investigators must meticulously sanitise and standardise data before applying advanced analytical tools. Forensic data often has poor quality because it contains disparate formats, for example, digital/typed text, handwritten notes on margins, invoices scanned as pictures, and improperly formatted email correspondence. Because an LLM does not inherently interpret images, machine-readable text must be extracted and prepared through rigorous data hygiene, thereby fulfilling the FAIS 410 mandate for data preparation.The Process:Optical Character Recognition (OCR): High-quality OCR is mandatory. Poor OCR blinds the AI (e.g., misreading the letter “B” as the number “8” makes “Invoice #B01” unmatchable to the ledger).De-duplication: Removing duplicate email threads prevents the AI from falsely identifying a single incident as a systemic pattern.Metadata Preservation: It’s important to keep track of important information such as Date Created, Author, and Last Modified when converting file types to text. A forensic investigator cannot use contract text unless the contract has been created at or before the transaction.Implementation Tip: Treat Data Hygiene as the digital equivalent of “Data Validation” in traditional Computer Assisted Audit Techniques (CAATs). Just as an investigator validates Excel data before analysis, one must verify the OCR output quality (e.g., via random sample checks) before feeding the ‘Data Lake’ to the AI. High-fidelity text input is the only way to ensure reliable AI output.In direct alignment with FAIS 410 (Applying Data Analysis), which explicitly recognizes the inherent challenges of receiving data in multiple formats, investigators must meticulously sanitise and standardise data before applying advanced analytical tools.2The “Prompt Library” for ForensicsAfter the data has been cleansed and placed into a protected environment, the forensic investigator will still need to interact with the said data. When you perform this interaction, you do so by way of “Prompting”. In a digital context, prompting can be viewed as the modern equivalent of asking precise investigation questions. Traditionally, professionals are trained to ask clients clear, targeted questions to obtain accurate information. In the same way, we must now learn to ask AI systems specific, well-structured questions to receive meaningful and reliable responses.It is recommended that firms build a “Prompt Library”, i.e., a standardized set of queries vetted by senior partners to ensure consistency across engagements.Case Study: Related Party Transactions (RPT)The Objective: Identify undisclosed RPTs in a dataset of 2,000 vendor contracts.The Weak Prompt “Are there any related parties in these contracts?”This is too vague; the AI doesn’t know who the related parties are.The Forensic Prompt “Context: You are a forensic investigator. Task: Review the attached vendor contracts. Action: Cross-reference the vendor names and registered addresses against the provided list of Key Managerial Personnel (KMP) and their relatives. Flag any contracts where the vendor address matches a KMP address, or where the vendor’s name contains the surname of a director. Output: A table listing the Contract ID, Vendor Name, and the specific Conflict Trigger identified.”3Semantic Pattern RecognitionStep 2 places an emphasis on all factual information, whereas Step 3 views the actions of the person or organization committing the fraud. Fraud is rarely perpetrated without emotion; rather, it is usually connected to some sort of emotional pressure, anxiety, or secrecy. The semantic functions of GenAI fit perfectly into this area. GenAI provides semantic analysis of the emotional “tone” of the communications that take place during the fraud; traditional methods of identifying communications related to the fraud do not provide this type of analysis.Sentiment Analysis for “Management Override”:Forensic investigators can instruct the AI to analyze email communications between the CFO and the Finance Team during the critical “financial close” period (e.g., March 25th to March 31st).The Prompt “Analyze the email dataset from March 25th to March 31st. Identify threads where the sentiment shifts to ‘Aggressive,’ ‘Urgent,’ or ‘Coercive.’ Specifically, flag emails where senior management instructs subordinates to ‘bypass standard procedure,’ ‘post the entry now and fix later,’ or ‘keep this offline.’ Rank the results by intensity of urgency.”The “Needle in the Haystack” Approach:Traditional keyword searches look for “bribe,” but sophisticated fraudsters use code words. GenAI identifies contextual anomalies. If an investigator flags a “Consulting Fee for Market Access” as suspicious, the AI can scan the entire contract database for conceptually similar transactions (e.g., “Liaison Charge” or “Expediting Fee”), granting immediate access to potential schemes without relying on exact word matches.4The Human Loop – Verification and Professional JudgmentThe final and most critical step is the “Human-in-the-Loop.” It must be unequivocally stated: AI acts as an analytical assistant, but the Chartered Accountant remains the ultimate investigator and decision-maker.AI models, even with RAG, can misinterpret nuances. A “pressure” email might just be a legitimate deadline; a “conflict of interest” might be a disclosed and approved transaction.The Verification Protocol:Source Linking: AI will usually provide links to sources when giving an answer. Therefore, if AI states something like “Contract #402 has a hidden return clause”, an investigator must click the citation’s link to see the original PDF and verify whether this fact is accurate, and that the words written actually convey the same meaning intended by the AI.Corroboration: The results derived from AI can be considered to be an “Investigative Alert,” where the findings are not definitive until corroborated by the collection of additional evidence, either in the form of bank statements, third-party confirmations, or physical verification.Robust Documentation, Chain of Custody, and Digital Evidence (FAIS Compliance): In alignment with FAIS 230 (Documentation in Forensic Engagements) and FAIS 320 (Evidence and Documentation), the working papers must be detailed enough to reconstruct the investigation. Crucially, the Chain of Custody requirements under FAIS 320 apply strictly to AI-processed data. The investigator must document exactly how the data was ingested, the specific AI Model Version (e.g., GPT-4o, Claude 3.5) used, and the Date and Timestamp of the query. Furthermore, in strict adherence to FAIS 420 (Evidence Gathering in Digital Domain), the sanctity of digital evidence must not be compromised. The original source files must remain entirely untouched and be preserved separately from any AI-processed, OCR-converted, or generated versions. Documenting these specific Verification Steps ensures a defensible evidentiary trail, proving the finding relies on unaltered source evidence and not merely an algorithmic output.By strictly adhering to this verification protocol, the investigator upholds the standards of Professional Skepticism mandated by SA 200, ensuring that the efficiency of AI does not come at the cost of audit quality.Bringing the Framework Together: A Practical Case StudyA whistleblower alleged a National Sales Head was inflating Q4 revenue. Traditional e-discovery failed because perpetrators avoided terms like “fake sales” in the 25,000+ emails and contracts, and the ERP data appeared compliant with Ind AS 115.Data Hygiene & Prompting (Steps 1 & 2)After rigorous OCR, the AI was prompted to cross-reference contract return clauses against email communications.Semantic Pattern Recognition (Step 3)The AI analyzed contextual tone, flagging 34 late-March threads showing unusual urgency and implicit indemnification (e.g., “Hold the inventory until April 15th, we will issue a promotional credit note”), successfully identifying hidden side letters.The Human Loop & Verification (Step 4)Treating this as a lead, the investigator manually reviewed the emails and cross-referenced the ledger, confirming massive March 30th dispatches and anomalous Q1 credit notes. GenAI bridged the gap between unstructured communication and structured records.This case perfectly illustrates how GenAI bridges the critical gap between unstructured human communication data and structured financial records, uncovering a sophisticated earnings management scheme that traditional keyword searches and standard ledger sampling would have entirely missed.Reporting AI Usage: Disclosures and FAIS 510In alignment with FAIS 510 (Reporting Results), any forensic report that leverages GenAI tools must include a dedicated disclosure section. Similar to how a forensic report formally discloses the reliance on a valuation expert or specific data analytics software, the use of AI must be explicitly acknowledged. This transparency protects the Chartered Accountant professionally and ensures the report meets the strict evidentiary standards required by the Indian Evidence Act.To ensure full compliance and mitigate liability, this disclosure should clearly outline:The specific name and version of the AI tool utilized (e.g., GPT-4o deployed via a secure Microsoft Azure Private Instance);The nature of the tasks performed by the AI and the specific areas of the investigation to which it was applied (e.g., semantic pattern recognition, bulk contract review, or email sentiment analysis);A clear, unequivocal disclaimer stating that all AI-generated outputs were treated strictly as investigative leads and not as conclusive evidence; andA comprehensive statement of limitations. This statement must formally acknowledge the inherent risks of the technology, including the possibility of algorithmic “hallucinations,” the AI’s inability to accurately interpret human sarcasm or cultural context, and the specific risks associated with processing incomplete or missing datasets.Risk & Compliance: The DPDP Act ContextThere are many ways that GenAI can be beneficial to forensics operations; however, they also create new avenues for risk. It’s essential that Chartered Accountants use extreme caution when considering these types of tools, as their use involves not just technical decisions, but also legal and ethical decisions based on the current landscape of Data Protection in India, which is rapidly evolving.The Dangers of Blind Reliance: Operational RisksWhile GenAI is a powerful accelerator, treating it as an autonomous investigator invites catastrophic investigative failure. The “Black Box” nature of these models, where the internal decision-making process is opaque, creates specific operational risks that every Chartered Accountant must actively mitigate.The “Plausible Narrative” Fallacy and Wrongful AccusationsLLMs have been made to be convincing and not factual. In a forensic setting, an AI model can be used to relate unrelated events to create a very realistic, coherent, yet incorrect fraud story. Indicatively, it can confuse a typical discussion of a volume discount as a kickback scheme because of bad wording in an email. Should an investigator take action based on this false positive without tracking it down to the underlying documents, it may give rise to false charges against quite innocent workers, reputation losses to the investigator, and potential legal liability.Confirmation Bias AmplificationSycophancy is a characteristic of AI models – they are prone to giving answers that the user would expect. When an investigator poses a question such as: “Find evidence of the CFO inflating revenue”, the model is more likely to perceive ambiguous data as evidence of inflation to be able to fulfill the hypothesis of the user. This only increases the confirmation bias of the investigator himself and can be derailing to the investigation by not paying attention to exculpatory evidence.Contextual Blindness and Data GapsArtificial intelligence does not have the ability to feel human intuition about sarcasm, industry lingo, or cultural undertones. An email message that says, “This deal is a steal,” would be decoded by an AI as a theft and not a good commercial deal. In addition, excessive dependence on the tool poses a threat when it comes to Incomplete Datasets. When the AI is only fed 80% of the data (where offline discussions or hard copies are not made available), it will be certain to give a conclusion based on that incomplete picture and the illusion of being complete is made dangerous.Therefore, AI outputs must be treated strictly as “Investigative Alerts” or leads, never as conclusive evidence.The Question of Legal Admissibility and EvidenceA critical distinction must be made: AI output is intelligence, not evidence. Under the Indian Evidence Act, an AI summary of a contract is generally not admissible; the original contract itself is the primary evidence. Thus, GenAI can be employed only to find the evidence but not to substitute it. The investigator should certify the chain of custody of the data. Provided that a fraud discovery is determined on the basis of an AI hallucination alone which could not be supported by source documents, the investigation will fail miserably in a court of law.AI output is intelligence, not evidence. Under the Indian Evidence Act, an AI summary of a contract is generally not admissible; the original contract itself is the primary evidence.The Risk of Skill AtrophyThe risk of losing the possibility to analyze raw documents can be long-term when junior investigators, who are over-reliant on AI summaries, are unable to do it. This “Skill Atrophy” may result in having a workforce capable of using the tool but has no idea of the underlying forensic principles. The companies have to make sure that AI is presented as an assistant to the seasoned employees, or the juniors keep doing the manual sample tests so that they retain their essential investigative skills.Data Privacy and the DPDP Act, 2023The Digital Personal Data Protection (DPDP) Act, 2023, fundamentally alters how client data is handled. Forensic data inevitably contains “Personal Data.” As a “Data Processor,” the investigator faces strict obligations:Purpose Limitation: Utilizing audit data to train a public AI model violates the Act. Uploading financial data to public/free-tier GenAI tools lacks reasonable security safeguards and invites significant penalties.The “Private Instance” Mandate: To remain compliant, firms must utilize “Enterprise-Grade” private environments where cloud providers contractually guarantee that data remains within specified geographic boundaries (data sovereignty) and is not used to train base models.Investigator Liability and the Human ShieldMore importantly, the DPDP Act instills heavy punishment for the misuse of data, yet the risk is not limited to fines, but also to professional liability. In the event that an AI model indicates that an employee has committed fraud, when it is actually a hallucination (as explained in Operational Risks), and the employee in question is harmed as a result, whether by reputation or by being fired, it is not the software that is liable, but the human investigator. The Act focuses on accountability of automated decision-making. As such, the protocol of Human-in-the-Loop, considered in Step 4, is not only an investigative quality measure, but a legal requirement. The human checking process is a legal “circuit breaker,” turning an unrefined algorithmic probability into a professionally checked discovery, and thus protecting the Chartered Accountant against allegations of algorithmic laxity or mishandling of data.ConclusionForensic investigation methodology has been transformed from reactive sampling methods to proactive, extensive analysis through the implementation of GenAI technologies. However, while AI can analyze and generate large volumes of data, it cannot replace the professional judgement of Chartered Accountants because AI does not have the ability to comprehend human intent, nor can it testify in court. Therefore, the future of forensic investigations will be populated by “Augmented Investigators”, or professionals who utilize the speed and volume of data generated by AI in conjunction with the professional judgment and ethical scepticism that are synonymous with Chartered Accountants, resulting in the transformation of the “Data Blindspot” into a strategic advantage and ultimately, a more robust level of evidence (or evidentiary support) in the current evolving digital landscape.ReferencesBouquot, J. (2025). Creating the Future Together in the Accountancy Profession’s AI Revolution. Journal of the Institute of Chartered Accountants of India. https://resource.cdn.icai.org/89646cajournal-dec2025-8.pdfDPDP Rules, 2025 notified. (n.d.). https://www.pib.gov.in/PressReleasePage.aspx?PRID=2190655&reg=3&lang=2Release of Revised Forensic Accounting and Investigation Standards (FAIS) and Implementation Guide on Forensic Accounting and Investigation Standards – (27-07-2023). (2023, July 27). The Institute of Chartered Accountants of India. https://www.icai.org/post/daab270723ACFE Report to the Nations | 2024 Global Fraud Study. (n.d.). https://legacy.acfe.com/report-to-the-nations/2024/Standard on Auditing (SA) 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, The Institute of Chartered Accountants of India (ICAI).Author may be reached at saurabhkhakhkhar45@gmail.com and eboard@icai.inThe Chartered Accountant, October 2026 · www.icai.org
AI, Artificial Intelligence, Ethics, IESBA Code, Global Ethics Day, CA GPT, Technology Revisions, Hallucinations, ICAI Journal
Ep. 537 — Ethics in the Age of Intelligent Technology: India's leadership and a global public-interest imperative
CA Journal
· October 2026
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Ethics in the Age of Intelligent TechnologyIndia’s leadership and a global public-interest imperativeImagine a technology-based economy in which intelligent systems help to prepare accounts, interrogate entire populations of transactions and identify risks before they become losses. Now imagine that the same systems can invent facts, conceal bias or act without a clear line of human responsibility. The technology opportunity is extraordinary. So is the obligation to use it ethically.India enters this moment in its technological leadership role in the world with an important ethical milestone. The Institute of Chartered Accountants of India’s revised Code of Ethics, effective from 1 April 2026, converges with the 2024 IESBA Code and incorporates its technology-related revisions. This achievement deserves congratulations. It also creates a timely opportunity to re-emphasise ethics where it belongs: at the forefront of every technology decision, not as a compliance check after design, procurement or deployment.2026 is particularly noteworthy for another reason: re-centering ethics is the topic of Global Ethics Day. For IESBA, re-centering ethics in the age of intelligent technology means asking at the outset how integrity, objectivity, professional competence and due care, confidentiality and professional behavior will be protected. It means deciding who remains accountable, what evidence will be required, which limitations must be communicated, and when a software tool should not be used. These questions do not inhibit innovation. They make innovation worthy of trust.India’s scale, digital ambition and globally respected accountancy profession make it a vital proving ground on how the latest technology innovations, such as AI, can be made consistent with re-centering ethics and ultimately, worthy of supporting public trust in the accountancy profession.India’s opportunity and responsibilityFew countries illustrate the pace of technological change more vividly than India. India is home to world-class technology companies, a deep engineering talent base and digital infrastructure operating at population scale. India is no stranger to artificial intelligence (AI) – a 2024 Microsoft and LinkedIn study reported that 92% of Indian knowledge workers used generative AI at work, compared with 75% globally. The measure extends well beyond accountancy, but its direction is unmistakable: intelligent tools have moved from experimentation into everyday work.Other technologies are moving through the same professional landscape. Distributed ledgers are being explored in financial services and public infrastructure for their capacity to create shared, tamper-evident records, while robotic process automation is increasingly used to execute structured, repetitive workflows in banking, finance and accounting. These technologies can improve speed, consistency, and traceability. They can also move errors across systems at scale or make responsibility harder to locate when design, data and oversight are weak.The Indian accountancy profession is not watching from the sidelines. By November 2024, ICAI reported that its CA GPT platform had attracted more than 70,000 active members, offered 19 specialised GPTs and processed more than 250,000 member prompts. Its Industry Forum incorporated annual reports from approximately 5,000 listed companies1. These figures show technology entering core financial analysis, learning and professional workflows – not simply administrative support.Adoption, however, is not the same as competence. ACCA’s India Talent Trends 2025 found that 43% of respondents in India identified AI proficiency as the most valuable future skill, against 36% globally, while only 27% felt confident in their AI knowledge. This adoption-to-competence gap, observed in many jurisdictions, is where effective ethical leadership becomes urgent. A profession cannot responsibly rely on tools it cannot adequately interrogate.India therefore has both a leadership opportunity and a governance responsibility. Its professional accountants can help organisations translate technological capability into trustworthy outcomes by insisting on fit-for-purpose systems, reliable data, meaningful oversight, and clear accountability. The question is no longer whether intelligent technology will shape professional work. It is whether the profession will shape that technology.The question is no longer whether intelligent technology will shape professional work. It is whether the profession will shape that technology.IESBA’s role is to help professional accountants in India and elsewhere act in the public interest through its Code of Ethics and associated guidance and close collaboration with local organizations and professionals. By working together, we can ensure that ethical competence in technology will support India’s business leadership in the world.IESBA’s durable ethical compass and the Three-Pillar ApproachThe technology-related revisions to the IESBA Code2, effective in India starting in April 2026, translate ethical principles into practical safeguards for working in an era of rapid and transformative digitalization. The strength of these provisions lies in a principle-based, technology-agnostic architecture. No code can anticipate every model, platform, or use case. Nor should a global ethical framework chase each product cycle. It must instead equip professional accountants to identify, evaluate and address threats as facts and technologies change.Under the Technology-related revisions, professional competence and due care now demand more than the ability to operate a technology-based tool. Professional accountants must understand, be able to explain, and evaluate the technology relevant to their work, including its assumptions, limitations and whether it is fit for the intended purpose. An attractive interface or confident answer is no evidence of reliability. The professional accountant must determine whether inputs are appropriate, outputs are sufficient, and reliance is justified.The revised confidentiality provisions extend across the full data lifecycle: collection, use, transfer, storage, dissemination, and lawful destruction. Information obtained for one purpose does not become freely available for another merely because an AI system can learn from it. Using client data to train a model requires specific, informed authorisation with clear boundaries; importantly, blanket consent should not be treated as an ethical shortcut.The Code and its technology-related revisions do not claim to answer every technology question. They provide something more durable: a disciplined way to ask the right ethical questions before speed, convenience or commercial pressure narrows the field of view. This approach remains relevant to whether a professional accountant is selecting software, developing an AI model, using an external platform or assuring a technology-enabled process. Keeping the principles-based Code fit for purpose regardless of the technology used is, in fact, the first of IESBA’s three-pillar approach to Technology.The second pillar is continuous horizon scanning. An eight-member Technology Expert Group monitors developments, including AI, digital assets, cybersecurity and quantum computing. IESBA staff monitor technology developments daily and interact with experts regularly, including through the monthly Decoding Ethics Podcast3 and numerous frequent outreach events. This kinetic outreach and monitoring activity by IESBA matters because ethical risks rarely arrive as neatly labeled issues. They emerge through changing business models, unexpected combinations of systems, and gaps between adoption and governance. They show up as news stories that become beacons of concern to standard-setting bodies in India and throughout the world.The second pillar’s focus on upcoming technology risks includes how digital assets on a blockchain or digital ledgers test the profession’s traditional boundaries, particularly where evidence is synthetic, model-driven, distributed across networks or difficult to trace. In such settings, the form of a record may appear precise while its provenance, completeness, or control environment remains uncertain.Distributed ledgers can provide tamper-evident transaction histories, but immutability does not establish the truth of information entered, the legitimacy of an off-chain event or the identity and authority of every participant. Smart contracts may be executed automatically while embedding flawed assumptions. Custody, valuation, related-party relationships, and dependence on exchanges, developers or infrastructure providers can each raise ethical and independence questions. Professional accountants need sufficient technological understanding to connect on-chain evidence with economic substance and legal rights.Larger concerns about financial crimes also inform the second pillar’s focus. Technology-enabled financial crime may involve both digital assets and AI. Deepfakes can impersonate executives; synthetic documents can support fictitious transactions; automated attacks can probe controls at speed; and layered digital-asset transfers can frustrate tracing. These are not separate technology problems to be handed to specialists and forgotten. They affect the reliability of evidence, the exercise of an inquiring mind, the design of safeguards, and sometimes independence itself. Given these risks, actionable guidance for professional accountants to isolate and address ethical issues becomes important. This is the focus of the third pillar.The third pillar is practical support through carefully developed non-authoritative materials, outreach, and communication. Such support helps accountants apply existing principles without creating new requirements or adding noise to an already polarized technology debate. These support materials are created not only because of horizon-scanning efforts, but also due to direct input received from IESBA’s world-wide stakeholders with guidance from senior leadership from IESBA.IESBA’s July 2026 publication, Emerging Technologies: A Characteristics-Based Approach4, illustrates the method of the third pillar. It provides tools – common-sense questions on aspects of emerging technologies to help professional accountants easily identify, evaluate and address threats to ethical conduct. Concerns relative to emerging technologies include opacity, non-determinism, data dependence, adaptivity, autonomy, scale, speed, third-party reliance and governance gaps – all of which may amplify bias, error, privacy and accountability risks. Further, IESBA’s guidance makes it plain that ethical assessment must span the technology lifecycle, from selection and design through use, monitoring and retirement. Integrated systems require holistic review because a sound component can still produce an unsound outcome when combined with weak data or controls. IESBA informs professional accountants that safeguards require continuing reassessment, and human accountability remains even when an agentic system initiates or completes tasks.IESBA’s AI-specific non-authoritative material to be published in the coming months will provide further support on dealing with the challenges professional accountants most commonly face. (See box below)This combination of durable standards, active scanning and focused implementation support is how ethical guidance can keep pace without becoming captive to fashion. It also provides a platform for stakeholder dialogue across jurisdictions and professional services and activities.When intelligent systems reshape professional judgment: 5 ExamplesThe speed and breadth of AI adoption are creating opportunities and challenges every day around the world. Some illustrative examples of ethical risks include:HallucinationsConsider a plausible month-end close process. An AI assistant drafts an explanation for an unusual variance, drawing on prior reports and external data. The narrative is fluent, but one cited event never occurred. A team member, pressed for time and reassured by the system’s confidence, approves it. Four of the five fundamental principles are challenged: first, Integrity is engaged because the explanation may mislead; second, professional competence and due care is at issue because the output was not adequately evaluated; third, objectivity must be considered because automation bias displaced challenge; and finally, professional behavior is called into question because unreliable information may reach decision-makers.Shadow AIAn employee uploads a client schedule to an unapproved public tool to save an hour. Where is the data stored? Can it be used for training? What contractual rights exist, and can the information be retrieved or destroyed? A seemingly minor productivity choice can create a risk extending across jurisdictions, vendors, and the full data lifecycle.Pricing innovationsAI can compress the hours required for some professional services, increasing pressure to reduce fees or move toward outcome-based pricing. Those models may create value, but they can intensify self-interest threats. A promised result, tight margin or accelerated deadline may encourage teams to reduce review, overstate a tool’s capability or rely on automation beyond what the evidence supports. Pricing innovation must not weaken the professional judgment on which the service depends.PartnershipsA firm may buy an AI tool from an audit client, sell technology to that client, jointly develop a platform, or form an alliance with a strategic provider for multiple services. Even where no explicit prohibition is triggered under the Code, the arrangement may create commercial dependency, a close business relationship, confidentiality exposure, a self-review threat or the risk of assuming management responsibility.Agentic AIAgentic AI raises the stakes further. A system able to plan, call other tools and execute transactions may compress several human decisions into a sequence that is difficult to reconstruct, let alone ethically analyze concerns such as biased training data. Professional accountants must establish boundaries, escalation points, validation and meaningful human review before deployment. Human accountability cannot be delegated to a machine simply because its actions are autonomous.These risks are not reasons to reject AI or technology in general. They are reasons to govern it ethically. The essential questions remain human and not technology focused: Is the output reasonable? What evidence supports it? Who benefits from the conclusion? What would a reasonable and informed third party think? And who will take responsibility when the system is wrong? IESBA’s technology guidance is designed to help the professional accountant develop the ethical answers to all these questions.Keeping humanity and trust at the centerIndia’s 2026 Code milestone shows that ethical convergence and technological ambition can advance together. That is an achievement to celebrate. It is also a commitment to fulfill through implementation. A Code acquires force when its principles shape the decisions made in firms, finance functions, classrooms, boardrooms and regulatory conversations every day.Furthering this goal of re-centering ethics today, especially in leading countries such as India, means placing at the forefront ethical considerations based on the Code. Leaders in the profession today must align human-based incentives with challenge, ensure that review is meaningful rather than ceremonial, and create a culture in which their fellow professional accountants and other colleagues can question a system without being characterized as resistant to innovation.Re-centering ethics also means technological literacy should be taught alongside ethical reasoning, with realistic cases involving hallucinations, bias, confidentiality, agentic action, digital assets, and fraud. Regulators and standard setters in India and elsewhere should continue listening, horizon-scanning, and supporting consistent application, intervening where evidence shows that principles or safeguards need reinforcement.Common sense questions too are part of keeping trust at the center of any ethics-based decision involving technology: before accepting an output, ask where it came from, what it omits and how it could be wrong? Before sharing data, ask whether there is authority, necessity, and protection? Before entering a commercial technology relationship, ask how it may appear to a reasonable and informed third party? Before delegating a process, decide where human judgment must remain.It is wise to remember that in 2026, the profession’s comparative advantage is not privileged access to intelligent tools. Those tools are rapidly becoming available to clients, competitors, and the public. The enduring advantage of professional accountants is disciplined judgment: the capacity to understand evidence, recognize threats, challenge an apparently plausible answer and act consistently in the public interest even when commercial incentives may be pointed elsewhere. Technology can extend the work capacity of professional accountants, but it cannot supply the ethical purpose that directs them.Ethics must move at the speed of innovation. That does not mean rewriting the rules for every new tool or chasing each technological fashion. It means making ethical reflection part of design, deployment, and daily use. India can lead by showing that scale need not dilute responsibility and speed need not displace due care. If human accountability, independence, and trust remain at the center of change, intelligent technology can serve not only more efficient markets and organizations, but also a more confident public.◆◆◆Author may be reached at eboard@icai.inhttps://www.icai.org/post/prc-icai-unveils-groundbreaking-ca-gpt-platform ↩https://www.ethicsboard.org/publications/final-pronouncement-technology-related-revisions-code ↩https://www.ethicsboard.org/news-events/2026-02/iesba-decoding-ethics-podcast ↩https://www.ethicsboard.org/publications/emerging-technologies-characteristics-based-approach-ethical-considerations-professional-accountants ↩The Chartered Accountant, October 2026, pp. 476–479 www.icai.org
Global Ethics Day, Ethics, ICAEW, Trust, Artificial Intelligence, Professional Competence, Code of Ethics, ICAI Journal
Ep. 538 — Re-centring Ethics for the Next Decade: Trust, Judgement and the Courage to Do the Right Thing
CA Journal
· October 2026
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Re-centring Ethics for the Next Decade: Trust, Judgement and the Courage to Do the Right ThingGlobal Ethics Day provides an important opportunity for us to pause and reflect on a question that goes to the heart of our profession: what does it mean to be an ethical professional in a rapidly changing world?This year's theme, "Re-centring Ethics", is particularly timely. We are living through a period of profound transformation. Artificial intelligence is changing how we work and make decisions. Businesses are navigating growing expectations around sustainability, transparency and corporate responsibility. Economic uncertainty, geopolitical change and increasingly complex regulation are creating new pressures for organisations and the professionals who serve them.Yet amid all this change, one thing remains constant: trust is fundamental to the accountancy profession, and ethics is fundamental to trust.For ICAEW, ethics is not an addition to professionalism or a "nice to have" alongside technical expertise. It is a professional competency in its own right. The ethical knowledge, skills and judgement of Chartered Accountants are as important as their technical knowledge and skills. Everything our members do, guiding organisations to make effective and sustainable decisions, is underpinned by trust and integrity.More than complianceOne of the most important messages I would offer for the next decade is that ethical behaviour must never be confused with compliance alone. Professional accountants today operate within an increasingly complex landscape of laws, regulations and standards. We must understand requirements relating to financial reporting, audit, taxation, anti-money laundering, sanctions, sustainability, data protection and many other areas. Compliance matters enormously. It provides essential safeguards for markets, organisations and the public.But compliance does not always answer every ethical question. There will always be situations where the rules do not provide an obvious answer. There will be grey areas where professional judgement is required. And there may be circumstances where simply asking, "Can we do this?" is very different from asking, "Should we do this?"This distinction is reflected in ICAEW's updated Code of Ethics. The 2025 revisions strengthen the relationship between compliance with the Code, the fundamental principles and the wider responsibility of professional accountants to act in the public interest. They reinforce the importance of complying not simply with the letter of the Code, but with its spirit. That is an important principle.Our ethical North StarFor professional accountants, the five fundamental principles of the Code of Ethics provide an essential framework for navigating difficult situations:IntegrityObjectivityProfessional competence and due careConfidentialityProfessional behaviourTogether with our responsibility to act in the public interest, these principles can serve as an ethical North Star. When circumstances are unclear, when pressures are competing or when we face an unfamiliar challenge, they provide a constant point of reference.Integrity requires us to be straightforward and honest. Objectivity requires us to exercise judgement without being compromised by bias, conflicts of interest or undue influence. Professional competence and due care require us to maintain the knowledge and skills necessary to provide competent professional services. Confidentiality protects the information entrusted to us. Professional behaviour reminds us of our wider responsibilities to the public and the reputation of our profession.Integrity requires us to be straightforward and honest. Objectivity requires us to exercise judgement without being compromised by bias, conflicts of interest or undue influence. Professional competence and due care require us to maintain the knowledge and skills necessary to provide competent professional services.These principles cannot remove every difficult decision. But they help us ask the right questions. The updated ICAEW Code also places greater emphasis on the role and mindset expected of professional accountants. One important concept is that of having an enquiring mind. This is broader than professional scepticism. An enquiring mind applies across professional activities. It means being open to questioning, critically evaluating the information we encounter and resisting the temptation to accept things simply because they are familiar, convenient or presented with confidence.The courage to stand one's groundEthics is not simply about knowing what the right principles are. It is also about having the courage to apply them. The revised ICAEW Code strengthens the definition of integrity by recognising the importance of strength of character.⚖Professional accountants must sometimes stand their ground when confronted with difficult situations. They may need to challenge others, ask uncomfortable questions or speak up when they believe something is wrong. That is not always easy.In my own role as a Risk and Compliance Partner, I have seen how valuable it can be to pause when something does not feel right and ask more questions. Of course, ethical decision-making requires more than instinct. We have professional frameworks and principles to guide us. But sometimes doing the right thing requires us to slow down, reflect and challenge the direction in which others are moving. In my experience, if a situation does not feel right from an ethical point of view, it is better to find an alternative or sometimes walk away from an opportunity.It may be inconvenient. It may be unpopular. It may even come at a cost. But these are precisely the moments when professional ethics matter most. To carry on regardless can, in some situations, come at a greater cost further down the line – whether that be financial or reputational cost.Ethics in the age of technologyPerhaps nowhere is the need to re-centre ethics clearer than in the rapid development of artificial intelligence.AI and other technologies offer extraordinary opportunities. They can improve productivity, identify patterns, support decision-making and transform the services professional accountants provide. But technology does not remove ethical responsibility.The updated Code recognises the growing impact of technology on the profession, including the risk that technology can impair objectivity and the need for professional accountants to maintain an awareness and understanding of relevant technological developments. We must also be alert to bias, including the biases that may influence our own judgement and those embedded within the systems and technologies we use.The question for professional accountants is not simply whether technology can produce an answer. We must also ask:Is the information reliable?Do we understand how the conclusion has been reached?Are we placing undue reliance on technology?Who remains accountable for the decision? These are fundamentally ethical questions.As technology becomes more sophisticated, human judgement becomes more, rather than less, important. Professional accountants must combine technological understanding with an enquiring mind, sound professional judgement and a willingness to challenge what they see. Innovation and integrity must go hand in hand.Ethics is a collective responsibilityWhile individual ethical judgement is essential, ethical behaviour does not exist in isolation. The culture of an organisation can either support people in doing the right thing or make it more difficult. That is why one of the most important developments in professional ethics is the growing recognition that everyone has a role to play in promoting an ethics-based culture.ETHICSLeadership is particularly important. Ethical cultures are most effective when leaders demonstrate ethical behaviour consistently – not simply in policies or annual reports, but in the decisions they make every day and in how they treat colleagues, clients and other stakeholders.But ethical culture cannot be created solely from the top down. Creating an ethical organisation is a collective responsibility. It requires individuals at every level to contribute. People must feel able to raise concerns, challenge decisions and speak up without fear of retribution.Professional behaviour in a modern worldRe-centring ethics must also mean recognising that professional conduct has changed alongside the world in which we operate.The updated ICAEW Code reflects modern expectations of professional behaviour. It makes clear that a reasonable and informed third party would expect a professional accountant, in their professional life, to treat others fairly, with respect and dignity, and not to bully, harass, victimise or unfairly discriminate against others.This is an important reminder that ethics is about how we treat people, not simply how we handle financial information or professional decisions. Professional behaviour does not stop at the office door. The reputation of our profession is shaped not only by the major decisions we make but also by the everyday behaviours we demonstrate.Ethics must be learned and maintainedIf ethics is professional competency, it must be continually developed. At ICAEW, ethics and ethical considerations have always been integrated throughout our professional education. Ethics is also one of the core themes of our Next Generation ACA, reflecting our belief that the Chartered Accountants of the future must be equipped with the ethical judgement needed to navigate an increasingly complex world.Ethical challenges evolve throughout a professional career. New technologies emerge. Business models change. New pressures arise. That is why ICAEW introduced mandatory ethics CPD for its members. This reflects a simple but important principle: ethical competence requires maintenance and practice.Professional accountants should regularly reflect on the pressures that may influence their decisions, the biases they may bring to a situation and the values that guide their judgement. We should ask ourselves not only whether we have followed the rules, but whether our actions would withstand scrutiny and whether they are consistent with our responsibility to the public interest. What might have been accepted by many thirty years ago may not be acceptable in the modern world.This commitment to continuous learning is also reflected in ICAEW's Global Ethics Day activities. I have been fortunate to attend the last two ICAEW Global Ethics Day events, and I would encourage readers to join ICAEW's free Global Ethics Day Livestream1. The event will bring together perspectives from across the profession to explore the ethical challenges and opportunities shaping our future.A shared responsibility for the futureThe accountancy profession is global, and the challenges we face increasingly cross national borders. That makes cooperation between professional bodies more important than ever.ICAI, as the world's largest professional body of Chartered Accountants, has an enormously important role in promoting professional standards and ethical values. Its commitment to strengthening ethics through the work of its Ethical Standards Board is an important contribution to the profession in India and to the wider global conversation.Professional bodies around the world have a shared responsibility: to ensure that future generations of accountants have not only the technical skills to succeed, but also the values, judgement and courage to deserve public trust.Ultimately, the future of our profession will not be determined simply by how successfully we adapt to technological and economic change. It will also be determined by whether we remain worthy of trust, and that is why ethics must remain at the centre of everything we do.That, for me, is what "Re-centring Ethics" truly means. Our principles must remain our compass, guiding us through uncertainty, challenging us when decisions are difficult and ensuring that, whatever the future brings, we continue to do the right thing.—— ◆◆◆ ——Author may be reached ateboard@icai.in1 Live stream: Global Ethics Day 202620–22 www.icai.org October 2026
Ep. 539 — Artha within Dharma: Integrity is integral
CA Journal
· October 2026
00:00
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Artha within Dharma: Integrity is integralA hundred years ago, Mahatma Gandhi mentioned a list of 7 social sins in his newspaper ‘Young India’. Wealth without work. Pleasure without conscience. Knowledge without character. Commerce without morality. Science without humanity. Worship without sacrifi ce. Politics without principle. Yes, commerce without morality was one of the sins ‘the father of the nation’ highlighted long before India’s entrepreneurial and industrial ambitions took wing. It is even more relevant today with India being one of the largest economies in the world. While businesses operate with many licenses, the biggest license is a societal license. No entrepreneur with long-term ambitions should risk running a business bereft of morality and devoid of integrity. Not just because of regulations, but also because of the social anchor that we have had for ages. Table of ContentsThe Indian Model of Stakeholder CapitalismArtha within DharmaTrust as the air we breatheIndia: Walking a path of difference to make a world of differenceOne World, One FamilyThe Indian Model of Stakeholder CapitalismThere are striking parallels between the growth of the US economy and its capital markets and where India is today. India fundamentally differs in one aspect, though. It comes out clearly in what renowned US economist Milton Friedman said in his famous “Friedman Doctrine”. In his 1970 essay, he argued that the sole social responsibility of a business is to increase its profits for its shareholders. This doctrine has understandably attracted criticism from time to time, especially during times when excesses of unchecked capitalism come to the fore. This approach is known as shareholder capitalism, of which the biggest example is the US.India traditionally did not accept this premise of an ‘owner’s first approach’. M.K. Gandhi had asserted way back in the 1940s that “Capital as such is not evil; it is its wrong use that is evil.” He called the holder of wealth its trustee rather than its owner. This paved the way for how Indian industrialists should approach business. What India follows is a capitalism of a different kind, viz., stakeholder capitalism. Make no mistake, stakeholder capitalism focuses on growth and profits too. However, it does not lose sight of how the profits are generated and shared. It does not undermine integrity. This creates ‘trust’ among stakeholders, including shareholders. This may seem trivial when the economic cycle is favourable. However, during challenging times, it is this trust built through integrity that can help organisations ride out the storm.Artha within DharmaOur cultural wiring helps here too. ‘Artha’, the pursuit of prosperity, counted as legitimate and even noble, but on one condition. It had to be pursued within ‘Dharma’. Wealth built on a shortcut or on someone else’s exploitation carried a cost. The concept of Artha within Dharma is deeply and directly linked to Karma. In Indian philosophy, Karma is the universal law of cause and effect that every action creates a corresponding reaction. Bearing this in mind gives us a more viable form of capitalism.As a famous quote goes, “Integrity is doing the right thing when no one is watching.” With the Indian philosophy of ‘Karma’, there is no such thing as an unwitnessed action. Integrity is simply paramount.In the corporate world, our dharma is also defined by regulations, and our regulators have played their part here. India was one of the first countries in the world to transform Corporate Social Responsibility (CSR) from a voluntary charitable act into a statutory obligation. 2% CSR mandate requires certain companies to spend at least 2% of their average net profits on social and environmental development.India was one of the first countries in the world to transform Corporate Social Responsibility (CSR) from a voluntary charitable act into a statutory obligation.Inherently the ultimate outcome of integrity in business is trust. Not the top line, not the bottom line, but TRUST.Trust as the air we breatheIn an era defined by Volatility, Uncertainty, Complexity, and Ambiguity (VUCA), corporate lifespans are shrinking drastically. As per some studies, the average tenure of a company in the S&P 500 was thirty-three years in 1964 and twenty-four by 2016, with something closer to twelve projected by 2027.Geopolitics drives business risk now as much as economics does. Climate change has moved from mere forecast to operating cost impact. Technology keeps changing at an unprecedented pace. The younger generation asks where a product came from before it buys, and where its money goes before it invests. In such a world, focusing merely on traditional metrics like immediate top-line dominance or market share is not good enough. To lead through this chaos, executives require more than just standard IQ and EQ; they must rely heavily on their AQ (Adaptability Quotient) to navigate change, and their SQ (Spiritual Quotient) to maintain humility and ethical grounding. The ultimate anchor that helps an organisation stand its ground is trust, and trust is the direct dividend of years of unyielding integrity.“India was one of the first countries in the world to transform Corporate Social Responsibility (CSR) from a voluntary charitable act into a statutory obligation”When a business operates within its Dharma, doing the right thing in the dark, it accumulates a reservoir of goodwill among its employees, consumers, suppliers, investors, and wider community. In a hyper-connected world where a company’s flaws are instantly exposed, a foundation built on trust acts as an insurance policy against existential crises. Stakeholders will rally to protect a trusted institution, but they will eagerly abandon an opportunistic one. Ultimately, corporate integrity is not a regulatory compliance chore; it is the ultimate strategy for institutional resilience and longevity.India: Walking a path of difference to make a world of differenceOn the national front too, India has stuck to doing the right thing even as global consensus on ESG has taken the backseat. Many other Governments qualify at one summit what they promised at the last. Institutions join net-zero alliances only to leave them. The United States has stepped back from the Paris Agreement and the three letters of ESG have become politically contested. Amid this global volatility, India has held its course.At Glasgow, the Prime Minister announced the Panchamrut, committing to net-zero by 2070. The government locked it into national industrial policies by accelerating the National Green Hydrogen Mission and tripling renewable energy targets. On the demand side, Mission LiFE (Lifestyle for Environment) turns climate action into a citizen-led movement, focusing on zero-waste traditions, circular economies, and water conservation. Furthermore, our largest listed companies must now report on sustainability by law (Business Responsibility and Sustainability Report - BRSR).We built a “glocal” architecture too to make claims checkable, ensuring ratings reflect domestic conditions rather than an imported lens.One World, One FamilyIndia is the sixth largest economy in the world and accounts for 18% of humanity. We have come a long way yet have a long way to go. As we aim to move from a per capita income of ~$2,800 to a high middle-income status by 2047, our path will not blindly follow the path taken by economies before us. We will aspire to grow but with a difference. An inclusive growth in harmony with the environment and the world. Vasudhaiva Kutumbakam. The whole world is one family is something our culture teaches us.India should not travel anyone else’s development path. We have a long way to go, and we intend to do so democratically, sustainably, and inclusively. We can build a model others might look to follow in the years to come. Capitalism with a conscience.◆◆◆Author may be reached ateboard@icai.inOctober 2026 | www.icai.org | 23–24
Corporate Governance, Directorship, ICAI Code of Ethics, Fiduciary Duty, Independent Director, Audit Committee, SEBI LODR, ICAI Journal
Ep. 540 — Chartered Accountants and Directorships: Important Ethical and Professional Aspects
CA Journal
· October 2026
00:00
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Chartered Accountants and Directorships: Important Ethical and Professional AspectsIntroduction: The Boardroom in an Era of Radical AccountabilityCorporate governance across the globe is navigating an unprecedented test of credibility. High-profile corporate collapses, financial irregularities, and the swift destruction of shareholder wealth have dismantled the illusion that tick-box regulatory compliance guarantees corporate probity. In India, the era where a corporate directorship was viewed as a benign accolade or an ornamental post-retirement sinecure has decisively closed. Stepping onto a corporate board today is an onerous public commitment carrying statutory exposure, personal fiduciary accountability, and moral responsibility to diverse stakeholders.For members of the Institute of Chartered Accountants of India (ICAI), directorships, particularly as Non-Executive and independent directors, represent a natural intersection of professional competence and public stewardship. Our training, financial literacy, auditing discipline, and foundational adherence to integrity make Chartered Accountants (CAs) indispensable leaders in modern boardrooms. We are naturally summoned to chair Audit Committees, anchor Risk Management Committees, and interpret intricate balance-sheet nuances for colleagues from non-financial disciplines.Yet, technical competence divorced from an active ethical compass is a hazardous corporate vulnerability. When financial acumen is used to skirt regulations, obscure leverage, or validate aggressive accounting treatments, the damage to the corporate ecosystem is devastating. As the ICAI commemorates Global Ethics Day on 21st October 2026 under the banner “Re-centring Ethics”, our profession must engage in unsparing introspection. Re-centring ethics within directorships demands looking past mechanical adherence to law and reaffirming our foundational covenant:A Chartered Accountant in the boardroom is, above all, a trustee of the public interest.The Fiduciary Dimension: Moving from Compliance to ConscienceSection 166 of the Companies Act, 2013, codified directors’ duties in India, mandating that a director act in good faith to promote the objects of the company for the benefit of its members as a whole, while factoring in the interests of employees, suppliers, creditors, the community, and the environment. While these statutory provisions apply uniformly across the board, the benchmark of accountability applied to a Chartered Accountant is qualitatively distinct.Under common law doctrine, the standard of “reasonable care, skill, and diligence” is evaluated against both an objective test (what a reasonably prudent director would do) and a subjective test (the specialised knowledge, skill, and experience that the director actually possesses). Because a CA brings advanced expertise in financial systems, tax regulations, auditing standards, and corporate law, regulatory bodies such as the Ministry of Corporate Affairs (MCA), the National Financial Reporting Authority (NFRA), and SEBI rightfully hold CA directors to an elevated standard of scrutiny:The Fallacy of Passive RelianceWhile a non-financial director might plead reasonable reliance on management certificates during complex accounting crises, a CA director cannot legitimately take refuge behind such claims. We are trained to read between ledger lines, decipher off-balance-sheet structures, and interrogate valuation models. Turning a blind eye to red flags because management provided a polished presentation constitutes an ethical abdication.Transcending Promoter PrimacyIndia’s corporate landscape remains predominantly promoter-driven. In many boardrooms, subtle psychological pressures foster an environment where management expects deference. A CA director must possess the moral courage to resist this deference. When the short-term interests of a promoter conflict with the enterprise’s long-term sustainability, our fiduciary loyalty belongs unconditionally to the company and its non-promoter stakeholders.Independence of Mind versus Independence in AppearanceThe framework governing independent directors under Section 149(6) and Schedule IV of the Companies Act, 2013, alongside Regulation 16(1)(b) of the SEBI (LODR) Regulations, 2015, outlines exhaustive negative criteria to establish independence—precluding pecuniary relationships, familial affiliations, and cross-directorships. However, statutory rules address only the outward architecture of independence. Genuine independence is an internal posture, not a statutory checklist.The ICAI Code of Ethics draws an essential philosophical distinction:Independence of Mind: The state of mind that permits the expression of a conclusion without being influenced by pressures that compromise professional judgement, thereby allowing an individual to act with integrity, objectivity, and professional scepticism.Independence in Appearance: The avoidance of facts and circumstances so significant that a reasonable, informed third party would conclude that an individual’s integrity or objectivity had been compromised.In boardroom environments, independence rarely erodes in a single dramatic capitulation; it deteriorates incrementally. Over extended tenures, directors naturally build cordial ties with executive management. When a CA director begins to prioritise boardroom harmony over rigorous inquiry, independence of mind has been compromised. Re-centring ethics requires constant self-scrutiny: are we probing related-party transactions with detached scepticism, or are we deferring to management to avoid conflict?Professional Conflicts, Capacity, and the ICAI Regulatory FrameworkA Chartered Accountant assuming a directorship must navigate the conflict-of-interest rules outlined in the Chartered Accountants Act, 1949, the Chartered Accountants Regulations, 1988, and the ICAI Code of Ethics.Segregation of Audit and Directorship: The integrity of the statutory audit function is inviolable. A CA cannot serve as statutory auditor of a company while holding a directorship in the company, its holding entity, or any of its subsidiaries. Constructing advisory arrangements or shell structures to circumvent this bar violates core professional ethics.Executive versus Non-Executive Roles: Under Regulation 190A of the Chartered Accountants Regulations, 1988, a member holding a Certificate of Practice (CoP) cannot engage in any business or occupation other than accountancy without Council permission. While serving as an Independent Director or Non-Executive Director (NED) falls within general Council permission, accepting an executive position, such as Managing Director (MD) or Whole-Time Director (WTD), involves commercial responsibilities that conflict with independent practice. Such roles require specific Council approval and usually entail surrendering active audit attest privileges.The Ethical Hazard of “Overboarding”: Accepting more board seats than one can diligently serve is a serious ethical compromise. Diligent directorship demands thorough review of board packs, examination of internal audit reports, and active participation in committees. A CA who collects board positions for prestige or sitting fees, arriving unprepared and rubber-stamping proposals, weakens corporate governance. Diligence is an ethical obligation.The Audit Committee: Anchoring the Corporate ConscienceThe Audit Committee serves as the principal institutional shield for external investors, creditors, and the public. In practice, Chartered Accountants are routinely chosen to chair or anchor this vital committee. Here, the CA director must translate ethical theory into forensic boardroom vigilance as mentioned in the table below.Oversight DomainKey Governance Imperatives for the CA DirectorFinancial Reporting IntegrityLook past EBITDA and headline earnings. Scrutinise aggressive revenue recognition, discretionary valuation models for intangibles, changes in depreciation methods, and off-balance-sheet vehicles.Related-Party Transactions (RPTs)Move beyond formal certificates. Probe the commercial substance of transactions, verify arm’s-length pricing through independent valuations, and ensure corporate value is not syphoned to promoter affiliates.Empowerment of Statutory AuditorsProtect external auditor objectivity. Conduct closed executive sessions with statutory and internal auditors without executive management present, asking directly: “What adjustments did management resist?”Internal Financial Controls (ICoFR)Demand proof that internal financial controls operate effectively. Challenge boilerplate management representation letters and ensure identified control deficiencies are remediated swiftly.Whistleblower MechanismsOversee the vigil mechanism directly. Ensure complaints regarding accounting irregularities, fraud, or executive misconduct are investigated independently without intimidation of informants.Audit Committee oversight: key governance imperatives for the CA directorRegulatory Scrutiny and Lessons from Judicial PrecedentsRegulatory authorities and Indian courts have repeatedly affirmed the accountability of independent directors. In major enforcement actions following corporate collapses and financial misstatements, regulators have rejected the argument that independent directors are passive participants immune from sanction.Key principles established across SEBI orders, MCA actions, and appellate rulings include:Constructive Knowledge: Where board papers disclose evident anomalies, or financial statements show sudden surges in unsecured advances, asset revaluations, or related-party loans, an independent director cannot plead ignorance. The law imputes knowledge where ordinary professional prudence would have revealed the issue.Duty of Affirmative Inquiry: When confronted with adverse internal audit observations or qualified auditor opinions, a CA director must take affirmative steps to ensure corrective action. Simply asking a question and passively accepting management’s reassurance does not satisfy the duty of care.Joint Fiduciary Liability: When corporate fraud occurs with the acquiescence or gross negligence of the board, independent directors who failed to record timely objections face statutory liability, including disqualification under Section 164 of the Companies Act, monetary penalties, and reputational harm.These precedents underscore that professional expertise elevates our stature but correspondingly magnifies our responsibility when governance breaks down.The Anatomy of Boardroom Dissent and ResignationOne of the sharpest ethical tests for a CA director arises when management pursues transactions that breach statutory mandates, ethical norms, or stakeholder welfare.The Danger of Silent Acquiescence: In corporate law, silence constitutes consent. An uneasy silence during a contentious vote renders the director legally and morally complicit. When an issue compromises integrity, a CA director must voice clear, reasoned dissent.The Discipline of the Written Record: Dissent must be formally recorded. The director must ensure that objections, reservations, and negative votes are minuted verbatim under Section 118 of the Companies Act. A documented dissent is both an ethical act of truth-telling and an essential legal safeguard.The Moral Responsibility of Resignation: When corporate governance suffers systemic breakdown and management repeatedly dismisses professional counsel, remaining on the board merely confers unearned credibility upon an errant management. In such cases, resignation becomes an ethical necessity.Transparent Departure: A resigning independent director must never hide governance breakdowns behind diplomatic excuses like “personal reasons” or “pre-occupation”. SEBI (LODR) regulations mandate transparent disclosure of the actual reasons to stock exchanges. Concealing the truth upon exit to avoid discomfort is a final, damaging breach of public duty.Re-Centring Ethics: A Practical Guide for CA DirectorsTo translate the theme of Global Ethics Day into concrete practice, every Chartered Accountant serving on a corporate board should adhere to five guiding tenets:Conduct Pre-Appointment Due Diligence: Prior to accepting a directorship, examine the promoter’s track record, governance culture, pending litigation, and past auditor turnover. Never join a board where the ethical climate is compromised.Maintain Professional Scepticism: Exercise scepticism as a permanent habit of mind. Approach management representations with constructive inquiry, requiring empirical verification rather than eloquent slide presentations.Commit to Continuous Technical Renewal: Modern boardroom governance encompasses cybersecurity risks, climate disclosures, ESG frameworks (such as BRSR Core), and AI accounting systems. A CA director must continuously upgrade technical skills to provide meaningful oversight.Prioritise Substance over Form: Do not be comforted by elaborate governance manuals, checklist compliance, and slick presentations. Scrutinise the underlying economic substance of every corporate transaction.Anchor Actions in Public Trust: In every board deliberation, remember the unseen stakeholders: retail investors, pensioners holding debt instruments, and employees relying on the enterprise’s survival. Our ultimate allegiance belongs to them.Conclusion: Guardians of the Economic RepublicThe Chartered Accountant designation is not merely a professional credential; it is an enduring covenant of trust entered into with society. When a corporate board invites a Chartered Accountant to join its ranks, it is not merely acquiring technical acumen. It is seeking the public confidence, moral authority, and professional integrity built by generations of practitioners.As we commemorate Global Ethics Day 2026, let us resolve that in every boardroom across India, Chartered Accountants will serve as the steadfast conscience of the enterprise. By re-centring ethics in our board stewardship—choosing moral courage over comfortable conformity, transparency over expediency, and enduring principles over transient gains—we safeguard corporate resilience, preserve public capital, and uphold the highest traditions of our noble profession.◆◆◆Author may be reached at eboard@icai.inThe Chartered Accountant | October 2026 www.icai.org
Corporate Ethics, Organizational Culture, Cognitive Bias, Ethical Fading, ICAI Journal, Global Ethics Day
Ep. 541 — Leading in Values: Ethics in the Corporate World
CA Journal
· October 2026
00:00
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Leading in Values: Ethics in the Corporate WorldPicture a Tuesday evening - the final, high-stakes day of the financial quarter. A sales team is one order short of its quarterly number that would lead to higher incentives. A key customer says he will sign today only if the invoice is back dated to the previous week. Nobody in that room is inherently dishonest. Everybody has a target and a seemingly valid business justification to say yes. It is settled in about ninety seconds, and it is precisely within these fleeting, quiet moments that the true reality of corporate ethics lives.We usually picture ethics as something dramatic: a multi-crore fraud, a sudden regulatory raid, or a scandalous front-page corporate collapse. That picture is comforting, because it lets us decide ethics is somebody else’s problem. However, the day-to-day reality is more granular and hopeful. Most people want to do the right thing, and most of the time they do. What decides the outcome is rarely a struggle between good and evil. Instead, it hinges on invoice date, the question that was courageously asked or left unasked.As the Institute of Chartered Accountants of India (ICAI) commemorates Global Ethics Day on 21st October 2026, the theme of “Re-centering Ethics” — invites us to bring ethics back to where it does its best work: the boardroom, the business plan and the everyday decision making.Where Ethics Is Kept, and Where It SlipsEthics is kept, or slips, in small decisions. A target that must be met by quarter-end. A supplier whose practices are easier not to examine. Each step looks reasonable on its own. Encouragingly, the reverse of this works too: small choices in the right direction, repeated over a period, build a resilient ethical culture that holds under pressure.Consider a classic dilemma situation I often put to managers. A regional manager notices that a new distributor has been paid a “market development fee” twice in one month, instead of once. The quarter is critical, the distributor is delivering exceptional volume, the underlying facts are unclear. To avoid operational friction, he decides to “keep an eye on it”. Three quarters later the additional fee is a routine line item, and an auditor asks a simple question nobody can answer. Asking early would have cost one awkward phone call; asking late cost an investigation. Speaking early is inexpensive — that is the whole lesson.“Speaking early is inexpensive. Speaking late is not.”None of this is peculiar to one manager. What made silence reasonable was circumstance, not character — and circumstances can be designed differently.Why We Choose Well — and Why We Sometimes Miss the ChoiceStart with an optimistic assumption, because it is true: most people, most of the time, will do the right thing if the work environment lets them. That last phrase carries two conditions.People must believe the values are real and see themselves in them. An engineer repeatedly told that safety comes first, but measured and incentivized only on units produced, does not disbelieve the value; he simply cannot find it in his working day. Belief is built by watching values used in decisions that cost something — a defective shipment held back, a supplier changed for repeated compliance failure.The barriers must be low enough. Even those who believe in values run into dilemma situations. Personal barriers include - fear of being seen as difficult, loyalty to a colleague, a home loan that depends on this job. Professional barriers include - an impossible target, a manager who does not want bad news, a rule nobody can explain. Ethics fails more often at these barriers than at the point of belief.“Most people want to do the right thing — and will, if they believe in the values and the barriers to follow it are low enough.”When people do miss the mark, it is rarely because they weighed right against wrong and chose wrong. It is because they never saw the decision as an ethical one. Three quiet features of human psychology do this.The first is Cognitive Bias. Just as our eyes are tricked by an optical illusion, so our judgment is prone to self-serving distortions. We easily rationalise our own process bypasses as necessary “prudence” while branding a colleague’s identical action as deliberate “evasion”—and feel entirely fair while doing so.The second is Organisational Framing. The specific vocabulary (point of view) utilised to describe a problem dictates how it is solved. Ask whether a batch that misses an internal quality standard is a “production issue” or an “integrity question,” and the same person may answer differently on the same facts, purely because of the words used.The third is Ethical Fading, when a target is called non-negotiable. Attention narrows to the number. The ethical part of the decision does not lose the argument; it never enters the room. Ask the team afterwards and they will honestly say no ethical question came up — they were solving for the number, not weighing right against wrong.Ethical Culture by DesignPeople rarely fail at the point of belief. They fail mostly at the barriers — the target that leaves no room, the manager who does not want bad news, the process that punishes the honest route. Removing those barriers is not a matter of asking people to try harder. It is a matter of design.That design has two halves. Four institutional pillars give an organisation its frame, and six managerial levers put the frame to work in a team’s daily life.The Four Institutional PillarsLeadership Commitment: No policy or internal control will build an ethical culture without genuine commitment from the top and middle management. Leaders constantly signal what truly matters through their own conduct, the behaviour they reward or sanction, and where they put resources.Compliance Structure: Stated commitment falls short without the governance structures, robust policies and controls to operationalise them. A well-designed compliance structure answers the practical questions: Who is responsible for the ethics programme? What authority they hold? How ethical considerations enter business processes? What controls prevent and detect misconduct?Communication and training: Policies achieve little unless they are understood and people are equipped to apply them. Training has to move past awareness of what the rules are, to why they matter and how to use them — which means a buyer learns through a supplier scenario rather than a lecture, and guidance is available at the moment a real situation arises.Measurement of effectiveness: Measurement moves ethics from stated aspiration to demonstrable accountability. It gives the board sight of how the programme is working, surfaces problems while they are still small, and shows where effort and resources need to be focused.The frame is what an organisation builds; the levers are what a manager uses. Six do most of the work, and each is available on any ordinary workday.The Six Managerial LeversBig Picture: Connect daily tasks to purpose and to people. An internal audit employee checking invoices is not processing paper; he is protecting money that belongs to shareholders, customers and fellow employees.Role Model: A team reads what its manager tolerates, not what the posters say. Approve one padded expense claim quietly and the policy has been rewritten for everybody, without a single email. Decline one, and that message travels just as far.Practical Path: Ensure that the ethical route is designed to be the easiest route. If the proper purchase process takes four weeks and the workaround two days, the workaround wins most of the time. Fix the broken process, not the values poster.Acknowledge Dilemmas: Say out loud that workplace dilemmas are normal. When a leader admits a decision was genuinely difficult — that turning down the order hurt and was still right — the team learns that doubt is not disloyalty.Enable Reporting: Make raising a concern simple, accessible and safe rather than career-threatening. This requires a credible channel, protection for whoever comes forward, and a feedback loop for action taken. If speaking up needs absolute courage, only the bravest (read: none) will do it.Reinforce the Values: Celebrate how results were achieved, not only the results. A team publicly acknowledged for rejecting an unethical manoeuvre, even at the cost of a major business opportunity, teaches an organisation more than a year of compliance training.Ethical Culture By DesignThe Frame — what the organisation buildsLeadership CommitmentCompliance StructureCommunication & TrainingMeasurement of Effectiveness The Levers — what a manager uses on any ordinary workdayBig pictureconnect the task to who it protectsRole modela team reads what its manager toleratesPractical pathmake the ethical route the easy routeAcknowledgesay aloud that dilemmas are normalEnableraising a concern must be safe, not braveReinforcecelebrate how results were achieved“A team reads what its manager tolerates, not what the posters say.”None of this needs a new rule, a new policy or a budget. It brings existing commitments into one clear picture of what good looks like — and asks only for the willingness to keep at it, week after week. Design and habit do most of the work. What they cannot do is settle the hard cases.Where the Rulebook Runs OutMost organisations that face ethical challenges are not short of policies. They are short of judgment at the point where the rulebook meets real world pressure. Two everyday scenes make the point.First, the quality manager. A batch clears every legal limit but falls marginally below the company’s own standard. It is peak season and delay costs money. Operations offers the most reasonable line in business: “It is within the legal limit. We will tighten the next batch.” It sounds sensible, and that is what makes it risky. The law is the floor of responsibility, not the ceiling. And “next batch” is how an exception becomes normal, because next batch there will be another deadline. The company that holds the shipment loses a week’s revenue and keeps the confidence of its customer.Second, the group chat that drifted. A sales manager is part of a friendly chat group with distributors. Over time it turns casual — greetings, jokes, market gossip, then an offhand line about a price revision not yet announced. A week later a screenshot appears elsewhere, and internal information is public. The boundary had gone long before the screenshot. The honest question is how many of us write things in a group chat that we would never put in an email.Neither case is settled by looking up a rule. Both are settled by what the person already believes and is enabled to act on.Values Are What You Do When It Costs YouThe corporate world has never been short of values statements. A value that is only displayed does nothing; it becomes real the moment it decides something difficult — a highly profitable order turned down because it cannot be won cleanly, or a top performer facing the same consequence for misconduct that any junior would. The distance between what a company says and how it behaves is the only true measure of its ethical culture.Standing of this kind is never built by branding. It is meticulously built in small moments: a supplier paid fairly for work the contract did not cover; a defect disclosed to a customer who would never have found it. Each of these actions inflicts costs on that day. Over years, such choices become the reason a company’s word is accepted without question — and no advertising can buy that.Underneath every durable business is a simple belief: the trust of customers, employees, partners and communities is the most valuable asset a company owns, earned through conduct rather than communication. Values work as a compass, guiding behaviour where the rulebook runs out. Rules tell people what they must not do. Values tell them who they are — and so what they will not do, even when nobody is watching and they could easily get away with it.Technology Changes; the Duty Does NotRe-centering ethics would be simpler if the risks remained static. The traditional ones — bribery, conflicts of interest, harassment, third-party misconduct — remain, and artificial intelligence (AI) adds new ground. As decisions on credit worthiness, hiring, dynamic pricing and even audit samples are shaped by AI, we inherit profound questions no algorithm can answer for us. Is the model fair, or has it learned old prejudices at scale? Can its decision be explained to the person it affects? Who is accountable when it gets one wrong? Alongside sit the duty to protect data and the speed at which any lapse becomes public. The work of re-centering is to carry settled principles — honesty, independence, care, accountability — onto this new ground and not let “it is new” become a reason for a lower ethical standard.The Profession That Holds the System TogetherNo profession sits closer to the centre of this than accountancy. The Chartered Accountant is a guardian of trust in the corporate world — the independent voice whose signature turns a company’s own account of itself into something the public can rely on. Investors, lenders, regulators and employees all act on the strength of that assurance.Which is why the ethical aspects described earlier are familiar here. Independence, objectivity, and professional skepticism are not merely terms found in our code of ethics; they are the profession’s explicit answer to high-pressure moments. They are placed above commercial convenience precisely because convenience is the very force arguing on the other side.Back to the Middle of the TableNone of this is a cost centre. Some still see ethics as a speed breaker on the path of high performance; the evidence points the other way. The costs of ethical failure — reputational damage, regulatory action, penalties, lost market share — are neither small nor short-lived. Conversely, fair choices, made consistently, work like compound interest. They accumulate into an unassailable strategic asset that competitors cannot replicate, ensuring that top-tier talent and capital consistently flow toward organisations they respect.Trust compounds the way it is built — one small decision at a time. That is all re-centering asks for: not a glorious programme, but the daily, disciplined habit of noticing and acting upon the right thing to do. The compass still works and the direction is known. The task is to keep ethics in the middle of the table, not as an afterthought once the numbers are settled, but as the frame within which they are made.Which brings us back to that Tuesday evening, and the invoice nobody questioned. Every reader of this article will sit in a version of that room. You may not set the aggressive target or own the process. But you will be there, and you will notice. The whole of ethics, on most days, comes down to one person willing to say: before we decide — is there a question here we are not asking? To ask that question costs a temporary moment of awkwardness. Choosing not to ask costs considerably more, later, to an innocent stakeholder down the line.“Ethics is not tested in big moments alone — it is shaped by everyday choices.”If we hold to that — at every level, and especially where no one is watching — we will not merely have marked a day for ethics. We will have successfully re-centred it, where it was always meant to be.◆◆◆Author may be reached at eboard@icai.inOriginally published in The Chartered Accountant, October 2026, pp. 38–41 (journal pp. 498–501), www.icai.org.
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Section 194-IC, Joint Development Agreements (JDA), TDS, Capital Gains, Section 45(5A), Real Estate, Direct Tax, ICAI Journal
Ep. 542 — Section 194-IC / Clause 393(1): TDS on Monetary Consideration under Joint Development Agreements
CA Journal
· October 2026
00:00
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Section 194-IC / Clause 393(1) TDS on Monetary Consideration under Joint Development Agreements (JDAs) have become a preferred mode of real estate development in India, especially where landowners collaborate with developers without transferring land outright. While Section 45(5A)1/67(14) of the Income Tax Act defers capital gains taxation for individual and HUF landowners to the year of the completion certificate, Section 194-IC/Clause 393(1) mandates deduction of tax at source on the monetary consideration paid under such agreements. This article comprehensively examines the scope, applicability, timing, compliance requirements, judicial precedents, and practical challenges relating to Section 194-IC/Clause 393(1), with specific focus on issues faced by developers and landowners during assessments and audits.This article examines the provisions of Section 194-IC/Clause 393(1) of the Income-tax Act, 1961 (as amended up to the Finance Act, 2023) relating to TDS on monetary consideration under Joint Development Agreements and notes their continuity under the new Income-tax Act, 2025, where Section 194-IC is renumbered as Clause 393(1). The corresponding capital gains provision under Section 45(5A) is likewise renumbered as Section 67(14), with both provisions carried forward under the new legislation without substantive change.IntroductionJoint Development Agreements (JDAs) have become increasingly common in India's real estate sector, particularly in Tier-I and Tier-II cities. In a typical JDA, the landowner contributes land, while the developer contributes capital, construction expertise, approvals, and marketing.To bring clarity to taxation in such arrangements, the Finance Act 2017 amended the Income Tax Act and introduced:Section 45(5A)/67(14) – defers capital gains taxation for individuals/HUF landowners until completion certificate.Section 194-IC/Clause 393(1) – mandates TDS on monetary consideration paid in a JDA covered under 45(5A)/67(14).Thus, 194-IC/Clause 393(1) acts as a revenue safeguard for the Government because capital gains tax gets postponed, but monetary consideration may be paid much earlier.Legislative background and purposePrior to the Finance Act, 2017, taxation of JDAs was governed by general provisions relating to transfer under Section 2(47). Courts had taken varying views on whether handing over of possession under a development agreement constituted a transfer, leading to uncertainty and inconsistent tax treatment. While Section 45(5A)/67(14) deferred capital gains taxation, the absence of a corresponding TDS mechanism created revenue leakage risks. Section 194-IC/Clause 393(1) was therefore introduced to ensure timely collection of tax on the monetary component of consideration.Before the introduction of Section 194-IC/Clause 393(1):Landowners receiving advance payments from developers often did not disclose income promptly.Developers were unsure which TDS section applied — 194-IA, 194-C or 194-J.Capital gains were triggered in the year of signing the JDA due to Section 2(47)(v) read with the Transfer of Property Act.This created substantial litigation and liquidity challenges."Section 194-IC/Clause 393(1) acts as a revenue safeguard for the Government because capital gains tax gets postponed, but monetary consideration may be paid much earlier."ProvisionPurposeSection 45(5A)/67(14)Defers capital gains for landowners to the year of completion certificateSection 194-IC / Clause 393(1)Ensures tax deduction on monetary consideration received earlyFinance Act 2017 introduced a harmonious schemeThus, 194-IC/Clause 393(1) ensures tax compliance on the cash component, even though capital gains are taxable later.Statutory text (simplified)Section 194-IC/Clause 393(1) requires:Developer to deduct TDS @ 10%On any monetary considerationPaid to individual/HUF landownerUnder a specified agreement (i.e., JDA covered by Section 45(5A)/67(14))No threshold limitTDS to be deducted at the time of payment or credit, whichever is earlierApplicability conditionsSection 194-IC/Clause 393(1) applies only when all the following conditions are met:There is a Joint Development Agreement.Landowner is an individual or HUF.JDA falls under Section 45(5A)/67(14).Developer pays monetary consideration (lump sum / installments / rent / hardship compensation / shifting allowance / corpus).Payment is income in nature (not refundable security deposit).It is pertinent to note that Section 45(5A)/67(14) applies only where the specified development agreement is registered, and consequently, Section 194-IC/Clause 393(1) would apply only in such registered agreements.Scope of monetary consideration (broad interpretation)The term monetary consideration includes:Lump sum considerationMonthly compensationGoodwill moneyHardship allowanceTemporary accommodation rent paid to landownerDevelopment charges paid directly to landownerAdvance / token moneyCorpus fundReimbursement that is not purely cost-to-costNot includedConstructed area shareRefundable security depositReimbursement of actual cost (with proof)Purely refundable security deposits, not adjustable against consideration and supported by contractual terms, may generally fall outside the scope of Section 194-IC/Clause 393(1). However, deposits which are adjustable, forfeitable, or linked to consideration may attract TDS implications.It may be noted that the Income-tax Act, 1961 does not provide an exhaustive definition of 'monetary consideration' for the purposes of Section 194-IC/Clause 393(1). The above inclusions represent a conservative interpretative approach based on practical and departmental perspectives and may vary depending on facts and contractual terms.When does TDS arise?At the time of credit in booksor at the time of payment, whichever is earlierThus, even a mere accounting entry triggers TDS.Rate and threshold10%Rate of TDSRe. 1No threshold: TDS from the first rupee20%Rate under Section 206AA if PAN is not furnishedRate: 10%No threshold: TDS from Re. 1 onwardsPAN mandatory: otherwise, Section 206AA applies @ 20%This is stricter than 194-IA (which has a ₹50 lakh threshold).Further, provisions of Section 206AB relating to higher deduction of tax in case of specified non-filers may also be applicable, subject to statutory exclusions.Detailed examplesThe following examples assume that the landowner is an Individual or HUF and that the specified agreement is registered, thereby attracting the provisions of Section 45(5A)/67(14).Example 1: Basic case of lump sum paymentFacts:JDA executed: 15 June 2024Landowner receives: ₹80,00,000 monetary consideration and 40% built-up areaPayment in 4 instalments of ₹20,00,000 eachInstalmentAmount (₹)TDS @10% (₹)Net paid (₹)120,00,0002,00,00018,00,000220,00,0002,00,00018,00,000320,00,0002,00,00018,00,000420,00,0002,00,00018,00,000TDS workingTDS must be deposited monthly and reported in Form 26Q.Example 2: Different timing for TDS vs capital gainsJDA signed: FY 2023-24Money paid: FY 2024-25Completion certificate: FY 2027-28EventProvision triggeredTimingPayment of monetary consideration194-IC/Clause 393(1) TDS @10%FY 2024-25Completion certificate issued45(5A)/67(14) capital gainsFY 2027-28TDS and capital gains occur in different years.Landowner may claim refund for many years.Example 3: Advance paid before signing JDAIf developer pays advance before JDA is executed:194-IC/Clause 393(1) does not applyCould fall under 194-IA (property purchase)Or 194-C (work contract) depending on structureOnce JDA is signed, the amount is re-characterized as 'Monetary Consideration' under 194-IC/Clause 393(1). The developer must reconcile the advance paid and ensure that TDS under 194-IC/Clause 393(1) is discharged, either retrospectively (if the payment was credited to the books) or immediately on re-characterization.However, upon execution of the Joint Development Agreement, where such advance assumes the character of monetary consideration under the specified agreement, the obligation to deduct tax under Section 194-IC/Clause 393(1) may arise at the stage of such re-characterisation.Example 4: Payment to multiple co-ownersIf 3 co-owners receive ₹30 lakh each, the developer must deduct separate TDS entries:Co-ownerPayment (₹)TDS (₹)Net paid (₹)A30,00,0003,00,00027,00,000B30,00,0003,00,00027,00,000C30,00,0003,00,00027,00,000PAN compulsory for each.Interaction with other TDS sectionsSection 194-IC/Clause 393(1) applies only where the conditions of Section 45(5A)/67(14) are satisfied, including landowner being an Individual or HUF and the agreement being registered. In cases where these conditions are not met, applicability of other TDS provisions such as Section 194-IA would depend upon the facts and structure of the transaction.SectionNatureApplicability vs 194-IC/Clause 393(1)194-IC / Clause 393(1)Monetary consideration under JDASpecial provision: applies only when Section 45(5A)/67(14) is triggered (i.e., landowner is an Individual or HUF). Overrides all others in this specific case.194-IAProperty purchaseNot applicable when 194-IC/Clause 393(1) applies. However, if the landowner is a company/firm/AOP (and 45(5A)/67(14) does not apply), 194-IA could potentially be applicable to the transfer of the capital asset, depending on the structure.194-CWork contractGenerally, not applicable to the primary land consideration. May be considered on payments strictly in the nature of construction services provided by the developer to the landowner (uncommon under JDA).194-IRentNot applicable to consideration for land transfer. Only applies if the payment is genuinely for the rent of premises/land usage, separate from the JDA consideration.TDS compliance for developersMonthly complianceTDS deposit within 7 days of month endQuarterly TDS return in Form 26QIssue Form 16A to landownerBooks of accountsDeveloper must create either:Monetary consideration ledgerAdvance to landowner ledgerHardship allowance ledgerShifting compensation ledgerAny credit in these accounts triggers TDS.Challenges for landownersBiggest challenge: TDS credit appears earlyTDS appears in Form 26AS and is also reflected in the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) in the year of deduction. But capital gain is taxed in year of completion certificate as per Section 45(5A)/67(14).This leads to:Refunds for multiple yearsCredit mismatchCash flow issuesLandowners must maintain TDS credit tracking.Practical mistakes seen in assessments/auditsDeducting TDS at 1% (194-IA).Treating constructed area as monetary consideration.Not deducting TDS on monthly hardship allowance.Delaying TDS deduction until completion.Deducting TDS only at project completion, not at payment.Using a common PAN for all co-owners.Judicial precedentsCIT v. Dr. T.K. Dayalu (2011) 336 ITR 617 (Kar.) Issue of transfer under development agreementsJDA creates transfer only when possession is handed over.Helps determine applicability of 45(5A)/67(14).PCIT v. Vembu Vaidyanathan (2019) 107 (Bombay HC) Timing issues in taxation of JDAsReiterated principle that capital gain event happens in year of completion.CBDT Circular No. 2/2018Clarifies that 45(5A)/67(14) applies only to individual/HUF landowners.TDS under 194-IC/Clause 393(1) applies only to monetary consideration.It may be noted that judicial precedents directly interpreting the scope of 'monetary consideration' under Section 194-IC/Clause 393(1) are presently limited.Flowchart: when does Section 194-IC/Clause 393(1) apply?Is the landowner an individual or HUF?No: 194-IC not applicableYesIs there a registered Joint Development Agreement covered under Section 45(5A)?No: 194-IC not applicableYesDoes the landowner receive any monetary consideration? Cash / Cheque / RTGS / Ledger credit etc.No: 194-IC not applicableYes194-IC applies @ 10% Only on the monetary component under the JDAChecklist for developersStageKey compliance requirementDetails / notesBefore executing JDAObtain PAN of each landownerMandatory for correct TDS mapping and TDS credit allocation for each co-owner under Sec 194-IC / Clause 393(1)Identify monetary component of considerationTDS @10% is applicable only on monetary consideration paid by developerIdentify co-owners and respective share %Required to deduct TDS proportionately and report separately in TDS Returns (Form 26Q)During projectDeduct TDS at 10% on every payment or creditDeduct at the earlier of: (a) payment; or (b) credit to landowner ledgerDeposit TDS monthlyDue date 7th of next month, except 30 April for March deductionsFile quarterly TDS returnsFile Form 26Q for all co-owners separately; ensure mapping of payments & challansPost-paymentIssue Form 16A to landownersMandatory TDS certificate to be issued quarterlyMaintain detailed ledgersLedger-wise: Payment Date, Amount, TDS Deducted for audit/tracing purposesReconcile with Form 26AS & AISEnsures landowner receives full TDS credit, avoids future litigationChecklist for landownersStageKey compliance requirementDetails / notesBefore signing JDAClarify monetary componentNeeded to determine TDS u/s 194-IC / Clause 393(1) (10% on monetary consideration). Helps compute future capital gains.Ensure Sec. 45(5A)/67(14) applicabilityAvailable only to individual/HUF landowners and registered JDA; taxation deferred till completion certificate.Review possession-handing clauseTo ensure possession is not considered "transfer" for capital gains unless 45(5A)/67(14) applies.During project executionTrack TDS entriesMatch every payment/credit to correct co-owner ledgers; verify monthly challans.Maintain Form 26AS & AISRegular checking avoids mismatch disputes; ensures landowner receives correct TDS credits.Plan refunds (if excess TDS deducted)Useful when monetary component is staggered or lower than expected.After completion certificateDeclare capital gains correctlyCompute capital gains in year of CC if 45(5A)/67(14) applies; else as per normal transfer rules.Claim full TDS creditsReconcile with 26AS/AIS & developer's Form 26Q; ensure no mismatch in ITR.ConclusionSection 194-IC/Clause 393(1) significantly strengthens tax governance in Joint Development Agreements by mandating withholding of tax on the monetary component payable to landowners. When read together with Section 45(5A)/67(14), it creates a balanced framework—while capital gains taxation is deferred to the year of completion certificate to ease liquidity pressures on landowners, the Government's revenue interests are safeguarded through timely tax deduction at source.Nevertheless, the divergence in timing between TDS deduction and capital gains recognition poses practical challenges, particularly in the form of prolonged refunds, credit mismatches, and cash-flow constraints for landowners, and compliance risks for developers. These challenges underscore the importance of precise drafting of JDAs, accurate identification of monetary consideration, and strict adherence to TDS procedures.Given the increasing prevalence of JDAs in India's real estate sector, a sound understanding of Section 194-IC/Clause 393(1) is indispensable for chartered accountants and tax professionals advising stakeholders. Proper application of this provision can substantially reduce litigation, ensure tax certainty, and facilitate smoother execution of joint development arrangements.ReferencesIncome Tax Act, 1961Finance Act, 2017CBDT Circular No. 2/2018CIT v. Dr. T.K. Dayalu (Kar. HC)PCIT v. Vembu Vaidyanathan (Bom. HC)ICAI Publications – Real Estate Transactions1 Section 45 and its sub-section pertain to 1961 Act, while section 67 and sub-sections pertain to 2025 Act; further, section 194-IC pertains to 1961 Act and section 393 pertains to 2025 Act. ↩Author may be reached at dimplekataria138@gmail.com and eboard@icai.in
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Inbound Secondments, Permanent Establishment (PE), Withholding Tax, Real Employer Test, Short-Stay Exemption, Tax Treaties, Direct Tax, ICAI Journal
Ep. 543 — Navigating Taxation in Inbound Overseas Secondments through the Labyrinth of Confusion
CA Journal
· October 2026
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Navigating Taxation in Inbound Overseas Secondments through the labyrinth of confusionInbound secondments to India involve employees of a foreign company (F Co.) working temporarily for an Indian entity (I Co.), typically while remaining on F Co.'s payroll. Tax issues arise around tax on salary, withholding tax obligations, and Permanent Establishment (PE) risk. Courts assess the "real employer" through operational control, payroll, vested commercial interest of F Co. in operations of I Co., and business conduct, not just formal agreements. Landmark rulings such as Morgan Stanley, Centrica, Northern Operating, Formula One, and Hyatt have progressively refined Service and Fixed Place PE doctrines. Employee short-stay exemptions under Tax Treaties may apply, subject to the foreign employer being considered as the real employer. Strategic planning requires careful scrutiny of functions, assets, risks of I Co. qua F Co., and control thereon by the latter. Further, evolving jurisprudence demands that the facts and arguments are presented holistically and with structure before appellate forums to avoid adverse consequences.IntroductionInbound secondments to India usually refer to cases where employees of a foreign entity (parent, group company, or overseas client – hereinafter called F Co.) are temporarily deputed/seconded to work for an Indian entity (hereinafter called I Co.). Generally, F Co. sends skilled employees to I Co. to provide expertise, train local staff, or manage key projects. For global contracts, part of the work may need to be executed in India under the supervision of foreign personnel. The business rationale of secondment lies in I Co. getting direct access to experienced resources while allowing F Co. to maintain oversight and even call the shots.Generally, secondment is not a permanent transfer; the employee remains on the foreign payroll legally or reserves a lien on social security benefits, etc. with the home employer and works for the Indian company for a limited duration. The employee also receives salary from F Co. into his foreign bank account for administrative convenience. Even if the employee receives salary from I Co. directly in his Indian or overseas bank account, F Co. may continue paying social security benefits to overseas accounts of the employees to ensure continuity after termination of the Indian secondment term/agreement. Generally, the cost in respect of the seconded employee is cross-charged by F Co. to I Co. on a cost-to-cost basis.Secondment documentationA typical secondment arrangement would have three-fold documentation governing the roles, terms and responsibilities between:F Co. and I Co.Inter-firm service agreement / secondment agreementF Co. and employeeAssignment agreementI Co. and employeeLocal employment letterPotential tax controversiesThe following tax controversies may potentially arise in India from this cross-border setup:Taxability of service fees or reimbursement in the hands of F Co.Withholding tax implications on reimbursement.Permanent establishment (PE) implications for F Co. through factors like prolonged stay of employee in India, or excessive control over Indian operations, thereby putting the Indian office at their virtual disposal.Short-stay exemption in the hands of the employee under the relevant Tax Treaty, if any, and incidental withholding tax implications in India on employee's salary in the hands of I Co.Issues 1 to 3: Who is the real employer?These issues rest on one fundamental question i.e., who the real employer is?If the question can be demonstrated in favour of I Co., then it is easy to justify that salary reimbursement to F Co. on a cost-to-cost basis is only for administrative convenience and that once it has carried out TDS on salary under Section 192 of the Income-tax Act 1961 ("the Act"), there is no need for I Co. to examine TDS implications again under Section 195 of the Act on reimbursement of such salary cost to F Co. It is also easy to conclude that if I Co. is the real employer and exercises substantive control on the seconded employee, the latter should not be seen as extended presence of F Co. in India to create a PE in India.However, if the facts tilt in favour of F Co. as being the "real employer", authorities may contend that F Co. is receiving service/manpower supply fees in lieu of lending their employees to India which should be taxed in India as fees for technical services (subject to Tax Treaty benefit, if any) in the absence of a PE or business income in the case of constitution of PE in India. F Co., being seen as the real employer of the seconded employee, may symbolise the former having control over the Indian operation or disposal of I Co. premises, thereby posing PE risk to it.The assessment of parameters defining a master–servant or employer–employee relationship, including directions on 'what to do' versus 'how to do it too,' and the distinction between a 'contract of service' and a 'contract for service,' has become more critical than ever in determining the real employer and the degree of control exercised over the employee during and after secondment.As this forms the focal point of dispute, it has generated a plethora of litigation over time—each case adding fresh perspectives and yielding varied conclusions on fact patterns that are similar yet not identical. The result is a labyrinth of complexity, with several principles already settled by the Apex Court. Yet new dimensions remain unexplored, with tax authorities and appellate forums adopting an evolving ambulatory approach, and judicial scrutiny often lifting the veil on contrived arrangements.Morgan Stanley1Supreme Court, 2007The Apex Court got an occasion to deliberate on the following aspects, where it coined the following principles of law:PE in IndiaIt was held that Morgan Stanley Advantage Services (MSAS), an Indian affiliate, constituted a Service PE of Morgan Stanley US under Article 5(2)(l) of the India–US DTAA.Attribution of profitsOnce the Indian entity (MSAS) was remunerated at arm's length price (ALP) for the services rendered, no further profits could be attributed to the foreign company in respect of the PE. Thus, transfer pricing and PE profit attribution principles were harmonized.Stewardship vs. deputationA line was drawn between stewardship function and deputation. Employees sent on "stewardship" functions (oversight, ensuring quality, protecting investor interests) do not create a PE; however, employees seconded and working under the control of I Co. could contribute to PE characterization.Centrica2Delhi High Court, 2014Another landmark Delhi High Court judgement dealt with Permanent Establishment (PE) issues in the context of secondment of employees.Centrica UK and other group entities seconded some employees to its Indian subsidiary, Centrica India Offshore Pvt. Ltd. (CIOP), for managerial and technical functions. It was held that if secondees remain employees of F Co. (contractually, payroll, repatriation rights) and render services in India "on behalf of F Co.", F Co. may be considered to have a Service PE in India, even if I Co. reimburses costs.Northern Operating Systems3Supreme Court, 2022The Supreme Court observed that the secondment arrangement was essentially the foreign entity "lending" its employees to the Indian company. Reimbursements of salary cost were consideration for a taxable supply of manpower services under indirect tax law. This has triggered a spur of discussion of re-evaluating the fundamentals of the secondment arrangement in the corridors of the income tax office too.Hyatt4Supreme Court, 2025The Supreme Court got the occasion to decide whether Hyatt International had a Fixed Place Permanent Establishment (PE) in India under Article 5(1) of the India-UAE DTAA, through its Strategic Oversight Services Agreement (SOSA) with Indian hotel companies, thereby making its income taxable in India.The Supreme Court examined the case through a Fixed Place PE lens and affirmed the same, owing to many factors, some of which are:Continuous and substantive operational control exercised by Hyatt over hotel operations.Exclusive possession of premises is not essential, and stability, productivity and dependence tests form the principle of Disposal and Fixed Place PE test; following its coordinate bench ruling in the case of Formula One.5Frequent visits coupled with intermittent return by Hyatt's executives collectively established a continuous business presence.Revenue-linked service fee arrangement seen as vested interest of F Co. in controlling the operations of I Co.India PE, assessed as a separate taxable entity and merits profit attribution exercise, regardless of global losses of F Co.How the doctrine evolved2007Morgan StanleyService PE; stewardship vs. deputation2014CentricaService PE despite cost reimbursement2022Northern OperatingSecondment as supply of manpower2025HyattFixed Place PE through controlThus, from 2007 (Morgan Stanley) to 2014 (Centrica) to 2022 (Northern Operating) to 2025 (Hyatt), the controversy regarding taxation of employees sent on secondment has come a long way, showing how Indian courts have progressively refined the PE doctrine and applied strictness on secondments and foreign control in India, moving from examination of Service PE to even Fixed Place PE. Courts are consistently looking at real control, payroll, repatriation rights, and commercial nexus, not just contracts.Issue 4: Taxability of salaryTaxability of salary in India (also linked with withholding tax thereon) is founded on the basic principle of where services are rendered or performed, regardless of where it is paid. While a resident as well as non-resident employee is hence taxable in respect of salary accrued during the exercise of employment in India, some benefit may be explored under Tax Treaties in respect of a non-resident employee.Short-stay exemptionMost Tax Treaties with India provide a 183-day or 90-day exemption rule under Article 15/16 dealing with Taxability of Dependent Personal Services. The same, popularly called 'Short stay exemption,' signifies that salary will not be taxed in India for an employee who is not a resident in India if all 3 conditions are met (taking the example of a typical tax treaty):Stay in India ≤ 183 days in the relevant fiscal year or 12-month period, as the case may be;Salary is paid by, or on behalf of, a non-resident employer; andSalary cost is not borne by a PE or fixed base of such an employer in India.If any of these conditions fail, salary remains taxable in India. However, if all three conditions are satisfied in a short-term secondment case, salary may come out of the contours of Indian taxability.But if the I Co. bears the cost or controls the secondee, Indian tax authorities may treat I Co. as the "real employer," making salary taxable in India even for short secondments.Secondee scenariosThus, the following potential scenarios typically emanate from an Indian non-resident secondee perspective:#ScenarioLikely outcome1Salary paid abroad by F Co., no recharge to I Co., stay < 183 daysLikely exempt under Tax Treaty2Salary paid in India by I Co.Taxable in India, regardless of stay period3Salary split-pay (part abroad, part in India)Entire salary relating to services in India taxable4Income taxed in both countriesEmployee may have to factor foreign tax credit admissibility in his country of residence for taxes suffered in IndiaIndian tax outcome for a non-resident secondeeThus, the real employer test can have a bearing on employee tax also. Interestingly, it runs contrary to the findings on Issues 1 to 3. In other words, if F Co. is determined to be the real employer, issues 1 to 3 are likely to result in adverse consequences for the assessee in terms of taxability and PE in the hands of F Co. and additional withholding tax obligations, if any, on I Co. qua F Co.ConclusionOverall, while standardised contracts may be in place, the operational reality, shaped by the actual conduct of business, the foreign company's direct commercial interest in the profitability or revenue of the Indian entity, and insights from employee interviews during tax surveys on 'who truly exercises control,' now forms the centre-stage of judicial evaluation of case-specific facts. This means strategic tax advice based on 'one size fits all' will no longer suffice. Functions, assets and risks of I Co. qua F Co. will have to be closely scrutinised by applying different perspectives from different judgements. The need is to exercise caution at the representation as well as planning stage.Representations in ongoing or past casesEvolving jurisprudence demands that the facts and arguments are presented holistically and with structure before appellate forums. This is essential to prevent restrictive readings of findings, confusion from overlapping agreements, overlooked arguments, omission of relevant precedents, or leaving appellate forums with incomplete issues to adjudicate. Incomplete facts or partially addressed questions may prejudice not only the assessee's case but also mislead future reliance on the decision as binding precedent.Planning for the futureWhen designing cross-border arrangements, it's important to ensure that F Co. exercises only the level of control over I Co. that is necessary for its role, whether as a service provider, franchisor, licensor, or the founder of a project office or capability center in India.Keeping the control limited in this way is essential for maintaining tax neutrality over time. Any level of control which crosses this line of control may be seen as extended arms of F Co. in India, long enough to be pulled to pay tax in India.Further, if at the planning stage, F Co. is confident of satisfying the real employer test, I Co. can use the same to explore the benefit of short-stay exemption for the purpose of employee withholding tax under the Tax Treaty, if any. Where the burden of incremental tax in India quo the host country falls on I Co/F Co., this line of analysis may create potential tax savings for the taxpayer group, also saving the non-resident employee from the hassle of seeking foreign tax credit in his country of residence.Case citationsDirector of Income Tax (International Taxation) v. Morgan Stanley & Co. Inc. (2007) 292 ITR 416 (SC) ↩Centrica India Offshore (P.) Ltd. v. CIT (2014) 364 ITR 336 (Del) – SLP dismissed later by the Supreme Court ↩C.C., C.E. & S.T. – Bangalore (Adj.) v. Northern Operating Systems Pvt. Ltd. (2022) 141 taxmann.com 289 (SC) ↩Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax (2025) 176 Taxmann 783 (SC) ↩Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation, Delhi (2017) 394 ITR 80 (SC) ↩CA. Shreya Daga The author may be reached at dagashreya1992@gmail.com and eboard@icai.in.
Ep. 544 — Financial Parenting: How Early Money Lessons Shape Future Financial Behaviour
CA Journal
· October 2026
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Financial Parenting How early money lessons shape future financial behaviourThis article explores the concept of financial parenting, emphasising its crucial role in shaping children’s long-term financial behaviours and well-being. It highlights how parenting styles, behaviour modelling, and early financial lessons influence attitudes towards saving, spending, and managing risk. The article offers age-appropriate practical strategies for parents that help inculcate financial discipline in children. It concludes by emphasising the importance of intentional financial parenting as both a personal and professional responsibility, promoting value-based money education to nurture financially competent and ethically responsible adults.ARAsritha RajResearch ScholarVRDr. Vidhya RavindranadanAcademicianIntroductionIn today’s fast-paced, consumer-focused society, financial literacy is essential, not optional. As people handle both physical and digital forms of money from a very young age, the basics of financial attitudes, problem-solving skills, financial behaviours, and decision-making skills are often established well before they undergo formal financial education. Such initial financial teaching and learning happens at home, with parents being the teachers in the financial attitude and growth of their children. However, the idea of financial parenting has gained importance in recent years.Financial parenting primarily includes the practices, strategies, and communication styles used by parents to impart values, habits, attitudes, and knowledge about money to children. Financial parenting is not the traditional financial education that is normally introduced in late adolescence or early adulthood. It begins very early at home through everyday conversations between children and parents about needs and wants, choices made while shopping, and by watching how parents handle their own money, their savings, loans, debts, etc. Children usually learn these basic lessons on money through observations, and these basics influence their financial behaviours, discipline and attitudes later in their adolescence and adulthood.Financial parenting is important and relevant in a consumer-driven economy where material achievements are associated with individual value and where poor financial decisions can lead to debts and subpar credit ratings. Since the online shopping platforms, digital transactions, and credit systems are wider and more common, and children are exposed to all of these at a very young age, having good financial knowledge at an early age has become a necessity. Thus, the importance and relevance of financial parenting and financial socialisation have also increased. Parents, being the first teachers of children, should always adopt a proactive role as mentors as well as financial educators for children. Considering these factors, this article delves into the importance of financial parenting, its different aspects, and the effects of early financial socialisation on long-term financial skills.Financial parentingParents’ financial attitudes and approaches significantly influence the financial habits and well-being of children as well. Financial parenting incorporates both the intentional and unintentional ways in which a parent shapes their children’s attitudes, perspectives, beliefs, and behaviour regarding finance. It also incorporates a parent’s approaches towards educating children about financial matters such as saving, spending, budgeting, debt management, etc. There should be effective communication between parents and children regarding finances, as it can also influence the overall well-being of children. Parenting plays an important role in teaching financial principles to children. Teaching children to save and use money wisely from early years can influence their financial decision-making and independence throughout their lives.Financial parenting includes another important psychological concept related to finance called financial socialisation. Individuals gain and nurture financial knowledge, skills, values, attitudes, and behaviours essential for effectively navigating the economic landscape through financial socialisation. Financial socialisation starts in early childhood and progresses into adulthood, with parents acting as the primary influencers during the crucial developmental years of a child. It is a learning process about finances and includes three major psychological pathways, which are observation, conversation, and experience. These are interconnected, and children acquire both financial abilities and psychological qualities through these.ObservationWatching how parents save, pay bills, handle debt and budget.ConversationTalking openly about the family budget, decisions and money rules.ExperienceHands-on chances to plan, spend and save money themselves.Children learn by observing parents’ savings attitude, financial challenges and how they handle their debts, how and when they pay bills, how they invest, how they make a monthly budget, etc. These need not be told or taught explicitly, but children observe these behaviours directly or indirectly and may act similarly when a similar situation comes in their lives. Observation also influences their views, attitude and behaviour not only in childhood but throughout their lives. Similarly, observation can help in avoiding threats. In some cases, children might have observed the consequences of wrong financial decisions or debts and avoid them in their adult lives. Learning through observing the consequences is called vicarious learning in psychology and is also a part of observation.Conversations involve direct exchange of verbal information between children and parents, where parents can discuss family budget, financial decisions, clarify financial doubts of the child, establish money usage rules, etc. If the child demands anything and the parents are not able to buy it for them, then it should be explained to the child. Every child should have an age-appropriate idea of the financial status of their parents. Children who often participate and children of parents who include them in financial discussions are more likely to develop confidence in managing money and making informed and effective financial decisions.Experience incorporates the practical opportunities where children manage money, such as preparing a shopping list for themselves, making purchases, saving for a desired item, etc. This can even include taking the child for monthly shopping and making the child check the price of items, talking about the value of money and helping them to identify their wants and needs and explaining the expenditure to them, but this has to be done age appropriately. Discussions and conversations will be fruitful only when they lead to experiences, so providing such opportunities from a young age itself influences the financial decision-making and well-being throughout life.Financial socialisation starts in early childhood and progresses into adulthood, with parents acting as the primary influencers during the crucial developmental years of a child.Psychological foundationsUnderstanding how financial discipline, attitude and behaviours are passed down from one generation to another necessitates an analysis of psychological theories that explain parent-child relationships and development. Three core frameworks that provide insights into how financial parenting shapes a child’s lifelong relationship with money are Social Learning Theory, Attachment Theory and Money scripts.Social learning theoryAlbert Bandura proposed the Social Learning Theory in 1977, positing that individuals learn through observation and imitation, particularly when the behaviour is shown by someone with authority or emotional significance, such as parents in the case of children. Children absorb many financial habits not only through direct teaching but also by observing how their parents manage money. So, children who observe the financial planning, cost comparisons, monthly budgeting, savings, etc, of parents are more inclined to adopt responsible financial decisions and behaviours later in their lives. On the other hand, children who witness impulsive spending, secrecy surrounding finances, or consistent financial strain may develop unhealthy financial habits and poor financial discipline later in their lives. Modelling or observational learning works at a subconscious level, and so it is especially influential too. Thus, children construct beliefs about money based on their observations, even if those behaviours are not explicitly taught or discussed. This highlights the necessity for alignment between what parents communicate and what they practice.Attachment theoryThe Attachment theory, formulated by John Bowlby, focuses on the role of early emotional connections in developing long-term trust and self-regulation patterns in children. When it comes to financial parenting, the nature of the attachment between parents and children significantly impacts how children manage money later in their lives. Secure attachment styles include consistent emotional support, trust and security from parents, and such children appear to have healthy financial management skills and more confidence in money management. They take risks, practice delayed gratification, and seek assistance whenever necessary. Conversely, children with insecure attachment styles are those who experience parental neglect or anxiety, and might either become overly reliant on others for financial decisions or develop a strong sense of independence and distrust regarding finances later in their lives. In this way, financial behaviours are not merely cognitive or skill-based; they are deeply connected with emotional regulation, self-esteem, and feelings of security, all of which are shaped by early attachment experiences, mainly parenting.Financial behaviours are not merely cognitive or skill-based; they are deeply connected with emotional regulation, self-esteem, and feelings of security.Parental money scriptsMoney scripts are the fundamental beliefs about money that are formed during early childhood. It is the unconscious frameworks of an individual’s feelings, thoughts and actions related to money. The tone, non-verbal cues including facial expressions, body language and actions that parents exhibit during financial discussions influence the money scripts of children. Money scripts basically include Scarcity, Abundance, Shame-based, and Avoidant scripts.ScarcityScarcity scripts arise when children receive ongoing messages about a lack of money. For example, when parents tell “we can’t afford that,” “we can buy it when we have money,” etc., children get a feeling of fear, anxiety, or hoarding tendencies. When children continuously hear such scarcity scripts, there is a chance of being stingy and anxious in adulthood too.AbundanceUsually, Abundance scripts in children develop when money is perceived as unlimited or when they are encouraged to spend without consideration for budgeting, potentially resulting in impulsivity or excessive financial confidence. When parents buy everything for the child, the child feels that money is abundant. Such children, when in adulthood, may become impulsive buyers with low financial discipline.Shame-basedShame-based scripts originate in families where money is linked to guilt, secrecy, or moral judgment, often leading to avoidance of financial conversations or a fear of failing financially. Some families lack conversations about finances; maybe one parent handles everything, or sometimes both parents together, without the involvement of children. Children from such families see money as a secret thing and avoid discussions or being open later, also.AvoidantAvoidant scripts are established in homes where financial topics are completely off-limits, resulting in a lack of financial knowledge and an unwillingness to engage in financial planning.Once ingrained, these beliefs can even outweigh formal financial education and become strong predictors of financial decisions in adulthood.Common parenting styles and their financial implicationsParenting affects the emotional development, learning and self-esteem, which are necessary for financial socialisation. The pioneer in parenting studies, Diana Baumrind, identified four types of parenting styles in the 1960s. They are authoritarian, authoritative, permissive, and neglectful parenting styles. Parenting can predict a child’s financial behaviours, beliefs, values, and their overall ability to manage money in the long run. Low responsivenessHigh responsivenessHigh controlAuthoritarianStrict, rule-bound, fear-driven money rules AuthoritativeWarmth with structure; mistakes become lessonsLow controlNeglectfulLittle guidance or exposure to money PermissiveNurturing, few limits on spendingBaumrind’s four styles, arranged by level of control and emotional responsiveness. Select a style to read more.Authoritarian parentingAuthoritarian parents show high levels of control and low levels of emotional responsiveness. They are restrictive and punitive in nature. When in financial education, they are strict, rule-oriented, and fear-driven, leaving little room for discussion. Children are expected to adhere to financial rules without comprehending their underlying reasons. Therefore, children may experience guilt or anxiety related to financial choices, which can lead to avoidance behaviour, lack of confidence, or an over-reliance on others. They might also become impulsive and show risky behaviours in adolescence and adulthood.Authoritative parentingAuthoritative parents show high levels of responsiveness and expectations. They show warmth with structure, provide clear guidelines and promote independence. Authoritative parents often involve their children in conversations about budgeting, saving, and making financial choices and decisions. They allow their children to make financial decisions appropriate for their age and use mistakes as opportunities for teaching. This parenting style promotes economic independence and competence in children. Children raised by authoritative parents tend to be more likely to adopt strong financial values, show financial discipline, and gain confidence in handling money throughout their lives. Such children, when in adulthood, are also more likely to pursue financial knowledge and plan for their future, showcasing improved financial literacy and responsible behaviours throughout their lives.Permissive parentingPermissive parents provide a lot of nurturing while establishing only a few rules or expectations for children. In terms of finances, they might not set limits for spending, frequently give money without expecting accountability, and avoid clear financial conversations. Children brought up in permissive environments often become impulsive and develop inadequate saving habits and lack financial discipline. Due to vague or inconsistently applied financial boundaries, these children may prioritise immediate satisfaction over learning about delayed rewards. As adults, this can result in overspending, poor budgeting abilities, and relying on credit without fully grasping the financial implications.Neglectful parentingNeglectful parents exhibit low involvement and guidance. Thus, children do not receive guidance or exposure regarding money. Financial discussions may be absent from family interactions, making the child navigate financial challenges independently. As a result, they often develop poor financial literacy and financial discipline, confusion about financial standards, and a lack of readiness for real-world financial responsibilities. Thus, children of neglectful parents may face financial instability, lack effective budgeting and saving techniques, and poor financial decision-making and planning in their adulthood.In conclusion, parenting styles greatly affect how children manage money throughout their lives. Among the four parenting styles, Authoritative parenting is the most effective in fostering lifelong financial well-being. Conversely, permissive, authoritarian, and neglectful parenting styles pose distinct challenges that can hinder a child’s ability to handle finances effectively.Practical strategies for parentsParents who have deep financial knowledge often face the difficulty of having financial expertise and translating that knowledge into relevant, age-appropriate educational experiences for their own children. The evidence-based strategies outlined below can provide a valuable framework for promoting positive financial attitudes and behaviours within the home environment, establishing a strong base for adult financial wellbeing.The capacity to postpone immediate gratification is a significant indicator of future financial stability. Parents can foster this skill by assisting children in establishing both short-term and long-term saving objectives, such as saving money for a toy, and identifying their needs and wants. Tools like reward charts and goal charts motivate and assist children in grasping the connection between effort and reward. This approach promotes qualities like patience, discipline, and intrinsic motivation, which are vital for effective financial management.Age-specific financial tasksProviding age-appropriate financial responsibilities will gradually enhance their financial decision-making skills and self-assurance, and thereby their financial well-being. This is an important part of financial parenting, too. Age-appropriate tasks that improve financial skills are as follows:Early childhoodAges 5–8Fundamental concepts related to money can be introduced to the child. Activities can include encouraging children to make needs and wants charts and differentiating between the two, and basic saving methods using clear jars or piggy banks.Middle childhoodAges 9–12Using interactive resources such as budgeting games or family-oriented financial challenges can make the learning process enjoyable and practical. Activities can include teaching children to give money and check balances from shopkeepers, providing a modest, regular allowance and promoting budgeting by categorising spending.AdolescenceAges 13–18Parents should explain basic financial ideas like compound interest or credit with real-life examples. Urge engagement in more complex activities such as managing a savings account, keeping track of personal expenses, etc.Some other effective approaches are engaging children in everyday family financial decisions, such as shopping for groceries within a budget, comparing prices, or organising a vacation while considering financial limitations. This involvement improves practical numeracy and decision-making abilities and emphasises the importance of money and financial planning.Discussing mistakes and financial valuesFostering an environment where financial errors are openly discussed instead of being met with punishment encourages a positive attitude towards learning and self-improvement. When children spend beyond their means or make unwise financial decisions, parents should use such instances as opportunities to teach, discussing what went wrong, what alternatives could have been considered, and how to improve future decisions.By incorporating these practical approaches into their daily routines, parents can significantly influence the development of financially savvy, ethically aware, and emotionally intelligent future adults. Such initiatives enhance individual financial health and support larger societal objectives of economic accountability and engaged citizenship.ConclusionFinancial parenting should be considered as a deliberate and value-based responsibility in today’s consumer-driven economy. Beyond managing personal finances well, all parents can exemplify and teach effective financial practices, influencing their children’s lifelong relationship with money. Intentional financial parenting blends technical knowledge with emotional intelligence, turning abstract financial concepts into practical lessons in discipline, responsibility, and ethics.Parents can enhance financial literacy and character development by engaging children in age-appropriate financial activities. The financial experiences that children encounter, including their financial independence, risks, scarcity and their responsibilities, can shape their attitudes toward money in adulthood. These initial financial learnings are not just standalone occurrences; they are intertwined into the child’s evolving sense of self and shape their financial choices throughout their life.ReferencesBandura, A., & Walters, R. H. (1977). Social learning theory (Vol. 1, pp. 141–154). Englewood Cliffs, NJ: Prentice Hall.Baumrind, D. (1966). Effects of authoritative parental control on child behaviour. Child Development, 887–907.Bowlby, J. (1979). The Bowlby-Ainsworth attachment theory. Behavioural and Brain Sciences, 2(4), 637–638.Estlein, R. (2016). Parenting styles. Encyclopedia of Family Studies, 1–3.Krisdayanthi, A. (2019). Penerapan financial parenting (gemar menabung) pada anak usia dini. Pratama Widya: Jurnal Pendidikan Anak Usia Dini, 4(1), 1. https://doi.org/10.25078/pw.v4i1.1063Lee, S.-A., & Yu, J. J. (2017). Parenting, adolescents’ future orientation, and adolescents’ efficient financial behaviours in young adulthood. Journal of Social Sciences, 13(4), 197–207. https://doi.org/10.3844/jssp.2017.197.207Rudi, J. H., Serido, J., & Shim, S. (2020). Unidirectional and bidirectional relationships between financial parenting and financial self-efficacy: Does student loan status matter? Journal of Family Psychology, 34(8), 949–959. https://doi.org/10.1037/fam0000658Serido, J., Shim, S., Mishra, A., & Tang, C. (2010). Financial parenting, financial coping behaviours, and well-being of emerging adults. Family Relations, 59(4), 453–464. https://doi.org/10.1111/j.1741-3729.2010.00615.xThe authors may be reached at eboard@icai.inPublished in The Chartered Accountant, October 2026, www.icai.org
Social Stock Exchange, SSE, SEBI, Zero Coupon Zero Principal (ZCZP), CSR, Impact Investment, Education Funding, NPO, Financial Instruments, ICAI Journal
Ep. 545 — Reimagining India's Social Stock Exchange: From Philanthropy to Sustainable Impact Investment
CA Journal
· October 2026
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Reimagining India's Social Stock Exchange: From Philanthropy to Sustainable Impact InvestmentIndia's Social Stock Exchange (SSE), announced in the Union Budget 2019–20 and operationalized during 2022–23, marks a significant initiative to bridge capital markets with social sector financing. The SSE framework envisages a wide range of financial instruments, including equity, debt, social impact funds, and development impact bonds. However, in practice, operations are currently confined to Zero Coupon Zero Principal (ZCZP) instruments, which function more like structured donations without offering financial returns. This article undertakes a critical evaluation of the SSE framework, tracing its regulatory evolution, current adoption levels, and inherent structural limitations. It further explores the potential role of SSE in addressing persistent funding gaps particularly in the higher education sector, drawing parallels with global university bond markets. The discussion concludes by advocating for the introduction of return-linked impact instruments to broaden investor participation and strengthen the long-term sustainability of the SSE.Investors / CSR FundsSocial Stock Exchange (SSE)Social EnterprisesSocial Impact OutcomesHow capital moves through the SSE ecosystemBackgroundThe Social Stock Exchange (SSE) was conceptualized in 2019 and became operational as a segment of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) between 2022-23. The primary objectives are to facilitate financing of social enterprises, to improve transparency and accountability, enable impact-based investing and standardize reporting of social impact. As Education and Healthcare are primary concerns to measure a country's development and achievements, the concept of SSE is built on the premise that private sector and the not-for-profit sector can play a significant role in national development outcomes if more funding is made available to them. Let us first understand the regulatory framework of SSE.FrameworkThe framework is based on regulations as notified by the Securities and Exchange Board of India (SEBI) and SSE operational guidelines issued by NSE & BSE which are as follows.Eligibility and recognition as Social EnterpriseAs per the SEBI framework, to participate in the SSE ecosystem, an entity must qualify as a "Social Enterprise", which can be either a Not-for-Profit Organization (NPO) or a For-Profit Social Enterprise (FPE).Eligibility conditionsPrimacy of social intent: The majority of the eligible social activities are aligned with SD goals. The enterprise must primarily engage in social activities such as:EducationHealthcarePoverty alleviationEnvironmental sustainabilityLivelihood generationThe 67% rule as critical requirement: As per SEBI's prescribed threshold under SSE regulations, the entity must demonstrate that at least 67% of its activities are aligned with social objectives, which are measured through Revenue, Expenditure, and Beneficiary base.Registration requirements for NPOsAs per regulations, NPOs are required to register separately on SSE before raising funds. The following are key conditions for registration:Must be registered as:Charitable TrustSocietySection 8 CompanyMust have:Valid Income Tax registration (12A/12AB/10(23C))Valid 80G certificationMinimum 3 years of existenceMinimum:₹50 lakh annual expenditure₹10 lakh funding in previous yearNo history of fraud, default, or regulatory violationsAdditionally, SEBI has also relaxed norms such as registration validity, which has been extended to 3 years without fundraising, aimed at encouraging greater participation.Fundraising instruments and listing requirementsThe SSE framework provides multiple instruments, but currently Zero Coupon Zero Principal (ZCZP) instruments are operationalized in the first phase. ZCZP instruments, as defined under the SSE framework, are unique securities issued by NPOs with no interest payment, no principal repayment and returns only in the form of social impact.As per listing guidelines, key conditions for issuance of ZCZP are as follows:Minimum issue size₹50 lakhMinimum application size₹1,000Minimum subscription75% (50% in certain cases)Form of issueDematerializedTransferabilityNon-transferable during tenureDisclosure and compliance frameworkThe SSE framework mandates detailed disclosure requirements such as:Audited Financial statementsGovernance structureDetails of past social impactUtilization of fundsAnnual impact report, evaluated by a SEBI-recognized social impact assessor etc.Governance and institutional mechanismAs envisaged under the SSE framework, the platform operates through a multi-layer governance structure such as:SEBI, as a RegulatorStock Exchanges (NSE/BSE), for operational managementSSE Governing Council, for policy oversightSocial Impact Assessors, for independent evaluationThis institutional framework ensures that SSE maintains transparency, credibility and investor confidence. This regulatory framework attempts to integrate financial market discipline with social impact objectives. It also envisages helping social organizations diversify their financing mechanisms so that they can scale up their operations.Issues and challengesIndia's social sector faces a funding gap due to reliance on traditional fundraising through CSR, donations, and grants. SSE envisages the development of the social sector by enabling diverse funding channels on a common platform with uniform frameworks in reporting, measurement and standards.India's social sector faces a funding gap due to reliance on traditional fundraising through CSR, donations, and grants. SSE envisages the development of the social sector by enabling diverse funding channels on a common platform with uniform frameworks in reporting, measurement and standards. It allows social enterprises to raise funds while ensuring accountability and measurable impact outcomes. Theoretically, the SSE framework offers diverse instruments like equity, debt, social impact funds (through AIFs), development impact bonds and ZCZP bonds, but practically only one instrument, i.e. ZCZP, has been used so far. SSE currently operates closer to a regulated donation-based platform.CSR and SSE linkageA significant policy development strengthening the linkage between Corporate Social Responsibility (CSR) and the Social Stock Exchange (SSE) ecosystem was introduced by the Ministry of Corporate Affairs (MCA) through the Companies (CSR Policy) Amendment Rules, 2026, notified on 27 May 2026. As notified by MCA, these amendments formally recognize subscription to ZCZP instruments listed on SSE as an eligible CSR activity under Schedule VII of the Companies Act, 2013. The amendment allows companies to deploy up to 10% of their annual CSR obligation through such instruments. These ZCZP instruments must be issued by eligible NPOs registered on the SSE in accordance with SEBI regulations. Importantly, companies investing through this route are exempt from impact assessment requirements, thereby easing compliance while enhancing transparency through SSE-based disclosures.This reform is particularly relevant given the scale of CSR funding in India. As per MCA data available on the national CSR portal, companies have spent ₹40,000+ crore in FY 2024–25, reflecting steady growth in corporate participation as per the CSR graph given in Figure 1.Figure 1: CSR spending in India, last 5 years (₹ crore)CSR spent in last 5 years Line chart showing CSR spending rising from about 26,000 crore in 2020-21 to over 40,000 crore in 2024-25. 0 10,000 20,000 30,000 40,000 ~26,200 ~26,600 ~31,000 ~36,000 40,000+ 2020-21 2021-22 2022-23 2023-24 2024-25 Financial year ₹ in croreValues for 2020-21 to 2023-24 are approximate readings from the original chart; FY 2024–25 is ₹40,000+ crore as per MCA data.If we look at the composition of CSR spending for FY 2024-25, as shown in Figure 2, the majority of CSR expenditures are spent on education and healthcare.Figure 2: Composition of CSR expenditure, FY 2024-2555%education +healthcareEducation34%Healthcare21%Environment & Sustainability8%Rural Development & Livelihood8%Gender Equality & Women Empowerment4%Sports Development2%Other Social Initiatives23%By formally integrating SSE into the CSR framework, the MCA has created a regulated, transparent channel for channelizing a portion of large CSR funds, potentially addressing funding gaps in critical sectors such as education and healthcare. This may also create the kind of demand the social stock exchange is lacking so far.Scalability bottlenecksNPOs registered on SSE90+Mobilized via SSE listing₹40+ croreRegistered NGOs in India4 lakh+SSE penetration< 0.02%However, scalability is still a bottleneck due to various reasons. Over 90 NPOs are registered on SSE, but only a limited number have successfully listed and raised funds. As per recent data, approximately ₹40+ crore has been mobilized through SSE listing. India has more than 4 lakh registered NGOs, but SSE penetration is less than 0.02%. One of the major reasons could be the lack of financial incentives to impact-oriented investors since ZCZP is positioned as a "donation".From the perspective of NPOs, registration on SSE is not always straightforward. Smaller organizations often face challenges in meeting eligibility thresholds relating to expenditure, governance documentation, and impact reporting. Further, continuous disclosure requirements, annual impact assessments, social audits, and compliance obligations may require specialized professional support, creating additional administrative and financial burdens. As a result, several grassroots organizations may find the SSE framework credible but resource-intensive during the initial years of adoption.From the perspective of retail and impact-oriented investors, the absence of financial returns remains a key deterrent. While investors appreciate transparency, governance standards, and measurable social outcomes, many prefer instruments that offer a combination of financial and social returns. Unlike traditional investments where risk is compensated through interest, dividends, or capital appreciation, ZCZP instruments provide only social impact. Consequently, SSE currently appeals primarily to philanthropists, CSR contributors, and impact-focused donors rather than a broader pool of retail investors.SSE: education sector perspectivesEducation is the core pillar of "human capital development" under Viksit Bharat, and India aims to become a global knowledge hub by 2047.The Union Budget 2025–26 allocated approximately ₹50,000+ crore for higher education and ₹78,000+ crore for school education, while the Ministry of Education received a total allocation of approximately ₹1.28 lakh crore. Despite these allocations, public expenditure on education remains around 4% of GDP against the National Education Policy (NEP) target of 6% of GDP. Limited research funding, underfunded infrastructural expansion plans and lower GER are a few other challenges that the Indian Higher Education system is currently facing. Just like developed countries, India also has research ambitions in semiconductors, quantum computing, aerospace technology, artificial intelligence, biotechnology, green energy, etc., which require long-term and persistent funding support. Government funding alone cannot achieve 2047 targets.India has more than 1000 Universities. Several Indian Universities are compared with the best Universities in the world. Universities in India are dependent on traditional funding sources such as government grants, philanthropic donations/CSR and academic fees.In the last two decades, India's higher education ecosystem has witnessed a significant transformation with the rapid rise of private universities and institutions playing a critical role in expanding access to education. Private universities form a large share of institutions but a relatively smaller share of enrolment and academic influence. One of the key reasons for this imbalance lies in funding asymmetry between public and private institutions. Public institutions receive support in terms of government grants, central research funding schemes and funding for infrastructure expansion and research labs, etc., whereas private universities and institutions have limited access to large-scale research grants and largely depend on academic fees. Having worked with the higher education sector, I have observed that even institutions with strong academic aspirations often defer research and infrastructure investments due to funding limitations and competing operational priorities.Many leading Indian private universities have set ambitious goals such as achieving global rankings, becoming research-intensive institutions and building international campuses and collaborations. However, these aspirations require multi-decade investment cycles, large upfront capital and sustained funding sources.Challenges faced in achieving these aspirations include:High capital requirement for advanced laboratories, research centres and technology infrastructure.Limited research funding since the majority of government research grants are available to public institutions.Difficulty in attracting global research talent due to funding limitations.Education funding gapParameterPublic universitiesPrivate universitiesFunding sourceGovernment grantsFees / Donations / CSRResearch fundingHighLimitedInfrastructureStrongDevelopingFinancial stabilitySecureDependentThese challenges show that current reliance on fees and donations is insufficient to support such ambitions. Therefore, there is a need to revamp the education financing model, and SSE can play a pivotal role in this. However, SSE is still at a relatively nascent stage and will mature over the coming years. The existing instrument may not sufficiently attract retail investors, as instruments like ZCZP do not give any return.Global university bond marketsIf we talk about countries like the USA, UK, Singapore, etc., education sectors like universities can raise funds by issuing bonds (secured/unsecured) which carry a 1% to 6% coupon rate, with maturity tenures of 25 years to 100 years. The purposes include financing campus expansion, strengthening infrastructure, upgrading academic facilities, and enabling intensive research ecosystems. Alumni and high-net-worth families are also allowed to invest in the bonds issued by universities, apart from pension funds, insurance companies, banks, mutual funds, etc. Lower risk, stable income, and tax benefits could be attractions for investors. Long-tenure maturity and lower coupon rates could be the reasons why universities explore bond issuances.Singapore Management UniversityRaised $100 million through its 2nd series of bond issuance in May 2026 with a 7-year tenure carrying a 2.02% coupon, following its inaugural sustainability bond issuance in July 2025. The proceeds are meant to finance or refinance projects of green buildings, renewable energy, access to essential services, pollution prevention and circular economy, and water and wastewater management.Harvard UniversitySuccessfully accessed capital markets through bond issuance in the years 2024 and 2025 to finance academic infrastructure, research facilities, technology investments and long-term campus development.India currently does not have a structured education bond market or university bond issuance framework. Existing financing mechanisms are limited to loans, grants, and CSR funding. Unlike developed economies where universities access long-term capital through bond markets, India's higher education financing remains largely dependent on non-market sources, highlighting a critical gap in financial innovation.Transition from philanthropy to impact investment: bridging the gapGenerally, donations or CSR funds are made for tax benefit purposes or as a mandatory requirement. Though recent developments in CSR regulations may enhance the scalability of SSE, the question remains of catering to large pools of retail and impact-oriented investors.There is a need to mobilize a financial instrument which serves two-fold benefits: addressing the funding gap in social sectors and incentivizing the impact-oriented investors.For India to achieve its Vision 2047 objectives, there is a need to mobilize a financial instrument which serves two-fold benefits – addressing the funding gap in social sectors and incentivizing the impact-oriented investors. Behavioural finance literature suggests that investors generally prefer financial returns alongside measurable social outcomes. Investors want financial and social returns, which are witnessed in the ESG investing boom. This has proved: "Impact with returns".India's Social Stock Exchange currently operates at the intersection of philanthropy and capital markets, yet it has not fully transitioned into a true impact investment platform. The existing ZCZP framework strengthens transparency and accountability in donations but lacks the financial incentives necessary to attract a broader base of investors. This creates a structural gap between philanthropic capital, which is limited in scale and largely compliance-driven, and impact investment capital, which seeks measurable social outcomes along with financial returns.Globally, the evolution of social finance has demonstrated that sustainable capital flows are achieved when investors are offered a blended value proposition, such as combining modest returns with measurable impact. Instruments such as social impact bonds, green bonds, and university bonds have successfully mobilized private capital by aligning financial and social objectives. In contrast, the SSE ecosystem in India remains predominantly donation-oriented, limiting its ability to tap into retail investors, high-net-worth individuals, and institutional investors.Bridging this gap requires reimagining SSE instruments beyond pure donation structures. Introducing hybrid financial products, such as low-yield impact bonds or outcome-linked securities, can create a viable pathway for transforming philanthropic intent into investment capital. Such instruments would not only enhance investor participation but also enable long-term scalable funding for sectors like education and healthcare.Way forward and the role of Chartered AccountantsDevelopment Impact Bonds (DIB) are one of the structured financial products under the SSE framework. Donors are termed as "outcome funders", and a grant is made available to the NPO after it delivers on pre-agreed social performance indicators at pre-agreed cost/rates. Such funders might be called as "risk funders", which enables financing of social operations on a pre-payment basis but also undertakes the risk of non-delivery of social performance indicators by the NPO. To compensate for this risk, the funder earns a small return if the social performance indicators are delivered.Although DIBs are recognized within India's Social Stock Exchange framework, they are not raised through stock exchanges; they operate as off-market, outcome-based contractual financing structures, despite being conceptually included within the SSE framework. This reinforces the need for instruments that combine measurable impact with investor returns. Low coupon rates and tax benefits with social impact reporting may enable more retail participation, private capital mobilization, and long-term sustainability of this platform.The future of India's higher education system depends on unlocking capital for private universities also. If the inclusion of "target segment" is expanded, private education institutions might also be encouraged to onboard on this platform, thus achieving aspirations of Indian Private Institutions becoming World-Class Institutions.Thus, the transition from philanthropy to sustainable impact investment is not merely desirable but essential for SSE to evolve into a sustainable and inclusive financing platform capable of supporting India's development goals for 2047. Chartered Accountants can play a critical role in structuring, evaluating, and certifying social finance instruments under SSE.ReferencesSEBI – Master Circular on Social Stock Exchange (January 2026). https://www.sebi.gov.in/sebiweb/home/HomeAction.doNational Stock Exchange of India (NSE), Social Stock Exchange (SSE) Portal & Operational Guidelines. https://www.nseindia.com/static/sseSEBI (2022), Framework on Social Stock Exchange, Circular dated 19 September 2022. https://www.sebi.gov.in/legal/circulars/sep-2022/framework-on-social-stock-exchange_63053.htmlNSE Circular on SSE Framework Implementation (2022). https://nsearchives.nseindia.com/web/sites/default/files/inline-files/NSE_Circular_22092022BSE Social Stock Exchange Portal. https://www.bsesocialstockexchange.comKamalnath, A. (2025). Sustainable Investment Management in India. Capital Markets Law Journal.Ministry of Corporate Affairs (MCA). Companies (CSR Policy) Amendment Rules, 2026.National CSR Portal (Government of India). https://www.csrxchange.gov.inAISHE Final Reports (Statistical Data). https://aishe.gov.in/aishe-final-reportUniversity Grants Commission (UGC). https://www.ugc.gov.inConfederation of Indian Industry (2025), Sustainable Finance in India.CA. Shruti MehtaMember of the InstituteAuthor may be reached at eboard@icai.inThe Chartered Accountant, October 2026, Financial Market, pp. 73–78. www.icai.org
Journal Entry Testing, Audit Quality, Management Override of Controls, SA 240, Fraud Detection, Data Analytics, Manual Journal Entries, ICAI Journal
Ep. 546 — Boosting Audit Quality: A Crafted Practical Approach to Journal Entry Testing
CA Journal
· October 2026
00:00
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Boosting audit quality: a practical approach to journal entry testingIs Journal Entry Testing required in every fi nancial statement audit, and why?Journal entry testing is required in every fi nancial statement audit. Regardless of how strong an organisation’s internal controls appear, the risk of management override of controls persists and often manifests through journal entries—especially those recorded at period end, routed outside normal approvals, or posted to unusual accounts. Robust journal entry testing helps ensure transactions are properly recorded and that fi nancial statements are free from material misstatement. This article emphasises the need to assess the risk of management override of controls and provides a crafted practical approach to journal entry testing along with the good practices for the journal entry testing.Meaning of Journal Entry A journal entry ( JE) records the fi nancial eff ects of a transaction in the accounting records / system. Every journal entry consists of major components like posting date and time, debit and credit accounts, amount of transaction, description / narration, voucher reference, and maker and checker identifi ers, etc. Journal entries may be either automated (systemgenerated) or manual (user-entered).Types of Journal entries and their audit relevanceJournal entries are not all the same. Some are posted by people, some are created automatically by the system, and some happen only occasionally depending on business events. Most of the entities take a hybrid approach; they use manual entries for adjustments and automated entries for routine transactions.A manual journal entry is a journal entry made by hand either physically or through some accounting soft ware. Normally, manual journal entries include accruals, deferrals, adjustments entries, reclassifi cation entries, consolidation entries and audit adjustments. Since manual journal entries are entered by human, a major risk exists in these types of entries. Th e risk exists because of the judgement, pressure to meet the expectations, estimations, period-end adjustments etc. Accordingly, the auditor is required to spend more time here, checking whether the entry was properly authorised and whether there are enough support and justifi cation behind it.Manual journal entries can be standard journal entries and non-standard journal entries. Non-standard or oneoff journal entries are the unusual entries. Th ese entries do not happen frequently and are outside the normal process, for example- Journal entries relating to business combination, amalgamation or merger etc. Nonstandard entries involve a lot of judgement, complexity, sometime are of a signifi cant amount. These entries require deeper audit testing and robust documentation. Automated journal entries, use fixed rules and algorithms to record a transaction. For instance, monthly depreciation run can be done through an automatic journal entry. It cannot be said that automated entries are risk free. These entries are to be evaluated through testing of IT General Controls (ITGC) and IT application controls (ITAC). As per the Standard on Auditing (SA) 240 - “The Auditor’s Responsibilities Relating to Fraud in an Audit or Financial Statements”, the management override of controls is a presumed risk in audit. Th e risk is presumed in audits without regard to the eff ectiveness of controls. Management override can involve a range of scenarios. For instance, the management may override controls by showing expenses as capital assets or asset under development, recording fictitious sales near the period closer, reversal of provisions to manage profits etc.Some of the common indicators that point towards management override can include posting on weekends or late nights, unusual debit and credit combinations which are not aligned with the process, entries posted by top management who normally do not post entries, entries with narrations like adjustment, reclass, rectification, rounded number adjustments’ and entries which are outside the normal workflow. Hence, it becomes pivotal for the auditor to design the nature, timing, and extent of the journal entry testing procedure and test the appropriateness of journal entries made in preparing the financial statements to detect the management override of controls. The auditor should come up with procedures that will be unpredictable and specifically target to detect high risk journal entries.How to plan and perform Journal entry testing? The auditor should follow a systematic targeted approach consistent with the standards on auditing for performing journal entry testing. First and foremost, the auditor should gain understanding of the financial reporting process and controls. The auditor should ask questions such as:Who can post journal entries? How are journal entries posted? Who approves Journal entries? Can one person be both the maker and checker of a journal entryHave there been any unusual journal entries during the yearHas the management asked anyone to override controls over journal entries during the year?Who has super user rights?“As per the Standard on Auditing (SA) 240 - “The Auditor’s Responsibilities Relating to Fraud in an Audit or Financial Statements”, the management override of controls is a presumed risk in audit”The auditor should perform a walkthrough of a key transaction to identify areas susceptible to misstatement. The auditor should understand authorisation hierarchy and segregation of duties. The auditor should understand the processes around initiating, processing, authorising, and recording journal entries. The auditor should understand who perform the control activities, what the control frequency is and what supporting documentation is available with respect to manual journal entries, non- recurring / nonstandard journal entries and post-closing journal entries.The auditor should assess the design and implementation of controls over journal entry initiation, review and posting. Then perform the test of operating effectiveness of controls over journal entries. This will ensure that the auditor understands how journal entries flow from source document to financial statements.In the second step, the auditor should inquire from the management and key personnel about awareness of unusual journal entries, cases of override or manipulation, authorisation rights for manual posting, and incentive, pressure or rationalisation that might result in fraud. Such inquiries should be corroborated through audit procedures. In the third step, the auditor determines the testing approach. The Auditor determines the high-risk criteria based on fraud risk assessment, IT control environment, and engagement specific factors.How to Determine the High Risk Criteria? Generic risk filters do not work and a tailored approach to criteria needs to be developed for the control environment and business risk in each engagement. The Auditor is required to take consideration of six risk factors while identifying high risk journal entries that required granular audit. These include: 1. Risk of material misstatement due to fraud: Transactions linked to areas with high fraud susceptibility for instance, revenue recognition, estimates;2. Control effectiveness: Where control over journal entry initiation, approval or posting are weak or ineffective;3. Nature and complexity of accounts affected: Entries involving provisions, reserves related party balances, or adjustments without underlying transactions;4. System complexity, the entity’s financial reporting process, and nature of evidence that can be tested; AccountDebitCreditCapital work-in-progress50,00,0003 Repairs and maintenance 50,00,000Narration: "Reclass – project cost"41Weekend, late-night, period-end posting2Same person as maker and checker3Round-number amount4Vague narration; expense moved to balance sheetAn illustrative entry combining several warning signs discussed belowWhy test journal entries in every auditJournal entry testing belongs in every financial statement audit. However strong an entity's controls look, management can still override them, and that override usually shows up in journal entries: those booked at period end, those that bypass normal approval, or those hitting unusual accounts.Well-designed testing gives the auditor comfort that transactions are recorded properly and that the financial statements are free of material misstatement. The article sets out why the risk of override must be assessed, a step-by-step testing approach, and practices that improve quality.What a journal entry isA journal entry records the financial effect of a transaction in the books or accounting system. Its main components typically include:posting date and timeaccounts debited and credited, and the amountdescription or narrationvoucher referencemaker and checker identifiersEntries are either automated (generated by the system) or manual (keyed in by a user).Types of journal entries and their audit relevanceMost entities use a hybrid model: automated entries for routine transactions and manual entries for adjustments. Each type carries a different risk profile.TypeTypical examplesWhy it matters to the auditorManual, standardAccruals, deferrals, adjustments, reclassifications, consolidation and audit adjustmentsHuman input brings judgement, estimates and pressure to hit targets. Check authorisation and supporting justification.Manual, non-standard (one-off)Entries for business combinations, amalgamations or mergersInfrequent, outside normal process, judgemental, complex and often large. Needs deeper testing and strong documentation.AutomatedMonthly depreciation runNot risk-free. Evaluate through IT general controls (ITGC) and IT application controls (ITAC).Management override of controlsUnder SA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, management override of controls is a presumed risk in every audit, regardless of how effective controls appear.Override can take many forms, such as presenting expenses as capital assets or assets under development, booking fictitious sales close to period end, or reversing provisions to smooth profits.Common indicatorsentries posted on weekends or late at nightdebit and credit combinations that don't fit the normal processentries posted by senior management who don't usually postnarrations such as "adjustment", "reclass" or "rectification"round-number adjustmentsentries processed outside the normal workflowThe auditor therefore needs to design the nature, timing and extent of journal entry procedures carefully, make them unpredictable, and aim them squarely at high-risk entries.Management override of controls is a presumed risk in every audit, regardless of how effective controls appear.Planning and performing journal entry testingThe article describes a systematic, targeted approach aligned with the Standards on Auditing, carried out in five steps.Understand the financial reporting process and controlsAsk who can post entries, how they are posted and approved, whether one person can act as both maker and checker, whether there were unusual entries during the year, whether anyone was asked to override controls, and who holds super-user rights.Perform a walkthrough of a key transaction, understand the authorisation hierarchy and segregation of duties, and learn who performs each control, how often, and what support exists for manual, non-recurring and post-closing entries. Assess design and implementation of controls over initiation, review and posting, then test operating effectiveness so the flow from source document to financial statements is clear.Inquire of management and key personnelAsk about awareness of unusual entries, instances of override or manipulation, rights to post manually, and any incentives, pressures or rationalisations that could lead to fraud. Corroborate the answers with audit procedures.Decide the testing approachSet high-risk criteria based on the fraud risk assessment, the IT control environment and engagement-specific factors. See high-risk criteria.Determine the period subject to testingDecide which sub-populations of entries to test. See period subject to testing.Confirm the population is complete and accurateBefore any analysis, address data reliability risks: input, integration, extraction and manipulation risk. See completeness and accuracy testing.Determining high-risk criteriaGeneric filters don't work. Criteria must be tailored to each engagement's control environment and business risks. The auditor should weigh six factors when identifying entries that need detailed work:Risk of material misstatement due to fraud: areas highly susceptible to fraud, such as revenue recognition and estimates.Control effectiveness: weak or ineffective controls over initiation, approval or posting.Nature and complexity of accounts: provisions, reserves, related-party balances, or adjustments with no underlying transaction.System complexity: the entity's reporting process and the kind of evidence available for testing.Entries outside the normal course of business.Characteristics of fraud and journal entries.Determining the period subject to testingThe Standards on Auditing recognise three sub-populations of journal entries:entries made at the end of the periodentries made throughout the periodentries made while preparing the financial statements (post-closing entries)Material post-closing entries and other financial statement adjustments should be tested whether or not a specific fraud risk has been identified. The auditor should also consider testing entries across the whole period, because fraud can occur at any time and may be deliberately concealed. Testing throughout the year also adds unpredictability.The population to request is a general ledger extract of all journal entries for the period plus a listing of post-closing entries. The auditor should then screen and layer that population to narrow and refine it.Completeness testingCompleteness can be tested in several ways:Full roll-forward: roll forward all account balances to confirm every transaction between opening and closing balances is included.Selective roll-forward: roll forward selected balances where risk is confined to particular ledgers.System query extraction: run a query that produces the full journal entry dataset.The extracted totals are then agreed to the general ledger, trial balance and financial statements.Accuracy of relevant data elementsBefore testing, decide whether the relevant data elements (RDEs) can be relied on. These include preparer ID, date, GL amount, debit/credit indicator, description, GL name and GL code. Reliability can be established in two ways:ApproachWhat the auditor doesControl approachTests management's controls over the accuracy and completeness of the internal information.Direct approachTests the accuracy and completeness of the information directly.This reliability work should be completed and documented before high-risk entries are identified.Selecting entries and resolving exceptionsOnce the population is shown to be reliable and complete, apply the high-risk criteria to select entries. Where ITGCs and ITACs are effective, automated entries can be excluded from the population before the criteria are applied.After testing, evaluate whether any anomaly points to a control deficiency or an intentional misstatement. Not every unusual entry is fraud, but every unusual entry needs an explanation.When an exception is foundobtain supporting documentationestablish who initiated the entry and whytest authorisationevaluate the accounting rationaleassess whether it signals control failure or intentdocument what was tested, why, what was found, and why the conclusion is acceptable or notCommon pitfallsReviews and peer inspections have repeatedly raised these concerns:No documented rationale for the high-risk criteria chosen, or for deciding not to test criteria identified at risk assessment.Generic criteria reused across audits without tailoring to the entity.Using the journal entry population without testing its completeness and accuracy.Sampling from high-risk entries, when every entry meeting the high-risk criteria should be tested.Flagging large populations as high risk without refined filters.Insufficient depth on non-standard and post-closing entries.Not reconciling the journal entry population to the audited financial statements.Each of these weakens audit quality and falls short of the Standards on Auditing.Case studies on journal entry fraud1. WorldComWorldCom inflated profits by capitalising operating "line costs" as assets through manual journal entries, and these top-level entries were not adequately examined by the external auditors.Lesson: scrutinise large manual capitalisation entries.2. EnronEnron used complex structures such as special purpose entities and mark-to-market accounting to mislead stakeholders. Journal entries moved liabilities off the balance sheet and boosted revenue.Lesson: independently test consolidation and related-party adjustments for economic substance and documentary support.3. Capitalisation of revenue expenditureUnder pressure to protect EBITDA margins, a company posted manual entries in the last week of the quarter with narrations like "reclass", "capitalisation" and "project cost". Many were round amounts posted by senior finance staff. Routine costs such as repairs, subcontracting and administration were shifted from profit and loss to CWIP, intangibles and prepaid expenses, improving EBITDA.4. Deferment of revenueSenior management bonuses depended on at least 5% quarterly revenue growth. After roughly 10% growth in Q1, management had finance defer part of Q1 revenue to Q2 through manual entries booked at the Q1 close and reposted in Q2. Revenue moved between quarters with no commercial reason, an incentive-driven override.5. Reversal of audit adjustmentsIn a multinational group, reporting deadlines fell before the Indian statutory audit closed. Prior-year statutory audit adjustments were booked in the Indian accounts but never reflected in the group reporting pack. Rather than update group figures or maintain a statutory-to-group reconciliation, the finance team reversed those audit adjustments in the statutory books near period end so they matched group reporting.Good practicesTailor engagement-specific high-risk criteria to the entity's environment and risk profile.Document the rationale for each high-risk criterion.Screen and layer the population, then re-evaluate and document the risk-assessment criteria after screening.Ensure engagement partner oversight of journal entry testing.If a criteria run returns too many entries, refine the criterion and run it again.Test non-standard entries and post-closing adjustments in detail.Use IT tools to find unusual patterns in the population.Using technology in journal entry testingNew sectors such as crypto-currency, gaming, digital assets and e-commerce create challenges that traditional methods may struggle with, making data analytics and AI increasingly important.AI anomaly detection can review 100% of entries to flag risky or potentially fraudulent ones.Machine learning models trained on past frauds and irregularities can estimate the likelihood of management override.Pattern recognition can spot behaviour such as splitting entries just below authorisation limits, or posting on weekends and holidays.Technology improves efficiency, but the auditor remains responsible for obtaining sufficient appropriate evidence. It doesn't replace professional scepticism.ConclusionJournal entries are the building blocks of financial statements, and testing them is a core defence against management override. That testing is only as strong as the approach behind it. Because its quality shapes the reliability of the financial statements, auditors should keep strengthening their journal entry procedures to give stakeholders greater assurance.ReferencesICAI, SA 230: Audit DocumentationICAI, SA 240: The Auditor's Responsibilities Relating to Fraud in an Audit of Financial StatementsICAI, SA 315: Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its EnvironmentICAI, SA 330: The Auditor's Responses to Assessed RisksICAI, SA 500: Audit EvidenceICAI, SA 530: Audit SamplingSummary of "Boosting Audit Quality: A Crafted Practical Approach to Journal Entry Testing" by CA. Lalit Agarwal, The Chartered Accountant, October 2026, pp. 91–95 (ICAI). Author contact: fcalalitagarwal@gmail.com, eboard@icai.in
Artificial Intelligence, 4Ps Framework, AI Governance, Data Ethics, Digital Transformation, Algorithmic Bias, ICAI Journal
Ep. 547 — The 4Ps of Artificial Intelligence for Business: Pillars, Promises, Perils and Precautions
CA Journal
· October 2026
00:00
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The 4Ps of Artificial Intelligence for Business: Pillars, Promises, Perils and PrecautionsArtificial Intelligence (AI) is reshaping business processes, fi nancial governance and professional practices across diverse industries. Automated accounting systems, continuous auditing, predictive analytics, and fraud detection exemplify how AI enhances operational effi ciency and decision-making. Nevertheless, AI integration introduces signifi cant ethical, regulatory, and workforce challenges. This article introduces the 4Ps of the Artifi cial Intelligence framework, Pillars, Promises, Perils, and Precautions, to systematically evaluate AI adoption within business ecosystems. The Pillars encompass foundational enablers, including data governance, technological infrastructure, skilled human capital, and ethical oversight. The promises refer to gains in productivity, risk management, and strategic agility. The Perils address risks including algorithmic bias, lack of explainability, cybersecurity threats, and employment disruption. The Precautions focus on regulatory compliance, ethical governance, independent audits, and ongoing reskilling. This framework offers a balanced perspective for chartered accountants, corporate leaders, regulators, and other stakeholders engaged in responsible digital transformation.IntroductionIndustry 4.0 technologies are redrawing global business. Backed by machine learning and data analytics, AI supports predictive modelling, automation, anomaly detection and real-time strategic decisions, and many organisations now run on AI-powered dashboards and analytics.India treats AI as a strategic growth lever. NITI Aayog's National Strategy for Artificial Intelligence (2018) frames it as a driver of inclusive development in healthcare, agriculture, education and smart governance, while the Ministry of Electronics and Information Technology (2019) has set out governance considerations around data, platforms and accountability.Globally, AI is discussed as a potential engine of economic growth whose measurable impact depends on complementary organisational change (World Economic Forum, 2023). Research suggests value comes less from buying technology than from structural readiness, cultural alignment and governance maturity (Huang & Rust, 2018). Like electricity and the internet before it, AI is a general-purpose technology: adopting it without adapting the organisation around it rarely yields lasting benefit.Adoption also raises concerns about fairness, transparency, bias, data security and compliance (Floridi & Cowls, 2019; Jobin, Ienca, & Vayena, 2019). For chartered accountants these concerns touch professional ethics, audit assurance and governance duties directly. A balanced framework that holds opportunities and risks together is therefore essential.ObjectivesExamine the promises and perils of AI in modern business practice.Analyse the foundational pillars of AI in relation to efficiency, ethics and employment.Propose precautionary measures for responsible AI adoption.Research orientationThe study is conceptual and descriptive. It draws on secondary sources, including peer-reviewed literature, public policy documents and institutional reports, and synthesises them into an analytical framework for business and professional practice rather than testing hypotheses empirically. The 4Ps framework treats AI adoption as one connected system of enablers, benefits, risks and safeguards.AI and businesses in IndiaAI use across Indian public and private enterprises has grown quickly over the past decade. Digital India and NITI Aayog's "AI for All" vision signal an intent to use AI for inclusive, sustainable growth in line with the Viksit Bharat@2047 aspiration, with priority sectors including agriculture, healthcare, education, smart mobility and financial services (Binns, 2018).Strategically, AI-driven analytics help firms anticipate market trends, understand consumer behaviour and model risk more accurately (Vasarhelyi, Kogan & Tuttle, 2015). Operationally, process automation, chatbots, RPA and virtual assistants shorten turnaround times and make service more consistent in banking, telecom, e-commerce and public services (Jobin, Ienca & Vayena, 2019).AI now shapes both the strategic and the operational sides of how enterprises are managed.In HR, AI supports candidate screening, talent analytics, performance monitoring and personalised training, helping to spot skill gaps. These gains in speed and scale still need oversight to prevent algorithmic bias (Gordon, 2019). In financial services, AI underpins portfolio optimisation, risk modelling, fraud detection and behavioural nudging, and the spread of AI-powered fintech reflects maturing digital infrastructure (MeitY, 2019).Rapid proliferation brings a need for strong governance, regulatory clarity, ethical safeguards and professional oversight (NITI Aayog, 2021). Sustainable adoption means pairing innovation with accountability so that progress supports long-term economic resilience and social equity.The 4Ps framework of Artificial IntelligenceThe framework treats AI adoption as an interconnected system in which each P depends on the others:Pillars are the foundational enablers.Promises are the strategic and operational gains.Perils are the systemic vulnerabilities.Precautions are the governance safeguards.P1Pillars: foundational enablers of AI adoptionAI needs solid institutional and technological foundations. Without them, initiatives underperform or drift out of ethical alignment.Data infrastructureReliable, accurate, structured data, supported by secure repositories, cloud systems and cybersecurity frameworks.Technological capabilityScalable compute and integration with existing ERP and information systems, so AI never runs in isolation.Skilled human resourcesAI reshapes roles rather than removing them. Accountants need fluency in data analytics, AI-enabled audit software and predictive financial models.Leadership commitmentClear objectives tied to organisational goals, proper resourcing and ongoing monitoring of performance metrics.Ethical governanceTransparency, responsibility and equality, as set out in NITI Aayog's guidance, so AI stays within legal and societal norms.Collaborative ecosystemsIndustry, academia and technology partners working together to speed up knowledge sharing, skills and best practice.P2Promises: strategic and operational advantagesBuilt on strong pillars, AI delivers measurable benefits across business functions.Operational efficiencyAutomating repetitive work cuts errors and turnaround times; in accounting this covers invoice processing, settlement and compliance tracking.Data-driven decisionsReal-time financial analysis, scenario prediction and risk modelling inform strategy.Personalisation and engagementTailored financial products and better responsiveness, with behaviour analysis improving retention.Fraud detection and risk managementMachine learning flags unusual transaction patterns and strengthens internal controls.Cost optimisationAutomation lowers administrative overhead and operational inefficiency.Innovation and market expansionPredictive consumer insight speeds product development and market entry.These productivity gains materialise only where robust governance supports them.P3Perils: risks and systemic challengesAI brings a range of risks that must be managed before they surface, not after.Employment displacementRoutine low- and mid-skill tasks may shrink; the World Economic Forum expects job transformation to accompany technological change.Algorithmic biasModels trained on biased data can discriminate, especially in recruitment, credit scoring and performance reviews.Data privacy and cybersecurityLarge datasets widen exposure to cyber attacks and breaches.Overreliance on automationLeaning too heavily on model outputs can reduce some errors while creating strategic blind spots.High implementation costsSMEs may find the infrastructure financially out of reach.Transparency and explainabilityBlack-box models can undermine auditability and accountability in regulated sectors.P4Precautions: governance and risk mitigationTo keep the promises while containing the perils, organisations need deliberate safeguards.Regulatory complianceAlign with national data protection and AI governance rules, including MeitY's guidance on responsible digital governance.Ethical AI policiesAdopt internal AI ethics charters covering fairness, transparency and accountability.Explainable AI systemsUse explainable models to build trust and ease regulatory audits.Continuous training and reskillingUpskill the workforce to soften displacement and build adaptability.Pilot testing and phased deploymentRoll out gradually to limit disruption and refine systems along the way.Independent auditsCommission regular third-party reviews of compliance and performance.Together these protect long-term value creation and institutional credibility.Figure 1: Conceptual 4Ps modelThe model shows how enablers, value-creation outcomes, risks and safeguards reinforce one another and must be handled together. It builds on literature in AI governance, innovation management and risk to give practitioners a structured lens for evaluating adoption.PillarsModel-based AIData-driven sourcesFast processing systemsAI-trained professionalsData-driven organisational cultureEthical governanceIndustry and IT collaborationLeadership supportPromisesStreamlined processes through automationReal-time data decisionsPersonalised market offeringsOptimised market targetingFraud detection via predictive analyticsFaster new product developmentNew market opportunitiesSmarter recruitment and lower costsPerilsJob displacement from automationLegal and ethical risksData privacy concernsLess human thinking and creative learningBarriers for MSMEs in remote locationsLimited explanation of decisionsReduced operational transparencyPrecautionsSound regulatory and ethical foundationsLegal and regulatory user consentAccountable, transparent third-party AI communicationAwareness of AI toolsSkilled people matched with suitable technologyPilot testing before full rolloutThe 4Ps of AI in BusinessFigure 1. Conceptual 4Ps model of AI in business.Practical implications for professional stakeholdersChartered accountants and finance professionalsAI shifts accounting from transaction processing toward analytical advisory work (Alles, 2015). Professionals should:Adopt AI-assisted audit techniques.Use predictive analytics in financial planning.Apply ethical judgement to AI outputs (Appelbaum, Kogan, & Vasarhelyi, 2017).Keep building digital competence.AI can tighten controls and reporting, but professional scepticism stays essential.Business managersManagers should integrate AI strategically while keeping governance discipline by:Aligning AI investment with long-term goals (Huang & Rust, 2018).Monitoring risk exposure and return on investment.Encouraging cross-functional collaboration.Keeping AI-driven decisions transparent.Good leadership makes AI complement human judgement, not replace it.Policymakers and regulatorsGovernments should build ecosystems that enable inclusive, responsible AI by:Developing clear regulatory frameworks.Encouraging public–private partnerships.Supporting small enterprises' digital transformation.Setting AI certification and audit standards (Appelbaum, Kogan, & Vasarhelyi, 2017).Balanced regulation supports innovation while protecting society.ConclusionAI is now part of the core architecture of business, touching operations, strategy, financial governance and customer engagement. The 4Ps framework offers a structured way to understand and implement it responsibly: strong pillars unlock the promises, honest recognition of the perils keeps expectations realistic, and precautions sustain value over time.For accountants and business leaders, AI brings both opportunity and responsibility. Strategic adoption, ethical vigilance and continuous learning will decide whether it drives inclusive growth or creates systemic weaknesses. Future research could test the framework empirically across sectors and organisational contexts.ReferencesAlles, M. G. (2015). Drivers of the use, facilitators and obstacles of big data and analytics in auditing. International Journal of Accounting Information Systems, 17, 1–15. https://doi.org/10.1016/j.accinf.2015.03.001Appelbaum, D. A., Kogan, A., & Vasarhelyi, M. A. (2017). Big data and analytics in the modern audit engagement: Research needs. Auditing: A Journal of Practice & Theory, 36(4), 1–27. https://doi.org/10.2308/ajpt-51684Binns, R. (2018). Fairness in machine learning: Lessons from political philosophy. Proceedings of the 2018 Conference on Fairness, Accountability, and Transparency, 149–159. https://proceedings.mlr.press/v81/binns18a.htmlFloridi, L., & Cowls, J. (2019). A unified framework of five principles for AI in society. Harvard Data Science Review, 1(1). https://doi.org/10.1162/99608f92.8cd550d1Gordon, F. (2019). Review of Virginia Eubanks (2018), Automating Inequality: How High-Tech Tools Profile, Police, and Punish the Poor. Law, Technology and Humans, 1, 162–164. https://doi.org/10.5204/lthj.v1i0.1386Huang, M.-H., & Rust, R. T. (2018). Artificial intelligence in service. Journal of Service Research, 21(2), 155–172. https://doi.org/10.1177/1094670517752459Jobin, A., Ienca, M., & Vayena, E. (2019). The global landscape of AI ethics guidelines. Nature Machine Intelligence, 1, 389–399. https://doi.org/10.1038/s42256-019-0088-2Ministry of Electronics and Information Technology (MeitY), Government of India. (2019). Report of Committee on platforms and data on Artificial Intelligence. meity.gov.inNITI Aayog. (2018). National strategy for artificial intelligence: Discussion paper. Government of India. niti.gov.inNITI Aayog. (2021). Responsible AI: Approach document for India, Part 1 – Principles for Responsible AI. niti.gov.inVasarhelyi, M. A., Kogan, A., & Tuttle, B. M. (2015). Big data in accounting: An overview. Accounting Horizons, 29(2), 381–396. https://doi.org/10.2308/acch-51071World Economic Forum. (2023). Future of Jobs Report 2023. weforum.orgBased on "The 4Ps of Artificial Intelligence for Business" by Dr. Pooja, The Chartered Accountant (ICAI), October 2026. Author contact: pooja.bhu091@gmail.com and eboard@icai.in.
AI, Artificial Intelligence, Sustainability, BRSR, ISSA 5000, Audit Methodology, Risk Assessment, ESG, Future of Audit, ICAI Journal
Ep. 548 — Audit, Sustainability and AI - Trust Redefined
CA Journal
· October 2026
00:00
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Audit, Sustainability and AI - Trust RedefinedToday, the world is evolving rapidly, and we, as trust providers, must evolve with it. Some of the changes we are witnessing today include the advent of Artificial Intelligence (AI) and the increasing relevance of sustainability. With these thematic changes growing day by day, the business world will be certain to adopt and commit to AI and Sustainability, respectively. For any change to be successful, trust is paramount. We as trust providers for this society will have to understand the ebbs and flows of these changes and ensure that we are able to act as a bridge between the businesses and the stakeholders. In some sense we must become the common language between businesses and stakeholders.IntroductionAs we move towards the goal of “Viksit Bharat”, the strategic imperatives for making India a “Developed Nation” are Sustainability and Artificial Intelligence. These are the same priorities that are making entrepreneurs and CXOs “Rethink” and “Reimagine” how to conduct businesses.So, how will this impact our world – The Audit world? Auditing is a profession that follows business. The evolution of auditing over the last few decades is a testament to the fact that all the changes in the business world equally impact on us in the form of three major questions:How do we audit?What do we audit?What do we report?In this changing world where businesses are “Rethinking” and “Reimagining”, let’s see how trust will be “Redefined”.Understanding the trendsSustainabilitySustainability today is no longer merely a narrative-driven concept. It is a critical phenomenon which impacts every facet of life, including business operations. At COP 21 in Paris, on 12 December 2015, Parties to the United Nations Framework Convention on Climate Change (UNFCCC)1 reached an agreement to combat climate change and to accelerate and intensify the actions and investments needed for a sustainable low-carbon future.The Paris Agreement builds upon the Convention and – for the first time – brings all nations into a common cause towards combating climate change and adapting to its effects through mobilising financial resources, technology, capacity building, etc.The national policies towards sustainability are being driven by the objectives of the Paris Agreement as one of the pillars. India’s commitment to Net Zero by 20702, SEBI’s mandate on Business Responsibility and Sustainability Reporting (BRSR) for the top 1,000 listed entities3, renewable energy incentives, RBI’s requirements on green deposits and financing frameworks4, and the evolving expectations from ESG rating providers all point to one conclusion: sustainability is no longer optional. It has become a structural business imperative driven by long-term survival and regulation.Artificial intelligenceOver the years, there are many technological advancements that helped the economies like India to strengthen their presence on the global stage. Now, Artificial Intelligence (AI) is such an opportunity. In the words of some experts, AI in its current stage does not even represent the tip of the iceberg. Despite being in its early stages, AI is already revolutionising business processes, offering enhanced capabilities in data analysis, decision-making, and operational efficiency.However, the rapid pace of technological advancement poses challenges for regulatory frameworks to keep up with the integration and governance of AI technologies. This regulatory uncertainty creates an onus on businesses and auditors to be agile and proactive in adopting AI and managing its outcomes.What is changing in audit?Now let us try to answer the three questions that we set out to answer.1) How do we audit?2) What do we audit?3) What should we report?How do we audit?In the traditional sense of auditing, we execute engagements having technology as an adjacent. As we see the world embracing the applications of Artificial Intelligence, it raises the question: should we revisit how we are going to deliver the audit? What will “Auditing” look like in the future?Let us take a few examples and examine how these areas could potentially change.AreaCurrent methodReimagined approach using AIRisk assessmentRisk assessment is one of the major requirements of Auditing, where weunderstand the business,understand the sector,compare past results with current performance,perform management discussions and board minutes reviews, etc.,Using the outcomes of the above, we identify which areas are prone to higher risk and design the audit programme accordingly.An AI-integrated audit tool could contain industry-wide risks that are predefined and updated based on market and economic changes.Using the summary of management discussions, past results, board minutes and current financial statements, AI will be able to make connections and identify the indicative risk factors.Based on the above, we can narrow down the potential risks with more precision and design the audit programme accordingly.Sample verificationEngagement teams compute “Materiality” and based on the account balances, the engagement teams identify a subset of the total population for testing. This is what we call “Sampling”. The outcome of such samples will be projected to the overall population to arrive at a conclusion.As technology progresses, companies will reach a situation where all client documents are maintained digitally. As we grow nearer to that scenario, the concept of “Sampling” might become more and more redundant.The future tools will have access to the entire population and audit the same by reviewing the supporting documents.Eg: Think of a client where all the Purchase Orders, Invoices and Goods Receipt Notes (GRNs) are uploaded into their accounting system, and we as auditors have access to such a system. If an audit tool can scan all purchase transactions, map the relevant documents, and generate exceptions or insights, the utility of sampling as a methodology may reduce significantly.There might be new auditing standards updated to align with new techniques.Income taxesThe management team provides:Tax computation – Current and deferredMaintains a year-on-year assessment summaryProvides TDS and advance tax receipts and challans, etc.We then go through all the computations, review the assessment orders, verify the challans/receipts and provide their observations.What might the future audit of taxes look like?There may be an API for the companies to directly gather all the data with respect to assessment orders, challans, notices, etc., where the data will flow from the tax website, which can be imported into the audit tool and processed in minutes.Tax computations will be automated, and the audit will also follow suit. We will have access to the repositories of tax that are built into the audit tool, which will provide comments on positions taken by the company on various matters.Current audit methods and how AI could reimagine themThe examples above may look far-fetched now but imagine a scenario where the future audit tool is based on a Large Language Model trained in accounting standards, auditing standards, tax laws and other regulations. Such a tool is not just capable of analysing some of the data but can provide insights from the entire data set of a company.In such scenarios, the role of the auditor is to look at the outputs and come to appropriate conclusions. Professional scepticism and judgement will take a new shape as the auditor considers the outputs from such tools.The rapid pace of technological advancement poses challenges for regulatory frameworks to keep up with the integration and governance of AI technologies. This regulatory uncertainty creates an onus on businesses and auditors to be agile and proactive in adopting AI and managing its outcomes.A word of cautionThe new ICAI Code of Ethics (effective April 01, 2026)5 requires chartered accountants to apply professional judgement when using the output of technology, actively evaluating the appropriateness of the inputs to the technology, including data. To maintain professional scepticism, accountants must guard against automation bias by questioning whether the automated output is reliable or fit for purpose, especially when dealing with contradictory information or unsubstantiated facts.Some of the factors to be considered by the professionals intending to use the output of technology (as indicated in the code of ethics) are as follows:The nature of the activity to be performed by technology.The expected use of, or extent of reliance on, the output of the technology.Whether the accountant has the ability or has access to an expert with the ability to understand, use and explain the technology and its appropriateness for the purpose intended.Whether the technology used has been appropriately tested and evaluated for the purpose intended.Prior experience with technology and whether its use for specific purposes is generally accepted.The employing organisation’s oversight of the design, development, implementation, operation, maintenance, monitoring, updating or upgrading of the technology.The controls relating to the use of technology, including procedures for authorising user access to the technology and overseeing such use.The appropriateness of the inputs to the technology, including data and any related decisions, and decisions made by individuals in the course of using the technology.Hence, it should be noted that while AI/technology can do a lot of heavy work and improve efficiency, the final responsibility for the audit opinion will always remain with the chartered accountant. We must document how we used the tool and apply our own judgement and checks.It should be noted that while AI/technology can do a lot of heavy work and improve efficiency, the final responsibility for the audit opinion will always remain with the chartered accountant.What do we audit?As we look at the past decades, the audit world has continuously adapted to the changes in the business environment. One such change in the business world is the incorporation of “Sustainability” as a business risk.Let us try to analyse this with an example of “Impairment of Property, Plant and Equipment (PPE) in a manufacturing unit”:What are the potential questions that we ask when assessing the “Impairment of PPE”?What is the value of the assets in the “Cash Generating Unit (CGU)”?Is the CGU generating sufficient cash to cover the value of assets?Is there any fall in prices of the products?Any changes to the regulatory environment? Etc.,Are these questions sufficient?Taking this example forward, the management has made a public commitment in its “Sustainability report” that they will invest in new technologies to ensure that the products they manufacture are more sustainable and gradually replace the existing machinery.In the scenario, all the questions above may take us to the conclusion that there are no impairment indicators. But when we bring the knowledge of organisation’s commitment to sustainability into the mix, the outcomes may look significantly different. We may be required to have further conversations with the clients on their plans for how this will be dealt with from a financial reporting perspective.Hence, it becomes important that while planning the audits, the engagement teams should be more vigilant to address the newer risks and design the audit procedures to mitigate the same.Some of the newer risks might be:The impact of climate change on business continuity and asset impairmentRisks of regulatory non-compliance with climate-related lawsThe threat of greenwashing and inconsistencies between sustainability and financial reportingDisruptions from tariffs, sanctions, and supply chain vulnerabilities. etc.,What do we report?If there is a potential change in how we audit and what we audit, it would be safe to say that there will be an impact on “What we report”.The past is often a useful starting point to understand how the future may evolve. If we look at how the reporting has evolved over a period, we can understand that our reporting has embraced the changes of the macro environment. Some of the examples are:Reporting on internal financial controls on financial reporting6;Disclosure of key audit matters for listed companies7;Specific reporting aspects like pending litigations, long-term contracts, regulatory compliance, audit trails, and backup requirements for books of accounts8.All these developments reflect the evolving requirements of the new world order. Now, if the new world order includes “Sustainability” and “Artificial Intelligence”, the Audit reporting will also follow suit.As we know today, SEBI has introduced BRSR reporting and mandated assurance/assessment for BRSR Core indicators3 through a glide path. There is little alignment between the financial statements and BRSR reporting and the respective assurances. We can anticipate in the future that there will be a linkage established between these reports which can provide a comprehensive understanding of financial and sustainability reporting.Also, with the advent of Artificial intelligence, it may not be surprising if the reporting moves from a singular outcome based “True and Fair” reporting to a more qualitative reporting or grading-based reporting.Sounds unlikely? Let’s ask ourselves, - “A company which has highly sophisticated AI-integrated systems and controls vis-à-vis a company whose controls are completely manual” - Can both these companies be assessed similarly? What is the differentiation? Can we add more value if we can provide a different reporting outcome which can help the users to make better judgements on criteria like – Processes & Controls, Cybersecurity, quality of financial reporting, sustainability etc.? Can our audit report move from being called as a “post-mortem report” to a more “futuristic report”?These are the potential questions that we as a profession should think about NOW. India, as a growing market, will attract a lot more investments from all over the world. Can we offer them something more in terms of Trust?An indicative futureThe International Auditing and Assurance Standards Board (“IAASB”) has approved and issued International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements and ICAI’s own standard SSA 5000 is aligned with it.This standard addresses the requirements covering the end-to-end process of a sustainability assurance engagement.Some of the excerpts are as follows:This standard introduced the requirement of reporting obligations on other information, i.e., sustainability information not subject to assurance, historical financial information, any other non-sustainability information or non-historical financial information.If the practitioner identifies that there is a material inconsistency between the financial statements information and the sustainability information, the practitioner is required to communicate the matter to the entity’s financial statements auditor, unless restricted by law, regulation, or professional requirements.Additionally, it explains that when there are sustainability matters that may also relate to matters disclosed in the entity’s financial statements, communication between the sustainability assurance practitioner and the auditor of the financial statements on topics of mutual interest relevant to both engagements may be useful at the planning stage of the assurance engagement.Standard acknowledges that there may be circumstances where the practitioner in a sustainability assurance engagement may intend to obtain evidence from work performed by the financial statement’s auditor. In these circumstances, the requirements addressing using the work of another practitioner apply, including communication, to the extent necessary in the circumstances, about the findings from the financial statements’ auditor’s work.The future of assurance professionals is clearly heading towards greater collaboration and integration between sustainability and financial assurance experts.What does it mean for us?As a profession we should consider the following:Creating a sandbox for developing comprehensive AI-integrated audit tools. This will elevate the profession as a whole.Firms can start with small, controlled pilot projects using AI tools on selected audits, note down what works and what doesn’t, and share learnings.Professionals can refer to the work already done by the AI Committee of ICAI (Use Cases for CAs, hackathon materials, published books, etc.).Revisit our auditing standards in light of changing micro and macro environments. For example: Risk assessment, audit methodology, reporting, etc.Upskilling ourselves to become more fluent in technology. We should not be mere users of technology, but as a profession we should have the foresight to integrate the changes in technological spheres into our profession.As business risks cut across various aspects like technology, sustainability, etc., we must be more collaborative to ensure that we have an in-depth understanding of these aspects and their impact on financial statements.Having said that, ICAI has already been very proactive in exploring various use cases for the profession. It is visible from the fact that there is an AI committee of ICAI that has already published use cases for CAs, hackathon materials, published books, etc.Also, ICAI has been instrumental in dispensing the knowledge of AI to professionals by setting up webinars, seminars, summits, etc. One such recent event is the AI Innovation Summit held on 26-27 June 2026 in New Delhi.Therefore, some of the key takeaways for us, as professionals, are as follows:We should be open to learning new concepts like Sustainability or embrace changes in technology.Assess the risks associated with these changes from both micro and macro perspectives.Create our own opportunities by building new-age tools.Be aligned with the latest reporting requirements.Be willing to work with people across professions.ConclusionThe convergence of trust, sustainability, and artificial intelligence is redefining the role of auditors and professionals. By embracing change, investing in new skills, and proactively adapting to global trends, the profession can continue to deliver value and foster trust in an increasingly complex world.◆◆◆Author may be reached at eboard@icai.inRack the BrainFive riddles from the world of professional ethics and assurance. Can you name each one?I discover a possible breach of law while performing my professional role;What ethical framework tells me how to respond rather than simply remain silent as my goal?The figures may balance, the explanations may sound right;But I still ask, “Where is the evidence?” before I sign.I enter with no pen, yet influence every line I write;When what I expect shapes what I see, what am I hiding from sight?When truth sits behind a veil, the Code asks, “Must it be shown?”;I weigh duty, relevance and confidentiality before the fact is known.Carbon claims may be polished, but evidence cannot be painted green;When assurance tests the story behind the numbers, what am I called between?Answers to the September 2026 puzzleDividendArbitragePhishingReal Estate Investment Trust (REIT)Advanced TaxReferencesUNFCCC — Paris Agreement text: https://unfccc.int/sites/default/files/english_paris_agreement.pdf ↩Prime Minister’s address at COP26 (India’s pledge statement): National Statement by PM at COP26 Summit in Glasgow | Prime Minister of India ↩SEBI circular / BRSR guidance (format, applicability and timelines) - SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122: SEBI | BRSR Core - Framework for assurance and ESG disclosures for value chain ↩RBI — pages/reports touching on sustainable finance and climate risk (general entry point): Master Directions - Reserve Bank of India ↩CODE OF ETHICS (Volume II) ↩Companies Act, 2013 — Section 143 (audit duties and reporting) and related rules (Ministry of Corporate Affairs / bare act): Report on the Internal Financial Controls with reference to Financial Statements under clause (i) of sub-section 3 of Section 143 of the Act ↩ISA 701 — Communicating Key Audit Matters in the Independent Auditor’s Report: https://resource.cdn.icai.org/44095aasb33841-sa701.pdf ↩Rule 11 of the Companies (Audit and Auditors) Rules, 2014 ↩The Chartered Accountant, October 2026, pages 106–111 (566–571). www.icai.org
